UNITED STATES
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 September 30, 1999 (Nine Month Transition
Period)
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
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(Address of Principal Executive Offices) (Zip Code)
(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: $20,947,634
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 17, 1999 was approximately
$11,682,385 (for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 3,049,750 shares of registrant's common stock outstanding as of
December 17, 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....................................12
ITEM 3. LEGAL PROCEEDINGS..........................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...........................................14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.......................................16
ITEM 7. FINANCIAL STATEMENTS.......................................27
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.................................................27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT..........................27
ITEM 10. EXECUTIVE COMPENSATION.....................................31
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...............................................38
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...........................39
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Quizno's Corporation was incorporated in Colorado in 1991. Our
headquarters is located at 1415 Larimer Street, Denver, CO 80202. Our telephone
number is (720) 359-3300.
We incorporated in Colorado in January 1991 as D&R, Inc. We changed our
name to The Quizno's Franchise Corporation in April 1991 and to The Quizno's
Corporation in June 1995. We do business as The Quizno's Corporation and
Quizno's. Our principal business address and that of our subsidiaries is 1415
Larimer Street, Denver, Colorado 80202. In January 1991, we purchased certain
assets of Quizno's America, Inc., which had operated, owned, and franchised
Quizno's restaurants (directly and through predecessors and affiliates) under
the QUIZNO'S name since 1981. We operate, and offer franchises to individuals or
entities ("Franchisees" or "Owners") to operate, restaurants with carry-out
facilities that sell submarine and other sandwiches, salads, other food products
and beverages, and related services ("Restaurants"). As of December 17, 1999,
there were 614 Restaurants (including 8 Bain's Deli Restaurants) in operation in
the United States, and agreements were in place for the opening of an additional
542 franchised restaurants in the United States. During the last two years, we
have grown to become the third largest sub sandwich chain in the United States.
Additionally, we offer franchises for area director marketing businesses
in which the area director ("Area Director") acts as our sales representative
within a defined geographic area to solicit and identify prospective
franchisees, to assist us in locating and securing sites for Restaurants within
a territory, and to provide additional support before, during, and after the
Restaurant opens.
We also offer master franchise rights for international markets, in which
the master franchisee has the right to function as a franchisor to offer and
sell Restaurant franchises and area director marketing agreements using our
trademarks and service marks in a defined geographic area (usually a country).
We have master franchise agreements in place for Canada, the United Kingdom,
Japan, Australia, and Central America. As of December 17, 1999, there were 83
Quizno's restaurants in operation in Canada, 3 in Japan, and 1 in Australia.
The Area Director or master franchisee is required to open a specified
number of Restaurants annually throughout the life of the area director
marketing agreement or master franchise agreement.
In 1999, we changed the date of our fiscal year end to September 30.
Therefore, our 1999 fiscal year, which ended on September 30, 1999, contained
only three-quarters (or nine months).
The Restaurants
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. We believe that the submarine
sandwiches offered in the Restaurants are distinctive in the market for several
reasons. Each submarine 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.
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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.
We focus on the quality of the ingredients contained in the food products
we produce and we require that certain 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 us in accordance with proprietary recipes developed by us. 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 our 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 quick service market niche represented by the
product. Open kitchens allow customers to watch as their sandwiches are
prepared. The decor package for the Restaurants includes 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 lunchtime
office workers and to serve the home meal replacement segment of the market.
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 units offer a full menu with an extensive variety of Quizno's
sandwiches. Soups, salads and desserts are also available at Quizno's Express
units. Quizno's Express units will typically share common area seating or may
have very limited seating at venues designed primarily for take out.
Concept and Strategy
Our marketing strategy is to position the Restaurants between fast food
and full-service dining. We believe 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, we
believe 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. We believe our concept is well positioned to fill a
growing niche in the restaurant business 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.
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Our goal is to build a strong and consistently profitable nationwide chain
of Restaurants with international expansion of the chain into selected foreign
markets. The primary vehicle for achieving our planned growth has been our area
director marketing program and, more recently, our master franchise program.
Our 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 or master franchisees, as well as revenue
generated from company-owned Restaurants and license fees generated from
licensing of our logos or in exchange for allowing a product company to sell
proprietary Quizno's items. Franchisees, master franchisees and Area Directors
pay fees to us only once in connection with execution of franchise agreements,
master 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. We may also repurchase certain
area directorships and territories in the future, as we have in 1999. The
royalty rate is currently 7% for traditional Restaurants, and the royalty rate
is 8% for Quizno's Express units; however, a small number of Franchisees operate
under older agreements that set lower royalty rates at 4% or 6%.
From time to time, we 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
proposed transaction would be in the our best interest. Our policy is not to
publicly announce such proposals until the likelihood that the proposed
transaction will be completed becomes probable.
Bain's Deli
In November 1997, our wholly-owned subsidiary, The Quizno's Acquisition
Company, purchased the assets of Bain's Deli Franchise Associates, L.P., a
Pennsylvania limited partnership and franchisor and operator of approximately 63
delicatessen-style sandwich shops located primarily in the eastern United
States. We never offered or sold additional Bain's Deli franchises and, in March
1999, sold to a third party all but 14 of the Bain's Deli franchise agreements
we originally acquired. There are currently 8 non-converted Bain's Deli
franchisees for which we are the franchisor. We will continue to give these 8
Bain's Deli franchisees the opportunity to convert to Quizno's Restaurants.
Area Director and Master Franchise Agreements
We offer Area Directors a domestic geographical territory, within which to
sell franchised Restaurants pursuant to an area director marketing agreement.
This program is designed to assist us in accelerating the marketing and sale of
franchises and the selection of Restaurant locations in the territory. Each
territory is based on areas of dominant influence of local television broadcast
stations as defined by the television broadcast industry. Our growth strategy
clusters Restaurants in particular television markets in order to facilitate
implementation of our advertising program.
Each Area Director pays us 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 not refundable.
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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 (with certain exceptions). We reserve the
right under the area director marketing agreement to market and sell franchises
and to establish company-owned Restaurants in a territory.
In international markets, we generally market our franchises through a
qualified person, or "Master Franchisee," from whom we receive a one-time master
franchise fee, negotiated on a case by case basis. The Master Franchisee
receives the right to sell franchises and area directorships in a defined
international market on an exclusive basis. We are paid a portion, typically
30%, of all franchise fees, royalties and area director fees collected by the
Master Franchisee.
As of December 17, 1999, we had 68 Area Directors whose Territories cover
approximately 75% of the population of the United States. We have also sold
master franchise rights for Canada, Japan, United Kingdom, Australia, and
portions of Central America.
The area director and master franchisee agreements set increasing minimum
performance levels that require the Area Director or Master Franchisee to
develop a specified number of Restaurants in each quarter or year (depending on
the form of agreement) during the term of the agreement. Our experience with the
Area Director and Master Franchisee programs to date indicates that while some
Area Directors and Master Franchisees will exceed their development schedules,
others will fail to meet their schedules. In our planning, we have allowed for a
certain percentage of Area Directors and Master Franchisees 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 franchisee financing. We may terminate an
agreement if the Area Director or Master Franchisee fails to meet the
development schedule, and we would then have the right to resell the territory
to a new Area Director or Master Franchisee.
In addition, through a required monthly minimum marketing expenditure, the
Area Director is required to actively promote the sale of our 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 us for consideration. The Area Director is also required to
perform monthly quality assurance inspections of the units in its area and
assist Franchisees within its area in opening. Our franchise sales materials are
made available to the Area Director.
Each domestic Area Director is paid a commission of 40% of the royalty
fees collected by us 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, subject to certain
exceptions in some contracts for pre-existing Restaurants in the territory,
"Turnkey" Restaurants, and conversion Restaurants for which the Area Director is
paid a flat monthly fee of $200 per Restaurant for performing support services.
Other forms of agreement exclude airport and other non-traditional units from
the commission payment obligation. Under some forms of agreement, 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 because of failure to meet the sales or opening goals, 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 franchise fee paid to us for each franchise sold and open within the
territory during the term of the area director marketing agreement.
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We have a program under which we will finance up to 50% of the area
director marketing fees for certain approved domestic Area Director candidates
who have the experience and skill requirement sought by us for our 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 to us for the
amount financed, which will bear interest at 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.
Franchise Program
We authorize individuals and companies, within the United States, called
"Franchisees" or "Owners," to establish and operate Restaurants at an approved
location pursuant to the terms of a franchise agreement. Under the franchise
agreement, we undertake 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 our 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, we provide continuing advice and consultation with respect to
operation of the Restaurant. From time to time, we elect to take over the
operation of a Restaurant from an unsuccessful franchisee and operate the
Restaurant until a new franchisee is found. Our 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 Restaurant is $20,000,
$15,000 for the second, and $10,000 for the third and any additional franchise
agreement. We offer the franchise for a Quizno's Express unit at a reduced
franchise fee of $10,000. The Owner also pays us 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. Sales tax and any other state
or federal tax is excepted. The Owner also pays an advertising fee to us in an
amount equal to 1% to 4% of gross sales, which are used by us 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 us in order to reimburse us for costs incurred
in connection with the establishment of a Restaurant. The total average cost to
a Franchisee for opening a Restaurant ranges between $50,200 and $225,162,
including 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 unit is a traditional or Express Restaurant.
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We collect weekly and monthly sales and other operating information from
each franchisee. We have agreements with most franchisees permitting us to
electronically debit the franchisees' bank accounts for the payment of
royalties, marketing fund contributions and other amounts owed to us under the
franchise agreement. This system significantly reduces the resources needed to
process receivables, improves cash flow and helps to limit past-due accounts
related to these items. Franchisees generally are required to purchase and
install an approved point of sale system that, among other things, allows us to
poll sales information daily.
We have 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 us 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 our operations manual.
We have 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 us, which allows for better quality control.
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 and we are not liable for any
amounts owed by the Owners. If the national food product distributor no longer
provided this service to us and our franchisees, we believe adequate alternative
national services would be available without a significant increase in costs.
We retain the right to approve the terms of the Owner's lease. A law firm
selected by us must review the lease as part of the approval process. The Owner
pays the costs for the review of the lease. We also reserve 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 us, 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 us, unless restricted by the 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 us. The Franchisee is required by the franchise agreement to submit all
required reports to us when and in the manner or format required by us.
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In order to provide for proper financial tracking and planning for Owners,
we began providing a restaurant bookkeeping service to our Restaurant Owners in
1994. In mid-1998, we outsourced the bookkeeping function. This service is
intended to assure the Owners have accurate financial records as well as to
allow us to keep accurate systemwide statistics. Franchise agreements executed
after February 10, 1995, require Owners to use this bookkeeping service for the
first year of operations, for the Owner's first unit, for a fee of $85 per week.
The Owner must submit copies of all proposed advertising or promotional
materials for written approval by us prior to use.
We have the right to terminate a franchise agreement for a variety of
reasons, including a Franchisee's failure to make payments when due or failure
to adhere to our policies and standards. However, state franchise laws may limit
our ability to terminate or refuse to renew a franchise.
We expect that Restaurants operating within our franchise system will
emphasize quality submarine sandwiches. In order to satisfy customer
expectations regarding menus and service, we require substantial uniformity
among all Restaurants. All Restaurants must conform to our decor and menu
specifications. The Owner is not allowed to sell any goods or services at a
Restaurant other than those goods and services specified by us.
Franchise Marketing Programs
In order to facilitate the marketing of franchised Restaurants, we devote
resources for national print media, sales staff, marketing materials, and trade
shows. In addition, we have specific programs to market our franchises,
including:
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. We have installed a toll free phone line
(1-800-DELI-SUBS) that rings directly into the Franchise sales department. The
information is entered into a data base of potential Owner inquiries and an
informational package is mailed to the caller.
Open Houses. We have an ongoing program of hosting open houses throughout
the country in conjunction with our Area Directors. Individuals who have
expressed an interest in our franchises are invited to open houses.
Computerized Data Base of Franchise Inquiries. We have installed a
computer network within our Franchise sales department for the purpose of
organizing, managing, and tracking individuals who inquire about our franchises.
National Advertising. We advertise nationally for new franchisees on a
regular and consistent basis in national, regional and local publications.
Company-Owned Restaurants
As of December 28, 1999, we currently own and operate 25 Quizno's
Restaurants. 17 are located in Colorado and 8 are located in Kansas. In fiscal
1999, company-owned Restaurants generated $534,636 in earnings. We also
currently own and operate 1 Quizno's Restaurant held for resale, which incurred
losses totaling $210,753 in fiscal 1999.
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While we expect to add new company-owned Restaurants from time to time, we
expect most of our growth in the foreseeable future to result from the
development of franchised Restaurants.
In addition, from time to time, we acquire or assume 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,
we 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, we 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
Our advertising staff develops advertising campaigns for use at all levels
to support consumer sales in the Restaurants. Each franchised Restaurant
currently pays 1% of gross sales to the marketing fund. All company-owned
Restaurants must pay into the marketing fund on an equal percentage basis with
all franchised Restaurants. We use the marketing fund to create, produce, and
place advertising, in-store signs, in-store promotions, and commercial
advertising; to pay agency costs and commissions; to create and produce video,
audio, and written advertisements; to administer multi-regional advertising
programs, including direct mail and other media advertising; to employ
advertising agencies and in-house staff assistance; and to support public
relations, market research, and other advertising and marketing activities. The
advertising may be disseminated in print, television, or radio. The coverage has
been local or regional, and, since early 1998, we have used national cable
television campaigns.
Each traditional Restaurant is required to spend another 3% of sales for
local advertising or promotions. Funds may be used to purchase media schedules
for TV, radio, or print ads produced by us, 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. We have the right to collect and designate all
or a portion of the local advertising fee for either a regional advertising
program or the marketing fund for the benefit of either the Restaurants within a
particular region or all Restaurants.
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 we possess.
We compete in the sandwich segment of the fast food industry, an industry
long dominated by hamburger chains. We believe that within the sub sandwich
segment, our largest competitors by number of stores are Subway and Blimpie.
Subway, the nation's largest submarine sandwich restaurant chain, has in excess
of 12,000 units in the U.S., while Blimpie has grown significantly in recent
years and has approximately 2,000 domestic units. The expansion of Subway has
drawn attention to submarine sandwiches, during a time of growing concern
relating to beef and fried foods. We believe that the submarine sandwich segment
is underdeveloped, and that demand for submarine style sandwiches will continue
to grow. Other than Subway and Blimpie, most submarine sandwich chains currently
have less than 200 units each and are primarily local or regional.
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Our 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. We have positioned the Restaurants
between the traditional fast food restaurant style of our submarine sandwich
competitors and full-service dining, and have focused on higher quality food
products, to distinguish the Restaurants from their competitors. The restaurant
business can be affected by changes in consumer tastes, national, regional or
local economic conditions, demographic trends, traffic patterns and the type,
number and location of competing restaurants. In addition, inflation, increased
food costs, labor and benefits costs and the lack of experienced management and
hourly employees may adversely affect the restaurant industry in general and our
Restaurants in particular
Franchise Competition. In addition to our Restaurant operations, we
compete 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 we have. We believe that we 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 our competitors. Finally, the ambiance
of Restaurants offers a Franchisee a pride in ownership that is unique to the
Quizno's concept.
Government Regulations
We are subject to Federal Trade Commission ("FTC") regulation and several
state laws which regulate the offer and sale of franchises. We are 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 us 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 generally
require registration of the franchise offering with state authorities. Those
that regulate the franchise relationship generally require that the franchisor
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 our
franchise operations.
In October 1999, the FTC issued proposed changes to the FTC Rule that
would effect certain disclosure obligations in connection with franchise sales.
These proposed changes are still subject to public comment, and even if adopted
as proposed, we do not think the changes would materially effect our franchise
sales or other operations. We are not aware of any other probable pending
franchise legislation that in our view is likely to affect our operations
significantly. We believe that our operations comply in all material respects
with the FTC Rule and the applicable state franchise laws.
9
<PAGE>
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. We are subject
to federal and state environmental regulations, but these have not had a
material effect on our 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.
We are also subject to state and federal labor laws that govern our
relationship with our employees, such as minimum wage requirements, overtime,
working conditions and citizenship requirements, or customers, such as the
Americans with Disabilities Act. 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 could increase
labor costs to us and our franchisees.
We do not have significant costs related to environmental law compliance
or research and development.
Trademarks
We presently own the following principal trademarks or service marks (the
"Marks"). All of our primary Marks are registered on the Principal Register of
the United States Patent and Trademark Office:
Mark Registration Number Registration Date
- ----------------------- -------------------- -------------------------
"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" service
mark 2,086,598 September 19, 1996
"QUIZNO'S SUBS OVEN
BAKED CLASSICS and
DESIGN" 2,228,680 March 2, 1999
The Quizno's Acquisition Company grants current Bain's Deli franchisees
the non-exclusive right to use the following trademarks for the operations 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).
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.
We have also filed the following trademarks or service marks
internationally:
10
<PAGE>
Application or Application or
Registration Registration
Country Trademark Number Date Status
- ------------- ------------ -------------- --------------- --------------
Australia Quizno's App. # 789815 30 March 1999 Pending
Quizno's Subs
Australia Oven Baked App. # 789814 30 March 1999 Pending
Classics
Canada Quizno's Reg. # 489496 6 February 1998 Registered
Quizno's Subs
Canada Oven Baked App. # not yet
Classics available Pending
(and design)
Europe-CTM Quizno's App. # 1057223 28 January 1999 Pending
Quizno's Subs
Europe-CTM Oven Baked App. # 1057264 28 January 1999 Pending
Classics
Great Quizno's Reg. # 1576926 18 August 1995 Registered
Britain
Quizno's Subs
Great Oven Baked
Britain Classics App # 2197852
(and design)
Japan Quizno's Reg. # 4275508 21 May 1999 Registered
Quizno's Subs
Japan Oven Baked
Classics App. # 17745/99 1 March 1999 Pending
(and design)
Mexico Quizno's Reg. # 502259 30 August 1995 Registered
Puerto Quizno's None 23 September 1997 Pending
Rico
Singapore Quizno's Reg. #6014/94 12 September 1994 Registered
South Quizno's Reg. # 29994 11 January 1996 Registered
Korea
There are no agreements currently in effect which significantly limit our
right to use or license the use of the Marks.
11
<PAGE>
Employees
As of December 20, 1999, we employed 70 full-time employees. In addition,
we employed 97 full-time and 191 part-time employees in our company-owned
Restaurants. Our employees are not covered by any collective bargaining
agreement and we believe our employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
We lease our headquarters office space of 13,368 square feet at 1415
Larimer Street, Denver, Colorado. We also lease the premises for each of the 27
company-owned and operated Restaurants at September 30, 1999, as follows:
1. 12201 East Arapahoe Englewood, CO 80112 2,486 sq. feet
Road, #B7
2. 6525 Gunpark Drive Boulder, CO 80301 1,976 sq. feet
3. 191 Blue River Parkway Silverthorne, CO 80498 931 sq. feet
4. 8081 East Orchard Road, Greenwood Village, CO 3,166 sq. feet
#67 80111
5. 2311 30th Street Boulder, CO 80301 1,400 sq. feet
6. 9425 South University Highlands Ranch, CO 1,919 sq. feet
Blvd. 80126
7. 1275 Grant Street Denver, CO 80203 1,400 sq. feet
8. 1250 South Hover Road, Longmont, CO 80501 2,350 sq. feet
Bldg. 8A
9. 1660 Lincoln Street, # Denver, CO 80264 1,660 sq. feet
105
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 Avenue, # Kenosha, WI 53142 1,214 sq. feet
73A
13. 14413 West Colfax Lakewood, CO 80401 1,300 sq. feet
14. 999 18th Street, # 136 Denver, CO 80202 1,360 sq. feet
15. 3507 Manchester Expr., Columbus, GA 31909 613 sq. feet
# F10
16. 270 West 14th Street Denver, CO 80204 1,700 sq. feet
17. 4403 South Tamarac Denver, CO 80237 2,420 sq. feet
Parkway
18. 818 17th Street Denver, CO 80202 1,800 sq. feet
19. 2401 West Central El Dorado, KS 67042 1,800 sq. feet
20. 738 North Waco Wichita, KS 67203 1,151 sq. feet
21. 4100 East Harry, #55 Wichita, KS 67218 1,850 sq. feet
22. 3300 North Rock Road Wichita, KS 67226 1,840 sq. feet
23. 2792 South Seneca Wichita, KS 67217 1,700 sq. feet
24. 2407 West 21st Street Wichita, KS 67203 1,225 sq. feet
25. 602 North Tyler Wichita, KS 67212 1,500 sq. feet
26. 678 East 47th Street Wichita, KS 67216 1,540 sq. feet
South
27. 1695 Larimer Street Denver, CO 80202 2,981 sq. feet
ITEM 3. LEGAL PROCEEDINGS
In re Kirwin Ventures, L.L.C., Case No. 54 114 00312 98, American
Arbitration Association. On June 29, 1998, Kirwin Ventures, L.L.C., a Michigan
franchisee, filed an arbitration action in Southfield, Michigan against us, the
Marketing and Promotion Fund, Michigan Restaurant Development, L.L.C. (the
former Michigan area director), Richard F. Schaden, and Richard E. Schaden. The
claim alleges violations of the Michigan Franchise Investment Law and
misrepresentations in connection with the franchise sale; failure of the area
director to comply with the area director marketing agreement; that advertising
materials were not well-suited to the Michigan market; breach of a duty of good
faith and fair dealing; and fraud. Kirwin seeks compensatory damages in excess
of $400,000 plus attorneys' fees and other unspecified relief. On July 17, 1998,
we filed a declaratory judgment action in federal court in Colorado asking that
the arbitration be moved to Colorado according to the terms of the underlying
franchise agreement. On December 27, 1999, the American Arbitration Association
notified us that the arbitration would be held in Denver. We and the other
defendants intend to deny each claim and will pursue counterclaims against
Kirwin Ventures.
12
<PAGE>
Mibichu L.L.C. v. The Quizno's Corporation, No. 98-007226-CK (Oakland
County, Michigan). Mibichu L.L.C. is a franchisee owned by the same individuals
who own Kirwin Ventures and which operate a second Restaurant in Michigan. On
June 29, 1998, Mibichu filed an action in Michigan state court against the same
respondents named in Kirwin. We removed the case to the United States District
Court for the Eastern District of Michigan Southern Division (No. 98-73256).
The complaint alleges virtually identical claims and seeks identical relief. We
and the other defendants once again deny the claims and intend to vigorously
defend the action and pursue counterclaims.
The Quizno's Corporation v. Robert W. Mitelhaus, No. 77 114 00187 98,
American Arbitration Association (Denver, Colorado). On August 1, 1998, we
terminated the area director agreement between us and Robert W. Mitelhaus, a
California area director. On the same day, we instituted an arbitration action
against Mitelhaus in Denver, Colorado, alleging that Mitelhaus 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 we failed to refund or pay certain amounts he claimed were due to
him, and that we violated various state and federal franchise laws. 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.
On April 13, 1999, the arbitration panel issued its ruling. It found that
Mitelhaus had materially breached the area director agreement and that we had
properly terminated that agreement. The panel therefore denied all of Mitelhaus'
claims for breach of contract and refuted his allegations of franchise law
violations. While the panel did award Mitelhaus approximately $230,000 in
pre-termination commissions and costs, those related primarily to referral
commissions that we owed Mitelhaus, before we terminated him in August 1998, for
previous master franchise and area directorship sales we had made. We had no
liability for our lawful termination of Mitelhaus' area director agreement. The
panel also ordered Mitelhaus to abide by all of the post-termination covenants
in the area director agreement
13
<PAGE>
The Quizno's Corporation v. Hot Concepts, Inc., No. 77 116 00246 99,
American Arbitration Association (Denver, Colorado). On July 19, 1999, we
terminated the area director agreement between us and Hot Concepts, Inc., an
area director for the Cincinnati, Ohio and Lexington, Kentucky markets. On the
same day, we instituted an arbitration action against Hot Concepts in Denver,
Colorado, alleging that Hot Concepts breached various provisions of the area
director agreement, including failure to develop the market. On October 14,
1999, Hot Concepts denied that it breached the area director agreement. Hot
Concepts counterclaimed that we fraudulently terminated the area director
agreement. In addition, Hot Concepts alleged that we failed to deal in good
faith by terminating the agreement, and that we fraudulently induced Hot
Concepts to enter into the agreement by misrepresenting the ability to develop
the market. Hot Concepts also alleged unjust enrichment. Hot Concepts seeks
damages of $1.5 million. We have denied the counterclaims and intend to pursue
the claims against Hot Concepts. The principal owners of Hot Concepts also owned
a second area directorship under Hampton-Davis Corp. for the Bowling Green,
Kentucky and Jacksonville, Tennessee markets. On September 15, 1999, we filed an
action entitled The Quizno's Corporation v. Hampton-Davis Corp., in the United
States District Court for the District of Colorado (No. 99-S-1812), in which we
asserted that Hampton-Davis failed to meet its development quota. On October 11,
1999, we terminated the area director agreement with Hampton-Davis. Although
Hampton-Davis has not yet responded to the compliant, we believe it will file
counterclaims similar to those filed by Hot Concepts and will seek similar
relief. If so, we intend to also deny those counterclaims.
From time to time, we are involved in litigation and proceedings arising
out of the ordinary course of our business. There are no other pending material
legal proceedings to which we are a party or to which our property is subject.
We do not believe that any of the foregoing litigation will have a material
adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to our shareholders at the 1999
Annual Meeting of Shareholders held on September 27, 1999:
Proposal #1 Election of Directors
For Withheld
Richard E. Schaden 1,596,203 225
Richard F. Schaden 1,596,203 225
Frederick H. Schaden 1,596,203 225
J. Eric Lawrence 1,596,203 225
Mark L. Bromberg 1,596,203 225
Brad A. Griffin 1,556,247
Brownell M. Bailey 39,956 225
Proposal #2 Approval of the increase of the number of shares authorized
under our Employee Stock Option Plan from 320,000 to 670,000
For Against Abstained
1,592,403 4,025 0
14
<PAGE>
Proposal #3 Approval of the increase of the number of shares authorized
under our Amended and Restarted Non-Employee Directors and
Advisors Stock Option
Plan from 140,000 to 200,000
For Against Abstained
1,592,203 4,225 0
Proposal # 4 Ratification of Accountants
For Against Abstained
1,595,928 0 500
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 fiscal 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 December 17, 1999, the stock closed at $8.125.
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
Fiscal Year Ended September 30, 1999
High Low Close
First Quarter $7.75 $6.88 $7.19
Second Quarter $7.75 $6.50 $7.25
Third Quarter $9.50 $6.94 $8.25
There were 169 holders of record (and approximately 1,000 beneficial
owners) of our Common Stock as of December 17, 1999. The first number includes
shareholders of record who hold stock for the benefit of others.
We do not expect to pay any dividends on our Common Stock in the
foreseeable future. Management currently intends to retain all available funds
for the development of our business and for use as working capital.
In October 1999, we announced a program to repurchase up to 200,000 shares
of our common stock. The timing, price, quantity and manner of purchases are
being determined by management consistent with applicable Securities and
Exchange Commission rules and are dependent upon market conditions. As of
November 30, 1999, we had repurchased 61,300 shares under this program.
15
<PAGE>
During the last quarter of the fiscal year ending September 30, 1999, we
sold the following securities without registration with the Securities and
Exchange Commission pursuant to the exemption noted:
Securities Number of Exemptions
Sold Date Shares Consideration Purchasers Claimed
- ------------ -------- --------- ------------- ------------- ------------
Common Stock 8/5/99 1,527 $12,025 Plan Quizno's 401(k) Section 4(2)
obligation Trust
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this annual report, and in
particular in this section entitled "Management's Discussion and Analysis or
Plan of Operation," are forward-looking statements that involve risks and
uncertainties that might adversely affect our 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 U.S. and
the other countries in which we franchise Restaurants, costs of labor and
employee benefits, costs of marketing, the success or failure of marketing
efforts, 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, spending patterns and demographic trends,
legal claims and litigation, the availability of financing for us and our
Franchisees at reasonable interest rates, the availability and cost of land and
construction, legislation and governmental regulations, and accounting policies
and practices. Many of these risks are beyond our control. In addition, specific
reference is made to the "Risk Factors" section contained in our Prospectus,
dated January 9, 1998, included in the Registration Statement on Form S-3 filed
by our company (Registration No. 333-38691).
The principal sources of our income are continuing fees, initial franchise
fees, and, historically, area director marketing fees. These sources are subject
to a variety of factors that could adversely impact our profitability 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 sources of income identified above. Because our franchises are
still concentrated in certain regions of the U.S., regional economic factors
could adversely affect our 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 we franchise the Restaurants will also impact our profitability. As eating
habits change and types of cuisine move in and out of fashion, our challenge
will be to formulate a menu within the Quizno'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.
As our revenues from foreign operations become more significant, our
profitability could be adversely impacted by international business risks and
political or economic instability in foreign markets. 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, we believe that the potential rewards of
expanding the market for our services to selected foreign countries far
outweighs such risks.
16
<PAGE>
Overview
In November 1999, we announced that we had changed our fiscal year end
from December 31 to September 30. The financial statements included with this
10-KSB filing reflect our balance sheet as of September 30, 1999, December 31,
1998 and December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for the nine months ended September 30, 1999
and the twelve months ended December 31, 1998 and 1997. Included below is the
unaudited statement of operations for the twelve months ended September 30, 1999
and 1998 and the unaudited statement of cash flows for the twelve months ended
September 30, 1999 and 1998. For purposes of Management's Discussion and
Analysis or Plan of Operation, we believe that these twelve-month statements and
comparisons provide a more meaningful analysis. Therefore, all comparison and
analysis included in this Management's Discussion and Analysis or Plan of
Operation will be based upon these twelve-month statements and related data.
Unless noted otherwise, all references to 1999 and 1998 refer to the twelve
months ending September 30, 1999 and 1998, respectively.
Consolidated Statement of Operations
For the Year Ended
September 30,
------------------------------
1999 1998
------------ ------------
(Unaudited)
Franchise operations:
Revenue
Continuing fees .................. $ 10,412,414 $ 5,119,903
Initial franchise fees ........... 3,610,042 2,675,567
Area director and master franchise
fees ............................ 2,131,882 2,357,216
Other ............................ 508,240 659,263
Interest ......................... 355,608 172,582
------------ ------------
Total revenue ............ 17,018,186 10,984,531
------------ ------------
Expenses
Sales and royalty commissions .... (5,302,456) (3,607,186)
Advertising and promotion ........ (96,433) (213,700)
General and administrative
(8,560,924) (5,567,313)
Total expenses
(13,959,813) (9,388,199)
Income from franchise operations .... 3,058,373 1,596,332
------------ ------------
Company store operations:
Sales ............................ 8,276,368 6,378,379
Cost of sales .................... (2,511,086) (1,929,730)
Cost of labor .................... (2,222,855) (1,549,512)
Other store expenses
(2,924,237) (2,319,752)
Total expenses
(7,658,178) (5,798,994)
------------ ------------
Income from Company stores operations $ 618,190 $ 579,385
============ ============
17
<PAGE>
Consolidated Statement of Operations (continued)
For the Year Ended
September 30,
------------------------------
1999 1998
----------- -----------
(Unaudited)
Other income (expenses):
Research, development and new programs .. $ -- $ (72,161)
Sales by stores held for resale ......... 997,583 859,745
Loss and expenses related to stores held
for sale ............................... (1,260,529)
Loss on sale or closure of Company stores (127,809) (120,928)
Sale of Japan master franchise .......... 1,168,801 --
Provision for bad debts ................. (354,827) (115,141)
Other expenses .......................... (68,245) (16,261)
Depreciation and amortization ........... (1,280,836) (564,766)
Privatization costs ..................... (265,472) --
Interest expense ........................ (321,718) (330,779)
----------- -----------
Total other expenses (1,513,052) (1,433,270)
----------- -----------
Net income before income taxes ............. 2,163,511 742,447
Income tax provision ....................... (353,135) --
----------- -----------
Net income (loss) .......................... 1,810,376 742,447
Preferred stock dividends .................. (179,151) (217,262)
----------- -----------
Net income before cumulative effect of
changed accounting principle .............. 1,631,225 525,185
Cumulative effect of changed accounting
principle (net of taxes) ................. (2,769,592) --
----------- -----------
Net income (loss) applicable to common
stockholders .............................. $(1,138,367) $ 525,185
=========== ===========
Consolidated Statement of Cash Flows
For the Year Ended
September 30,
----------------------------
1999 1998
----------- -----------
(Unaudited)
Cash flows from operating activities
Net income (loss) before preferred stock
dividends ............................. $ (959,216) $ 742,447
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities -
Depreciation and amortization ....... 1,179,690 564,766
Cumulative effect of changed
accounting principle ............... 4,388,208 --
Provision for losses on accounts and
notes receivable ................... 354,827 115,141
Loss on disposal of Company stores .. 158,308 120,928
Deferred income taxes ............... (3,395,416) (65,515)
Amortization of deferred financing
costs .............................. 101,146 54,072
Issuance of notes receivable for
master franchise and area director .. (1,211,237) (965,407)
marketing agreements
Other ............................... 17,972 2,660
Changes in assets and liabilities -
Accounts receivable .............. (497,682) (249,502)
Other assets ..................... 108,968 (184,110)
Accounts payable ................. 95,453 (334,563)
Accrued liabilities .............. 384,684 (71,374)
Deferred franchise costs ......... (536,385) (283,370)
Deferred initial franchise fees
and other fees .................. 5,174,771 2,010,112
Accrued income taxes ............. 851,469 --
----------- -----------
5,581,278 887,193
----------- -----------
Net cash provided by operating
activities ...................... $ 6,215,560 $ 1,456,285
=========== ===========
18
<PAGE>
Consolidated Statement of Cash Flows (continued)
For the Year Ended
September 30,
----------------------------
1999 1998
----------- -----------
(Unaudited)
Cash flows from investing activities
Cash paid for acquisition ............. $ (286,355) $ -
Purchase of property and equipment .... (2,139,866) (1,420,853)
Proceeds from notes receivable ........ 1,355,282 812,944
Investment in turnkey stores .......... (7,558) (546,790)
Short-term investments ................ (3,060,688) (1,203,189)
Issuance of other notes receivable .... (362,578) (631,864)
Investment by minority interest owners 151,601 --
Purchase of minority interest owners .. (150,000) --
Intangible and deferred assets ........ (1,262,185) (248,207)
Proceeds from sale of assets and stores 213,000 --
Deposits .............................. (42,805) (121,265)
Area director marketing territory
repurchases .......................... (863,984) --
Other investments ..................... (15,000) --
----------- -----------
Net cash used by investing
activities ..................... (6,471,136) (3,359,224)
----------- -----------
Cash flows from financing activities
Principal payments on long-term
obligatins ........................... (1,866,919) (377,605)
Proceeds from long-term obligations ... 2,242,187 973,924
Loan and offering costs ............. -- (56,317)
Redemption of Class B Preferred Stock (500,000) --
Proceeds from issuance of common stock
and preferred stock .................. 128,479 1,419,351
Preferred dividends paid .............. (179,452) (217,262)
----------- -----------
Net cash (used by) provided by
financing activities ........... (175,705) 1,742,091
----------- -----------
Net decrease in cash and cash equivalents (431,281) (160,848)
Cash and cash equivalents - beginning of
year .................................... 1,058,109 1,218,957
----------- -----------
Cash and cash equivalents - end of year .. $ 626,828 $ 1,058,109
=========== ===========
In 1999, before the cumulative effect of accounting changes, we were
profitable for the year and for each of the four quarters in 1999. We ended the
year with 634 Restaurants open (including 8 Bain's Deli restaurants), another
505 Restaurants sold and scheduled to open in the future, 27 Company owned
Restaurants, 79 area directorships owned by 68 Area Directors, and 5
international master franchisees. We believe we have built a strong foundation
for the Company upon which growth can continue with regular profits. In 1999,
before the cumulative effect of accounting changes, we earned $1,810,376
compared to $742,447 in 1998 (amounts are before preferred stock dividends).
On a quarterly basis, earnings before cumulative effect of changes in
accounting principle and preferred stock dividends, by business segment, reflect
continued overall improvement over the last eight quarters.
19
<PAGE>
Franchise Company
Quarter Ended Operations Stores Other Net
- ------------------- ------------ ------------ ---------- -----------
December 31, 1997 357,877 102,059 (386,349) 73,587
March 31, 1998 291,888 107,384 (257,593) 141,679
June 30, 1998 482,699 166,386 (400,411) 248,674
September 30, 1998 463,868 203,556 (388,917) 278,507
December 31, 1998 708,022 83,554 (347,821) 443,755
March 31, 1999 526,519 183,564 (260,848) 449,235
June 30, 1999 535,169 197,769 (538,877) 194,061
September 30, 1999 1,288,663 153,303 (718,641) 723,325
The following table reflects our revenue growth by source and Restaurants
for the past two years:
For the year ended
September 30,
--------------------
1999 1998
------- -------
Revenue (000's)
Continuing fees ............. $10,412 $ 5,120
Initial franchise fees ...... 3,610 2,676
Area director fees .......... 2,132 2,357
Other ....................... 832
------- -------
864 832
Franchise revenue ........... 17,018 10,985
Sales by Company owned stores 8,276 6,378
Sales by stores held for .... 860
------- -------
resale ...................... 998 860
------- -------
Total revenue ............... $26,292 $18,223
======= =======
Percent increase ............ 44%
=======
Restaurants open, beginning . 438 241
New Restaurants opened ...... 258 167
Restaurants acquired ........ -- 60
Restaurants sold ............ (31) --
Restaurants closed .......... (28) (25)
Restaurants closed, scheduled
to reopen................... (4) (5)
Restaurants reopened ........ 1 --
------- -------
Restaurant open, end ........ 634 438
======= =======
Franchises sold, domestic and
international .............. 545 361
======= =======
Initial franchise fees
collected (000's)........... $6,986 $4,785
Systemwide sales (millions).. $152 $89
Average unit volume (1)...... $369,000 $339,000
Same store sales (2) (3)..... Up 7.3%
(1) Average unit volumes of $369,000 and $339,000, are for the nine months ended
September 30, 1999 (annualized) and December 31, 1998, respectively. Average
unit volumes exclude Restaurants located in convenience stores and gas stations
and include only Restaurants open at least one year under the same ownership.
(2) Same store sales are for the nine months ended September 30, 1999 compared
to the comparable period in 1998 and is based on 228 stores open all of 1999 and
1998. Stores that transferred ownership during this period, or were in
substantial default of the franchise agreement at September 30, 1999, are
excluded.
(3) Because we are 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. Results of
Operations
20
<PAGE>
Comparison of Years Ended September 30, 1999 and 1998
Franchise revenue increased 55% in 1999 to $17,018,186 from $10,984,531 in
1998. Total revenue increased 44% in 1999 to $26,292,137 from $18,222,655 in
1998. The revenue increase resulted primarily from continuing fees and Company
store sales.
Continuing fees increased 103% in 1999 to $10,412,414 from $5,119,903 in
1998. Continuing fees are comprised of royalties and licensing fees.
Royalty fees increased 74% in 1999 to $8,386,050 from $4,832,014 in 1998.
Royalty fees are a percentage of each Owner's sales paid to us and will increase
as new franchises open, as the average royalty percentage increases, and as
average unit sales increase. At September 30, 1999, there were 607 franchises
open (including Bain's) compared to 408 franchises open at September 30, 1998.
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. We
have no immediate plans to further increase the royalty rate.
Licensing fees are generated through the licensing of our trademark for
use by others. Licensing fees are expected to continue and to increase as
systemwide sales and the awareness and value of our brand increases. For 1999,
licensing fees were $2,026,364 and $287,889 in 1998. There was no licensing fee
revenue prior to January 1, 1998.
Initial franchise fees increased 35% in 1999 to $3,610,042 from $2,675,567
in 1998. Initial franchise fees are one-time fees paid by Owners at the time the
franchise is purchased. Initial franchise fees are not recognized as income
until the period in which all of our obligations relating to the sale have been
substantially performed, which generally occurs when the franchise opens. Our
share of initial franchise fees sold by foreign master franchisees is recognized
when received. In 1999, we opened 258 franchises, including 46 international
Restaurants, as compared to 167, including 22 international Restaurants, opened
in 1998. Our initial franchise fee has been $20,000 since 1994. Owners 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 Owner. Our share of initial franchise fees for
international Restaurants is generally 30% of the franchise fee and will vary
depending on the country and the currency exchange rate.
Initial franchise fees collected by us for domestic franchise sales are
recorded as deferred initial franchise fees until the related franchise opens.
Deferred initial franchise fees at September 30, 1999 were $7,910,648 and
represent 505 domestic franchises sold but not yet in operation, compared to
$4,279,868 at September 30, 1998 representing 324 domestic franchises sold but
not open. Approximately 159 international franchises had been sold but were not
open at September 30, 1999 (approximately 80 at September 30, 1998). Direct
costs related to the sale, primarily sales commissions to Area Directors, are
deferred on our books and recorded as an expense at the same time as the related
initial franchise fee is recorded as income. Deferred costs paid and due at the
time of opening with respect to initial franchise fees deferred at September 30,
1999 were $1,585,773. Approximately 50% of all domestic initial franchise fees
received by us are paid to Area Directors for sales and opening commissions.
21
<PAGE>
We did not sell or open any Bain's franchises in 1999 or 1998, nor do we
expect to in the future.
Area director and master franchise fees were $2,131,882 in 1999 and
$2,357,216 in 1998. Domestic area director fees were $1,200,813 in 1999 and
$1,499,466 in 1998. For analysis purposes, these amounts are not comparable.
Effective January 1, 1999, we changed our accounting policy related to the
recognition of revenue from area director marketing agreement fees to one that
recognizes these fees as revenue on a straight-line basis over the term of the
agreement, which is ten years. This change reflected a decision made by the U.S.
Securities and Exchange Commission in December 1999 relative to the recognition
of area director fee revenue. Commissions paid to the area director upon the
inception of the agreement are classified as a prepaid and recognized as an
expense over the same ten year term. The effect of the change in the nine-month
period ending September 30, 1999, was the deferral of $4,262,701 of net revenue
previously recognized in prior years. This was reported as a cumulative effect
of change in accounting principle for $2,685,502 (net of $1,577,199 in income
tax benefits) and is included in the net loss for 1999.
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. In 1999, we sold 14 new area directorships including 5
existing Area Directors who purchased additional territory, as compared to 20
area directorships sold in 1998. At September 30, 1999, we had a total of 79
area directorships owned by 68 Area Directors who owned areas encompassing
approximately 75% of the population of the United States.
International master franchise fees are one-time fees paid to us for the
right to sell franchises in a designated, exclusive, international market. The
master franchisee assumes all of our obligations and duties under the agreement.
We recognize these fees when received. International master franchise fees
earned were $931,069 in 1999 and $857,750 in 1998. The 1999 fees received were
for the United Kingdom, $510,000, Japan, $125,000, Australia, $221,069, and the
rights to part of Central America, $115,000. A total of $40,000 of the fees have
been deferred until our training obligations are completed. The 1998 fees of
$632,750 and $225,000 were for Canada and Japan, respectively.
We offer domestic Area Director applicants financing for up to 50% of the
area fee. The amount financed is required to be paid to us 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. We also periodically offer payment plans to international Master
Franchisee applicants. Of the 14 domestic and international areas sold in 1999,
11 used this financing for $1,450,309, representing 68% of the area director
fees recognized in 1999. In 1998, a total of $1,083,408 was financed,
representing 46% of area revenue.
Other revenue decreased by 23% in 1999 to $508,240 from $659,263 in 1998.
Other revenue is primarily amounts paid by equipment suppliers for design and
construction, franchise transfer fees and bookkeeping fees charged Owners for
whom we provided bookkeeping services. Amounts paid by equipment suppliers were
$324,139 in 1999 compared to $298,330 in 1998. This amount will vary based on
new store openings. Franchise transfer fees increased in 1999 to $86,500 from
$46,000 in 1998. Since 1995, our franchise agreement requires all new Owners to
utilize our bookkeeping services, or a firm designated by us, to provide
bookkeeping services, for their first 12 months of operations. Bookkeeping fees
were $30,888 in 1999 compared to $286,364 in 1998. Bookkeeping fees declined,
and are expected to be immaterial in the future, because we out-sourced the
function to a third party in 1998.
22
<PAGE>
Sales and royalty commissions expense increased 47% to $5,302,456 (44.2%
of royalty and initial franchise fees) in 1999 from $3,607,186 (48.0% of royalty
and initial franchise fees) in 1998. Sales and royalty commissions are amounts
paid to our domestic Area Directors, commissions paid to other sales agents and
employees, and costs related to sales promotions and incentives. Sales and
royalty commission expense declined in 1999 as a percentage of royalty and
initial franchise fee due to the repurchase of certain area directorships.
Our domestic Area Directors receive commissions equal to 50% of the
initial franchise fees and 40% of royalties received by us 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 54% to $8,560,924 in 1999
from $5,567,313 in 1998. As a percent of franchise revenue, general and
administrative expenses have decreased slightly from 50.7% in 1998 to 50.3% in
1999. General and administrative expenses include all of our operating costs.
The increase is primarily due to the addition of employees to service the
rapidly growing network of our Owners and Area Directors. Although general and
administrative expenses will likely continue to increase as we grow, we expect
the rate of increase to continue to decline.
We believe our general and administrative expenses are adequate and are
not excessive in relation to our size and growth.
Company owned stores earned $618,190 on sales of $8,276,368 in 1999
compared to $579,385 on sales of $6,378,379 in 1998. During 1999, we operated
stores for a total of 257 store operating months. In 1998, we had a total of 189
store operating months. Sales per store month decreased 4.7% in 1999 to $32,166
from $33,748 in 1998.
At September 30, 1999, we had 25 (24 at September 30, 1998) Company owned
stores. In 1999, we purchased from an Owner one Restaurant. During 1998, we
acquired and converted to Company owned Quizno's eight competitive sandwich
shops in Wichita, Kansas, built and opened six new Company owned Quizno's,
purchased from Owners four Restaurants, reclassified as stores held for resale
five Company owned Quizno's, and sold to an Owner one Company owned store.
Stores held for resale lost $262,946 on sales of $997,583 in 1999 compared
to a loss of $213,234 on sales of $859,745 in 1998. At September 30, 1999 and
1998, we operated two and six stores held for resale, respectively. In 1999, we
closed two stores held for resale and sold two stores to an Owner. During 1998,
eight stores were classified as stores held for resale and two Bain's units were
returned to the seller.
23
<PAGE>
Japan master franchise income represents payments received in 1999 of
$1,423,348 for the master franchise rights of Japan. In the second quarter of
1999, we also received $22,000 for our share of an area director marketing
agreement sold in Japan. In 1999, we incurred direct costs related to the
revenue totaling $276,547 resulting in net revenue of $1,168,801. We received
$350,000 in 1998. The payments were recognized as revenue when received.
Although we plan to continue to enter into master franchise agreements
internationally, we do not expect such transactions to be of the magnitude of
the Japanese transaction.
Provision for bad debts was $354,827 in 1999 compared to $115,141 in 1998.
The increase in the 1999 expense was primarily due to allowances for promissory
notes due for stores purchased from us and subsequently closed.
Other expenses were $68,245 in 1999 compared to $16,261 in 1998. The
increase in the 1999 expense was primarily due to the loss on the sale of
assets. The 1998 expense was primarily subleasing losses related to one store
previously owned by us and sold to an Owner.
Depreciation and amortization was $1,280,836 in 1999 and $564,766 in 1998.
The increase was due primarily to the depreciation related to assets of stores
held for resale, the acquisition and development of new Company owned
Restaurants in 1998 and certain other tangible and intangible assets with short
lives expensed beginning in late 1998. A portion of the increase is related to
certain intangible assets fully amortized in 1999 and thereafter not recurring.
Privatization costs were $265,472 in 1999 and represents our costs
associated with a proposed going private transaction. As discussed in our 1998
Form 10-KSB, on December 29, 1998, we received a proposal from our majority
shareholders to merge the company into a new entity owned by them, pursuant to
which all of our shareholders other than themselves, would receive cash for
their company shares. On August 10, 1999, we announced that the proposal had
been withdrawn. An agreement regarding all the terms of the transaction could
not be reached with the Special Committee of the Board of Directors evaluating
the offer.
Interest expense was $321,718 in 1999 and $330,779 in 1998. The decrease
was primarily attributable to a decrease in our effective interest rate. On
January 6, 1999, we paid $500,000 to redeem all of our outstanding Class B
Preferred Stock and paid off the remaining principal of our 12.75% convertible
subordinated debt. The funds used for this payoff were obtained through the
borrowing of $1,853,931 from an unrelated noteholder. This note accrues interest
at the rate of 7.75% per annum.
Income tax expense was $353,135 in 1999. There was no income tax benefit
or expense recorded in 1998. Our taxable income has historically exceeded our
book income primarily because initial franchise fees we receive are taxable
income in the year received and are book income in the year the franchise opens.
Consequently, we will not pay income taxes on this income when it is recognized
for financial reporting purposes. As of December 31, 1998, we used all of our
tax net operating loss carryforwards and incurred a tax liability. Accordingly,
in the first quarter of 1999, we reduced the amount by which we had recorded an
impairment of our deferred tax asset in prior years and recorded the tax benefit
of prior years net operating losses of $368,553. Subsequent to December 31,
1998, our provision for income taxes was recorded at 37%.
24
<PAGE>
Cumulative effect of a change in accounting principle was $2,769,592. This
amount was composed of a $2,685,502 (net of $1,577,199 in income tax benefits)
change reflected by a decision made by the U.S. Securities and Exchange
Commission in December 1999 relative to the recognition of area director fees.
As previously discussed, effective January 1, 1999, we changed our accounting
policy related to the recognition of area director marketing agreement fees to
one that recognizes such fees as revenue on a straight-line basis over the term
of the agreement, which is ten years.
Also, during April 1998, Statement of Position 98-5, "Reporting
in 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 was required to be adopted in the second quarter of 1999. Upon adoption,
we were required to write-off $84,090 (net of $41,417 in income tax benefits) in
preopening related costs that were deferred on the balance sheet as of December
31, 1998.
Liquidity and Capital Resources
Net cash provided by operating activities was $6,215,560 in 1999 compared
to $1,456,285 in 1998, an improvement of $4,759,275. The primary reasons for the
improvement were the increase in net deferred franchise fees of $2,911,644, the
increase of $1,729,927 in net income before depreciation, amortization, and the
cumulative effect of changes in accounting principles, and the increase in
accounts payable, accrued liabilities and the decrease in accounts receivable
totaling $637,794. These amounts were partially offset by an increase of
$859,816 in deferred income taxes less other changes totaling $339,629.
Net cash used in investing activities was $6,471,136 in 1999 compared to
cash used by investing activities of $3,359,224 in 1998. Cash used by investing
activities for both years was primarily related to the acquisition or
development of company owned Restaurants. The primary reason for the increase in
funds used was the $1,857,499 increase associated with short-term investments.
In addition, in 1999, cash of $863,984 was used to acquire area director
territory repurchases.
Net cash used by financing activities was $175,705 in 1999 compared to
cash provided by financing activities of $1,742,091 in 1998. The 1999 amount was
primarily from financing company owned Restaurants and the redemption of the
Class B Preferred stock. The amount provided in 1998 was primarily from the sale
of Class B and Class C preferred stock.
At September 30, 1999, we had $192,923 invested in two stores held for
resale. The stores held for resale are expected to be sold or closed by December
31, 1999.
In the second quarter of 1998, we tested a program under which our 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 ours. 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 Owner, whose personal liability is limited to one year.
The Owner 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, we 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 September 30, 1999, 13 leases had been
executed under this program.
25
<PAGE>
On December 31, 1996, we completed a debt financing for $2 million of
which $500,000 was converted to preferred stock in December 1997. On January 6,
1999, we paid off the loan and redeemed the preferred stock at a cost of
$1,854,000. As required by the loan agreement, we issued a warrant to the lender
to purchase 372,847 shares of our common stock at an exercise price of $3.10.
On October 1, 1999, our Board of Directors authorized the purchase of up
to 200,000 shares of our common stock. Subject to applicable security laws,
repurchases may be made at such times, and in such amounts, as we deem
appropriate. As of November 30, 1999, we had repurchased 61,300 shares at an
average price of $8.63.
On October 5, 1999, we closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. The loan bears interest at
10.1%, which may be adjusted to the ten-year Treasury note rate plus 4.25%
during the first 120 days, and is repayable in monthly installments of $193,344
for nine years and five months. The loan is secured by the assets of our company
owned stores and other assets of ours existing at September 30, 1999. The loan
is part of a securitized pool and includes a provision which could require us to
pay up to another $1,555,555 depending on the amount of defaults, if any, in the
loan pool. The proceeds of the loan were used to pay-off existing debt of
$3,320,956, pay costs and fees associated with the loan of $560,000, and prepay
interest and one payment of $304,624. The balance of $9,814,420 is available to
use, with certain restrictions, for general corporate purposes other than
working capital, dividends, or to repurchase the majority shareholder's stock.
Certain notes payable held by us at September 30, 1999 were repaid with the
AMRESCO note proceeds. See Note 9 of the Notes to the Consolidated Financial
Statements for the identification of the notes repaid with these proceeds.
On October 11, 1999, our Board of Directors approved the purchase of a
corporate jet allowing for more efficient travel by management between areas of
franchise operations. For tax purposes, the airplane qualifies for accelerated
depreciation, resulting in the deferral of income tax payments. The $3,350,000
purchase was completed on October 13, 1999.
On November 16, 1999, we announced that our subsidiary, QUIZ-DIA, Inc.
purchased the assets of ASI-DIA, Inc. ("ASI") for a total of $4.875 million in
cash. Assets purchased include two Quizno's restaurants and three bars,
including the WWW.COWBOY bar, and various other assets located on Concourses A
and B at the Denver International Airport. We intend to continue operating the
restaurants as Quizno's Classic Subs and the bars as operated by ASI.
As discussed in our 1998 Form 10-KSB, on December 29, 1998, we received a
proposal from our majority shareholders to merge the company into a new entity
owned by them, pursuant to which all of our shareholders other than themselves
would receive cash for their company shares. On August 10, 1999, we announced
that the proposal had been withdrawn. An agreement regarding all the terms of
the transaction could not be reached with the Special Committee of the Board of
Directors evaluating the offer.
As we have in the past, we will continue to consider acquisitions of other
chains, the purchase of Quizno's Restaurants from our Owners, and the purchase
of Quizno's area directorships from our Area Directors. From time to time, we
will make offers and enter into letters of intent for such transactions subject
to the completion of due diligence. In all such cases, we will identify the
sources of cash required to complete such transactions prior to entering into a
binding agreement.
26
<PAGE>
We have never paid cash dividends on our common stock and we do not
anticipate a change in this policy in the foreseeable future.
Year 2000 Disclosure
Prior to December 1, 1999, we took various steps to address the year 2000
(or Y2K) issues as they related to our computer systems and operations in
general. We reviewed our internal systems to determine what steps we could take
to minimize Y2K's potential disruptive effect on our operations. We concluded
that we were not at material risk from Y2K issues. We use current versions of
widely used, publicly available software for our accounting and other data
processing requirements. The providers of the software utilized by us have
stated that there will be no failures in the programs used by us resulting from
the year 2000. We use a small amount of customized software, all of which has
been developed by us over the last two years, and has been written to be
functional in the year 2000. We did not determine the impact, if any, that year
2000 issues might have on our vendors. However, we believe there are adequate
alternative vendors that can supply products and services to us if necessary.
Finally, our business, quick service restaurants, is not highly dependent upon
electronic data processing.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
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.
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 - 5
Consolidated Statements of Cash Flows.........................F - 6
Notes to Consolidated Financial Statements........................F - 8
<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 the September 30, 1999 and December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the nine months ended September 30, 1999 and the
years ended December 31, 1998 and 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 September 30, 1999 and December 31, 1998 and
1997 and the results of their operations and their cash flows for the nine
months ended September 30, 1999 and the years ended December 31, 1998 and 1997,
in conformity with generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
December 13, 1999
Denver, Colorado
F - 1
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------------
1999 1998 1997
------------- ------------ ------------
Assets
<S> <C> <C> <C>
Current assets
Cash and cash equivalents ............................ $ 626,828 $ 702,258 $ 561,287
Short-term investments ............................... 4,263,877 1,541,423 538,188
Accounts receivable, net of allowance for
doubtful accounts of $43,793 (1999),
$20,000 (1998) and $38,231 (1997) (Note 8) .......... 1,047,438 857,280 545,109
Current portion of notes receivable
(Notes 3 and 8) ..................................... 519,994 1,212,522 598,486
Deferred tax asset (Note 12) ......................... 128,718 81,260 --
Other current assets ................................. 373,578 266,100 375,902
Assets held for resale (Note 4) ...................... 1,082,310 690,030 593,675
------------ ------------ ------------
Total current assets ............................... 8,042,743 5,350,873 3,212,647
------------ ------------ ------------
Property and equipment, net (Notes 2 and 5) ............. 4,804,051 3,535,222 2,240,661
------------ ------------ ------------
Other assets
Intangible assets, net (Notes 2 and 6) ............... 1,662,265 1,553,522 1,651,637
Other deferred assets (Note 7) ....................... 1,726,984 1,119,371 739,762
Deferred tax asset (Note 12) ......................... 3,507,213 734,808 175,000
Deposits and other assets (Note 2) ................... 361,189 119,883 76,294
Notes receivables, net (Notes 3 and 8) ............... 1,670,329 1,375,872 734,495
------------ ------------ ------------
Total other assets ................................. 8,927,980 4,903,456 3,377,188
------------ ------------ ------------
Total assets ............................................ $ 21,774,774 $ 13,789,551 $ 8,830,496
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ..................................... $ 1,219,157 $ 1,317,085 $ 1,065,374
Accrued liabilities .................................. 544,476 532,324 489,848
Current portion of long-term obligations
(Notes 8 and 9) ..................................... 337,642 370,404 303,084
Current portion of subordinated debt
(Note 9) ............................................ 218,546 244,084 110,912
Income taxes payable (Note 12) ....................... 851,469 200,000 --
------------ ------------ ------------
Total current liabilities .......................... 3,171,290 2,663,897 1,969,218
Long-term obligations (Notes 8 and 9) ................... 1,268,504 964,984 741,570
Subordinated debt (Note 9) .............................. 1,498,791 1,130,916 1,389,088
Deferred revenue ........................................ 13,722,331 4,781,946 2,148,662
------------ ------------
Total liabilities .................................. 19,660,916 9,541,743 6,248,538
------------ ------------ ------------
Commitments and contingencies (Notes 4, 10,
13 and 15)
Minority interest in Subsidiary (Note 2) ................ -- 151,601 --
Stockholders' equity (Notes 9 and 11)
Preferred stock, $.001 par value,
1,000,000 shares authorized;
Series A issued and outstanding 146,000
(1999, 1998 and 1997) ($876,000
liquidation preference) ............................. 146 146 146
Series B issued and outstanding 0 (1999),
100,000 (1998) and 100,000 (1997)
($500,000 liquidation preference) ................... -- 100 100
Series C issued and outstanding 167,000
(1999, 1998 and 1997) ($835,000
liquidation preference) ............................. 167 167 167
Common stock, $.001 par value; 9,000,000
shares authorized; issued and outstanding,
3,074,177 (1999), 3,054,459 (1998) and
2,923,294 3,074 3,054 2,923
Capital in excess of par value ....................... 4,485,949 5,065,247 4,663,744
Accumulated deficit .................................. (2,375,478) (972,507) (2,085,122)
------------ ------------ ------------
Total stockholders' equity ................... 2,113,858 4,096,207 2,581,958
------------ ------------ ------------
Total liabilities and stockholders' equity .............. $ 21,774,774 $ 13,789,551 $ 8,830,496
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F - 2
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Nine For the Years Ended
Months Ended December 31,
September 30, --------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Franchise operations
Revenue (Note 8)
Continuing fees .................. $ 8,682,783 $ 5,836,822 $ 2,747,955
Initial franchise fees ........... 2,722,959 2,883,650 2,269,001
Area director and master
franchise fees (Note 1) ......... 776,523 3,022,276 2,139,080
Other ............................ 370,374 604,172 593,771
Interest ......................... 238,790 259,193 137,640
------------ ------------ ------------
Total revenue ................ 12,791,429 12,606,113 7,887,447
------------ ------------ ------------
Expenses
Sales and royalty commissions .... (3,877,691) (4,266,024) (2,346,476)
Advertising and promotion ........ (53,943) (191,755) (245,953)
General and administrative ....... (6,509,444) (6,201,857) (4,611,978)
------------ ------------ ------------
Total expenses ............... (10,441,078) (10,659,636) (7,204,407)
------------ ------------ ------------
Income from franchise operations ........ 2,350,351 1,946,477 683,040
------------ ------------ ------------
Company store operations
Sales ................................ 6,420,563 6,848,737 4,070,666
------------ ------------ ------------
Cost of sales ........................ (1,969,433) (2,042,092) (1,309,624)
Cost of labor ........................ (1,747,029) (1,683,225) (1,037,101)
Other store expenses ................. (2,169,465) (2,562,540) (1,432,290)
------------ ------------ ------------
Total expenses ............... (5,885,927) (6,287,857) (3,779,015)
------------ ------------ ------------
Income from Company stores operations ... 534,636 560,880 291,651
Other income (expenses)
Research, development and new programs -- -- (72,161)
Sales by stores held for resale ...... 566,841 1,281,904 149,549
Loss and expenses related to stores
held for sale ....................... (777,594) (1,541,957)
Loss on sale or closure of Company
stores .............................. (80,304) (47,505) (120,928)
Sale of Japan master franchise ....... 1,168,801 -- --
Provision for bad debts .............. (220,536) (285,308) (49,540)
Other expenses ....................... (26,287) (47,838) (64,544)
Depreciation and amortization ........ (921,300) (781,977) (406,444)
Privatization costs .................. (265,472) -- --
Interest expense ..................... (240,827) (340,614) (290,019)
------------ ------------ ------------
Total other expenses ......... $ (796,678) $ (1,763,295) $ (1,064,309)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Nine For the Years Ended
Months Ended December 31,
September 30, ----------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) before income taxes ...... $ 2,088,309 $ 744,062 $ (89,618)
Income tax (provision) benefit (Note 12) ... (721,688) 368,553 --
----------- ----------- -----------
Net income (loss) before preferred
dividends and cumulative effect of changes
in accounting principle ................... 1,366,621 1,112,615 (89,618)
Preferred stock dividends .................. (124,230) (220,890) (93,998)
----------- ----------- -----------
Net income (loss) before cumulative effect
of changes in accounting principle ........ 1,242,391 891,725 (183,616)
Cumulative effect of changes in accounting
principle (net of taxes) (Note 1) ......... (2,769,592) -- --
----------- ----------- -----------
Net income (loss) applicable to common
stockholders .............................. $(1,527,201) $ 891,725 $ (183,616)
Net income per share - basic
Net income per share before cumulative
effect of changes in accounting principle . $ .40 $ .30 $ (.06)
Cumulative effect of changes in accounting
principle ................................. (.90) -- --
----------- ----------- -----------
Basic net income per share of common stock . $ (.50) $ .30 $ (.06)
=========== =========== ===========
Net income per share - diluted
Net income per share before cumulative
effect of changes in accounting principle . $ .35 $ .26 $ (.06)
Cumulative effect of changes in accounting
principle ................................. (.90) -- --
----------- ----------- -----------
Diluted net income per share of common stock $ (.55) $ .26 $ (.06)
=========== =========== ===========
Weighted average common shares outstanding
Weighted average common shares outstanding
- basic ................................... 3,060,878 3,014,042 2,878,310
=========== =========== ===========
Weighted average common shares outstanding
- diluted ................................. 3,816,549 3,445,972 2,878,310
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible
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,
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 11) .... 167,000 167 -- -- 798,379 -- 798,546
Issuance of Series B
convertible preferred
stock for debt, net
of offering costs
of $44,277 (Note 9) ..... 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 9) ................ -- -- -- -- 44,277 -- 44,277
Issuance of common stock
for acquisition ......... -- -- 18,182 18 99,982 -- 100,000
Issuance of common stock
for exercise of options
pursuant to employee
benefit plan (Note 11) .. -- -- 40,355 40 92,116 -- 92,156
Inherent value of options
granted to area
directors (Note 11) ..... -- -- -- -- 33,950 -- 33,950
Preferred stock
dividens (Note 11) ...... -- -- -- -- (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
pursuant to employee
benefit plan (Note 11) .. -- -- 51,165 51 222,473 -- 222,524
Issuance of common stock
for exercise of options
by underwriter (Note 11) -- -- 80,000 80 399,920 -- 400,000
Preferred stock
dividens (Note 11) ...... -- -- -- -- (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
Issuance of common stock
for exercise of options
pursuant to employee
benefit plan (Note 11) .. -- -- 28,809 29 75,438 -- 75,467
Tax benefit from exercise
of stock options ........ -- -- -- -- 14,840 -- 14,840
Shares cancelled (Note 11) -- -- (9,091) (9) (45,446) -- (45,455)
Redemption of Series B
Preferred Stock (Note 11) (100,000) (100) -- -- (499,900) -- (500,000)
Preferred stock
dividends (Note 11) ..... -- -- -- -- (124,230) -- (124,230)
Net income ............... -- -- -- -- -- (1,402,971) (1,402,971)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30,
1999 313,000 $ 313 3,074,177 $ 3,074 $ 4,485,949 $(2,375,478) $ 2,113,858
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine For the Years Ended
Months Ended December 31,
September 30, ----------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ........................ $(1,402,971) $ 1,112,615 $ (89,618)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities -
Depreciation and amortization .......... 844,220 757,911 406,444
Cumulative effect of a change in
accounting principle .................. 4,388,208 -- --
Provision for losses on accounts and
notes receivable ..................... 220,536 285,308 (12,846)
Loss on disposal of Company stores .... 80,304 78,004 120,928
Issuance of stock for services ........ -- -- 16,349
Inherent value of options granted ..... -- -- 33,950
Deferred income taxes ................. (2,819,863) (641,068) --
Amortization of deferred financing
costs ................................ 77,080 24,066 54,072
Issuance of notes receivable for
master franchise and area director
marketing agreements ................. (487,279) (1,599,977) (354,412)
Other ................................. 17,972 -- --
Changes in assets and liabilities -
Accounts receivable ................ (398,076) (369,279) (168,661)
Other assets ....................... (77,735) 109,802 (192,997)
Accounts payable ................... (99,330) 251,711 12,346
Accrued liabilities ................ 12,152 42,476 319,120
Deferred franchise costs ........... (659,547) (287,610) 6,085
Deferred initial franchise fees and
other fees ........................ 4,672,693 2,633,284 573,191
Accrued income taxes ............... 651,469 200,000 --
----------- ----------- -----------
6,422,804 1,484,628 813,569
----------- ----------- -----------
Net cash provided by operating
activities .................... 5,019,833 2,597,243 723,951
----------- ----------- -----------
Cash flows from investing activities
Cash paid for acquisition of Company store (286,355) -- (623,800)
Purchase of property and equipment ....... (1,477,962) (1,780,767)
Proceeds from notes receivable ........... 1,221,099 889,671 553,007
Investment in turnkey stores ............. (7,558) (281,620) (593,675)
Short-term investments ................... (2,722,454) (1,003,235)
Issuance of other notes receivable ....... (37,390) (773,307) (455,099)
Investment by minority interest owners ... -- 151,601 --
Purchase of minority interest owners ..... (150,000) -- --
Intangible and deferred assets ........... (736,458) (601,862) (294,853)
Proceeds from sale of assets and stores .. -- 213,000 135,000
Deposits ................................. (89,749) (43,589) (38,665)
Area director marketing territory
repurchases ............................. (863,984) -- --
Other investments ........................ (15,000) -- --
----------- ----------- -----------
Net cash used by investing
activities .................... (5,165,811) (3,230,108)
----------- ----------- -----------
Cash flows from financing activities
Line-of-credit ........................... -- -- (220,239)
Principal payments on long-term
obligations ............................. (1,733,697) (505,440) (347,799)
Proceeds from long-term obligations ...... 2,338,168 877,642 155,615
Redemption of Class B Preferred Stock .... (500,000) -- --
Loan costs ............................... -- -- (37,469)
Proceeds from issuance of common stock
and preferred stock ..................... 90,307 622,524 910,807
Offering costs ........................... -- -- (36,454)
Preferred dividends paid ................. (124,230) (220,890) (93,998)
----------- ----------- -----------
Net cash provided by financing
activities .................... 70,548 773,836 330,463
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents ................................ (75,430) 140,971 (1,566,043)
Cash and cash equivalents - beginning of year 702,258 561,287 2,127,330
----------- ----------- -----------
Cash and cash equivalents - end of year ..... $ 626,828 $ 702,258 $ 561,287
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $240,827 (1999), $340,614 (1998)
and $290,019 (1997). Cash paid during the year for income taxes was
$1,198,275 (1999), $72,515 (1998) and $0 1997.
Supplemental disclosure of non-cash investing and financing activities:
During 1999, the Company sold a store held for resale for $150,000, all of
which was in the form of a promissory note, and recorded a loss on sale of
$11,684. Also, the Company sold the franchising rights and obligations for
all but 14 of its Bain's Deli's franchise agreements to Bain's Deli
Corporation for $850,000, represented by a note receivable, a reduction of
a related payable and other intangibles. In 1999, the Company recorded a
gain of $12,071 related to this sale.
Also, during 1999, the Company reached a settlement with Bain's Deli that
resulted in the return to the Company of the 9,091 shares of Company stock
originally issued as part of the purchase of the Bain's units in 1997 and
the cancellation of the Company's note payable to Bain's Deli in the amount
of $116,118.
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 Bain's purchase agreements, in the amount of $437,553.
Corresponding reductions in property and equipment ($150,000) and
intangibles ($287,553) were also recorded.
During 1999, 1998 and 1997, the Company acquired assets under capital
leases totaling $124,742, $231,085and $77,942, 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)
===========
See notes to consolidated financial statements.
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
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, Australia, Japan and Central America 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, S & S, Inc.
("S&S") formerly 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, the Quizno's Licensing Company ("QLC") incorporated
in 1998 to license companies who use the Quizno's logos and QUIZ-DIA, Inc.
("DIA") incorporated in 1999 to purchase restaurant assets at Denver
International Airport. 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
September 30, 1999:
Sold But
Not Yet In
Operation Operational Total
--------- ----------- ------
Quizno's
Company owned restaurants ........... -- 17 17
Franchise restaurants - U.S. and
Puerto Rico ......................... 505 527 1,032
Franchise Restaurants - International 159 72 231
Restaurants held for resale ......... -- 2 2
Bain's
Franchise restaurants ............... -- 8 8
Quizno's Kansas
Company owned restaurants ........... -- 8 8
----- ----- -----
664 634 1,298
===== ===== =====
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries QOC, S&S, QRC, QLC, QAC and QKL.
Change in Fiscal Year
In November 1999, the Company changed its fiscal year from December 31 to
September 30. All references in the financial statements to the year or period
ended September 30 relate to the nine months ended September 30, 1999.
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
$1,140,779.
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 1999, unrealized gains and losses were immaterial as amortized cost
approximated market value.
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 that 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
Area Director Territory Repurchases
Costs associated with repurchasing area directory territories are deferred and
amortized on a straight-line basis over 15 years.
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
September 30, 1999, 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. franchisees 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. These franchise fees are non-refundable in
most circumstances. 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 after
certain restrictive performance criteria are met. 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. Prior to January 1, 1999,
the Company recognized revenue when all material services and conditions
required to be performed by the Company had been substantially completed.
Change in Accounting Method for Area Director Marketing Agreements
Effective January 1, 1999, the Company changed its accounting policy related to
the recognition of area director marketing agreement fees to one that recognizes
such fees as revenue on a straight-line basis over the term of the agreement,
which is ten years. Direct expenses attributable to the fees are classified as a
prepaid and recognized as an expense over the same ten year term. The effect of
the change in fiscal 1999 resulted in the deferral of $4,262,701 of net revenue
previously recognized in prior years. Fiscal 1999 income before the cumulative
effect adjustment included $387,108 of amortized deferred net revenue related to
area director marketing agreement fees. This change was reported as a cumulative
effect of change in accounting principle for $2,685,502 (net of $1,577,199 in
income tax benefits) and is included in the net loss in fiscal 1999.
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 master 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 and area director fee revenues and costs and net operating loss
carryforwards.
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 nine months ended September 30, 1999 and
the years ended December 31, 1997 and 1998 consisted of preferred stock,
convertible debt, stock options and warrants outstanding (Note 14).
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 September 30, 1999 because of the relatively short maturity of these
instruments.
The carrying amounts of long-term notes receivable approximate fair value as of
September 30, 1999 because the discounted cash flows at current rates
approximate the rates of the significant notes.
The carrying amounts of notes payable and debt issued approximate fair value as
of September 30, 1999 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, 1998 and 1997 to make them comparable to those presented for the
nine months ended September 30, 1999, none of which change the previously
reported net income or total assets.
Recently Issued Accounting Pronouncements
During April 1998, Statement of Position 98-5, "Reporting in 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 was required to be
adopted by the first quarter of 1999. Upon adoption, the Company was required to
write-off $125,507 ($84,090 net of applicable taxes) in preopening related costs
that were deferred on the balance sheet as of December 31, 1998. This write-off
was reported as a cumulative effect of a change in accounting principle.
Note 2 - Acquisition of Assets
Effective July 31, 1999, the Company repurchased the 30% minority interest of
QKL for $150,000 in cash.
On July 1, 1999, the Company purchased, for cash, a Quizno's Restaurant from a
franchisee for a total purchase price of $286,355. The purchase was accounted
for under the purchase method.
The purchase price has been allocated to the assets purchased based on the fair
market values at the date of acquisition, as follows:
Equipment $ 65,000
Leasehold improvements 105,000
Covenant not to compete 100,000
Lease Agreement 10,087
Inventory and deposit 6,268
---------
$ 286,355
=========
No pro forma statement of operations is presented as the effect is not material
to the Company's operations.
Note 3 - Notes Receivable
Notes receivable consist of the following:
December 31,
September 30, ---------------------
1999 1998 1997
----------- --------- ---------
Notes receivable related to area director
marketing agreements, interest ranging
from 6% to 15%, due in varying amounts
through December 2010. $1,540,826 $1,878,855 $ 853,028
Notes receivable for sale of stores,
interest ranging from 6% to 15%, due in
varying amounts through October 2012. 530,026 410,058 494,318
Note receivable from national advertising
trust, interest at 10%, paid in full in
February 1999. - 267,058 -
Note receivable from Bain's Deli
Corporation, interest accrues at 6% if
note balance not paid down $25,000 in any
one year, due February 1, 2006 150,000 - -
Other notes receivable with interest
ranging from 0% to 11%, due in varying
amounts through 2011. Includes $0
(1999), $21,524 (1998) and $35,524 (1997)
due from the Advertising Fund (Note 8). 11,213 32,423 125,635
----------- --------- ---------
2,232,065 2,588,394 1,472,981
Less current portion (519,994) (1,212,522) (598,486)
----------- --------- ---------
1,712,071 1,375,872 874,495
Less allowance (41,742) - (140,000)
----------- --------- ---------
$ 1,670,329 $1,375,872 $ 734,495
=========== ========== ==========
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 September 30,
- ------------------------
2000 $ 519,994
2001 360,189
2002 378,702
2003 331,937
2004 205,829
Thereafter 435,414
---------
2,232,065
Less allowance (41,742)
---------
$2,190,323
==========
Note 4 - Assets Held for Resale
Included in assets held for resale are the following:
December 31,
September 30, ----------------------
1999 1998 1997
---------- ---------- ----------
Furniture fixtures and equipment $ 65,421 $ 221,034 $ -
Leasehold improvements 108,056 383,771 -
Goodwill and other 19,446 33,590 -
Area director territory repurchases 889,387 51,635 -
Stores under development - - 593,675
---------- ---------- ----------
$1,082,310 $ 690,030 $ 593,675
========== ========== ===========
During 1997, the Company acquired a store from a franchisee and also 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. In 1999, the Company sold another store as a franchise
for a sale price of $150,000 and closed one store. Costs incurred by the Company
prior to their disposal amounted to approximately $179,000 and $170,000,
respectively. The Company intends to close one store and sell the remaining
store by the end of 1999.
Note 5 - Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------
Life 1999 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Equipment 3-10 years $2,014,698 $1,524,799 $ 903,371
Furniture and fixtures 7-10 years 1,052,232 764,672 390,435
Leasehold improvements Lease term
(Note 10) 2,286,344 1,712,215 1,297,334
Software 3-5 years 681,238 313,540 113,506
---------- ---------- -----------
6,034,512 4,315,226 2,704,646
Less accumulated
depreciation and amortization (1,230,461) (780,004) (463,985)
---------- ---------- -----------
Net property and equipment $4,804,051 $3,535,222 $ 2,240,661
========== ========== ===========
</TABLE>
Depreciation expense for 1999 included depreciation on certain assets sold, or
held for resale that will not recur in future years if these assets are sold, as
is the intention of the Company.
Note 6 - Intangible Assets
Intangible assets consist of the following:
December 31,
September 30,-----------------------
1999 1998 1997
---------- ---------- -----------
Covenants not to compete $ 600,113 $1,667,546 $ 1,664,759
Franchise agreements 792,796 310,506 292,395
Prepaid area director marketing
commission 526,776 - -
Trademarks and other 455,339 442,813 318,827
---------- ---------- -----------
2,375,024 2,420,865 2,275,981
Less accumulated amortization (712,759) (867,343) (624,344)
---------- ---------- -----------
$1,662,265 $1,553,522 $ 1,651,637
========== ========== ===========
Note 7 - Other Deferred Assets
Other deferred assets consist of the following:
December 31,
September 30, -----------------------
1999 1998 1997
---------- ---------- -----------
Deferred franchise costs $1,585,773 $ 926,226 $ 638,616
Deferred financing costs 108,769 87,080 101,146
Other deferred costs 32,442 106,065 -
---------- ---------- -----------
$1,726,984 $1,119,371 $ 739,762
========== ========== ===========
Note 8 - Related Party Transactions
The Company had notes receivable from the Advertising Fund of $0, $21,524 and
$35,524 at September 30, 1999 and December 31, 1998 and 1997, respectively. The
balances related to an off season build-up for advertising which was reimbursed
to the Company in the subsequent year.
In September 1999, two employees of the Company purchased an area directorship
for $200,000, of which $180,000 of which was in the form of a promissory note
and $20,000 was in cash.
Two directors of the Company own more than 50% in a company that owns an area
directorship. In 1999, 1998 and 1997, the Company paid the Area Director
$142,364, $139,358 and $85,577, respectively, in commissions and royalties. At
September 30, 1999, $55,547 was owed to the Company on a promissory note due
from the area director. During 1997, 1998 and 1999, payments on such notes were
$4,655, $6,212 and $8,000, respectively. An additional $10,000 was paid in
November 1999 to bring the note and all accrued interest current. The area
director is also indebted to the Company for $13,075 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
paid off in approximately 24 months.
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, 1998 and 1999, the Company made payments pursuant to the
promissory note totaling $18,839, $18,993 and $14,245, respectively. In October
of 1999, this note was paid-off in full.
Note 9 - Long-Term Obligations and Convertible Subordinated Debt
December 31,
September 30,-----------------------
1999 1998 1997
---------- ---------- ----------
Various capital leases, with monthly
payments totaling approximately $25,200
including interest at rates ranging from
9.74% to 11% and expiring through June
2004. Collateralized by restaurant and
office equipment. In conjunction with
Company's loan agreement with AMRESCO,
$852,982 of the September 30, 1999
balance was paid-off in October 1999
(Note 15). $ 970,999 $ 986,077 $ 127,770
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.
In conjunction with Company's loan
agreement with AMRESCO, the September 30,
1999 balance was paid-off in October 1999
(Note 15). 23,574 35,869 52,048
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. In conjunction
with Company's loan agreement with
AMRESCO, the September 30, 1999 balance
was paid-off in October 1999 (Note 15). 35,220 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. In conjunction with
Company's loan agreement with AMRESCO,
the September 30, 1999 balance was
paid-off in October 1999 (Note 15). 37,470 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. In 1998, 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. In connection with a
settlement with Bain's Deli Franchise
Associates, this note was cancelled in
1999. - 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.
In conjunction with Company's loan
agreement with AMRESCO, the September 30,
1999 balance was paid-off in October 1999
(Note 15). 81,072 93,742 -
Note payable to a financing company with
interest at 7.92%. The note calls for
monthly principal and interest payments
of $7,528 and matures March 23, 2006.
Collateralized by restaurant equipment.
In conjunction with Company's loan
agreement with AMRESCO, the September 30,
1999 balance was paid-off in October 1999
(Note 15). 457,811 - -
Notes payable, paid in full in 1998. - - 146,203
---------- ---------- ----------
1,606,146 1,335,388 1,044,654
Less current portion (337,642) (370,404) (303,084)
---------- ---------- ----------
$1,268,504 $ 964,984 $ 741,570
========== ========== ===========
Subordinated debt consists of:
December 31,
September 30, ----------------------
1999 1998 1997
---------- --------- ---------
Subordinated debt payable to a financing
company with an initial principal balance
of $1,853,931. The note accrues interest
at the rate of 7.75% per annum and
requires monthly payments of $28,665.
The note is collateralized by all of the
restaurant equipment and furniture and
fixtures existing at six of the Company's
stores. The Company is required to
maintain certain annual cash flow
covenants under the agreement. In
conjunction with Company's loan agreement
with AMRESCO, the September 30, 1999
balance was paid-off in October 1999
(Note 15). $1,717,337 $ - $ -
12.75% convertible subordinated debt,
paid in full during 1999. - 1,375,000 1,500,000
Less current portion (218,546) (244,084) (110,912)
---------- --------- ---------
$1,498,791 $1,130,916 $ 1,389,088
========== ========== ===========
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.
Maturities of long-term obligations, convertible subordinated debt and capital
leases are as follows:
Long-Term
Obligations and
Subordinated Capital
Year Ending September 30, Debt Leases Total
- ------------------------- ----------- ----------- -----------
2000 $ 344,172 $ 302,724 $ 646,896
2001 360,471 297,946 658,417
2002 344,462 281,196 625,658
2003 366,978 231,381 598,359
2004 511,326 33,725 545,051
Thereafter 425,075 -- 425,075
----------- ----------- -----------
2,352,484 1,146,972 3,499,456
Less amount representing interest -- (175,973) (175,973)
----------- ----------- -----------
Total principal 2,352,484 970,999 3,323,483
Less current portion (344,172) (212,016) (556,188)
----------- ----------- -----------
$2,008,312 $ 758,983 $ 2,767,295
========== =========== ===========
Included in equipment in the accompanying 1999, 1998 and 1997 balance sheets are
assets held under capital leases in the amount of $1,063,920, $1,278,925 and
$161,147, respectively and accumulated amortization of $149,372, 132,837 and
$65,079, respectively.
Note 10 - Commitments and Contingencies
The Company leases an office facility, twenty-nine restaurant locations
(including stores held for resale) and certain equipment and vehicles under
operating lease agreements which provide for the payment of rent totaling
approximately $64,000 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
$762,891, $642,447 and $636,874 during the periods ended September 30, 1999 and
December 31, 1998 and 1997, respectively.
Future minimum rental payments are as follows:
Year Ending September 30,
- -------------------------
2000 $1,379,049
2001 1,394,739
2002 1,319,456
2003 1,167,023
2004 890,451
Thereafter 1,665,003
----------
$7,815,721
==========
Minimum payments for the period ended September 30, 1999 have not been reduced
by minimum rentals of $1,653,278 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 taxes, depreciation, amortization and
interest over the prior year. Bonuses accrued during 1997, 1998 and 1999 totaled
$291,260, $209,000 and $262,354, respectively. One agreement expires in December
2000 while the other agreement expires in December 2003.
On April 26, 1999, the Company signed a licensing agreement with the Coca Cola
Company to purchase certain amounts of fountain syrups in return for cash
incentives. The agreements requires the Company to purchase a total of
12,000,000 gallons of fountain products and 1,000,000 cases of bottled products.
If the Company cancels the agreement, the Company would be obligated to refund a
pro rata share of the licensing fee based upon contract product not purchased.
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 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. The Company denied
each of the area director's claims and defenses.
On April 13, 1999, the arbitration panel issued its ruling. It found that the
area director had materially breached the area director agreement and that the
Company had properly terminated that agreement. The panel therefore denied all
of the area director's claims for breach of contract and refuted his allegations
of franchise and securities law violations. While the panel did award the area
director approximately $230,000 in pre-termination commissions and costs, those
related primarily to referral commissions that the Company owed the area
director, before the Company terminated him in August 1998, for previous master
franchise and area directorship sales made. The Company had no liability for its
lawful termination of the area director's area director agreement. The panel
also ordered the area director to abide by all of the post-termination covenants
in the area director agreement.
Note 11 - 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 and has a liquidation preference of $5.00 per share plus all
then accrued and unpaid cumulative dividends. All issued and outstanding 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 anytime after October 8, 2000, and has a liquidation
preference of $5.00 per share plus all then accrued and unpaid cumulative
dividends.
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 670,000 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
periods ended September 30, 1999 and December 31, 1998 and 1997, 250,500,
117,205 and 98,550, 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 200,000 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 periods ended
September 30, 1999 and December 31, 1998 and 1997, 29,000, 28,000 and 18,000
options were granted under the Director Plan, respectively.
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. During
1999, the Company granted options under the AD Plan for 10,275 shares.
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.
In 1999, the Company reached a settlement with Bains Deli that resulted in the
return to the Company of the 9,091 shares of Company stock originally issued as
part of the purchase of the Bains units in 1997.
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,
September 30,----------------------
1999 1998 1997
---------- ---------- ----------
Net income (loss) before cumulative
effect of changes in accounting principle
= as reported $1,242,391 $ 891,725 $ (183,616)
Net income (loss) before cumulative effect
of changes in accounting principle
- pro forma $ 662,806 $ 586,960 $ (433,536)
Basic earnings (loss) per share - as
reported $ .40 $ .30 $ (.06)
Basic earnings (loss) per share - pro
forma $ .22 $ .19 $ (.15)
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 from 5 to 10 years.
The following is a summary of options and warrants granted, exercised and
expired:
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Average Fair Exercise
Exercise Value of Currently Price of
Price of Options Exercisable Options and
Options Options and Options Warrants-
and and Warrants and Currently
Warrants Warrants Granted Warrants Exercisable
----------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding December 31,
1997 888,060 $3.82 568,283 $2.17
Granted 205,580 $1.21 $1.80
Forfeited or exercised (197,102) $(1.06)
Outstanding December 31,
1998 896,538 $3.40 590,867 $2.52
Granted 279,500 $1.81 $3.50
Forfeited or exercised (60,695) $(.25)
Outstanding September 30,
1999 1,115,343 $4.29 616,925 $3.54
=========
</TABLE>
September 30, 1999
----------------------------------------------------------
Options and
Options and Warrants Outstanding Warrants Exercisable
---------------------------------- ----------------------
Weighted
Weighted Average Weighted
Range of Options and Average Remaining Average
Warrants Number Exercise Contractual Number Exercise
Exercisable Price Outstanding Price Life Exercisable Price
- ------------------- --------- --------- ----------- ----------- ---------
$3.00 - $5.50 819,043 $3.21 5.3 years 614,965 $3.53
$5.75 - $8.18 296,300 $7.28 5.8 years 1,960 $6.64
--------- -----------
1,115,343 $4.29 5.4 years 616,925 $3.54
========= ===========
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 12 - Income Taxes
The components of the provision for income tax benefit for the year ended
September 30, 1999 and December 31, 1998 are as follows:
September 30, December 31,
1999 1998
------------ -----------
Current income tax expense $ 1,951,848 $ 213,500
Deferred income tax benefit (1,230,160) (582,053)
----------- -----------
$ 721,688 $ (368,553)
=========== ===========
For the period ended September 30, 1999, the net deferred tax benefit related to
the cumulative effect of changes in accounting of $1,589,703 is not reflected in
the table above.
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 that the Company would realize its
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 1999, 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,
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,
September 30,----------------------
1999 1998 1997
----------- --------- -----------
Current deferred tax asset $ 128,718 $ 81,260 $ -
Current deferred tax liabilities - - -
----------- --------- -----------
Net current deferred tax asset $ 128,718 $ 81,260 $ -
=========== ========= ===========
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------
1999 1998 1997
----------- --------- ----------
<S> <C> <C> <C>
Long-term deferred tax asset $ 4,890,254 $1,673,620 $ 900,000
Long-term deferred tax liability (1,383,041) (938,812) -
----------- ---------- ----------
3,507,213 734,808 900,000
Less impairment - - (725,000)
----------- ---------- ----------
Net long-term deferred tax asset 3,507,213 734,808 175,000
----------- ---------- ----------
Net deferred tax asset $ 3,635,931 $ 816,068 $ 175,000
=========== ========== ==========
</TABLE>
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,
September 30, -----------------
1999 1998 1997
------- ------ ------
Federal statutory rate 37.0% 34.0% (34.0)%
Nondeductible expenses .9 8.4 -
Other - deferred including utilization of
NOL (3.3) (13.5) -
Valuation allowance - (78.0) 34.0
------- ------ ------
34.6% (49.1)% - %
====== ====== ======
Note 13 - 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. The maximum
amount will increase to $10,500 in 2000.
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 $60,427, $31,675 and $33,251 to the Plan for the
periods ended September 30, 1999 and December 31, 1998 and 1997, respectively.
Note 14 - Earnings (Loss) Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
For the Nine For the Years Ended
Months Ended December 31,
September 30, --------------------
1999 1998 1997
---------- --------- ---------
Numerator - net income (loss) before
cumulative effect of changes in accounting
principle
Numerator for basic earnings per share $1,242,391 $ 891,725 $(183,616)
Preferred dividends (net of taxes) 78,265 - -
---------- --------- ---------
Numerator for diluted earnings per share $1,320,656 $ 891,725 $(183,616)
========== ========= =========
Numerator for basic and diluted earnings per
share - cumulative effect of changes in
accounting principle $(2,769,592) N/A N/A
Denominator - net income (loss)
before cumulative effect of changes in
accounting principle Denominator for
basic earnings per share - weighted
average shares 3,060,878 3,014,042 2,878,310
Effect of dilutive securities - convertible
debt, options and warrants 755,671 431,930 -
------------ --------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares 3,816,549 3,445,972 2,878,310
============ ========= =========
Denominator for basic and diluted earnings
per share - cumulative effect of changes in
accounting principle 3,060,878 N/A N/A
Basic earnings (loss) per share $ (.50) $ .30 $ (.06)
============ ========= =========
Diluted earnings (loss) per share $ (.55) $ .26 $ (.06)
============ ========= =========
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
Note 15 - Subsequent Events
On October 11, 1999, the Board of Directors of the Company approved the purchase
of a corporate jet by the Company allowing for more efficient travel by
management between areas of franchise operations. For tax purposes, the airplane
qualifies for accelerated depreciation, resulting in the deferral of income tax
payments. The $3,350,000 purchase was completed on October 13, 1999.
On October 5, 1999, the Company closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. The loan bears interest at
10.1%, which may be adjusted to the ten-year treasury note rate plus 4.25%
during the first 120 days, and is repayable in monthly installments of $193,338
for nine years and five months. The loan is secured by the assets of Company
owned stores and other assets of the Company existing at September 30, 1999. The
loan is part of a securitized pool and includes a provision which could require
the Company to pay up to another $1,555,555 depending on the amount of defaults,
if any, in the loan pool. The proceeds of the loan were used to pay-off existing
debt of $3,320,956, pay costs and fees associated with the loan of $560,000, and
prepay interest and one payment of $304,624. The balance of $9,814,420 is
available to use, with certain restrictions, for general corporate purposes
other than working capital, dividends, or to repurchase the majority
shareholder's stock.
Certain notes payable held by the Company at September 30, 1999 were repaid with
the AMRESCO note proceeds. See Note 9 for the identification of the notes repaid
with these proceeds.
On November 16, 1999, the Company announced that its subsidiary, QUIZ-DIA, Inc.
purchased the assets of ASI-DIA, Inc. ("ASI") for a total of $4.875 million in
cash.
Assets purchased include two Quizno's Company restaurants and three bars,
including the WWW.COWBOY bar, and various other assets located on Concourses A
and B at Denver International Airport. The Company intends to continue operating
the restaurants as Quizno's Classic Subs and the bars as operated by ASI.
The purchase will be accounted for under the purchase method. The purchase price
will be allocated to the assets purchased based on the fair market values at the
date of acquisition.
Note 16 - Transition Reporting
In October 1999, the Company changed its fiscal year from December 31 to
September 30. As such, the 1999 financial statements are as of and for the nine
months ended September 30, 1999. The 1998 and 1997 financial statements are as
of and for the twelve months ended December 31, 1998 and 1997, respectively. For
comparative purposes, the following unaudited summarized consolidated statement
of operations is presented for the nine-month periods ended September 30, 1998
and 1997.
For the Nine Months Ended
September 30,
---------------------------
(Unaudited) 1998 1997
- ----------- --------- -------------
Total revenue $14,223,450 $8,108,457
Income from franchise operations $ 1,238,455 $ 325,163
Income from Company store operations $ 477,326 $ 189,592
Net income (loss) before taxes $ 668,860 $ (163,205)
Net income (loss) applicable to common $ 502,891 $ (205,910)
shareholders
Net income (loss) per share - basic $ .17 $ (.07)
Net income (loss) per share - diluted $ .15 $ (.07)
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 our Directors as of December 17,
1999, are set forth below:
Name Age Position(s) with Company Director Since
- ------------------- ------- ------------------------ ---------------
Richard E. Schaden 35 President, Chief 1991
Executive Officer
and Director
Richard F. Schaden 61 Secretary and 1991
Director
Frederick H. Schaden 53 Director 1993
J. Eric Lawrence 32 Director 1997
Brad A. Griffin 49 Director 1999
Mark L. Bromberg 48 Director 1997
Each director is currently serving a one year term that will end on the
date of our 2000 Annual Meeting of Shareholders.
Director's Biographical Information
Mr. Richard E. Schaden has been President and a Director of our company
since its inception on January 7, 1991, and was appointed as Chairman of the
Board of Directors in November 1999. 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
our company. Mr. Schaden graduated Magna Cum Laude from the University of
Colorado with a degree in Business Management and Finance. See "Certain
Transactions."
Mr. Richard F. Schaden has been Vice President, Secretary and a Director
of our company since its inception on January 7, 1991. 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 our 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. 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 for over 25 years and has served as a
senior officer of its affiliates since 1981. Mr. Schaden earned a B.S. in
Business Administration from Xavier University in Cincinnati, Ohio. See
"Certain Transactions."
28
<PAGE>
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 us
$2,000,000 in 1996, and Mr. Lawrence serves on the Board pursuant to a
contractual arrangement between our 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 December 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.
Mr. Brad A. Griffin has been the managing director of GriffCo Development,
which develops, builds, leases and manages commercial and retail real estate,
since 1994. He is also the managing director of Oasis Investment, a company that
manages investment assets and trades NASDAQ and Exchange stocks and options.
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 PepsiCo, which he grew from one restaurant in 1988 to 30 in 1993
when it was sold to PepsiCo. 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.
Richard F. Schaden is the father of Richard E. Schaden. Frederick H.
Schaden is the brother of Richard F. Schaden and Richard E. Schaden's uncle.
29
<PAGE>
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 our company:
Name Age Position(s) with the Company
- ---------------- --- ----------------------------
Richard E. Schaden 35 President, Chief Executive Officer and
Chairman of the Board
Mark R. Laramie 48 Chief Operating Officer
Robert W. Scanlon 53 Executive Vice President for Development
Sue A. Hoover 54 Executive Vice President for Marketing
Richard F. Schaden 61 Vice President, Secretary and Director
Patrick E. Meyers 40 Vice President and General Counsel
John L. Gallivan 52 Chief Financial Officer, Treasurer and
Assistant Secretary
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 us in 1998 as the Chief Operating Officer. Prior to
joining us, 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.
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 our company as Director of Marketing in 1991. She was
named Senior Vice President of Marketing in 1997 and was named an Executive Vice
President in October 1998. Ms. Hoover graduated from the University of Iowa with
a B.A. in 1968.
Patrick E. Meyers joined us 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 our company from 1993 to
1997, when he resigned to become a full-time employee of our company.
30
<PAGE>
John L. Gallivan joined us as Chief Financial Officer in 1994. He was
later elected Treasurer and Assistant Secretary. Prior to his joining our
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 our
directors, our officers (including a person performing a policy-making function)
and persons who own more than 10% of a registered class of our 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. Directors, officers and 10% Holders are required by
SEC regulations to furnish us with copies of all of the Section 16(a) reports
they file. Based solely upon such reports, we believe that during fiscal 1999
our directors, advisors, officers and 10% Holders complied with all filing
requirements under Section 16(a) of the Exchange Act, except for Messrs. Mark R.
Laramie, Mark L. Bromberg, J. Eric Lawrence, Frederick H. Schaden, Brad A.
Griffin, Brownell E. Bailey (a former Director), and Lewis G. Rudnick, Bruce H.
Gulbus and Lyle B. Stewart (Advisory Board members), who inadvertently failed to
file their Forms 5 for fiscal 1999 in a timely manner, as a result of our change
of the date of our fiscal year end.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
Set forth below is information about compensation during fiscal 1999 of
our five most highly compensated executive officers, including our CEO ("Named
Officers").
Summary Compensation Table. The following table provides certain summary
information for fiscal 1999 (1), 1998 and 1997 concerning compensation awarded
or paid to, or earned by, the Named Officers:
31
<PAGE>
<TABLE>
<CAPTION>
Long-Term and Other
Annual Compensation Compensation
------------------------------------ --------------------------
Option 401(k) Plan
Name and Position Year Salary Bonus Shares(2) Contribution (3)
- ------------------- ----------- --------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Richard E. Schaden 12/31/97 $108,500 $125,731 4000 $2,534
President and 12/31/98 $181,452 $130,625 5,164 $2,000
Chief Executive 9/30/99 $196,710 $ 1,500 33,000 $2,329
Officer (4)
Mark R. Laramie 12/31/98 $ 35,865 $ 0 8,000 $ 0
Chief Operating Officer 9/30/99 $112,450 $ 18,000 36,000 $ 0
Robert W. Scanlon, 12/31/97 $ 79,998 $ 13,276 4,000 $1,168
Executive Vice President 12/31/98 $ 85,783 $ 28,115 5,164 $3,418
of Development 9/30/99 $ 78,000 $ 10,289 9,000 $5,885
Sue A. Hoover, 12/31/97 $ 33,000 $ 0 4,000 $ 654
Executive Vice President 12/31/98 $ 90,479 $ 13,968 9,164 $3,016
of Marketing 9/30/99 $ 73,125 $ 20,826 6,000 $3,962
Patrick E. Meyers, 12/31/97 $ 68,546 $ 1,500 8,000 $ 0
Vice President and 12/31/98 $ 84,000 $ 24,674 5,164 $ 0
General Counsel 9/30/99 $ 72,768 $ 24,632 14,000 $2,500
Richard F. Schaden, 12/31/97 $ 83,500 $ 75,439 0 $ 0
Vice President and 12/31/98 $ 83,500 $ 78,375 0 $ 0
Secretary (4) 9/30/99 $ 62,625 $ 0 0 $ 0
----------
</TABLE>
(1) Fiscal 1999 contained only nine months because we changed our fiscal year
end to September 30 during 1999.
(2) As an incentive for our eligible employees to work to enhance our
performance and assure our future success, we grant options to purchase shares
of common stock to successful employees from time to time under our Employee
Stock Option Plan. All options indicated in this table have been granted under
that Plan.
(3) We provide our employees with a 401(k) Employee's Savings Plan, pursuant to
which we contribute to each eligible employee's account an amount equal to 50%
of such employee's annual contribution. Employees in 1999 were limited to a
maximum contribution of $10,000 by applicable provisions of the Internal Revenue
Code. That amount increases to $10,500 in 2000. Prior to 1999, we matched
employee contributions up to 6% of each employee's total annual compensation. We
have issued shares of Common Stock for 50% our annual contribution to each
account under the 401(k) Plan.
(4) Because of the change in our fiscal year end to September 30, and the fact
that Mr. Schaden's contractual bonus is calculated on a calendar year basis, he
has not yet earned (nor can the amount be calculated) the bonus that is expected
to be paid covering the 1999 fiscal year.
Stock Option Awards. We adopted our Employee Stock Option Plan (the
"Employee Plan") in 1993. The purposes of the Employee Plan are to enable us to
provide opportunities for certain officers and key employees to acquire a
proprietary interest in our company, to increase incentives for such persons to
contribute to our performance and further success, and to attract and retain
individuals with exceptional business, managerial and administrative talents,
who will contribute to our progress, growth and profitability. As of September
30, 1999, we had issued 22,963 shares upon exercise of options under the
Employee Plan and had 647,037 shares reserved for issuance under the Employee
Plan.
32
<PAGE>
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 of our officers and employees are
eligible for ISOs. We determine which persons will receive ISOs, the applicable
exercise price, vesting provisions and the exercise term. The terms and
conditions of option grants 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. ISOs must satisfy the statutory
requirements of the Code in order to qualify for certain preferential treatment.
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
common stock, by delivery of options granted under the Employee Plan or a
combination of any of these methods.
Option information for fiscal 1999 relating to the Named Officers is set
forth below:
Option Grants in Fiscal 1999
Number of
Shares of Percentage of
Common Stock Total Options
Underlying Granted to
Options Employees in
Granted in Fiscal Exercise Expiration
Name Fiscal 1999 1999 Price Date
- -------------------- ------------- --------- -------- -------
Richard E. Schaden 33,000 13.3% $7.975 (1)
Mark R. Laramie 36,000 14.5% $ 7.25 (1)
Robert W. Scanlon 9,000 3.6% $ 7.25 (1)
Sue A. Hoover 6,000 2.4% $ 7.25 (1)
Patrick E. Meyers 14,000 5.6% $ 7.25 (1)
(1) One-third of all options granted to the Named Officers and others in 1999
vest on each of the second, third and fourth anniversary of the grant date,
February 4, 1999, if the optionee is still employed by us on that date. Vested
options terminate if not exercised on February 4, 2004 or 90 days after an
employee leaves our company.
33
<PAGE>
<TABLE>
<CAPTION>
Number of Shares 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 4,961 34,291 $13,656 $3,240
Mark R.
Laramie 0 0 1,600 42,400 $400 $24,280
Robert W.
Scanlon 3,873 $11,619 4,000 14,291 $17,800 $26,743
Sue A.
Hoover 0 0 16,273 12,891 $47,323 $19,269
Patrick E.
Meyers 0 0 25,873 15,291 $97,979 $12,693
</TABLE>
(1) The dollar values are calculated by determining the difference between $
7.88 per share, the fair market value of the Common Stock at September 30, 1999,
and the exercise price of the respective options.
Employment Contracts. Richard E. Schaden has entered into an Employment
Agreement with us that terminates on December 31, 2003. His contract provides
that he will serve as our President and Chief Executive Officer. Mr. Schaden
will devote his full time to company matters. His annual base salary is
$220,000. 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 each full calendar year during the term of the
agreement 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 business. The contract provides that we
will pay one-half of Mr. Schaden's medical insurance coverage and one-half of
the cost of disability insurance. We will pay for $1,000,000 of term life
insurance for Mr. Schaden, payable to his designated beneficiary. We 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 us in 1993
that terminated by its terms on December 31, 1998. At a Board Meeting on May 6,
1999, the Board of Directors approved the extension of Mr. Schaden's 1993
Employment Agreement for an additional two years, retroactive to January 1,
1999. This Agreement provides that he will serve as Vice President and Secretary
of our company. Mr. Schaden will not devote his full time to company matters,
but will devote such time to company matters as we request. His current base
salary is $83,500 per year, which may be adjusted from time to time by mutual
agreement between Mr. Schaden and the Board of Directors. Mr. Schaden may take
on special projects for us at the direction of the Board of Directors and
receive additional compensation for such projects. The Agreement provides an
annual bonus equal to 6% of any positive increase in earnings before interest,
taxes, depreciation and amortization for each full calendar year during the term
of the agreement over the level of such amount for the prior full calendar year.
We may terminate the Agreement for cause upon ninety days' notice. Mr. Schaden
may terminate the Employment Agreement upon ninety days' notice.
34
<PAGE>
None of the other Named Officers have an employment agreement with us.
Director Compensation
Directors who are not officers or employees 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 common stock,
which immediately vest.
During fiscal 1999, we paid each of our four non-employee directors,
$1,500 (except for J. Eric Lawrence who was paid $1,000), as compensation for
their attendance at regular Board and Committee meetings. For their service
during fiscal 1999, these outside Directors each received a grant of options to
purchase 4,000 shares of common stock that immediately vested. In addition,
during fiscal 1999, a Special Committee of the Board of Directors, composed of
two independent members of the Board of Directors, was constituted to review and
evaluate a proposal to take our company private. That proposal was ultimately
withdrawn. For their service on the Committee, Mr. Mark Bromberg was paid
$44,718.52 plus out-of-pocket disbursements, and Mr. Brownell Bailey was paid
$43,225.81 plus out-of-pocket disbursements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our equity securities (common stock and three classes of preferred
stock) as of December 17, 1999, (a) by each person known to us to own
beneficially more than 5% of the Common Stock, (b) each of our Named Officers
and directors and (c) by all of our officers and directors named herein as a
group.
<TABLE>
<CAPTION>
Class A Class C Class D
Class A Preferred Class C Preferred Class D Preferred
Common Common Preferred Stock Preferred Stock Preferred Stock
Name and Stock Stock Stock Percentage Stock Percentage Stock Percentage
Address Owned (1) Percentage Owned Owned Owned Owned Owned Owned
- ---------- --------- ---------- -------- ---------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard E. 856,877 27.4% 73,000 50% 0 0 0 0
Schaden (2)
1415
Larimer St.
Denver, CO
80202
Richard F. 882,667 28.0% 73,000 50% 34,000 20.4% 0 0
Schaden (2)
11870
Airport Wy.
Broomfield,
CO 80021
Retail 415,056 12.0% 0 0 0 0 0 0
Restaurant (3)
& Growth
Capital,
L.P.
10000 N.
Central
Expressway
Suite 1060
Dallas, TX
75231
Mark L. 10,000 * 0 0 0 0 0 0
Bromberg (4)
1801 Kings
Isle Dr.
Plano, TX
75093
35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class A Class C Class D
Class A Preferred Class C Preferred Class D Preferred
Common Common Preferred Stock Preferred Stock Preferred Stock
Name and Stock Stock Stock Percentage Stock Percentage Stock Percentage
Address Owned (1) Percentage Owned Owned Owned Owned Owned Owned
- ---------- --------- ---------- -------- ---------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Eric 12,000 * 0 0 0 0 0 0
Lawrence (4)
10000 N.
Central
Expressway
Suite 1060
Dallas, TX
75231
Frederick 24,000 * 0 0 2,000 1.1% 0 0
H. Schaden (4)
100 S.
Wacker Drive
Suite 860
Chicago, IL
60606
Brad A. 1,000 * 0 0 5,000 2.7% 0 0
Griffin (4)
207 Canyon
Blvd.
Suite 300
Boulder, CO
80302
Mark R. 1,600 * 0 0 0 0 1,000 25%
Laramie (4)
1415
Larimer St.
Denver, CO
80202
Robert W. 5,948 * 0 0 0 0 0 0
Scanlon (5)
1415
Larimer St.
Denver, CO
80202
Sue A. 24,982 * 0 0 0 0 0 0
Hoover 1415 (5)
Larimer St.
Denver, CO
80202
Patrick E. 26,131 * 0 0 0 0 0 0
Meyers (5)
1415
Larimer St.
Denver, CO
80202
All 1,859,505 5.9% 146,000 100% 41,000 24.2% 1,000 25%
Executive
Officers
and
Directors
as a Group
(11 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 this 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 such options
or warrants or convertible securities 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 have been exercised or converted. Our Class A
and Class C Preferred Stock are currently convertible into Quizno's common
stock.
(2) Richard E. Schaden and Richard F. Schaden beneficially own, through a voting
trust pursuant to which they are joint voting trustees, 1,547,334 shares of
common stock and 146,000 shares of Class A Convertible Preferred Stock of our
company, and 4,000 shares of common stock owned by a family member for which the
voting trust holds sole voting power. 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 4 years, subject to
extension. Richard E. Schaden, individually, beneficially owns 784 shares of
common stock allocated to him under our 401(k) Plan, 4339 shares of common stock
held in his own name, 1,087 shares of common stock represented by currently
exercisable stock options, and 2,000 shares of common stock owned by a family
member for which he holds sole voting power. Richard F. Schaden, individually,
beneficially owns 34,000 shares of our Class C Convertible Preferred Stock. Of
the shares of common stock indicated as owned by each of them, 73,000 may be
acquired by conversion of Class A Convertible Preferred Stock, and 34,000 may be
acquired by Richard F. Schaden by conversion of Class C Convertible Preferred
Stock.
(3) Retail & Restaurant Growth Capital, L.P. ("RRGC"), in connection with a loan
to our company that has since been repaid, has been issued two Warrants by us.
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 beneficially owned by Messrs. Lawrence,
Bromberg, Griffin and Laramie may be acquired through the exercise of options.
All of the shares indicated as beneficially owned by Mr. Frederick Schaden may
be acquired through the exercise of options or conversion of Class C Convertible
Preferred Stock.
(5) Robert W. Scanlon, individually, beneficially owns 473 shares of common
stock allocated to him under our 401(k) Plan, 1,475 shares of common stock held
in his own name, and 4,000 shares of common stock represented by currently
exercisable stock options. Sue A. Hoover, individually, beneficially owns 709
shares of common stock allocated to her under our 401(k) Plan, 11,873 shares of
common stock held in her own name, and 12,400 shares of common stock represented
by currently exercisable stock options. Patrick E. Meyers, individually,
beneficially owns 158 shares of common stock allocated to him under our 401(k)
Plan, 3,973 shares of common stock held in his own name, and 22,000 shares of
common stock represented by currently exercisable stock options.
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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 our company, a portion of which was convertible into
372,847 shares of our common stock, and with interest accrued 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 our common stock at $3.10 per share. On
October 8, 1997, we 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 our 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, we also issued
a warrant to RRGC that granted it the right to purchase up to 42,209 shares of
the common stock at $5.00 per share. Such number of shares of common stock is
subject to downward adjustment if we meet certain net income and other goals. In
no case will the warrant be exercisable for less than 30,041 shares of the
common stock. On January 6, 1999, we 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.
Effective October 1, 1994, a wholly-owned subsidiary of our company
acquired by merger all of the assets and obligations of Schaden & Schaden, Inc.,
a Colorado corporation, or "SSI", owned by Richard E. Schaden and Richard F.
Schaden. The assets of SSI included interests in several Quizno's Classic Subs
restaurants and interests in two area directorships. The consideration paid by
us to the Schadens, included $876,000 that was paid in our Class A 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
common stock. We may call the Class A Preferred Stock upon 60 days notice.
During fiscal 1999 and 1998 each preferred shareholder received dividends of
$28,470 annually.
Richard F. Schaden and Frederick H. Schaden, directors of our company,
each own an interest in Illinois Food Management, Inc. ("IFM") that owns
approximately 50% of our Chicago Area Director. We also own approximately 12% of
IFM. In fiscal 1998 and 1999, respectively, we paid the Area Director $139,358
and $142,363.54 as commissions on the sale of new franchises and royalties. In
early 1996, IFM requested that we extend the payment terms relating to amounts
owed to us by IFM as a result of its operations as an Area Director. As a result
of that request, we agreed to defer payment of $63,547. IFM issued to us a
promissory note in that amount payable over 6 years with an interest rate of 12%
per annum. At September 30, 1999, $55,547.29 was owed to us on this promissory
note. During fiscal 1998 and 1999, accrued interest payments on the note were
$6,212 and $8,000, respectively. IFM is also indebted to us for $13,075.34 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 26 months.
In 1997, we purchased a Restaurant from a company in which Sue Hoover, our
Executive Vice President of Marketing, was a 42.5% shareholder. The purchase
price was $80,000 of which $15,000 was paid in cash and $65,000 paid by issuance
of a promissory note bearing interest at 11% and payable over four years. During
fiscal 1998 and 1999, we made payments pursuant to the promissory note totaling
$18,993 and $14,245, respectively.
On October 13, 1999, we purchased a 1997 Cessna Citation 525. As of the
same date, we entered into an interchange agreement with Richard F. Schaden,
P.C., which is 100% owned by Richard F. Schaden. Mr. Schaden, through his
company, owns a 1980 Cessna 560 Citation V. Under the interchange agreement, the
parties agreed to lease each aircraft to each other, on an as-needed basis,
without charge, although the parties will pay the operational costs of the
airplane. We also will pay Mr. Schaden or his company to provide services
related to the airplane operations, including for pilot and management services.
We do not anticipate that such payments will be material.
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We anticipate entering into an agreement with Pink Sand Corporation, for
the development rights to United States Territory of Guam and the Commonwealth
of the Northern Mariana Islands. Pink Sand is principally owned by Richard F.
Schaden. The development agreement will require Pink Sand to open 5 Restaurants
during the term of the agreement. So long as Pink Sand meets the development
schedule, it will have the exclusive rights to develop Restaurants in the
territory. The development fee is $42,500, payable upon execution of the
agreement. The fee equals one hundred percent of the first initial franchise fee
and fifty percent of the aggregate initial franchise fees due for all of the
other Restaurants that Pink Sand must develop under the agreement. Each time
Pink Sand signs a franchise agreement for a Restaurant to be developed within
the territory, we will apply the Development Fee in increments equal to fifty
percent of the initial franchise fee due for that Restaurant to reduce the
additional amount Pink Sand must pay. We anticipate entering into the agreement
in December 1999 or early January 2000.
In 1995, we sold the Area Director rights for the Detroit, Michigan area
to a company wholly-owned by Richard F. Schaden. The fee paid to us 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 1998, we
paid the Area Director $27,664 in royalties. Mr. Schaden sold the area
directorship in 1998 to an entity owned by Scott Adams, a former employee of our
company, and we approved the transfer of the area director marketing agreement.
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 our
insurance policies, including the directors and officers policies that we have
purchased.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B. We will furnish to
our shareholders, a copy of any of the exhibits listed below upon payment of
$.25 per page to cover our costs of furnishing the exhibits.
Item No. Exhibit Description
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.
2.3 Asset 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
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2.4 Asset Purchase Agreement, among Quiz-DIA, Inc., Airport services,
Inc. and ASI-DIA, L.P., dated as of the 5th day of November, 1999,
incorporated by reference to Exhibit 2.3 to Form 8-K, filed by the
Company with the SEC on November 22,1999.
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.(I) By-laws of the Company*
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.
3.(II) Articles of Amendment to the Articles of Incorporation of the
Company, authorizing 10,000 shares of Class D Preferred Stock.*
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.
9.4 Third Amendment to Voting Trust Agreement dated as of September 1,
1999*
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 Directors and Advisors.*
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).
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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).
10.10 Indemnity Agreement of J. Eric Lawrence, incorporated by reference
to Exhibit 10.10 to the Company's Form 10-KSB, dated March 26, 1998
10.11 Indemnity Agreement of Mark L. Bromberg, incorporated by reference
to Exhibit 10.11 to the Company's Form 10-KSB, dated March 26, 1998
10.12 Form of Franchise Agreement, incorporated by reference to Exhibit
10.12 to the Company's Form 10-KSB, dated March 26, 1998.
10.13 Form 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 Headquarters Office Lease for the Company, incorporated by reference
to Exhibit 10.14(b) to the Company's Form 10-KSB, filed with the SEC
on March 31, 1999.
10.15 Amendment 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.
10.16 Amendment 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.
10.17 Deferment 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.
10.18 Investment 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.
10.19 Stockholders' 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.
10.20 First 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.
10.21 Warrant 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.
41
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10.22 Warrant to Purchase Shares of Common Stock of the Company, dated as
of December 31, 1998 and issued to RRGC.*
10.23 Asset Purchase Agreement between The Quizno's Acquisition Company
and Bain's Deli Corporation dated as of February 1, 1999,
incorporated by reference to Exhibit 10.28 to the Company's form
10-KSB filed with the SEC on March 31, 1999.
10.24 Airplane Purchase Agreement, dated as of September 22, 1999, between
the Company and Sacramento Aviation Management Company.*
10.25 Interchange Agreement, dated as of October 13, 1999, between the
Company and Richard F. Schaden, P.C.*
10.26 Form of Master Franchise Agreement*
10.27 Investment letter agreement, dated as of October 4, 1999, between
the Company and AMERESCO Commercial Finance, Inc.*
10.28 Form of Promissory Note, dated as of October 5, 1999, issued by the
Company to AMERESCO Commercial Finance, Inc.*
10.29 Form of Pledge and Security Agreement, dated as of October 5, 1999,
between the Company and AMERESCO Commercial Finance, Inc.*
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 November 5, 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.*
- ----------
* Filed with this Report.
(b) Reports on Form 8-K. We filed three (3) reports on Form 8-K during the
fiscal quarter ending September 30, 1999. All three Form 8-K filings reported on
only Item 5 matters. Such filings where made on August 11, August 19, and
September, 1999, and related to press releases announcing the withdrawal of
proposed going private transaction, second quarter financial results and the
results of shareholder votes taken at our September 27, 1999 Annual Meeting,
respectively.
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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 December 21, 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 December 30, 1999
- ----------------------- Officer and Director
Richard E. Schaden (Principal Executive Officer)
/s/ Richard F. Schaden Vice President, December 30, 1999
Richard F. Schaden Secretary and Director
/s/ Mark L. Bromberg Director December 30, 1999
Mark L. Bromberg
/s/ J. Eric Lawrence Director December 30, 1999
J. Eric Lawrence
/s/ Frederick H. Schaden Director December 30, 1999
Frederick H. Schaden
Director December 30, 1999
- -------------------
Brad A. Griffin
/s/ John L. Gallivan Chief Financial Officer December 30, 1999
John L. Gallivan and Treasurer (Principal
Financial and Accounting
Officer
43
BYLAWS
OF
THE QUIZNO'S CORPORATION
ADOPTED AUGUST 25, 1994, AS AMENDED
ARTICLE I
Offices and Agents
1. Principal Office. The principal office of the Corporation may be
located within or without the State of Colorado, as designated by the most
recent filing with the Secretary of State of Colorado. The Corporation may have
other offices and places of business at such places within or without the State
of Colorado as shall be determined by the directors.
2. Registered Office. The registered office of the corporation
required by the Colorado Business Corporation Act must be continually maintained
in the State of Colorado, and it may be, but need not be, identical with the
principal office, if located in the State of Colorado. The address of the
registered office of the Corporation may be changed from time to time as
provided by the Colorado Business Corporation Act.
3. Registered Agent. The Corporation shall maintain a registered
agent in the State of Colorado as required by the Colorado Business Corporation
Act. Such registered agent may be changed from time to time as provided by the
Colorado Business Corporation Act.
ARTICLE II
Shareholders Meetings
1. Annual Meetings. The annual meeting of the shareholders of the
corporation shall be held at a date and time fixed by resolution of the board of
directors or by the president in the absence of action by the board of
directors. The annual meeting of the shareholders shall be held for the purpose
of electing directors and transacting such other corporate business as may come
before the meeting. If the election of directors is not held as provided herein
at any annual meeting of the shareholders or at any adjournment thereof, the
board of directors shall cause the election to be held at a special meeting of
the shareholders as soon thereafter as it may conveniently be held.
Notice of an annual meeting need not include a description of the
purpose or purposes of the meeting except when the purpose of the meeting is
to consider (i) an amendment to the Articles of Incorporation of the
Corporation, (ii) a merger or share exchange in which the Corporation is a
party and, with respect to a share exchange, in which the Corporation's shares
will be acquired, (iii) the sale, lease, exchange or other disposition, other
than in the usual and regular course of business, of all or substantially all
of the property of the Corporation or of another entity which the Corporation
controls, in each case with or without goodwill, (iv) the dissolution of the
Corporation or (v) any other purpose for which a statement of purpose is
required by the Colorado Business Corporation Act.
2. Special Meetings. Unless otherwise prescribed by the Colorado
Business Corporation Act, special meetings of the shareholders of the
Corporation may be called at any time by the chairman of the board of
directors, if any, by the president, by resolution of the board of directors
or upon receipt of one or more written demands for a meeting, stating the
purpose or purposes for which it is to be held, signed and dated by the
holders of at least ten percent (10%) of all votes entitled to be cast on any
issue proposed to be considered at the meeting. Notice of a special meeting
shall include a description of the purpose or purposes for which the meeting
is called.
3. Place of Meeting. The annual meeting of the shareholders of the
Corporation may be held at any place, either within or without the State of
Colorado, as may be designated by the board of directors. Except as limited by
the following sentence, the person or persons calling any special meeting of
the shareholders may designate any place, within or without the State of
Colorado, as the place for the meeting. If no designation is made or if a
special meeting shall be called other than by the board of directors, the
chairman of the board of directors or the president, the place of meeting
shall be the principal office of the Corporation. A waiver of notice signed by
all shareholders entitled to vote at a meeting may designate any place as the
place for holding such meeting.
4. Notice of Meeting. Written notice stating the date, time and place
of the meeting shall be given no fewer than ten (10) and no more than sixty
(60) days before the date of the meeting, except that if the number of
authorized shares is to be increased, at least thirty (30) days' notice shall
be given. Notice shall be given personally or by mail, private carrier,
telegraph, teletype, electronically transmitted facsimile or other form of
wire or wireless communication by or at the direction of the president, the
secretary, or the officer or other person calling the meeting to each
shareholder of record entitled to vote at such meeting. if mailed and if in a
comprehensible form, such notice shall be deemed to be given and effective
when deposited in the United States mail, addressed to the shareholder at his
or her address as it appears in the Corporation's current record of
shareholders, with postage prepaid. If notice is given other than by mail, and
provided that the notice is in comprehensible form, the notice is given and
effective on the date received by the shareholder. No notice need be sent to
any shareholder if three successive notices mailed to the last known address
of such shareholder have been returned as undeliverable until such time as
another address for such shareholder is made known to the Corporation by such
shareholder.
When a meeting is adjourned to a different date, time or place,
notice need not be given of the new date, time or place if the new date, time
or place is announced at the meeting before adjournment. At the adjourned
meeting, the Corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than 120
days, or if a new record date is fixed for the adjourned meeting, a new notice
of the adjourned meeting shall be given to each shareholder of record entitled
to vote at the meeting as of the new record date.
5. Waiver of Notice. A shareholder may waive any notice of a meeting
either before or after the time and date of the meeting. The waiver shall be in
writing, be signed by the shareholder entitled to the notice and be delivered to
the corporation for inclusion in the minutes or filing with the corporate
records, but such delivery and filing shall not be conditions for effectiveness.
A shareholder's attendance at a meeting waives objection to (i) lack
of notice or defective notice of the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting because of lack of
notice or defective notice, and (ii) consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the
meeting notice, unless the shareholder objects to considering the matter when
it is presented.
6. Fixing of Record Date. In order to determine shareholders entitled
(i) to be given notice of a shareholders meeting (ii) to demand a special
meeting, (iii) to vote, or (iv) to take any other action, the board of
directors may fix a future date as the record date, such date, in any case,
shall not be more than seventy (70) days and in case of a meeting of
shareholders not less than ten (10) days prior to the date on which the
particular action requiring such determination of shareholders is to be taken.
If no record date is fixed, the record date shall be the date on which notice
of the meeting is mailed or the date on which a resolution of the board of
directors providing for a distribution is adopted, as the case may be. When a
determination of shareholders entitled to vote at any meeting of shareholders
is made as provided in this Section 6, such determination shall apply to any
adjournment thereof.
Notwithstanding the foregoing, the record date for determining the
shareholders entitled to take action without a meeting or entitled to be given
notice of action so taken shall be the date a writing upon which the action is
taken is first received by the Corporation. The record date for determining
shareholders entitled to demand a special meeting shall be the date of the
earliest of the demands pursuant to which the meeting is called.
7. Voting List. After fixing a record date for a shareholder's
meeting, the Corporation shall prepare a list of names of all its shareholders
who are entitled to be given notice of the meeting. The list shall be arranged
by voting groups and within each voting group by class or series, and shall show
the address of, and the number of shares of each class or series that are held
by each shareholder.
The shareholders' list shall be available for inspection by any
shareholder, beginning the earlier of ten (10) days before the meeting for which
the list was prepared or two (2) business days after notice of the meeting is
given and continuing through the meeting, and any adjournment thereof, at the
Corporation's principal office or at a place identified in the notice of the
meeting in the city where the meeting will be held.
A shareholder, his agent or attorney, may upon written demand,
inspect and copy the list during regular business hours and during the period it
is available for inspection, provided, (i) the shareholder has been a
shareholder for at least three (3) months immediately preceding the demand or
holds at least five percent (5%) of all outstanding shares of any class of
shares as the date of the demand, (ii) the demand is made in good faith and for
a purpose reasonably related to the demanding shareholder's interest as a
shareholder, (iii) the shareholder describes with reasonable particularity the
purpose and records the shareholder desires to inspect, (iv) the records are
directly connected with the described purpose and (v) the shareholder pays a
reasonable charge covering the costs of labor and material for such copies, not
to exceed the cost of production and reproduction.
8. Proxies. At all meetings of shareholders, a shareholder may vote
by proxy by signing an appointment form either personally or by his or her duly
authorized attorney-in-fact. A shareholder may also appoint a proxy by
transmitting or authorizing the transmission of a telegram, teletype, or other
electronic transmission providing a written statement of the appointment to the
proxy, to a proxy solicitor, proxy support service organization or other person
duly authorized by the proxy to receive appointments as agent for the proxy, or
to the Corporation. The transmitted appointment shall set forth or be
transmitted with written evidence from which it can be determined that the
shareholder transmitted or authorized the transmission of the appointment. The
proxy appointment form shall be filed with the Secretary of the corporation by
or at the time of the meeting. The appointment of a proxy is effective when
received by the corporation and is valid for eleven (11) months unless a
different period is expressly provided in the appointment form.
Any complete copy, including an electronically transmitted facsimile,
of an appointment of a proxy may be substituted for or used in lieu of the
original appointment for any purpose for which the original appointment could be
used.
Revocation of a proxy does not affect the right of the Corporation to
accept the proxy's appointment unless (i) the Corporation had notice that the
appointment was coupled with an interest and notice that the interest is
extinguished is received by the Secretary or other officer or agent authorized
to tabulate votes before the proxy exercises his authority under the appointment
or (ii) other notice of the revocation of the appointment is received by the
Secretary or other officer or agent authorized to tabulate votes before the
proxy exercises his authority under the appointment. Other notice of revocation
may, in the discretion of the Corporation, be deemed to include the appearance
at a shareholders meeting of the shareholder who granted the proxy appointment
and his voting in person on any matter subject to a vote at such meeting.
The death or incapacity of the shareholder appointing a proxy does
not affect the right of the Corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the Secretary or other officer
or agent authorized to tabulate votes before the proxy exercised his authority
under the appointment.
The Corporation shall not be required to recognize an appointment
made irrevocable if it has received a writing revoking the appointment signed by
the shareholder either personally or by the shareholder's attorney-in-fact,
notwithstanding that the revocation may be a breach of an obligation of the
shareholder to another person not to revoke the appointment.
A transferee for value of shares subject to an irrevocable appointment
may revoke the appointment if the transferee did not know of its existence
when he acquired the shares and the irrevocable appointment was not noted on
the certificate representing the shares.
Subject to the provisions of Article II, Section 10 below or any
express limitation on the proxy's authority appearing on the appointment form,
a corporation is entitled to accept the proxy's vote or other action as that
of the shareholder making the appointment.
9. Voting Rights. Each outstanding share, regardless of class, is
entitled to one vote and each fractional share is entitled to a corresponding
fractional vote, on each matter voted on at a shareholder's meeting except to
the extent that the voting rights of the shares of any class or classes are
limited or denied by the Articles of Incorporation. Only shares are entitled to
vote. Voting on any question or in any election may be by voice vote unless the
presiding officer shall order, or any shareholder shall demand, that voting be
by ballot.
Cumulative voting in the election of directors shall not be permitted.
Except as otherwise ordered by a court of competent jurisdiction upon
a finding that the purpose of this Section 9 would not be violated in the
circumstances presented to the court, the shares of the Corporation are not
entitled to be voted if they are owned, directly or indirectly, by another
corporation, domestic or foreign, and the Corporation owns, directly or
indirectly, a majority of the shares entitled to vote for directors of the other
corporation, except to the extent the other corporation holds the shares in a
fiduciary capacity.
Redeemable shares are not entitled to be voted after notice of
redemption is mailed to holders and a sum sufficient to redeem the shares has
been deposited with a bank, trust company, or other financial institution under
an irrevocable obligation to pay the holders the redemption price on surrender
of the shares.
10. Corporation's Acceptance of Votes. If the name signed on a vote,
consent, waiver, proxy appointment, or proxy appointment revocation corresponds
to the name of a shareholder, the Corporation, if acting in good faith, is
entitled to accept the vote, consent, waiver, proxy appointment, or proxy
appointment revocation and to give it effect as the act of the shareholder. If
the name signed on a vote, consent, waiver, proxy appointment, or proxy
appointment revocation does not correspond to the name of a shareholder, the
Corporation, if acting in good faith, is nevertheless entitled to accept the
vote, consent, waiver, proxy appointment, or proxy appointment revocation and to
give it effect as the act of the shareholder if:
(a) The shareholder is an entity and the name signed purports to be that
of an officer or agent of the entity;
(b) The name signed purports to be that of an administrator,
executor, guardian, or conservator representing the shareholder and, if the
Corporation requests, evidence of fiduciary status acceptable to the
Corporation has been presented with respect to the vote, consent, waiver,
proxy appointment or proxy appointment revocation;
(c) The name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the Corporation requests, evidence of
this status acceptable to the Corporation has been presented with respect to
the vote, consent, waiver, proxy appointment or proxy appointment revocation;
(d) The name signed purports to be that of a pledgee, beneficial
owner. or attorney-in-fact of the shareholder and, if the Corporation
requests, evidence acceptable to the Corporation of the signatory's authority
to sign for the shareholder has been presented with respect to the vote,
consent, waiver, proxy appointment or proxy appointment revocation;
(e) Two or more persons are the shareholder as cotenants or
fiduciaries and the name signed purports to be the name of at least one of the
cotenants or fiduciaries and the person signing appears to be acting on behalf
of all the cotenants or fiduciaries; or
(f) The acceptance of the vote, consent, waiver, proxy appointment,
or proxy appointment revocation is otherwise proper under rules established by
the Corporation that are not inconsistent with the provisions of this Section
10.
The Corporation is entitled to reject a vote, consent, waiver, proxy
appointment or proxy appointment revocation if the Secretary or other officer
or agent authorized to tabulate votes,, acting in good faith, has reasonable
basis for doubt about the validity of the signature on it or about the
signatory's authority to sign for the shareholder.
The Corporation and its officer or agent who accepts or rejects a
vote, consent, waiver, proxy appointment or proxy appointment revocation in
good faith and in accordance with the standards of this Section 10 are not
liable in damages for the consequences of the acceptance or rejection.
11. Quorum and Voting Requirements. A majority of the votes entitled
to be cast on a matter by a voting group shall constitute a quorum of that
voting group for action on the matter unless a lesser number is authorized by
the Articles of Incorporation. once a share is represented for any purpose at
a meeting, including the purpose of determining that a quorum exists, it is
deemed present for quorum purposes for the remainder of the meeting and for
any adjournment of that meeting, unless otherwise provided in the Articles of
Incorporation or unless a new record date is or shall be set for that
adjourned meeting.
If a quorum exists, action on a matter other than the election of
directors by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group
opposing the action, unless the vote of a greater number or voting by classes
is required by law or the Articles of Incorporation. For election of
directors,, those candidates receiving the most votes shall be elected.
12. Adjournments. If less than a quorum of shares entitled to vote is
represented at any meeting of the shareholders, a majority of the shares so
represented may adjourn the meeting from time to time without further notice,
for a period not to exceed 120 days at any one adjournment. If a quorum is
present at such adjourned meeting, any business may be transacted which might
have been transacted at the meeting as originally noticed. Any meeting of the
shareholders may adjourn from time to time until its business is completed.
13. Action by Shareholders Without Meeting. Any action required or
permitted to be taken at a shareholders' meeting may be taken without a
meeting if all of the shareholders entitled to vote thereon consent to such
action in writing. Action taken under this Section 13 shall be effective as of
the date the last writing necessary to effect the action is received by the
Corporation, unless all of the writings necessary to effect the action specify
a later date as the effective date of the action, in which case such later
date shall be the effective date of the action. If the corporation receives
writings describing and consenting to the action signed by all of the
shareholders entitled to vote with respect to the action, the effective date
of the action may be any date that is specified in all of the writings as the
effective date of the action. Any such writings may be received by the
Corporation by electronically transmitted facsimile or other form of wire or
wireless communication providing the Corporation with a complete copy thereof,
including a copy of the signature thereto. Action taken under this Section 13
has the same effect as action taken at a meeting of shareholders and may be
described as such in any document.
Any shareholder who has signed a writing describing and consenting to
action taken pursuant to this Section 13 may revoke such consent by a writing
signed by the shareholder describing the action and stating that the
shareholder's prior consent thereto is revoked, if such writing is received by
the Corporation before the effectiveness of the action.
14. Meetings by Telecommunication. Any or all of the shareholders may
participate in an annual or special shareholders, meeting by, or the meeting
may be conducted through the use of, any means of communication by which all
persons participating in the meeting may hear each other during the meeting. A
shareholder participating in a meeting by this means is deemed to be present
in person at the meeting.
ARTICLE III
Board of Directors
1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall
be managed under the direction of, the board of directors, except as otherwise
provided in the Colorado Business Corporation Act or the Articles of
Incorporation.
2. Number, Qualifications and Term of Office. The number of directors
of the Corporation shall be fixed from time to time by resolution of the board
of directors, within a range of no less than three (3) or more than nine (9). A
director shall be a natural person who is eighteen years or older. A director
need not be a resident of the State of Colorado or a shareholder of the
Corporation.
Directors shall be elected at each annual meeting of shareholders and
shall hold such office until the next annual meeting of shareholders and until
his successor is elected and qualifies. A decrease in the number of directors
does not shorten an incumbent director's term.
3. Resignation, Vacancies. Any director may resign at any time by
giving written notice to the Corporation. A resignation of a director is
effective when the notice is received by the Corporation unless the notice
specifies a later effective date. Unless otherwise specified in the notice, the
acceptance of such resignation by the Corporation shall not be necessary to make
it effective. Any vacancy on the board of directors may be filled by the
affirmative vote of a majority of the shareholders or by the affirmative vote of
the board of directors even if less than a quorum is remaining in office. If
elected by the directors, the director shall hold office until the next annual
shareholders' meeting at which directors are elected. If elected by the
shareholders, the director shall hold office for the unexpired term of his or
her predecessor in office, except that, if the director's predecessor was
elected by the directors to fill a vacancy, the director elected by the
shareholders shall hold office for the unexpired term of the last predecessor
elected by the shareholders.
4. Removal of Directors by Shareholders. Unless otherwise provided in
the Articles of Incorporation, the shareholders may remove one or more
directors with or without cause. A director may be removed by the shareholders
only at a meeting called for the purpose of removing the director and the
meeting notice states that the purpose, or one of the purposes, of the meeting
is removal of the director.
5. Removal of Directors by Judicial Proceeding. A director may be
removed by the District Court of the Colorado county where the principal office
is located or if the corporation has no principal office in the State of
Colorado, by the District Court of the Colorado county in which its registered
office is located, upon a finding by the District Court that the director
engaged in fraudulent or dishonest conduct or gross abuse of authority or
discretion with respect to the Corporation and that removal is in the best
interests of the Corporation. The judicial proceeding may be commenced either by
the Corporation or by shareholders holding at least ten percent (10%) of the
outstanding shares of any class.
6. Compensation. By resolution of the board of directors, any
director may be paid any one or more of the following: his expenses, if any, of
attendance at meetings; a fixed sum for attendance at each meeting; a stated
salary as director; or such other compensation as the Corporation and the
director may reasonably agree upon. No such payment shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV
Meetings of the Board
1. Place of Meetings. The regular or special meetings of the board of
directors shall be held at the principal office of the Corporation unless
otherwise designated.
2. Regular Meetings. The board of directors shall meet each year
after the annual meeting of the shareholders for the purpose of appointing
officers and transacting such other business as may come before the meeting.
The board of directors may provide, by resolution, for the holding of
additional regular meetings without other notice than such resolution.
3. Special Meetings. Special meetings of the board of directors may
be called at any time by the chairman of the board, if any, by the president or
by a majority of the members of the board of directors.
4. Notice of Meetings. Notice of the regular meetings of the board of
directors need not be given. Except as otherwise provided by these Bylaws or the
laws of the State of Colorado, written notice of each special meeting of the
board of directors setting forth the time and the place of the meeting shall be
given to each director not less than two (2) days prior to the date and time
fixed for the meeting. Notice of any special meeting may be either personally
delivered or mailed to each director at his business address, or by notice
transmitted by telegraph, telex, electronically transmitted facsimile or other
form of wire or wireless communication. If mailed, such notice shall be deemed
to be given and to be effective on the earlier of (i) three (3) days after such
notice is deposited in the United States mail properly addressed, with postage
prepaid, or (ii) the date shown on the return receipt if mailed by registered or
certified mail return receipt requested. If notice be given by telex,
electronically transmitted facsimile or other similar form of wire or wireless
communication, such notice shall be deemed to be given and to be effective when
sent, and with respect to a telegram, such notice shall be deemed to be given
and to be effective when the telegram is delivered to the telegraph company. If
a director has designated in writing one or more reasonable addresses or
facsimile numbers for delivery of notice to him, notice sent by mail, telegraph,
telex, electronically transmitted facsimile or other form of wire or wireless
communication shall not be deemed to have been given or to be effective unless
sent to such addresses or facsimile numbers, as the case may be. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the board of directors need be specified in the notice or waiver of notice of
such meeting.
5. Waiver of Notice. A director may, in writing, waive notice of any
special meeting of the board of directors either before, at, or after the
meeting. Such waiver shall be delivered to the Corporation for filing with the
corporate records. Attendance or participation of a director at a meeting waives
any required notice of that meeting unless at the beginning of the meeting or
promptly upon the director's arrival, the director objects to holding the
meeting or transacting business at the meeting because of lack of notice or
defective notice and does not thereafter vote for or assent to action taken at
the meeting.
6. Quorum, Manner of Acting. At meetings of the board of directors a
majority of the number of directors fixed by resolution of the board shall
constitute a quorum for the transaction of business. If the number of directors
is not fixed, then a majority of the number in office immediately before the
meeting begins, shall constitute a quorum. If a quorum is present when a vote is
taken, the affirmative vote of a majority of directors present is the act of the
board of directors unless the vote of a greater number is required by these
Bylaws, the Articles of Incorporation or the Colorado Business corporation Act.
7. Presumption of Assent. A director who is present at a meeting of
the board of directors when corporate action is taken is deemed to have assented
to the action taken unless:
(a) the director objects at the beginning of such meeting or promptly
upon his or her arrival, to the holding of the meeting or the transacting of
business at the meeting and does not thereafter vote for or assent to any action
taken at the meeting;
(b) the director contemporaneously requests that his or her dissent
or abstention as to any specific action taken be entered in the minutes of
such meeting; or
(c) the director causes written notice of his or her dissent or
abstention as to any specific action to be received by the presiding officer
of such meeting before its adjournment or by the Corporation promptly after
adjournment of such meeting.
The right of dissent or abstention as to a specific action taken in
a meeting of a board is not available to a director who votes in favor of the
action taken.
8. Committees. The board of directors may, by a resolution adopted by
a majority of all of the directors in office when the action is taken, designate
one of more of its members to constitute an executive committee, and one or more
other committees. To the extent provided in the resolution, each committee shall
have and may exercise all of the authority of the board of directors, except
that no such committee shall have the authority to: (i) authorize distributions;
(ii) approve or propose to shareholders action required by the Colorado Business
Corporation Act to be approved by shareholders; (iii) fill vacancies on the
board of directors or any committee thereof; (iv) amend the Articles of
Incorporation; (v) adopt, amend or repeal these Bylaws; (vi) approve a plan of
merger not requiring shareholder approval; (vii) authorize or approve the
reacquisition of shares except in accordance with a formula or method prescribed
by the board of directors; or (viii) authorize or approve the issuance or sale
of shares, or a contract for the sale of shares, or determine the designation,
relative rights, preferences and limitations of a class or series of shares;
except that the board of directors, may authorize a committee or an officer to
do so within limits specifically prescribed by the board of directors. The
conduct of committee meetings shall comply with the provisions of this Article
IV relating to board of director meetings.
The creation of, delegation of authority to, or action by a committee
does not alone constitute compliance by a director with the standards of conduct
set forth in Article V.
9. Informal Action by Directors. Any action required or permitted be
taken at a board of directors' meeting may be taken without a meeting if all
members of the board consent to such action in writing. Action taken under this
Section 9 is effective at the time the last director signs a writing describing
the action taken unless the directors establish a different effective date, and
unless, before such time, a director has revoked his or her consent by a writing
signed by the director and received by the president or secretary. Action taken
pursuant to this Section 9 has the same effect as action taken at a meeting of
the directors and may be described as such in any document.
10. Telephonic Meetings. Members of the board of directors may
participate in a regular or special meeting by or conduct the meeting through
the use of any means of communication by which all directors participating may
hear each other during the meeting. A director participating in a meeting by
this means is deemed to be present in person at the meeting.
ARTICLE V
Standards of Conduct
Each director shall perform his or her duties as a director,
including his or her duties as a member of any committee, and each officer with
discretionary authority shall discharge his or her duties under that authority,
(i) in good faith, (ii) with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, and in a manner he or she
reasonably believes to be in the best interest of the Corporation.
In discharging his or her duties, a director or officer is entitled
to rely on information, opinions, reports, or statements, including financial
statements and other financial data, if prepared or presented by (i) one or more
officers or employees of the Corporation whom the director or officer reasonably
believes to be reliable and competent in the matters presented, (ii) legal
counsel, a public accountant, or other person as to matters which the director
or officer reasonably believes to be within such persons' professional or expert
competence or (iii) in the case of a director, a committee of the board of
directors of which the director is not a member if the director reasonably
believes the committee merits confidence.
A director or officer is not acting in good faith if he or she has
knowledge concerning the matter in question that makes reliance otherwise
permitted under this Article V unwarranted.
A director or officer is not liable as such to the Corporation or its
shareholders for any action he or she takes or omits to take as a director or
officer, as the case may be, if, in connection with such action or omission, he
or she performed the duties of the position in compliance with this Article V.
ARTICLE VI
Officers and Agents
1. General.
(a) The officers of the Corporation shall consist of a president,
secretary and treasurer, appointed annually by the board of directors. Each
officer shall be a natural person eighteen years of age or older. The board of
directors or the president may appoint such other officers, assistant officers,
committees and agents, including a chairman of the board, vice chairman of the
board, one or more vice presidents, assistant secretaries and assistant
treasurers, as they may consider necessary. To the extent not provided in these
bylaws, the board of directors or the president, as the case may be, shall from
time to time determine the procedure for the appointment of officers, their term
of office, their authority and duties and their compensation. one person may
hold more than one office. In all cases where the duties of any officer, agent,
or employee are not prescribed by these Bylaws or by the board of directors,
such officer, agent or employee shall follow the orders and instructions of the
president of the Corporation.
(b) Any officer appointed by the board of directors shall have the
power to execute and deliver on behalf of and in the name of the Corporation
any instrument requiring the signature of an officer of the Corporation,
except as otherwise provided in these Bylaws or where the execution and
delivery thereof shall be expressly delegated by the board of directors to
some other officer or agent of the Corporation. Unless authorized to do so by
these Bylaws or by the board of directors, no officer, agent or employee shall
have any power or authority to bind the Corporation in any way, to pledge its
credit or to render it liable pecuniarily for any purpose or in any amount.
(c) Any officer of the Corporation with the title of President, Chief
Operating Officer, Chief Financial Officer or General Counsel shall be
authorized hereby to execute and deliver on behalf of and in the name of the
Corporation any lease, contract or other agreement, obligating the Corporation
to make periodic payments for goods or services obtained by the Corporation in
the ordinary course of its business, in amounts relating to a single lease,
contract or other agreement not to exceed $50,000 per year. The execution and
delivery of any such instrument by any one of such officers shall legally bind
the Corporation, without the necessity of a resolution of the Board of
Directors. Any vendor of goods or services to the Corporation shall be
justified in relying on the authority of the signature of any of such officers
to bind the Corporation upon receipt of a certified copy of this provision.
(d) The Chief Financial Officer of the Corporation shall be
authorized hereby to open any account at a banking institution, to legally
bind the Corporation to the terms such institution customarily requires of its
account holders, and to designate the officers with signing authority on such
account, provided, however, that at least two officers of the Corporation
shall be necessary to sign checks on or withdraw funds from such account in
excess of $10,000. The execution and delivery of any instrument agreeing to
such terms or designating such signatories by the Chief Financial Officer
shall legally bind the Corporation, without the necessity of a resolution of
the Board of Directors. Any banking institution shall be justified in relying
on the authority of the signature of the Chief Financial Officer to bind the
Corporation upon receipt of a certified copy of this provision.
2. Appointment and Term of Office. The officers of the Corporation
appointed by the board of directors shall be appointed at each annual meeting of
the board held after each annual meeting of the shareholders. If the appointment
of officers is not made at such meeting or if an officer or officers are to be
appointed by another officer or officers of the Corporation, such appointments
shall be made as soon thereafter as practicable. officers appointed by the
president may be appointed for indeterminate terms.
3. Vacancies. A vacancy in any office, however occurring, may be
filled by the board of directors, or by the officer or officers authorized by
these bylaws or the board of directors, for the unexpired portion of the
officer's term.
4. Resignation. An officer may resign at any time by giving written
notice of resignation to the Corporation. A resignation of an officer is
effective when the notice is received by the Corporation unless the notice
specifies a later effective date. If a resignation is made effective at a later
date, the board of directors may permit the officer to remain in office until
the effective date and may fill the pending vacancy before the effective date if
the board of directors provides that the successor does not take office until
the effective date, or the board of directors may remove the officer at any time
before the effective date and may fill the resulting vacancy.
5. Removal. Any officer or agent of this Corporation may be removed
with or without cause by the board of directors, an officer or officers
authorized by the board of directors, or the officer that appointed such officer
or agent.
6. Contract Rights. Appointment of an officer does not itself create
contract rights. An officer's removal does not affect the officer's contract
rights, if any, with the Corporation. An officer's resignation does not affect
the Corporation's contract rights, if any, with the officer.
7. Chairman of the Board. The chairman of the board, if any, shall
preside as chairman at meetings of the shareholders and the board of directors.
He or she shall, in addition, have such other duties as the board may prescribe
that he or she perform. At the request of the president, the chairman of the
board may, in the case of the president's absence or inability to act,
temporarily act in his or her place. In the case of death of the president or in
the case of his or her absence or inability to act without having designated the
chairman of the board to act temporarily in his place, the chairman of the board
shall perform the duties of the president, unless the board of directors, by
resolution, provides otherwise. If the chairman of the board shall be unable to
act in place of the president, the vice presidents may exercise such powers and
perform such duties as provided in Section 9 below.
8. Vice-Chairman of the Board. The Vice Chairman of the Board, if
any, in the absence of the Chairman of the Board, shall preside at all meetings
of the shareholders and of the Board of Directors. He shall have such other
powers and duties as may from time to time be prescribed by the Board of
Directors.
9. President. Subject to the direction and supervision of the board
of directors, the president shall be the chief executive officer of the
Corporation and shall have general and active control of its affairs and
business and general supervision of its officer, agents and employees. In the
event the position of chairman or vice-chairman of the board shall not be
occupied or the chairman or vice-chairman shall be absent or otherwise unable to
act, the president shall preside at meetings of the shareholders and directors
and shall discharge the duties of the presiding officer. The president may sign,
with the secretary or any other proper officer of the Corporation thereunto
authorized by the board of directors, certificates for shares of the
Corporation, any deeds, mortgages, bonds, contracts, or other instruments which
the board of directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the board of
directors or by these Bylaws to some other officer or agent of the Corporation,
or shall be required by law to be otherwise signed or executed. Unless otherwise
directed by the board of directors, the president shall attend in person or by
substitute appointed by him, or shall execute on behalf of the Corporation
written instruments appointing a proxy or proxies to represent the Corporation
at, all meetings of the shareholders of any other corporation in which the
Corporation holds any stock. on behalf of the Corporation, the president may in
person or by substitute or by proxy execute written waivers of notice and
consents with respect to any such meetings. At all such meetings and otherwise,
the president, in person or by substitute or proxy, may vote the stock held by
the Corporation, execute written consents and other instruments with respect to
such stock and exercise any and all rights and powers incident to the ownership
of said stock.
10. Vice Presidents. Each vice president shall have such powers and
perform such duties as the board of directors may from time to time prescribe or
as the president may from time to time delegate to him. At the request of the
president, in the case of the president's absence or inability to act, any vice
president may temporarily act in his place. In the case of the death of the
president, or in the case of his absence or inability to act without having
designated a vice president or vice presidents to act temporarily in his place,
the board of directors, by resolution, may designate a vice president or vice
presidents, to perform the duties of the president. If no such designation shall
be made, the chairman of the board of directors, if any, shall exercise such
powers and perform such duties, as provided in Section 8 of this Article V, but
if the Corporation has no chairman of the board of directors, or if the chairman
is unable to act in place of the president, any of the vice presidents appointed
by the board of directors may exercise such powers and perform such duties.
11. Secretary. The secretary shall (i) prepare, or cause to be
prepared, and maintain as permanent records the minutes of the proceedings of
the shareholders and the board of directors or any committee thereof, a record
of all actions taken by the shareholders or board of directors or any committee
thereof without a meeting and a record of all waivers of notice of meetings of
shareholders and of the board of directors or any committee thereof, (ii) see
that all notices are duly given in accordance with the provisions of these
Bylaws and as required by law, (iii) serve as custodian of the records and of
the seal of the Corporation and affix the seal to all documents, (iv) keep at
the registered office or principal place of business, a record containing the
names and addresses of all shareholders in a form that permits preparation of a
list of shareholders arranged by voting group and by class or series of shares
within each voting group, that is alphabetical within each class or series and
that shows the address of, and the number of shares of each class or series held
by, each shareholder, unless such a record shall be kept at the office of the
Corporation's transfer agent or registrar, (v) maintain at the Corporation's
principal office the originals or copies of the Corporation's Articles of
Incorporation, Bylaws, minutes of all shareholders, meeting and records of all
action taken by shareholders without meeting for the past three years, all
written communications within the past three years to shareholders as a group or
to the holders of any class or series of shares as a group, a list of the names
and business addresses of the current directors and officers, a copy of the
Corporation's most recent corporate report filed with the Secretary of State,
and financial statements showing in reasonable detail the Corporation' s assets
and liabilities and results of operations for the last three years, (vi) have
general charge of the stock transfer books of the Corporation, unless the
Corporation has a transfer agent, (vii) authenticate records of the Corporation
and (viii) in general, perform all duties incident to the office of secretary
and such other duties as from time to time may be assigned to him by the
president or by the board of directors. Assistant secretaries, if any, shall
have the same duties and powers, subject to supervision by the secretary. The
directors and/or shareholders may however respectively designate a person other
than the secretary or assistant secretary to keep the minutes of their
respective meetings.
12. Treasurer. The treasurer shall be the chief financial officer of
the Corporation, shall have care and custody of all corporate funds, securities,
evidences of indebtedness and other personal property of the Corporation and
shall deposit the same in accordance with the instructions of the board of
directors. The treasurer shall receive and give receipts and acquittances for
money paid by or on account of the Corporation, and shall pay out of the
Corporation's funds on hand all bills, payrolls and other just debts of the
Corporation of whatever nature upon maturity. Such power given to the treasurer
to deposit and disburse funds shall not, however, preclude any other officer or
employee of the Corporation from also depositing and disbursing funds when
authorized to do so by the board of directors. The treasurer shall, if required
by the board of directors, give the Corporation a bond in such amount and with
such surety or sureties as may be ordered by the board of directors for the
faithful performance of duties of his office. The treasurer shall have such
other powers and perform such other duties as may be from time to time
prescribed by the board of directors or the president. The assistant treasurers,
if any, shall have the same powers and duties, subject to the supervision of the
treasurer.
The treasurer shall also be the principal accounting officer of the
Corporation and shall prescribe and maintain the methods and systems of
accounting to be followed, keep complete books and records of account as
required by the Colorado Business Corporation Act, prepare and file all local,
state and federal tax returns, prescribe and maintain an adequate system of
internal audit and prepare and furnish the president and the board of directors
statements of account showing the financial position of the Corporation and the
results of its operations.
13. Assistant Secretaries and Assistant Treasurers. The Assistant
Secretaries and the Assistant Treasurers respectively (in the order designated
by the Board of Directors or, lacking such designation, by the President), in
the absence of the Secretary or Treasurer, as the case may be, shall perform the
duties and exercise the powers of such Secretary or Treasurer and shall perform
such other duties as the Board of Directors shall prescribe.
14. Delegation of Duties. Whenever an officer is absent, or whenever,
for any reason, the board of directors may deem it desirable, the board may
delegate the powers and duties of an officer to any other officer or officers or
to any director or directors.
15. Bond of Officers. The board of directors may require any officer
to give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the board of directors for such terms and conditions as
the board of directors may specify, including, without limitation, for the
faithful performance of his duties and for the restoration to the Corporation of
all property in his or her possession or under his or her control belonging to
the Corporation.
ARTICLE VII
Share Certificates and the Transfer of Shares
1. Share Certificates. Each share certificate shall state on its face
(i) the name of the Corporation and that it is incorporated under the laws of
the State of Colorado, (ii) the name of the person to whom the certificate is
issued, and (iii) the number and class of shares and the designation of the
series, if any, the certificate represents. Each share certificate shall be
signed, either manually or in facsimile, by the chairman or vice chairman of the
board of directors or by the president or the vice president and by the
treasurer or an assistant treasurer or by the secretary or an assistant
secretary, or such other officers as the board of directors may designate, by
resolution, and may bear the corporate seal or its facsimile, and such other
information as may be deemed necessary or appropriate. If the person who signed
a share certificate either manually or in facsimile, no longer holds office when
the certificate is issued, the certificate is nevertheless valid. If the
Corporation is authorized to issue different classes of shares or different
series within a class, the certificate shall state conspicuously on its front or
back that the Corporation will furnish the shareholder information regarding the
designations, preferences, limitations and relative rights of each class and for
each series, upon written request and without charge.
2. Shares Without Certificates. The board of directors may authorize
the issuance by the Corporation of some or all of the shares of any or all of
its classes or series without certificates. Said authorization shall not affect
shares already represented by certificates until they are surrendered to the
Corporation. Within a reasonable time after the issuance or transfer of shares
without certificates, the Corporation shall send to the shareholder a written
statement of the information required by Section 1 of this Article VII.
3. Issuance of Shares. Except as provided in the Articles of
Incorporation, the board of directors may authorize the issuance of shares for
consideration consisting of any tangible, intangible property or benefit to the
Corporation, including cash, promissory notes, services performed and other
securities of the Corporation. The board of directors shall determine that the
consideration received or to be received for the shares to be issued is
adequate. Such determination, in the absence of fraud, is conclusive insofar as
the adequacy of such consideration relates to whether the shares are validly
issued, fully paid and nonassessable. The promissory note of a subscriber or an
affiliate of a subscriber for shares shall not constitute consideration for the
shares unless the note is negotiable and is secured by collateral other than the
shares, having a fair market value at least equal to the principal amount of the
note. For the purposes of this Section 3, "promissory note" means a negotiable
instrument on which there is an obligation to pay independent of collateral and
does not include a nonrecourse not. Unless otherwise expressly provided in the
Articles of Incorporation, shares having a par value may be issued for less than
the par value.
4. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of a certificate alleged to have been
destroyed or lost if the owner makes an affidavit or affirmation of that fact
and produces such evidence of loss or destruction as the board may require. The
board, in its discretion, may as a condition precedent to the issuance of a new
certificate require the owner to give the Corporation a bond as indemnity
against any claim that may be made against the Corporation relating to the
certificate allegedly destroyed or lost.
5. Transfer of Shares.
(a) Shares of the Corporation shall only be transferred on the stock
transfer books of the Corporation by the holder of record thereof upon the
surrender to the Corporation of the share certificates duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer and such documentary stamps as may be required by law. In that event,
the surrendered certificates shall be cancelled, new certificates issued to the
persons entitled to them, and the transaction recorded on the books of the
Corporation. The person in whose name shares stand on the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes.
(b) The Articles of Incorporation, by these Bylaws, by an agreement
among shareholders, or among shareholders and the Corporation, may impose
restriction on the transfer or registration or transfer of shares of the
Corporation. A restriction does not affect shares issued before the restriction
became effective unless the holder of such shares acquired such shares with
knowledge of the restriction, is a party to the agreement containing the
restriction, or voted in favor of the restriction or otherwise consented to the
restriction.
(c) A restriction on the transfer or registration of transfer of
shares is valid and enforceable against the holder or a transferee of the holder
if the restriction is authorized by the Colorado Business Corporation Act and
its existence is noted conspicuously on the front or back of the certificate or
is contained in the information statement required by Section 2 of this Article
VII above. Unless so noted, a restriction is not enforceable against a person
without knowledge of the restriction.
6. Registered Shareholders. The Corporation shall be entitled to
treat the registered holder of any shares of the Corporation as the owner
thereof for all purposes, and the Corporation shall not be bound to recognize
any equitable or other claim to, or interest in, such shares or rights deriving
from such shares on the part of any person other than the registered holder,
including without limitation any purchaser, assignee or transferee of such
shares or rights deriving from such shares, unless and until such other person
becomes the registered holder of such shares, whether or not the Corporation
shall have either actual or constructive notice of the claimed interest of such
other person.
7. Transfer Agent, Registrars and Paying Agents. The board may at its
discretion appoint one or more transfer agents, registrars and agents for making
payment upon any class of stock, bond, debenture or other security of the
Corporation. Such agents and registrars may be located either within or outside
Colorado. They shall have such rights and duties and shall be entitled to such
compensation as may be agreed.
ARTICLE VIII
Insurance
By action of the board of directors, notwithstanding any interest of
the directors in the action, the Corporation may purchase and maintain
insurance, in such scope and amounts as the board of directors deems
appropriate, on behalf of any person who is or was a director, officer,
employee, fiduciary or agent of the Corporation, or who, while a director,
officer, employee, fiduciary or agent of the Corporation, is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee, fiduciary or agent of any other foreign or domestic corporation or of
any partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company or other enterprise or employee benefit
plan, against any liability asserted against, or incurred by, him or her in that
capacity or arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify him or her against such liability
under the provisions of the Colorado Business Corporation Act. Any such
insurance may be procured from any insurance company designated by the board of
directors of the Corporation, whether such insurance company is formed under the
laws of Colorado or is a company in which the Corporation has an equity interest
or any other interest, through stock ownership or otherwise.
ARTICLE IX
Miscellaneous
1. Seal. The Corporation's seal, if any, shall be
circular in form and shall contain the name of the Corporation and
the words, "Seal" and "Colorado."
2. Fiscal Year. The fiscal year of the Corporation shall be December
31 of each year. Said fiscal year may be changed from time to time by the board
of directors in its discretion.
3. Amendments. The board of directors shall have power to make, amend
and repeal these bylaws at any regular or special meeting of the board unless
the shareholders expressly provide that the directors may not amend or repeal
such bylaw. The shareholders also shall have the power to make, amend or repeal
these bylaws at any annual meeting or at any special meeting called for that
purpose.
4. Gender. Whenever required by the context, the
singular shall include the plural, the plural the singular, and one
gender shall include all genders.
5. Invalid Provision. The invalidity or unenforceability of any
particular provision of these bylaws shall not affect the other provisions
herein, and these Bylaws shall be construed in all respects as if such invalid
or unenforceable provision was omitted.
6. Governing Law. These Bylaws shall be governed by and construed in
accordance with the laws of the State of Colorado.
7. Definitions. Except as otherwise specifically provided in these
Bylaws, all terms used in these Bylaws shall have the same definition as in the
Colorado Business Corporation Act.
I, Richard F. Schaden, as Secretary of The Quizno's Corporation,
hereby certify that the foregoing Bylaws were adopted by the board of directors
of the Corporation effective August 25, 1994, and amended from time to time by
such board through May 6, 1999.
/s/Richard F. Schaden
-----------------------
Richard F. Schaden, Secretary
SS: Form D-4
Submit in Duplicate
Submit in duplicate
Filing Fee: $25.00
document must be typewritten
Mail To:
Colorado Secretary of State
Corporations Office
1560 Broadway, Suite 200
Denver, Colorado 80202
(303) 894-2251
ARTICLES OF AMENDMENT
of the
ARTICLES OF INCORPORATION
of
THE QUIZNO'S CORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act,
the undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is: The Quizno's Corporation.
SECOND: The following amendment to the Amended and Restated Articles
of Incorporation was duly authorized by the Board of Directors without
shareholder action at a meeting held on May 6, 1999 in accordance with the
provisions of Section 7-106-102 of the Colorado Business Corporation Act.
THIRD: Article II of the Amended and Restated Articles of
Incorporation of the Corporation is hereby amended by adding the
following paragraph to Article II:
"Class D Subordinated Convertible Preferred Stock.
a. General. Ten thousand (10,000) shares of authorized preferred stock is
hereby designed as the Class D Subordianted Convertible Preferred Stock
(the "Class D Preferred Stock").
b. Conversion.
(i) Subject to the following paragraphs, each share of Class D Preferred
Stock shall be convertible into twenty-five (25) shares of the
Corporation's common stock, par value $.001 per share (the "Common
Stock"), at any time after (i) the Corporation's earnings before income
tax, depreciation and amortization for a fiscal year (excluding such
earnings derived from extraordinary asset acquisitions after June 1, 1999,
and nonrecurring or unusual transactions, as determined by the
Corporation's Chief Executive Officer) equal or exceed $12,000,000, and
(ii) the Corporation's Chief Executive Officer has approved such
conversion (the "Conversion Vesting Date"), provided, however that in no
case shall any such conversion be permitted to occur before March 31,
2001, or after the redemption date provided for in paragraph c below.
(ii) If at any time the Corporation reorganizes, consolidates, merges,
exchanges shares, or sells, leases, exchanges or transfers all or
substantially all of its assets, then as a part of such reorganization,
consolidation, merger, share exchange or sale, lease, exchange or
transfer, provision shall be made so that each holder of shares of Class D
Preferred Stock will thereafter be entitled (but only after the occurrence
of the Conversion Vesting Date) to receive upon conversion of his shares
of Class D Preferred Stock, the number of shares of stock or other
securities or property of the Corporation, or successor corporation
resulting from such reorganization, consolidation, merger, share exchange
or sale, lease, exchange or transfer, which the holder would have received
had he converted his shares of Class D Preferred Stock immediately prior
to the effective time of such reorganization, consolidation, merger, share
exchange or sale, lease, exchange or transfer. In the event of a
distribution, including a stock dividend, in shares of Common Stock, or
any reclassification, subdivision (stock split) or combination (reverse
stock split) of Common Stock, the conversion rate set forth in clause (i)
above shall be adjusted so that the holder of Class D Preferred Stock
shall receive the kind and amount of shares of Common Stock, or other
securities or property, upon conversion, which the holder would have
received had he converted his shares of Class D Preferred Stock
immediately prior to such distribution, reclassification, subdivision or
combination.
c. Redemption. At the option of the Corporation, shares of Class D
Preferred Stock may be redeemed, in whole or in part, on or after March
31, 2005, at a redemption price of $3.00 per share, so long as the holder
of such shares of Class D Preferred Stock is given sixty (60) days notice
of such redemption.
d. Dividends. The holder of record of each share of Class D Preferred
Stock shall receive no dividends, whether in cash, stock or other
property, except as provided in paragraph e below.
e. Liquidation or Dissolution. In the event of any voluntary or
involuntary liquidation, or winding up of the affairs of the Corporation,
the holders of the issued and outstanding Class D Preferred Stock shall be
entitled to receive for each share of Class D Preferred Stock, before any
distribution of the assets of the Corporation shall be made to the holders
of shares of Common Stock, a dollar amount equal to $3.00. The payment of
the liquidation distribution provided herein shall be subordinated to the
payment of required liquidation distributions on all other classes or
series of Preferred Stock of the Corporation then outstanding, and shall
only be paid if the payment of the required liquidation distributions have
been made to all holders of any other classes or series of Preferred Stock
of the Corporation then outstanding. A reorganization, consolidation or
merger of the Corporation, a share exchange, a sale, lease, exchange or
transfer of all or substantially all of its assets as an entirety, or any
purchase or redemption of stock of the Corporation of any class, shall not
be regarded as a "liquidation, dissolution, or winding up of the affairs
of the Corporation" within the meaning of this paragraph e.
f. Voting Rights. Except as otherwise expressly provided in the Colorado
Business Corporation Act, holders of Class D Preferred Stock shall have no
right to vote for the election of directors or for any other purpose."
IN WITNESS WHEREOF, The Quizno's Corporation has caused these
Articles of Amendment to its Articles of Incorporation to be signed by its
President and Chief Executive Officer, effective as of the date of filing with
the Secretary of State of the State of Colorado.
THE QUIZNO'S CORPORATION
By
----------------------
Its President and Chief
Executive Officer
THIRD AMENDMENT TO VOTING TRUST AGREEMENT
THIS AGREEMENT is made and entered into this 1st day of September, 1999,
by and between Richard F. Schaden and Richard E. Schaden ("Shareholders"), as
shareholders of The Quizno's Corporation (the "Corporation"), and as joint
Trustees under the Voting Trust Agreement (the "Trustees").
W I T N E S S E T H:
WHEREAS, the Shareholders and the Trustees are parties to a Voting Trust
Agreement dated July 14, 1994, as amended from time to time (the "Voting
Trust"); and
WHEREAS, pursuant to the terms of the Voting Trust, the Shareholders
deposited, with the Trustees, an aggregate of 1,552,800 shares of the
Corporation's Common Stock; and
WHEREAS, pursuant to the terms of the Voting Trust, the Shareholders
deposited an additional 9,200 shares of the Corporation's Common Stock and
146,000 shares of the Corporation's Class A Cumulative Convertible Preferred
Stock with the Trustees on November 4, 1994; and
WHEREAS, the Shareholders on September 5, 1996 withdrew 8,666 shares of
the Corporation's Common Stock from the Voting Trust to make a gift of such
shares; and
WHEREAS, the Shareholders on January 20, 1998 withdrew 6,000 shares of the
Corporation's Common Stock from the Voting Trust to make gifts of such
shares; and
WHEREAS, the Trustees have consented to each such withdrawal.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties hereto agree as follows:
1. Section 5 of the Voting Trust is hereby amended, to add the following
sentence to such Section: "From time to time the Trustees may issue Restated
Trust Certificates in the form included in this Section with such changes and
modifications as may be necessary to reflect gifts, sales or other
dispositions of the shares deposited hereunder, or consolidations or
splitting up of outstanding stock certificates and to void all prior Trust
Certificates issued pursuant to the terms hereof."
2. The number of shares of stock subject to the Voting Trust listed
adjacent to the signatures of the Shareholders on page 5, as amended from
time to time, of the Voting Trust is hereby deleted and the following
substituted therefore:
NUMBER OF SHARES OF CORPORATION
SHAREHOLDERS SUBJECT TO VOTING TRUST AGREEMENT
- ------------ ---------------------------------
Common Stock Class A Stock
------------ -------------
Richard F. Schaden 773,667 73,000
Richard E. Schaden 773,667 73,000
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
----------------------
RICHARD F. SCHADEN,
SHAREHOLDER AND TRUSTEE
----------------------
RICHARD E. SCHADEN,
SHAREHOLDER AND TRUSTEE
THE QUIZNO'S CORPORATION
AMENDED AND RESTATED STOCK OPTION PLAN FOR
DIRECTORS AND ADVISORS
(As Amended Through November 4, 1999)
The purposes of The Quizno's Corporation's Amended and Restated Stock Option
Plan for Directors and Advisors (the "Plan") are to (i) enable The Quizno's
Corporation (the "Company") to attract and retain qualified directors and
advisors who will serve and advise the Company regarding the establishment and
satisfaction of long-term, strategic objectives, (ii) furnish an incentive to
directors and advisors of the Company by making ownership in the Company
available to them and (iii) amend and restate the Company's original
Non-Employee Director Stock Option Plan, adopted by the Board on the November
30, 1993 and approved by the stockholders on December 20, 1993, under which no
options were granted. Options granted under the Plan do not qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
ARTICLE I
Definitions
For Plan purposes, except where the context clearly indicates otherwise, the
following terms shall have the following meanings:
"Advisors" shall mean any person or persons appointed or designated by
resolution of the Board as an advisor to the Company or the Board.
"Board" shall mean the Board of Directors of the Company.
"Closing Price," see definition in "Fair Market Value."
"Committee" shall mean the Compensation Committee of the Board, or such other
Committee of the Board as the Board shall designate from time to time, which
other Committee shall consist of three or more directors appointed by the Board
from time to time.
"Company" shall mean The Quizno's Corporation.
"Eligible Participant" shall mean any Advisor or member of the Board.
"Option" shall mean a right to purchase Shares granted pursuant to the Plan and
evidenced by an option certificate or stock option agreement in such form as the
Committee may adopt for general use from time to time.
"Optionee" shall mean an Eligible Participant to whom an Option is granted
pursuant to this Plan.
"Plan" shall mean The Quizno's Corporation Stock Option Plan for Directors and
Advisors.
<PAGE>
"Shares" shall mean shares of the Company's common stock, par value $.001.
"Fair Market Value" of the Shares shall mean the average of the daily Closing
Price, as defined below, per Share for the ten (10) consecutive trading days
commencing fifteen (15) trading days before such date. For purposes hereof,
"Closing Price" shall mean, with respect to each share of the Company's common
stock for any day, (a) the last reported sale price or, in case no such sale
takes place on such day, the average of the closing bid and asking price, in
either case as reported on the principal national securities exchange on which
the Shares are listed or admitted for trading or, (b) if the Shares are not
listed or admitted for trading on national securities exchange, the last
reported sale price, or in the case no such sale takes place on such day, the
average of the highest reported bid and the lowest reported asked quotation for
the Shares, in either case as reported on the Automatic Quotation System of
NASDAQ or a similar service if NASDAQ is no longer reporting such information.
If no such market exists for the Shares, and no such market has existed for the
Shares for ninety (90) days or more, the Board shall make a good faith
determination of the Fair Market Value.
ARTICLE II
Shares Subject to the Plan
The aggregate number of Shares which may be delivered upon exercise of Options
granted under the Plan shall not exceed 200,000, subject to appropriate
adjustment in the event the number of issued Shares shall be increased or
reduced by a change in par value, combination, split-up, merger,
reclassification, distribution of a dividend payable in stock, or the like.
Shares covered by Options which have lapsed or expired may, in the Board's
discretion, again be made subject to grants pursuant to the Plan.
ARTICLE III
Option Grants
3.1 Grant of Options. During the term of this Plan, all Advisors and
directors shall automatically be granted an Option to purchase 4,000
Shares (pro-rated on a quarterly basis for service before an Advisor's
or director's initial January 1 and subject to appropriate adjustment
in the event the number of issued Shares shall be increased or reduced
by a change in par value, combination, split-up, merger,
reclassification, distribution of a dividend payable in stock, or the
like) on (i) the date of their initial appointment or designation by
the Board as an Advisor or their initial election to the Board, as the
case may be, and (ii) every January 1 subsequent to that appointment,
designation or election; provided, however, that such Advisor or
director continues to hold such position of Advisor or director on such
January 1. An Advisor or director may waive their right to the automatic
grant of an Option as provided herein by notifying the Company in
writing at least ten (10) business days prior to the grant date.
3.2 Stock Option Agreement. Each Option shall be evidenced by a written
instrument, in such form as the Committee shall from time to time
approve, which shall state the terms and conditions of the Option in
accordance with the Plan and also shall contain such additional
provisions as may be necessary or appropriate under applicable laws,
regulations and rules.
<PAGE>
ARTICLE IV
Terms of Options
4.1 Exercise Price. The Option exercise price per Share shall be one hundred
percent (100%) of the "Closing Price," as defined in Article I above, of
a Share on the date the Option is granted.
4.2 Transfer--Restrictions. All Options shall be exercisable during an
Optionee's lifetime only by such optionee. Options shall not be
transferable other than by will or the laws of descent and distribution.
No Option shall be subject, in whole or in part, to attachment,
execution or levy of any kind.
4.3 Vesting. All Options granted shall vest and be exercisable on the grant
date.
4.4 Expiration. All Options shall expire ten (10) years from the grant date
or, if an Optionee ceases to be a director or an Advisor of the Company
for any reason, all Options held by such optionee shall terminate upon
the earlier of (i) three years after the date on which he or she ceased
to be a director or an Advisor, as the case may be, or (ii) ten (10)
years from the date of grant.
4.5 No Rights as Stockholder. No Optionee shall have any rights to dividends
or other rights of a stockholder of the Company prior to the purchase of
such Shares upon the exercise of the Option.
ARTICLE V
Delivery of Shares
No Shares will be delivered upon exercise of an Option until the exercise price
of the option is paid in full (i) in cash, (ii) by the delivery to the Company
of Shares with a Fair Market Value equal to the exercise price of the Option,
(iii) by delivery of a combination of (i) and (ii) with an aggregate Fair Market
Value equal to the exercise price or (iv) by delivery of an Option or Options to
purchase Shares with a net aggregate value (i.e., the aggregate value of all
Shares subject to the exercised options less the aggregate exercise price of
such Options) equal to the exercise price.
Share certificates issued to Optionees upon exercise of Options may, at the sole
discretion of the Committee, be issued subject to, and bear language limiting
their transfer otherwise than in accordance with, the Plan and applicable state
and federal law, including the then existing regulations under Section 16(b) of
the Securities and Exchange Act of 1934, as amended.
ARTICLE VI
Continuation of Service
Neither this Plan nor the grant of any Option hereunder shall confer upon any
Optionee the right to continue as a director or Advisor of the Company or
obligate the Company to nominate any Optionee for election as a director or
appointment or designation an as Advisor at any time.
<PAGE>
ARTICLE VII
Fundamental Transactions
7.1 Merger, Consolidation or Change of Control. In connection with any
merger, consolidation, change in control or similar reorganization,
excluding an initial public offering ("Reorganization"), the Committee
may in its discretion:
(a) Negotiate a binding agreement whereby any acquiring or successor
corporation will assume each Option then outstanding or substitute an
equivalent option meeting the requirements of Section 424(a) of the Code
for each Option outstanding;
(b) Accelerate any applicable vesting provisions; or
(c) Authorize cash payments to Optionees equal to the difference between the
aggregate Exercise Price of each Option then outstanding irrespective of
the Option's current exercisability and the Fair Market Value of the
Shares covered by such Option. Any cash payment which the Company may
be required to make pursuant to such Committee authorization shall be
made within sixty (60) days following such authorization and fully
discharge any and all obligations the Company may have in connection
with the Options. Notwithstanding the forgoing, the Committee shall
have no obligation to take any action with respect to any Option in
connection with a Reorganization.
7.2 Initial Public Offering. Notwithstanding the registration with the
Securities and Exchange Commission of any Shares pursuant to a plan for
the initial public offering of the Company's common stock, the
applicable vesting schedule shall continue to apply to all Options.
Upon the registration of any of the Company's common stock, the optionee
must comply with all applicable federal and state securities laws which
apply to such Optionees and any stock received upon exercise of any
options.
ARTICLE VIII
Plan Administration
8.1 Administration by Committee. The Plan shall be administered by the
Committee. The Committee shall be empowered, subject to the provisions
of the Plan and to any other directives issued by the Board, to
prescribe, amend and rescind rules and regulations of general
application relating to the operation of the Plan and to make all other
determinations necessary or desirable for its proper administration.
Decisions of the Committee shall be final, conclusive and binding upon
all parties, including the Company, the stockholders and the Eligible
Participants.
8.2 Indemnification. Neither the Company, any subsidiary thereof, nor any
director or officer thereof, nor the Committee nor any member of the
Committee shall be liable for any act, omission, interpretation,
construction or determination made in connection with the Plan in good
faith. The Committee and each of its members shall be entitled to
indemnification and reimbursement by the Company in respect of any
claim, loss, damage or expense (including reasonable attorneys, fees and
costs) arising therefrom to the full extent permitted by law and under
any directors and officers liability insurance coverage which may be in
effect from time to time.
<PAGE>
ARTICLE IX
Amendment and Discontinuance
The Board is authorized to make such changes in the Plan as it, in its sole
discretion, deems necessary. The Board may at any time suspend or discontinue
the Plan. No action of the Board or of the stockholders, however, shall alter or
impair any Option therefore granted under the Plan except as herein provided.
ARTICLE X
Adjustments
In the event of a stock dividend, stock split or other subdivision,
consolidation, reorganization or similar change in the outstanding shares of
Common Stock or capital structure of the Company (collectively, a "Stock
Adjustment"), the following shall occur under the Plan: (i) the number of shares
of Common Stock reserved or otherwise available under Article II for Options,
and subject to outstanding Options, shall be adjusted proportionately (and
automatically reduced by any fraction resulting from such adjustment); and (ii)
the Exercise Price per share of outstanding Options shall be adjusted so that
the aggregate Exercise Price payable pursuant to each outstanding Option after
the Stock Adjustment shall equal the aggregate amount so payable prior to the
Stock Adjustment. In the event of any dispute concerning such adjustment, the
decision of the Committee shall be conclusive. if a Stock Adjustment is made,
the Committee shall notify all Optionees of such adjustment within thirty (30)
days of making such an adjustment, which notification shall state the adjusted
number of shares of Common Stock for which a particular Option is exercisable.
ARTICLE XI
Miscellaneous
10.1 No Obligation or Entitlement. It is expressly understood that this Plan
grants powers to the Committee but does not require their exercise; nor
shall any person, by reason of the adoption of this Plan, be deemed to
be entitled to the grant of any Option; nor shall any rights be deemed
to accrue under the Plan except as Options may actually be granted
hereunder.
10.2 Other Grants. The adoption of this Plan shall not preclude the Board
from granting options to purchase Shares to any person in connection
with his or her service on the Board without reference to, and outside
of, this Plan.
10.3 Expenses. All expenses of the Plan, including the cost of maintaining
records, shall be borne by the Company.
<PAGE>
ARTICLE XII
Plan Adoption and Term
This Plan shall become effective upon the (i) adoption by the Board and (ii)
approval by the Company's stockholders at an Annual Meeting of Stockholders.
This Plan shall continue in effect for ten years from the date of its initial
approval by the Company's stockholders. No Option may be granted hereunder after
such ten-year period, but Options granted within such ten-year period may extend
beyond the termination date of the Plan.
THIS WARRANT (AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT) AND THE
COMMON SHARES INTO WHICH SUCH SECURITIES ARE CONVERTIBLE ARE SUBJECT TO AN
INVESTMENT AGREEMENT DATED DECEMBER 31, 1996, AND A STOCKHOLDERS AGREEMENT DATED
AS OF DECEMBER 31, 1996, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF
THE CORPORATION AND WILL BE FURNISHED TO THE HOLDER ON REQUEST TO THE SECRETARY
OF THE CORPORATION. SUCH INVESTMENT AGREEMENT AND STOCKHOLDERS AGREEMENT
PROVIDE, AMONG OTHER THINGS, FOR CERTAIN RESTRICTIONS ON VOTING, SALE, TRANSFER,
PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE SECURITIES EVIDENCED BY THIS
WARRANT AND THAT THE HOLDER HAS RIGHTS TO REQUIRE REPURCHASE BY THE CORPORATION
UPON THE OCCURRENCE OF CERTAIN EVENTS. THE SECURITIES EVIDENCED BY THIS WET HAVE
NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAW, AND SUCH SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THE SAME ARE REGISTERED AND
QUALIFIED IN ACCORDANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION, SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF THE QUIZNO'S CORPORATION
Issued Date: December 31, 1998
THIS CERTIFIES THAT, for value received, Retail & Restaurant Growth
Capital, L.P., a Delaware limited partnership ("Holder"), is entitled, subject
to the provisions and upon the terms and conditions hereinafter set forth, to
subscribe for and purchase up to Three Hundred Seventy-Two Thousand Eight
Hundred Forty Seven (372,847) shares (as adjusted pursuant to the provisions
hereof), (the "Number") of the fully paid and nonassessable Common Stock, par
value $.001, of THE QUIZNO'S CORPORATION, a Colorado corporation (the "Company"
or the "Corporation"), for a price per share (the "Warrant Price") equal to
$3.10 (as adjusted, pursuant to the provisions hereof).
As used herein, the term "Shares" shall mean the Company's presently
authorized Common Stock, or any stock into or for which such Common Stock shall
have been or may hereafter be converted or exchanged pursuant to the Amended and
Restated Articles of Incorporation of the Company as from time to time amended
as provided by law and in such Articles (hereinafter the "Charter"), the term
"Note" shall mean that certain Amended and Restated Senior Subordinated
Convertible Note due 2001 issued by the Corporation to Retail & Restaurant
Growth Capital, L.P. on December 31, 1996, and the term "Grant Date" shall mean
December 31, 1998. Capitalized terms used and not defined herein shall have the
meanings set forth in a certain Investment Agreement dated as of December 31,
1996 by and between the Company and Retail & Restaurant Growth Capital, L.P.
(the "Investment Agreement").
<PAGE>
1. Term.Subject to the provisions of this Warrant the purchase right
represented by this Warrant is exercisable, in whole or in part, at any time and
from time to time prior to 5:00 p.m. (Dallas time) on the earlier of (a)
December 31, 2004, or (b) six years after prepayment in full of the Note.
2. Method of Exercise
2.1 Standard Method. The purchase right represented by this Warrant
may be exercised by the holder hereof, in whole or in part and from time to
time, by either, at the election of the Holder hereof, (a) the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly
executed) at the principal office of the Company and by the payment to the
Company, by check or by wire transfer, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased
or (b) if in connection with a registered public offering of the Company's
securities (provided that such offering includes Shares and that the holder
shall have elected to participate therein pursuant to the exercise of the
registration rights referred to in Section 6 hereof), the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly
executed) at the principal office of the Company together with notice of
arrangements reasonably satisfactory to the Company and any underwriter, in the
case of an underwritten registered public offering, for payment to the Company
either by certified or bank check or by wire transfer from the proceeds of the
sale of Shares to be sold by the holder in such public offering of an amount
equal to the then applicable Warrant Price per Share multiplied by the number of
Shares then being purchased; however, notwithstanding the cash payment
requirements set forth in this Section 2.1, the Holder shall be entitled to use
the net issue exercise option as hereinafter provided in Section 2.2. The person
or persons in whose names) any certificates) representing Shares shall be
issuable upon exercise of this Warrant shall be deemed to have become the
holder(s) of record of, and shall be treated for all purposes as the record
holder(s) of, the Shares represented thereby (and such Shares shall be deemed to
have been issued) immediately prior to the close of business on the date or
dates upon which this Warrant is exercised and the then applicable Warrant Price
paid. In the event of any exercise of the rights represented by this Warrant,
certificates for the Shares of stock so purchased shall be delivered to the
holder hereof as soon as possible and in any event within ten days of receipt of
such notice and payment of the then applicable Warrant Price and, unless this
Warrant has been fully exercised or expired, a new Warrant representing the
portion of the Shares, if any, with respect to which this Warrant shall not then
have been exercised and containing the same terms and conditions of this Warrant
shall also be issued to the holder hereof as soon as possible and in any event
within such ten-day period.
2.2 Net Issue Exercise. In lieu of exercising this Warrant for cash,
holder may elect to receive Shares equal to the value of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with notice of s,.lch election in which event the
Company shall issue to Holder that number of Shares computed using the following
formula:
- 2 -
<PAGE>
X=Y(A-B)
A
Where
X = the number of Shares to be issued to Holder.
Y = the number of Shares purchasable under this Warrant (or
such lesser amount as equals the number of Shares which
could be purchased with the portion of this Warrant being
cancelled).
A = the Current Market Price (as defined below) of one Share.
B = the Warrant Price (as adjusted to the date of such
calculations).
3. Stock Fully Paid. Reservation of Shares. All Shares that may be issued
upon the exercise of the rights represented by this Warrant, and all shares into
which such Shares are convertible will, upon issuance, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by the
Warrant may be exercised, the Company will at all times have authorized and
reserved for the purpose of issuance upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of Shares to provide for the
exercise of the unexercised rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows: The "Warrant Price" shall initially be $3.10 and
shall be adjusted and readjusted from time to time as provided in this Warrant.
(a) Adjustments to Warrant Price.
(i) Stock Dividends. Subdivisions and Combinations. Non Pro-Rata
Repurchases. In case at any time or from time to time the Corporation shall:
(A) take a record of the holders of its Other Stock (as defined below)
for the purpose of entitling them to receive a dividend payable in, or other
distribution of, Other Stock (other than Common Stock), or
(B) subdivide its outstanding shares of Other Stock into a larger
number of shares of Other Stock, or
(C) combine its outstanding shares of Other Stock into a smaller
number of shares of Other Stock,
then the Warrant Price in effect immediately after the happening of any such
event shall be proportionately decreased, in case of the happening of events
described in subparagraphs A or B above, or proportionately increased, in case
of the happening of events described in subparagraph C above. "Other Stock"
shall mean the Common Stock and shall also include all other stock of the
Corporation of any other class other than Convertible Stock. A reclassification
of the Other Stock into shares of Other Stock and shares of any other class of
stock shall be deemed a distribution by the Corporation to the holders of its
Other Stock of such shares of such other class of stock within the meaning of
this Subsection and, if the outstanding shares of Other Stock shall be changed
into a larger or smaller number of shares of Other Stock as a part of such
reclassification, shall be deemed a subdivision or combination, as the case may
be, of the outstanding shares of Other Stock within the meaning of this
Subsection a(i).
(ii) Repurchase of Other Stock. In case at any time or from time to time,
the Corporation shall (except as hereinafter provided) repurchase any Other
Stock (the "Repurchased Stock"), then upon the consummation of such repurchase
the Warrant Price then in effect shall be decreased to an amount determined by
multiplying the Warrant Price in effect immediately prior to such adjustment by
a fraction, (x) the numerator of which is the Current Market Price (as defined
below) per share of Common Stock as determined on the date on which such
repurchase is made, and (y) the denominator of which is the Current Market Price
per share of Common Stock on the date immediately prior to such repurchase
(after giving effect to any stock splits, stock dividends or other stock
repurchases between the date of such repurchase and the date on which such
calculation is made); provided, however, that if the numerator of such fraction
is greater than the denominator of such fraction, then no adjustment to the
Warrant Price shall be made. No adjustment of the Warrant Price shall be made
under this Subsection upon the repurchase of the Repurchased Stock if such
repurchase, together with all repurchases during the previous twelve (12)
calendar months, is a repurchase of less than the sum of (1) 5% of the issued
and outstanding Other Stock determined as of the date of such repurchase, lua
(2) repurchases of stock options and Other Stock underlying such stock options
in a transaction or series of transactions during such twelve (12) month period
not exceeding $50,000 in the aggregate.
(iii) Issuance of Additional Shares of Other Stock. "Additional Shares
of Other Stock" shall mean all shares of Other Stock issued by the Corporation
after the date of this Warrant other than (i) the shares of Common Stock issued
to a holder of Convertible Stock upon conversion of such Convertible Stock, and
(ii) Permitted Common Stock Issuances. In case at any time or from time to time,
the Corporation shall (except as hereinafter provided) issue, whether in
connection with the merger of a corporation into the Corporation or otherwise,
any Additional Shares of Other Stock for a consideration per share less than the
Warrant Price then in effect (as so adjusted from time to time for additional
issuances, reductions and other adjustments to the number of shares of Common
Stock outstanding, including without limitation stock splits, stock dividends,
reverse stock splits, pro rata repurchases, and any other good faith transfer
of securities or other transaction which results in an increase or decrease in
the number of shares of Common Stock outstanding, (such amount per share, the
"Minimum Issue Price") on the Computation Date (determined as set forth below),
then the Warrant Price shall be adjusted to be that number determined by
multiplying the Warrant Price in effect immediately prior to such adjustment by
a fraction (x) the numerator of which shall be the number of shares of Other
Stock then outstanding, plus the number of shares of Other Stock which the
aggregate consideration for the total number of such Additional Shares of Other
Stock so issued would purchase at the Minimum Issue Price per share of Common
Stock and (y) the denominator of which shall be the number of shares of Other
Stock then outstanding plus the number of such Additional Shares of Other Stock
so issued. The provisions of this Subsection shall not apply to any issuance of
Additional Shares of Other Stock for which an adjustment is provided under
Subsection 4(a)(i). No adjustment of the Warrant Price shall be made under this
Subsection upon the issuance of any Additional Shares of Other Stock which are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any Convertible Securities, if any such adjustment shall previously
have been made upon the issuance of such warrants, options or other rights or
upon the issuance of such Convertible Securities (or upon the issuance of any
warrant or other rights therefor) pursuant to Subsection (iv) or (v) of
Subsection 4(a). "Convertible Securities" shall mean evidences of indebtedness,
shares of stock or other securities, including additional Performance Shares,
which are convertible into or exchangeable for Additional Shares of Other Stock,
either immediately or upon the arrival of a specified date or the happening of
a specified event. For purposes of this Subsection, the "Computation Date" shall
be the earlier of (x) the date on which the Corporation shall enter into a firm
contract for the issuance of such Additional Shares of Other Stock, or (y) the
date of actual issuance of such Additional Shares of Other Stock.
(iv) Issuance of Warrants. Options or Other Rights. In case at any time
or from time to time, the Corporation shall take a record of the holders of its
Other Stock for the purpose of entitling them to receive a distribution of, or
shall otherwise issue, any warrants, options or other rights to subscribe for
or purchase any Additional Shares of Other Stock or any Convertible Securities
(other than Permitted Common Stock Issuances and Common Stock issuable upon
conversion of Convertible Stock), and the consideration per share for which
Additional Shares of Other Stock may at any time thereafter be issuable pursuant
to such warrants, options or other rights or pursuant to the terms of such
Convertible Securities shall be less than the Minimum Issue Price then in effect
on the Computation Date (as determined below), then the Warrant Price shall be
adjusted as provided in the second sentence of Subsection 4(a)(iii).
Such adjustment shall be made on the basis that (i) the consideration per share
for which such Additional Shares of Other Stock may be issued equals a fraction,
(x) the denominator of which is the maximum number of Additional Shares of
Other Stock issuable pursuant to all such warrants, options or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities, and (y) the numerator of which is the minimum consideration received
and receivable by the Corporation for such Additional Shares of Other Stock
pursuant to such warrants, options or other rights or pursuant to the terms of
such Convertible Securities, (ii) the maximum number of Additional Shares of
Other Stock issuable pursuant to all such warrants, options or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of the Computation Date
(determined as set forth in the last sentence of this Subsection), and (iii)
the aggregate consideration for such maximum number of Additional Shares of
Other Stock shall be deemed to be the minimum consideration received and
receivable by the Corporation for the issuance of such Additional Shares of
Other Stock pursuant to such warrants, options or other rights or pursuant to
the terms of such Convertible Securities.
For purposes of this Subsection, the "Computation Date" shall be the
earliest of (a) the date on which the Corporation shall take a record of the
holders of its Other Stock for the purpose of entitling them to receive any such
warrants, options or other rights, (b) the date on which the Corporation shall
enter into a firm contract for the issuance of such warrants, options or other
rights, and (c) the date of actual issuance of such warrants, options or other
rights.
(v) Issuance of Convertible Securities. In case at any time or from time
to time, the Corporation shall take a record of holders of the Other Stock for
the purpose of entitling them to receive a distribution of, or shall otherwise
issue, any Convertible Securities (other than Permitted Common Stock Issuances,
and Convertible Stock) and the consideration per share for which additional
shares of other stock may at any time thereafter be issuable pursuant to the
terms of such Convertible Securities shall be less than the Minimum Issue Price
then in effect on the Computation Date (as determined below), then the Warrant
Price shall be adjusted as provided in the second sentence of Subsection 4(a)
(iii). Such adjustment shall be made on the basis that (i) the amount of
consideration per share for which such Additional Shares of Other Stock may be
issued equals a fraction (x) the denominator of which is the maximum number of
Additional Shares of Other Stock necessary to effect the conversion or exchange
of all such Convertible Securities, and (y) the numerator of which shall be the
minimum consideration received and receivable by the Corporation for the
issuance of such Additional Shares of Other Stock pursuant to the terms of such
Convertible Securities, (ii) the maximum number of Additional Shares of Other
Stock necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of the Computation Date
(determined as set forth in the penultimate sentence of this Subsection), and
(iii) the aggregate consideration for such maximum number of Additional Shares
of Other Stock shall be deemed to be the minimum consideration received and
receivable by the Corporation for issuance of such Additional Shares of Other
Stock pursuant to the terms of such Convertible Securities.
For purposes of this Subsection, the "Computation Date" shall be the
earliest of (a) the date on which the Corporation shall take a record of the
holders of its Other Stock for the purpose of entitling them to receive any such
Convertible Securities, (b) the date on which the Corporation shall enter into a
firm contract for the issuance of such Convertible Securities, and (c) the date
of actual issuance of such Convertible Securities. No adjustment of the Warrant
Price shall be made under this Subsection upon the issuance of any Convertible
Securities which are issued pursuant to the exercise of any warrants, options or
other subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants, options or other
rights pursuant to Subsection 4(a)(iv).
(vi) Superseding Adjustment of Warrant Price. If at any time after any
adjustment of the Warrant Price shall have been made pursuant to the foregoing
Subsections 4(a)(iv) or 4(a)(v) on the basis of the issuance of warrants,
options or other rights or the issuance of other Convertible Securities or
after any new adjustment of the Warrant Price shall have been made pursuant to
this Subsection 4(a)(vi),
(A) such warrants, options or other rights or the right of conversion
or exchange in such other Convertible Securities shall expire, and a portion of
such warrants, options or rights, or the right of conversion or exchange in
respect of a portion of such other Convertible Securities, as the case may be,
shall not have been exercised, or
(B) the consideration per share for which Additional Shares of Other
Stock are issuable pursuant to such warrants, options, or rights or the terms of
such other Convertible Securities, shall be increased solely by virtue of
provisions therein contained for an automatic increase in such consideration per
share upon the arrival of a specified date or the happening of a specified
event, such previous adjustment shall be rescinded and annulled and the
Additional Shares of Other Stock which were deemed to have been issued by virtue
of the computation made in connection with the adjustment so rescinded and
annulled shall no longer be deemed to have been issued by virtue of such
computation. Thereupon, a recomputation shall be made of the effect of such
warrants, options or other rights, or other Convertible Securities on the basis
of:
(1) treating the number of Additional Shares of Other Stock, if
any, theretofore actually issued or issuable pursuant to the previous exercise
of such warrants, options or other rights or such right of conversion or
exchange, as having been issued on the date or dates of such issuance as
determined for purposes of such previous adjustment and for the consideration
actually received therefor, and
(2) treating any such warrants, options or other rights or any
such other Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share for such Additional Shares of Other Stock issuable under
such warrants, options or other rights or other Convertible Securities,
and, if and to the extent called for by the foregoing provisions of this
Subsection 4(a) on the basis aforesaid, a new adjustment of the Warrant Price
shall be made, and such new adjustment shall supersede the previous adjustment
so rescinded and annulled. If any such superseding adjustment of the Warrant
Price is made after the exercise of this Warrant by a former Holder of this
Warrant, in lieu of such adjustment, if, and only if, such former Holder owns
shares of Common Stock of the Corporation obtained upon exercise of this
Warrant, the Corporation shall have the option to purchase the number of shares
of Common Stock from such former Holder equal to the difference between (x) the
number of shares of Common Stock which such former Holder received upon exercise
prior to the adjustment, and (y) the number of shares of Common Stock which such
former Holder would have received on exercise had such adjustment been made
prior to exercise. The purchase price per share of such stock shall be $0.01 per
share.
(vii) Other Provisions Applicable to Adjustments Under this Section.
The following provisions shall be applicable to the making of adjustments of
the Warrant Price hereinbefore provided for in this Subsection 4(a):
(A) Treasury Stock. The sale or other disposition of any issued
shares of Other Stock owned or held by or for the account of the Corporation
shall be deemed an issuance thereof for purposes of this Subsection 4(a).
(B) Computation of Consideration. To the extent that any Additional
Shares of Other Stock or any Convertible Securities or any warrants, options or
other rights to subscribe for or purchase any Additional Shares of Other Stock
or any Convertible Securities shall be issued solely for cash consideration,
the consideration received by the Corporation therefor shall be deemed to be the
amount of cash received by the Corporation therefor, or, if such Additional
Shares of Other Stock or Convertible Securities are offered by the Corporation
for subscription, the subscription price, or, if such Additional Shares of
Other Stock or Convertible Securities are sold to underwriters or dealers for
public offering without a subscription offering, the initial public offering
price, in any such case excluding any amounts paid or receivable for accrued
interest or accrued dividends, and after deductions for any compensation,
underwriting discounts, placement fees or funding or financing commitment fees
(but before deduction for any other expenses) paid or incurred by the
Corporation for and in the underwriting of, or otherwise in connection with,
the issue thereof. To the extent that such issuance shall be for a consideration
other than solely for cash, then, except as herein otherwise expressly provided,
the amount of such consideration shall be deemed to be the fair value of such
consideration at the time of such issuance as determined in good faith by the
Corporation's Board of Directors. The consideration for any Additional Shares of
Other Stock issuable pursuant to any warrants, options or other rights to
subscribe for or purchase the same shall be the consideration received or
receivable by the Corporation for issuing such warrant, options or other
rights, plus the additional consideration payable to the Corporation upon the
exercise of such warrants, options or other rights. The consideration for any
Additional Shares of Other Stock issuable pursuant to the terms of any
Convertible Securities shall be the consideration received or receivable by the
Corporation for issuing any warrants, options or other rights to subscribe for
or purchase such Convertible Securities, plus the consideration paid or payable
to the Corporation in respect of the subscription for or purchase of such
Convertible Securities, plus the additional consideration, if any, payable to
the Corporation upon the exercise of the right of conversion or exchange in such
Convertible Securities.
(C) When Adjustments to be Made. The adjustments required by the
preceding Subsections of this Subsection 4(a) shall be made whenever and as
often as any specified event requiring an adjustment shall occur, except that
no adjustment of the Warrant Price that would otherwise be required shall be
made (except in the case of a subdivision or combination of shares of the Other
Stock, as provided for in Subsection 4(a)(i)) unless and until such adjustment,
either by itself or with other adjustments not previously made, adds or
subtracts at least 1 % to the Warrant Price, as determined in good faith by the
Board of Directors of the Corporation. Any adjustment representing a change of
less than such minimum amount shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this Subsection 4(a)
and not previously made, would result in a minimum adjustment. For the purpose
of any adjustment, any specified event shall be deemed to have occurred at the
close of business on the date of its occurrence, All calculations made under
this Subsection shall be made to the nearest cent. Notwithstanding any other
provision of this Warrant, and except for a combination of shares or other
adjustment pursuant to Section 4(a)(i), no adjustment to the Warrant Price
shall be made which causes the Warrant Price to be increased; and once the
Warrant Price is adjusted downward, it shall not be readjusted upward except as
provided in Section 4(a)(vi).
(D) Fractional Interests. In computing adjustments under this
Subsection 4(a), fractional interests in Other Stock shall be taken into account
to the nearest one thousandth of a share.
(E) When Adjustment not Required. If the Corporation shall take a
record of the Holders of its Other Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution thereof to shareholders, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then (i) thereafter no adjustment shall be required by reason of the
taking of such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled, or (ii) in the event that any such adjustment
previously made in respect of such taking of record cannot be rescinded or
annulled as a result of the conversion of this Warrant after the taking of such
record occurs, in lieu of such recision or annulment of the adjustment, if the
Warrant was exercised by a former Holder of this Warrant, and if such former
Holder owns shares of Common Stock of the Corporation obtained upon exercise of
this Warrant, the Corporation shall have the option to purchase the number of
shares of Common Stock from such former Holder equal to the difference between
(x) the number of shares of Common Stock which such former Holder had received
upon conversion after such record date, and (y) the number of shares of Common
Stock which such former Holder would have received on conversion had such
adjustment been annulled or rescinded prior to conversion. The purchase price
per share of such Common Stock shall be $.01 per share.
(viii) Merger. Consolidation or Disposition of Assets. In case the
Corporation shall merge or consolidate into another corporation, and such
transaction does not constitute an Event of Default (or the Payee waives its
right to accelerated payment under the Investment Agreement) or shall sell,
transfer or otherwise dispose of all or substantially all of its property,
assets or business to another corporation and pursuant to the terms of such
merger, consolidation or disposition, shares of common stock of the successor or
acquiring corporation (or any parent thereof) are to be received by or
distributed to the holders of Other Stock of the Corporation, then the Holder of
this Warrant shall have the right thereafter to receive, upon conversion of this
Warrant, shares of common stock equal to the number of shares of common stock of
the successor or acquiring corporation receivable upon or as a result of such
merger, consolidation or disposition of assets had the Holder of this Warrant
converted it into Common Stock of the Corporation immediately prior to such
event. If, pursuant to the terms of such merger, consolidation or disposition of
assets, any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants, options or other subscription or purchase
rights) are to be received by or distributed to the holders of Other Stock of
the Corporation (whether in addition to common stock of the successor or
acquiring corporation, or any parent thereof, or otherwise) the Warrant Price in
effect shall be adjusted to that number determined by multiplying the Warrant
Price then in effect by a fraction (x) the numerator of which shall be the
Current Market Price per share of Common Stock immediately prior to the closing
of such merger, consolidation or disposition minus the portion applicable to one
share of Common Stock of any such cash so distributable and of the fair value of
any such shares of stock or other securities or property so received or
distributed, and (y) the denominator of which shall be the Current Market Price
per share of Common Stock immediately prior to the closing of such merger,
consolidation or disposition. The fair value of any such shares of stock or
other securities or property shall be determined pursuant to the Valuation
Procedure. In case of any such merger, consolidation or disposition of assets,
the successor or acquiring corporation shall expressly assume the due and
punctual observance and performance of each and every covenant and condition
hereof to be performed and observed by the Corporation and all of the
obligations and liabilities hereunder, subject to such modification as shall be
necessary to provide for adjustments to the Warrant Price which shall be as
nearly equivalent as practicable to the adjustments provided for in this
Subsection 4(a). For the purposes of this Subsection 4(a)(viii), "common stock
of the successor or acquiring corporation" shall include stock of such
corporation of any class, which is not preferred as to dividends or assets over
any other class of stock of such corporation and which is not subject to
redemption, and shall also include any evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable for any
such stock, either immediately or upon the arrival of a specified date or the
happening of a specified event, and any warrants, options or other rights to
subscribe for or purchase any such stock. The foregoing provisions of this
Subsection shall similarly apply to the successive mergers, consolidations or
dispositions of assets.
(ix) Sale of Stock under Section 11.1 (b) of Investment Agreement. If
the Principal Stockholders invest in the Common Stock of the Corporation under
Section 11.1(b)(ii) of the Investment Agreement, then the Warrant Price shall
be adjusted as follows: the new Warrant Price shall be equal to a fraction the
numerator of which is the Conversion Principal paid on the Note and the
denominator of which is the number of shares into which the Warrant is
exercisable immediately prior to the adjustment plus a number equal to ten
percent (10%) of the number of shares of Common Stock purchased by the Principal
Stockholders.
(b) Adjustment to Number. At the time the Warrant Price is adjusted, the
Number shall also be adjusted by multiplying the Number immediately prior to the
adjustment by a fraction the numerator of which is the Warrant Price immediately
prior to the adjustment and the denominator of which is the adjusted Warrant
Price.
(c) No Impairment. The Corporation will not through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
Holder of this Warrant against impairment. Without limiting the generality of
the foregoing, the Corporation (i) will not permit the par value of any shares
of stock at the time receivable upon the exercise of this Warrant to exceed the
Warrant Price then in effect, (ii) will take all such action as may be necessary
or appropriate in order that the Corporation may validly and legally issue fully
paid nonassessable shares of stock on the exercise of this Warrant, and (iii)
will not take any action which results in any adjustment of the Warrant Price if
the total number of shares of Common Stock issuable after the action upon the
exercise of this Warrant and all other warrants, options and other right to
acquire Common Stock will exceed the total number of shares of Common Stock then
authorized by the Charter and available for the purpose of issue upon such
exercise.
(d) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Warrant Price and the Number pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (i) the consideration received or to be received by the Corporation
for any Additional Shares of Other Stock issued or sold or deemed to have been
issued, (ii) the number of shares of Other Stock then outstanding or deemed to
be outstanding, and (iii) the Warrant Price and the Number in effect immediately
prior to such issue or sale and as adjusted and readjusted on account thereof,
showing how each was calculated. The Corporation shall, as promptly as
practicable following its receipt of the written request, but in any event
within five Business Days after receipt of such written request, of the Holder
furnish or cause to be furnished to the Holder a like certificate setting forth
(i) the Warrant Price and Number at the time in effect, showing how each was
calculated, and (ii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of this Warrant.
(e) Notices of Record Date. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend which is the same as cash dividends paid in previous
quarters) or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to the
Holder at least thirty days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such divide-.(I or distribution.
(f) Common Stock Reserved. The Corporation shall at all times reserve
and keep available out of its authorized but unissued Common Stock such number
of shares of Common Stock as shall from time to time be sufficient to effect
conversion of this Warrant.
(g) Closing of Books. The Corporation will not close its books against the
permitted transfer of this Warrant or its exercise.
(h) Registration: Transfer Taxes. The Corporation shall keep at its
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of this Warrant. Upon the surrender of this
Warrant at such place, the Corporation shall, at the request of the Holder
execute and deliver a new certificate or certificates in exchange therefor
representing in the aggregate the amount of this Warrant represented by the
surrendered Warrant (and the Corporation forthwith shall cancel such surrendered
Warrant), subject to the requirements of applicable securities laws. Each such
new Warrant shall be registered in such name and shall represent such amount as
shall be requested by the Holder and shall be substantially identical in form to
this Warrant. The issuance of new Warrants shall be made without charge to the
Holder for any issuance tax in respect of any transfer involved in the issuance
and delivery of any Warrant in a name of (i) the Holder, or (ii) any affiliate
of the Holder. ,
(i) Definitions. The following terms shall have the following meanings,
which meanings shall be equally applicable to the singular and plural forms of
such terms:
"Business Day" means any day which is not a Saturday or a Sunday or a public
holiday or a day on which banks are required or permitted to close under the
laws of the State of California.
"Common Stock" means the Common Stock of the Corporation, par value
$0.001.
"Convertible Stock" means the Corporation's Class A Cumulative Convertible
Preferred Stock, par value $0.001 per share, outstanding on the date of this
Note.
"Current Market Price" per share of Common Stock at the date herein specified,
shall be deemed to be the average of the Closing Prices for ten consecutive
Business Days immediately prior to the day in question or, if no Closing Price
is reported, the average of the closing bid and asked prices. "Closing Prices"
for each such Business Day shall be the last sale price reported on the National
Association of Securities Dealers Automated Quotations System ("NASDAQ") on the
preceding Business Day or, if the Common Stock is an issue for which last sale
prices are not reported on NASDAQ, the closing bid quotation on such day (the
closing bid quotation for a given day shall be the highest bid quotation as
quoted in any of The Wall Street Journal, the national Quotation Bureau pink
sheets, quotation sheets of registered marketmakers and, if necessary, dealer's
telephone quotations), but, in each of the preceding two cases, if the relevant
NASDAQ price or quotation did not exist on such day, then the price or quotation
on the next preceding Business Day in which there was such a price or quotation.
"Other Stock" shall have the meaning assigned to it in Section 4(a)(i).
"Permitted Common Stock Issuances" means (i) shares of Common Stock or options
issuable under the Corporation's existing stock option plans and 401 (k) plans,
so long as such shares issued and outstanding under these plans do not exceed
fifteen percent (15%) issued and outstanding of the capital stock of the
Corporation on a fully diluted basis; (ii) shares of Common Stock issuable upon
conversion of this Note, (iii) warrants issuable upon prepayment of the Note and
Common Stock issuable upon exercise thereof; (iv) shares of Common Stock
issuable upon conversion of the Convertible Stock, and (v) shares of Common
Stock issuable upon exercise of warrants of the Corporation outstanding on
December 31, 1996.
"Principal Stockholders" shall mean each of the Corporation's Stockholders
owning five percent (5%) or more of the Corporation's issued and outstanding
capital stock on a fully diluted basis.
"Qualified Public Offering" means a secondary public offering of the
Corporation's stock which results in net proceeds to the Corporation of at
least $15,000,00
"Warrants" means the warrants issued upon payment of the Note.
5. Fractional Shares. No fractional Shares will be issued in connection
with any exercise hereunder, but in lieu of such fractional shares the Company
shall make a cash payment therefor upon the basis of the Warrant Price then
in effect.
6. Other Agreements. This Warrant and the Shares, when issued, are subject
to the terms and conditions of an Investment Agreement and a Stockholders
Agreement and a Registration Rights Agreement, each dated as of December 31,
1996, among the Company and the "Holders" identified therein, and the holder of
this Warrant and the Shares into which it is exercisable is entitled to the
benefits and is subject to the obligations set forth therein which may limit
the right of the holder to transfer this Warrant and such Shares, entitle the
holder to receive certain information from the Company, entitle the holder to
certain registration rights and other rights concerning the sale of the Warrant
or Shares in certain transactions and contain certain other rights and
restrictions.
7. Representations and Warranties. This Warrant is issued and delivered on
the basis of the following representations and warranties of the Company:
7.1 Authorization and Delivery. This Warrant has been duly authorized
and executed by the Company and when delivered will be the valid and binding
obligation of the Company enforceable in accordance with its terms;
7.2 Warrant Shares. The Warrant Shares have been duly authorized and
reserved for issuance by the Company and, when issued and paid for in accordance
with the terms hereof, will be validly issued, fully paid and nonassessable;
7.3 Rights and Privileges. The rights, preferences, privileges and
restrictions granted to or imposed upon the Shares and the holders thereof are
as set forth herein and in the Company's Charter are true and complete copies
of which have been delivered to the original warrant holder; and
7.4 No Inconsistency. The execution and delivery of this Warrant are
not, and the issuance of the Warrant upon exercise of this Warrant in accordance
with the terms hereof will not be, inconsistent with the Company's Charter or
by-laws, do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company, and do not and will not
contravene any provision of, or constitute a default under, any indenture,
mortgage, contract or other instrument of which the Company is a party or by
which it is bound or require the consent or approval of, the giving of notice
to, the registration with or the taking of any action in respect of or by, any
Federal, state or local government authority or agency or other person.
8. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
9. Notice of Expiration. The Company shall give notice of expiration of
this Warrant to Holder sixty (60) days prior to the end of the term.
10. Notices. Any notice which is required or permitted to be given pursuant
hereto shall be given in the manner provided in the Investment Agreement.
11. Binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger or consolidation, and all of the
obligations of the Company relating to the Shares issuable upon the exercise of
this Warrant shall be as set forth in the Company's Charter and the Company's
by-laws (each as amended from time to time) and shall survive the exercise and
termination of this Warrant and all of the covenants and agreements herein and
in such other documents and instruments of the Company shall inure to the
benefit of the successors and assigns of the holder hereof. The Company will, at
the time of the exercise of this Warrant, in whole or in part, upon request of
the holder hereof but at the Company's expense, acknowledge in writing its
continuing obligation to the holder hereof in respect of any rights (including,
without limitation, any right to registration of the Shares issuable upon
exercise of this Warrant) to which the holder hereof shall continue to been
titled after such exercise in accordance with this Warrant; provided, that the
failure of the holder hereof to make any such request shall not affect the
continuing obligation of the Company to the holder hereof in respect of such
rights.
12. Descriptive Headings. The descriptive headings of the several paragraphs
of this Warrant are inserted for convenience only and do not constitute a part
of this Warrant.
13. Governing Law. This warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws
of the state of Texas
IN WITNESS WHEREOF, the undersigned, being duly authorized, has executed
and delivered this Warrant as of this day and year set forth at the beginning
of this Warrant.
THE QUIZNO'S CORPORATION, a
Colorado Corporation
By:
----------------------
Its: Vice President/General Counsel
<PAGE>
EXHIBIT A-1
Notice of Exercise
To: The Quizno's Corporation
1. The undersigned hereby elects to purchase - shares of Common Stock
of THE QUIZNO'S CORPORATION pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or, subject to compliance with the restrictions on
transfer set forth in Section 7 of the Warrant, in such other name or names as
are specified below:
___________________________________
(Name)
___________________________________
(Address)
3. The undersigned represents that the aforesaid shares being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned
has no present intention of distributing or reselling such shares.
Signature
_______________________________
(Name of Signatory)
By:____________________________
Its:___________________________
Date:__________________________
<PAGE>
EXHIBIT A-2
Notice of Exercise
To: The Quizno's Corporation
1. Contingent upon and effective immediately prior to the closing (the
"Closing") of the Company's public offering contemplated by the Registration
Statement on Form S_, filed ____________, _____, the undersigned hereby elects
to purchase ______ shares of Common Stock of the Company (or such lesser number
of shares as may be sold on behalf of the undersigned at the Closing) pursuant
to the terms of the attached Warrant.
2. Please deliver to the custodian for the selling shareholders a stock
certificate representing such shares.
3.The undersigned has instructed the custodian for the selling shareholders
to deliver to the Company $_________or, if less, the net proceeds due the
undersigned from the sale of shares in the aforesaid public offering. If such
net proceeds are less than the purchase price for such shares, the undersigned
agrees to deliver the difference to the Company prior to the Closing.
Signature
________________________________
(Name of Signatory)
By:_____________________________
Its:____________________________
Date:___________________________
SACRAMENTO AVIATION
MANAGEMENT CO.
PURCHASE AGREEMENT
THIS AGREEMENT, made this 22ND day of SEPTEMBER 19, 1999 by and between:
SELLER PURCHASER
SACRAMENTO AVIATION MANAGEMENT C0. THE QUIZNO'S CORPORATION
5957 FREEPORT BLVD. 1415 LARIMER
SACRAMENTO, CA 95822 DENVER, CO 80202
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties agree as follows:
1. The PURCHASER agrees to purchase and the SELLER agrees to sell the following
aircraft:
Aircraft Make 1997 CESSNA Engine Make WILLIAMS - ROLLS ROYCE
Aircraft Model CITATION 525 Engine Model FJ44-1A
Aircraft Serial # 525-0212 Engine Serial # L- 1433
Aircraft Reg # N67VW Engine Serial # R - 1434
hereinafter, "the Aircraft."
The Aircraft is equipped with standard and/or optional accessories and equipment
as specified by Seller's specification sheet, which is attached hereto and
incorporated herein by referenced as Exhibit A.
2. PURCHASER agrees to pay to SELLER a total price of: $ 3,350,000.00 due
and payable in U.S. Funds upon delivery of said Aircraft to PURCHASER. SELLER
acknowledges receipt of deposit from PURCHASER in the amount of $50,000.00, to
be applied as credit toward the aforementioned purchase price, requiring a
balance due from PURCHASER at closing of $3,300,000.00.
3. SELLER will deliver the aircraft to the PURCHASER by 10/13/99 at such
place as may be mutually agreed upon by the Parties.
4. Seller warrants that it is either the owner of the Aircraft or that it is
a duly authorized agent of the Aircraft owner, with authority to execute and
deliver this Agreement and carry out the SELLER's obligations herein. At the
time of delivery of the Aircraft and full payment of the total price by
PURCHASER, SELLER will deliver to PURCHASER an FAA Bill of Sale, FAA Form AC
8050-2, duly executed by SELLER, conveying title to said Aircraft to PURCHASER
free and clear of all liens, charges or encumbrances. PURCHASER shall execute
and deliver to SELLER, at the time of delivery of the aircraft, a delivery
receipt in the form attached hereto as Exhibit B. In addition, SELLER will
transfer to the PURCHASER all available logbooks, manuals and other records as
pertaining to the application and maintenance of the Aircraft. At the time of
delivery, SELLER represents and warrants that all applicable payments relating
to the "ProParts" program shall be paid up to date and further, that all due or
overdue Cescom inspections and related repairs shall be completed by SELLER.
SELLER further agrees to replace the door seal of the Aircraft's emergency door
at SELLER's expense prior to delivery. SELLER is aware of no damage history of
the Aircraft which would, by law, require the fling of FAA Form 337.
5. PURCHASER hereby agrees to pay any and all taxes, duties or fees assessed
or levied by any Federal, State or local taxing authority as a result of this
sale, delivery, registration or ownership of the Aircraft by PURCHASER.
6. THE AIRCRAFT IS BEING SOLD ON AN "AS IS" BASIS. THERE ARE NO WARRANTIES,
RELATING TO THE CONDITION OF THE AIRCRAFT, WHICH EXTEND BEYOND THE DESCRIPTION
OF THE AIRCRAFT. EXCEPT FOR WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT
AND/OR THE RELATED AIRCRAFT BILL OF SALE, SELLER DISCLAIMS ALL OTHER EXPRESS OR
IMPLIED WARRANTIES OR REPRESENTATIONS OF ANY KIND OR NATURE WHATSOEVER
INCLUDING MERCHANTABILITY AND FITNESS FOR USE. SHOULD ANY MANUFACTURERS'
WARRANTIES STILL BE IN EFFECT WITH RESPECT TO THE AIRCRAFT AND ITS COMPONENTS,
INCLUDING ENGINES (OTHER THAN WARRANTIES WHICH BY THEIR TERMS ARE
UNASSIGNABLE), SELLER WILL REASONABLY ASSIST PURCHASER TO MAINTAIN CONTINUITY
OF THE WARRANTIES FOR PURCHASER'S BENEFIT.
7. SELLER shall not be liable for any failure of or delay in delivery of the
Aircraft for the period that such failure or delay is due to acts of God or the
public enemy; civil war, governmental priorities or allocations; strikes or
labor disputes; inability to obtain necessary materials, accessories, equipment
or parts from the manufacturers thereof; or any other cause beyond the SELLER's
reasonable control. SELLER agrees to notify PURCHASER promptly of the
occurrence of any such cause and to carry out this Purchase Agreement as
promptly as practical after such cause is terminated.
8. This Purchase Agreement shall not be modified or amended except by an
instrument in writing signed by authorized representatives of the parties. All
notices and requests hereunder shall be in writing and shall be sent to the
addresses hereinabove set forth (or to such other address as may hereafter be
designated in writing).
9. If after execution of this Agreement, either party shall default under
this Agreement, then either party shall have all rights provided under this
contract and pursuant to applicable law to seek recovery for damages. The
parties hereby reserve such rights and no part of this Agreement shall limit
those rights, except as specifically provided for herein.
10. PURCHASER and SELLER warrant that the terms and coeditions of this
Purchase Agreement were fully read and understood and that they constitute the
entire Agreement between the parties.
11. If any one or more provisions of this Purchase Agreement shall be found
to be illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
12. This Purchase Agreement shall be binding upon and inure to the benefit
of the respective legal representatives and heirs of the individual parties, and
the respective successors and assigns of the corporate parties, except as
otherwise herein provided.
13. The Parties hereto, appoint as its escrow agent, Insured Aircraft Title
Service, Oklahoma City, Oklahoma, and authorizes said agent to receive and hold
all deposits of money. Escrow agent is further authorized to, but is not
necessarily required to, receive and hold for filing on behalf of both Parties,
all applicable bills of sale, security agreements, applications for
registration, and related documents, until such time as the conditions,
covenants and agreements, expressed and implied, necessary to properly effect
the above-described aircraft transaction have been performed. Upon confirmation
that the provisions herein have been fully performed and satisfied, by noticed
from both Parties, escrow agent may, at the time of closing and delivery, file,
said documents for recording with the Federal Aviation Administration, and
further shall transfer all deposits to the SELLER. It is agreed that escrow
fees will be split equally between Purchaser and Seller.
14. The parties hereto agree to cooperate with the other to ensure
completion of any and all requisite documents and/or filings in order to effect
the purpose of the transaction described herein.
15. Additional Provisions: NONE
16. Transaction to be completed by October 13, 1999.
IN AGREEMENT WHEREOF, the parties hereto have caused this Purchase Agreement to
be executed by their authorized representatives.
WITNESS: THE QUIZNO'S CORPORATION
--------------------------------
PURCHASER
Nicole L. Johnson By:
--------------------------------
Date:Vice President/General Counsel
WITNESS: SACRAMENTO AVIATION MANAGEMENT CO.
---------------------------------
SELLER
WITNESS:
___________________________ By:_____________________
Date: 9/27/99
SACRAMENTO AVIATION
MANAGEMENT CO.
EXHIBIT "A" TO
AIRCRAFT PURCHASE AGREEMENT
1997 CESSNA CITATION JET
N67VW SERIAL NUMBER 525-0212
TOTAL TIME AIRFRAME 400 HOURS
TOTAL TIME ENGINES L - 400 HOURS
R - 400 HOURS
EXTERIOR:
INTERIOR: CHAMPAGNE AND SADDLE INTERIOR, GLOSS LAMINATE CABINETRY, LH FORWARD
DELUXE BIRCH REFRESHMENT CENTER, RH & LH EXECUTIVE TABLES, AFT BIRCH
DIVIDER WITH MIRROR ON FORWARD SIDE, AFT REMOVABLE CURTAIN, AFT
BAGGAGE COMPARTMENT, LH AFT BELTED FLUSHING POTTY
AVIONICS
COM DUAL BENDIX/KING
NAV DUAL BENDIX/KING
DME DUAL BENDIX/KING
ADF BENDIX/KING
TRANSPONDER BENDIX/KING
RADAR 2000 VP
RADAR ALTIMETER BENDIX/KING KRA-405
L.R.N. GNS-X/LS WITH GPS
AUTO PILOT/ FLIGHT DIRECTOR
SPZ 5000 TWO TUBE EFIS FLIGHT DIRECTOR
ADDITIONAL EQUIPMENT
WOODWARD ENGINE SYNCHRONIZE SHADIN AIR DATA COMPUTER
50 CUBIC FOOT OXYGEN SYSTEM 44 AMP BATTERY
CHIMES INDIRECT LIGHTING
COCKPIT ASSIST HANDLE NAVIGATION CHART CASE
AIRCRAFT SUBJECT TO PRIOR SALE OR REMOVAL FROM THE MARKET
ALL SPECIFICATIONS SUBJECT TO VERIFICATION UPON INSPECTION
SACRAMENTO AVIATION
MANAGEMENT CO.
EXHIBIT "B" TO
AIRCRAFT PURCHASE AGREEMENT
DELIVERY RECEIPT
Receipt is hereby acknowledged on behalf of THE QUIZNO' S CORPORATION of the
delivery to it by SACRAMENTO AVIATION MANAGEMENT C0. at 1:00 o'clock this 13th
day of October, 1999, at______________ , the following described Aircraft
together with the parts and equipment associated herewith, pursuant to the
Aircraft Purchase Agreement dated as of the 22ND day of SEPTEMBER, 1999 between
SACRAMENTO AVIATION MANAGEMENT C0. and THE QUIZNO'S CORPORATION and verification
that all conditions and provisions of said Purchase Agreement are complied with.
Aircraft Make 1997 CESSNA Engine Make WILLIAMS - ROLLS ROYCE
Aircraft Model CITATION 525 Engine Model FJ44-IA
Aircraft Serial # 525-0212 Engine Serial# L- 1433
Aircraft Reg # N67VW Engine Serial# R- 1434
By:_______________________________ Date:10/13/99
Title: Chief Financial Officer
INTERCHANGE AGREEMENT
THIS AGREEMENT, made and entered into as of the 13th day of October, 1999,
by and between Richard F. Schaden, P.C., with an address of 11870 Airport Way,
Broomfield, Colorado 80021 ("Schaden") and The Quizno's Corporation, with an
address of 1415 Larimer Street, Denver, Colorado 80202 ("Quizno's").
WITNESSETH:
WHEREAS, Schaden is the owner of one 1980 Cessna 560 Citation V aircraft,
serial number 560-0066, bearing the United States Registration Number N60S
("First Aircraft"); and
WHEREAS, Quizno's is a registered owner of one 1997 Cessna 525CJ aircraft,
serial number 525-012, bearing the United States Registration Number N67VW
("Second Aircraft");
WHEREAS, Schaden and Quizno's desire to lease said aircraft, with flight
crews, each to the other, on an interchange basis as defined in Section
91.501(c)(2) of the Federal Aviation Regulations ("FARs");
NOW THEREFORE, Schaden and Quizno's, declaring their mutual intention to
enter into and be bound by this Interchange Agreement, and for the good and
valuable consideration set forth below, hereby covenant and agree as follows:
1. Subject to paragraph 3 hereof, Schaden agrees to lease the First
Aircraft to Quizno's pursuant to the provisions of FAR 91.501(c)(2) and to
provide a fully qualified flight crew for all operations of First Aircraft
during the term of this Agreement in exchange for equal time on the Second
Aircraft plus the charges described in paragraph 6 below. The term of this
Agreement (the "Term") shall commence on the date of this Agreement and shall
continue until termination as provided in paragraph 3 below.
2. Quizno's agrees to lease the Second Aircraft to Schaden pursuant to
the provisions of FAR 91.501(c)(2) and to provide a fully qualified flight crew
for all operations of Second Aircraft during the Term set forth in paragraph 1
above in exchange for equal time on the First Aircraft.
3. Either party may terminate this Agreement upon thirty (3) days
written notice for any reason, or upon five (5) days prior written notice after
an uncured default as described in paragraph 14 of this Agreement.
4. The owner of each aircraft shall pay all expenses related to the
operation of that aircraft when incurred regardless of which party is using the
aircraft when the weather, and related user fees, and any and all additional
expenses incurred by or because of the operation of the aircraft.
5. The owner of each aircraft shall keep an account of the time the
other party uses its aircraft. Such account may be inspected by the other
party upon reasonable notice. Each accounting shall include the following
items:
a. Fuel, oil, lubricants, and other additives;
b. Travel expenses of the crew, including food, lodging, and
ground transportation;
c. Hangar and tie down costs at and away from the aircraft's
base of operations; hangar base costs may include equipment
specifically acquired for the servicing of each aircraft;
d. Insurance obtained for the operation(s) and the cost of hull
insurance attributable to such operation(s);
e. Landing fees, airport taxes, and similar assessments;
f. Customs, foreign permits, and similar fess directly related
to the flight;
g. In-flight food and beverages;
h. Passenger ground transportation;
i. Flight planning, charts, Loran, and weather contract
services;
j. Maintenance expenses including but not limited to labor
(both by employees and outside contracts), parts maintenance
and replacements, overhaul of engine (including any specific
power-by-the-hour expenses), propellers, avionics, and
airframe;
k. Maintenance reserve fund payments;
l. Flight crew, maintenance, and administrative/clerical
salaries and associated benefits;
m. Contract training costs;
n. Depreciation charges.
6. Quizno's shall pay to Schaden a $150.00 per flight hour operational
costs differential attributable to the higher engine and fuel consumption costs
respecting the First Aircraft in comparison to such costs for the Second
Aircraft. Schaden shall provide an invoice to Quizno's from time to time
identifying the foregoing cost differentials with reasonable detail. Quizno's
shall pay the invoice amount to Schaden within thirty (30) days of the invoice
date.
7. Each party will provide the other with requests for flight time and
proposed flight schedules as far in advance of any given flight as possible.
Requests for flight time shall be in a form, whether oral or written, mutually
convenient to, and agreed upon by the parties. In addition to proposed
schedules and flight times, each party shall provide at least the following
information for each proposed flight at some time prior to scheduled departure
as required by the operator or operator's flight crew:
a. proposed departure point;
b. destination;
c. date and time of flight;
d. the number of anticipated passengers;
e. the nature and extent of any non-customary luggage and/or
cargo to be carried;
f. the date and time of a return flight, if any;
g. any other information concerning the proposed flight that
may be pertinent or required by operator or operator's
flight crew;
8. Schaden shall have final authority over the scheduling of the First
Aircraft and Quizno's shall have final authority over the scheduling of the
Second Aircraft; profided, however, that each will u se its best efforts to
accommodate the needs of the other and to avoid conflicts in scheduling.
9. For the purposes of this Agreement, the owner of each aircraft shall
be solely responsible for securing maintenance, preventive maintenance, and
required or otherwise necessary inspections on that aircraft, and shall take
such requirements into account in scheduling the aircraft. No period of
maintenance, preventive maintenance, or inspection shall be delayed or postponed
for the purpose of scheduling the aircraft, unless said maintenance or
inspection can be safely conducted at a later time in compliance with all
applicable laws and regulations, and within the sound discretion of the pilot
in command. The Pilot in Command shall have final and complete authority
to cancel any flight for any reason or condition which in his judgment would
compromise the safety of the flight.
10. The owner of each aircraft shall provide a qualified flight crew
for each flight undertaken on that aircraft under this Agreement. The foregoing
notwithstanding, the lessee operator may conduct operations in the other's
aircraft with its own crew, provided such lessee owner remains in compliance
with all applicable aircraft insurance requirements, Federal Aviation
Regulations, and applicable law.
11. In accordance with applicable Federal Aviation Regulations, each
qualified flight crew provided under this Agreement will exercise all of its
duties and specifically agrees that the flight crew, in its sole discretion,
may terminate any flight, refuse to commence any flight, or take other action
which in the considered judgment of the Pilot in Command is necessitated by
considerations of safety. No such action of the Pilot in Commend shall create
or support any liability for loss, injury, damage, or delay to either party
or any other person. The parties further agree that neither party shall be
liable for delay or failure to furnish or return either aircraft or crew
pursuant to this Agreement when such failure is caused by government regulation
or authority, mechanical difficulty, war, civil commotion, strikes or labor
disputes, weather conditions, or acts of God.
12. Each party warrants that:
a. It will use the other party's aircraft for and on account of
its own business only, and will not use said aircraft for
the purposes of providing transportation of passengers or
cargo in air commerce for compensation or hire;
b. It shall refrain from incurring any mechanic's or other
lien in connection with inspection, preventative
maintenance, maintenance or storage of the aircraft, whether
permissible or impermissible under this Agreement, nor
shall there be any attempt by any party hereto convey,
mortgage, assign, lease or any way alienate the other
party's aircraft or create any kind of lien or security
interest involving said aircraft or do anything or take any
action that might mature into such a lien;
c. During the term of this Agreement, each party will abide by
and conform to all such laws, governmental and airport
orders, rules and regulations, as shall from time to time
be in effect relating in any way to the operation and use
of either aircraft pursuant to this Interchange Agreement;
d. Such Interchange operations are covered by the party's
aircraft all-risk phsyical damage insurance (hull coverage),
aircraft bodily injury and property damage liability
insurance, passenger, pilot, and crew voluntary settlement
insurance and statutory worker's compensation and employer's
liability insurance.
13. Each party agrees to idemnify and hold harmless the other against
all losses, including costs, attorneys' fees and expenses, by reason of claims
for injury to or death of persons and loss of or damage of property arising out
of or in any manner connected with the performance of such party's
responsibilities under this Agreement or any breach by such party of any
covenant or warranty made herein. The parties agree that in the event either
party shall be liable to the other for any reason relating to this Agreement,
that under no circumstances shall the damaged party be entitled to any special
or consequential damages, including but not limited to damages for lost profits.
14. A party shall be in default hereunder if at any time during the
term of this Agreement the party;
a. is delinquent in making any payments under this Agreement
for a period of more than fifteen (15) days; or
b. does not perform any or all of the requirements on its part
to be performed under this Agreement and/or or is in
breach of all or any of the covenants herein contained; and
fails to cure after ten (10) days' written notice; or
c. is adjusted bankrupt or insolvement; or
d. files a voluntary petition in bankruptcy or for
reorganization; or
e. suffers a receivership to be appointed for its assets.
15. Upon the occurrence of any of the events listed in paragraph 14
above, the party not in default shall have the right to terminate this
Agreement as provided in paragraph 3 above, and to pursue any further remedies
available to that party in law or in equity.
16. For purposes of this Agreement, the permanent base of operation of
First Aircraft shall be the Jeffco Airport, Broomfield, Colorado.
17. For purposes of this Agreement, the permanent base of operation
of Second Aircraft shall be the Jeffco Airport, Broomfield, Colorado.
18. Neither this Agreement nor any party's interein herein shall be
assignable to any other party whatsoever. Notwithstanding the foregoing, this
Agreement shall inure to the benefit of and be binding upon the parties hereto,
their heirs, representatives, and successors.
19. For purposes of this Agreement, where applicable, the term "owner"
shall include persons operating either of the aircraft pursuant to an aircraft
lease agreement entered into previously by one or both of the parties.
20. Upon termination of this Agreement, the parties shall determine
the number of flight hours each party used the other party's aircraft under
this Agreement. If there is a usage differential, then: (a) this Agreement
shall be deemed a time sharing agreement (as defined in FAR Section 91.501(c)(1)
for the number of flight hours which make up the differential; and (b) the party
receiving more flight hours shall pay for the number of flight hours which
make up the differential in an amount not to exceed the authorized charges set
forth in FAR Section 91.50(d). Such payment shall be made within thirty (30)
days following termination of this Agreement. This paragraph shall survive
such termination.
21. TRUTH IN LEASING STATEMENT UNDER SECTION 91.23 OF THE FEDERAL
AVIATION REGULATIONS.
a. THE FIRST AIRCRAFT, A 1990 CESSNA 560 CITATION V AIRCRAFT,
MANUFACTURER'S SERIAL NO. 560-0066, CURRENTLY REGISTERED
WITH THE FEDERAL AVIATION ADMINISTRATION AS N60S, HAS BEEN
MAINTAINED AND INSPECTED UNDER FAR PART 91 DURING THE 12
MONTHS PRECEDING THE EXECUTION OF THIS AGREEMENT.
b. THE FIRST AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER
FAR PART 91 FOR OPERATIONS TO BE CONDUCTED UNDER THIS
AGREEMENT DURING THE DURATION OF THIS AGREEMENT.
c. SCHADEN IS CONSIDERED RESPONSIBLE FOR OPERATIONAL CONTROL
OF THE FIRST AIRCRAFT UNDER THIS AGREEMENT.
d. SCHADEN HEREBY CERTIFIES THAT IT IS RESPONSIBLE FOR
OPERATIONAL CONTROL OF THE FIRST AIRCRAFT FOR PURPOSES OF
THIS AGREEMENT AND THAT IT UNDERSTANDS ITS RESPONSIBILITIES
FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.
e. THE SECOND AIRCRAFT, A 1997 CESSNA 525CJ AIRCRAFT,
MANUFACTURER'S SERIAL NO. 525-0212, CURRENTLY REGISTERED
WITH THE FEDERAL AVIATION ADMINISTRATION AS N67VW, HAS BEEN
MAINTAINED AND INSPECTED UNDER FAR PART 91 DURING THE 12
MONTHS PRECEDING THE EXECUTION OF THIS AGREEMENT.
f. THE SECOND AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER
FAR PART 91 FOR OPERATIONS TO BE CONDUCTED UNDER THIS
AGREEMENT DURING THE DURATION OF THIS AGREEMENT.
g. QUIZNO'S IS CONSIDERED RESPONSIBLE FOR OPERATIONAL CONTROL
OF THE SECOND AIRCRAFT UNDER THIS AGREEMENT.
h. QUIZNO'S HEREBY CERTIFIES THAT IT IS RESPONSIBLE FOR
OPERATIONAL CONTROL OF THE SECOND AIRCRAFT FOR PURPOSES OF
THIS AGREEMENT AND THAT IT UNDERSTANDS ITS RESPONSIBILITIES
FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.
i. AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL
AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED
FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE.
j. THE "INSTRUCTIONS FOR COMPLIANCE WITH TRUTH IN LEASEING
REQUIREMENTS" ATTACHED HERETO ARE INCORPORATED HEREIN BY
REFERENCE.
IN WITHNESS WHEREOF, the parties hereto have caused the signatures of their
authorized representatives to be affixed below on the day and year first above
written. The persons signing below warrant their authority to sign.
/s/ Richard F. Schaden P.C. The Quizno's Corporation
- ----------------------------- --------------------------
By: By:
Title: Title:Vice President/General Counsel
NOTE: A COPY OF THIS AGREEMENT MUST BE CARRIED IN THE AIRCRAFT WHILE BEING
OPERATED HEREUNDER.
INSTRUCTIONS FOR COMPLIANCE WITH
"TRUTH IN LEASING" REQUIREMENTS
1. Mail a copy of the agreement to the following address via certified mail,
return receipt requested, immediately upon execution of the agreement
(14 C.F.R. 91.23 requires that the copy be sent within twenty-four hours
after it is signed):
Federal Aviation Agreement
Aircraft Registration Branch
ATTN: Technical Section
P.O. Box 25724
Oklahoma City, Oklahoma 73125
2. Telephone or fax the nearest Flight Standards District Office at least
forty-eight hours prior to the first flight made under this agreement.
3. Carry a copy of the agreement in the aircraft at all times when the
aircraft is being operated under the agreement.
EXHIBIT B
(TO MASTER FRANCHISE OFFERING CIRCULAR)
MASTER FRANCHISE AGREEMENT
<PAGE>
THE QUIZNO'S CORPORATION
MASTER FRANCHISE AGREEMENT
FOR ____________________
MASTER FRANCHISEE
DATE OF AGREEMENT
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1 PREAMBLES...................................................1
2 CERTAIN DEFINITIONS.........................................1
3 DEVELOPMENT RIGHTS AND OBLIGATIONS..........................5
3.1 GRANT OF DEVELOPMENT RIGHTS............................5
3.2 TERRITORIAL RIGHTS OF MASTER FRANCHISEE................5
3.3 DEVELOPMENT OBLIGATIONS................................5
3.4 EXTENSION OF DEVELOPMENT TERM..........................6
3.5 FRANCHISE AND AREA DIRECTOR AGREEMENTS.................6
3.6 RIGHTS RETAINED BY FRANCHISOR..........................7
4 GUIDANCE AND ASSISTANCE.....................................7
4.1 INITIAL TRAINING.......................................7
4.2 CONTINUING TRAINING....................................7
4.3 CONTINUING GUIDANCE AND SUPPORT BY FRANCHISOR..........7
4.4 OPERATING MANUAL.......................................8
4.5 ASSISTANCE IN OPENING PILOT RESTAURANT.................9
4.6 PRODUCT AND OPERATIONS DEVELOPMENT.....................9
5 OPERATIONS OBLIGATIONS OF MASTER FRANCHISEE.................9
5.1 FORM AGREEMENTS........................................9
5.2 APPOINTMENT OF AREA DIRECTORS.........................10
5.3 TRAINING AND SUPPORT..................................10
5.4 SYSTEM STANDARDS......................................10
5.5 COMPLIANCE WITH THE SYSTEM............................11
5.6 MASTER FRANCHISE PREMISES.............................11
6 OTHER OBLIGATIONS OF MASTER FRANCHISEE.....................11
6.1 CHIEF EXECUTIVE OFFICER...............................11
6.2 OTHER MANAGEMENT PERSONNEL OF
MASTER FRANCHISEE.....................................12
6.3 INSURANCE.............................................12
6.4 RECORDS AND REPORTS...................................13
6.5 GOVERNMENTAL APPROVALS................................14
6.6 COMPLIANCE WITH LEGALREQUIREMENTS/GOOD RESTAURANT PRACTICES
15
6.7 SUPPLY ARRANGEMENTS...................................15
7 INITIAL AND CONTINUING FEES................................16
7.1 INITIAL FEES..........................................16
7.2 INITIAL FRANCHISE AND AREA DIRECTOR FEES..............16
7.3 CONTINUING FEES.......................................16
7.4 INTEREST ON LATE PAYMENTS.............................16
7.5 WITHHOLDING TAXES.....................................17
7.6 CURRENCY OF PAYMENT...................................17
7.7 EXCHANGE CONTROLS.....................................18
7.8 STAMP DUTIES..........................................18
8 MARKETING..................................................18
9 CONFIDENTIAL INFORMATION...................................19
10 EXCLUSIVE RELATIONSHIP.....................................20
11 INDEPENDENT CONTRACTORS/INDEMNIFICATION....................20
11.1 INDEPENDENT CONTRACTORS...............................20
11.2 NO LIABILITY FOR ACTS OF OTHER PARTY..................21
11.3 TAXES.................................................21
11.4 INDEMNIFICATION.......................................21
12 MARKS......................................................22
12.1 GOODWILL AND OWNERSHIP OF THE MARKS...................22
12.2 LIMITATIONS ON MASTER FRANCHISEE'S
USE OF THE MARKS......................................22
12.3 NOTIFICATION OF INFRINGEMENT AND CLAIMS...............22
12.4 DISCONTINUANCE OF USE OF MARKS........................23
12.5 REGISTERED USER AGREEMENTS............................23
12.6 MASTER FRANCHISEE'S TRADE NAME........................23
13 TRANSFER...................................................24
13.1 BY FRANCHISOR.........................................24
13.2 BY MASTER FRANCHISEE..................................24
13.3 FRANCHISOR'S RIGHT OF FIRST REFUSAL...................24
13.4 DEATH OF MASTER FRANCHISEE............................25
14 TERMINATION OF AGREEMENT...................................25
14.1 BY MASTER FRANCHISEE..................................25
14.2 BY FRANCHISOR.........................................26
15 RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION......26
15.1 MARKS.................................................26
15.2 COVENANT NOT TO COMPETE...............................27
15.3 AREA DIRECTOR AND FRANCHISE AGREEMENTS................27
15.4 CONTINUING OBLIGATIONS................................28
16 ENFORCEMENT................................................28
16.1 INFORMAL DISPUTE RESOLUTION...........................28
16.2 FORMAL DISPUTE RESOLUTION.............................28
16.3 SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.....29
16.4 WAIVER OF OBLIGATIONS.................................30
16.5 RIGHTS OF PARTIES ARE CUMULATIVE......................30
16.6 WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.............31
16.7 LIMITATION OF CLAIMS..................................31
16.8 COSTS AND LEGAL FEES..................................31
16.9 GOVERNING LAW/CONSENT TO JURISDICTION.................32
16.10NO RIGHT TO SET-OFF...................................32
17 REPRESENTATIONS OF MASTER FRANCHISEE.......................32
18 MISCELLANEOUS PROVISIONS...................................33
18.1 BINDING EFFECT........................................33
18.2 CONSTRUCTION..........................................33
18.3 GOVERNING LANGUAGE....................................33
18.4 NOTICES, REPORTS AND PAYMENTS.........................33
JOINDER..........................................................36
<PAGE>
EXHIBITS AND ATTACHMENTS
EXHIBIT A - DEVELOPMENT AREA
EXHIBIT B - DEVELOPMENT QUOTA
EXHIBIT C - MARKS
EXHIBIT D - OWNERSHIP INTERESTS
GUARANTY AND ASSUMPTION OF OBLIGATIONS
<PAGE>
THE QUIZNO'S CORPORATION
MASTER FRANCHISE AGREEMENT
FOR _____________________
THIS AGREEMENT is made and entered into this ____ day of _________, 2000,
by and between THE QUIZNO'S CORPORATION, a corporation organized under the laws
of the State of Colorado, U.S.A. ("Franchisor"), and __________________________
_______________________________________________________________________________
("Master Franchisee").
1. PREAMBLES.
Franchisor has developed methods for establishing, operating and promoting
restaurants offering submarine sandwiches, salads, other food products and
beverages and related restaurant and carry out services ("QUIZNO'S Restaurants")
which include the use and license of proprietary rights in certain valuable
trade names, service marks and trademarks owned by Franchisor (the "Marks"),
including the service mark "QUIZNO'S," and Franchisor's distinctive techniques,
expertise and knowledge in the establishment, operation and promotion of
restaurants and related licensed methods of doing business.
Franchisor grants master franchises to qualified parties to develop and
operate and to franchise others to develop and operate QUIZNO'S Restaurants in
defined market areas under the Marks and pursuant to the System (defined below).
Franchisee recognizes and acknowledges the benefits to be derived from
being identified and associated with Franchisor and being able to utilize the
System and therefore desires to acquire a master franchise for QUIZNO'S
Restaurants in the Development Area (defined below). Franchisor is willing to
grant Master Franchisee such master franchise under the terms and conditions
which are contained in this Agreement.
2. CERTAIN DEFINITIONS.
For purposes of this Agreement, the terms listed below have the meanings
indicated. Other terms used in this Agreement are defined and construed in the
context in which they occur.
"Affiliate" - any Person (defined below) or entity that directly or
indirectly owns or controls, that is directly or indirectly owned or controlled
by, or that is under common ownership or control with another Person. For
purposes of this definition, the term "control" shall mean the possession,
directly or indirectly, of a Controlling Interest (defined below).
"Agreement Date" - the date on which this Agreement is executed by the
last party to sign.
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<PAGE>
"Agreement Term" - the period commencing upon the Agreement Date and ending
upon the expiration or termination of the last Franchise Agreement in the
Development Area to expire or terminate, or termination of this Agreement in
accordance with the provisions hereof.
"Area Director" - a representative of Master Franchisee authorized by
Master Franchisee pursuant to an Area Director Agreement to sell franchises for
QUIZNO'S Restaurants in a defined geographic area within the Development Area
and to provide site selection and support services to QUIZNO'S Restaurants
within such geographic area.
"Area Director Agreement" - the form of area director marketing agreement
(including all exhibits, ancillary documents and guarantees attached thereto)
approved by Franchisor, as periodically modified in accordance with this
Agreement.
"Area Directorship" - the right to sell franchises for QUIZNO'S Restaurants
and the obligation to provide site selection and support services to Franchisees
pursuant to an Area Director Agreement.
"Competitive Business" - any business operating, or forming joint ventures
to operate, or granting franchises or licenses to others to operate, a
restaurant or other food service business deriving more than 10% of its gross
receipts, excluding gross receipts relating to the sale of alcoholic beverages,
from the sale of submarine, hoagie, hero-type or deli-style sandwiches (other
than another QUIZNO'S Restaurant operated by Franchisee).
"Confidential Information" - as defined in Section 9.
"Controlling Interest" - A Person shall be deemed to have a controlling
interest if that Person has the right to vote twenty five percent (25%) or more
of the voting securities or other interest of a partnership, corporation or
other form of limited liability company, or is entitled to receive twenty five
percent (25%) or more of the net profits of any such entity, or is otherwise
able to direct or cause the direction of the management or policies of any such
entity. A trustee of a trust shall be deemed to hold one hundred percent (100%)
of the voting interests of the trust and each beneficiary of a trust shall be
deemed to hold his proportionate share of the voting interest of the trust or,
if such interest is indeterminate, one hundred percent (100%) of the voting
interests of the trust.
"Development Area" - the geographic area or areas described on Exhibit A
to this Agreement.
"Development Period" - each period of time defined as a Development Period
on Exhibit B to this Agreement.
"Development Quota" - the minimum number of QUIZNO'S Restaurants that must
be open and in operation at the end of each Development Period in each of the
geographic areas which comprise the Development Area, as set forth on Exhibit B
to this Agreement.
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<PAGE>
"Development Rights" - the right to grant Franchises (defined below) and
Area Directorships for the development and operation of QUIZNO'S Restaurants to
be located in the Development Area.
"Development Term" - the period during which Master Franchisee is
authorized to grant Franchises and Area Directorships, which will commence on
the Agreement Date and will expire, unless extended or terminated in accordance
with the terms of this Agreement, on the tenth (10th) anniversary of the
Agreement Date.
"Dollars" and "$" - the legal currency of the United States.
"Form Agreements" - as defined in Section 5.1.
"Franchise" - the right to develop and operate a QUIZNO'S Restaurant at a
specified location within the Development Area and to use the Marks and the
System in the operation thereof pursuant to a Franchise Agreement (defined
below).
"Franchise Agreement" - the form of franchise agreement (including all
exhibits, ancillary documents and guarantees attached thereto) approved by
Franchisor, as periodically modified in accordance with Section 5.1.
"Franchisee" - one or more person(s) that is (are ) a party to a Franchise
Agreement with Master Franchisee for the development and operation of a
Restaurant within the Development Area, whether or not such person(s) is (are)
an Affiliate of Master Franchisee.
"Gross Sales" - sales of any kind for all services or products from or
through a Restaurant, including any such sale of services or products made for
cash or upon credit, or partly for cash and partly for credit, regardless of
collection of charges for which credit is given, regardless of whether such sale
is conducted in compliance with or in violation of the terms of the Franchise
Agreement and regardless of whether such sale is at the Restaurant or off-site,
but exclusive of discounts, sales, value-added or service taxes or other similar
taxes and credits actually collected from customers and paid to the appropriate
taxing authority. Gross Sales shall also include the fair market value of any
services or products received by Franchisee in barter or exchange for its
services and products.
"Legal Requirements" - applicable laws, ordinances, regulations, rules,
administrative orders, decrees and policies of any government, governmental
agency or department, including without limitation the governments of the
Development Area and the United States.
"Marks" - the trademarks, service marks, logos and other commercial
symbols set forth on Exhibit D to this Agreement which Franchisor from time to
time authorizes Master Franchisee to use and sublicense to Franchisees to
identify Restaurants and the Products offered by such Restaurant. Such
trademarks, service marks, logos and other commercial symbols are subject to
modification and discontinuance and may include additional or substitute
trademarks, service marks, logos and commercial symbols as provided in this
Agreement.
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<PAGE>
"Owners" - all persons or entities holding Ownership Interests (defined
below) in Master Franchisee and all persons or entities who have other direct or
indirect property rights in Master Franchisee or this Agreement (the persons or
entities who are Owners as of the date of this Agreement are listed on Exhibit E
to this Agreement).
"Ownership Interest" - a direct or indirect, disclosed or undisclosed,
legal or beneficial ownership or property right or voting right, including,
without limitation: (a) in relation to a company, the ownership of shares or
other equity interests in the company; (b) in relation to a partnership, the
ownership of a general or limited partnership interest; (c) in relation to a
trust, the ownership of the beneficial interest of such trust; or (d) the right
to cast some or all of the votes associated with such shares or interests.
"Person" - an individual, corporation, general or limited partnership,
limited liability company, trust, association or other legal entity.
"Pilot Restaurant" - as defined in 3.1.
"Products" - all products and services which Franchisor authorizes for
sale by Restaurants.
"Restaurant" - a QUIZNO'S Restaurant located within the Development Area.
"Restricted Persons" - (1) Owners who have a Controlling Interest in
Master Franchisee; (2) Affiliates of Master Franchisee; (3) the parents,
spouses, natural and adopted children of Master Franchisee and of Owners of a
Controlling Interest in Master Franchisee, and (4) the officers, directors and
management personnel of Master Franchisee and its Affiliates.
"Submarine Sandwich Restaurant" - a business, including a QUIZNO'S
Restaurant, that offers for sale submarine, hoagie or hero-type or deli-style
sandwiches.
"System" - the recipes, methods, techniques, formats, systems, methods,
procedures, standards, and specifications which Franchisor specifies for use in
the operation of QUIZNO'S Restaurants, all of which Franchisor may improve,
further develop or otherwise modify from time to time.
"United States" and "U.S." - The United States of America.
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<PAGE>
3. DEVELOPMENT RIGHTS AND OBLIGATIONS.
3.1 GRANT OF DEVELOPMENT RIGHTS.
Subject to the terms and conditions of this Agreement, Franchisor hereby
grants to Master Franchisee the Development Rights during the Development Term
and the right to function as the franchisor under Franchise Agreements with
Franchisees and Area Director Agreements with Area Directors. Master Franchisee
may not itself own or operate QUIZNO'S Restaurants or Area Directorships during
the Agreement Term; however, Master Franchisee may grant Franchises or Area
Directorships to its Affiliates. Franchisees and Area Directors, including
Affiliates of Master Franchisee, shall execute a Franchise Agreement for each
such QUIZNO'S Restaurant and an Area Director Agreement for each Area
Directorship, as applicable. The rights granted to Master Franchisee by this
Agreement are limited to the Development Area and Master Franchisee agrees that
it is not hereby granted any rights to franchise, and that it will not operate
or grant Franchises for QUIZNO'S Restaurants or Area Directorships for locations
outside of the Development Area, nor solicit prospective Franchisees or Area
Directors from outside the Development Area.
Before granting any Franchise to a Person that is not an Affiliate of
Master Franchisee, Master Franchisee shall, in compliance with the Development
Quota, cause an Affiliate to sign a Franchise Agreement and open a QUIZNO'S
Restaurant within the Development Area that successfully passes Franchisor's
operational review, to be used as a prototype Restaurant and training facility
(the "Pilot Restaurant"). An Affiliate of Master Franchisee shall operate the
Pilot Restaurant or a replacement therefor at all times during the Development
Term and any extension thereof.
3.2 TERRITORIAL RIGHTS OF MASTER FRANCHISEE.
Except as hereinafter provided, and provided that Master Franchisee is in
full compliance with this Agreement, Franchisor and its Affiliates will not
operate or grant Franchises, Area Directorships, or other development rights for
QUIZNO'S Restaurants within the Development Area during the Development Term.
After the termination of this Agreement or the termination or expiration of the
Development Term (unless the Development Term is extended as provided in this
Agreement), Franchisor and its Affiliates shall have the right to operate and
grant Franchises and Development Rights for QUIZNO'S Restaurants within the
Development Area, subject only to the territorial rights (if any) granted to
Franchisees and Area Directors.
3.3 DEVELOPMENT OBLIGATIONS.
Master Franchisee agrees to comply with the Development Quota with respect
to each Development Period. The determination as to whether Master Franchisee
has met its development obligations hereunder shall be made based on the number
of Restaurants open and operating at the end of a Development Period. For
purposes of the development obligations hereunder, a Restaurant that has been
open and in operation and is subsequently permanently closed, rendered
inoperable by fire or other casualty or required to be closed due to
condemnation or other governmental action, during the last six (6) months of a
Development Period, shall be counted as open and operating at the end of such
Development Period (but not thereafter); any other Restaurant must be open and
operating in compliance with the applicable Franchise Agreement in order to be
counted toward the satisfaction of the Development Quota. Master Franchisee
agrees that during the Agreement Term, it will at all times faithfully, honestly
and diligently perform its obligations hereunder and will continuously exert its
best efforts to promote and enhance the development and operation of QUIZNO'S
Restaurants within the Development Area.
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<PAGE>
3.4 EXTENSION OF DEVELOPMENT TERM.
Upon expiration of the Development Term, if Master Franchisee has
substantially complied with all of the terms of this Agreement during the
Development Term, including without limitation the Development Quota, subject to
the terms of Section 3.4, Master Franchisee shall have the right to extend the
Development Term for ten (10) additional years. Master Franchisee shall give
Franchisor written notice of its request for an extension of the Development
Term not more than twelve (12) months nor less than six (6) months prior to the
expiration of the Development Term. Within sixty (60) days following
Franchisor's receipt of such notice from Master Franchisee, Franchisor and
Master Franchisee shall negotiate in good faith concerning a new development
quota for the extended Development Term. In connection with the extension of the
Development Term, Master Franchisee and all Owners shall execute general
releases, in a form satisfactory to Franchisor, of any and all claims against
Franchisor and its Affiliates and their respective shareholders, directors,
officers, employees, agents, successors and assigns. If Franchisor and Master
Franchisee do not execute a binding agreement extending the term of the
Development Term prior to the expiration thereof, Master Franchisee's
Development Rights pursuant to this Agreement shall be deemed to have expired
and Franchisor shall have the right to operate and grant franchises and
development rights for QUIZNO'S Restaurants in the Development Area, subject
only to territorial rights previously granted to Franchisees and Area Directors.
Upon expiration of the extended Development Term as set forth above, if
Master Franchisee has substantially complied with all of the terms of this
Agreement during such extended Development Term, including without limitation
the Development Quota for the extended Development Term, Master Franchisee shall
have the right to extend the Development Term for a second period of ten (10)
additional years, subject to the terms and conditions set forth herein with
respect to the first extension of the Development Term.
3.5 FRANCHISE AND AREA DIRECTOR AGREEMENTS.
Master Franchisee will enter into a Franchise Agreement or Area Director
Agreement directly with each Franchisee and Area Director. Master Franchisee
will enforce each Franchise Agreement and Area Director Agreement, and will
ensure compliance with all Legal Requirements, including without limitation
regulations affecting the sale of Franchises and Area Directorships in the
Development Area. Franchisor shall be named as a third party beneficiary of each
Franchise Agreement and Area Director Agreement and will have the right, but not
the obligation, to assume the Master Franchisee's obligations thereunder in
accordance with Section 15.3.
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<PAGE>
Master Franchisee will have the sole obligation for approving each
Franchisee. Franchisor will have the right to approve any prospective Area
Director prior to execution of the Area Director Agreement in accordance with
Section 5.2. Master Franchisee shall have the right to establish development
goals with respect to any Area Directorship sold in the Development Area,
provided that non-performance of any Area Director with respect to such goals
will not affect Master Franchisee's obligation to meet Master Franchisee's
Development Quota. Master Franchisee shall be responsible for any payments to
Area Directors in the Development Area (including commissions on royalties or
other payments due under the Area Director Agreement).
3.6 RIGHTS RETAINED BY FRANCHISOR.
Except as expressly limited by Sections 3.2 and 3.3., Franchisor (on
behalf of itself, its Affiliates and its designees) retains all rights to
develop, manufacture, market, distribute or sell the Products or any other
product or service within or outside the Development Area and to engage in any
business or activity within or outside the Development Area.
4. GUIDANCE AND ASSISTANCE.
4.1 INITIAL TRAINING.
Franchisor will furnish at its principal office in the United States a
training program to the initially appointed senior managers of Master Franchisee
at no charge to Master Franchisee. Master Franchisee shall pay charges
established by Franchisor for training programs furnished to any individual who
replaces a previously trained manager. Master Franchisee agrees to be
responsible for all travel and living expenses and compensation for its managers
who attend such training programs. Master Franchisee shall attend and
successfully complete the initial training prior to opening the Pilot Restaurant
or granting Franchises or Area Directorships.
4.2 CONTINUING TRAINING.
Franchisor will periodically conduct additional training programs relating
to various aspects of the development and operation of QUIZNO'S Restaurants.
Franchisor will have the right to designate one (1) or more senior managers of
Master Franchisee who will be required to attend such conferences or training
programs, which will be provided at no charge to Master Franchisee except that
Master Franchisee agrees to be responsible for all travel and living expenses
and compensation of its managers who attend such conferences and training
programs.
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<PAGE>
4.3 CONTINUING GUIDANCE AND SUPPORT BY FRANCHISOR.
Franchisor shall provide ongoing advice and guidance to Master Franchisee
concerning the development, operation and franchising of QUIZNO'S Restaurants.
In connection with such assistance, Franchisor shall furnish written and other
materials and various of its personnel to communicate the System to Master
Franchisee. Franchisor personnel shall be available for periodic consultation in
English with personnel of Master Franchisee by telephone, facsimile transmission
and correspondence. Franchisor will furnish to Master Franchisee copies (in
English) of advertising and marketing materials developed by Franchisor for
QUIZNO'S Restaurants and information relating to products, equipment and
computer systems and software developed and implemented in QUIZNO'S Restaurants
in the United States.
4.4 OPERATING MANUAL.
Franchisor shall loan to Master Franchisee a copy of its operating manual
for the development and operation of QUIZNO'S Restaurants used in the United
States. Master Franchisee shall submit for review and approval by Franchisor in
English any modifications to the System and System Standards (defined below)
that Master Franchisee believes to be necessary to comply with the Legal
Requirements of the Development Area or for the commercial success of QUIZNO'S
Restaurants operated in the Development Area. Franchisor agrees to consider such
proposed modifications in good faith and to notify Master Franchisee in writing
of Franchisor's acceptance or rejection of such modifications, specifying the
reasons for any rejections. Modifications to the System and System Standards
shall be reflected in the operating manual for the Development Area (the
"Operating Manual"). If necessary, Master Franchisee shall cause (at its
expense) the Operating Manual to be translated into the language of the
Development Area. The Operating Manual and the copyright therein and in any
translations thereof shall be the property of Franchisor and Master Franchisee
agrees to execute any and all instruments and documents, render such assistance
and take such action as may, in the opinion of Franchisor's counsel, be
necessary or advisable to establish, protect and maintain the interests of
Franchisor in the Operating Manual and the copyright therein. Except for
providing one (1) copy of the Operating Manual to each Franchisee and each Area
Director, Master Franchisee agrees that it will not copy or disclose any part of
the Operating Manual to any person other than its employees who have a need to
know the contents of the Operating Manual.
Master Franchisee, within thirty (30) days of receiving any updated
information regarding the Operating Manual, shall in turn update its copy of the
Operating Manual as instructed by Franchisor and shall conform its operations
with the updated provisions within a reasonable time thereafter. Master
Franchisee shall also be responsible for ensuring that each of the Franchisees
and Area Directors in the Development Area shall, in turn, update their copy of
the Operating Manual as instructed by Franchisor, and shall conform their
operations with the updated provisions within a reasonable period of time
thereafter. Master Franchisee acknowledges that a master copy of the Operating
Manual maintained by Franchisor at its principal office shall be controlling in
the event of a dispute relative to the content of any Operating Manual.
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4.5 ASSISTANCE IN OPENING PILOT RESTAURANT.
Franchisor will provide on-site advice, guidance and support for a period
of thirty (30 ) days in connection with the opening and initial operations of
the Pilot Restaurant.
4.6 PRODUCT AND OPERATIONS DEVELOPMENT.
Master Franchisee will authorize Franchisees to sell new Products and
advise Franchisees of modifications or additions to operating procedures for the
development and operation of QUIZNO'S Restaurants that Franchisor develops and
designates for use by QUIZNO'S Restaurant franchisees. If Franchisor determines
it is necessary, Franchisor will provide training to Master Franchisee
concerning such new Products and operating procedures at times and places
designated by Franchisor. Master Franchisee agrees to disclose to Franchisor all
ideas, concepts, methods, techniques, products and services relating to the
development and operation of QUIZNO'S Restaurants conceived or developed by
Master Franchisee and its Affiliates, Area Directors and Franchisees. Master
Franchisee acknowledges and agrees that any such ideas, concepts, methods,
techniques, products and services shall be considered works made for hire and
shall belong exclusively to Franchisor. If any such materials are determined not
to be "works made for hire," such materials are hereby assigned and transferred
completely and exclusively to and shall be owned by Franchisor and shall, at
Franchisor's discretion, be incorporated into the System for use by Master
Franchisee and the Franchisees. Neither Franchisor nor its Affiliates shall have
any obligation to make any payment to Master Franchisee or any other person with
respect to any such idea, concept, method, technique, product or service.
5. OPERATIONS OBLIGATIONS OF MASTER FRANCHISEE.
5.1 FORM AGREEMENTS.
Franchisor shall furnish to Master Franchisee a form of franchise
agreement and a form of area director agreement to be used in the Development
Area. Master Franchisee shall submit for Franchisor's review and approval any
modifications to such agreements that Master Franchisee believes to be necessary
to comply with Legal Requirements or for the commercial success of QUIZNO'S
Restaurants in the Development Area. Franchisor agrees to consider such proposed
modifications and reject only those which it concludes will be harmful to or
inconsistent with, the System or the operation of QUIZNO'S Restaurants, and
notify Master Franchisee of Franchisor's acceptance or rejection of such
modifications. The modified franchise agreement and area director agreement,
developed as hereinabove provided, are referred to respectively herein as the
"Franchise Agreement" and the "Area Director Agreement" and together as the
"Form Agreements." Master Franchisee acknowledges and agrees Franchisor
periodically may require Master Franchisee to modify the Franchise Agreement or
the Area Director Agreement. Master Franchisee agrees that it will not make any
other material changes to the Form Agreements without the prior written consent
of Franchisor. Master Franchisee agrees to (at its expense) translate the Form
Agreements into the language of the Development Area. Master Franchisee agrees
to submit a copy of such translations to Franchisor for its approval prior to
delivering them to prospective Franchisees or Area Directors.
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5.2 APPOINTMENT OF AREA DIRECTORS.
Master Franchisee shall obtain Franchisor's prior written approval before
appointing each Area Director. Master Franchisee shall submit to Franchisor in
writing such information as Franchisor may reasonably request from time to time
concerning each proposed Area Director.
5.3 TRAINING AND SUPPORT.
Master Franchisee agrees to develop a training program and to provide
training to Franchisees and Area Directors and their employees in accordance
with specifications prescribed by Franchisor. Master Franchisee agrees to
diligently and continuously provide support and assistance to Franchisees and
Area Directors and to diligently and competently perform all of its obligations
under Franchise Agreements and Area Director Agreements. All services and
assistance provided to Franchisees and Area Director Agreements in connection
with the operation of QUIZNO'S Restaurants and Area Directorships shall be
provided by Master Franchisee and such obligation of Master Franchisee shall not
be transferred, delegated or subcontracted to any other person (other than
Franchisor pursuant to this Agreement).
5.4 SYSTEM STANDARDS.
Master Franchisee acknowledges and agrees that the development and
operation of Restaurants in accordance with the mandatory recipes,
specifications, standards, operating procedures and rules Franchisor prescribes
for the development and operation of QUIZNO'S Restaurants (the "System
Standards") is the essence of this Agreement and essential to preserve the
goodwill of the Marks and all QUIZNO'S Restaurants. Therefore, Master Franchisee
agrees that, at all times during the Agreement Term, Master Franchisee will: (i)
comply with all System Standards; (ii) will cause Area Directors to comply with
all System Standards; and (iii) will cause Franchisees to develop, maintain and
operate Restaurants in compliance with all System Standards. All terms and
conditions of this Agreement related to System Standards shall relate to System
Standards as they may be periodically modified and supplemented by Franchisor in
its discretion during the Agreement Term. Among the aspects of the development
and operation of Restaurants that may be regulated by System Standards, and with
which Master Franchisee and Franchisees are obligated to comply, are:
maintenance of equipment and vehicles (if any); replacement of obsolete or
worn-out equipment, and signs; interior and exterior signs, emblems, decals,
lettering and logos; selection of Franchisees and Area Directors; types, models,
brands and designated and approved suppliers of required and authorized
equipment, signs, products, materials and supplies; sales and marketing
activities, advertising and promotional activities, customer communication and
retention programs, and materials and media required or authorized for use in
such activities and programs; use and display of the Marks, and use and display
of other trademarks and commercial symbols, including trademarks of approved
suppliers; staffing levels and functions of employees; qualifications, uniforms
and appearance of employees; initial and ongoing training and testing of
employees; minimum hours of operation; goods and services required or authorized
to be offered; arrangements with third parties to furnish products or services
to customers; participation in market research and testing, and product and
service development programs; management; use of approved advertising and
marketing materials; bookkeeping, accounting, inventory control, data processing
and record keeping systems and forms; formats, content, method and frequency of
reports of sales, revenues, financial performance and condition, and other
operating and financial information; types, amounts, terms and conditions of
required insurance coverage; compliance with applicable laws; obtaining required
licenses and permits; adherence to good business practices; observing high
standards of honesty, integrity, fair dealing and ethical business conduct; and
such other elements and aspects of the development, appearance and operation of,
and conduct of business by, Restaurants as is determined from time to time to be
useful or required to preserve or enhance the operation of Restaurants and the
image and goodwill of the Marks. Master Franchisee hereby agrees that System
Standards prescribed from time to time in the Operating Manuals, or otherwise
communicated to Master Franchisee, Area Directors and Franchisees in writing,
constitute provisions of this Agreement and the Form Agreements. All references
to this Agreement and the Form Agreements shall include all System Standards as
periodically modified.
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5.5 COMPLIANCE WITH THE SYSTEM.
Master Franchisee agrees to diligently and continuously monitor compliance
with the System, to strictly enforce compliance with the System Standards by all
Area Directors and Franchisees and to furnish assistance to Franchisees to
correct deficiencies in operation. Master Franchisee also agrees that if it is
unable to obtain a Franchisee's or an Area Director's compliance with the System
and System Standards, it will terminate the Franchise Agreement or Area Director
Agreement, as applicable. Master Franchisee agrees to consult with Franchisor
prior to terminating a Franchise Agreement or an Area Director Agreement. Master
Franchisee further agrees to enforce all post-termination obligations of
Franchisees and Area Directors under their Franchise Agreement and Area Director
Agreements.
5.6 MASTER FRANCHISE PREMISES. Master Franchisee shall obtain and at
all times during the Agreement Term maintain office facilities in the
Development Area for operation of Master Franchisee ("Master Office"). The
Master Office shall have a dedicated telephone line, which shall be answered
in the name of QUIZNO'S and shall otherwise be equipped and furnished and have
signage in a manner consistent with the image and minimum standards of
Franchisor.
6.0 OTHER OBLIGATIONS OF MASTER FRANCHISEE.
6.1 CHIEF EXECUTIVE OFFICER.
Concurrently with the execution of this Agreement Master Franchisee agrees
to designate a Chief Executive Officer, who shall be an Owner of Master
Franchisee and approved by Franchisor, to act as the Chief Executive Officer of
Master Franchisee. The Chief Executive Officer shall exert his full-time efforts
to the franchising, development and operation of Restaurants and shall not
engage in any other business or other activity, directly or indirectly, that
requires any significant management responsibility or time commitments or that
may otherwise conflict with Master Franchisee's obligations hereunder. The Chief
Executive Officer shall attend and complete to Franchisor's satisfaction such
training programs as Franchisor shall prescribe (which may be conducted in whole
or in part at one (1) or more of the offices of Franchisor in the United
States). If the relationship of the Chief Executive Officer with Master
Franchisee terminates, or if the proposed Chief Executive Officer fails to
satisfactorily complete such training programs, Master Franchisee agrees to
promptly designate a replacement Chief Executive Officer approved by Franchisor,
who shall satisfactorily complete such training programs. The Chief Executive
Officer shall speak, read and write the English language fluently.
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6.2 OTHER MANAGEMENT PERSONNEL OF MASTER FRANCHISEE.
Master Franchisee agrees to hire and maintain the number and level of
management personnel required for: (i) the management and supervision of the
grant of Franchises and Area Directorships; (ii) the development and operation
of Restaurants within the Development Area and the conduct of the Pilot
Restaurant in accordance with this Agreement. Master Franchisee shall keep
Franchisor advised of the identities of such management personnel. Master
Franchisee agrees that such personnel will be properly trained to perform their
duties. Franchisor will from time to time make available training programs for
such personnel at times and locations in the United States designated by
Franchisor. Such management personnel shall speak, read and write the English
language fluently.
6.3 INSURANCE.
Master Franchisee agrees to maintain insurance necessary to comply with
all Legal Requirements concerning insurance and to maintain general liability
insurance against claims for bodily and personal injury, death and property
damage caused by or occurring in connection with the conduct of Master
Franchisee's duties hereunder (including without limitation operation of the
Pilot Restaurant by Master Franchisee's Affiliate). Master Franchisee shall also
maintain in force other insurance of the types, in the amounts and with such
terms and conditions as Franchisor may from time to time reasonably prescribe in
the Operating Manual or otherwise. Such insurance shall be maintained under one
(1) or more policies of insurance containing minimum liability and types of
coverages appropriate in the Development Area. Each insurance policy shall name
Franchisor and its Affiliates that it designates as additional named insureds,
shall contain a waiver of all subrogation rights against Franchisor, its
Affiliates, and their successors and assigns, and shall provide for thirty (30)
days' prior written notice to Franchisor of any material modification,
cancellation, or expiration of such policy. Master Franchisee shall furnish to
Franchisor annually a copy of the certificates of insurance or other evidence
requested by Franchisor that such insurance coverage is in force. The
maintenance of sufficient insurance coverage shall be the responsibility of
Master Franchisee. Notwithstanding any other provision of this Agreement,
Franchisor shall have no obligation to prescribe types or amounts of insurance
coverage and shall have no obligation to indemnify Master Franchisee if it does
not do so or if the types or amounts of insurance coverage prescribed by
Franchisor are insufficient to fully cover a claim made against Master
Franchisee.
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6.4 RECORDS AND REPORTS.
Master Franchisee agrees to maintain and preserve at its principal office,
full, complete and accurate records and reports pertaining to the development
and operation of Restaurants and the performance by Master Franchisee of its
obligations under this Agreement, including, but not limited to, records and
information relating to: franchisee applications, inspection and supervisory
reports relating to the operation of Restaurants and Area Directorships, copies
of all Franchise Agreements and Area Director Agreements entered into by Master
Franchisee, records reflecting the financial condition and performance of Master
Franchisee, Area Directors and Franchisees, records of the receipts and
expenditures of the Marketing Program (defined below) and such other records and
reports as periodically may be prescribed by Franchisor. Franchisor and its
agents shall have the right to inspect, audit and make copies or extracts of
such records and reports and Master Franchisee agrees to fully cooperate with
any such inspection or audit during regular hours. Franchisor shall have the
right, at any time, during normal Restaurant hours, to inspect the premises of
any Restaurant and the office of any Area Director for the purpose of monitoring
compliance with Franchise Agreements and Area Director Agreements and Master
Franchisee's compliance with the terms of this Agreement.
In addition to the reports required in connection with the operation and
franchising of Restaurant, Master Franchisee shall deliver to Franchisor in the
form periodically prescribed by Franchisor the following:
(a) a notice of Restaurant opening within five (5) days following
the opening date of that Restaurant;
(b) by the twentieth (20th) day of each month, a report of the Gross
Sales for each Restaurant in the prior month, the number of Restaurants opened,
closed and under development during the immediately preceding month;
(c) within thirty (30) days of the end of each quarter of Master
Franchisee's financial year, a profit and loss account for such quarter and a
report disclosing Master Franchisee's net worth as of the end of such quarter,
and performance of each Area Director;
(d) within ninety (90) days after the end of Master Franchisee's
financial year, a financial year-end balance sheet for Master Franchisee and a
profit and loss account for such financial year reflecting all year-end
adjustments, and a statement of changes in financial condition on a basis
consistent with generally accepted accounting principles of the Development Area
(or, at Franchisor's option in accordance with any recognized international
accounting principles which may be adopted by appropriate standards-setting
bodies during the Agreement Term);
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(e) not less than sixty (60) days prior to the end of each Development
Period, a Restaurant development plan for the succeeding Development Period,
including capital and operating budgets and plans for sales of Franchises,
appointment of Area Directors and development of Restaurants;
(f) within sixty (60) days following the end of each Development
Period, an analysis of Master Franchisee's compliance with the development plans
for the previous Development Period;
(g) not less than sixty (60) days prior to the end of each financial
year of Master Franchisee, a marketing plan and budget describing the proposed
marketing activities and expenditures for the Marketing Program (hereinafter
defined) for the succeeding financial year;
(h) within sixty (60) days following the end of each financial year
of Master Franchisee, a report of the receipts and disbursements of, and
advertising, promotion, public relations, market research and other marketing
programs and activities undertaken by, the Marketing Program during the
preceding year; and
(i) such other data, reports, information, financial statements and
supporting records relating to Franchisees, Area Directors and Gross Sales of
Restaurants as Franchisor periodically prescribes.
Each such report and financial statement furnished by Master Franchisee
shall be verified as correct and signed by Master Franchisee in the manner
prescribed by Franchisor. Master Franchisee shall immediately report to
Franchisor any events or developments which may have a significant or material
adverse impact on the performance of Master Franchisee under this Agreement or
the goodwill associated with the Marks and Restaurants.
Master Franchisee shall also require each Franchisee to submit reports
required by Franchisor from time to time, including those reports required by
the Franchise Agreements.
6.5 GOVERNMENTAL APPROVALS.
Master Franchisee agrees to execute any and all instruments and documents,
render such assistance, and otherwise cooperate with Franchisor, in order to
obtain all governmental approvals necessary at any time during the Agreement
Term, in the opinion of Franchisor's counsel, to comply with the Legal
Requirements. At its option, Franchisor shall have the right to submit, or to
require Master Franchisee to submit, this Agreement or either of the Form
Agreements to any governmental entity or agency ("Agency") for registration or
approval in the event Franchisor determines such registrations or approvals are
necessary in order to comply with the Legal Requirements. If the Agency requires
that any amendments be made to this Agreement or the Franchise Agreement as a
condition to such approval or registration and such amendments are acceptable to
Franchisor, Franchisor will deliver to Master Franchisee for execution an
addendum to this Agreement or either or both of the Form Agreement, or other
appropriate documents, to reflect such amendments. If Franchisor determines in
good faith that the effect of any amendment required by the Agency as a
condition to registration or approval will be materially detrimental to its
interests, Franchisor may terminate this Agreement by delivering written notice
thereof to Master Franchisee. If any governmental registration or approval is
required before the parties may implement this Agreement, and if the Agency has
not registered or approved this Agreement or the Franchise Agreement within one
hundred eighty (180) days of the date of their submission to the Agency for such
approval or registration, Franchisor may terminate this Agreement by delivering
written notice thereof to Master Franchisee. In the event Franchisor terminates
this Agreement for any of the reasons set forth in the immediately preceding
sentence, provided that Master Franchisee has fully cooperated with Franchisor
in the registration or approval process and Master Franchisee and its Owners
have executed general releases, in form acceptable to Franchisor, releasing
Franchisor and its Affiliates and their respective officers, directors,
shareholders, employees and agents from any and all liability, Franchisor shall
refund all amounts paid by Master Franchisee hereunder, less any expenses
incurred by Franchisor in connection with the execution of this Agreement and
the attempts to obtain governmental approval thereof.
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6.6 COMPLIANCE WITH LEGAL
REQUIREMENTS/GOOD RESTAURANT PRACTICES.
Master Franchisee and its Affiliates shall secure and maintain in force in
their names all required licenses, permits, and certificates relating to Master
Franchisee's obligations hereunder, including without limitation conduct of the
Pilot Restaurant by Master Franchisee's Affiliate. Master Franchisee and its
Affiliates shall at all times comply with Legal Requirements. All advertising by
Master Franchisee, its Affiliates and Franchisees shall be completely factual
and conform to high standards of ethical advertising. Master Franchisee, its
Affiliates and Franchisees shall in all dealings with Franchisor, public
officials and other third parties adhere to high standards of honesty,
integrity, fair dealing and ethical conduct, and will refrain from any practice
which may be injurious to the reputation of Franchisor or Master Franchisee and
the goodwill associated with the Marks and QUIZNO'S Restaurants. Master
Franchisee shall notify Franchisor within five (5) days of the commencement of
any action, suit, or proceeding, and of the issuance of any order, writ,
injunction, award, or decree of any court, agency, or other governmental
instrumentality, which may adversely affect the operation or financial condition
of Master Franchisee, a Franchise, an Area Director or a Restaurant.
6.7 SUPPLY ARRANGEMENTS.
The Pilot Restaurant will be built using U.S. equipment suppliers
designated by Franchisor. Master Franchisee shall establish and maintain supply
arrangements on competitive terms and conditions for products and equipment to
be sold by or used in the operation of QUIZNO'S Restaurants, and such
arrangements shall be subject to Franchisor's prior written approval. Master
Franchisee shall ensure that all such products and equipment comply with System
Standards.
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7. INITIAL AND CONTINUING FEES.
7.1 INITIAL FEES.
Concurrently with the execution of this Agreement, Master Franchisee shall
pay to Franchisor an Initial License Fee in the amount of US $______________.
Master Franchisee acknowledges and agrees that the Initial License Fee
represents payment for the initial grant of the rights to use the Marks and
System, for Franchisor's foregone opportunity to use or license those rights and
benefits granted to Master Franchisee hereunder, that Franchisor has earned the
Initial License Fee upon receipt thereof and that the Initial License Fee is
under no circumstances (except as specifically set forth herein) refundable to
Master Franchisee after it is paid to Franchisor.
7.2 INITIAL FRANCHISE AND AREA DIRECTOR FEES.
Master Franchisee agrees to pay to Franchisor thirty percent (30%) of all
initial franchise fees and all initial area director fees received by Master
Franchisee under all Franchise Agreements and Area Director Agreements
(including without limitation such agreements with Affiliates of Master
Franchisee). Franchisor's portion of such fees shall be payable to Franchisor
within five (5) business days of Master Franchisee's receipt of those fees and
shall be fully earned by Franchisor upon payment, notwithstanding any subsequent
decision by Master Franchisee to refund all or a portion of the initial
franchise fee or area director fee.
7.3 CONTINUING FEES.
Master Franchisee agrees to pay to Franchisor a Continuing License Fee,
equal to 30% (thirty percent) of all royalties and other recurring fees (but not
advertising and marketing fees) received by Master Franchisee from Franchisees
and Area Directors (including without limitation Affiliates of Master
Franchisee). The Franchise Agreements will provide for payments of royalties and
other amounts owed directly to Master Franchisee (on a weekly basis by
electronic transfer in the case of royalty and other recurring fees). Although
Franchisor may elect to cause Master Franchisee to terminate any Franchisee who
fails to pay royalties and other fees when due, Master Franchisee shall be
primarily responsible for ensuring payment and compliance with other terms of
the Franchise Agreements for any Franchisee located within the Development Area.
Master Franchisee shall pay the Continuing License Fee to Franchisor on the
tenth (10th) day of each month (unless a holiday, in which case payment will be
due the next business day) for royalties and other fees collected the previous
month.
7.4 INTEREST ON LATE PAYMENTS.
All amounts which Master Franchisee owes to Franchisor or its Affiliates
under this Agreement or any related agreement shall bear interest after the due
date at the rate of one and one-half percent (1.5%) per month, unless such rate
is higher than the highest legal rate permitted by applicable law, in which
case, the rate payable shall be the highest legal rate permitted by law. Such
interest shall be payable in the same currency as the principal debt on which
interest accrues. Master Franchisee acknowledges that this Section 7.4 shall not
constitute Franchisor's agreement to accept such payments after they are due or
a commitment by Franchisor to extend credit to, or otherwise finance Master
Franchisee or the Pilot Restaurant. Master Franchisee acknowledges that its
failure to pay all such amounts when due shall constitute grounds for
termination of this Agreement notwithstanding the provisions of this Section
7.4.
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7.5 WITHHOLDING TAXES.
In the event that any amounts payable by Master Franchisee to Franchisor
hereunder are subject to withholding or other taxes that Master Franchisee is
required to deduct from such payments, Master Franchisee agrees to promptly
deliver to Franchisor receipts of applicable governmental authorities for all
such taxes withheld or paid. Master Franchisee shall be responsible for and
shall indemnify and hold Franchisor and its Affiliates harmless against any
penalties, interest and expenses incurred by or assessed against Franchisor or
its Affiliates as a result of Master Franchisee's failure to withhold such taxes
or to timely remit them to the appropriate taxing authority. Master Franchisee
agrees to fully and promptly cooperate with Franchisor to provide such
information and records as Franchisor may request in connection with any
application by Franchisor to any taxing authority with respect to tax credits,
exemptions or refunds available for any withholding or other taxes paid or
payable by Master Franchisee. In the event Franchisor is required to refund to
Master Franchisee any amounts paid hereunder, Franchisor shall not be required
to refund that portion of those amounts which were withheld by Master Franchisee
in order to comply with any applicable tax law unless and until Franchisor
receives a refund of such amounts from the applicable government or agency
thereof or utilizes a foreign tax credit which is directly attributable to such
amounts on its United States federal income tax return which is accepted by the
United States Treasury or with respect to which the period within which such
credit may be reduced or disallowed has expired.
7.6 CURRENCY OF PAYMENT.
All payments by Master Franchisee to Franchisor under this Agreement shall
be made in Dollars unless otherwise specified by Franchisor. All payments
hereunder to be calculated in the currency of the Development Area and converted
into Dollars for payment to Franchisor shall be converted at the spot currency
rate announced by the New York Office of Citibank as of 10:00 a.m. New York time
on the business day immediately preceding the date payment is transmitted
provided, however, that in the event a payment is transmitted after the date
payment is due, the currency exchange rate used shall be the rate as of the date
payment was due or the rate as of the date the payment is transmitted, whichever
rate produces the larger amount in the currency of payment. All payments made
hereunder shall be made in full net of any bank charges by telegraphic or
electronic transfer to a bank of Franchisor's choosing located in the United
States or elsewhere, or, if Franchisor so elects, shall be deposited in a bank
of Franchisor's choosing located within the Development Area.
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7.7 EXCHANGE CONTROLS.
Master Franchisee shall use its best efforts to obtain any consents or
authorizations which may be necessary in order to permit timely payments in
Dollars of all amounts payable hereunder. If at any time, any legal restriction
is imposed upon the purchase of Dollars or the transfer to or credit of a
non-resident party with payments in Dollars, Master Franchisee shall notify
Franchisor immediately. While such restrictions are in effect, Franchisor may
require payment in any currency designated by Franchisor that is available to
Master Franchisee or, at Franchisor's option, may require Master Franchisee to
deposit all amounts due but unpaid as a result of such a restriction in any type
of account, in any bank or institution in the Development Area designated by
Franchisor. Franchisor shall be entitled to all interest earned on such
deposits. Franchisor may also elect to receive payment in the form of products
or services available to Master Franchisee or its Affiliates, the value of which
will be based on the actual cost of such products or services to Master
Franchisee or its Affiliates. If payment is made in products or services, Master
Franchisee agrees to deliver such products or services to Franchisor or its
designated agent or shipper within the Development Area.
7.8 STAMP DUTIES.
Master Franchisee shall within the time prescribed by applicable law,
submit an executed copy of this Agreement to each governmental agency within the
Development Area responsible for the assessment of any stamp duty or comparable
duties or taxes for the purposes of assessing or obtaining an opinion as to the
stamp duty payable on or in respect of this Agreement and Master Franchisee
agrees to pay all stamp duties and comparable duties and taxes (including any
penalties for late payment) assessed to be payable on or in respect of this
Agreement.
8. MARKETING.
Master Franchisee agrees to (a) establish, maintain and administer a
Franchisee funded marketing fund for the Development Area (the "Marketing
Fund"); (b) require all Franchisees (including those which are Affiliates of
Master Franchisee) to contribute to the Marketing Fund in accordance with the
terms of their Franchise Agreements; (c) direct the creation and implementation
of advertising, marketing and promotional programs for the Development Area; (d)
adapt the marketing materials provided to the Marketing Fund by Franchisor for
use in the Development Area; and (e) furnish each Franchisee with reasonable
quantities of marketing, advertising and promotional materials without charge.
Master Franchisee may purchase advertising materials developed by Franchisor
from Franchisor's domestic Marketing and Promotion Fund. Master Franchisee
agrees to make available to all Franchisees within ninety (90) days after the
end of its financial year a report of the receipts and expenditures of and the
advertising, promotion, public relations, market research and other marketing
programs and activities of the Marketing Fund during the preceding financial
year. If Master Franchisee receives any vendor rebates from sales of Products
within the Development Area, Master Franchisee shall deposit the full amount of
all rebates into the Marketing Fund. Other than vendor rebates disclosed to
Franchisor, Master Franchisee will not negotiate for, receive or accept income
of any sort in connection with sales from or to Franchisees or Area Directors.
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Franchisor shall make available for sale to Master Franchisee advertising
and marketing materials developed for use in the U.S. The purchase price shall
be reasonable and related to the materials expected usefulness in the
Development Area.
9. CONFIDENTIAL INFORMATION.
Franchisor possesses (and will continue to develop and acquire) certain
confidential and proprietary information ("Confidential Information") relating
to the development, operation and franchising of QUIZNO'S Restaurants,
including: the terms of this Agreement; franchisee selection criteria; plans and
specifications for the development of QUIZNO'S Restaurants; recipes; training
materials, programs and systems; methods, techniques, formats, specifications,
standards, procedures, sales and marketing techniques, computer software
programs, statistical data, and knowledge of and experience relating to the
development and operation of QUIZNO'S Restaurants; marketing and advertising
programs; knowledge of specifications for and suppliers of certain products,
materials, supplies, equipment, fixtures, furnishings and services; and
knowledge of operating results and financial performance of QUIZNO'S
Restaurants. Franchisor will disclose certain Confidential Information to Master
Franchisee and to certain employees of Master Franchisee in training programs,
the Operating Manual and in guidance furnished to Master Franchisee and its
employees during the Agreement Term.
Master Franchisee acknowledges and agrees that neither Master Franchisee
nor any employee or Affiliate of Master Franchisee will acquire any interest in
the Confidential Information, other than the right to utilize the Confidential
Information in performing its obligations hereunder and as disclosed to certain
employees of Master Franchisee's Affiliate who are Franchisees during the
Agreement Term, and that the use or duplication of any Confidential Information
in any other restaurant operation would constitute an unfair method of
competition. Master Franchisee further acknowledges and agrees that Confidential
Information is proprietary, includes trade secrets of Franchisor, is not
generally known or easily accessible and is important to Franchisor and its
Affiliates and other master franchisees, area directors and franchisees of
Franchisor. Consequently, Franchisor will disclose the Confidential Information
to Master Franchisee solely on the condition that Master Franchisee and its
Owners agree, and Master Franchisee and Owners do hereby agree, that Master
Franchisee and the Restricted Persons during the term of this Agreement and
subsequent to its expiration or termination: will not use Confidential
Information in any other restaurant operation or capacity; will maintain the
absolute confidentiality of Confidential Information; will not make unauthorized
copies of any portion of Confidential Information; will adopt and implement all
reasonable procedures that Franchisor prescribes from time to time to prevent
unauthorized use or disclosure of Confidential Information, including without
limitation restrictions on disclosure thereof to Franchisees, Restaurant
personnel and others; and will impose all of the aforementioned restrictions and
obligations on all Franchisees. Notwithstanding anything to the contrary
contained in this Agreement, the restrictions on Master Franchisee's disclosure
and use of Confidential Information will not apply to information that is or
becomes generally known in the quick service restaurant industry other than
through disclosure (whether deliberate or inadvertent) by Master Franchisee, an
Area Director or a Franchisee, or to the disclosure of Confidential Information
in judicial or administrative proceedings to the extent that Master Franchisee
is legally compelled to disclose such information, provided Master Franchisee
must have used its best efforts and afforded Franchisor the opportunity to
obtain an appropriate protective order or other assurance satisfactory to
Franchisor of confidential treatment for the information required to be
disclosed.
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10. EXCLUSIVE RELATIONSHIP.
Master Franchisee acknowledges and agrees that Franchisor would be unable
to protect the Confidential Information against unauthorized use or disclosure
and would be unable to encourage a free exchange of ideas and information among
owners of QUIZNO'S Restaurants if master franchisees, area directors,
franchisees and their management personnel were permitted to hold Ownership
Interests in or perform services for Competitive Business. Master Franchisee
further acknowledges that restrictions on the right of Master Franchisee and the
Restricted Persons to hold Ownership Interests in or perform services for
Competitive Business will not hinder their activities under this Agreement or
otherwise. Franchisor has entered into this Agreement with Master Franchisee on
the express condition that with respect to the operation of Submarine Sandwich
Restaurants and other restaurants engaged in the production and sale of the
Products, Master Franchisee and the Restricted Persons will deal exclusively
with Franchisor. Master Franchisee therefore agrees that during the Agreement
Term, Master Franchisee and Restricted Persons will not have any direct or
indirect (through a Restricted Person or otherwise) Ownership Interest in any
Competitive Business in the Development Area or elsewhere, perform services as a
director, officer, manager, employee, consultant, representative, agent or
otherwise for any Competitive Business or directly or indirectly employ or seek
to employ any person who is employed by Franchisor, its Affiliates or by any
other master franchisee, area director or franchisee of Franchisor, nor induce
any such person to leave said employment without the prior written consent of
such person's employer.
11. INDEPENDENT CONTRACTORS/INDEMNIFICATION.
11.1 INDEPENDENT CONTRACTORS.
It is understood and agreed by the parties that this Agreement does not
create a fiduciary relationship between them, that Franchisor and Master
Franchisee are and shall be independent contractors, and that nothing in this
Agreement is intended to make either party a general or special agent, joint
venturer, partner, or employee of the other for any purpose. Master Franchisee
shall conspicuously identify itself in all dealings with others as a
subfranchisor of Franchisor and shall conspicuously and prominently place such
other notices of independent ownership on such forms, cards, stationery, and
other materials as Franchisor may require from time to time.
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11.2 NO LIABILITY FOR ACTS OF OTHER PARTY.
Master Franchisee shall not employ any of the Marks in signing any
contract, application for any license or permit, or in a manner that may result
in liability of Franchisor or its Affiliates for any indebtedness or obligation
of Master Franchisee, nor will Master Franchisee use the Marks in any way not
expressly authorized herein. Except as expressly authorized in writing, neither
Franchisor nor Master Franchisee shall make any express or implied agreements,
warranties, guarantees or representations, or incur any debt in the name of or
on behalf of the other, or represent that their relationship is other than
Franchisor and subfranchisor, and neither Franchisor nor Master Franchisee shall
be obligated by or have any liability under any agreements or representations
made by the other that are not expressly authorized in writing, nor shall
Franchisor be obligated for any damages to any person or property directly or
indirectly arising out of the development or operation of Restaurants including
the Pilot Restaurant.
11.3 TAXES.
Franchisor shall have no liability for any sales, value added, use,
service, stamp duty, occupation, excise, gross receipts, income, property,
payroll or other taxes, whether levied upon this Agreement, Master Franchisee,
one (1) or more Restaurants, Franchisees or Area Directors or Master
Franchisee's property, or upon Franchisor, in connection with operations
conducted by Master Franchisee (except any taxes that Franchisor is required by
law to collect from Master Franchisee with respect to purchases from Franchisor
or taxes described in Section 7.5). Payment of all such taxes shall be the
responsibility of Master Franchisee.
11.4 INDEMNIFICATION.
Master Franchisee agrees to indemnify, defend and hold Franchisor, its
Affiliates, and their respective shareholders, directors, officers, employees,
agents, and their respective successors and assignees, harmless against and to
reimburse them for all claims, causes of action, costs, expenses, loss,
liability, damages or obligations arising from or relating to Master
Franchisee's obligations pursuant to this Agreement, including without
limitation obligations under this Section, any and all taxes described in
Section 11.3, the operation of the Pilot Restaurant, the direction and
administration of the Marketing Fund, the operation of any Restaurant or Area
Directorship, or the transfer of any interest in this Agreement, a Franchise
Agreement, an Area Director Agreement, or an Ownership Interest in Master
Franchisee, to the extent that such claims, causes of action, costs, expenses,
loss, liability, damages or obligations do not arise from the negligence or
wrongful conduct of Franchisor. For purposes of this indemnification, "claims"
shall mean and include all obligations, actual and consequential damages, and
costs incurred in the defense of any claim against Franchisor, including without
limitation reasonable accountants', attorneys', attorney assistants',
arbitrators' and expert witness fees, costs of investigation and proof of facts,
court costs, other litigation expenses, and travel and living expenses.
Franchisor shall have the right to defend any such claim against it in such
manner as Franchisor deems appropriate. This indemnity shall continue in full
force and effect subsequent to and notwithstanding the expiration or termination
of this Agreement.
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12. MARKS.
12.1 GOODWILL AND OWNERSHIP OF THE MARKS.
Master Franchisee acknowledges that Master Franchisee's right to use the
Marks is derived solely from this Agreement and is limited to granting
Franchises and Area Directorships in the Development Area in accordance with the
terms hereof. Any unauthorized use of the Marks by Master Franchisee shall
constitute a breach of this Agreement and an infringement of the rights of
Franchisor in and to the Marks. Master Franchisee acknowledges and agrees that
all usage of the Marks by Master Franchisee, Area Directors and Franchisees and
any goodwill established by such use shall inure to the exclusive benefit of
Franchisor and that this Agreement does not confer any goodwill or other
interests in the Marks upon Master Franchisee, other than the right to grant
Franchises and Area Directorships in compliance with this Agreement. All
provisions of this Agreement applicable to the Marks shall apply to any other
trademarks and commercial symbols hereafter authorized for use by and licensed
to Master Franchisee by Franchisor. Master Franchisee agrees that neither Master
Franchisee nor its Affiliates will use or attempt to register any other
trademarks, service marks or other commercial symbol for use in connection with
the development, operation or franchising of QUIZNO'S Restaurants. Master
Franchisee covenants that it will not directly or indirectly, either alone or in
conjunction with others, challenge or take any action to cause a challenge to
the validity or ownership of the Marks or to obstruct the efforts of Franchisor
or its Affiliates with respect to the registration thereof.
12.2 LIMITATIONS ON MASTER FRANCHISEE'S USE OF THE MARKS.
Master Franchisee shall not use the Marks as part of any corporate or
trade name or with any prefix, suffix, or other modifying words, terms, designs,
or symbols, or in any modified form, nor may Master Franchisee use any Mark in
connection with the performance or sale of any unauthorized services or products
or in any other manner not expressly authorized in writing by Franchisor. All
Marks shall be displayed in the manner prescribed by Franchisor.
12.3 NOTIFICATION OF INFRINGEMENT AND CLAIMS.
Master Franchisee shall immediately notify Franchisor of any apparent
infringement of or challenge (actual or threatened) to Master Franchisee's or an
Area Director's or a Franchisee's use of any Mark, or claim by any person of any
rights in any Mark or a confusingly or deceptively similar trademark or service
mark. Master Franchisee shall not communicate with any person other than its
counsel, Franchisor and Franchisor's counsel with respect to any such
infringement, challenge or claim. Franchisor shall have sole discretion to take
such action as it deems appropriate in connection with any such infringement,
challenge or claim, and the right to control any settlement, litigation,
arbitration or administrative proceeding arising therefrom. Master Franchisee
agrees to execute any and all instruments and documents, render such assistance,
and take such action as may, in the opinion of Franchisor's counsel, be
necessary or advisable to protect and maintain the interests of Franchisor in
the Marks. Franchisor will reimburse Master Franchisee for the reasonable
expenses incurred and paid by Master Franchisee in complying with the
requirements imposed by this Section, so long as Master Franchisee has used the
Marks in accordance with this Agreement.
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In the event that Franchisor elects not to take action with respect to any
alleged infringement or challenge to a Mark, Master Franchisee may take such
action and Franchisor shall cooperate with Master Franchisee in doing so,
provided that Franchisor shall retain the ultimate authority to control and
approve or disapprove the conduct and settlement of any action taken by Master
Franchisee with respect to such infringement or challenge.
12.4 DISCONTINUANCE OF USE OF MARKS.
If it becomes advisable at any time in Franchisor's sole judgment for
Master Franchisee and one (1) or more Area Directors or Franchisees to modify or
discontinue use of any Mark or for Master Franchisee to use one or more
additional or substitute trademarks or service marks, Master Franchisee agrees
to immediately comply with and require such Area Directors and Franchisees to
immediately comply with Franchisor's directions to modify or otherwise
discontinue the use of such Mark, or use one or more additional or substitute
trademarks, logos or commercial symbols. Franchisor will have no obligation to
reimburse Master Franchisee or any Area Directors or Franchisees for any
expenditures made by them to modify or discontinue the use of a Mark or to adopt
substitutes for discontinued Marks, including, without limitation, any
expenditures relating to advertising or promotional materials, and no obligation
to reimburse Master Franchisee or Franchisees for any loss of goodwill of their
Restaurants related to a discontinued Mark.
12.5 REGISTERED USER AGREEMENTS.
Master Franchisee shall at the request and expense of Franchisor do all
acts and execute all documents necessary or desirable in Franchisor's opinion
for establishing Master Franchisee as a user of the Marks hereunder and, where
required, for the registration of Master Franchisee's permitted use with
governmental agencies. Following such request, Master Franchisee shall not be
entitled to exercise any of the rights granted by this Agreement until Master
Franchisee has executed and delivered such documents to Franchisor. Any
registered user agreement shall be in form and substance acceptable to
Franchisor.
12.6 MASTER FRANCHISEE'S TRADE NAME.
Master Franchisee acknowledges that Franchisor has a prior and superior
claim to the Marks and "QUIZNO'S" trade name. Franchisor grants Master
Franchisee the right to use the trade name "QUIZNO'S" in the legal name of the
entity used in conducting the Master Franchisee's business provided for in this
Agreement. Master Franchisee agrees not to register or attempt to register any
trade name using the word "QUIZNO'S" in Master Franchisee's name or in any other
person or business entity name without the prior written consent of Franchisor.
When this Agreement is terminated, Master Franchisee shall execute any
assignment or other document Franchisor requires to transfer to the Franchisor
any rights Master Franchisee may possess in a trade name utilizing "QUIZNO'S" or
any other Mark owned by the Franchisor.
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13. TRANSFER.
13.1 BY FRANCHISOR.
This Agreement is fully transferable by Franchisor and shall inure to the
benefit of any assignee or other legal successor to the interests of Franchisor
herein. Master Franchisee acknowledges and agrees that Franchisor may assign or
delegate any or all of its rights and obligations under this Agreement to an
Affiliate or an unaffiliated third party. In the event Franchisor delegates or
assigns any obligations as aforesaid, Franchisor may direct Master Franchisee to
make payments due to Franchisor hereunder directly to the delegate or assignee.
13.2 BY MASTER FRANCHISEE.
Master Franchisee understands and acknowledges that the rights and duties
created by this Agreement are personal to Master Franchisee and the Owners and
that Franchisor has entered into this Agreement in reliance upon the individual
or collective character, skill, aptitude, attitude, business ability and
financial capacity of Master Franchisee and the Owners. Therefore, neither this
Agreement, a Controlling Interest in Master Franchisee, nor any Area Director
Agreement or Franchise Agreement may be transferred, in a single transfer or a
series of transfers, without the prior written approval of Franchisor, which may
be withheld in Franchisor's sole discretion. Any such transfer without such
approval shall constitute a breach hereof and shall convey no rights to or
interests in this Agreement, and Area Director Agreement or any Franchise
Agreement. Master Franchisee agrees to reimburse Franchisor for all reasonable
expenses incurred by Franchisor in evaluating and approving a proposed transfer.
As used in this Agreement, the term "transfer" shall include, without
limitation, whether voluntary or involuntary, direct or indirect: an assignment,
sale, gift or pledge; the grant of a mortgage, charge, lien or security interest
including, without limitation, the grant of a collateral assignment; a merger or
consolidation, or issuance of additional Ownership Interests or redemption of
Ownership Interests; a sale of voting interests or of securities convertible to
voting interests, or an agreement granting the right to exercise, or control the
exercise, of voting rights of any holder of an Ownership Interest; and a
transfer that occurs as a result of divorce, insolvency, corporate or
partnership dissolution, or upon death, by will, intestate succession or by
declaration of, or transfer to, a trust.
13.3 FRANCHISOR'S RIGHT OF FIRST REFUSAL.
If Master Franchisee or an Owner shall at any time determine to sell or
transfer an interest in this Agreement, the assets of Master Franchisee (other
than in the ordinary course of business), one (1) or more Area Director
Agreements, one (1) or more Franchise Agreements or a Controlling Interest in
Master Franchisee, Master Franchisee or the Owners, as applicable, agree to
obtain a bona fide, executed written offer and earnest money deposit in the
amount of five percent (5%) or more of the offering price from a qualified,
responsible and fully disclosed purchaser and a true and complete copy of the
offer and any proposed ancillary agreements shall immediately be submitted to
Franchisor. The offer must apply only to this Agreement, the assets of Master
Franchisee, the Area Director Agreement(s), the Franchise Agreement(s) or an
Ownership Interest in Master Franchisee and may not include the purchase of any
other property or rights. Franchisor or its designee shall have the right,
exercisable by written notice delivered to Master Franchisee or the Owners
within thirty (30) days from the date of delivery of an exact copy of such offer
to Franchisor, to purchase such interests for the price and on the terms and
conditions contained in such offer, provided that Franchisor may substitute cash
or marketable securities of equal value for any form of payment proposed in such
offer. Franchisor's credit shall be deemed equal to the credit of any proposed
purchaser. Franchisor shall have not less than ninety (90) days to prepare for
closing. If Franchisor does not exercise its right of first refusal, Master
Franchisee or the Owners may complete the sale to such purchaser pursuant to and
on the exact terms of such offer, subject to Franchisor's approval of the
transfer as provided in this Section, provided that if the sale to such
purchaser is not completed within one hundred twenty (120) days after delivery
of such offer to Franchisor, or there is a material change in the terms of the
sale, Franchisor shall have an additional right of first refusal for thirty (30)
days on the terms and conditions applicable to the initial right of first
refusal, except that Franchisor shall have the option to substitute any of the
modified terms of purchase for those contained in the original offer.
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13.4 DEATH OF MASTER FRANCHISEE.
Upon the death of an Owner of Master Franchisee, the executor,
administrator, conservator, or other personal representative of such Owner
shall, within a reasonable time from the date of death, transfer the deceased
Owner's interest in this Agreement, Master Franchisee, or the assets of Master
Franchisee, to such deceased Owner's heirs or legatees, provided the transferees
are approved by Franchisor, in accordance with this Section. If the Owner's
heirs or legatees cannot meet the conditions of this Agreement, the Owner's
personal representative shall transfer the Owner's interest to a third party in
accordance with the provisions of this Section.
14. TERMINATION OF AGREEMENT.
14.1 BY MASTER FRANCHISEE.
If Master Franchisee is in substantial compliance with this Agreement and
Franchisor materially breaches this Agreement, Master Franchisee may terminate
this Agreement effective sixty (60) days after delivery of written notice of
termination if Master Franchisee gives written notice of such breach to
Franchisor and Franchisor does not cure such breach within sixty (60) days after
delivery of notice of such breach, or if such breach cannot reasonably be cured
within sixty (60) days after delivery of notice of such breach, does not
undertake within sixty (60) days after delivery of such notice, and continue
until completion, reasonable efforts to cure such breach. Any termination of
this Agreement by Master Franchisee other than as provided in Section 14.1 shall
be deemed a termination by Master Franchisee without cause.
14.2 BY FRANCHISOR.
Franchisor may at its option terminate the Agreement Term or the
Development Term, effective upon the delivery of written notice of termination
to Master Franchisee or, if applicable, upon Master Franchisee's failure to cure
a breach of this Agreement before the expiration of any period of time within
which such breach may be cured in accordance with the provisions set forth
below, if: (i) Master Franchisee fails to satisfy the Development Quota for two
consecutive Development Periods or an aggregate of four (4) Development Periods;
(ii) Franchisor elects to terminate this Agreement as provided in Section 6.5;
(iii) Master Franchisee or an Owner makes an assignment or transfer in violation
of this Agreement; (iv) Master Franchisee or an Owner of a Controlling Interest
in Master Franchisee is convicted by a trial court of, or pleads guilty to, a
crime or offense that may adversely affect the goodwill associated with the
Marks or the reputation of QUIZNO'S Restaurants, or engages in conduct that
adversely affects the reputation of Franchisor or the goodwill associated with
the Marks; (v) Master Franchisee or an Owner applies for trademark or service
mark registration of any of the Marks anywhere in the world, or makes any
unauthorized use of the Marks or an unauthorized use or disclosure of the
Confidential Information; (vi) Master Franchisee becomes insolvent in the sense
that Master Franchisee is unable to pay its bills as they become due or the
liabilities of Master Franchisee exceed its assets; (vii) Master Franchisee
makes an assignment for the benefit of creditors or an admission of its
inability to pay its obligations as they become due; (viii) Master Franchisee
files a voluntary petition in bankruptcy, files any pleading seeking any
reorganization, liquidation or dissolution under any law, admits or fails to
contest the material allegations of any such pleading filed against it, or is
adjudicated a bankrupt or insolvent; (ix) a receiver, trustee, liquidator or
other person acting in a comparable capacity is appointed for a substantial part
of the assets of Master Franchisee; (x) the claims of creditors of Master
Franchisee or its Owners are abated or subject to a moratorium under any law;
(xi) a Restricted Person violates the restrictions set forth in Section 9 or
Section 10; (xii) Master Franchisee fails to pay any amount when due hereunder
to Franchisor and fails to correct such failure within ten (10) days after
written notice thereof; or (xiii) Master Franchisee fails to comply with any
other provision of this Agreement and does not correct such failure within sixty
(60) days after written notice of such failure or, if or if such breach cannot
reasonably be cured within sixty (60) days after delivery of notice of such
breach, does not undertake within sixty (60) days after delivery of such notice,
and continue until completion, reasonable efforts to cure such breach.
15. RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION.
15.1 MARKS.
Except with respect to any ongoing obligations of Master Franchisee under
Section 15.3, Master Franchisee and the Owners agree that after the termination
of this Agreement or expiration of the Agreement Term, they: (i) will not
directly or indirectly identify Master Franchisee as a current or former Master
Franchisee of, or as otherwise associated with, Franchisor; (ii) will not use
any Mark, or any trade name, trademark or commercial symbol that is deceptively
similar to any Mark, in any manner or for any purpose; (iii) will not use any
trade name, trademark or commercial symbol that suggests or indicates a
connection or association with Franchisor; (iv) will remove all signs containing
any Mark and return to Franchisor or destroy all forms and materials containing
any Mark; and (v) will return to Franchisor all copies of the Operating Manual
and any other confidential materials which have been loaned or made available by
Franchisor pursuant to this Agreement.
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15.2 COVENANT NOT TO COMPETE.
Upon termination of this Agreement or upon expiration of the Agreement
Term, for a period of two (2) years commencing on the effective date of such
termination or expiration, Master Franchisee and the Restricted Persons agree
they will not: (i) have any direct or indirect (through a Restricted Person or
otherwise) Ownership Interest in any Competitive Business located or operating
within the Development Area, or within any other Development Area in which
QUIZNO'S Restaurants are then under development or in operation; (ii) perform
services as a director, officer, manager, employee, consultant, representative,
agent or otherwise for any Competitive Business located or operating within the
Development Area or within any other Development Area in which QUIZNO'S
Restaurants are then under development or in operation; or (iii) directly or
indirectly employ or seek to employ, any person who is employed by Franchisor,
its Affiliates or by any other master franchisee, area director or franchisee of
Franchisor or its Affiliates, nor induce nor attempt to induce any such person
to leave said employment without prior written consent of Franchisor and such
person's employer.
15.3 AREA DIRECTOR AND FRANCHISE AGREEMENTS.
Unless Master Franchisee has extended the Development Term pursuant to
Section 3.4, upon expiration or termination of the Development Term, Master
Franchisee shall no longer have Development Rights hereunder but shall be
entitled to collect commissions on royalties from Restaurants open in the
Development Area on the date of termination or expiration for the remainder of
the term remaining under the applicable Franchise Agreement provided that Master
Franchisee continues to provide required services as franchisor therefor.
In addition to, and not in lieu of, the rights of Franchisor and the
obligations of Master Franchisee under this Section, if this Agreement
terminates or expires (including termination or expiration of the Development
Term), Master Franchisee agrees to assign to Franchisor or its designee, at the
option of Franchisor: (i) all of its rights and obligations under those Area
Director Agreements designated by Franchisor, and (ii) in consideration of the
payment provided in this Section, all of its rights and obligations under those
Franchise Agreements designated by Franchisor. Franchisor may exercise its right
to assignment of any Franchise Agreement at any time after termination of the
Agreement Term or the Development Term until the expiration or termination of
that Franchise Agreement (including any renewal terms). If Franchisor exercises
the option provided for in this Section, it shall have ninety (90) days from the
date of the notice exercising such option to designate the Franchise
Agreement(s) to be assigned and prepare for closing. The payment to be made for
each Franchise Agreement assigned shall be an amount equal to one third (0.3333)
of the royalty (but not advertising) fees actually paid by the Franchisee
pursuant to that Franchise Agreement during the five (5) year period commencing
with the effective date of assignment. Such payments shall be made to Master
Franchisee on or before thirty (30) days following the end of each calendar
quarter. Franchisor may deduct from the payments due to Master Franchisee
pursuant to this Section any amount then due and owing to Franchisor or its
Affiliates under this Agreement. If Franchisor terminates the Agreement Term or
the Development Term for cause (other than failure to meet the Development
Quota) or if Master Franchisee terminates this Agreement without cause, Master
Franchisee shall not be entitled to the foregoing payment for any assigned
Franchise Agreement. Master Franchisee shall not be entitled to receive, or
obligated to make, further payments (except as provided in this Section 15.3) of
royalties or other amounts from Franchise Agreements or to Area Director
Agreements assigned to Franchisor, provided that such assignment will not limit
Master Franchisee's indemnification obligations for claims arising from facts
that occur prior to the assignment date. The Form Agreements shall set forth
Franchisor's right to assignment as provided in this Section. The Area Director
Agreements and Franchise Agreements transferred, as designated by Franchisor,
shall be assigned free and clear of any liens, charges and encumbrances.
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15.4 CONTINUING OBLIGATIONS.
All obligations of Franchisor and Master Franchisee which expressly or by
their nature survive the termination of this Agreement or the expiration of the
Agreement Term shall continue in full force and effect subsequent to and
notwithstanding its expiration or termination and until they are satisfied in
full or by their nature expire.
16. ENFORCEMENT.
16.1 INFORMAL DISPUTE RESOLUTION.
Prior to filing any proceeding, except as provided in Section 16.2
concerning temporary restraining orders and injunctive relief, the party
intending to file such a proceeding shall be required to notify the other party
in writing of the existence and the nature of the dispute. Franchisor and Master
Franchisee each agree that within fifteen (15) business days of the other
party's receipt of such notice, the Chief Executive, Chief Operating Officer or
other senior executive officer of both Franchisor and Master Franchisee shall
meet in Denver, Colorado, U.S.A., for a minimum of two (2) eight (8) hour days
in order to attempt to resolve the dispute amicably. If such informal dispute
resolution attempts prove to be unsuccessful, the notifying party may initiate a
proceeding as described in Section 16.2.
16.2 FORMAL DISPUTE RESOLUTION.
If the parties are unable to resolve any dispute informally under Section
16.1, any party may commence a proceeding pursuant to the terms and limitations
set forth in this Section 16. All controversies, disputes or claims arising
between Franchisor, its Affiliates, and their respective officers, directors,
shareholders, partners, agents, employees and attorneys (in their representative
capacity) and Master Franchisee (and its Owners and the guarantors of this
Agreement) arising out of or related to the relationship of the parties, this
Agreement or any provision hereof, any Area Director Agreement or Franchise
Agreement or any related agreement, the validity of this Agreement or any
provision hereof or any System Standard relating to the establishment or
operation of QUIZNO'S Restaurants (collectively, "Claims") shall be commenced in
the District Court for the City & County of Denver, Colorado, U.S.A., or the
United States District Court for the District of Colorado, U.S.A., or any other
state or federal court in the district where Franchisor then has its principal
office. The parties have negotiated regarding a forum in which to resolve any
disputes that may arise between them and have agreed to select a forum in order
to promote stability in their relationship. Therefore, the parties waive any
objection they may have to the personal jurisdiction of or venue in such courts.
The parties further agree that in connection with any such proceeding, any party
shall submit or file any Claim that would constitute a compulsory counterclaim
(as defined by Rule 13 of the United States Federal Rules of Civil Procedure or
its successor Rule) within the same proceeding as the Claim to which it relates.
Any such Claim which is not submitted or filed as described above shall be
barred. Notwithstanding anything to the contrary contained in this Section,
Master Franchisee and Franchisor each have the right in a proper case to obtain
temporary restraining orders and temporary or preliminary injunctive relief from
a court of competent jurisdiction. The provisions of this Section are intended
to benefit and bind certain third party non-signatories and will continue in
full force and effect subsequent to and notwithstanding the expiration of the
Agreement Term or the termination of this Agreement.
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Master Franchisee, its Affiliates and the Owners agree not to bring any
Claim asserting that any of the Marks are generic or otherwise invalid. Master
Franchisee, its Affiliates and the Owners agree that their sole recourse for
Claims arising between the parties shall be against Franchisor or its successors
and assigns, and further agree that the shareholders, directors, officers,
employees and agents of Franchisor and its Affiliates (other than Master
Franchisee) shall not be personally liable nor named as a party in any action
arising from a Claim. The parties agree that any proceeding will be conducted on
an individual, not a class-wide, basis, and that a proceeding involving a Claim
may not be consolidated with any other proceeding between Franchisor and any
other person or entity. No previous course of dealing shall be admissible to
explain, modify or contradict the terms of this Agreement. No implied covenant
of good faith and fair dealing shall be used to alter the express terms of this
Agreement.
16.3 SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
All provisions of this Agreement are severable and this Agreement shall be
interpreted and enforced as if all completely invalid or unenforceable
provisions were not contained herein and partially valid and enforceable
provisions shall be enforced to the extent valid and enforceable. To the extent
that the exclusive dealing provisions of Section 10 or the post-termination
restrictive covenant set forth in Section 15.2 is deemed unenforceable by virtue
of its scope in terms of geographic area, activity prohibited or length of time,
but may be made enforceable by reductions of any of them, Master Franchisee and
Franchisor agree that same shall be enforced to the fullest extent permissible
under the laws and public policies applied in the jurisdiction in which
enforcement is sought. If any applicable and binding law or rule of any
jurisdiction requires a greater prior notice of the termination of this
Agreement than is required hereunder or the taking of some other action not
required hereunder, or if under any applicable and binding law or rule of any
jurisdiction, any provision of this Agreement or any specification, standard or
operating procedure prescribed by Franchisor is invalid or unenforceable, the
prior notice or other action required by such law or rule shall be substituted
for the comparable requirements hereof, and Franchisor shall have the right, in
its sole discretion, to modify such invalid or unenforceable provision,
specification, standard or operating procedure to the extent required to be
valid and enforceable. Such modifications to this Agreement shall be effective
only in such jurisdiction and shall be enforced as originally made and entered
into in all other jurisdictions.
- 29 -
<PAGE>
16.4 WAIVER OF OBLIGATIONS.
Franchisor and Master Franchisee may by written instrument unilaterally
waive any obligation of or restriction upon the other under this Agreement. No
acceptance by Franchisor of any payment by Master Franchisee or any other person
or entity and no failure, refusal or neglect of Franchisor or Master Franchisee
to exercise any right under this Agreement or to insist upon full compliance by
the other with its obligations hereunder shall constitute a waiver of any
provision of this Agreement. Franchisor makes no warranties or guarantees upon
which Master Franchisee may rely, and assumes no liability or obligation to
Master Franchisee, by granting any waiver, approval, or consent to Master
Franchisee, or by reason of any neglect, delay, or denial of any request
therefor. Any waiver granted by Franchisor shall be without prejudice to any
other rights Franchisor may have, will be subject to continuing review by
Franchisor, and may be revoked, in Franchisor's sole discretion, at any time and
for any reason, effective upon delivery to Master Franchisee of ten (10) days'
prior written notice. Franchisor and Master Franchisee shall not be deemed to
have waived or impaired any right, power or option reserved by this Agreement
(including, without limitation, the right to demand exact compliance with every
term, condition and covenant herein, or to declare any breach thereof to be a
default and to terminate this Agreement prior to the expiration of its term), by
virtue of any custom or practice of the parties at variance with the terms
hereof; any failure, refusal, or neglect of Franchisor or Master Franchisee to
exercise any right under this Agreement or to insist upon exact compliance by
the other with its obligations hereunder, including, without limitation, any
System Standard; any waiver, forbearance, delay, failure, or omission by
Franchisor to exercise any right, power, or option, whether of the same, similar
or different nature, with respect to any QUIZNO'S Restaurants or any franchise
agreement therefor; or the acceptance by Franchisor of any payment from Master
Franchisee after any breach of this Agreement.
16.5 RIGHTS OF PARTIES ARE CUMULATIVE.
The rights of Franchisor and Master Franchisee hereunder are cumulative
and no exercise or enforcement by Franchisor or Master Franchisee of any right
or remedy hereunder shall preclude the exercise or enforcement by Franchisor or
Master Franchisee of any other right or remedy hereunder or which Franchisor or
Master Franchisee is entitled by law to enforce.
- 30 -
<PAGE>
16.6 WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.
Franchisor and Master Franchisee hereby waive to the fullest extent
permitted by law, any right to or claim for any punitive, exemplary or special
damages against the other and agree that in the event of a dispute between them,
except as otherwise provided herein, each shall be limited to the recovery of
any actual damages sustained by it (provided that this limitation shall not
apply to statutory penalties such as those set forth in 15 U.S.C. ' 1117(a)).
Franchisor and Master Franchisee irrevocably waive trial by jury in any action,
proceeding or counterclaim, whether at law or in equity, brought by either of
them. The parties acknowledge that the parties' waiver of jury trial rights
provides the parties with the mutual benefit of uniform interpretation of this
Agreement and any dispute arising out of this Agreement or out of the parties'
relationship created by this Agreement, and further acknowledge the receipt and
sufficiency of mutual consideration for such benefit.
16.7 LIMITATION OF CLAIMS.
Except with regard to Master Franchisee's obligations to pay to Franchisor
Restaurant Opening Fees, Continuing Fees and other payments due Franchisor and
its Affiliates pursuant to this Agreement, any and all Claims arising out of or
relating to this Agreement or the relationship of Master Franchisee and
Franchisor shall be barred unless a proceeding is commenced within one (1) year
from the date Franchisor or Master Franchisee knew or, exercising reasonable
diligence should have known, of the facts giving rise to such Claims, or the
period of time in which Claims must be brought under applicable law, whichever
is less, or such Claim shall be barred. The parties understand that such time
limit may be shorter than otherwise allowed by law.
16.8 COSTS AND LEGAL FEES.
If Franchisor or Master Franchisee is required to enforce this Agreement
in a proceeding, the party prevailing in such proceeding shall be reimbursed by
the other party for its costs and expenses, including without limitation
reasonable attorneys' fees (for attorneys and legal assistants), accountants'
fees, and expert witness fees, costs of investigation and proof of facts, court
costs, other litigation expenses and travel and living expenses, whether
incurred prior to, in preparation for or in contemplation of the filing of any
such proceeding. If Franchisor is required to engage legal counsel in connection
with any failure by Master Franchisee to comply with this Agreement, Master
Franchisee shall reimburse Franchisor for any of the above-listed costs and
expenses incurred by it.
- 31 -
<PAGE>
16.9 GOVERNING LAW/CONSENT TO JURISDICTION.
Master Franchisee and Franchisor agree that, except to the extent governed
by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1051
et seq.) or other federal law, this Agreement and the relationship of the
parties shall be governed by the internal laws of the State of Colorado, U.S.A.
except that its choice of law and conflict of law rules shall not apply and any
franchise registration, disclosure, relationship or similar statute which may be
adopted by the State of Colorado shall not apply unless its jurisdictional
requirements are met independently without reference to this Section. Franchisor
may file an action seeking an order pursuant to Section 16.2 or to enforce any
judgment or order in any such court or in any court located in the Development
Area. Master Franchisee irrevocably submits to the jurisdiction of such courts
and waives any objection it may have to either the jurisdiction or venue of such
courts.
16.10 NO RIGHT TO SET-OFF.
Master Franchisee shall not be allowed to set off amounts owed to
Franchisor hereunder against any monies owed to or claimed by Master Franchisee,
which right of set off is hereby expressly waived by Master Franchisee.
17. REPRESENTATIONS OF MASTER FRANCHISEE.
Master Franchisee represents and warrants that it has induced Franchisor
to enter into this Agreement based on the following representations and
warranties made to Franchisor. The following representations and warranties
shall survive termination of this Agreement.
(a) Master Franchisee understands and acknowledges that Franchisor
has made no promise or guarantee, express or implied, that Master Franchisee
will be able to comply with any applicable laws and regulations concerning the
sale of franchises in the Development Area throughout the entire term hereof,
but Master Franchisee agrees to use best efforts to comply with the same.
(b) Franchisor has made no representations or statements of actual,
average, projected or forecasted sales, profits or earnings to Master Franchisee
upon which Master Franchisee has in any way relied upon in entering into this
Agreement, except as may be set forth in Franchisor's Uniform Franchise Offering
Circular.
(c) Master Franchisee acknowledges that it has read this Agreement
and understands and accepts the terms contained in this Agreement as being
reasonably necessary to maintain Franchisor's high standards of quality and
service and the uniformity of those standards and thereby to protect and
preserve the goodwill of the Marks and the integrity of the System. Master
Franchisee acknowledges that it has conducted an independent investigation of
the business venture contemplated by this Agreement and recognizes that, like
any other business, the nature of this business may evolve and change over time,
that the investment involves business risks and that the success of the venture
is largely dependent upon Master Franchisee's business abilities and efforts.
Master Franchisee further represents to Franchisor, as an inducement to its
entry into this Agreement, that Master Franchisee has made no misrepresentations
in obtaining the license granted pursuant to this Agreement.
- 32 -
<PAGE>
18. MISCELLANEOUS PROVISIONS.
18.1 BINDING EFFECT.
This Agreement is binding upon the parties and their respective executors,
administrators, heirs, assigns and successors in interest, and shall not be
modified except by written agreement signed by both Master Franchisee and
Franchisor.
18.2 CONSTRUCTION.
The preambles and exhibits are a part of this Agreement, which constitutes
the entire agreement of the parties, and, except for Area Director Agreements
and Franchise Agreements, there are no other oral or written understandings or
agreements between Franchisor and Master Franchisee relating to the subject
matter of this Agreement. The headings of the several sections and subsections
hereof are for convenience only and do not define, limit or construe the
contents of such sections or subsections. The term "Master Franchisee" as used
herein is applicable to one or more persons, a corporation or a partnership, as
the case may be, and the singular usage includes the plural and the masculine
and neuter usages include the other and the feminine. If two or more persons are
at any time Master Franchisee hereunder, whether or not as partners or joint
venturers, their obligations and liabilities to Franchisor shall be joint and
several. This Agreement may be executed in multiple copies, each of which shall
be deemed an original.
18.3 GOVERNING LANGUAGE.
This Agreement and the Operating Manual originally will be written in the
English language, and all questions of interpretation of this Agreement or the
Operating Manual shall be resolved by reference to the same as written in
English.
18.4 NOTICES, REPORTS AND PAYMENTS.
All written notices, reports and payments permitted or required to be
delivered by the provisions of this Agreement or of the Operating Manual shall
be deemed so delivered at the time delivered by hand, five (5) business days
after being placed in the hands of a commercial courier service for express
delivery or ten (10) days after placement with a government mail service by
Registered or Certified Mail (or the equivalent), Return Receipt Requested,
postage prepaid. All such notices, reports and payments shall be addressed to
the parties as follows:
- 33 -
<PAGE>
If to Franchisor: The Quizno's Corporation
1415 Larimer Street
Denver, Colorado 80202
Attention: Legal Department
If to Master ___________________________________
Franchisee: ___________________________________
___________________________________
___________________________________
A change by any party with respect to the address for delivery of all such
notices and reports must be delivered in writing to the other party within ten
(10) business days of any such change in address. Any required payment or report
not actually received by Franchisor during regular hours on the date due (or
postmarked by government postal authorities at least two (2) days prior thereto)
will be deemed delinquent. For purposes of this Agreement, the term "business
day" shall exclude Saturdays, Sundays and official holidays.
- 34 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
in multiple counterparts in _______, _______ on the day and year first above
written.
THE QUIZNO'S CORPORATION _____________________________
Master Franchisee (Print Name)
By:_________________________ By:_________________________
Name:_______________________ Name:_______________________
Title:______________________ Title:______________________
- 35 -
<PAGE>
JOINDER
In consideration of, and as a condition to, the grant by Franchisor to
Master Franchisee of the master franchise rights set forth in this Agreement,
the undersigned Owners (on behalf of themselves and the Restricted Persons)
hereby agree to be personally bound by the provisions of this Agreement
applicable to them.
OWNERS
______________________________ ___________________________
Name: Name:
______________________________ ___________________________
Name: Name:
- 36 -
<PAGE>
EXHIBIT A
TO THE MASTER FRANCHISE AGREEMENT
BY AND BETWEEN THE QUIZNO'S CORPORATION
AND
DATED ___________________
DEVELOPMENT AREA
The Development Area referred to in Section 2 of the captioned agreement
shall consist of .
THE QUIZNO'S CORPORATION _____________________
Master Franchisee
By:_________________________ By:______________________
Name:_______________________ Name:____________________
Title:______________________ Title:___________________
A - 1
<PAGE>
EXHIBIT B
TO THE MASTER FRANCHISE AGREEMENT
BY AND BETWEEN
THE QUIZNO'S CORPORATION
AND ________________
DATED __________________
DEVELOPMENT QUOTA
Cumulative
Number of
QUIZNO'S
Restaurants to
be Open and in
Date Operation in the
Development Development Area
Development Period Date Development ("Development
Period Commences Period Ends Quota")
- --------------------------------------------------------------------
First January 1, December 31,
Second January 1, December 31,
Third January 1, December 31,
Fourth January 1, December 31,
Fifth January 1, December 31,
Sixth January 1, December 31,
Seventh January 1, December 31,
Eighth January 1, December 31,
Ninth January 1, December 31,
Tenth January 1, December 31,
THE QUIZNO'S CORPORATION ___________________________
Master Franchisee
By:_________________________ By:________________________
Name:_______________________ Name:______________________
Title:______________________ Title:_____________________
B - 1
<PAGE>
EXHIBIT C
TO THE MASTER FRANCHISE AGREEMENT
BY AND BETWEEN
THE QUIZNO'S CORPORATION
AND ______________________
DATED __________________
MARKS
As of the date of this Agreement, Master Franchisee shall be authorized to use
the following Marks in connection with the franchising of QUIZNO'S Restaurants
pursuant to this Agreement, all of which are registered on the Principal
Register of the United States Patent and Trademark Office:
<TABLE>
<CAPTION>
Application Application
or or
Registration Registration
Country Trademark Number Date Status Classes
- ----------- -------------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Australia Quizno's App. # 30 March
789815 1999 Pending 30, 32, 42
Quizno's Subs
Australia Oven Baked App. # 30 March 30, 32, 42
Classics 789814 1999 Pending
Canada Quizno's 6 February No
Reg. # 1998 Registered classification
489496 in Canada
Quizno's Subs
Canada Oven Baked App. # No
Classics not yet Pending classification
(and design) available in Canada
Europe-CTM Quizno's App. # 28 January
1057223 1999 Pending 42
Quizno's Subs
Europe-CTM Oven Baked 28 January
Classics App. # 1999 Pending 42
1057264
Great Quizno's Reg. # 18 August
Britain 1576926 1995 Registered 42
Quizno's Subs
Great Oven Baked
Britain Classics App # 30, 32, 42
(and design) 2197852
Japan Quizno's Reg. # 21 May
4275508 1999 Registered 42
Quizno's Subs
Japan Oven Baked
Classics App. # 1 March Pending 42
(and design) 17745/99 1999
Mexico Quizno's Reg. # 30 August
502259 1995 Registered 42
Puerto Quizno's 23 September
Rico None 1997 Pending 42
Singapore Quizno's 12 September
Reg. # 1994 Registered 42
6014/94
South Quizno's 11 January
Korea Reg. # 1996 Registered 42
29994
</TABLE>
C - 1
<PAGE>
EXHIBIT D
TO THE MASTER FRANCHISE AGREEMENT
BY AND BETWEEN
THE QUIZNO'S CORPORATION
AND ________________
DATED __________________
OWNERSHIP INTERESTS
Master Franchisee represents and warrants that it is duly organized and
validly existing in good standing under the laws of the jurisdiction of its
incorporation or organization, is qualified to do business in all jurisdictions
in which its business activities or the nature of properties owned by Master
Franchisee requires such qualification, and has the corporate or other authority
to execute, deliver and carry out all of the terms of this Agreement.
Master Franchisee further represents and warrants that all Owners and
their interests in Master Franchisee are completely and accurately listed on
this Exhibit D and agree that Master Franchisee will execute such revised
versions of Exhibit D as may be necessary during the term of this Agreement to
reflect any changes in the information contained in original Exhibit D.
1. Ownership Structure. If MASTER FRANCHISEE is a company or other entity
(including a partnership or an entity having limited liability), MASTER
FRANCHISEE and its Owners represent and warrant that the ownership structure of
MASTER FRANCHISEE is as follows:
Class of Number of Units Percentage of
Ownership of Ownership Total Ownership
Name of Owner Interest Interests Interests
- --------------- ----------------- --------------- --------------------
D - 1
<PAGE>
There are no other authorized classes of Ownership Interests of MASTER
FRANCHISEE.
OWNERS
______________________________ _______________________________
Name: Name:
______________________________ _______________________________
Name: Name:
D - 2
<PAGE>
GUARANTY AND ASSUMPTION OF OBLIGATIONS
UNDER THE MASTER FRANCHISE AGREEMENT
DATED ______________________,
BETWEEN
THE QUIZNO'S CORPORATION
AND
In consideration of, and as an inducement and a condition to, the
execution of that certain MASTER FRANCHISE AGREEMENT of even date herewith (the
"Agreement") between THE QUIZNO'S CORPORATION ("Franchisor") and ("Master
Franchisee"), each of the undersigned hereby personally and unconditionally: (1)
guarantees to Franchisor, and its successors and assigns, for the term of the
Agreement and thereafter as provided in the Agreement, that Master Franchisee
shall punctually pay and perform each and every undertaking, agreement and
covenant set forth in the Agreement; and (2) agrees to be personally bound by,
and personally liable for the breach of, each and every provision in the
Agreement, both monetary obligations, including without limitation, the
obligations to pay costs and legal fees as provided in the Agreement, and the
obligation to take or refrain from taking specific actions or to engage or
refrain from engaging in specific activities, including without limitation the
provisions of the Agreement relating to competitive activities.
Each of the undersigned waives: (1) acceptance and notice of acceptance by
Franchisor of the foregoing undertakings; (2) notice of demand for payment of
any indebtedness or nonperformance of any obligations hereby guaranteed; (3)
protest and notice of default to any party with respect to the indebtedness or
nonperformance of any obligations hereby guaranteed; (4) any right he may have
to require that an action be brought against Master Franchisee or any other
person as a condition of liability; (5) all rights to payments and claims for
reimbursement or subrogation which any of the undersigned may have against
Master Franchisee arising as a result of the execution of and performance under
this guaranty by the undersigned; and (6) any and all other notices and legal or
equitable defenses to which he may be entitled.
Each of the undersigned consents and agrees that: (1) his direct and
immediate liability under this guaranty shall be joint and several not only with
Master Franchisee, but also among the undersigned; (2) he shall render any
payment or performance required under the Agreement upon demand if Master
Franchisee fails or refuses punctually to do so; (3) such liability shall not be
contingent or conditioned upon pursuit by Franchisor of any remedies against
Master Franchisee or any other person; (4) such liability shall not be
diminished, relieved or otherwise affected by any extension of time, credit or
other indulgence which Franchisor may from time to time grant to Master
Franchisee or to any other person, including without limitation the acceptance
of any partial payment or performance, or the compromise or release of any
claims, none of which shall in any way modify or amend this guaranty, which
shall be continuing and irrevocable throughout the term of the Agreement and for
so long thereafter as there are any monies or obligations owing by Master
Franchisee to Franchisor under the Agreement; and (5) the written acknowledgment
of Master Franchisee, accepted in writing by Franchisor, or the judgement of any
court of competent jurisdiction establishing the amount due from Master
Franchisee shall be conclusive and binding on the undersigned as guarantors.
D - 3
<PAGE>
If Franchisor is required to assert a claim for amounts owed by Master
Franchisee to Franchisor hereunder, or if Franchisor is required to enforce this
Guaranty and Assumption of Obligations, Franchisor shall be entitled to
reimbursement of its costs and expenses, including but not limited to,
reasonable accountants', attorneys' attorney assistants', arbitrators' and
expert witness fees, costs of investigation and proof of facts, court costs,
other litigation expenses and travel and living expenses, whether incurred prior
to, in preparation for or in contemplation of the filing of any such proceeding.
If Franchisor is required to engage legal counsel in connection with any failure
by the undersigned to comply with this guaranty, the undersigned shall reimburse
Franchisor for any of the above-listed costs and expenses incurred by it.
This Guaranty and Assumption of Obligations shall be governed by the
internal laws of the State of Colorado, U.S.A., except that its choice of law
and conflict of law rules shall not apply.
IN WITNESS WHEREOF, each of the undersigned has hereunto affixed his
signature on the same day and year as the Agreement was executed.
OWNERS
______________________________ ___________________________
Name: Name:
______________________________ ___________________________
Name: Name:
D - 4
October 4, 1999
All Parties described below as "Borrowers"
c/o John H. Gallivan
1415 Larimer Street
Denver, CO 80202
Via Facsimile: (720) 359-3395
Re Fixed Rate Commitment Letter: Total Note Amount: $15,555,555.64 (consisting
of $14,000,000.00 of Aggregate Loan Amount and $1,555,555.64 of Aggregate Credit
Enhancement Amount).
Dear Mr. Gallivan:
AMRESCO Commercial Finance, Inc. ("ACFI" or the "Lender") is pleased to approve
your loan application ("Application") for a loan and agrees to lend you the
total amount set forth above to the following companies (collectively, "you",
"your", or the "Borrower"): The Quizno's Corporation; The Quizno's Operating
Company; S & S Company; The Quizno's Realty Company; The Quizno's Acquisition
Company; The Quizno's Licensing Company; and Quizno's Kansas, L.L.C. The
allocation of the aggregate Loan Amount and the Total Note Amount and
corresponding terms will be set forth on Exhibit A attached hereto and made a
part hereof:
The following terms and conditions will apply on your loan(s):
1. Note Amount: Your loan(s) will be evidenced by two secured
-------------
promissory notes (collectively, the "Note") in an aggregate
amount ("Total Note Amount") of $15,555,555.64 of which
$14,000,000.00 will be the principal amount disbursed to you
at closing pursuant to your instructions and the terms of
this Commitment Letter (excluding your closing costs which
are withheld) and $1,555,555.64 will be your aggregate Credit
Enhancement Amount.
2. Interest Rate: Prior to an event of default, the interest
---------------
rate on the loan(s) will be equal to the 10-year treasury
note rate 10 days prior to the closing date plus 4.25%,
which as of September 28, 1999 would equate to an annual
interest rate of 10.10%. The loan and enhancement payments
herein reflect an assumed interest rate of 10.10%, but are
subject to change based upon the 10-year treasury note rate
as of the date the interest rate is locked. ACFI will have
the unilateral right, at any time, to readjust this rate
once within four months from the closing date, at a rate
equal to 4.25% plus the then current 10 year treasury note
rate. If requested by Lender, Borrower shall execute slip
pages to the Note necessary to conform the Note to the
interest rate set forth in this section 2
3. Scheduled Monthly Credit Enhancement Obligation Payment:
--------------------------------------------------------
You will pay an aggregate amount of $13,092.65 each month
while your aggregate Credit Enhancement Amount remains
outstanding.
4. Scheduled Monthly Loan Payment: You will pay an aggregate
--------------------------------
amount of $193,337.48 each month while all the loan(s) listed
above remain outstanding. This amount will be reduced accordingly
for any such loan(s) that mature or are paid off.
5. Payments and Monthly Enhancement Rebates: The first payment
-----------------------------------------
under the loan(s) ("Closing Payment") will be due on the
date that such loans close and will be withheld from the loan
proceeds to be disbursed to you at the Closing Date. The
Closing Payment will equal the sum of (i) interest payable
on each Loan Amount from the Closing Date to the first day
of the next month, (ii) the Scheduled Monthly Loan Payment
for each of your loan(s) and (iii) the Scheduled Monthly
Credit Enhancement Obligation payment for each of your
loan(s). The Scheduled Monthly Loan Payment for each loan
will consist of (i) amortization of the corresponding Note
Amount over the stated loan term and (ii) interest on the
outstanding Loan Amount corresponding to such loan. The
Scheduled Monthly Loan Payment will be the same amount every
month. You will make payments of the Scheduled Monthly Loan
Payment and Scheduled Monthly Credit Enhancement Obligation
Payment no later than the first day of each month (each a
"Payment Date") beginning on January 1, 2000 (assuming an
October 1999 closing).
If no loan in the pool of loans made by ACFI (of which your
loans are a part) is delinquent or in default, you will be
entitled to an aggregate monthly enhancement rebate ("Monthly
Enhancement Rebate") of $13,092.65, an amount equal to your
initial aggregate Scheduled Monthly Credit Enhancement Obligation
Payment. If any loans in such loan pool are delinquent or in
default, the amount of your Monthly Enhancement Rebate will be
reduced and may be eliminated entirely. All calculations of the
Monthly Enhancement Rebate will be made by ACFI, its agent or
representatives. Your Monthly Enhancement Rebate will be
applied to your next Scheduled Monthly Credit Enhancement
Obligation Payment which is due. In the event you are entitled
to such credit, you will be notified prior to the next Payment
Date of the reduced amount due on the next Payment Date. All
payments will be made in United States dollars and at the
offices of the Lender or such other place or places as the
Lender may notify you.
6. Prepayment: Each loan may be prepaid in full (but not
----------- in part) subject to certain restrictions and
payment of a yield maintenance make-whole premium, if due.
The yield maintenance make-whole premium shall be in effect
for the first seven (7) years of the loan term, after which
such premium shall be 1% of the then outstanding loan balance.
7. Use: You will use the Aggregate Loan Amount solely for the
---- business or commercial purpose identified as follows
(allocations are estimates):
Refinance Existing Debt $3,515,000
*Escrowed funds for various uses as
described below 9,900,000
Closing costs (including 1st month
payment) 585,000
-----------
Total Loan Proceeds $14,000,000
* The escrowed funds will be split into two different uses. 60% of the
escrowed amount will be used for any of the specific uses as follows:
going-private transaction, tender offers to Quizno's shareholders or
other QSR chains, open market purchases of QUIZ stock, acquisition of new
stores, upgrades at the corporate and store level, repurchase area
directorships. 40% of the escrowed funds can be used for anything that
Quizno's wishes to use the funds for with specific exception to working
capital, dividends or distributions, or to "cash-out" the two majority
equity holders.
Quizno's may use a maximum of $2 million of the escrowed funds for a
program that will offer limited financing to franchisees. In this program
Quizno's will finance no more that 66.7% of the start-up costs for a
franchisee, with the franchisee injecting the additional 33.3% in equity.
Quizno's will be allowed to draw on this escrow account a maximum of $1
million per month. If the total amount in draws in a specific month is
higher than $1 million, ACFI must approve the disbursement of funds that
month. ACFI will receive monthly reports on the disbursements and uses of
funds until the balance of the escrow is $0.
8. Collateral: Your obligations will be secured by a blanket,
----------- first priority, perfected security interest in all
of your present and future assets other than real and personal
property acquired in the future subject to a purchase money
security agreement, to the extent and in form and substance
satisfactory to us and our counsel. These assets must include,
but are not limited to all presently owned and future acquired:
equipment and personal property relating to the corporate office
and each of the units listed on Exhibit A; leasehold
mortgages/deeds of trust for at least 50% of the unit locations
listed on Exhibit A (if 50% of the leasehold mortgages cannot be
obtained ACFI will allow a substitution of other collateral in
form and substance satisfactory to ACFI in its sole discretion);
all of your general intangibles (as defined in the Uniform
Commercial Code), including all trademarks, patents, trade names,
trade secrets, service marks, service names, franchise agreements,
license agreements, contract rights, and all proceeds and income
thereof. Upon your request, Lender shall release its lien on all
franchise agreements entered into subsequent to the date that the
Borrower achieves $7 million in annual EBITDA and a FCCR of 2.00:1
based on annual audited financial statements.
9. Fixed Charge Coverage Ratios:
a. You are obligated to maintain a Fixed Charge Coverage Ratio
(FCCR) of 1.35:1 at the corporate (consolidated) level
throughout the life of your loan(s). ACFI will monitor this
compliance on an annual basis and sometimes more frequently if
conditions warrant.
b. YOU MAY NOT BORROW OR INCUR ADDITIONAL INDEBTEDNESS IF THE
PAYMENTS ON SUCH INDEBTEDNESS WOULD CAUSE THE FCCR to GO below
1.50:1 (POST TRANSACTION). Any additional indebtedness may not
be secured by any of the collateral referred to above.
10. Closing Documents: At the closing you must execute and deliver
------------------ standard ACFI loan documents, in form and
substance satisfactory to us, including the following:
a. Secured Promissory Notes evidencing your obligation to repay
such loan(s);
b. Pledge and Security Agreement granting a security interest to
the Lender in the collateral referred to above;
c. Leasehold Mortgages/Deeds of Trust and other real property
documentation, as applicable;
d. An opinion of your legal counsel in form and substance
satisfactory to us and our counsel;
e. UCC-1 Financing Statements and all other documents required to
perfect a security interest in the collateral referenced
above; and
f. Any and all other documents required by us in connection with
your loan.
Execution copies: Execution copies of the Secured Promissory Notes, Pledge
-----------------and Security Agreement, UCC-1 Financing Statements,
Leasehold Mortgages/Deeds of Trust and other real property documentation,
and/or Affiliate Guarantee(s), as applicable, and a form of the required
opinion letter will be provided to you and your counsel following your
acceptance of this letter.
11. Additional Conditions: This offer is subject to the following
----------------------additional conditions:
a. You must sign, date and return the enclosed copy of this letter
on or before October 4, 1999.
b. You must provide evidence to Lender that it shall receive at
closing a first priority, perfected security interest in the
collateral referred to above.
c. Prior to closing, you must execute and deliver into escrow
pending the closing, all closing documents referenced above.
d. The closing of this loan must occur on or before October 12, 1999
at such place as Lender may select. If the loan(s) does not close
on or before this date, ACFI may change or withdraw its
commitment, or change the applicable interest rate at its sole
discretion.
e. Lender's counsel must be satisfied with the documentation,
proceedings and legal opinions incident to this transaction.
f. There shall have been no material adverse change in your
financial condition or prospects since the date of this
commitment letter.
g. ACFI must receive each of the following, in form and substance
acceptable to ACFI in its sole discretion: (i) a legal review of
your loan files; (ii) Borrowing Resolutions from each of the
entities listed above as Borrowers; (iii) completed and signed
environmental questionnaires for each unit; (iv) landlord
estoppels for at least 50% of the locations listed on Exhibit A;
(v) resolution of various lease issues as noted on fax dated
September 20, 1999; and (vi) the unqualified approval of the
Loan by ACFI's warehouse lender.
12. Fees:
-----
a. Application Fee: For and in consideration of providing this
commitment letter, Borrower has paid Lender a non-refundable
application deposit of $70,000 (The "Application Fee") which
will be credited against the Loan Fee (as defined below) on
the loan closing date. If the loan does not close, Lender
shall retain the Application Fee.
b. Loan Fee: For and in consideration for the loan, Borrower
shall pay, from the proceeds of the loan at closing, a loan
fee ("Loan Fee") of 2.5% of the Aggregate Loan Amount, less
the Application Fee. If the loan closes, the Loan Fee shall
be used to pay for lending costs and expenses. However, if the
loan does not close, Borrower must pay for all costs and
expenses incurred in connection with the loan.
<PAGE>
If you accept this letter on the terms and conditions provided herein, please
sign in the space provided below and return to the Lender at the address noted
above on or before October 4, 1999.
Sincerely,
AMRESCO Commercial Finance, Inc.
By: /s/ Ryan Hoppe
--------------------------------
Ryan Hoppe, Senior Underwriter
By the undersigned's signature below, the undersigned accepts the offer for the
loan(s) described in this commitment letter and agrees to all of the terms and
conditions to such loan(s) described above.
<TABLE>
<CAPTION>
The Quizno's Corporation, as Borrower The Quizno's Operating Company as Borrower
<S> <C>
By: _________________________________________ By:
- ----------------------------------------
Name: ______________________________________ Name:
- --------------------------------------
Title: _______________________________________ Title:
- ---------------------------------------
Date: _______________________________________ Date:
- ---------------------------------------
S & S Company, as Borrower The Quizno's Realty Company, as Borrower
By: _________________________________________ By:
- ----------------------------------------
Name: ______________________________________ Name:
- --------------------------------------
Title: _______________________________________ Title:
- ---------------------------------------
Date: _______________________________________ Date:
- ---------------------------------------
The Quizno's Acquisition Company, as Borrower The Quizno's Licensing Company, as Borrower
By: _________________________________________ By:
- ----------------------------------------
Name: ______________________________________ Name:
- --------------------------------------
Title: _______________________________________ Title:
- ---------------------------------------
Date: _______________________________________ Date:
- ---------------------------------------
Quizno's Kansas, L.L.C., as Borrower
By: _________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________
</TABLE>
AMRESCO Commercial Finance, Inc.
Exhibit A
The Quizno's Corporation Schedule of Loan Allocation
<TABLE>
<CAPTION>
Original Credit Original Loan Loan
Loan Enhancement Note Term Interest Loan Enhancement
Unit # Amount Amount Amount (mos) Rate Payment Payment
- ------------- -------------- ------------- --------------- ------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate $10,250,000.00 $1,138,888.89 $11,388,888.89 120 10.10% $141,550.73 $9,585.65
E. Arapahoe 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
Gunpark 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
Blue River 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
E. Orchard 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
Pearl Street 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
S. University 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
Grant Street 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
S. Hover 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
Lincoln Street 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
West Colfax 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
North Washington 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
W. Colfas 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
18th Street 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
S. Tamarac 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
17th Street 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
W. Central 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
N. Waco 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
R. Harry 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
N. Rock Road 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
S. Senecca 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
W. 21st Street 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
N. Tyler 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
E. 47th Street 150,000.00 16,666.67 166,666.67 120 10.10% 2,071.47 140.28
-------------- ------------- -------------- ----------- ----------
$14,000,000.00 $1,555,555.64 $15,555,555.64 $193,337.48 $13,092.65
</TABLE>
BORROWER: 3889
PROMISSORY NOTE
ACLC 1999-2 SBL PROGRAM
$14,222,222.28 October 5, 1999
FOR VALUE RECEIVED, the undersigned The Quizno's Corporation; The Quizno's
Operating Company; S & S Company; The Quizno's Realty Company; The Quizno's
Acquisition Company; The Quizno's Licensing Company; and Quizno's Kansas, LLC,
(collectively the "Borrower") hereby promises to pay to the order of AMRESCO
Commercial Finance, Inc., a Nevada corporation (together with its successors and
assigns, the "Lender"), the principal sum of Twelve Million Eight Hundred
Thousand Dollars and No Cents ($12,800,000.00) (the "Aggregate Loan Amount")
and an amount of up to One Million Four Hundred Twenty Two Thousand Two Hundred
Twenty Two Dollars and Twenty Eight Cents ($1,422,222.28) (the "Aggregate Credit
Enhancement Amount"), and all other amounts owed under the Loan Documents,
together with all interest accrued thereon, at the times and place and in the
manner specified in the Loan Documents.
This Promissory Note is one of a series of notes (the "Program Notes")
issued by certain business owners or landlords of commercial properties (the
"Program Borrowers") in connection with loans (the "Program Loans") made or to
be made by the Lender to the Program Borrowers as part of the ACLC 1999-2 SBL
Program. This Promissory Note evidences the Borrower's obligation, inter, alia,
(i) to repay the loan(s) (each of the loans set forth on Schedule I attached
hereto and made a part hereof, a "Loan" and, collectively, the "Loans") made by
the Lender to the Borrower on the date hereof in an aggregate principal amount
equal to the Aggregate Loan Amount, (ii) to guarantee the payment of
delinquencies or defaults in respect of Program Loans or any obligations in
connection therewith, as determined in Lender's sole discretion ("Program Loan
Deficiencies"; each such delinquent or defaulted Program Loan or related
obligation, a "Delinquent Program Loan") in an amount up to the Aggregate Credit
Enhancement Amount, (iii) to pay, subject to rebate, the Scheduled Monthly
Credit Enhancement Obligation Payment (as hereinafter defined) and (iv) to pay
interest on the Aggregate Loan Amount. For purposes of this paragraph, a
"delinquent" Program Loan is defined as a Program Loan where the loan payments
are past due by one or more days. Moreover, a "defaulted" Program Loan is
defined as a Program Loan where an Event of Default has occurred and remains
uncured (as defined in the Borrower's Pledge and Security Agreement).
1. Definitions. Terms defined in the Pledge and Security Agreement, dated
as of the date hereof (the "Security Agreement"), between the Borrower and the
Lender which are not otherwise defined herein shall have the meanings ascribed
to such terms in the Security Agreement. The following terms shall have the
meanings set forth on Schedule II attached hereto and made a part hereof: ACLC
1999-2 SBL Program, ACFI Closing Settlement Statement, Closing Payment, Credit
Enhancement Amount, Funding Date, Interest Rate, Loan Amount, Loan Deficiency,
Note Amount, Ratable Share, Scheduled Monthly Credit Enhancement Obligation
Payment, Scheduled Monthly Loan Payment, State and Stated Maturity Date. All
terms defined in the singular will have the same meaning when used in the
plural and vice versa.
2. Interest. The Borrower agrees to pay interest on the outstanding Note
Amount at the Interest Rate from the date any loan proceeds are advanced (the
"Closing Date") until the Loans have been discharged or otherwise paid in full
in accordance with the terms hereof. Interest shall be payable in one (1) month
installments, on the first day of every calendar month (each such date, a
"Payment Date") and, unless otherwise expressly stated, in arrears. Interest on
the Aggregate Loan Amount shall be paid as part of the Scheduled Monthly Loan
Payment, and interest on the outstanding Aggregate Credit Enhancement Amount
shall be paid, subject to rebate, as the Scheduled Monthly Credit Enhancement
Obligation Payment. All computations of interest shall be made by the Lender on
the basis of a year of 360 days and shall be allocated in twelve (12) equal
monthly installments.
Notwithstanding the foregoing paragraph, upon the occurrence and during the
continuation of an Event of Default, the Borrower shall instead pay interest on
the outstanding Note Amount at a rate (the "Default Rate") per annum equal to
the Interest Rate plus three percent (3.00%), payable upon demand by the Lender.
All obligations hereunder which are not paid by the Borrower when due and
payable shall bear interest at the Default Rate.
3. Guarantee. As more fully specified herein, the Borrower hereby
irrevocably and unconditionally guarantees and promises to pay to the Lender
(the "Guarantee") an amount up to the Aggregate Credit Enhancement Amount plus
the aggregate Scheduled Monthly Credit Enhancement Obligation Payments for the
payment of Program Loan Deficiencies.
4. Required Payments and Rebates.
(a) Closing Payment. On the Closing Date, the Borrower shall pay the
Closing Payment to the Lender. The Closing Payment equals the sum of (i)
interest payable on each Loan Amount from the Closing Date to the first
day of the next calendar month thereafter, (ii) the Scheduled Monthly Loan
Payment for each Loan and (iii) the Scheduled Monthly Credit Enhancement
Obligation Payment for each Loan.
(b) Scheduled Monthly Loan Payments. The Borrower agrees to pay the Lender
an amount equal to the Scheduled Monthly Loan Payment for each Loan (i) on the
Closing Date (as part of the Closing Payment) and (ii) on each Payment Date
thereafter, commencing on the first day of the third calendar month following
the calendar month in which the Closing Date occurs or, if the Closing Date
occurs on a Payment Date, on the first day of the second calendar month
following the calendar month in which the Closing Date occurs (the "Initial
Payment Date"), until the earliest of (A) the acceleration or prepayment of
such Loan (subject to the fulfillment of prepayment amounts under Section 5b),
(B) the applicable Loan Amount Repayment Date (as defined in Section 4(e),
below) or (C) the applicable Stated Maturity Date. The Scheduled Monthly Loan
Payment for each Loan equals (1) the monthly installment amount which will fully
amortize the Loan Amount and the Credit Enhancement Amount of such Loan
(including the applicable interest on such amounts) over the period from the
calendar month preceding the Initial Payment Date through the applicable Stated
Maturity Date less (2) the Scheduled Monthly Credit Enhancement Obligation
Payment for such Loan.
(c) Scheduled Monthly Credit Enhancement Obligation Payments. The
Borrower agrees to pay the Lender an amount equal to the Scheduled Monthly
Credit Enhancement Obligation Payment for each Loan (i) on the Closing
Date (as part of the Closing Payment) and (ii) on each Payment Date,
commencing on the Initial Payment Date, until the earliest of (A) the
discharge, acceleration or prepayment of such Loan (subject to the
fulfillment of prepayment amounts under Section 5b), (B) payment in full
of the applicable Credit Enhancement Amount or (C) the applicable Stated
Maturity Date. Each Scheduled Monthly Credit Enhancement Obligation
Payment shall be subject to the Monthly Enhancement Rebate provided for in
Section 4(d), below.
(d) Monthly Enhancement Rebates.
(i) If, on any Payment Date, there are no outstanding Program Loan
Deficiencies, the Borrower shall be entitled to a rebate on each Loan (a
"Monthly Enhancement Rebate") in an amount equal to the Scheduled Monthly Credit
Enhancement Obligation Payment for such Loan plus the Borrower's pro rata
portion of recoveries of Program Loan Deficiencies with respect to previously
paid Scheduled Monthly Credit Enhancement Obligation Payments which have not
been previously rebated. On the Initial Payment Date, if there are no
outstanding Program Loan Deficiencies, the Borrower shall also be entitled to a
rebate of the Scheduled Monthly Credit Enhancement Obligation Payments paid
pursuant to clause (iii) of Section 4(a).
(ii) If, on any Payment Date, there are outstanding Program Loan
Deficiencies, the amount of each Monthly Enhancement Rebate will be reduced, in
whole or in part, by an amount which would equal the Borrower's pro rata portion
of such Program Loan Deficiency or Deficiencies multiplied by the applicable
Ratable Share, provided, however, that in no event shall the Monthly Enhancement
Rebate be reduced by more than the Scheduled Monthly Credit Enhancement
Obligation Payment. For the purposes of this subsection (ii), the Borrower's
pro rata portion of any Program Loan Deficiency shall be calculated by (A)
dividing the Borrower's aggregate Scheduled Monthly Credit Enhancement
Obligation Payments by the aggregate Scheduled Monthly Credit Enhancement
Obligation Payments of all non-delinquent Program Loans and (B) multiplying such
amount by the Program Loan Deficiency or Deficiencies.
(iii) Any payment (excluding prepayments) made under this Promissory
Note which is less than (A) the aggregate of (1) the Scheduled Monthly Loan
Payment on each Loan and (2) the Scheduled Monthly Credit Enhancement Obligation
Payment on each Loan minus (B) the allocated Monthly Enhancement Rebate, if any,
shall be applied ratably among the Loans, in accordance with their respective
Ratable Shares (see Schedule I), creating a Loan Deficiency on each of the
Borrower's Loans. If the Borrower's Loans are subject to any Loan Deficiency,
the Borrower will not be entitled to any Monthly Enhancement Rebate on any Loan.
(iv) Each Monthly Enhancement Rebate, if any, will be credited against
the payment of the Scheduled Monthly Credit Enhancement Obligation Payment for
the applicable Loan due on the immediately succeeding Payment Date.
(e) Discharge; Repayment of the Credit Enhancement Amount.
(i) At any time after the Loan Amount of any Loan has been paid in
full by the Borrower pursuant to Section 4(b), above (the "Loan Amount
Repayment Date"), the Borrower may elect to have such Loan discharged by making
a payment in an amount (the "Discharge Amount") equal to the lesser of (A) the
outstanding Credit Enhancement Amount of such Loan and (B) the Program Credit
Enhancement Amount (as defined in Section 5, below), if any, as of such date.
(ii) In the event that the Borrower does not elect to discharge any
Loan in accordance with paragraph (i), above, on the applicable Loan Amount
Repayment Date, the Borrower shall instead repay the outstanding Credit
Enhancement Amount of such Loan in monthly installments (each such installment
to be in an amount equal to the Scheduled Monthly Loan Payment for such Loan) on
each Payment Date, commencing on the first Payment Date following the Loan
Amount Repayment Date, until the earliest of (A) payment in full of the
outstanding Credit Enhancement Amount, (B) the discharge or acceleration of
such Loan (in accordance with Section 4 and 5) or (C) the applicable Stated
Maturity Date.
(iii) Upon payment of the Loan Amount and either (A) the Discharge
Amount of any Loan or (B) the amount described in Section 4(e)(ii), such Loan
and the Borrower's obligations hereunder relating to such Loan shall be
terminated.
(f) Stated Maturity Date. Unless earlier repaid, prepaid or accelerated
hereunder, the outstanding Loan Amount of each Loan and all accrued and unpaid
interest thereon, the outstanding Credit Enhancement Amount of such Loan and
all accrued and unpaid Scheduled Monthly Credit Enhancement Obligation Payments
shall be due and payable in full on the applicable Stated Maturity Date.
5. Prepayments.
(a) Procedures. Each Loan is subject to prepayment in whole, but not in
part. In the event of prepayment, Borrower shall pay the Prepayment Amount as
said term is defined below. The Prepayment Amount is due and payable regardless
of whether the prepayment by Borrower is made voluntarily or involuntarily,
including any prepayment required by the holder's exercise of its rights of
acceleration in the Event of Default. In the event that the Borrower elects to
prepay any Loan, the Borrower shall deliver written notice (the "Prepayment
Notice") of such prepayment election to the Lender not less than thirty (30)
days nor more than sixty (60) days from the proposed prepayment date (the
"Prepayment Date"). Within twenty (20) days of the Lender's receipt of such
Prepayment Notice, the Lender shall deliver a written notice to the Borrower
setting forth the estimated total amount of the Prepayment Amount (as defined
below) payable on the proposed Prepayment Date, which amount shall be subject
to adjustment for Delinquent Program Loans and changes in the Reinvestment Rate.
(b) Prepayment Amount. On the Prepayment Date, the Borrower shall pay the
Lender an amount, with respect to the Loan to be prepaid (the "Prepayment
Amount"), equal to the sum of (i) the outstanding Loan Amount on the Prepayment
Date, (ii) all interest accrued and unpaid on the Loan Amount from the
immediately preceding Payment Date through the Prepayment Date, if any, plus an
additional month of interest on the Loan Amount, (iii) all accrued and unpaid
Scheduled Monthly Credit Enhancement Obligation Payments due to the Prepayment
Date, (iv) if any Program Loan Deficiencies exist on the Prepayment Date, the
lesser of (A) the outstanding Credit Enhancement Amount and (B) the Program
Credit Enhancement Amount (the "Credit Enhancement Prepayment"), and (v) with
regard only to the Loan set forth on Schedule I as Loan Number "Consolidated"
the Make Whole Premium.
(c) Definitions. For purposes of this Section 5, the following terms have
the following meanings:
"Discounted Value" means, with respect to each Loan, the amount
calculated by discounting all Remaining Scheduled Monthly Loan Payments
from their respective scheduled due dates to the Prepayment Date, in
accordance with acceptable financial practice and at a discount factor
(applied on a monthly basis) equal to the Reinvestment Rate.
"Make Whole Premium" means, with respect to each Loan for the
first seven (7) years from the Funding Date, a premium equal to the
excess, if any, of the Discounted Value over the outstanding Loan Amount,
and anytime thereafter, 1% of the outstanding Loan Amount. The Make Whole
Premium shall in no event be less than zero.
"Program Credit Enhancement Amount" means, with respect to each
Loan, an amount equal to the product of (i) the ratio of (A) the
outstanding Loan Amount plus the outstanding Credit Enhancement Amount on
the Prepayment Date of such prepaying Program Loan to (B) the outstanding
Loan Amounts plus the outstanding Credit Enhancement Amounts of all
Program Loans that are not Delinquent Program Loans, multiplied by (ii)
the sum (without duplication) of (A) the Program Prepayment Amounts for
all Delinquent Program Loans on the Prepayment Date plus (B) any other
outstanding Program Loan Deficiencies on the Prepayment Date.
"Program Prepayment Amount" means, with respect to any Delinquent
Program Loan, an amount equal to the sum of (i) the outstanding Loan Amount of
such Delinquent Program Loan on the Prepayment Date, (ii) all accrued and unpaid
interest on such Delinquent Program Loan to the Prepayment Date, (iii) all
accrued and unpaid Scheduled Monthly Credit Enhancement Obligation Payments on
such Delinquent Program Loan to the Prepayment Date, and (iv) the Make Whole
Premium with respect to such Delinquent Program Loan.
"Reinvestment Rate" means the bond equivalent yield to maturity
implied by either (i) the yield reported, as of 10:00 A.M. (New York City time)
on the business day next preceding the Prepayment Date, on the display
designated as "Page 678" on the Telerate Service (or such other display as may
replace Page 678 on the Telerate Service) for actively traded United States
Treasury obligations having a maturity equal to the Remaining Average Life, or
(ii) if such yields shall not be reported as of such time or the yields
reported as of such time shall not be ascertainable, the Treasury Constant
Maturity Series yields reported (for the latest day for which such yields shall
have been so reported as of the business day next preceding the Prepayment Date)
in Federal Reserve Statistical Release H. 15 (519) (or any comparable successor
publication) for actively traded United States Treasury obligations having a
constant maturity equal to the Remaining Average Life. Such implied yield shall
be determined, if necessary, by (A) converting United States Treasury bill
quotations to bond-equivalent yields in accordance with accepted financial
practice, and (B) interpolating linearly between reported yields.
"Remaining Average Life" means, with respect to each Loan, the
number of years (calculated to the nearest one-twelfth year) obtained by
dividing (i) the outstanding Loan Amount on the Prepayment Date into (ii)
the sum of the products obtained by multiplying (A) the principal portion
of each Remaining Scheduled Monthly Loan Payment by (B) the number of
years (calculated to the nearest one-twelfth year) which will elapse
between the Prepayment Date and the Loan Amount Repayment Date.
"Remaining Scheduled Monthly Loan Payments" means, with respect to
each Loan, an amount equal to the sum of all Scheduled Monthly Loan Payments
that would be due during the period from the Prepayment Date to and including
the Loan Amount Repayment Date.
6. Payment Procedures.
(a) Method and Timing. The Borrower shall make each payment due hereunder
in one aggregate amount per calendar month, not later than 3:00 p.m. (New York
City time) on the day when due, in lawful money of the United States of America
(in freely transferable U.S. dollars and in immediately available funds), at
such place or places identified by Lender by Electronic Transfer of Funds. BY
WRITTEN NOTICE TO THE BORROWER, THE LENDER MAY REQUEST BORROWER TO MAKE SUCH
PAYMENTS AT OTHER PLACES AND BY OTHER METHODS AND BORROWER SHALL THEREAFTER MAKE
SUCH PAYMENTS IN ACCORDANCE WITH SUCH WRITTEN NOTICE FROM LENDER.
(b) Business Day. Whenever a payment to be made under this Promissory Note
shall be due and payable on a Saturday, Sunday or legal holiday under the laws
of the State or a date on which banking institutions located in New York, New
York are authorized or required to close, such payment shall be made on the next
succeeding business day.
(c) Computation of Time Periods. In this Promissory Note, in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including", the words "to" and "until" each
mean "to but excluding" and the word "through" means "to and including".
(d) Calculations. All calculations of the Monthly Enhancement Rebate, the
Make Whole Premium and other amounts due on prepayment or acceleration and the
amounts actually received by the Lender with respect to Delinquent Loans will
be made by the Lender and audited monthly by an independent third-party selected
by the Lender (or its agent or representative). The Borrower agrees that all
such calculations will be conclusive and binding, absent manifest error.
(e) Application. The Lender shall apply timely payments made under this
Promissory Note in the following order with respect to each Loan: (i) to accrued
and unpaid interest on the Loan Amount, (ii) to any late payment charges due
pursuant to Section 6(f), below, (iii) to accrued and unpaid Scheduled Monthly
Credit Enhancement Obligation Payments, (iv) to the Make Whole Premium, if any,
(v) to the Loan Amount, until the outstanding Loan Amount is zero, and (vi) the
balance, if any, to the Credit Enhancement Amount to the extent then due and
unpaid. Notwithstanding the foregoing, any payment (excluding prepayments) made
under this Promissory Note which is less than (A) the aggregate of (1) the
Scheduled Monthly Loan Payment on each Loan and (2) the Scheduled Monthly Credit
Enhancement Obligation Payment on each Loan minus (B) the allocated Monthly
Enhancement Rebate, if any, shall be applied ratably among the Loans, in
accordance with their respective Ratable Shares.
(f) Late Payment Charge: If, on any Payment Date, the Lender has not
received the full Scheduled Monthly Loan Payment due on such Payment Date in
accordance with Section 6(a), above, the Borrower shall pay to the Lender,
promptly on demand, as liquidated damages, a late payment charge of $750 per
Loan.
7. Concerning the Guarantee.
(a) Nature of the Guarantee. The Guarantee is absolute, unconditional,
irrevocable and continuing in nature. The Guarantee is a guarantee of prompt
and punctual payment and performance and is not merely a guarantee of
collection. The obligations of the Borrower under this Promissory Note with
respect to the Guarantee are direct and primary obligations of the Borrower and
are independent of the obligations (the "Program Obligations") of any Program
Borrower or any other Person with respect to any Program Note or any document or
instrument relating thereto (each a "Program Loan Document" and, collectively,
the "Program Loan Documents"), and a separate action or actions may be brought
and prosecuted against the Borrower to enforce the Guarantee, irrespective of
whether any action is brought against any Program Borrower or any other Person
or whether any Program Borrower or any other Person is joined in any such action
or actions. The liabilities and obligations of the Borrower under this
Promissory Note shall be absolute and unconditional notwithstanding any event
or occurrence, including without limitation:
(i) any lack of validity or enforceability of any Program Loan
Document;
(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Program Obligations under any Program Document,
or any other amendment or waiver of or any consent to departure therefrom
including, without limitation, any increase in any Program Loan;
(iii) any taking, exchange, release or non-perfection of any collateral,
or any taking, release or amendment or waiver of or consent to departure from
any other guarantee, for all or any of the Program Obligations;
(iv) any manner of application of any collateral, or proceeds thereof,
to all or any of the Program Obligations, or any manner of sale or other
disposition of any collateral or any other assets of the Program Borrowers;
(v) any change, restructuring or termination of the structure or
existence of any Program Borrower;
(vi) the existence of any claim, set-off, defense or other right which
the Borrower may have at any time against the Lender, whether in connection
with the transactions contemplated by this Promissory Note and the other Loan
Documents or otherwise;
(vii) any impossibility or impracticality of performance, illegality,
force majeure, any act of government, or any other circumstance which might
otherwise constitute a defense available to, or a discharge of, any Program
Borrower or a guarantor, or any other circumstance or event or happening
whatsoever, whether foreseen or unforeseen and whether similar or dissimilar to
anything referred to above in this Section 7; or
(viii) any variation in the percentage amount of Aggregate Credit
Enhancement among Program Borrowers.
The Guarantee shall continue to be effective or be reinstated (at any
time, including, without limitation, after discharge or termination of any
Loan or this Promissory Note), as the case may be, if at any time any
payment (or part thereof) of any of the Program Obligations is rescinded
or must otherwise be returned by the Lender upon the insolvency,
bankruptcy or reorganization of any Program Borrower, all as though such
payment had not been made.
(b) Relationship to Other Agreements. Nothing herein shall in any way
modify or limit the effect of terms or conditions set forth in any other
document, instrument or agreement executed by the Borrower or in
connection with the Program Obligations, but each and every term and
condition hereof shall be in addition thereto.
(c) Consents and Waivers. The Borrower acknowledges that the obligations
undertaken herein involve the guarantee of obligations of Persons other than
the Borrower and, in full recognition of that fact, consents and agrees that
the Lender may, at any time and from time to time, without notice or demand,
and without affecting the enforceability or continuing effectiveness hereof:
(i) supplement, modify, amend, extend, renew, accelerate or otherwise change
the time for payment or the terms of the Program Obligations or any part
thereof; (ii) supplement, modify, amend or waive, or enter into or give any
agreement, approval or consent with respect to, the Program Obligations or any
part thereof, or any of the Program Documents or any additional security or
guaranties, or any condition, covenant, default, remedy, right, representation
or term thereof or thereunder; (iii) accept new or additional instruments,
documents or agreements in exchange for or relative to any of the Program
Documents or the Program Obligations or any part thereof; (iv) accept partial
payments on the Program Obligations; (v) receive and hold additional security
or guaranties for the Program Obligations or any part thereof; (vi) release,
reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange,
substitute, transfer and/or enforce any security or guaranties, and apply any
security and direct the order or manner of sale thereof as the Lender in its
sole and absolute discretion may determine; (vii) release any Person from any
personal liability with respect to the Program Obligations or any part thereof;
(viii) settle, release on terms satisfactory to the Lender or by operation of
applicable laws or otherwise liquidate or enforce any Program Obligation and any
security or guarantee therefor in any manner, consent to the transfer of any
security and bid and purchase at any sale; and/or (ix) consent to the merger,
change or any other restructuring or termination of the partnership or
corporate existence, as the case may be, of the Borrower, any Program Borrower
or any other Person, and correspondingly restructure the Program Obligations,
and any such merger, change, restructuring or termination shall not affect the
liability of the Borrower or the continuing effectiveness hereof, or the
enforceability hereof with respect to all or any part of the Program
Obligations. In addition to the foregoing, the Borrower consents and agrees that
Lender may add or delete Program Borrowers and Program Loans. Borrower waives
any defense to enforcement of this guarantee based upon variation of risk in the
addition or deletion of Program Borrowers or in adding or deleting Program Loans
before or after the date hereof.
The Borrower hereby waives promptness, diligence, notice of acceptance,
presentment, demand, notice of dishonor, protest and any other notice with
respect to any of the Program Obligations and the Guarantee and any requirement
that the Lender or any Program Borrower protect, secure, perfect or insure any
lien or any property subject thereto or exhaust any right or take any action
against any Program Borrower or any other Person or any collateral. Borrower
hereby waives any rights it may now or hereinafter have to an appraisal of any
security or collateral for the Program Obligations, including, without
limitation, any such rights provided by statute. BORROWER ALSO WAIVES ALL
DEFENSES THAT IT MAY BE ENTITLED TO UNDER SURETYSHIP LAW REGARDING THE GUARANTEE
(d) Subrogation.
(i) Except as set forth in subsection (ii), below, the Borrower will
not exercise any rights which it may acquire by way of subrogation under the
Guarantee, by any payment made hereunder or otherwise.
(ii) If the Borrower should make a payment under the Guarantee, the
Borrower's sole claim and recourse for repayment of amounts so paid shall be to
amounts actually received by the Lender in respect of Program Loan Deficiencies
and held by the Lender for credit against either the next Scheduled Monthly
Credit Enhancement Obligation Payment or the next Scheduled Monthly Loan Payment
due from the Borrower on each Loan; provided, however, that if the Borrower
prepays a Loan and pays a Credit Enhancement Prepayment, such Borrower is not
entitled to any future recoveries with respect to such Loan. The Lender does not
represent or warrant that (A) any such amounts will be recovered on Delinquent
Program Loans, (B) amounts recovered on Delinquent Program Loans or other monies
will be actually received and held by the Lender for such credit, or (C) to the
extent, if any, that such monies are so received and held by the Lender, such
monies will be sufficient to reimburse or indemnify the Borrower for all amounts
paid under the Guarantee.
(e) Liability. The liability of the Borrower hereunder is joint and several
and is independent of any other guaranties at any time in effect with respect to
all or any part of the Program Obligations, and the Borrower's liability
hereunder may be enforced regardless of the existence of any such guaranties.
Any termination by or release of any guarantor in whole or in part shall not
affect the continuing liability of the Borrower hereunder, and no notice of any
such termination or release shall be required.
(f) Borrower is entering into the Guarantee as a material inducement to
Lender to make the Loans and Borrower acknowledges that Lender would not make
such Loans absent the Guarantee.
8. Security Arrangements. This Promissory Note is entitled to the benefits
of and is secured by the pledge, liens, security title, rights and security
interests granted under the Security Agreement and the other Loan Documents,
as the same may be amended, supplemented or renewed, from time to time.
9. Remedies. If an Event of Default occurs, the Lender may take (but is
not obligated to take) any or all of the following actions: (a) declare the
entire Note Amount, all interest, the Make Whole Premium on each Loan and any
other amounts payable hereunder to be, whereupon the same shall become,
forthwith due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby waived by the Borrower, (b) proceed to
enforce or cause to be enforced any remedies provided under any of the Loan
Documents or (c) exercise any other remedies available at law or in equity. The
Borrower agrees that upon the occurrence of an Event of Default, the Borrower
shall pay all costs and expenses actually incurred by Lender (including, without
limitation, reasonable attorney's fees and disbursements) incident to the
enforcement, collection, protection or preservation of any right or claim of the
Lender under the Loan Documents, including any such fees or costs incurred in
connection with any bankruptcy or insolvency proceeding or Borrower.
10. UNDERSTANDINGS WITH RESPECT TO WAIVERS, AGREEMENTS AND CONSENTS:
THE BORROWER HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES ALL OF THE WAIVERS,
AGREEMENTS AND CONSENTS ("WAIVERS") SET FORTH IN THIS PROMISSORY NOTE BOTH AS
BORROWER HEREUNDER AND AS GUARANTOR WITH RESPECT TO THE GUARANTEE, AND THAT EACH
AND ALL SUCH WAIVERS ARE BEING MADE KNOWINGLY, INTENTIONALLY, VOLUNTARILY,
WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF
SUCH WAIVERS WITH ITS ATTORNEY. THE BORROWER FURTHER ACKNOWLEDGES THAT THE
GUARANTEE AND SUCH WAIVERS ARE A MATERIAL INDUCEMENT TO THE LENDER TO MAKE THE
LOANS TO THE BORROWER; THAT THE TERMS OF THE LOANS ARE FAVORABLE TO BORROWER AND
THAT THE LENDER WOULD NOT HAVE MADE THE LOANS ON SUCH TERMS WITHOUT SUCH
GUARANTEE AND WAIVERS; AND THE BORROWER HEREBY MAKES AND ACKNOWLEDGES THAT IT
MAKES SUCH WAIVERS WITH RESPECT TO EACH OTHER PROGRAM LOAN. THE BORROWER
ACKNOWLEDGES AND AGREES THAT NEITHER THE LENDER, NOR ANY OF ITS AFFILIATES,
AGENTS OR REPRESENTATIVES HAS MADE AND NO SUCH PERSON IS MAKING OR SHALL BE
DEEMED TO HAVE MADE ANY REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE
GUARANTEE, INCLUDING ANY REPRESENTATION OR WARRANTY CONCERNING ANY PROGRAM
BORROWER'S PERFORMANCE, THE FINANCIAL CONDITION OF ANY PROGRAM BORROWER, OR THE
ABILITY OF ANY PROGRAM BORROWER TO PERFORM ITS PROGRAM OBLIGATIONS. THE BORROWER
ACKNOWLEDGES THAT IT HAS SUFFICIENT KNOWLEDGE AND EXPERIENCE TO BE CAPABLE OF
EVALUATING THE RISKS OF ITS LOAN AND GUARANTEE. IF ANY OF THE WAIVERS HEREIN ARE
DETERMINED TO BE UNENFORCEABLE UNDER APPLICABLE LAW, SUCH WAIVERS SHALL BE
EFFECTIVE TO THE MAXIMUM EXTENT PERMITTED BY SUCH LAW.
11. WAIVER OF TRIAL BY JURY. THE BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, AND THE LENDER BY ITS ACCEPTANCE OF THIS PROMISSORY NOTE
IRREVOCABLY AND UNCONDITIONALLY WAIVES, ANY AND ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE
RELATING TO THIS PROMISSORY NOTE.
12. LIMITATION ON INTEREST. NOTWITHSTANDING ANY OTHER PROVISION HEREOF, IN
NO EVENT SHALL THE AMOUNT OR RATE OF INTEREST OR OTHER AMOUNTS PAYABLE,
CONTRACTED FOR, CHARGED OR RECEIVED UNDER OR IN CONNECTION WITH THIS PROMISSORY
NOTE, FROM TIME TO TIME OR FOR WHATEVER REASON, EXCEED THE MAXIMUM RATE OR
AMOUNT, IF ANY, SPECIFIED BY APPLICABLE LAW. IF ANY SUCH PAYMENT IS FOUND TO
BE USURIOUS, SUCH PORTION OF THE PAYMENT THAT IS CONSIDERED USURIOUS SHALL BE
TREATED AS A PRINCIPAL PAYMENT.
13. Miscellaneous.
(a) Amendment. Neither this Promissory Note nor any provision hereof may
be amended, altered, modified, changed, waived, discharged or terminated,
except by an instrument in writing signed by the Lender and its assigns.
(b) Assignment. This Promissory Note is freely assignable in whole or in
part, from time to time, by the Lender and the Lender may grant participation
interests herein. Without limiting the foregoing, the Borrower understands and
agrees that the Lender intends to and may sell, pledge, grant a security
interest in, collaterally assign, transfer, deliver or otherwise dispose of
this Promissory Note and Borrower's other Loan Documents (or any interest
therein, or its rights and powers thereunder), from time to time, in connection
with a Securitization. The Borrower may only assign this Promissory Note and the
rights and obligations under this Promissory Note (including the rights to
rebates or credits as provided in Section 4(d)) in full but not in part, (i)
with the prior written consent of the Lender, (ii) to entities qualified to be
Program Borrowers and (iii) in accordance with the Security Agreement and upon
payment to Lender of (A) a fee in an amount equal to 1% of the outstanding
Aggregate Loan Amount on the date of any such assignment and (B) all expenses
incurred by the Lender in connection therewith (including attorneys fees and
costs). This Promissory Note shall be binding upon Borrower, its heirs, devises,
administrators, executives, personal representatives, successors, receivers,
trustees, and permitted assignees, including all successors in interest of the
Borrower, and shall inure to the benefit of the Lender, and the successors and
assignees of the Lender.
(c) Time of the Essence. For all payments to be made and obligations
to be performed under this Promissory Note, time is of the essence.
(d) Severability. Whenever possible this Promissory Note and each provision
hereof shall be interpreted in such manner as to be effective, valid and
enforceable under applicable law. If and to the extent that any such provision
shall be held invalid and unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provisions
hereof, and any determination that the application of any provision hereof to
any person or under any circumstance is illegal and unenforceable shall not
affect the legality, validity and enforceability of such provision as it may be
applied to any other person or in any other circumstance.
(e) No Waiver; Remedies Cumulative. No failure to exercise and no delay in
exercising on the part of the Lender of any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or privilege preclude any other or further exercise
thereof, or the exercise of any other right, power or privilege. All rights and
remedies provided in this Promissory Note or any other Loan Document or any law
shall be available to Lender and shall be cumulative.
(f) Headings Descriptive. The headings of the various sections, subsections
and paragraphs of this Promissory Note are for convenience of reference only,
do not constitute a part hereof and shall not affect the meaning or construction
of any provision hereof.
(g) GOVERNING LAW. THIS PROMISSORY NOTE AND ALL LOAN DOCUMENTS ARE ENTERED
INTO IN THE STATE OF IDAHO, AND THE VALIDITY, ENFORCEABILITY, CONSTRUCTION AND
INTERPRETATION OF THIS PROMISSORY NOTE SHALL BE CONSTRUED, APPLIED, ENFORCED AND
GOVERNED UNDER AND BY THE LAWS OF THE STATE OF IDAHO WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW. THE TERM "STATE" AS USED IN THIS PROMISSORY NOTE
AND ALL OTHER LOAN DOCUMENTS SHALL MEAN THE STATE OF IDAHO.
(h) Joint and Several Liability. If Borrower consists of more than one
Person, the obligations and liabilities of each such Person hereunder shall be
joint and several.
14. Loan Pool Flexibility. Lender shall have the right, at its sole and
absolute discretion upon written notice to Borrower, to transfer (a "Transfer"),
within eighteen (18) months from the effective date of this Promissory Note,
all or any of the Loans and all Liens related to such Loans, from the Program to
any other loan program formed by Lender. Upon the occurrence of a Transfer, the
Loan Documents shall be automatically amended and reclassified to reflect the
Transfer. Borrower shall execute all amendments or other documents Lender deems
necessary to effectuate a Transfer.
15. Guaranty. Each of the undersigned, if more than one, (each, for
purposes of this section only, a "Guarantor") intends to be obligated under this
Promissory Note as a primary obligor; however, if any Guarantor is adjudged to
be a surety by operation of law or otherwise, such Guarantor agrees that it
shall be a guarantor of the Obligations and not an accommodation maker of the
Promissory Note and each Guarantor further agrees as follows:
(a) Guaranty of Obligations. The Guarantor, jointly and severally if more
than one, irrevocably, absolutely and unconditionally guaranties (the
"Guaranty") to the Lender the payment when due of all Obligations, including,
without limitation, all amendments, modifications, supplements, renewals or
extensions of any of the Loan Documents or Obligations, whether such amendments,
modifications, supplements, renewals or extensions are evidenced by new or
additional instruments, documents or agreements or change the rate of interest
on any Obligation or the security therefor, or otherwise.
(b) Nature of The Guaranty. The Guaranty is a guaranty of prompt and
punctual payment and performance and is not merely a Guaranty of collection.
The obligation of the Guarantor to make payments to the Lender under this
Guaranty are direct and primary obligations. Upon the occurrence and during the
continuance of any Event of Default, the Guarantor understands and agrees that
the Lender may, but is not required to, enforce this Guaranty independently of
any other remedy or security the Lender may have or hold in connection with this
Guaranty or the Obligations guarantied hereunder without first or ever
proceeding against and/or exhausting any security or remedy against any other
person or party or any Collateral. Without limiting the generality of the
foregoing, the liability of the Guarantor under this Guaranty shall be absolute
and unconditional notwithstanding any event or occurrence, including without
limitation:
(i) any defect in, or invalidity, illegality or unenforceability of
any of the Loan Documents;
(ii) the existence of any claim, defense or set-off which the Borrower
or the Guarantor may have at any time against the Lender, whether in connection
with the transactions contemplated by this Guaranty or otherwise;
(iii) the existence or absence of any legal action to enforce the Loan
Documents or any security therefor, the issuance of any judgment therefor or
the execution of any such judgment;
(iv) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, any Loan Document or any other
agreement or instrument relating thereto, or any other amendment or waiver of
or any consent to departure therefrom including, without limitation, any
increase in the Obligation resulting from the extension of additional credit to
the Borrower or otherwise;
(v) any taking, exchange, release or non-perfection of any Collateral,
or any taking, release or amendment or waiver of or consent to departure from
any other Guaranty, for all or any of the Obligations;
(vi) any manner of application of any Collateral, or proceeds thereof,
to all or any of the Obligations, or any manner of sale or other disposition of
any Collateral or any other assets of the Borrower;
(vii) any change, restructuring, merger, buy-out, sale, or termination
of the structure or existence of the Borrower; or
(viii) any impossibility or impracticality of performance, illegality,
force majeure, any act of government, or any other circumstance which might
otherwise constitute a defense available to, or a discharge, of the Borrower or
the Guarantor, or any other circumstance or event or happening whatsoever,
whether foreseen or unforeseen, and whether similar or dissimilar to anything
referred to above in this Section.
<PAGE>
(c) Waiver. Except to the extent required by law and to the extent such
requirement cannot be waived, the Guarantor (i) waives notice of acceptance,
presentment, demand, notice of dishonor, protest, of this Guaranty and notice
of any liability to which it may apply, (ii) waives promptness, diligence,
notice of acceptance and any other notice with respect to any of the Obligations
under the Promissory Note and any requirement that the Lender or the Borrower
protect, secure, perfect or insure any lien or any property subject thereto or
exhaust any right or take any action against the Borrower or any other person
or any Collateral, and (iii) waives any rights it, the Borrower, any other
guarantor or any other person may now or hereafter have to an appraisal of any
security or Collateral for the Borrower's Obligations under the Promissory Note,
including, without limitation, any such rights provided by statute.
16. Adjustment to Interest Rate. Within four (4) months following the
Closing Date, Lender shall have the right, at its sole and absolute discretion
upon written notice (the date Lender provides such notice the "Adjustment Date")
to Borrower, to adjust the Interest Rate to a interest rate equal to the
ten-year treasury note rate at the Adjustment Date plus 4.25% per annum.
Borrower shall, within two (2) days of such notice, execute and deliver to
Lender an amended and restated fixed rate promissory note (the "Fixed Rate
Note") in the form attached hereto as Exhibit A and dated as of the Adjustment
Date, with the "Aggregate Loan Amount" and "Aggregate Credit Enhancement Amount"
for the Fixed Rate Note stated as the then current outstanding "Aggregate Loan
Amount" and "Aggregate Credit Enhancement Amount" of this Promissory Note, and
the "Interest Rate" for the Fixed Rate Note stated as the ten-year treasury note
rate at the Adjustment Date plus 4.25% per annum, plus any change to the
Scheduled Monthly Loan Payment in Schedule I thereto necessitated from such
adjustment. The maturity date for the Fixed Rate Note shall be the Stated
Maturity Date in this Promissory Note. Upon Borrower's execution and delivery to
Lender of the Fixed Rate Note, Lender shall mark this Promissory Note
"Cancelled" and shall return it to Borrower. Borrower's failure to comply with
the obligations contained in this section shall be an "Event of Default" under
the Security Agreement.
The remainder of this page intentionally left blank.
<PAGE>
THIS DOCUMENT IS EXECUTED UNDER SEAL AND INTENDED TO TAKE EFFECT AS A SEALED
INSTRUMENT.
Attest: The Quizno's Corporation
By:/s/ Carri L. Bryan By:/s/ Patrick Meyers
------------------ ---------------------------
Name:Carri L. Bryan Name: Patrick Meyers
Title:Legal Manager Title: Vice President/General Counsel
Attest: The Quizno's Operating Company
By:/s/ Carri L. Bryan By: /s/ Patrick Meyers
------------------ ---------------------------
Name:Carri L. Bryan Name: Patrick Meyers
Title:Legal Manager Title: Vice President/General Counsel
Attest: S & S Company
By:/s/ Carri L. Bryan By: /s/ Patrick Meyers
------------------ ---------------------------
Name:Carri L. Bryan Name: Patrick Meyers
Title:Legal Manager Title: Vice President/General Counsel
Attest: The Quizno's Realty Company
By:/s/ Carri L. Bryan By: /s/ Patrick Meyers
------------------ ---------------------------
Name:Carri L. Bryan Name: Patrick Meyers
Title:Legal Manager Title: Vice President/General Counsel
Attest: The Quizno's Acquisition Company
By:/s/ Carri L. Bryan By: /s/ Patrick Meyers
------------------ ---------------------------
Name:Carri L. Bryan Name: Patrick Meyers
Title:Legal Manager Title: Vice President/General Counsel
Attest: The Quizno's Licensing Company
By:/s/ Carri L. Bryan By: /s/ Patrick Meyers
------------------ ---------------------------
Name:Carri L. Bryan Name: Patrick Meyers
Title:Legal Manager Title: Vice President/General Counsel
Attest: Quizno's Kansas, LLC
By:/s/ Carri L. Bryan By: /s/ Patrick Meyers
------------------ ---------------------------
Name:Carri L. Bryan Name: Patrick Meyers
Title:Legal Manager Title: Vice President/General Counsel
Address: 1415 Larimer St., Denver, CO 80202
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street, Denver, CO; that he is the VP/General Counsel
of The Quizno's Corporation, the corporation described in and which executed
the foregoing instrument; and that he signed his name thereto by authority of
the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of
office this 4th day of October, 1999.
/s/ Candace R. Arnold
------------------------------
Notary Public
My commission expires:
6/16/01
- ------------------------
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street, Denver, CO; that he is the VP/General Counsel of
The Quizno's Operating Company, the corporation described in and which executed
the foregoing instrument; and that he signed his name thereto by authority of
the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of
office this 4th day of October, 1999.
/s/ Candace R. Arnold
------------------------------
Notary Public
My commission expires:
- --------------------------
6/16/01
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street, Denver, CO; that he is the VP/General Counsel
of S & S Company, the corporation described in and which executed the foregoing
instrument; and that he signed his name thereto by authority of the board of
directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of
office this 4th day of October, 1999.
- ------------------------------
/s/ Candace R. Arnold
Notary Public
My commission expires:
- ------------------------
6/16/01
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street, Denver, CO; that he is the VP/General Counsel of
The Quizno's Realty Company, the corporation described in and which executed
the foregoing instrument; and that he signed his name thereto by authority of
the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of
office this 4th day of October, 1999.
- ------------------------------
/s/ Candace R. Arnold
Notary Public
My commission expires:
- ------------------------
6/16/01
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street, Denver, CO; that he is the VP/General Counsel
of The Quizno's Acquisition Company, the corporation described in and which
executed the foregoing instrument; and that he signed his name thereto by
authority of the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of
office this 4th day of October, 1999.
- ------------------------------
/s/ Candace R. Arnold
Notary Public
My commission expires:
- ------------------------
6/16/01
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street, Denver, CO; that he is the VP/General Counsel of
The Quizno's Licensing Company, the corporation described in and which executed
the foregoing instrument; and that he signed his name thereto by authority of
the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of
office this 4th day of October, 1999.
- ------------------------------
/s/ Candace R. Arnold
Notary Public
My commission expires:
- ------------------------
6/16/01
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On this 4th day of October, 1999, before me, a Notary Public, personally
appeared Patrick Meyers known or identified to me (or proved to me on the oath
of ___________________________ to be the VP/General Counsel of Quizno's Kansas,
LLC, the limited liability company that executed the instrument, or the person
who executed the instrument on behalf of said liability company, and
acknowledged to me that such limited liability company executed the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
/s/ Candace R. Arnold
-------------------------------------
Notary Public
My commission expires:
- ------------------------------
6/16/01
<PAGE>
SCHEDULE I
SCHEDULE OF LOANS
<TABLE>
<CAPTION>
Credit Scheduled
Loan Date Loan Enhancement Monthly Maturity* Ratable
Number of Loan Amount Amount Loan Pmt Date Share
- ------------ ----------- --------------- ----------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated 10/5/99 $10,250,000.00 $1,138,888.89 $141,550.73 11/1/2009 83%
E. Arapahoe 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
Gunpark 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
Blue River 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
E. Orchard 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
Pearl Street 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
S. University 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
Grant Street 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
S. Hover 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
Lincoln Street 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
West Colfax 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
N. Washington 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
W. Colfax 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
18th Street 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
Larimer 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
W. 14th Street 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
S. Tamarac 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
17th Street 10/5/99 $150,000.00 $16,666.67 $2,071.47 11/1/2009 1%
</TABLE>
*The Maturity Date above shall be increased when the Funding Date occurs one or
more months later than the date of this Promissory Note, with the Maturity Date
increased one month for each month after the date hereof (for example, a loan
that is dated in June, that funds in August, would have each above Maturity Date
increased by two months). The Maturity Date above is based on the date of this
Promissory Note, which may or may not be the Funding Date.
SCHEDULE II
CERTAIN DEFINITIONS
"ACLC 1999-2 SBL Program" means the series of loans made by the Lender to
the Program Borrowers in an aggregate amount not to exceed three hundred million
dollars ($300,000,000.00) and to be funded by the Lender no later than December
31, 2001.
"ACFI Closing Settlement Statement" means the document signed by the
Borrower prior to closing that outlines the flow of funds for closing, as well
as the Funding Date.
"Closing Payment" means $285, 696.13, but will change if the Funding Date
is any day other than the date hereof.
"Credit Enhancement Amount" means, as applicable, each of the credit
enhancement amounts set forth on Schedule I attached to the Promissory Note.
Among Program Borrowers the percentage of Credit Enhancement to Aggregate Loan
Amount may vary and the percentage amount for each Program Borrower is set by
Lender in its sole and absolute discretion.
"Funding Date" means the date the loan is actually closed and funds are
wired (date of ACFI Closing Settlement Statement).
"Interest Rate" means Ten and Ten Tenths percent (10.10%) per annum,
unless changed by written agreement pursuant to the rate lock provision in the
commitment letter between Lender and Borrower.
"Loan Amount" means, as applicable, each of the loan amounts set forth on
Schedule I attached to the Promissory Note.
"Loan Deficiency" means a delinquency or default with respect to any Loan
or related Obligation.
"Note Amount" means the Aggregate Credit Enhancement Amount plus the
Aggregate Loan Amount.
"Ratable Share" means, with respect to each Loan, the fraction, expressed
as a percentage, corresponding to such Loan on Schedule I attached to the
Promissory Note. For a given loan, its Ratable Share will equal the original
Loan Amount (of said given loan) divided by the original Aggregate Loan Amount
of the Borrower.
"Scheduled Monthly Credit Enhancement Obligation Payment" means, with
respect to each Loan, an amount equal to (a) the product of (i) the Interest
Rate and (ii) the Credit Enhancement Amount for such Loan divided by (b) twelve
(12).
"Scheduled Monthly Loan Payment" means, with respect to each Loan, the
Scheduled Monthly Loan Payment corresponding to such Loan on Schedule I attached
to the Promissory Note.
"State" means the State of Idaho.
"Stated Maturity Date" means, with respect to each Loan, the Maturity Date
corresponding to such Loan listed on Schedule I attached to the Promissory Note.
<PAGE>
Warehouse
ALLONGE
Allonge endorsement attached to the Note, in the stated principal amount
of $14,222,222.28, executed by The Quizno's Corporation; The Quizno's Operating
Company; S & S Company; The Quizno's Realty Company; The Quizno's Acquisition
Company; The Quizno's Licensing Company; and Quizno's Kansas, LLC payable to the
order of AMRESCO COMMERCIAL FINANCE, INC., a Nevada corporation.
Pay to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as
custodian or trustee under the applicable custodian agreement or indenture, and
its successors and/or assigns, without recourse or warranty.
AMRESCO COMMERCIAL FINANCE, INC.,
a Nevada corporation
By:_________________________________
Name: Dale Conder
Title: Vice President
<PAGE>
Securitization
ALLONGE
Allonge endorsement attached to the Note, in the stated principal amount
of $14,222,222.28, executed by The Quizno's Corporation; The Quizno's Operating
Company; S & S Company; The Quizno's Realty Company; The Quizno's Acquisition
Company; The Quizno's Licensing Company; and Quizno's Kansas, LLC payable to the
order of AMRESCO COMMERCIAL FINANCE, INC., a Nevada corporation.
Pay to the order of ACFI FUNDING CORP., a Delaware corporation without
recourse or warranty.
AMRESCO COMMERCIAL FINANCE, INC.,
a Nevada corporation
By:_________________________________
Name: Dale Conder
Title: Vice President
Pay to the order of FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, a
national banking association, as custodian or trustee under the applicable
custodial or trust agreement, without recourse or warranty.
ACFI FUNDING CORP.,
a Delaware corporation
By:_________________________________
Name: William C. Cole
Title: Vice President
BORROWER: 3889
PLEDGE AND SECURITY AGREEMENT
ACLC 1999-2 SBL PROGRAM
made by
The Quizno's Corporation; The Quizno's Licensing Company;
The Quizno's Acquisition Company; The Quizno's Realty Company;
S & S Company; The Quizno's Operating Company; Quizno's
Kansas, LLC, collectively as Borrower
in favor of
AMRESCO COMMERCIAL FINANCE, INC.,
as Secured Party
<PAGE>
PLEDGE AND SECURITY AGREEMENT (this "Security Agreement"), dated as of the date
set forth on the signature page hereof, by The Quizno's Corporation; The
Quizno's Licensing Company; The Quizno's Acquisition Company; The Quizno's
Realty Company; S & S Company; The Quizno's Operating Company; Quizno's Kansas,
LLC, (collectively the "Borrower"), in favor of AMRESCO COMMERCIAL FINANCE,
INC., a Nevada corporation (together with its successors and assigns, the
"Secured Party").
Preliminary Statements
A. On the date hereof, the Secured Party will make certain loans
(each a "Loan" and, collectively, the "Loans") to the Borrower reflected in a
Promissory Note to the Secured Party, dated the date hereof (the "Promissory
Note"), in a form prepared by and acceptable to Secured Party, which Promissory
Note will evidence the Borrower's obligation, inter, alia, (i) to repay the
Loans, (ii) to guarantee the payment of delinquencies or defaults in respect of
Program Loans (as defined therein) in an amount up to the Aggregate Credit
Enhancement Amount (as defined therein), (iii) to pay rebatable Scheduled
Monthly Credit Enhancement Obligation Payments (as defined therein) on each Loan
and (iv) to pay interest and other amounts as set forth therein.
B. It is a condition to the making of the Loans, that the Borrower
shall have executed and delivered this Security Agreement whereby the Borrower,
in order to provide security for the full payment when due of all amounts
payable under the Promissory Note, shall pledge and grant to the Secured Party a
security interest in the collateral described herein.
NOW THEREFORE, in consideration of the foregoing and in order to induce the
Secured Party to make the Loans available to the Borrower and for other good and
valuable consideration, the receipt and sufficiency of which the Borrower hereby
acknowledges, the Borrower and the Secured Party agree as follows:
ARTICLE I
DEFINITIONS AND OTHER TERMS
1. Definitions and Other Terms.
1.1. Defined Terms. The following terms shall have the meanings
herein specified unless the context otherwise requires. All terms not otherwise
defined herein shall have the meaning accorded to such terms in the Promissory
Note. All terms defined in the singular will have the same meaning when used in
the plural and vice versa.
"Accounts" means "accounts" as such term is defined in the UCC.
"Affiliate" means, with respect to any designated Person, any Person
that, directly or indirectly, controls or is controlled by or is under common
control with such designated Person and, without limiting the generality of the
foregoing, shall include, (a) any Person who is a director or officer of,
partner in, trustee of, or blood or legal relative, guardian or representative
of the designated Person, or any Person who acts or serves in a similar capacity
with respect to the designated Person, (b) any Person of which or whom the
designated Person is a director or officer, partner, trustee, or blood or legal
relative, guardian or representative, or with respect to which or whom, the
designated Person acts or serves in a similar capacity; and (c) any Person, who,
directly or indirectly, is the legal or beneficial owner of or controls ten
percent (10%) or more of any class of equity securities of the designated
Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities,
by contract or otherwise.
"Affiliate Guarantor" has the meaning ascribed to such term in Section 1.2.
"Aggregate Credit Enhancement Amount" has the meaning ascribed to such term
in the Promissory Note.
"Applicable Collateral" means, for each Loan, the portion of the Collateral
specifically relating to the Store which corresponds to such Loan (as set forth
on Schedule 4 attached hereto).
"Business" means all Stores operated by the Borrower.
"Business Day" means any day other than a Saturday, Sunday or a day on
which banking institutions in New York City are authorized or obligated by
law or executive order to be closed.
"Cash Flow" means, for any period, with respect to any Person, an
amount equal to (a) the sum of (i) pre-tax income, (ii) interest expense, (iii)
depreciation and amortization, (iv) Discretionary Expenses, (v) Rental Expense
and (vi) Non-Recurring Expenses less (b) Non-Recurring Income, all as reflected
on such Person's financial statement for such period.
"Chattel Paper" has the meaning ascribed to such term under the UCC.
"Code" means the Internal Revenue Code of 1986 as amended.
"Collateral" has the meaning ascribed to such term in Section 2.
"Consolidated FCCR" means, for any period, the ratio of (a) the
Borrower's Cash Flow for such period to (b) the sum of Fixed Charges and Rental
Expense of the Borrower for such period.
"Contracts" shall mean all contracts and agreements to which the
Borrower now is, or hereafter will be, bound, or a party, beneficiary or
assignee (other than rights evidenced by Chattel Paper, Documents or
Instruments), including, without limitation, any franchise agreements or license
agreements and all other agreements and documents executed and delivered with
respect to such contracts, and all revenues, rentals and other sums of money due
and to become due thereunder from any of the foregoing.
"Copyrights" shall mean all United States or other registered and
unregistered copyrights, all licenses thereto, and all applications therefor,
and all reissues, divisions, continuations, renewals, extensions, modifications,
supplements thereto or to any part thereof, and the right to sue for past,
present and future infringements of the foregoing, and all rights corresponding
to the foregoing throughout the world.
"Credit Enhancement Amount" has the meaning ascribed to such term in the
Promissory Note.
"Default Rate" has the meaning ascribed to such term in the Promissory
Note.
"Deposit Accounts" has the meaning ascribed to such term in the UCC.
"Discretionary Expenses" means, with respect to any Person, the difference
between (a) operating expenses for salaries, wages, benefits, and reimbursements
and the like incurred by such Person and (b) the reasonable and customary
expenses for salaries, wages, benefits, and reimbursements incurred by such
Person, as determined by the Secured Party or any appointed servicer.
Discretionary Expenses shall in no event be less than zero.
"Distributions" means distributions, all salaries, fees and other
compensation, and all reimbursement or indemnification, directly or indirectly,
paid or payable to (or for the benefit of) any Affiliate of the Borrower, other
than a Person who is an officer of the Borrower and is not otherwise an
Affiliate of the Borrower. "Distributions" shall include, but not be limited to,
any payment or reimbursement of travel and entertainment expenses, automobile
expenses, and premiums or expenses associated with any insurance policy other
than those expressly required to be maintained pursuant to Section 3.18 hereof.
"Document" has the meaning ascribed to such term under the UCC.
"EBITDA" means, for any period, with respect to any Person, earnings
before interest, taxes, depreciation and amortization as reflected on such
Person's audited financial statement for such period.
"ERISA" means the Employee Retirement Income Security Act of 1974 as
amended.
"Equipment" means any "equipment", as such term is defined in the
UCC, used or bought for use primarily in the Pledged Stores and not included
within Inventory, now or hereafter owned or leased by the Borrower and, in any
event, shall include, but shall not be limited to, all machinery, tools,
computer software, office equipment, furniture, appliances, furnishings,
fixtures, vehicles, motor vehicles, petroleum storage tanks and pumps, and any
manuals, instructions and similar items which relate to the foregoing, and any
and all additions, substitutions and replacements of any of the foregoing,
wherever located, together with all improvements thereon and all attachments,
components, parts, equipment and accessories installed thereon or affixed
thereto.
"Event of Default" has the meaning ascribed to such term in Section 7.
"Financing Statements" means the UCC financing statements, prepared
by Secured Party, and delivered to Borrower and which Borrower must execute and
deliver to Secured Party as a condition under the Loan Documents.
"Fixed Charges" means, with respect to any Person, for any period,
without duplication, the aggregate of all amounts paid or accrued by such Person
during such period with respect to Indebtedness, as determined in accordance
with generally accepted accounting principles.
"Franchise Agreement" means any franchise or license agreement or
agreements with Borrower as franchisor or licensor, or as franchisee or
licensee.
"General Intangibles" shall mean "general intangibles" as such item
is defined in the UCC and shall include, but not be limited to, royalties,
writings, memoranda, confirmations, passbooks, signature cards,
acknowledgements, understandings, contract rights, licenses, excluding liquor
licenses, leases, permits, filings, consents, and approvals, and all puts,
calls, options, warrants, and securities, and all security interests, Patents,
inventions, processes, lists (including customer and suppliers lists), methods,
and information (including proprietary information, director and shareholder,
sales, business, financial, accounting, forecasts, projections, media, and other
information), know-how, software, programs, plans, data, blueprints, designs,
drawings, surveys, notices, Copyrights, Trademarks, tradenames, trade secrets,
service marks, service names, logos and goodwill, and all recordings and
registrations thereof, applications for recording or registration, renewals,
modifications, supplements, reissues, continuations, extensions, divisions
thereof and rights corresponding thereto, and all manuals, standards, practices,
mail, advertisements, files, reports, books, catalogs, records, journals,
invoices, and bills, and all rights (including voting rights, rights to receive
notice or to consent, rights to payment, interest, dividends, distributions or
earnings, rights to sue and enforce), powers (including powers of attorney),
privileges, benefits, and remedies relating thereto or arising in connection
therewith.
"Goods" has the meaning ascribed to such term in the UCC.
"Indebtedness" means, with respect to any Person, (a) all obligations
of such Person for borrowed money, (b) all obligations of such Person evidenced
by bonds, debentures, notes or other similar instruments, (c) all obligations of
such Person to pay the deferred purchase price of property or services, (d) all
capitalized lease obligations of such Person, (e) all indebtedness of others
secured by a Lien on any asset of such Person, whether or not such indebtedness
has been assumed by such Person and (f) all indebtedness of others to the extent
guaranteed by such Person.
"Instrument" has the meaning ascribed to such term in the UCC (other
than Instruments constituting Chattel Paper).
"Insurance and Condemnation Proceeds" means (a) any and all proceeds
of any insurance (insuring the Collateral or otherwise required to be maintained
hereunder, including return of unearned premium), indemnity, warranty or
guaranty payable to the Secured Party or Borrower from time to time, and claims
for insurance, indemnity, warranty or guaranty effected or held for the benefit
of the Borrower, with respect to any of the Collateral, and (b) any and all
payments (in any form whatsoever) made or due and payable to the Borrower from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by any governmental
authority (or any person acting under color of governmental authority).
"Inventory" means all inventory of the Borrower of every type or
description, including all "inventory" as such term is defined in the UCC, now
owned or hereafter acquired and wherever located, whether raw, in process or
finished, and all materials usable in processing the same and all documents of
title covering any inventory, including, without limitation, work in process,
materials used or consumed in the Pledged Stores, now owned or hereafter
acquired or manufactured by the Borrower and held for sale in the ordinary
course of its business; all present and future substitutions thereof, parts and
accessories thereof and all additions thereto; and all Proceeds thereof and
products of such inventory in any form whatsoever.
"Lease Obligations" means with respect to any Person, any obligations
of such Person in connection with any leases for personal property (including
Equipment) or real property, to the extent such obligations are not included in
Indebtedness.
"License" means any license to use the Trademarks in connection with the
operation of the Business.
"Lien" means any deed, mortgage, pledge, security interest, hypothecation,
collateral assignment, encumbrance, lien (statutory or other), or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, any conditional sale or other
title retention agreement, any financing lease having substantially the same
economic effect as any of the foregoing, and the filing of any financing
statement under the UCC).
"Liquor License" means all liquor licenses issued to, or used by,
Borrower or any Affiliate of Borrower in connection with the Stores including,
but not limited to, all liquor licenses listed on Schedule 5 attached hereto.
"Loan" and "Loans" have the meanings ascribed to such terms in the
preliminary statements of this Security Agreement.
"Loan Amount" shall have the meaning ascribed to such term in the
Promissory Note.
"Loan Documents" means the Promissory Note, this Security Agreement
and any guarantee, mortgage, deed of trust or other instrument, agreement,
certificate or other writing, now or hereafter executed and delivered in
connection with the Promissory Note or the Obligations.
"Make Whole Premium" means: (a) for a Fixed Rate loan has the
meaning ascribed to such term in the Fixed Rate Promissory Note, and (b) for an
Adjustable rate loan means the same as "Prepayment Premium" as such term is
defined in the Adjustable Promissory Note.
"Non-Recurring Expenses" and "Non-Recurring Income" mean expenses or
income, as the case may be, that is extraordinary and generally not reflected in
any prior period or reasonably anticipated to be incurred in any subsequent
period received.
"Note Amount" has the meaning ascribed to such term in the Promissory Note.
"Obligations" means each and every obligation, covenant, agreement,
Indebtedness and liability of the Borrower to the Secured Party evidenced by,
arising under or in connection with the Promissory Note (including, without
limitation, indebtedness, obligations and liabilities in respect of principal,
interest, the Make Whole Premium, the Credit Enhancement Amount and the
Scheduled Monthly Credit Enhancement Obligation Payments for each of the Loans),
this Security Agreement, or any other Loan Document, and any future advances
thereon, renewals, extensions, modifications, amendments, substitutions and
consolidations thereof, including the Borrower's obligations to pay (or
reimburse the Secured Party for) all costs and expenses (including attorneys
fees and disbursements) incurred by the Secured Party in obtaining, maintaining,
protecting and preserving its interest in the Collateral or its security
interest therein, foreclosing, retaking, holding, preparing for sale or lease,
selling or otherwise disposing or realizing on the Collateral and Liquor
Licenses (if any) or in exercising its rights hereunder or as a secured party
under the UCC, any other applicable law, regulation or rule or this Security
Agreement, including interest on such costs and expenses which shall accrue at
the rate of eight percent (8%) per annum, and all other indebtedness,
obligations and liabilities of any kind of the Borrower to the Secured Party,
now or hereafter existing (including future advances whether or not pursuant to
commitment), arising directly between the Borrower and the Secured Party
relating to the Loan Documents, whether absolute or contingent, joint and/or
several, secured or unsecured, due or not due, contractual or tortious,
liquidated or unliquidated, arising by operation of law or otherwise, or direct
or indirect, including the Borrower's liabilities to the Secured Party as a
member of any partnership, syndicate, association or other group, and whether
incurred by the Borrower as principal, surety, endorser, guarantor,
accommodation party or otherwise.
"Patents" means all United States or other registered and unregistered
patents, all licenses thereto, and all applications therefor, and all reissues,
divisions, continuations, renewals, extensions, modifications, supplements
thereto or to any part thereof, and the right to sue for past, present and
future infringements of the foregoing, and all rights corresponding to the
foregoing throughout the world, including, but not limited to, those patents
listed on Schedule 6 attached hereto.
"Permitted Liens" means any and all of the Liens set forth on Exhibit B
attached hereto.
"Person" means any individual, corporation, partnership, unincorporated
association, firm, trust, joint stock company, joint venture or other entity
of whatever nature.
"Pledged Stores" means those Stores listed on Schedule 1 attached hereto.
"Principal Party" shall have the meaning ascribed to such term in Section
7(e).
"Proceeds" shall mean "proceeds" as such term is defined in the UCC
or under other relevant law and shall include, but shall not be limited to, (a)
any and all proceeds of any insurance (insuring the Collateral or otherwise
required to be maintained hereunder, including return of unearned premium),
indemnity, warranty or guaranty payable to the Secured Party or Borrower from
time to time, and claims for insurance, indemnity, warranty or guaranty effected
or held for the benefit of the Borrower, with respect to any of the Collateral
and Liquor Licenses (if any), (b) any and all payments (in any form whatsoever)
made or due and payable to the Borrower from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral and Liquor Licenses (if any) by any governmental
authority (or any person acting under color of governmental authority) and (c)
any and all interest, income, dividends, distributions and earnings on the
Collateral and Liquor Licenses (if any) or other monies, revenues or other
amounts derived from the Collateral and Liquor Licenses (if any), including any
such amounts received in connection with any disposition of the Franchise
Agreement.
"Program" means the ACLC 1999-2 SBL Program of loans to Program Borrowers.
"Program Borrower" has the meaning ascribed to such term in the
Promissory Note. In addition, in the Secured Party's opinion, all Program
Borrowers substantially comply in all material respects with the Secured Party's
current underwriting guidelines for loans to small business owners, and in no
event will loans be made to Program Borrowers where (a) the Pledged Store has
less than one year of seasoning, and (b) (i) the most recent annual revenue of
the Borrower is less than $500,000 or (ii) the most recent annual Borrower Cash
Flow is less than $100,000.
"Program Loan Deficiencies" has the meaning ascribed to such term in the
Promissory Note.
"Promissory Note" has the meaning ascribed to such term in the preliminary
statements to this Security Agreement.
"Property" means the real property or properties on which the Pledged
Stores are located, as more specifically described on Schedule 1 attached
hereto.
"Rental Expense" means, with respect to any Person, for any period,
the aggregate of all amounts paid or accrued with respect to Lease Obligations
during such period, as determined in accordance with generally accepted
accounting principles.
"Required Consolidated FCCR" has the meaning ascribed to such term in
Section 3.15.
"Scheduled Monthly Credit Enhancement Obligation Payment" shall have the
meaning ascribed to such term in the Promissory Note.
"Scheduled Monthly Loan Payment" shall have the meaning ascribed to such
term in the Promissory Note.
"Securitization" means the sale, pledge, grant of a security interest,
collateral assignment, transfer and delivery or other encumbrance or disposition
of all or any portion of the Program Loans (or the Secured Party's rights and
powers therein) by the Secured Party, from time to time, to one or more of its
Affiliates or to other Persons, including the sale of the Program Loans by the
Secured Party to one or more Persons who will issue debt instruments or equity
certificates backed by such Program Loans and the servicing of such Program
Loans by Person appointed as servicer in connection therewith.
"State" shall have the meaning ascribed to such term in the Promissory
Note.
"Store" means a business/commercial property owned and/or operated by
the Borrower and includes all aspects of the operating unit, and Borrower's
chief executive office.
"Trademarks" shall mean all United States or other registered or
unregistered trademarks, trade names, service marks and service names, together
with the goodwill of the business connected with the use thereof, and symbolized
thereby, all licenses thereto (including the License, if applicable) and all
applications therefor, and all reissues, divisions, continuations, renewals,
extensions, modifications, supplements thereto or to any part thereof, and the
right to sue for past, present and future infringements of the foregoing, and
all rights corresponding to the foregoing throughout the world, including, but
not limited to, those trademarks listed on Schedule 6 attached hereto.
"UCC" means the Uniform Commercial Code (or any comparable law) in
effect in any relevant jurisdiction the laws of which govern the perfection of
security interests hereunder.
"UCC Search" means the security interest, tax lien, suit and judgment
search of the Borrower conducted in the locations set forth on Schedule 2
hereto.
1.2. Certain Calculations. For the purposes of calculating the
Borrower's Cash Flow, Discretionary Expenses, Non-Recurring Expenses,
Non-Recurring Income, Indebtedness and Lease Obligations, the term "Borrower"
shall mean the Borrower and any Affiliate of the Borrower (an "Affiliate
Guarantor") that is providing the Secured Party with a guarantee of any of the
Borrower's Obligations and the term "financial statement" shall mean a
consolidated financial statement of the Borrower and such Affiliate.
1.3. Rules of Construction. When used in this Security Agreement: (a)
"or" is not exclusive; (b) a reference to a law includes any amendment or
modification of such law; (c) a reference to a Person includes its permitted
successors and permitted assigns; and (d) a reference to an agreement,
instrument or document shall include such agreement, instrument or document as
the same may be amended, modified or supplemented from time to time in
accordance with its terms.
ARTICLE II
SECURITY INTERESTS
2. Security Interests.
2.1. Pledge and Grant of Security Interest. As collateral security
for the prompt and complete payment and performance when due of all of the
Obligations, the Borrower hereby pledges and grants to the Secured Party, a
continuing security interest in, and Lien on, all of the Borrower's right, title
and interest in and to the following (collectively, the "Collateral"): (a) all
Accounts, Goods, Documents, Chattel Paper, Deposit Accounts, Instruments,
Inventory, Equipment, General Intangibles, Contracts (including the Franchise
Agreement and License, if applicable), certificates of title, fixtures, money,
securities, deposits, credits, claims, demands, assets and other personal
property, now owned, existing, hereafter acquired, held, used, sold or consumed
in connection with or related to the Stores or the Pledged Stores and any other
property, rights and interests of the Borrower which at any time relate to,
arise out of or in connection with the foregoing or which shall come into the
possession or custody or under the control of the Secured Party or any of its
agents, representatives, associates or correspondents, in connection with the
foregoing; any and all additions and accessions, replacements, substitutions,
and improvements, of or to all the foregoing; and all products, rents, profits,
offspring and Proceeds thereof and (b) all Accounts, Goods, Documents, Chattel
Paper, Deposit Accounts, Instruments, General Intangibles, Contracts (including
the Franchise Agreement and License, if applicable), certificates of title,
money, securities, deposits, credits, claims, demands, assets and other personal
property of Borrower, whether now owned, existing, hereafter acquired, held,
used, sold or consumed, and any other property, rights and interests of the
Borrower which at any time relate to, arise out of or in connection with the
foregoing or which shall come into the possession or custody or under the
control of the Secured Party or any of its agents, representatives, associates
or correspondents, in connection with the foregoing; any and all additions and
accessions, replacements, substitutions, and improvements, of or to all the
foregoing; and all products, rents, profits, offspring and Proceeds thereof.
Without limiting the generality of the foregoing, this Security Agreement also
secures the payment of all amounts which constitute part of the Obligations and
would be owed by the Borrower to the Secured Party but for the fact they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Borrower. Anything in this
Security Agreement to the contrary notwithstanding, the security interest
created hereby and the definition of the term "Collateral," shall not include
any property or assets, tangible or intangible, which Borrower may hereafter
acquire and which is not (i) royalties, a Franchise Agreement, a license of
Trademarks or similar agreement in which Borrower is the franchisor or licensor
(except as provided otherwise by the Loan Documents); (ii) acquired, held, used,
sold, or consumed in connection with or related to the Pledged Stores; or (iii)
an addition, accession, replacement, substitution, or improvement to the
foregoing sub-parts (i) and (ii) or any product, rent, profit, offspring or
Proceed thereof; provided that the Lien of Secured Party on personal property
(tangible or intangible) acquired by Borrower subsequent to the closing of the
Loans (other than such personal property set forth in sub-part (i) above, and
any addition, accession, replacement, substitution, or improvement thereto or
any product, rent, profit, offspring or Proceed thereof, or personal property
used in a Pledged Store other than Borrower's chief executive office) shall be
subordinate to any Lien thereon belonging to the Person financing such personal
property and such subordination shall be self operative without need for further
instruments of subordination.
2.2. Security Interest Absolute. All rights of the Secured Party and
the security interests hereunder shall be absolute and unconditional
irrespective of:
(a) any change in the time, manner, amount or place of payment of, or
in any other term of, all or any of the Obligations, or any other
amendment or waiver of or any consent to any departure from the Promissory
Note or any other Loan Document;
(b) any exchange, release or nonperfection of all or any part of the
Collateral or any other collateral, or any release from, amendment to,
waiver of or consent to departure from any guaranty, for all or any of the
Obligations; or
(c) to the fullest extent permitted by law, any other circumstances
which might otherwise constitute a defense available to, or a discharge
of, the Borrower or a third party pledgor.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
3. Representations, Warranties and Covenants. The Borrower hereby
represents, warrants and covenants that:
3.1. Organization. The Borrower (unless the Borrower is an individual)
is and will continue to be duly formed, validly existing and in good standing
under the laws of the state of its organization set forth on Schedule 1 and is
duly authorized to do business in, and is in good standing in each jurisdiction
where the Business or the Property is located and where such organization,
qualification or standing is necessary, required or proper in connection with
the Borrower's ownership or use of the Liquor Licenses (if any), or the
Collateral or the Property or the conduct of the Business.
3.2. Power and Authority. The Borrower (and, with respect to clause
(c), below, in the case of Loan Documents executed by an Affiliate Guarantor,
each such Affiliate Guarantor) has all requisite power, authority and the legal
right and all necessary permits, consents, licenses and authorizations (a) to
own the Collateral, (b) to conduct the Business, (c) to hold the Liquor License
(if any), and (d) to execute, deliver and perform its obligations under this
Security Agreement, the Promissory Note and the other Loan Documents.
3.3. Execution and Delivery; Enforceability. Upon execution, this
Security Agreement, the Promissory Note and the other Loan Documents will be
duly executed and delivered by the Borrower (and in the case of Loan Documents
executed by an Affiliate Guarantor, by each such Affiliate Guarantor). Upon
execution, each of this Security Agreement, the Promissory Note and the other
Loan Documents will constitute a legal, valid and binding obligation of the
Borrower, enforceable against the Borrower, in accordance with its terms.
3.4. Name; Chief Executive Office; Location.
(a) The Borrower's legal name, federal tax payor identification
number, and mailing address are accurately set forth on Schedule 1. The Borrower
has not merged, consolidated, acquired all or substantially all of the assets of
any other Person, or except as disclosed on Schedule 1, used any other name
(whether in connection with the Business, Property or the Collateral or for
business, obtaining credit or financing or otherwise) in the last five years.
(b) The Borrower's principal place of business, chief executive
office (and, if the Borrower is an individual, residence) is accurately set
forth on Schedule 1.
(c) The Borrower operates and shall continue to operate the Pledged
Stores from the Property at the address(es) and in the county(ies) and state(s)
set forth in Schedule 1. Schedule 1 correctly discloses that the Borrower either
(i) is sole record owner of the Property or (ii) leases (or subleases) the
Property and the record owner of each Property is the person or entity disclosed
on Schedule 1. All personal property of the Borrower owned, acquired, held,
used, sold or consumed in the Pledged Stores including Accounts, Goods,
Inventory, Equipment, General Intangibles, Contracts, Chattel Paper,
Instruments, Documents, Liquor Licenses, certificates of title, fixtures,
securities and money, and all writings relating thereto and records thereof,
books of record or account, employees, business, offices and operations are
located at and conducted out of such Property or at its chief executive office.
(d) The Borrower will neither change its name, federal tax payor
identification number, or its chief executive office (or, if an individual,
residence), nor the location of its business, property or assets (including the
Pledged Stores, the Liquor License (if any), and the Collateral), nor assume a
different name, nor conduct its business or affairs under any other name or in
any other location, nor merge, consolidate, or change its corporate structure
(whether by stock sale, issuance, purchase or otherwise), nor change its use of
any item of Collateral, or the Liquor License (if any), without in each instance
providing the Secured Party with not less than sixty (60) days prior written
notice of the proposed action and specifying within such notice and with
reasonable clarity and particularity the timing and nature of such proposed
action. Additionally, the Borrower shall provide such other information in
connection with the proposed action as the Secured Party may reasonably request
and shall have taken all action, reasonably satisfactory to the Secured Party,
to maintain the security interest of the Secured Party in the Collateral
intended to be granted hereby at all times fully perfected and in full force and
effect.
3.5. No Conflict. The Borrower's (and in the case of Loan Documents
executed by an Affiliate Guarantor, such Affiliate Guarantor's) execution,
delivery and consummation of the transactions contemplated by this Security
Agreement, the Promissory Note and other Loan Documents do not and will not
(with the passage of time or otherwise) (a) conflict with, violate or constitute
a default under any law, rule, regulation, order, decree, contract, agreement
(including the Franchise Agreement, if applicable), note, mortgage, bond,
indenture, lease, license, or obligation of or applicable to the Borrower (or
such Affiliate Guarantor), the Liquor License (if any) or the Collateral or (b)
grant, create or result in any Lien in favor of any person (other than the
Secured Party) on or to the Business or any other property or assets of the
Borrower (including the Collateral and the Franchise Agreement, if applicable).
3.6. No Consent Required. Except for the filing of the Financing
Statements in the locations set forth on Schedule 2 hereto (and, if applicable,
the recording of the mortgage or deed of trust included in the Loan Documents),
no consent of any other Person and no authorization, approval or other action by
and no notice to or filing with, any court, government, agency or regulatory
authority is required (a) for the grant by the Borrower of the pledge and
security interest granted hereby or for the execution, delivery or performance
of this Security Agreement, the Promissory Note and other Loan Documents or (b)
for validity, perfection or maintenance of the pledge, lien and security
interest created hereby.
3.7. Affiliates. Schedule 3 contains a complete and accurate list of
all Affiliates of the Borrower (including Affiliate Guarantors) who have
executed and delivered any note, security agreement, guarantee or other loan
document to the Secured Party.
3.8. Title to the Collateral. The Borrower has and, subject to
Section 4, will maintain good and marketable title to the Collateral, the
Franchise Agreement (if applicable), and the Liquor License (if any) free of all
Liens (other than Permitted Liens and the security interest granted to the
Secured Party hereunder) and such Collateral, Franchise Agreement (if
applicable), and the Liquor License (if any), are sufficient to enable a
franchisee to operate the Pledged Stores at the Property in accordance with the
Franchise Agreement.
3.9. No Liens. Except as shown on the UCC List attached hereto as
Exhibit A, there is no Lien (including any federal or state tax lien), suit
(including any action, proceeding, or other litigation pending, or to the
Borrower's knowledge, threatened) or judgment (including any award, injunction,
order) filed with, registered, indexed or recorded in any public office, court,
arbitration panel, administrative agency or regulatory authority (or intended so
to be), directly or indirectly, identifying or encumbering or covering or
involving the Collateral, the Franchise Agreement (if applicable), or the Liquor
License (if any) or which could have a material adverse effect on the Borrower,
any Pledged Store or the Borrower's ability to perform its Obligations. All
Liens listed on Exhibit A shall be removed upon funding of the Loan unless such
lien is specifically identified as a Permitted Lien. Other than the security
interest granted to the Secured Party hereunder and the Permitted Liens, and
except as provided in Section 4 hereof, the Borrower has not and, without the
prior written consent of the Secured Party, will not enter into any agreement or
understanding or take, permit or suffer to exist any action (including the
filing of a financing statement, agreement, pledge, mortgage, notice or
registration) or event (whether by operation of law or otherwise) for the
purpose of, or that may have the effect of, directly or indirectly, (a) granting
a Lien on (including any state or federal tax lien), pledging, transferring,
assigning, selling, disposing of, or encumbering any Collateral, the Franchise
Agreement (if applicable), or the Liquor License (if any), any interest therein
or rights pertaining thereto or involving the Borrower or the Pledged Stores, or
(b) changing, modifying, supplementing, or increasing the amount of credit,
loans, indebtedness or value secured by the Permitted Liens, if any, or the
amount, property or assets encumbered thereby.
3.10. Maintenance of Collateral and Business. At the Borrower's sole
cost and expense, the Borrower shall (a) keep, use, operate and maintain the
Collateral, the Pledged Stores, the Business and the Property in accordance with
applicable laws, rules, and regulations, and in accordance with the standards
established by the franchisor under the Franchise Agreement (if applicable), (b)
operate the Pledged Stores at the Property and in accordance with the Franchise
Agreement (if applicable) and customary, prudent business practices, and at all
times fully comply with terms and provisions of the Franchise Agreement (if
applicable), (c) fully comply with all current and future laws and regulations
concerning the storage and sale of petroleum products, if applicable, and (d)
not do or suffer to be done any act whereby the value of the Collateral, the
Property, the Liquor License (if any), or any Pledged Store or any part or
interest therein may be lessened in any material respect. The Borrower shall
notify the Secured Party promptly of any actual or threatened destruction or
material damage or impairment of any Pledged Store, the Collateral, the
Property, the Liquor License (if any), or if Borrower receives a notice of
violation from any governmental entity or agency.
3.11. Perfected Security Interest. This Security Agreement and the
grant and transfer of the Collateral hereunder creates a valid and enforceable
security interest in the Collateral. Upon filing of the Financing Statements in
the locations set forth on Schedule 2 hereto, such security interest will be
perfected and subject to no prior or equal security interest other than and only
to the extent of the Permitted Liens and the Liens of any other Person permitted
by Section 2.1 of this Security Agreement. The execution and filing of the
Financing Statements has been duly authorized by all appropriate action on the
part of the Borrower (and any other Person named as debtor therein) and the
Borrower (and any other Person named as debtor therein) has duly executed the
Financing Statements.
3.12. No Violation; Indemnity. The Borrower has not and shall not
acquire, obtain, make, manufacture, produce, operate, hold, possess, maintain,
use, sell, transfer, grant, pledge, or dispose of (for purposes of this Section
3.12, collectively "the Borrower's use") any of its Business, securities,
property or assets (including any proceeds of the Loans, the Collateral, the
Liquor License (if any), and the Property) in violation of any statute, law,
rule, ordinance, regulation, policy, procedure, injunction, award, decree,
judgment, contract, agreement (including the Franchise Agreement, if
applicable), understanding, or right or interest of any other Person (for
purposes of this Section 3.12, each such event a "violation"), and to the
Borrower's knowledge no such violation has been made by any other Person and no
basis for a claim of any such violation exists. The Borrower shall indemnify and
hold the Secured Party harmless from and against any such violation, and any
other loss, liability, damage, cost or expense whatsoever (including attorneys'
fees and disbursements) arising out of or in connection with the Borrower's use
of any of its Business, securities, property or assets (including any proceeds
of the Loans, the Collateral, the Liquor License (if any), and the Property).
3.13. Franchise Agreement. The Borrower, if a franchisee or a
franchisor under a Franchise Agreement, is and will continue to be in good
standing under such Franchise Agreement. The Borrower, if a franchisee or
franchisor under a Franchise Agreement, has not breached and is not in default
under the Franchise Agreement and shall not breach or be in default under the
Franchise Agreement and The Borrower has no knowledge of any claim of (or basis
for any claim of) any such breach or default, except as stated on Schedule 7
attached hereto. The Borrower, if a franchisee under a Franchise Agreement,
shall not terminate or fail to renew the Franchise Agreement; and the Borrower
has no knowledge of any claim of (or basis for any claim of) any such
termination or nonrenewal. The Borrower agrees
to fully comply, at the Borrower's own cost and expense, with the terms of the
License and the Franchise Agreement (including any renewal option) and to
promptly notify the Secured Party of any adverse development with regard to the
Franchise Agreement or the License, including any claim of breach of or default
under, or threat of nonrenewal or termination of, or litigation involving the
Franchise Agreement or the License.
3.14. Operating Experience. The Borrower has had at least two years
experience operating a business or businesses similar to the Business of the
Pledged Store. In addition, each Pledged Store has been operating for at least
twelve months.
3.15. FCCR. During the term of this Security Agreement, the Borrower
shall maintain a Consolidated FCCR of not less than 1.35:1 (the "Required
Consolidated FCCR"). All calculations of the Consolidated FCCR shall be based
upon the financial information furnished by the Borrower hereunder (see Sections
3.21 and 3.22) for the twelve-month period ending December 31 of each year or
more frequently as the Secured Party may from time to time reasonably request.
3.16. Limitation on Indebtedness, Lease Obligations and Distributions.
The Borrower shall not, directly or indirectly, incur any Indebtedness, Lease
Obligations or make or become obligated to make any Distributions if after
giving effect to such incurrence or payments, the Consolidated FCCR would be
less than 1.50:1.
3.17. Inspection. The Borrower shall allow the Secured Party, its
agents and representatives, from time to time, to inspect the Collateral, the
Property, the Liquor License (if any) and the Borrower's books and records
pertaining thereto or otherwise to the Business, and the Borrower will assist
(and permit abstracts and photocopies of the Borrower's books and records to be
taken and retained by) the Secured Party, its agents and representatives in
making any such inspection.
3.18. Insurance. At the Borrower's sole cost and expense, the Borrower
shall
(a) (i) keep the Collateral (which for purposes of this Section 3.18
includes the Property) insured against loss or damage by fire, theft,
collision and other hazards (including flood, if no certification or other
evidence satisfactory to the Secured Party is delivered to the Secured
Party to the effect that the Property is not located within a federally
designated special flood hazard area) as may be required by the Franchise
Agreement (if applicable), or the Secured Party and by policies of fire,
extended coverage and other insurance with such company or companies, in
such amounts (and, with respect to policies required for property, fire
and flood insurance in an amount not less than the lesser of (A) the
replacement value thereof, and (B) the Loan Amount payable under the
Promissory Note), as may be required by the Franchise Agreement (if
applicable) and the Secured Party, but in no event less than the minimum
amount required to prevent the imposition of any coinsurance requirement
on the insured, (ii) maintain liability insurance of not less than one
million dollars, (iii) maintain business interruption insurance with scope
and coverage reasonably satisfactory to the Secured Party, and (iv)
maintain such other insurance (including certain minimum levels of
acceptable workers' compensation, property damage, general public
liability insurance) as may be required by law or by the Franchise
Agreement (if applicable);
(b) cause all insurance policies required hereunder (i) to be
maintained by providers either (A) having ratings of not less than B++
from A.M. Best Company Inc. (or comparable ratings from a comparable
rating agency) or (B) who, if not so rated, have been approved by the
Secured Party and (ii) to contain a standard lender's loss payable
endorsement or mortgagee's endorsement providing for payment directly to
the Secured Party and/or its designees and to provide for a minimum of
thirty (30) days notice to the Secured Party prior to cancellation or
modification or nonrenewal;
(c) timely pay all premiums, fees and charges required in connection
with all of its insurance policies and otherwise continue to maintain such
policies in full force and effect;
(d) promptly deliver the insurance policies, certificates (and
renewals) thereof or other evidence of compliance herewith to the Secured
Party; and
(e) promptly notify the Secured Party of any loss covered by such
insurance policies and allow the Secured Party to join the Borrower in
adjusting any loss in excess of $50,000.
3.19. Loan Proceeds. No part of the proceeds of the Loans will be
used, directly or indirectly, for the purpose of buying or carrying any "margin
stock" within the meaning of Regulation G or U of the Board of Governors of the
Federal Reserve System. The Borrower intends to and agrees to use the proceeds
of the Loans solely for the lawful, proper business or commercial purpose(s) set
forth in its application for the Loans and Secured Party's commitment letter.
3.20. Solvency. The Borrower (and each Affiliate Guarantor) is
solvent and, after giving effect to the Obligations, will continue to be
solvent.
3.21. Reporting Requirements. The Borrower agrees to provide to the
Secured Party within twenty (20) days after June 30 and December 31 of each
calendar year during the term of this Security Agreement, a compliance
certificate (in the form attached hereto as Exhibit C). The Borrower further
agrees to provide to the Secured Party: (a) within seventy-five (75) days after
December 31st of each calendar year and as the Secured Party may reasonably
request from time to time, consolidated Borrower and individual Pledged Store
internally generated financial statements covering the twelve (12) month period
then-ended; and (b) copies of such other reports and information as the Secured
Party may from time to time request. The financial statements furnished to the
Secured Party in connection with the Borrower's application for the Loans and
hereunder shall reflect all Indebtedness and Lease Obligations of the Person
covered thereby and shall be sufficiently detailed to allow the Secured Party to
calculate the Consolidated FCCR.
3.22. Accuracy of Information. All information, reports, statements
and financial and other data furnished (or hereafter furnished) by the Borrower
to the Secured Party, its agents or representatives hereunder or in connection
with the Borrower's application for the Loans and the Obligations, are (and
shall be on the date so furnished) true, complete and correct. Borrower hereby
authorizes Secured Party to request credit bureau reports while any of the
Obligations are outstanding.
3.23. Employee Benefit Plans.
(a) Definitions.
"Employee Benefit Plan" means any group health insurance, group life
insurance, medical, ss.401(k), profit sharing, defined benefit, pension,
cafeteria, SIMPLE, SEP, Borrower-sponsored IRA or any other employee
benefit plan sponsored by the Borrower, including without limitation any
program, arrangement or plan within the meaning of Section 3(3) of ERISA.
"Borrower." For purposes of this Section 3.23, the term "Borrower"
shall include all employers (whether or not incorporated) which by reason
of common control or otherwise are treated together with Borrower as a
single employer within the meaning of the Internal Revenue Code ("Code"),
including without limitation under Code Sections 414(b), (c), (m), (n) or
(o).
(b) Employee Benefit Plans Comply With ERISA and Code. For every
Employee Benefit Plan (i) the Employee Benefit Plan is in compliance with
ERISA and the Code, (ii) no accumulated funding deficiency within the
meaning of ERISA or the Code has been incurred, and (iii) neither Borrower
nor any other party has applied for or obtained a waiver from the Internal
Revenue Service of any minimum funding requirement. Each Employee Benefit
Plan intended to be qualified under the Code has been determined to be
qualified by the Internal Revenue Service and nothing has occurred since
the date of the last determination which resulted or is likely to result
in the revocation of the determination.
(c) No PBGC or Withdrawal Liability. Borrower has not incurred any
liability to the Pension Benefit Guaranty Corporation ("PBGC") in
connection with any Employee Benefit Plan or ceased operations at any
facility or withdrawn from any Employee Benefit Plan in a manner which
could give rise to liability under ERISA. For example and without
limitation, no Employee Benefit Plan has been a plan for which a
"reportable event," within the meaning of Section 4043 of ERISA, has
occurred, or to the knowledge of Borrower, has been a plan for which any
liability to the PBGC has been or is expected to be incurred. Borrower has
not incurred any withdrawal liability (including any contingent or
secondary withdrawal liability) within the meaning of ERISA to any
Employee Benefit Plan which is a multiemployer plan (as defined by ERISA),
and no event has occurred, and there exists no condition or set of
circumstances, which presents a material risk of the occurrence of any
withdrawal from or the partition, termination, reorganization or
insolvency of any multiemployer plan which could result in any liability
with respect to a multiemployer plan. Borrower has not been notified by
the sponsor of any multiemployer plan that the multiemployer plan is in
reorganization or has been terminated, within the meaning of Title IV of
ERISA, and operations have not ceased at any facility which would subject
Borrower to the provisions of Section 4062(e) of ERISA. No proceeding has
been instituted on behalf of any multiemployer plan against Borrower to
enforce Section 515 of ERISA.
(d) No Tax or Other Liability. Borrower has no liability for any
Employee Benefit Plan for any lien, tax, penalty or excise tax under ERISA
or the Code. Other than claims for benefits submitted by participants or
beneficiaries, no claim, lawsuit or cause of action against or proceeding
involving any Employee Benefit Plan is pending or, to Borrower's
knowledge, threatened by any party. Except to the extent required under
Section 601 et seq. of ERISA and Section 4980B of the Code, Borrower
provides no benefits described in Section 3(1) of ERISA to any retired or
former employee or is obligated to provide benefits to or on behalf of any
employee following the employee's retirement or other termination of
service with Borrower.
(e) No Prohibited Transactions. No transaction relating to any
Employee Benefit Plan proscribed by Section 406 of ERISA ("Prohibited
Transaction") has occurred for which an exemption is not expressly
available and applicable under ERISA. Furthermore, to the extent within
the knowledge or control of the Borrower, neither the execution and
delivery of this Security Agreement, the acquisition of the Promissory
Note by Secured Party or its Assigns, nor the consummation of any other
transaction contemplated by this Security Agreement constitutes or will
constitute a Prohibited Transaction with respect to any Employee Benefit
Plan for which an exemption is not expressly available and applicable
under ERISA.
(f) All Employee Benefit Plans Funded and Currently In Compliance.
Borrower has performed all of Borrower's obligations under all Employee
Benefit Plans. Full and timely payment has been made of all amounts which
Borrower is required, under applicable law or under any Employee Benefit
Plan or any other agreement to which Borrower is a party, to have paid for
each Employee Benefit Plan. Borrower has made adequate provision for
reserves for all obligations and liabilities under each Employee Benefit
Plan that have accrued but are not yet due under the terms of any Employee
Benefit Plan or related agreements.
(g) Transaction Will Not Trigger Benefits. The execution and delivery
of this Security Agreement, and the consummation of the transactions
contemplated by this Security Agreement, will not (i) result in any
payment by Borrower (including, without limitation, severance,
unemployment compensation, parachute payment, bonus or otherwise) becoming
due to any director, employee, or independent contractor of Borrower under
any Employee Benefit Plan, agreement or otherwise, (ii) increase any
benefits otherwise payable under any Employee Benefit Plan or agreement,
or (iii) increase or create any liability referred to in either Section
3.23(b) or 3.23(c) above.
3.24. Taxes. The Borrower and each of its Affiliates and each entity
which might have tax liabilities for which the Borrower or any of its Affiliates
is or may be liable, has filed all tax returns and paid all taxes required by
law to be filed or paid, which have become due pursuant to said returns (or
which to the knowledge of the Borrower are due and payable) and on all
assessments received by the Borrower, such Affiliate or such entity, as the case
may be. No extensions of the time for the assessment of deficiencies have been
granted by the Borrower or any of its Affiliates. There are no material Liens on
any properties or assets of the Borrower or any of its Affiliates imposed or
arising as a result of the delinquent payment or the nonpayment of any tax,
assessment, fee or other governmental charge. To the best of Borrower's
knowledge, the income tax returns of the Borrower and its Affiliates have been
examined and reported upon by the relevant tax authorities, or closed by
applicable statutes of limitations, for all fiscal years through the fiscal year
ended December 31, 1990, and neither the Borrower nor any of its Affiliates nor
any such entity has given or consented to any waiver of the statute of
limitations with respect to its tax liabilities for any such year. Adequate
provision has also been made for all other taxes (whether past, current or
deferred, federal, provincial, local or foreign, due or to come due) on such
balance sheet, and the Borrower knows of no transaction or matter which might
or could result in additional tax assessments to the Borrower or any of its
Affiliates in the ordinary course since the date of such balance sheet. There
are no applicable taxes, fees or other governmental charges payable by the
Borrower or any of its Affiliates in connection with the execution and delivery
of this Agreement, and the other Loan Documents by the Borrower or any of its
Affiliates or the offer, issuance, sale and delivery of the Promissory Note by
the Borrower.
3.25. Property Leases. The Borrower, if a tenant or subtenant under a
lease or sublease of the Property, shall not terminate any such lease or
sublease (other than any lease or sublease of the Property located at 1415
Larimer Street, Denver, Colorado) and the Borrower has no knowledge of any claim
of (or basis for any claim of) any such termination. The Borrower agrees to
exercise and fully comply with the terms of all renewal options provided for in
such lease or sublease, and to promptly notify the Secured Party of any adverse
development with regard to the threat of nonrenewal or termination of such lease
of sublease.
3.26. Liquor License. Liquor licenses have been issued to Borrower by
both the State of Colorado and local licensing authority with respect to
Borrower's location(s) set forth on Schedule 5. The Liquor Licenses are and will
continue to be in full force and in good standing, and Borrower shall pay any
and all fees and costs in connection therewith. Borrower is not in violation of
the Liquor Licenses and Borrower shall not fail to renew the Liquor Licenses.
Borrower agrees to fully comply, at Borrower's own cost and expense, with the
terms and conditions of the Liquor Licenses.
3.27. Release of Franchise Agreements. Upon Secured Party's receipt of
written request from Borrower, Secured Party shall release all Liens in those
Franchise Agreements entered into subsequent to the date that Borrower achieves
Seven Million Dollars ($7,000,000.00) in EBITDA and a Consolidated FCCR of
2.00:1 for the most recent consecutive twelve (12) month period and all Liens in
the royalties received from such Franchise Agreements.
ARTICLE IV
SPECIAL PROVISIONS CONCERNING INVENTORY, EQUIPMENT AND
REAL PROPERTY
4. Special Provisions Concerning Inventory, Equipment and Real
Property. The Borrower shall do nothing to impair the rights of the Secured
Party in the Inventory and the Equipment and shall cause the Inventory and the
Equipment to at all times be, constitute and remain personal property subject to
the security interest granted to the Secured Party. Notwithstanding the
preceding sentence, provided the Borrower is not in default under any of its
Obligations (and no event which with the passage of time would be an Event of
Default has occurred and is continuing), in the ordinary course of the
Borrower's Business, (a) the Borrower may sell its Inventory, and (b) subject to
sections 3.15 and 3.16 hereto, with the prior consent of the Secured Party,
which will not be unreasonably withheld, the Borrower may, from time to time,
refinance existing Permitted Liens in accordance with the terms thereof, replace
its Equipment, acquire new Equipment and accessions to its Equipment, or acquire
fee interest in (or ground lease of) any Property, subject to purchase money
security interests; provided that, if the Secured Party has a leasehold mortgage
or deed of trust on any lease of such Property, such lease remains in full force
and effect, subject to the Secured Party's security interest and any Person with
a lien on the fee interest in (or ground lease of) such Property provides the
Secured Party with a nondisturbance agreement and such other assurances as the
Secured Party shall reasonably request.
ARTICLE V
SPECIAL PROVISIONS CONCERNING INSURANCE AND
CONDEMNATION PROCEEDS AND PROCEEDS
5. Special Provisions Concerning Insurance and Condemnation Proceeds and
Proceeds.
5.1. Special Provisions Concerning Insurance and Condemnation
Proceeds. Unless prohibited under the terms of the Property lease, if
applicable, the Borrower hereby directs any and all transferors, distributors or
payors (including insurance companies with whom the Borrower maintains
insurance) to make payment of all Insurance and Condemnation Proceeds directly
to the Secured Party and authorizes the Secured Party, in its sole discretion,
to apply the same toward repayment of the Loans, whether or not due, or, toward
replacement of the Collateral. Notwithstanding the terms of the Property lease,
if applicable, the Borrower will use its best efforts and hereby assigns the
Insurance and Condemnation Proceeds toward replacement of the Collateral and
shall keep any lease or options to extend the lease in effect until the Loans
are paid.
5.2. Special Provisions Concerning Proceeds. All Proceeds, whether
received by the Secured Party or by the Borrower, or by any other Person will be
included in the Collateral subject to the security interest granted to the
Secured Party hereunder. Upon and during the continuation of an Event of
Default, the Borrower shall (a) identify, earmark, segregate and keep separate
all Proceeds received by it, (b) upon the Secured Party's request, promptly
account to the Secured Party for all Proceeds, and (c) hold all Proceeds
received by the Borrower in trust for the benefit of the Secured Party and shall
promptly (and in any event not later than the fifth day after receipt) deliver
(or cause to be delivered) the same to the Secured Party and into its possession
in the form received by the Borrower and at a time and in a manner satisfactory
to the Secured Party.
ARTICLE VI
SPECIAL PROVISION CONCERNING RIGHTS AND
DUTIES WHILE IN POSSESSION OF COLLATERAL
6. Special Provision Concerning Rights and Duties While in Possession of
Collateral.
6.1. Borrower's Possession. Upon and during the continuance of an
Event of Default, to the extent the same shall, from time to time, be in the
Borrower's possession, the Borrower will hold all securities, Instruments,
Chattel Paper, Documents, certificates and money and other writings evidencing
or relating to the Collateral or Liquor License (if any) in trust for the
Secured Party and, upon request or as otherwise provided herein, promptly
deliver the same to the Secured Party in a form received and at a time and in a
manner satisfactory to the Secured Party. With respect to the Collateral in the
Borrower's possession the Borrower shall at the Secured Party's request take
such action as the Secured Party in its discretion deems necessary or desirable
to create, perfect and protect the Secured Party's security interest in any of
the Collateral.
6.2. Secured Party's Possession. With respect to all of the
Collateral and those Liquor Licenses delivered or transferred to, or otherwise
in the custody or control of (including any items in transit to or set apart
for) the Secured Party or any of its agents, associates or correspondence in
accordance with this Security Agreement, the Borrower agrees that: (a) such
Collateral and Liquor Licenses will be, and is deemed to be in the sole
possession of the Secured Party; (b) subject to Section 4, the Borrower has no
right to withdraw or substitute any such Collateral or Liquor License without
the consent of the Secured Party, which consent may be withheld or delayed in
the Secured Party's sole discretion; (c) the Borrower shall not take or permit
any action, or exercise any voting and other rights, powers and privileges in
respect of the Collateral and Liquor Licenses inconsistent with the Secured
Party's sole possession thereof; and (d) the Secured Party may in its sole
discretion and without notice, without obligation or liability except to account
for property actually received by it, and without affecting or discharging the
Obligations, (i) further transfer and segregate the Collateral and Liquor
Licenses in its possession; (ii) receive Proceeds and hold the same as part of
the Collateral and/or apply the same as hereinafter provided; and (iii) exchange
any of the Collateral and Liquor Licenses for other property upon
reorganization, recapitalization or other readjustment. Following the occurrence
of an Event of Default, the Secured Party is authorized (A) to exercise or cause
its nominee to exercise all or any rights, powers and privileges (including to
vote) on or with respect to the Collateral and Liquor Licenses with the same
force and effect as an absolute owner thereof; (B) whether any of the
Obligations be due, in its name or in the Borrower's name or otherwise, to
demand, sue for, collect or receive any money or property at any time payable or
receivable on account of or in exchange for, or make any compromise or
settlement the Secured Party deems desirable with respect to, any of the
Collateral and Liquor Licenses; and (C) to extend the time of payment, arrange
for payment in installments, or otherwise modify the terms of, or release, any
of the Collateral. Notwithstanding the rights accorded the Secured Party with
respect to the Collateral and Liquor Licenses, and except to the extent provided
below or required by the UCC or other applicable law (which requirement cannot
be modified, waived or excused), the Secured Party's sole duty with respect to
the Collateral and Liquor Licenses in its possession (with respect to custody,
preservation, safekeeping or otherwise) will be to deal with it in the same
manner that the Secured Party deals with similar property owned and possessed by
it. Without limiting the foregoing, the Secured Party, and any of its officers,
directors, partners, trustees, owners, employees and agents, to the extent
permitted by law (1) will have no duty with respect to the Collateral and Liquor
Licenses or the rights granted hereunder; (2) will not be required to sell,
invest, substitute, replace or otherwise dispose of the Collateral and Liquor
Licenses; (3) will not be required to take any steps necessary to preserve any
rights against prior parties to any of the Collateral and Liquor Licenses; (4)
will not be liable for (or deemed to have made an election of or exercised any
right or remedy on account of) any delay or failure to demand, collect or
realize upon any of the Collateral and Liquor Licenses; and (5) will have no
obligation or liability in connection with the Collateral and Liquor Licenses or
arising under this Security Agreement. The Borrower agrees that such standard of
care is reasonable and appropriate under the circumstances.
ARTICLE VII
EVENTS OF DEFAULT
7. Events of Default. The happening of any one or more of the
following events shall constitute an "Event of Default" hereunder:
(a) the Borrower shall fail to make any payment under this Security
Agreement, the Promissory Note or any Loan Document when the same becomes
due and payable and such failure shall continue for five Business Days after the
Secured Party provides notice to the Borrower of such failure; or
(b) the Borrower shall default under, fail to perform or observe any
covenant or condition of or agreement in, or breach, or make a material
inaccuracy in or omission from, any representation or warranty under or
in, this Security Agreement, the Promissory Note, any other Loan Document,
the Franchise Agreement or the License (if applicable), any financial or
other statement delivered to the Secured Party or any agreement,
instrument or obligation in connection with any Permitted Lien, and such
default, failure, breach, inaccuracy or omission shall continue unremedied
for the earliest of (i) fifteen (15) days following the date that notice
of such default, failure, breach, inaccuracy or omission is given to the
Borrower by the Secured Party, (ii) fifteen (15) days following the date
that the Borrower first obtains knowledge of such default, failure,
breach, inaccuracy or omission, or (iii) in the case of any Permitted
Lien, the occurrence of such event (or, if there exists an applicable cure
period, the expiration of such cure period); or
(c) Intentionally Deleted; or
(d) any of the Borrower's Affiliates listed on Schedule 3 shall fail
to make any payment when due under, or default under, fail to perform or
observe any covenant of or condition or agreement in breach of, or make
any material inaccuracy in or omission from any representation and
warranty under, any security agreement with the Secured Party or note held
by the Secured Party or any other loan document with the Secured Party or
in any other agreement, instrument, document or certificate, or financial
or other statement delivered to the Secured Party, and such failure,
default or breach continues beyond any applicable grace period provided
therein; or
(e) the Borrower or any Affiliate Guarantor or any partnership in
which the Borrower is a partner (each hereinafter called a "Principal
Party") shall die, dissolve, merge or consolidate, suspend the transaction
of business or incur any material adverse change in its financial
condition or prospects; or
(f) the Borrower or any other Principal Party shall be expelled from
or suspended by any stock or securities exchange or other exchange, or any
proceeding, procedure or remedy supplementary to or in enforcement of
judgment (involving an amount in excess of $100,000 in the aggregate which
is not insured against) shall be resorted to or commenced against, or with
respect to any property of, the Borrower or any other Principal Party; or
(g) the Borrower or any other Principal Party shall make an
assignment for the benefit of, or composition with, creditors, or shall be
or become insolvent or unable, or generally fail, to pay its debts when
due, or shall be or become a party or subject to any bankruptcy,
reorganization, insolvency or other similar proceeding, or a receiver or
liquidator, custodian or trustee shall be appointed for the Borrower or
any other liable party, or a substantial portion of any of the Borrower's
or their respective assets and, if any of the foregoing shall occur
involuntarily as to the Borrower and any other Principal Party, it shall
not be dismissed with prejudice, stayed or discharged within forty-five
(45) days; or
(h) the Borrower or any other Principal Party shall take any action
to effect, or which indicates its acquiescence in, any of (e), (f) or (g),
above; or
(i) the Borrower defaults under any other loan or note to any other
lender; or
(j) notwithstanding the foregoing, if a notice of default is given to
the Borrower under the lease, (if any) of the Property and such default is
not cured within three (3) days from the date of such notice.
ARTICLE VIII
REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT
8. Remedies Upon Occurrence of Event of Default.
8.1. Cumulative Rights and Remedies. Upon the occurrence of an Event
of Default, the Secured Party shall have the rights, powers and remedies (a)
granted to secured parties under the UCC; (b) granted to the Secured Party under
any other applicable statute, law, rule or regulation; and (c) granted to the
Secured Party under this Security Agreement, the Promissory Note or any other
Loan Document or any other agreement between the Borrower and the Secured Party.
In addition, all such rights, powers and remedies shall be cumulative and not
alternative. Any single or partial exercise of, or forbearance, failure or delay
in exercising any right, power or remedy shall not be, nor shall any such single
or partial exercise of, or forbearance, failure or delay be deemed to be a
limitation, modification or waiver or any right, power or remedy and shall not
preclude the further exercise thereof; and every right power and remedy of the
Secured Party shall continue in full force and effect until such right, power
and remedy is specifically waived by an instrument in writing executed and
delivered with respect to each such waiver by the Secured Party.
8.2. Acceleration of Obligations. Upon the occurrence of an Event of
Default, and at any time thereafter if any Event of Default shall then be
continuing, the Secured Party may, from time to time in its discretion, by
written notice to the Borrower declare the Promissory Note (including any Make
Whole Premium required to be paid upon prepayment of any Loan) and any other
Obligations to be immediately due and payable whereupon (and, automatically
without any notice, demand or other action by the Secured Party, upon the
occurrence of any Event of Default set forth in subsections (e) through (h) of
Section 7) such principal, interest and other Obligations shall be immediately
due and payable, without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrower to the maximum extent
permitted by law.
8.3. Additional Rights of the Secured Party. Upon the occurrence of
an Event of Default, the Secured Party may, from time to time, in its
discretion, and without the Borrower's assent, without advertisements or notices
of any kind (except for the notice specified in Section 8.5 below regarding
notice required in connection with a public or private sale), or demand of
performance or other demand, or obligation or liability (except to account for
amounts actually received) to or upon the Borrower or any other person (all such
advertisements, notices and demands, obligations and liabilities, if any, hereby
being expressly waived and discharged to the extent permitted by law),
forthwith, directly or through its agents or representatives, (a) disclose such
default and other matters (including the name, address and telephone number of
the Borrower) in connection therewith in the Secured Party's reasonable
discretion to any other Program Borrower, the Borrower's franchisor or
franchisee (if applicable) and other creditors or obligors of the Borrower (and
the Borrower understands that the Secured Party intends to make such disclosure,
from time to time); (b) to the extent permitted by applicable law enter any
premises, with or without the assistance of other persons or legal process; (c)
require the Borrower to account for (including accounting for any products and
proceeds of any Collateral), segregate, assemble, make available and deliver to
the Secured Party, its agents or representatives, the Collateral and the Liquor
Licenses (if any); (d) take possession of, operate, render unusable, collect,
transfer and receive, recover, appropriate, foreclose, extend payment of,
adjust, compromise, settle, release any claims included in, and do all other
acts or things necessary or, in the Secured Party's sole discretion appropriate,
to protect, maintain, preserve and realize upon, the Liquor License (if any),
the Collateral and any products and proceeds thereof, in whole or in part; and
(e) exercise all rights, powers and interests with respect to any and all
Collateral and Liquor Licenses, and sell, assign, lease, license, pledge,
transfer, negotiate (including endorse checks, drafts, orders, or instruments),
deliver or otherwise dispose (by contract, option(s) or otherwise) of the Liquor
License (if any), or the Collateral or any part thereof. Any such disposition
may be in one or more public or private sales, at or upon an exchange, board or
system or in the county(ies), in the state(s) set forth on Schedule 1 or
elsewhere, at such price, for cash or credit (or for future delivery without
credit risk) and upon such other terms and conditions as it deems appropriate,
with the right of the Secured Party to the extent permitted by law upon any cash
sale or sales, public or private, to purchase the whole or any part of said
Collateral and Liquor License, free of any right, claim or equity of redemption
of or in the Borrower (such rights, claims and equity or redemption, if any,
hereby being expressly waived). Notwithstanding that the Secured Party, whether
in its own behalf and/or on behalf of another or others, may continue to hold
the Collateral and Liquor License, and regardless of the value thereof, or any
delay or failure to dispose thereof, unless and then only to the extent that the
Secured Party proposes to retain the Collateral and/or Liquor License in
satisfaction of the Obligations by written notice in accordance with the UCC,
the Borrower shall be and remain liable for the payment in full of any balance
of the Obligations and expenses at any time unpaid. Without limiting the
foregoing, upon the Borrower's failure to abide by and comply with its
obligations under Section 3 (including Sections 3.9, 3.10 or 3.18) or Section 13
hereof, in addition to its other rights and remedies, the Secured Party may (but
is not required to), in its sole discretion and to the extent it deems
necessary, advisable or appropriate, take or cause to be taken such actions or
things to be done (including the payment or advancement of funds, or requiring
advancement of funds to be held by the Secured Party to fund such obligations,
including taxes or insurance) as may be required hereby (or necessary or
desirable in connection herewith) to correct such failure (including causing the
Collateral to be maintained or insurance protection required hereby to be
procured and maintained) and any and all costs and expenses incurred (including
attorney's fees and disbursements) in connection therewith shall be included in
the Borrower's Obligations and shall be immediately due and payable and bear
interest at the Default Rate.
8.4. Application of Proceeds. The Secured Party may apply the net
proceeds, if any, of any collection, receipt, recovery, appropriation,
foreclosure or realization, or from any use, operation, sale, assignment, lease,
pledge, transfer, delivery or disposition of all or any of the Collateral and/or
the Liquor License (if any), after deducting all reasonable costs and expenses
(including attorneys fees, court costs and legal expenses) incurred in
connection therewith or with respect to the care, safekeeping, custody,
maintenance, protection, administration or otherwise of any and all of said
Collateral or Liquor License, or in any way relating to the rights of the
Secured Party under this Security Agreement, (a) first, to the satisfaction of
the Obligations, in whole or in part, in such order as the Secured Party may, in
its discretion, elect; (b) second, to the payment, satisfaction or discharge of
any of other Indebtedness or obligation as required by any law, rule or
regulation; and (c) lastly, the surplus, if any, to the Borrower.
8.5. Required Notice of Sale. In exercising its rights, powers and
remedies as secured party, the Secured Party agrees to give the Borrower five
(5) days notice of the time and place of any public sale of Collateral or of the
time after which any private sale of Collateral may take place, unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market. The Borrower agrees that such
period and notice is commercially reasonable under the circumstances.
8.6. Applicable Collateral. In furtherance and not in limitation of
the foregoing, in no event shall the designation of all or any portion of the
Collateral as "Applicable Collateral" restrict or limit the Secured Party in the
exercise of its remedies under this Section 8. Such designation is intended
solely for the purposes set forth in Section 14.2. All of the Collateral shall
secure all of the Obligations. The Borrower expressly waives any right (a) to
limit the Secured Party solely to the Applicable Collateral with respect to any
Loan or (b) to require the Secured Party to proceed against the Applicable
Collateral with respect to any Loan before proceeding against any other
Collateral with respect to such Loan. The Borrower agrees that, upon the
occurrence of an Event of Default, the Secured Party may proceed against the
Collateral in satisfaction of any Obligation, in such manner and in such order
as the Secured Party may determine in its sole and absolute discretion.
8.7. Additional Remedies Concerning Liquor Licenses. In furtherance
and not in limitation of the foregoing, upon the occurrence of an Event of
Default, Borrower will continue to maintain, in good standing, any and all
Liquor Licenses. Borrower will cooperate with any and all requests of Secured
Party, its trustees, its receivers, or otherwise with respect to the issuance of
any temporary permits or transfer of the Liquor Licenses whatsoever. In this
regard, the Borrower hereby consents to the issuance of any and all temporary
permits and to the transfer of any and all such Liquor Licenses to the Secured
Party, its duly appointed receivers, trustees, or otherwise. Borrower covenants
to take no actions inconsistent with the foregoing.
ARTICLE IX
POST-DEFAULT POWER OF ATTORNEY
9. Post-Default Power of Attorney. The Borrower hereby irrevocably
constitutes and appoints, effective on and after the occurrence of an Event of
Default, the Secured Party acting through any officer or agent thereof, with
full power of substitution, as the Borrower's true and lawful attorney-in-fact
with full irrevocable power and authority in the Borrower's place and stead and
in the Borrower's name or in its own name, from time to time in the Secured
Party's discretion, to receive, open and dispose of mail addressed to the
Borrower, to take any and all action, (including the authority to act fully and
completely with respect to any and all Liquor Licenses), to do all things, to
execute, endorse, deliver and file any and all writings, documents, (including
documents of conveyance, transfer or otherwise for Liquor Licenses),
instruments, notices, statements (including financing statements, and writings
to correct any error or ambiguity in any Loan Document), applications and
registrations (including registrations and licenses for securities, Copyrights,
Patents and Trademarks), checks, drafts, acceptances, money orders, or other
evidence of payment or proceeds, which may be or become necessary or desirable
in the sole discretion of the Secured Party to accomplish the terms, purposes
and intent of this Security Agreement and the other Loan Documents, including
the right to appear in and defend any action or proceeding brought with respect
to the Collateral or Property, and to bring any action or proceeding, in the
name and on behalf of the Borrower, which the Secured Party, in its discretion,
deems necessary or desirable to protect its interest in the Collateral, Liquor
License (if any) or Property. Any and all acts done under the foregoing
authorization are hereby ratified and approved by Borrower. Said attorney or
designee shall not be liable for any acts of commission or omission, nor for any
error of judgment or mistake of fact or law, unless and then only to the extent
that the same constitutes its gross negligence or willful misconduct. This power
is coupled with an interest and is irrevocable. THIS POWER DOES NOT AND SHALL
NOT BE CONSTRUED TO AUTHORIZE ANY CONFESSION OF JUDGMENT.
ARTICLE X
INDEMNIFICATION
10. Indemnification. The Borrower agrees to indemnify the Secured
Party and hold the Secured Party harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against the Secured Party in any way
relating, in any way arising out of or in connection with this Security
Agreement, the Loan Documents or the transactions contemplated hereby or
thereby. Without limitation of the foregoing, the Borrower will reimburse the
Secured Party for all expenses (including expenses for legal services of every
kind) of, or incidental to, the negotiation of, entering into and enforcement of
any of the provisions hereof and of any of the Obligations, and any actual or
attempted sale, lease or other disposition of, and any exchange, enforcement,
collection, compromise or settlement of any of the Collateral or the Liquor
License (if any), and receipt of the Proceeds thereof, and for the care of the
Collateral or the Liquor License (if any) and defending or asserting the rights
and claims of the Secured Party in respect thereof, by litigation or otherwise,
including expense of insurance, and all such expenses shall be the Borrower's
Obligations.
ARTICLE XI
OBLIGATIONS ABSOLUTE
11. Obligations Absolute. The Borrower's Obligations will be absolute,
unconditional and irrevocable and will be paid or satisfied strictly in
accordance with their respective terms under all circumstances whatsoever,
including: (a) the invalidity or unenforceability of all or any of, or any part
of, this Security Agreement, the Promissory Note or any other Loan Document, or
any consent, waiver, amendment or modification thereof; (b) the existence of any
claim, setoff, defense or other right which the Borrower may have at any time
against the Secured Party, or any other Person, whether in connection with this
Security Agreement, any other Loan Documents, the transactions contemplated
hereby, thereby or otherwise all of which the Borrower hereby waives to the
maximum extent permitted by law; or (c) the loss, theft, damage, destruction or
unavailability of the Collateral or the Liquor License (if any) to the Borrower
for any reason whatsoever, it being understood and agreed that the Borrower
retains all liability and responsibility with respect to the Collateral and the
Liquor License (if any).
ARTICLE XII
ASSIGNMENT AND DISSEMINATION OF INFORMATION
12. Assignment and Dissemination of Information.
12.1. Assignment. This Security Agreement is freely assignable, in
whole or in part, by the Secured Party and, to the extent of any such
assignment, the Secured Party shall be fully discharged from all responsibility.
The Borrower understands and agrees that the Secured Party intends to and may,
from time to time, sell, pledge, grant a security interest in and collaterally
assign, transfer and deliver or otherwise encumber or dispose of the Promissory
Note, this Security Agreement and the other Loan Documents and its rights and
powers hereunder and thereunder, in whole or in part, in connection with the
Securitization or any other assignment or other disposition of the Promissory
Note. The Borrower may not, in whole or in part, directly or indirectly, assign
this Security Agreement or any Loan Document or its rights hereunder or
thereunder or delegate its duties hereunder without, in each instance, the
specific prior written consent of the Secured Party, which consent may be
withheld or delayed in the Secured Party's sole discretion, and payment of the
amounts required under and compliance with Section 13(b) of the Promissory Note.
For purposes of this Security Agreement, a change in control of the Borrower
(whether by stock sale, issuance or otherwise) shall constitute an assignment
hereof.
12.2. Dissemination of Information. If Secured Party determines at
any time to sell, transfer or assign the Promissory Note, Security Agreement, or
other Loan Documents, and any or all servicing rights with respect thereto, or
to otherwise issue a Securitization involving the Loan Documents, Secured Party
may forward to each purchaser, transferee, assignee, investor or their
perspective successors in such Securitization or any rating agency rating such
Securitization and each prospective investor, all documents and information
which Secured Party now has or may hereafter acquire relating to the Loan
Documents, the Borrower, any Guarantor and the Property, which shall have been
furnished by Borrower or any Guarantor, as Secured Party determines necessary or
desirable.
ARTICLE XIII
FURTHER ASSURANCE
13. Further Assurance. The Borrower agrees at any time and from time
to time, at the Borrower's sole cost and expense, to obtain, procure, execute
and deliver, file and affix such further agreements, bills of sale and
assignments, instruments, documents, warehouse receipts, bills of lading,
vouchers, invoices, notices, statements, writings, (including financing
statements, and writings to correct any error or ambiguity in any Loan
Document), powers (including stock and bond powers, and powers of attorney), tax
stamps and information, and to do or cause to be done all such further acts and
things (including the execution, delivery and filing of financing statements on
Form UCC-1, payment of filing fees and transfer, gains and recording taxes) as
the Secured Party may reasonably request, from time to time, in its discretion.
Without limiting the foregoing, the Borrower authorizes the Secured Party to the
extent permitted under the UCC to execute and file, or file without the
Borrower's signature, any and all financing statements, amendments thereto and
continuations thereof as the Secured Party deems necessary or appropriate and
the Borrower shall pay and indemnify the Secured Party for and hold the Secured
Party harmless from any and all costs and expenses in connection therewith. The
Borrower agrees that it will promptly notify the Secured Party of and agree to
correct any defect, error or omission in the contents of any of the Loan
Documents or in the execution, delivery or acknowledgement thereof. The Borrower
further agrees to execute, prior to or within three months following closing, a
Form 4506 Request for Copy or Transcript of Tax Form, which form will be
provided by Secured Party.
ARTICLE XIV
TERM, PARTIAL RELEASE AND REINSTATEMENT
14. Term, Partial Release and Reinstatement
14.1. Term. This Security Agreement shall be immediately in full
force and effect upon the Borrower's execution below, whether or not it is
signed by the Secured Party. Upon indefeasible payment in full of the
Obligations in accordance with the terms thereof, this Security Agreement and
the security interest granted hereunder shall terminate and the Secured Party,
at the Borrower's expense, will execute and deliver to the Borrower the proper
instruments (including UCC termination statements) acknowledging the termination
of such security interest, and will duly assign, transfer and deliver (without
recourse, representation or warranty) such Collateral and Liquor Licenses (as
applicable) as may be in the Secured Party's possession, and not to be retained,
sold, or otherwise applied or released pursuant to this Security Agreement, to
the Borrower, except that the Borrower's obligations under Sections 10, 11, 13
and 15 shall survive indefinitely.
14.2. Partial Release. Upon the indefeasible payment in full of any
Loan (including, without limitation, any Make Whole Premium or other amounts
payable by the Borrower with respect to such Loan) in accordance with the
provisions of the Promissory Note, the security interest hereunder with respect
to the Applicable Collateral shall terminate, and the Secured Party, at the
expense of the Borrower, will execute and deliver to the Borrower the proper
instruments (including UCC partial release statements) acknowledging the
termination of such security interest, and will duly assign, transfer and
deliver (without recourse, representation or warranty) such of the Applicable
Collateral as may be in the possession of the Secured Party and has not
theretofore been sold or otherwise applied or released pursuant to this Security
Agreement, to the Borrower, and shall take such other action as the Borrower may
reasonably request to effectuate the foregoing.
14.3. Reinstatement. This Security Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any amount
received by the Secured Party in respect of the Obligations is rescinded or must
otherwise be restored or returned by the Secured Party upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of the Borrower or any
Principal Party or upon the appointment of any intervenor or conservator of, or
trustee or similar official for, the Borrower, any Principal Party or any
substantial part of the Borrower's or any Principal Party's assets, or
otherwise, all as though such payments had not been made.
ARTICLE XV
MISCELLANEOUS
15. Miscellaneous.
15.1. FINAL AGREEMENT; AMENDMENTS, CONSENTS, AUTHORIZATIONS. THIS
SECURITY AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE BORROWER AND THE
SECURED PARTY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS OF THE BORROWER AND THE SECURED PARTY. THE
BORROWER UNDERSTANDS AND AGREES THAT ORAL AGREEMENTS AND ORAL COMMITMENTS TO
LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE
NOT ENFORCEABLE. THE BORROWER ACKNOWLEDGES AND AGREES THERE ARE NO ORAL
AGREEMENTS BETWEEN THE BORROWER AND THE SECURED PARTY. This Security Agreement
and the Loan Documents represent the entire understanding of the Secured Party
and the Borrower with respect to the transactions contemplated hereby and
thereby. None of the terms or provisions of this Security Agreement or any other
Loan Document may be waived, altered, modified, or amended except in each
instance by a specific written instrument duly executed by the Secured Party.
Without limiting the foregoing, no action or omission to act shall be deemed to
be a consent, authorization, representation or agreement of the Secured Party,
under the UCC or otherwise, unless, in each instance, the same is in a specific
writing signed by the Secured Party. The inclusion of Proceeds in the Collateral
does not and shall not be deemed to authorize the Borrower to sell, exchange or
dispose of the Collateral or the Franchise Agreement or otherwise use the
Collateral in any manner not otherwise specifically authorized herein.
15.2. Notices. All notices and other communications given pursuant to
or in connection with this Security Agreement shall be in duly executed writing
delivered to the parties at the addresses set forth below (or such other address
as may be provided by one party in a notice to the other party):
If to the Secured Party: If to the Assignee of Secured Party:
AMRESCO COMMERCIAL FINANCE, INC. NORWEST BANK MINNESOTA, N.A.
412 E. Parkcenter Blvd. Sixth & Marquette Suite 300
Suite 300 Minneapolis, MN 55479-0070
Boise, Idaho 83706 Facsimile Number: (612) 667-9825
Facsimile Number: (208)333-2050
If to the Borrower, to the Borrower's chief executive office (or
residence), as represented by the Borrower herein.
Notice delivered in accordance with the foregoing shall be effective
(a) when delivered, if delivered personally or by receipted-for telex,
telecopier, or facsimile transmission, (b) two (2) days after being delivered in
the United States (properly addressed and all fees paid) for overnight delivery
service to a courier (such as Federal Express) which regularly provides such
service and regularly obtains executed receipts evidencing delivery or (c) five
(5) days after being deposited (properly addressed and stamped for first-class
delivery) in a daily serviced United States mail box.
15.3. Reasonableness. If at any time the Borrower believes that the
Secured Party has not acted reasonably in granting or withholding any approval
or consent under the Promissory Note, this Security Agreement, or any other Loan
Document or otherwise with respect to the Obligations, as to which approval or
consent either the Secured Party has expressly agreed to act reasonably, or
absent such agreement, a court of law having jurisdiction over the subject
matter would require the Secured Party to act reasonably, then the Borrower's
sole remedy shall be to seek injunctive relief or specific performance and no
action for monetary damages or punitive damages shall in any event or under any
circumstance be maintained by the Borrower against the Secured Party.
15.4. Recovery of Sums Required To Be Paid. The Secured Party shall
have the right from time to time to take action to recover any sum or sums which
constitute a part of the Obligations as the same become due, without regard to
whether or not the balance of the Obligations shall be due, and without
prejudice to the right of the Secured Party thereafter to bring an action of
foreclosure, or any other action, for a default or defaults by the Borrower
existing at the time such earlier action was commenced.
15.5. WAIVERS. THE BORROWER HEREBY MAKES AND ACKNOWLEDGES THAT IT
MAKES ALL OF THE WAIVERS SET FORTH IN THIS SECURITY AGREEMENT, THE PROMISSORY
NOTE AND THE OTHER LOAN DOCUMENTS KNOWINGLY, INTENTIONALLY, VOLUNTARILY, WITHOUT
DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF SUCH
WAIVERS WITH ITS ATTORNEY; THE BORROWER FURTHER ACKNOWLEDGES THAT SUCH WAIVERS
ARE A MATERIAL INDUCEMENT TO THE SECURED PARTY TO MAKE THE LOANS TO THE BORROWER
AND THAT THE SECURED PARTY WOULD NOT HAVE MADE THE LOANS WITHOUT SUCH WAIVERS;
AND THE BORROWER HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES SUCH WAIVERS WITH
RESPECT TO EACH OTHER LOAN IN THE PROGRAM.
15.6. WAIVER OF TRIAL BY JURY. THE BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, AND THE SECURED PARTY BY ITS ACCEPTANCE OF THE
PROMISSORY NOTE AND THIS SECURITY AGREEMENT AND OTHER LOAN DOCUMENTS IRREVOCABLY
AND UNCONDITIONALLY WAIVES, ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO
THE PROMISSORY NOTE, THIS SECURITY AGREEMENT, OR ANY OTHER LOAN DOCUMENT OR THE
OBLIGATIONS.
15.7. Relationship. The relationship of the Secured Party to the
Borrower hereunder is strictly and solely that of secured lender on the one hand
and borrower and guarantor on the other and nothing contained in the Promissory
Note, this Security Agreement or any other Loan Document or otherwise in
connection with the Obligations is intended to create, or shall in any event or
under any circumstance be construed as creating, a partnership, joint venture,
tenancy-in-common, joint tenancy or other relationship of any nature whatsoever
between the Secured Party and the Borrower other than as secured lender on the
one hand and borrower and guarantor on the other.
15.8. Time is of the Essence. For all payments to be made and all
obligations to be performed under the Loan Documents, time is of the essence.
15.9. Governing Law; Binding Effect. THIS SECURITY AGREEMENT AND ALL
LOAN DOCUMENTS ARE ENTERED INTO IN THE STATE OF IDAHO, SECURED PARTY'S CHIEF
EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS IS LOCATED IN THE STATE OF
IDAHO, AND ALL NOTICES AND SUMS PAYABLE UNDER THE LOAN DOCUMENTS RELATING TO
THIS SECURITY AGREEMENT WILL BE SENT TO THE SECURED PARTY IN THE STATE OF IDAHO.
BORROWER AND SECURED PARTY AGREE THAT THE VALIDITY, ENFORCEABILITY, CONSTRUCTION
AND INTERPRETATION OF THIS SECURITY AGREEMENT, AND OF ALL TRANSACTIONS AND
DOCUMENTS UNDER OR RELATING TO IT, WILL BE CONSTRUED, APPLIED, ENFORCED AND
GOVERNED UNDER THE LAWS OF THE STATE OF IDAHO (WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW), PROVIDED HOWEVER, THAT WITH RESPECT TO THE
CREATION, ATTACHMENT, PERFECTION, PRIORITY AND ENFORCEMENT OF ANY LIENS CREATED
BY THIS SECURITY AGREEMENT, THE LAWS OF THE STATE WHERE THE APPLICABLE PROPERTY
IS LOCATED SHALL APPLY. This Security Agreement shall be binding upon the
Borrower, and the heirs, devisees, administrators, executives, personal
representatives, successors, receivers, trustees, and (without limiting Section
12 hereof) assignees, including all successors in interest of the Borrower in
and to all or any part of the Collateral and the Liquor Licenses (if any), and
shall inure to the benefit of the Secured Party, and the successors and
assignees of the Secured Party.
15.10. Severability. Whenever possible this Security Agreement, the
Promissory Note and each Loan Document and each provision hereof and thereof
shall be interpreted in such manner as to be effective, valid and enforceable
under applicable law. If and to the extent that any such provision shall be held
invalid and unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provisions hereof or
thereof, and any determination that the application of any provision hereof or
thereof to any person or under any circumstance is illegal and unenforceable
shall not affect the legality, validity and enforceability of such provision as
it may be applied to any other person or in any other circumstance.
15.11. Headings Descriptive. The headings, titles and captions used
herein are for convenience only and shall not affect the construction of this
Security Agreement or any term or provision hereof.
15.12. Counterparts. This Security Agreement may be executed in a
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original; and all such counterparts shall together constitute
but one and the same agreement.
15.13. Acknowledgement. Borrower acknowledges that Secured Party's
underwriting guidelines and standards are applied on a case by case basis and
that waivers may be granted in any particular case (including in the case of a
borrower to be included in a pool with Borrower). Borrower further acknowledges
that Secured Party's underwriting guidelines or standards may be modified at any
time by Secured Party without notice to Borrower.
15.14. Attorneys Fees and Costs. Borrower agrees that upon the
occurrence of an Event of Default, the Borrower shall pay all costs and expenses
actually incurred by Secured Party (including without limitation attorney's fees
and disbursements) incident to the enforcement, collection, protection or
preservation of any right or claim of Secured Party under the Loan Documents,
including any such fees or costs incurred in connection with any bankruptcy or
insolvency proceeding of Borrower.
<PAGE>
15.15. Loan Pool Flexibility. Secured Party shall have the right, at
its sole and absolute discretion upon written notice to Borrower, to transfer (a
"Transfer"), within eighteen (18) months from the effective date of this
Security Agreement, all or any of the Loans and all Liens related to such Loans,
from the Program to any other loan program formed by Secured Party. Upon the
occurrence of a Transfer, the Loan Documents shall be automatically amended and
reclassified to reflect the Transfer. Borrower shall execute all amendments or
other documents Secured party deems necessary to effectuate a Transfer.
15.16. Public Announcement. Upon the closing of the Loans, Secured
Party is authorized in its discretion to issue news releases and at its own
expense to publish "tombstone ads" and other announcements in newspapers, trade
journals and other appropriate media, containing information about the Loans as
may be deemed noteworthy by Secured Party, including without limitation the
legal and trade name of Borrower, the amount of the Loan and the name, nature
and location of the Collateral.
The remainder of this page intentionally left blank.
<PAGE>
IN WITNESS WHEREOF, the Borrower has executed and entered into this
Security Agreement and delivered it to the Secured Party on and as of the date
set forth below. This document is executed under seal and intended to take
effect as a sealed instrument.
Date: October 5, 1999
Attest: The Quizno's Corporation
By/s/ Candace R. Arnold By:/s/ Patrick Meyers
- ----------------------- --------------------------
Name:Candace R. Arnold Name: Patrick Meyers
Title: H.R. Coordinator Title: Vice President/General Counsel
Attest: The Quizno's Operating Company
By/s/ Candace R. Arnold By:/s/ Patrick Meyers
- ----------------------- --------------------------
Name:Candace R. Arnold Name: Patrick Meyers
Title: H.R. Coordinator Title: Vice President/General Counsel
Attest: S & S Company
By/s/ Candace R. Arnold By:/s/ Patrick Meyers
- ----------------------- --------------------------
Name:Candace R. Arnold Name: Patrick Meyers
Title: H.R. Coordinator Title: Vice President/General Counsel
Attest: The Quizno's Realty Company
By/s/ Candace R. Arnold By:/s/ Patrick Meyers
- ----------------------- --------------------------
Name:Candace R. Arnold Name: Patrick Meyers
Title: H.R. Coordinator Title: Vice President/General Counsel
Attest: The Quizno's Acquisition Company
By/s/ Candace R. Arnold By:/s/ Patrick Meyers
- ----------------------- --------------------------
Name:Candace R. Arnold Name: Patrick Meyers
Title: H.R. Coordinator Title: Vice President/General Counsel
Attest: The Quizno's Licensing Company
By/s/ Candace R. Arnold By:/s/ Patrick Meyers
- ----------------------- --------------------------
Name:Candace R. Arnold Name: Patrick Meyers
Title: H.R. Coordinator Title: Vice President/General Counsel
Attest: Quizno's Kansas, LLC
By/s/ Candace R. Arnold By:/s/ Patrick Meyers
- ----------------------- --------------------------
Name:Candace R. Arnold Name: Patrick Meyers
Title: H.R. Coordinator Title: Vice President/General Counsel
Address: 1415 Larimer St., Denver,
CO 80202
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street; that he is the Vice President/General Counsel
of The Quizno's Corporation, the corporation described in and which executed
the foregoing instrument; and that he signed his name thereto by authority of
the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office
this 4th day of October, 1999.
/s/ Candace R. Arnold
- ------------------------------
Notary Public
My commission expires:
- ------------------------
6/16/01
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street; that he is the Vice President/General Counsel
of The Quizno's Operating Company, the corporation described in and which
executed the foregoing instrument; and that he signed his name thereto by
authority of the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office
this 4th day of October, 1999.
/s/ Candace R. Arnold
- ------------------------------
Notary Public
My commission expires:
- ------------------------
6/16/01
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street; that he is the Vice President/General Counsel
of S&S Company, the corporation described in and which executed the foregoing
instrument; and that he signed his name thereto by authority of the board of
directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office
this 4th day of October, 1999.
/s/ Candace R. Arnold
- ------------------------------
Notary Public
My commission expires:
- ------------------------
6/16/01
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street; that he is the Vice President/General Counsel
of The Quizno's Realty Company, the corporation described in and which executed
the foregoing instrument; and that he signed his name thereto by authority of
the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office
this 4th day of October, 1999.
/s/ Candace R. Arnold
- ------------------------------
Notary Public
My commission expires:
- ------------------------
6/16/01
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street; that he is the Vice President/General Counsel
of The Quizno's Acquisition Company, the corporation described in and which
executed the foregoing instrument; and that he signed his name thereto by
authority of the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office
this 4th day of October, 1999.
/s/ Candace R. Arnold
- ------------------------------
Notary Public
My commission expires:
- ------------------------
6/16/01
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On the 4th day of October, 1999, before me a Notary Public personally
appeared Patrick Meyers, to me known to be the person named in and who executed
the foregoing instrument, who, being duly sworn, did depose and say that he
resides at 1415 Larimer Street; that he is the Vice President/General Counsel
of The Quizno's Licensing Company, the corporation described in and which
executed the foregoing instrument; and that he signed his name thereto by
authority of the board of directors of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office
this 4th day of October, 1999.
/s/ Candace R. Arnold
- ------------------------------
Notary Public
My commission expires:
- ------------------------
6/16/01
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF Denver )
On this 4th day of October, 1999, before me, a Notary Public, personally
appeared Patrick Meyers known or identified to me (or proved to me on the oath
of ___________________________ to be the Vice President/General Counsel of
Quizno's Kansas, LLC, the limited liability company that executed the
instrument, or the person who executed the instrument on behalf of said
liability company, and acknowledged to me that such limited liability company
executed the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
/s/ Candace R. Arnold
- ------------------------------
Notary Public
My commission expires:
- ------------------------
6/16/01
SECURED PARTY:
AMRESCO COMMERCIAL FINANCE, INC.
By: ________________________________
Dale Conder
Vice President
(SEAL)
<PAGE>
SCHEDULE 1
A. Borrower Information
If an individual, the Borrower's residence address:
Street:
City:
County:
State:
Zip:
The Borrower's chief executive office: 1415 Larimer Street, Denver,
CO 80202
The Borrower's state of organization: Colorado
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Corporation
Street Address : 1415 Larimer Street, Denver, CO 80202
Legal Description of Property:
East Denver, Block 45, Lot 20 and 20 feet of Lot 21, City of Denver, Denver
County, Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 4403 S. Tamarac Parkway, Suites 5B, 6A, 6B
Denver, CO 80237
Legal Description of Property:
That Lease dated June 1, 1998, and all amendments thereto, between Public
Storage, Inc., as Landlord/successor Landlord, and The Quizno's Operating
Company, as Tenant/successor Tenant, doing business as a Quizno's restaurant,
which covers the following real property/a portion of the following real
property located in Denver County,
State of Colorado:
That portion of the North one-half of Section 9, Township 5 South, Range 67,
West of the Sixth Principal Meridian, City and County of Denver, State of
Colorado, described as follows:
Commencing at the North one-quarter corner of said Section 9; thence Westerly
along the North Line of said Section 9 a distance of 1,301.91 feet; thence on a
deflection angle to the left of 89(Degree)55'24", 60.00 feet to a point of the
South Right-of-Way Line on Quincy Avenue as recorded by Ordinance No. 349-1971;
thence on a deflection angle to the left of 90(Degree)04'36" and Easterly along
said Right-of-Way Line 932.19 feet to a point of curvature of a curve to the
right; thence Southeasterly along the arc of said curve to the right having a
central angle of 73(Degree)20'16" and a radius of 350.00 feet an arc distance of
448.00 feet to a point on the Westerly Right-of-Way Line of South Tamarac
Parkway; thence Southerly along the tangent of the previously described curve
and along said Westerly Right-of-Way Line, 10.00 feet; thence on a deflection
angle to the right of 02(Degree)40'28" along said Westerly Right-of-Way Line
212.91 feet to the True Point of Beginning; thence continuing Southerly along
the previously described course and along said Westerly Right-of-Way Line,
130.00 feet to a point on the Northwesterly Right-of-Way Line of Interstate
Highway No. 225, as conveyed to the State Department of Highways in Deed
recorded September 25, 1974, in Book 950, page 398, and continuing along said
Northwesterly Right-of-Way Line the following four courses:
thence on a deflection angle to the right of 87(Degree)19'40", 4.00 feet; thence
on a deflection angel to the left of 70(Degree)31'30", 122.00 feet; thence on a
deflection angle to the right of 55(Degree)05'30", 268.10 feet to a point of
curvature of a curve to the right; thence Southwesterly along the arc of said
curve to the right having a central angle of 08(Degree)49'21" and a radius of
1,065.80 feet, an arc distance of 164.11 feet to a point on a non-tangent line,
said point also being the Southeast corner of that parcel of land described in
Book 1481 at Page 46. thence Northwesterly on a deflection angle to the right
(from a prolongation of the tangent of the previously described curve) of
79(Degree)26'41" along the Easterly line of said parcel described in Book 1481
at Page 46, a distance of 247.50 feet; thence on a deflection angle to the right
of 33(Degree)49'34", 153.94 feet; thence on a deflection angle to the right of
90(Degree)00'00", 205.39 feet to the point of curvature of a curve to the left;
thence along the arc of said curve to the left having a central angle
33(Degree)49'34" and a radius of 215.00 feet, an arc distance of 126.93 feet to
a point of tangent; thence Northeasterly along the tangent of said curve 63.93
feet to the point of curvature of a curve to the right; thence along the arc of
said curve to the right having a central angle of 19(Degree)50'18" and a radius
of 142.96 feet, an arc distance of 49.50 feet to a point of tangent; thence
Easterly along the tangent of said curve, 67.27 feet to the True Point of
Beginning.
<PAGE>
Containing 3.377 acres more or less,
TOGETHER WITH Reciprocal Easement recorded July 20, 1977, in Book 1481 at Page
46 and August 2, 1973 in book 1489 at Page 156, amended November 16, 1984 at
Reception Numbers 043458, 043460, 043464, 043468 and amended December
18, 1984 at Reception No. 054392.
and TOGETHER WITH access easement recorded April 27, 1977 in Book 1427 at Page
649, amended November 16, 1984 at Reception Numbers 043459, 043461, 043462,
043463, 043465, 043466, 043467 and December
18, 1984 at Reception No. 054393.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Corporation
Street Address : 10450 West Colfax, Lakewood, CO 80215
Legal Description of Property:
That Lease dated September 19, 1994, and all amendments thereto, between Douglas
P. Allen, as Landlord/successor Landlord, and The Quizno's Corporation, as
Tenant/successor Tenant, doing business as a Quizno's restaurant, which covers
the following real property/a portion of the following real property located in
Jefferson County, State of Colorado:
Lot 2, Block 3 except the North 10 feet thereof, Idlewild, County of Jefferson,
State of Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Realty Company
Street Address : 250 W. 14th Street, Denver, CO 80204
Legal Description of Property:
That Lease dated December 29, 1997 , and all amendments thereto, between Forum
Building Housing, LP c/o Colorado Coalition for the Homeless, as
Landlord/successor Landlord, and The Quizno's Realty Company, as
Tenant/successor Tenant, doing business as a Quizno's restaurant, which covers
the following real property located in Denver County, State of Colorado:
The Real Estate commonly known as The Form Building, 250 West 14th Street,
Denver, Colorado, County of Denver.
Also known as:
Lots 39 and 40
Block 22
Evans Addition to the City of Denver
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 191 Blue River Parkway, Silverthorne, CO 80498
Legal Description of Property:
That Lease dated Septmber 5, 1992, and all amendments thereto, between DMS
Partnership., as Landlord/successor Landlord, and The Quizno's Operating
Company, as Tenant/successor Tenant, doing business as a Quizno's restaurant,
which covers the following real property located in Summit County, State of
Colorado:
Lot 1, RIVERVIEW SUBDIVISION, FILING NUMBER 1, according to the plat
thereof filed under Reception No. 237481, County of Summit, State of
Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Corporation
Street Address : 8081 E. Orchard Road #67, Greenwood Village, CO 80111
Legal Description of Property:
That Lease dated June 22, 1990, and all amendments thereto, between Marilyn
Hickey Ministries, Inc., as Landlord/successor Landlord, and The Quizno's
Corporation, as Tenant/successor Tenant, doing business as a Quizno's
restaurant, which covers the following real property/a portion of the following
real property located in Arapahoe County,
State of Colorado:
A PARCEL OF LAND BEING ALL OF LOT 9 AND PART OF LOTS 10 AND 11. ALL IN BLOCK 7
OF "A SUBDIVISION OF SECTION 16" (AS RECORDED IN BOOK 2, PAGE 10). TOGETHER WITH
A PART OF TRACT 5 OF "A SUBDIVISION OF SECTION 21" (AS RECORDED IN BOOK 1, PAGE
12), TOGETHER WITH THOSE PORTIONS OF EAST ORCHARD ROAD AND SOUTH ULSTER STREET,
AS DEDICATED BY SAID SUBDIVISION, ALL BEING IN TOWNSHIP 5 SOUTH, RANGE 67 WEST
OF THE SIXTH PRINCIPAL MERIDIAN, CITY OF GREENWOOD VILLAGE, COUNTY OF ARAPAHOE,
STATE OF COLORADO, MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING AT THE SOUTHWEST CORNER OF SAID LOT 9, BLOCK 7; THENCE NORTH
00(Degree) 03' 01" EAST AND ALONG THE WEST LINE OF SAID LOT 9, A DISTANCE OF
20.00 FEET TO THE TRUE POINT OF BEGINNING; THENCE CONTINUING ALONG SAID WEST
LINE, A DISTANCE OF 305.32 FEET TO THE NORTHWEST CORNER OF SAID LOT 9; THENCE
NORTH 89(Degree) 31' 38" EAST ALONG THE NORTH LINE OF SAID LOT 9, A DISTANCE OF
200.00 FEET; THENCE NORTH 13(Degree) 45' 33" WEST AND RADIALLY TO A CURVE ON THE
SOUTHERLY BOUNDARY LINE OF THE SUBDIVISION OF GREENWOOD PLAZA SECOND FILING
AMENDED PLAT (AS RECORDED IN BOOK 25, PAGES 70 AND 71), A DISTANCE OF 276.00
FEET TO A POINT ON SAID CURVE; THENCE NORTHEASTERLY ALONG SAID SOUTHERLY
BOUNDARY ON A CURVE TO THE LEFT, HAVING A CENTRAL ANGLE OF 100(Degree) 41' 25"
AND A RADIUS OF 50.00 FEET, AN ARC DISTANCE OF 87.87 FEET TO A POINT; THENCE
NORTH 65(Degree) 33' 02" EAST ALONG SAID SOUTHERLY BOUNDARY ON A LINE RADIAL
FROM THE PREVIOUSLY DESCRIBED CURVE, A DISTANCE OF 365.60 FEET TO THE POINT OF
INTERSECTION WITH THE SOUTHWESTERLY RIGHT OF WAY LINE OF INTERSTATE HIGHWAY
I-25; THENCE SOUTH 24(Degree) 26' 59" EAST ALONG SAID RIGHT OF WAY LINE, A
DISTANCE OF 306.79 FEET TO THE INTERSECTION WITH THE WESTERLY RIGHT OF WAY LINE
OF SOUTH ULSTER STREET, AS PLATTED BY SAID "A SUBDIVISION OF SECTION 16"; THENCE
SOUTH 16(Degree)08' 50" EAST, A DISTANCE OF 214.42 FEET TO THE POINT OF
INTERSECTION WITH THE EASTERLY RIGHT OF WAY LINE OF SAID SOUTH ULSTER STREET,
SAID POINT ALSO BEING 60.00 FEET EAST OF AND OPPOSITE THE NORTHEAST CORNER OF
SAID LOT; THENCE SOUTH 00(Degree) 06' 01" WEST ALONG SAID EASTERLY RIGHT OF WAY
LINE, A DISTANCE OF 324.77 FEET TO THE SOUTHWEST CORNER OF LOT 8, BLOCK 6 OF
SAID "A SUBDIVISION OF SECTION 16"; THENCE SOUTH 22(Degree) 00' 23" WEST, A
DISTANCE OF 99.54 FEET TO A POINT ON THE CENTERLINE OF SOUTH ULSTER STREET, AS
PLATTED BY SAID "A SUBDIVISION OF SECTION 21", SAID POINT LAYING 62.00 FEET
SOUTH OF THE NORTH QUARTER CORNER OF SAID SECTION 21; THENCE NORTH 80(Degree)40'
40" WEST, A DISTANCE OF 658.48 FEET TO THE TRUE POINT OF BEGINNING
EXCEPTING THEREFROM, THAT PORTION AS CONVEYED TO THE STATE DEPARTMENT OF
HIGHWAYS IN DEED RECORDED OCTOBER 17, 1985 IN BOOK 4574 AT PAGE 269, COUNTY OF
ARAPAHOE, STATE OF COLORADO.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 2311 30th Street, Unit A, Boulder, CO 80301
Legal Description of Property:
That Lease dated September 20, 1991, and all amendments thereto, between
Property Colorado SC TWG Corp., as Landlord/successor Landlord, and The Quizno's
Operating Company, as Tenant/successor Tenant, doing business as a Quizno's
restaurant, which covers the following real property located in Boulder County,
State of Colorado:
1,400 to 1,600 rentable square feet located on the 1st floor, known as Unit A
and being a part of that building located in the Crossroad Commons Shopping
Center located in City and County of Boulder, Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Corporation
Street Address : 1275 Grant Street, Denver, CO 80203
Legal Description of Property:
That Lease dated February 12, 1990, and all amendments thereto, between 1275
Grant Street Partnership, as Landlord/successor Landlord, and The Quizno's
Corporation, as Tenant/successor Tenant, doing business as a Quizno's
restaurant, which covers the following real property/a portion of the following
real property located in
Denver County, State of Colorado:
East 65 Feet of Lots 36 through 40, Block 40, H.C. Brown's Second Addition in
the City and County of Denver, State of Colorado and more commonly known as 1275
Grant Street, Denver, Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 1660 Lincoln Street, Suite 105, Denver, CO 80264
Legal Description of Property:
That Lease dated July ____, 1993, and all amendments thereto, between Chancery
Investment Company, Inc., as Landlord/successor Landlord, and The Quizno's
Operating Company, as Tenant/successor Tenant, doing business as a Quizno's
restaurant, which covers the following real property located in Denver County,
State of Colorado:
2,490 rentable square feet located on the 1st floor, known as suite 105 and
being a part of that building located at 1660 Lincoln Street, Denver, CO 80264.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 1695 Larimer Street, Denver, CO 80222
Legal Description of Property:
That Lease dated December 15, 1995, and all amendments thereto, between Larimer
98, LLC, as Landlord/successor Landlord, and The Quizno's Operating Company, as
Tenant/successor Tenant, doing business as a Quizno's restaurant, which covers
the following real property/a portion of the following real property located in
Denver County, State of Colorado:
The 2,981 rentable square feet of retail space (including a prorata share of the
adjacent hallway and restrooms) Commonly referred to as 1695 Larimer Street and
located on the ground floor of the Barclay Plaza Office Building, 1675 Larimer
Street, Denver, Colorado, whose legal
description is:
The northerly 10.201 feet of Lot 26, along with Lots 27 through 32; except the
rear 4 feet thereof, Block 37, East Denver Subdivision, City and County of
Denver, State
of Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating
Company
Street Address : 14413 West Colfax, Lakewood, CO 80401
Legal Description of Property:
That Lease dated December 16, 1997, and any amendments thereto, between Denver
West Village, Inc., as Landlord/successor Landlord, and The Quizno's Operating
Company, as Tenant/successor Tenant, doing business as a Quizno's restaurant,
which covers the following real property located in Jefferson County, State of
Colorado:
A TRACT OF LAND SITUATED IN THE NORTHWEST QUARTER OF SECTION 6, TOWNSHIP 4
SOUTH, RANGE 69 WEST, OF THE SIXTH P.M., COUNTY OF JEFFERSON, STATE OF COLORADO,
DESCRIBED AS FOLLOWS:
COMMENCING AT THE WEST ONE-QUARTER CORNER OF SAID SECTION 6, THENCE NORTH
00(Degree) 03' 30" EAST, ALONG THE WEST LINE OF THE NORTHWEST QUARTER OF SAID
SECTION 6, A DISTANCE OF 533.73 FEET TO A POINT ON THE NORTHERLY RIGHT OF WAY
LINE OF OLD GOLDEN ROAD, SAID POINT BEING THE TRUE POINT OF BEGINNING; THENCE
NORTH 86(Degree) 22' 30" EAST, ALONG SAID NORTHERLY RIGHT OF WAY LINE, A
DISTANCE OF 1348.06 FEET TO A POINT ON THE NORTHERLY RIGHT OF WAY LINE OF U.S.
HIGHWAY 40 AS DESCRIBED IN PARCEL V, BOOK 415 AT PAGE 47 OF THE JEFFERSON COUNTY
RECORDS; THENCE NORTH 45(Degree) 03' 27" EAST, ALONG SAID NORTHERY RIGHT OF WAY
LINE, A DISTANCE OF 606.11 FEET; THENCE NORTH 44(Degree) 56' 30" WEST, A
DISTANCE OF 310.00 FEET; THENCE NORTH 45(Degree) 03' 30" EAST, A DISTANCE OF
300.00 FEET; THENCE NORTH 44(Degree) 56' 30" WEST, A DISTANCE OF 15.00 FEET;
THENCE NORTH 35(Degree) 44' 30" EAST, A DISTANCE OF 211.09 FEET; THENCE NORTH
62(Degree) 31' 30" EAST, A DISTANCE OF 131.97 FEET; THENCE NORTH 27(Degree) 28'
30" WEST, A DISTANCE OF 151.67 FEET; THENCE ALONG THE ARC OF A CURVE TO THE LEFT
THROUGH A CENTRAL ANGLE OF 40(Degree) 06' 20", AN ARC DISTANCE OF 337.51 FEET, A
RADIUS OF 482.17 FEET AND A CHORD BEARING OF NORTH 64(Degree) 09' 21" EAST WITH
A DISTANCE OF 330.66 FEET; THENCE NORTH 44(Degree) 06' 12" EAST, A DISTANCE OF
51.65 FEET TO A POINT ON THE SOUTHWESTERLY LINE OF THAT TRACT OF LAND DESCRIBED
IN BOOK 2175 AT PAGE 100; THENCE NORTH 45(Degree) 53' 48" WEST, ALONG SAID
SOUTHWESTERLY LINE, A DISTANCE OF 9.17 FEET; THENCE CONTINUING ALONG SAID
SOUTHWESTERLY LINE, NORTH 67(Degree) 41' 54" WEST, A DISTANCE OF 76.29 FEET;
THENCE SOUTH 44(Degree) 06' 12" WEST, A DISTANCE OF 77.57 FEET; THENCE ALONG THE
ARC OF A CURVE TO THE RIGHT THROUGH A CENTRAL ANGLE OF 40(Degree) 29' 24" AN ARC
DISTANCE OF 239.30 FEET, A RADIUS OF 338.62 FEET AND A CHORD BEARING OF SOUTH
64(Degree) 20' 54" WEST WITH A DISTANCE OF 234.35 FEET; THENCE SOUTH 84(Degree)
35' 36" WEST, A DISTANCE OF 175.00 FEET; THENCE ALONG THE ARC OF A CURVE TO THE
RIGHT THROUGH A CENTRAL ANGLE OF 10(Degree) 17' 06" AN ARC DISTANCE OF 175.92
FEET, A RADIUS OF 980.00 FEET AND A CHORD BEARING OF SOUTH 89(Degree) 44' 09"
WEST WITH A DISTANCE OF 175.68 FEET; THENCE NORTH 85(Degree) 07' 18" WEST, A
DISTANCE OF 170.92 FEET; THENCE ALONG THE ARC OF A CURVE TO THE LEFT THROUGH A
CENTRAL ANGLE OF 13(Degree) 16' 21" AN ARC DISTANCE OF 48.18 FEET, A RADIUS OF
208.00 FEET AND A CHORD BEARING OF SOUTH 88(Degree) 14' 31" WEST WITH A DISTANCE
OF 48.08 FEET TO A POINT ON THE SOUTHERLY LINE OF THAT TRACT OF LAND DESCRIBED
AT RECEPTION NO. 86033660; THENCE SOUTH 48(Degree) 29' 36" WEST, ALONG SAID
SOUTHERLY LINE, A DISTANCE OF 562.06 FEET TO A POINT ON THE SOUTHERLY RIGHT OF
WAY LINE OF INTERSTATE HIGHWAY 70 AS DESCRIBED ON BOOK 1770 AT PAGE 187; THENCE
SOUTH 44(Degree) 06' 13" WEST, ALONG SAID SOUTHERLY RIGHT OF WAY LINE, A
DISTANCE OF 1335.53 FEET TO A POINT ON THE WEST LINE OF THE NORTHWEST QUARTER OF
SAID SECTION 6; THENCE SOUTH 00(Degree) 03' 30" WEST, ALONG SAID WEST LINE, A
DISTANCE OF 45.80 FEET TO THE POINT OF BEGINNING, CONTAINING 1,411,156 SQUARE
FEET OR 32.40 ACRES, MORE OR LESS. TOGETHER WITH BLOCKS 1 AND 2, DENVER WEST
BANK/OFFICE/BUSINESS PARK SEGMENT, COUNTY OF JEFFERSON, STATE OF COLORADO.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 818 17th Street, Denver, CO 80202
Legal Description of Property:
That Lease dated May 12, 1998, and all amendments thereto, between HEP-Denver,
Ltd., as Landlord/successor Landlord, and The Quizno's Operating Company, as
Tenant/successor Tenant, doing business as a Quizno's restaurant, which covers
the following real property located
in Denver County, State of Colorado:
A certain tract of land situated in the County of Denver, State of Colorado and
more particularly described as follows:
Lots 28 to 32, inclusive, Block 129, East Denver, City and County of Denver,
State of Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Corporation
Street Address : 4495 Washington Street, Denver, CO 80216
Legal Description of Property:
That Lease dated March 23, 1995, and all amendments thereto, between A. Gene
Byrne and Ethel Irene Byrne, as Landlord/successor Landlord, and The Quizno's
Corporation, as Tenant/successor Tenant, doing business as a Quizno's
restaurant, which covers the following real property located in Denver County,
State of Colorado:
Lots 19, 20, 21, 22, 23, 24 Block 4 Garden Place City and County of Denver State
of Colorado
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 1250 S. Hover Road, Bldg. 8A, Longmont, CO 80501
Legal Description of Property:
That Lease dated January 29, 1992, and all amendments thereto, between CBL
Peripheral Properties Limited Partnership, as Landlord/successor Landlord, and
The Quizno's Operating Company, as Tenant/successor Tenant, doing business as a
Quizno's restaurant, which covers the following real property located in Boulder
County,
State of Colorado:
Lot Eight A (8A) Twin Peaks Mall Subdivision Replat "A", City of Longmont,
Boulder County, Colorado, as shown on plat recorded on Film 1355, Reception No.
690304 in the Recorder's Office of Boulder County, Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 12201 E. Arapahoe Road, #6B, Englewood, CO 80112
Legal Description of Property:
That Lease dated October 24, 1997, and all amendments thereto, between
Concord/Southfield Center, as Landlord/successor Landlord, and The Quizno's
Operating Company, as Tenant/successor Tenant, doing business as a Quizno's
restaurant, which covers the following real property located in Arapahoe County,
State of Colorado:
All of Lots 1 and 2, Block 1, Southfield Park Subdivision,
Except that portion conveyed to Arapahoe County in Deed Recorded
October 26, 1984, in Book 4292, at Page 458.
County of Arapahoe
State of Colorado
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 6525 Gunpark Drive, Boulder, CO 80301
Legal Description of Property:
That Lease dated January 31, 1986, and all amendments thereto, between Gunbarrel
Square Center, LLC, as Landlord/successor Landlord, and The Quizno's Operating
Company, as Tenant/successor Tenant, doing business as a Quizno's restaurant,
which covers the following real property located in Boulder County, State of
Colorado:
Lot 1, Gunbarrel Square, less Pad 1 and Pad 2, a resubdivision of Tract "L" and
Tracts "K" and "M", Gunbarrel Green Second Replat, a Subdivision in the
northwest 1/4 of Section 11, Township 1 North, Range 70 West of the 6th P.M.,
County of Boulder, State of Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Corporation
Street Address : 9425 S. University Blvd., Highlands Ranch, CO 80126
Legal Description of Property:
That Lease dated June 30, 1993, and all amendments thereto, between Highlands
Ranch Marketplace, LLC, as Landlord/successor Landlord, and The Quizno's
Corporation, as Tenant/successor Tenant, doing business as a Quizno's
restaurant, which covers the following real property
located in Douglas County, State of Colorado:
2003 sq. Ft. Located in the shopping center described as Lots 1-5,
Highlands Ranch filing no. 123-A, County of Douglas, State of
Colorado.
<PAGE>
SCHEDULE 1
B. Pledged Store Information
Legal Name : The Quizno's Corporation (Tax ID 84-1169286)
The Quizno's Licensing Company (Tax ID 84-1466476)
The Quizno's Acquisition Company (Tax ID 84-1406781)
The Quizno's Realty Company (Tax ID 84-1457061)
S & S Company (Tax ID 84-1318299)
The Quizno's Operating Company (Tax ID 84-1284253)
Quizno's Kansas, LLC (Tax ID 91-1921744)
Trade Name : Quizno's Classic Subs
Franchise owned by (if
applicable) : N/A
Property : Leased by The Quizno's Operating Company
Street Address : 999 18th Street, Denver, CO 80202
Legal Description of Property:
That Lease dated September 24, 1996, and all amendments thereto, between
Denver-Stellar Associates Limited Partnership, as Landlord/successor Landlord,
and The Quizno's Corporation, as Tenant/successor Tenant, doing business as a
Quizno's restaurant, which covers the following real property located in Denver
County,
State of Colorado:
PARCEL A
Lots 1 through 32, inclusive, Block 110, TOGETHER WITH, the vacated alley in
said Block 110, EAST DENVER, City and County of Denver, State of Colorado.
PARCEL B
Revocable Permit or License in City and County of Denver Ordinance 427, Series
of 1978, recorded July 2, 1985 at Reception No. 033657 to encroach with basement
wells and vehicular ramps in those parts of 18th Street, 19th Street, Champs
Street and Curtis Street bounding Block 110, EAST DENVER, located within the
boundaries described as
follows:
COMMENCING as the most Westerly corner of Block 110, EAST DENVER; thence
Northwesterly and parallel with the Southwesterly line of said Block 110
extended Northwesterly 1 foot to the TRUE POINT OF BEGINNING; thence
Northeasterly and parallel with the Northwesterly line of said Block 110, 70
feet; thence Northwesterly and parallel with the Southwesterly line of said
Block 110 extended Northwesterly 3 feet; thence Northeasterly and parallel with
the Northeasterly line of said Block 110, 30 feet; thence Northwesterly and
parallel with the Southwesterly line of said Block 110, extended Northwesterly 8
feet; thence Northeasterly and parallel with the Northwesterly line of said
Block 110, 290 feet; thence Easterly to a point that is 9 feet Southeasterly
from the most Northerly corner of said Block 110 and 10 feet Northeasterly from
the Northeasterly line of said Block 110; thence Southeasterly and parallel with
the Northeasterly line of said Block 110, 255 feet; thence Southerly to a point
5 feet Southeasterly from the most Easterly corner of said Block 110 and 12 feet
Southeasterly from the Southeasterly line of said Block 110; thence
Southwesterly and parallel with the Southeasterly line of said Block 110, 385
feet; thence Westerly to a point 9 feet Northwesterly from the most Southerly
corner of said Block 110 and 10 feet Southwesterly from the Southwesterly line
of said Block 110; thence Northwesterly and parallel with the Southwesterly line
of said Block 110, 251 feet; thence Northerly to the TRUE POINT OF BEGINNING.
PARCEL C
Revocable Permit or License in City and County of Denver Ordinance No. 220,
Series of 1981, recorded July 11, 1985 at Reception No. 037797, to encroach with
concrete planters in the following described areas in the City and County of
Denver and State of Colorado, to-wit:
Those parts of Curtis Street, Champs Street and 18th Street described as
follows:
<PAGE>
Encroachment "A"
That part of Curtis Street adjacent to Block 110, East Denver, described as
follows: Beginning at a point on the Northwesterly line of Block 110, East
Denver, said point being 27.19 feet Southwesterly of the most Northerly corner
thereof; thence on an angle to the right of 133(Degree) 46' 47" a distance of
1.94 feet; thence on an angle to the left of 90(Degree) 06' 36" a distance of
7.15 feet; thence on an angle to the left of 43(Degree) 24' 36" a distance of
3.58 feet; thence on an angle to the left of 45(Degree) 17' 02" a distance of
1.77 feet; thence on an angle to the right of 43(Degree) 24' 37" a distance of
11.14 feet; thence on an angle to the right of 42(Degree) 52' 15" a distance of
1.72 feet; thence on an angle to the left of 43(Degree) 17' 57" a distance of
11.91 feet; thence on an angle to the left of 44(Degree) 00' 31" a distance of
1.63 feet; thence on an angle to the right of 43(Degree) 30' 51: a distance of
11.08 feet; thence on an angle to the right of 45(Degree) 21' 35" a distance of
1.77 feet; thence on an angle to the left of 44(Degree) 49' 34" a distance of
47.05 feet; thence on an angle to the left of 44(Degree) 59' 30" a distance of
8.98 feet to a point on the Northwesterly line of Block 110, East Denver; thence
Northeasterly along said Northwesterly line 99.86 feet to the point of
beginning.
Encroachment "B"
That part of Curtis Street adjacent to Block 110, East Denver, described as
follows: Beginning at a point on the Northwesterly line of Block 110, East
Denver, said point being 141.28 feet Southwesterly of the most Northerly corner
thereof; thence on an angle to the right of 134(Degree) 37' 42" a distance of
18.33 feet; thence on an angle to the left of 89(Degree) 02' 22" a distance of
0.61 feet; thence on an angle to the left of 46(Degree) 22' 20" a distance of
12.31 feet; thence on an angle to the left of 44(Degree) 15' 58" a distance of
3.48 feet; thence on an angle to the right of 44(Degree) 58' 27" a distance of
17.58 feet to a non-tangent point of curve; thence along a curve to the right
having a radius of 8.38 feet and a central angle of 107(Degree) 01' 35" a
distance of 15.65 feet to a point on the Northwesterly line of Block 110, East
Denver; thence Northeasterly along said Northwesterly line a distance of 11.87
feet to the point of beginning.
Encroachment "C"
That part of the Champs Street adjacent to Block 110, East Denver, described as
follows: Beginning at a point on the Southeasterly line of Block 110, East
Denver, said point being 16.55 feet Northeasterly from the most Southerly corner
thereof; thence on an angle to the right of 90(Degree) 47' 59" a distance of
3.66 feet; thence on an angle to the left of 90(Degree) 45' 52" a distance of
50.21 feet; thence on an angle to the left of 43(Degree) 06' 04" a distance of
6.22 feet to a point on the Southeasterly line of said Block 110; thence
Southwesterly along said Southeasterly line 61.56 feet to the point of
beginning.
Encroachment "D"
That part of 18th Street adjacent to Block 110, East Denver, described as
follows: Beginning at a point on the Southwesterly line of Block 110, East
Denver, said point being 12.57 feet Northwesterly from the most Southerly corner
thereof; thence on an angle to the left of 89(Degree) 31' 03" a distance of 3.59
feet; thence on an angle to the right of 89(Degree) 36' 12" a distance of 25.53
feet to a non-tangent point of curve; thence along a curve to the left having a
radius of 7.26 feet and a central angle of 29(Degree) 35' 19" a distance of 3.75
feet to a point on the Southwesterly line of said Block 110; thence
Southeasterly along said Southwesterly line a distance of 24.49 feet to the
point of beginning.
<PAGE>
SCHEDULE 2
UCC Filing Locations
<TABLE>
<CAPTION>
State of State of
State Located Principal Incorporation City County State
- -------------- ----------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Colorado Colorado Colorado Denver Arapahoe CO
Boulder Boulder CO
Silverthorne Summit CO
Highlands Douglas CO
Ranch
Denver Denver CO
Lakewood Jefferson CO
Greenwood Arapahoe CO
Village
Longmont Boulder CO
SOS,
Colorado
</TABLE>
<PAGE>
SCHEDULE 3
List all Borrower's Affiliates who have executed loan
documents to the Secured Party.
Name of Affiliate Address Relationship to Borrower
- ----------------- ------- ------------------------
NONE
<PAGE>
SCHEDULE 4
Applicable Collateral
Loan Number Store Name Address
- ----------- ---------- -------
E. Arapahoe Quizno's 12201 E. Arapahoe Rd., #6B,
Englewood, CO 80112
Gunpark Quizno's 6525 Gunpark Drive, Boulder, CO 80301
Blue River Quizno's 191 Blue River Parkway,
Silverthorne, CO 80498
E. Orchard Quizno's 8081 E. Orchard Rd., #67,
Greenwood Village, CO 80111
Pearl Street Quizno's 2311 30th Street, Unit A,
Boulder, CO 80301
S. University Quizno's 9425 S. University Blvd.,
Highlands Ranch, CO 80126
Grant Street Quizno's 1275 Grant Street, Denver, CO
80203
S. Hover Quizno's 1250 S. Hover Rd., Bldg. 8A,
Longmont, CO 80501
Lincoln Street Quizno's 1660 Lincoln Street, Suite 105,
Denver, CO 80264
West Colfax Quizno's 10450 West Colfax, Lakewood, CO
80215
N. Washington Quizno's 4495 Washington St., Denver, CO
80216
W. Colfax Quizno's 14413 West Colfax Ave., Lakewood,
CO 80401
18th Street Quizno's 999 18th Street, Denver, CO 80202
Larimer Quizno's 1695 Larimer St., Denver, CO 80222
W. 14th Street Quizno's 250 W. 14th Street, Denver, CO
80204
S. Tamarac Quizno's 4403 S. Tamarac Parkway, Suites
5B, 6A, 6B, Denver, CO 80237
17th Street Quizno's 818 17th Street, Denver, CO 80202
Corporate Office N/A 1415 Larimer Street, Denver, CO
80202
<PAGE>
SCHEDULE 5
Liquor Licenses
[IF NONE, SO STATE]
Type of Permit and
Licensee Unit Address License No. Issuing Entity Expiration
- ---------- ------------ ----------- ------------------ -----------
NONE
<PAGE>
SCHEDULE 6
Trademarks and Patents
Trademarks - Federal Registration
Registration Date of Application
Trademark Number Registration Serial No.
- --------- ------ ------------ ----------
Smoothy Q 75-705, 786
Smoothie Q (Stylized) 75-705, 785
Quizno's Subs Oven Baked
Classics (& Design) 2,228,680 3/2/99
Cheeze Louise (&
Design) 2,144,161 3/17/98
Cheeze Louise Home Bake
Pizza (& Design) 2,125,221 12/30/97
Quizno's Classic Subs
Express 2,086,598 8/5/97
Q Quizno's (& Design) 1,965,096 4/2/96
Quizno's (& Design) 1,716,834 9/15/92
Bain's 1,640,049 4/2/91
Quizno's (Stylized) 1,317,421 1/29/85
Bain's Cafeteria
(Stylized) 959,079 5/15/73
Patents - Federal Registration
Registration Date of Application
Patent Number Registration Serial No.
- ------- --------------- ------------ -----------
NONE
<PAGE>
SCHEDULE 7
Pending Claims Regarding Franchise Agreements as of October 7, 1999
Pending Claims Related to
Franchisee Litigation Past Due Royalties Past Due Royalties
- ------------ ----------- ------------------ --------------------
Abene Yes No N/A
Anderson Yes No N/A
Spicer Yes No N/A
LDC Partners Yes Yes Greater than $10,000
but less than
$20,000
Wagner Yes No N/A
Hot Concepts Yes No N/A
Gateway Bankruptcy Yes Under $10,000
Wheaton No Yes Under $10,000
Orland Park No Yes Greater than $10,000
but less than
$20,000
Ralston Plaza No Yes Under $10,000
Madison (Closed) No Yes Under $10,000
<PAGE>
Exhibit A
UCC LIST
Quizno's Kansas, LLC
<TABLE>
<CAPTION>
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
General Electric SOS-Kansas 2553233 Restaurant To be paid at closing
Equipment
General Electric Butler County, 431 Restaurant To be paid at closing
Kansas Equipment
General Electric Sedgwick 99-01234 Restaurant To be paid at closing
County, KS Equipment
Quizno's Classic Subs
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
Norwest Bank SOS - Colorado F0464852 Accounts, Obtain termination
chattel paper,
contract rights
Stoico Restaurant Group, Inc.
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
Liberty Bank & Trust Sedgwick 97 02475 Acct's Verify collateral;
County, KS Receivable obtain termination
Inventory
The Quizno's Corporation
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
Retail & Restaurant Boulder County, CO 01670350 Tangible and Release as to
Growth Capital intangible ACFI's collateral
personal
property, incl.
Accounts, chattel
paper, inventory
<PAGE>
GE Capital Boulder 1898130 Restaurant To be paid at closing
County, CO Equipment
GE Capital Arapahoe A7004530 Restaurant To be paid at closing
County, CO Equipment
Retail & Restaurant Arapahoe A9013780 Tangible Release as to ACFI's
Growth Capital County, CO and intangible
collateral
personal
property,
incl.
Accounts,
chattel
paper,
inventory
Meridian Financial Jefferson F0571266 Personal To be paid at closing
Corp. County, CO property
GE Capital Jefferson F0789854 Restaurant To be paid at closing
County, CO equipment
Meridian Financial Douglas 9839811 Personal To be paid at closing
Corp. County, CO property
Retail & Restaurant Denver 9700004315 Tangible Release as to ACFI's
Growth Capital County, CO and intangible collateral
personal
property,
incl.
Accounts,
chattel
paper,
inventory
Retail & Restaurant Denver 9700004316 Tangible Release as to ACFI's
Growth Capital County, CO and collateral
intangible
personal
property,
incl.
Accounts,
chattel
paper,
inventory
Amendment/Release 9800140007
Colorado Business SOS - CO 9700069178 Restaurant To be paid at closing
Leasing FF&E
Amendment 9900089788
<PAGE>
Colorado Business SOS - CO 9700092973 Restaurant To be paid at closing
Leasing FF&E
Amendment 9900089790
Colorado Business SOS - CO 9700092975 Restaurant To be paid at closing
Leasing FF&E
Amendment 9900089786
GE Capital SOS - CO 9900013845 Restaurant To be paid at closing
equipment
Retail & Restaurant SOS - CO A7004531 Tangible Release as to ACFI's
Growth Capital and collateral
intangible
personal
property,
incl.
Accounts,
chattel
paper,
inventory
Retail & Restaurant SOS - CO U0146952 Tangible Release as to ACFI's
Growth Capital and collateral
intangible
personal
property,
incl.
Accounts,
chattel
paper,
inventory
Retail & Restaurant SOS - CO 19972000584 Tangible Release as to ACFI's
Growth Capital and intangible collateral
personal
property,
incl.
Accounts,
chattel
paper,
inventory
Amendment/Partial 19982050508
Release
Retail & Restaurant SOS - CO 9700004316 Tangible Release as to ACFI's
Growth Capital and collateral
intangible
personal
property,
incl.
Accounts,
chattel
paper,
inventory
<PAGE>
Amendment/Partial 9800140007
Release
Meridian Financial SOS - CO F0571267 Personal To be paid at closing
Corporation property
Meridian Financial SOS - CO 9800032717 Personal To be paid at closing
Corporation property
GE Capital SOS - CO 9800032717 Restaurant To be paid at closing
equipment
Meridian Financial SOS - CO 9900013844 Personal To be paid at closing
Corporation property
Colorado Business SOS - CO 9700069177 Restaurant To be paid at closing
Leasing FF&E
Amendment 9900089787
GE Capital SOS - CO F0789855 Restaurant To be paid at closing
equipment
GE Capital SOS - CO 40152207 Restaurant To be paid at closing
equipment
GE Capital SOS - CO A9013781 Restaurant To be paid at closing
equipment
Colorado Business SOS - CO 9700092974 Personal To be paid at closing
Leasing property
Amendment 9900089785
Colorado Business SOS - CO 9700092972 Personal To be paid a closing
Leasing property
Amendment 9900089789
Newcourt SOS - CO 19992017263 Phone Permitted encumbrance
Communications equipment
GE Capital SOS - CO 19992004786 Restaurant To be paid at closing
equipment
Meridian Financial SOS - CO 19982070374 Personal To be paid at closing
Corporation property
<PAGE>
Meridian Financial SOS - CO 19982034339 Personal To be paid at closing
Corporation property
Meridian Financial SOS - CO 19982019591 Personal To be paid at closing
Corporation property
Meridian Financial SOS - CO 19982019590 Personal To be paid at closing
Corporation property
Meridian Financial SOS - CO 19982019589 Personal To be paid at closing
Corporation property
Meridian Financial SOS - CO 19982014632 Personal To be paid at closing
Corporation property
The Quizno's Acquisition Company
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
Bain's Deli SOS - CO 19982018855 Accounts, Verify collateral;
Franchise Associates inventory, obtain termination
equipment
Sue Hoover
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
IRS SOS - CO 19872548277 Lien for Tax Verify collateral
Period 1980 (Blue River)
Falcon Financial (Corporation) (LLC)
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
Key Bank Commercial SOS - CO 19992011981 Inventory, Verify collateral
Loan Services equipment location
(S. University)
<PAGE>
The Quizno's Operating Company
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
Yogurt Ventures, USA SOS - CO 19982022801 Smoothie Verify collateral
equipment location
Advanta Business SOS - CO 19962057900 Printer, Verify collateral
Services terminal location
Schaden & Schaden, Inc.
Secured Party/(Plaintiff): Filing Location: Filing Number: Collateral: Action Required:
- -------------------------- ---------------- -------------- ----------- ----------------
Colorado Dept. Of Boulder County, CO 1812412 Judgment Verify collateral
Revenue location
</TABLE>
<PAGE>
Exhibit B
Permitted Encumbrances
[Subject to approval of the Secured Party]
<TABLE>
<CAPTION>
Name of Secured Party or Lienor $ Amount Collateral or Property Encumbered
- ------------------------------- ------------ ---------------------------------
<S> <C> <C>
Newcourt Communications $1,500/mo Phone equipment
</TABLE>
<PAGE>
Exhibit C
Form of
Compliance Certificate
AMRESCO Commercial Finance, Inc.
412 E. Parkcenter Blvd., Suite 300
Boise, Idaho 83706
Re: Pledge and Security Agreement, dated October 5, 1999,
by the Borrower in favor of AMRESCO Commercial
Finance, Inc. (the "Security Agreement").
The Borrower hereby certifies to the Secured Party (as defined in the
Security Agreement) that (i) all representations and warranties made by the
Borrower in the Security Agreement, as of the date hereof, are true and correct
in all material respects as if made on the date hereof; (ii) the Borrower has
performed all of its covenants and other Obligations (as defined in the Security
Agreement) required to be performed under the Loan Documents (as defined in the
Security Agreement) as of the date hereof; (iii) no Event of Default (as defined
in the Security Agreement) has occurred and the Borrower has no reason to
believe that an Event of Default will occur any time in the six-month period
following the date hereof; (iv) all information provided regarding year-to-date
sales of each Pledged Store, as indicated below, is true, complete and correct;
and (v) all information, reports, statements and financial and other data
furnished by the Borrower to the Secured Party, its agents or representatives in
connection with the Borrower's Loans and secured Obligations were, on the date
so furnished, and are true, complete and correct.
IN WITNESS WHEREOF, the undersigned has caused this Compliance Certificate
to be executed and delivered for and on behalf of the Borrower, this ____ day
of _____________, ____.
The Quizno's Corporation The Quizno's Licensing Company
By:_________________________________ By:_________________________________
Name: Name:
Title: Title:
The Quizno's Acquisition Company The Quizno's Realty Company
By:_________________________________ By:_________________________________
Name: Name:
Title: Title:
S & S Company The Quizno's Operating Company
By:_________________________________ By:_________________________________
Name: Name:
Title: Title:
Quizno's Kansas, LLC
By:_________________________________
Name:
Title:
Pledged Store Year-To-Date Sales
--------------------- ---------------------
* Exhibit 21.1
LIST OF SUBSIDIARIES OF THE QUIZNO'S CORPORATION
1. The Quizno's Operating Company, a Colorado corporation 2. S&S 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. QUIZ-DIA, Inc., a Colorado
corporation 7. 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 Forms S-8 (No. 333-45549 and
333-45205), of our report dated December 13, 1999 appearing in this annual
report on form 10-KSB of The Quizno's Corporation and Subsidiaries for the year
ended September 30, 1999.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
DECEMBER 30, 1999
DENVER, COLORADO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 626,828
<SECURITIES> 0
<RECEIVABLES> 1,091,231
<ALLOWANCES> 43,793
<INVENTORY> 0
<CURRENT-ASSETS> 8,042,743
<PP&E> 6,034,512
<DEPRECIATION> 1,230,461
<TOTAL-ASSETS> 21,774,774
<CURRENT-LIABILITIES> 3,171,290
<BONDS> 0
0
313
<COMMON> 3,074
<OTHER-SE> 2,110,471
<TOTAL-LIABILITY-AND-EQUITY> 21,774,774
<SALES> 6,420,563
<TOTAL-REVENUES> 6,937,707
<CGS> 1,969,433
<TOTAL-COSTS> 16,327,005
<OTHER-EXPENSES> 902,156
<LOSS-PROVISION> 220,536
<INTEREST-EXPENSE> 240,827
<INCOME-PRETAX> 2,088,309
<INCOME-TAX> 721,688
<INCOME-CONTINUING> 1,366,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,769,592)
<NET-INCOME> (1,527,201)
<EPS-BASIC> (.50)
<EPS-DILUTED> (.55)
</TABLE>
