UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1169286
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
(Address of principal executive offices)
(720) 359-3300
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by Section
13 or 15(d)of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Outstanding at
Class May 8, 2000
------------------------------ ----------------
Common Stock, $0.001 par value 2,986,721 shares
<PAGE>
THE QUIZNO'S CORPORATION
Commission File Number: 000-23174
Quarter Ended March 31, 2000
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Part I - FINANCIAL INFORMATION
Consolidated Statements of Income...................................Page 1
Consolidated Balance Sheets.........................................Page 3
Consolidated Statements of Cash Flows...............................Page 5
Consolidated Statement of Stockholders' Equity......................Page 7
Notes to Consolidated Financial Statements..........................Page 8
Management's Discussion and Analysis or Plan of Operation.. ........Page 11
Part II - OTHER INFORMATION.........................................Page 24
Signature...........................................................Page 27
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FRANCHISE OPERATIONS:
Revenue
Continuing fees ....................... $ 3,871,071 $ 2,505,498 $ 7,508,553 $ 4,235,129
Initial franchise fees ................ 1,459,677 768,754 2,922,107 1,655,837
Area director and master franchise fees 150,926 472,146 631,722 1,827,505
Other ................................. 321,218 99,991 548,621 237,857
Interest .............................. 135,399 65,107 266,092 181,925
----------- ----------- ----------- -----------
Total revenue .................. 5,938,291 3,911,496 11,877,095 8,138,253
----------- ----------- ----------- -----------
Expenses
Sales and royalty commissions ......... 1,883,516 1,173,440 3,640,536 2,598,205
General and administrative ............ 3,132,854 1,962,666 5,654,369 4,056,636
----------- ----------- ----------- -----------
Total expenses ................. 5,016,370 3,136,106 9,294,905 6,654,841
----------- ----------- ----------- -----------
Net income from franchise operations .... 921,921 775,390 2,582,190 1,483,412
----------- ----------- ----------- -----------
COMPANY STORE OPERATIONS:
Sales ................................... 3,757,196 2,018,585 6,514,780 3,874,390
----------- ----------- ----------- -----------
Expenses
Cost of sales ......................... 1,071,426 609,084 1,886,647 1,150,737
Cost of labor ......................... 824,348 547,535 1,447,053 1,023,361
Other store expenses .................. 1,485,290 678,402 2,583,921 1,433,174
----------- ----------- ----------- -----------
Total expenses ................. 3,381,064 1,835,021 5,917,621 3,607,272
----------- ----------- ----------- -----------
Net income from Company store operations 376,132 183,564 597,159 267,118
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
(continued on next page)
(Unaudited)
- 1 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OTHER INCOME (EXPENSE):
Sales by stores held for resale ..................... $ -- $ 223,994 $ 103,153 $ 654,736
Expenses related to stores held for resale .......... (68,511) (317,421) (200,896) (800,356)
Loss on sale of Company stores ...................... -- (72,928) (43,595) (120,433)
Sale of Japan master franchise ...................... -- 860,867 -- 860,867
Provision for bad debts ............................. (45,614) (153,214) (213,485) (287,505)
Depreciation and amortization ....................... (441,709) (270,992) (903,694) (630,528)
Interest expense .................................... (458,334) (87,684) (925,302) (168,575)
Other expense ....................................... (37,657) 5,716 (98,216) (36,242)
----------- ----------- ----------- -----------
Total other expense ................................. (1,051,825) 188,338 (2,282,035) (528,036)
----------- ----------- ----------- -----------
Net income before income taxes ...................... 246,228 1,147,292 897,314 1,222,494
(Provision) benefit for income taxes ................ (76,178) (365,096) (302,545) 3,457
----------- ----------- ----------- -----------
Net income .......................................... 170,050 782,196 594,769 1,225,951
Preferred stock dividends ........................... (40,341) (45,660) (79,626) (100,581)
----------- ----------- ----------- -----------
Net income before cumulative effect of a change in
accounting principle ............................... 129,709 736,536 515,143 1,125,370
Cumulative effect of a change in accounting
principle (net of taxes) (Note 15) ................. -- (84,090) -- (84,090)
----------- ----------- ----------- -----------
Net income applicable to common shareholders ........ $ 129,709 $ 652,446 $ 515,143 $ 1,041,280
=========== =========== =========== ===========
Net income per share-basic
Net income before cumulative effect of a change in
accounting principle ............................... $ 0.04 $ 0.24 $ 0.17 $ 0.37
Cumulative effect of a change in accounting
principle .......................................... -- (0.03) -- (0.03)
----------- ----------- ----------- -----------
Basic net income per share of common stock .......... $ 0.04 $ 0.21 $ 0.17 $ 0.34
=========== =========== =========== ===========
Net income per share-diluted
Net income before cumulative effect of a change in
accounting principle ............................... $ 0.03 $ 0.19 $ 0.14 $ 0.30
Cumulative effect of a change in accounting principle -- (0.02) -- (0.02)
----------- ----------- ----------- -----------
Diluted net income per share of common stock ........ $ 0.03 $ 0.17 $ 0.14 $ 0.28
=========== =========== =========== ===========
Weighted average common shares outstanding
Basic .............................................. 2,991,388 3,054,535 2,990,259 3,056,437
=========== =========== =========== ===========
Diluted ............................................ 3,822,721 3,756,414 3,782,622 3,760,775
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
(Unaudited)
- 2 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
2000 1999
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents .................. $ 368,568 $ 626,828
Short term investments ..................... 6,854,532 4,263,877
Accounts receivable, net of allowance
for doubtful accounts of $155,471
at March 31, 2000 and $43,793 at
September 30, 1999 ........................ 1,911,348 1,047,438
Current portion of notes receivable ........ 538,128 519,994
Deferred tax asset ......................... 128,718 128,718
Other current assets ....................... 456,343 373,578
Assets held for resale and investment
in area directorships ..................... -- 1,082,310
----------- -----------
Total current assets ....................... 10,257,637 8,042,743
----------- -----------
Property and equipment at cost,
net of accumulated depreciation
and amortization of $1,798,696 at
March 31, 2000 and $1,230,461 at
September 30, 1999 (Notes 7 and 10) ...... 11,126,132 4,804,051
----------- -----------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $909,375 at March 31,
2000 and $712,759 at September 30, 1999
(Note 10) ................................... 5,192,155 1,662,265
Investment in area directorships, net of
accumulated amortization of $73,225
at March 31, 2000 ........................... 1,607,876 --
Deferred assets .............................. 2,418,516 1,726,984
Deferred tax asset ........................... 3,532,298 3,507,213
Deposits and other assets .................... 213,983 361,189
Notes receivable, net of allowance for
doubtful accounts of $40,000 at March 31,
2000 and $41,742 at September 30, 1999 ...... 1,522,942 1,670,329
----------- -----------
Total other assets ............................ 14,487,770 8,927,980
----------- -----------
Total assets .................................. $35,871,539 $21,774,774
=========== ===========
See notes to consolidated financial statements.
(Unaudited)
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ........................... $ 1,559,087 $ 1,219,157
Accrued liabilities ........................ 1,003,512 544,476
Current portion of subordinated debt ....... -- 218,546
Current portion of long term obligations ... 1,210,325 337,642
Income taxes payable ....................... -- 851,469
------------ ------------
Total current liabilities ..................... 3,772,924 3,171,290
Line of credit (Note 8) ....................... -- --
Long term obligations (Note 9) ................ 15,779,261 1,268,504
Subordinated debt ............................. -- 1,498,791
Deferred revenue (Note 4) ..................... 14,192,004 13,722,331
----------- ------------
Total liabilities ............................. 33,744,189 19,660,916
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000
shares authorized:
Class A issued and outstanding 146,000
at March 31, 2000 and September 30,
1999 ($876,000 liquidation preference) ..... 146 146
Class C issued and outstanding 167,000
at March 31, 2000 and September 30,
1999 ($835,000 liquidation preference) ..... 167 167
Class D issued and outstanding 4,000 at
March 31, 2000 ($12,000 liquidation
preference) (Note 12) ...................... 4 --
Class E issued and outstanding 58,007
at March 31, 2000 ($500,020 liquidation
preference) (Note 14) ...................... 58 --
Common stock, $.001 par value;9,000,000
shares authorized; issued and
outstanding 2,984,636 at March 31,
2000 and 3,074,177 at September 30,
1999(Note 13) .............................. 2,985 3,074
Capital in excess of par value ................ 3,904,699 4,485,949
Accumulated deficit ........................... (1,780,709) (2,375,478)
------------ ------------
Total stockholders' equity .................... 2,127,350 2,113,858
------------ ------------
Total liabilities and stockholders' equity .... $35,871,539 $21,774,774
=========== ===========
</TABLE>
See notes to consolidated financial statements.
(Unaudited)
- 4 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 594,769 $ 1,141,861
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change
in accounting principle ...................... -- 125,507
Depreciation and amortization ................. 903,694 630,528
Provision for bad debts ....................... 213,485 287,505
Deferred income taxes ......................... (25,085) (594,660)
Promissory notes accepted for area
director fees ................................ (221,357) (798,793)
Loss on disposal of Company store ............. 43,595 120,433
Area director marketing agreement
fees recognized .............................. (48,890) --
Changes in assets and liabilities:
Accounts receivable ......................... (868,043) (667,219)
Other current assets ........................ (56,828) 119,546
Accounts payable ............................ 339,930 469,562
Accrued liabilities ......................... 459,036 581,625
Income taxes payable ........................ (851,469) 321,354
Deferred franchise costs .................... (89,550) (127,761)
Deferred initial franchise fees
and other fees ............................. 523,995 2,017,176
------------ ------------
Net cash provided by operations ............ 917,282 3,626,664
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........... (4,894,545) (1,119,439)
Issuance of other notes receivable ........... (89,000) (325,188)
Short term investments ....................... (2,590,655) (457,985)
Proceeds from the sale of assets
and stores .................................. 137,361 213,000
Acquisition of Company owned stores .......... (5,767,393) --
Principal payments received on notes
receivable .................................. 345,158 704,402
Investment by minority interest owners ....... -- 143,503
Intangible and deferred assets and deposits .. 105,959 (596,500)
Investments in area director territories ..... (685,916) (352,571)
------------ ------------
Net cash (used in) investing activities ..... (13,439,031) (1,790,778)
------------ ------------
</TABLE>
See notes to consolidated financial statements.
(continued on next page)
(Unaudited)
- 5 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ......... 143,778 66,477
Proceeds from sale of Class D and Class E
Preferred Stock ........................... 293,583 --
Principal payments on long term obligations (3,513,897) (1,609,631)
Proceeds from issuance of notes payable .... 17,180,000 2,242,187
Financing costs ............................ (646,317) (1,309)
Common stock repurchased ................... (1,114,032) --
Dividends paid ............................. (79,626) (100,882)
Redemption of Class B Preferred Stock ...... -- (500,000)
----------- -----------
Net cash provided by financing activities 12,263,489 96,842
----------- -----------
Net (decrease) increase in cash ............... (258,260) 1,932,728
Cash, beginning of period ..................... 626,828 1,058,109
----------- -----------
Cash, end of period ........................... $ 368,568 $ 2,990,837
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest ... $ 747,329 $ 162,716
============ ============
Cash paid during the period for income
taxes ..................................... $ 1,528,450 $ 274,840
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 1999, we reduced notes payable, pursuant
to the terms of a purchase agreement, in the amount of $116,118. A corresponding
reduction in intangibles was also recorded. Also, during the period, we sold the
franchising rights and obligations for all but 14 of our Bain's Deli's franchise
agreements to Bain's Deli Corporation for $850,000, $800,000 of which was in the
form of a promissory note. Finally, we acquired assets under capital leases
totaling $150,082.
During the six months ended March 31, 2000, we accepted a promissory note in the
amount of $19,446 for equipment previously held for resale. A note receivable in
the amount of $79,566 was capitalized in exchange for an Area Director territory
repurchased during the quarter. At March 31, 2000, we had signed Class E
Preferred Stock Subscription Agreements for $500,020, of which $175,020 was
included in accounts receivable and subsequently collected in April 2000. Also,
a Company store held for resale was closed and the net assets of $35,633 were
written-off.
See notes to consolidated financial statements.
(Unaudited)
- 6 -
<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
----------- ------------ ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1999 .......... 413,000 $ 413 3,054,459 $ 3,054 $ 5,065,247 $ (972,507)
Issuance of common stock for
exercise of options and
pursuant to the employee
benefit plan ........................ -- -- 28,809 29 75,438 --
Tax benefit from exercise of
options ............................. -- -- -- -- 14,840 --
Shares cancelled ..................... -- -- (9,091) (9) (45,446) --
Redemption of Series B Preferred
Stock ............................... (100,000) (100) -- -- (499,900) --
Preferred stock dividends ............ -- -- -- -- (124,230) --
Net (loss) ........................... -- -- -- -- -- (1,402,971)
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 1999 ....... 313,000 313 3,074,177 3,074 4,485,949 (2,375,478)
Issuance of common stock for exercise
of options and pursuant to the
employee benefit plan .............. -- -- 38,459 39 143,739 --
Common Stock repurchased (Note 13) ... -- -- (128,000) (128) (1,113,904) --
Issuance of Series D Convertible
Preferred Stock (Note 12) ........... 4,000 4 -- -- 11,396 --
Issuance of Series E Convertible
Preferred Stock (Note 14) ........... 58,007 58 -- -- 457,145 --
Preferred stock dividends ............ -- -- -- -- (79,626) --
Net income ........................... -- -- -- -- -- 594,769
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 2000 ........... 375,007 $ 375 2,984,636 $ 2,985 $ 3,904,699 $(1,780,709)
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
(Unaudited)
- 7 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
consolidated operations for the three and six month periods ended March 31, 2000
and March 31, 1999, (b) the consolidated financial position at March 31, 2000
and September 30, 1999, (c) the consolidated statements of cash flows for the
six month periods ended March 31, 2000 and March 31, 1999, and (d) the
consolidated changes in stockholders' equity for the nine month and six month
periods ended September 30, 1999 and March 31, 2000, respectively, have been
made.
2. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for financial
statements. For further information, refer to the audited consolidated financial
statements and notes thereto for the nine months ended September 30, 1999,
included in our Annual Report on Form 10-KSB to the Securities and Exchange
Commission filed on December 30, 1999.
3. In October 1999, we changed our fiscal year from December 31 to
September 30. All references in the financial statements to the period ended
March 31 relate to the three and six months ended March 31, 2000. The results
for the three-month and six-month periods ended March 31, 2000 are not
necessarily indicative of the results for the entire fiscal year of 2000.
4. 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. 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 2000 income included $258,072
($129,036 for the second quarter ended March 31, 2000) of amortized deferred net
revenue related to area director marketing agreement fees previously recognized
prior to fiscal 1999.
5. We are obligated to pay an opening commission to the area director who
sold the franchise at the time the franchise opens for business. These
commissions are expensed at the time the related franchise opens for business
and are not accrued as a liability of ours until that time. At March 31, 2000,
there were 516 domestic franchises sold but not yet open with related opening
commissions totaling $1,959,900 ($1,585,773 at September 30, 1999).
6. Other than the items discussed in our annual report on Form 10-KSB for
the year ended September 30, 1999, there are no other pending material legal
proceedings to which we are a party or to which our property is subject. In
addition, from time to time, we are involved in litigation and proceedings
arising out of the ordinary course of our business. We do not believe that any
of the foregoing litigation will have a material adverse effect on us.
(Unaudited)
- 8 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. (continued) In 1999, we commenced a program called Owner in Training
under which it provides financial assistance to store managers interested in
owning their own franchise. We provide financial guarantees to such persons for
start-up capital loans. In 1999, we guaranteed two such loans totaling $320,000.
7. 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.
8. On December 22, 1999, we closed on a line of credit loan and was loaned
$3,350,000 by Merrill Lynch Business Financial Services, Inc. The loan bears
interest at the 30 day Dealer Commercial Paper Rate plus 2.5% (equal to 8.13% at
December 31, 1999). The maximum amount of the line of credit loan is $3,350,000,
which maximum is reduced monthly based on a seven-year amortization. The line of
credit loan is secured by a first security interest in our jet aircraft. In
December 1999, $3,350,000 was drawn on the line of credit and in January 2000,
the line of credit loan was paid down to zero.
9. 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
10.9% (10.1% through January 31, 2000), and is repayable in monthly installments
of $199,201 for nine years and five months. The loan is secured by the assets of
our 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.
10. On November 16, 1999, we, through 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 Denver International Airport. We intend to continue operating the
restaurants as Quizno's Classic Subs and the bars as operated by ASI.
(Unaudited)
- 9 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. (continued) The purchase was accounted for under the purchase
method. The purchase price was allocated to the assets purchased based on
the fair market values at the date of acquisition as follows:
Restaurant and bar equipment $ 875,000
Furniture and fixtures 370,000
Leasehold improvements 265,000
Concession agreements 3,365,000
----------
$4,875,000
==========
On January 26, 2000, we closed on a loan in the amount of $3,180,000 from
GE Capital Business Asset Funding. The loan bears interest at 9.53% and is
payable in equal monthly installment of $52,023 for 5 years. The loan is secured
by a first security interest in the assets of QUIZ-DIA, Inc.
11. In January 2000, we purchased, for cash, the assets of four Quizno's
Restaurants from two franchisees for a total purchase price of $741,000. The
purchases were accounted for under the purchase method. The purchase price was
allocated to the assets purchased based on the fair market values at the date of
acquisition.
12. Each share of Class D Preferred Stock is convertible into twenty-five
shares of our common stock, at any time after (i) our 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 our Chief Executive
Officer) equal or exceed $12,000,000, and (ii) our Chief Executive Officer has
approved such conversion. The Class D Preferred Stock is not convertible before
March 31, 2001.
13. 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 March 31, 2000, we had repurchased 128,000 shares at an
average price of $8.70.
14. There are currently 150,000 authorized shares of Class E Cumulative
Convertible Preferred Stock ("Class E Preferred Stock"). Each share of Class E
Preferred Stock is convertible into one share of our common stock, at any time.
Shares of the Class E Preferred Stock may be redeemed by us at any time on or
after April 1, 2003, at a redemption price of $8.62 per share. Until redeemed or
converted to common stock, each Class E Preferred stockholder will receive a
cumulative monthly dividend of $0.0862 per share. The Class E Preferred Stock is
junior in liquidation preference to our Class A Preferred Stock and our Class C
Preferred Stock, but senior to our Class D Preferred Stock and common stock.
15. 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 calendar 1999. Upon adoption, we
were 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.
16. In February 2000, we entered into a $75,000 promissory note with an
officer of the The Quizno's Corporation. The note accrues interest at an
annual rate of 9.25% and accrued interest and principal is due March 1, 2001.
(Unaudited)
- 10 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this quarterly 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 us
(Registration No. 333-38691) and to our annual report filed on Form 10-KSB for
the year ended September 30, 1999.
The principal sources of our income are continuing fees, initial franchise fees,
and, historically, area director marketing and master franchise 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.
- 11 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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-QSB
filing reflect our balance sheet as of March 31, 2000 and September 30, 1999,
the consolidated statements of operations for the three and six months ended
March 31, 2000 and 1999, the consolidated changes in stockholders' equity for
the nine and six months ended September 30, 1999 and March 31, 2000,
respectively, and the consolidated statements of cash flows for the six months
ended March 31, 2000 and 1999. All references to 2000 and 1999 refer to fiscal
year 2000 and fiscal year 1999, respectively.
Our primary business is the franchising of Quizno's restaurants. As a
franchisor, revenue is principally derived from: (1) continuing fees, (2)
initial franchise fees, and (3) area director and master franchise fees.
Continuing fees increase as the number of franchised restaurants open increase.
Initial franchise fees are one-time fees paid upon the sale of a franchise and
vary directly with the number of franchises we can sell and open. Area director
and master franchise fees occur when a country or exclusive area is sold and are
expected to decline as the number of remaining available markets declines.
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. Each of these sources of revenue contributes to our
profitability, but the relative contribution of each source will vary as we
mature. Over time initial fees and continuing fees will generate proportionately
more revenue than area director and master franchise fees.
We earned a profit before preferred dividends in the second quarter of fiscal
2000 of $170,050, composed of income from franchise operations of $921,921,
income from Company owned store operations of $376,132, and less other income
and expense and taxes totaling $(1,128,003). In the comparable quarter of fiscal
1999, we earned a profit before preferred dividends and a cumulative effect of a
change in accounting principle of $782,196, composed of income from franchise
operations of $775,390, income from Company owned store operations of $183,564,
and less other income and expense and taxes totaling $(176,758).
For the six months ended March 31, 2000, we earned a profit of $594,769,
composed of income from franchise operations of $2,582,190, income from Company
owned store operations of $597,159, and less other income and expense and taxes
totaling $(2,584,580). In the comparable period of fiscal 1999, we earned a
profit before preferred dividends and a cumulative effect of a change in
accounting principle of $1,225,951, composed of income from franchise operations
of $1,483,412, income from Company owned store operations of $267,118, and less
other income and expense and taxes totaling $(524,579).
- 12 -
<PAGE>
The following tables reflects our revenue growth by source and number of
restaurants for the second quarter and first six months of fiscal 2000 compared
to the comparable periods in fiscal 1999:
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
<TABLE>
<CAPTION>
($ in thousands) Three Months Ended March 31, Six Months Ended March 31,
------------------------------ --------------------------
2000 1999 %Change 2000 1999 %Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Continuing fees ............... $ 3,871 $ 2,505 55% $ 7,508 $ 4,235 77%
Initial franchise fees ........ 1,460 769 90% 2,922 1,656 76%
Area director and master
franchise fees ................ 151 472 (68)% 632 1,827 (65)%
Other ......................... 321 100 221% 549 238 131%
Interest ...................... 135 65 108% 266 182 46%
------- ------- ------- ------- ------- -------
Total franchise revenue ....... 5,938 3,911 52% 11,877 8,138 46%
Sales by Company owned stores . 3,757 2,019 86% 6,515 3,874 68%
Sales by Stores held for resale -- 224 (100)% 103 655 (84)%
------- ------- ------ ------- ------- -------
Total Revenue ................. $ 9,695 $ 6,154 58% $18,495 $12,667 46%
======= ======= ======= ======= ======= =======
Earnings before interest expense,
income taxes, depreciation and
amortization, preferred stock
dividends and cumulative effect
of a change in accounting
principle (EBITDA) ............. $ 1,146 $ 1,506 (24)% $ 2,776 $ 2,022 35%
======= ======= ====== ======= ======= =======
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Restaurants open, beginning 721 494 634 438
New restaurants opened 88 52 188 113
Restaurants reopened 1 - 1 -
Restaurants closed, to reopen (2) (2) (3) (2)
Restaurants closed, Quizno's (3) (14) (5) (26) (10)
Restaurants closed, Bains (2) - (2) -
Restaurants sold, Bains - (30) - (30)
------ ------ ------ ------
Restaurants open, end 792 509 792 509
====== ====== ====== ======
Franchises sold, domestic 87 135 184 242
Franchises sold, international 16 13 37 88
------ ------ ------ ------
Total 103 148 221 330
====== ====== ====== ======
Initial franchise fees collected $1.8 million $2.3 million $3.3 million $3.8 million
Systemwide sales, domestic $63.9 million $36.5 million $117.0 million $67.1 million
Avg. unit volume for 1999,
domestic (1) $365,000 - - -
Same store sales, domestic (2) Up 7.8% Up 7.6% Up 6.2% Up 7.4%
</TABLE>
1) Average unit volume is for the twelve months ended December 31, 1999.
Average unit volume excludes restaurants located in convenience stores and gas
stations and includes only restaurants open at least one year under the same
ownership that are currently not in default.
2) Same store sales are based on 360 stores open since the beginning of
October 1998. Stores that transferred ownership during this period or are in
substantial default of the franchise agreement are excluded. 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 units are included from more
start up markets. Excludes non-traditional units located in convenience stores
and gas stations.
3) Ten of the fourteen Quizno's closed in the last quarter were
non-traditional locations. For the six months ended March 31, 2000, 17 of the 26
Quizno's closed were non-traditional locations. Non-traditional locations are
convenience and gas units, hospitals, colleges, food courts, etc. We have
changed our site criteria to approve such locations only when the demographics
and unit economics for any such proposed unit are well above average.
- 14 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Results of Operations
Comparison of the first half of fiscal 2000 with the first half of fiscal 1999
and the second quarter of fiscal 2000 with the second quarter of fiscal 1999
Franchise revenue increased 52% in the second quarter of fiscal 2000 to
$5,938,291 from $3,911,496 in the same quarter last fiscal year. For the first
half of fiscal 2000, franchise revenue increased 46% to $11,877,095 from
$8,138,253 last year. Total revenue increased 58% in the second quarter of
fiscal 2000 to $9,695,487 from $6,154,075 in the same quarter last fiscal year.
For the first half of fiscal 2000, total revenue increased 46% to $18,495,028
from $12,667,379 last year.
Continuing fees increased 55% in the second quarter of fiscal 2000 to $3,871,071
from $2,505,498 in the second quarter of fiscal 1999. For the first half of
fiscal 2000, continuing fees increased 77% to $7,508,553 from $4,235,129 in
fiscal 1999. Continuing fees are comprised of royalties and licensing fees.
Royalty fees are a percentage of each franchisee'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 March 31, 2000 there were 761 franchises
open, as compared to 485 at March 31, 1999. The royalty was 5% for agreements
entered into prior to February 11, 1995, 6% for agreements entered into from
February 11, 1995 to March 31, 1998, and 7% for all franchise agreements entered
into after March 31, 1998. The royalty for Quizno's Express units is 8%. The
royalty paid to us by master franchisees on international units is approximately
2.1%. We have no immediate plans to increase the royalty rate.
Royalty fees were $3,400,145 for the second quarter of fiscal 2000 compared to
$1,855,920 for the same period last year, an increase of 83%. For the first half
of fiscal 2000, royalty fees were $6,294,033 compared to $3,448,004 for the same
period last fiscal year, an increase of 83%.
Licensing fees are fees generated through the licensing of the Quizno's
trademark for use by others, which includes fees received from product companies
to sell proprietary products to our restaurant system. Licensing fees are
expected to increase as systemwide sales and the awareness and value of the
Quizno's brand increases. Licensing fees were $470,926 in the second quarter of
fiscal 2000 and $649,578 in the comparable fiscal 1999 quarter. For the first
half of fiscal 2000, licensing fees were $1,214,520 and $787,125 in the
comparable fisca1 1999 period. Included in the fiscal 2000 first quarter and
fiscal 1999 second quarter were $200,000 of non-recurring licensing fees from
Coca Cola Company related to a licensing agreement signed in April 1999.
- 15 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Initial franchise fees increased 90% in the second quarter of fiscal 2000 to
$1,459,677 from $768,754 in the same quarter last fiscal year. For the first
half of fiscal 2000, initial franchise fees increased 76% to $2,922,107 from
$1,655,837 in the same period last fiscal year. Initial franchise fees are
one-time fees paid by franchisees at the time the franchise is purchased.
Initial franchise fees are not recognized as income until the period in which
all of 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 franchises is recognized when received. In the first
half of fiscal 2000, we opened 189 franchises, including 28 international
restaurants, as compared to 113 franchises opened, including 16 international
restaurants, in the same period last fiscal year. Our domestic initial franchise
fee has been $20,000 since 1994. Franchisees 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 are recorded as deferred initial
franchise fees until the related franchise opens. Deferred initial franchise
fees at March 31, 2000 were $8,248,649 and represent 516 domestic franchises
sold but not yet in operation, compared to $6,572,694 at March 31, 1999
representing 401 domestic franchises sold but not open. Direct costs related to
the franchise sale, primarily sales commissions paid 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 with respect to
initial franchise fees deferred at March 31, 2000 were $1,675,333.
Area director and master franchise fees decreased 68% in the second quarter of
fiscal 2000 to $150,926 from $472,146 in the same quarter last fiscal year. For
the first half of fiscal 2000, area director and master franchise fees decreased
65% to $631,722 from $1,827,505 in the same period last year. For analysis
purposes, these amounts are not comparable. Effective January 1, 1999, we
changed our accounting policy related to the recognition of revenue from
domestic 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.
Deferred domestic area fees are one-time fees paid to us for the right to sell
franchises on our behalf in a designated, non-exclusive area. Domestic area
director fees recognized were $150,926 in the second quarter of fiscal 2000 and
$281,077 in the comparable fiscal 1999 quarter. For the first half of fiscal
2000, domestic area director fees recognized were $321,722 and $1,041,436 in the
comparable fiscal 1999 period.
- 16 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
The fee for U.S. areas was $.05 per person from January 1997 through December
1997, $.06 from January 1998 through February 1998, and $.07 since March 1,
1998. In addition, each area director is required to pay a training fee of
$10,000. In the first half of fiscal 2000, we sold 6 area directorships for
$292,400 compared to 7 sold in the first half of fiscal 1999. At March 31,
2000, we had a total of 68 area directors who owned areas encompassing
approximately 70% 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 the agreement is signed. International master
franchise fees were $0 in the second quarter of fiscal 2000 and $191,069 for the
second quarter of fiscal 1999. For the first half of fiscal 2000, international
master franchise fees recognized were $310,000 and $786,069 in the comparable
fiscal 1999 period.
In the first quarter of fiscal 2000, we sold the master franchise rights to
Switzerland for $300,000. A total of $20,000 of these fees was deferred until
our training obligation is completed. We also recognized $30,000 of previously
deferred international master franchise fees in the quarter as we substantially
completed our training obligations under the agreements. The international
master franchise fees in the first quarter of fiscal 1999 were for the sale of
the United Kingdom for $510,000, of which $40,000 was deferred until completion
of our training obligations, and $125,000 related to the sale of Japan. In the
second quarter of fiscal 1999, we sold the master franchising rights to part of
Australia for $191,069.
We offer domestic area director and master franchise applicants financing for
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. Of the seven domestic and international areas sold in the first
half of fiscal 2000, two used this financing for $221,357, representing 37% of
the total domestic area director fees and international master franchise fees
received or financed in fiscal 2000. In the first half of fiscal 1999, seven
used this financing for $1,037,865.
The area director and master franchise agreements set increasing minimum
performance levels that require the area director or master franchisee to sell
and open a specified number of franchised restaurants in each year during the
term of the area agreement. Our experience with the program 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 that will not meet their development schedule. Delays in the sale
and opening of restaurants can occur for many reasons. The most common are
delays in the selection or acquisition of an appropriate location for the
restaurant, delays in negotiating the terms of the lease and delays in
franchisee financing. We may terminate an area or master agreement if the area
director or master franchisee fails to meet the development schedule, and we
then have the right to resell the territory to a new area director or master
franchisee or operate it our self.
- 17 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Other revenue increased by 221% in the second quarter of fiscal 2000 to $321,218
from $99,991 in the second quarter of fiscal 1999. For the first half of fiscal
2000, other revenue increased by 131% to $548,621 from $237,857 in the
comparable fiscal 1999 period. Other revenue is primarily amounts paid by
equipment suppliers for design and construction, franchise transfer fees and
bookkeeping fees charged franchisees for which we provided bookkeeping services.
Amounts paid by equipment suppliers were $167,000 in the second quarter of
fiscal 2000 compared to $58,554 in the second quarter of fiscal 1999. For the
first half of fiscal 2000, amounts paid by equipment suppliers were $348,158
compared to $162,419 in the first half of fiscal 1999. This amount will vary
based on new store openings.
Sales and royalty commissions expense increased to $1,883,516 in the second
quarter of fiscal 2000 from $1,173,440 in the same quarter of fiscal 1999. For
the first half of fiscal 2000, sales and royalty commissions expense increased
to $3,640,536 from $2,598,205 in the first half of fiscal 1999. 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, as a percentage of royalty
and initial franchise fees, declined in the second quarter of fiscal 2000 to 39%
from 45% in the comparable quarter of fiscal 1999. For the first half of fiscal
2000, sales and royalty commission expense, as a percentage of royalty and
initial franchise fees, declined to 40% from 51% in the first half of fiscal
1999. Both decreases were due to the repurchase and termination of certain area
directorships now operated by us.
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 agreement and in some cases, upon expiration of the area director
agreement a commission of 1% of sales for 5 years.
Our foreign master franchisees retain 70% of initial fees, area director fees
and royalties paid from franchises sold, open and operating in the master
franchisee's territory, except the Canadian master franchisee who retained 100%
of initial franchise fees in 1998 only, and the United Kingdom master franchisee
who will retain 85% of the initial franchise fees through December 31, 2001.
Under the master franchise agreement, we have no obligation to provide services
that will result in any incremental cost to us, other than an initial training
trip to the country by an employee of ours.
- 18 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
General and administrative expenses increased 60% to $3,132,854 in the second
quarter of fiscal 2000 from $1,962,666 in the comparable quarter last fiscal
year. For the first half of fiscal 2000, general and administrative expenses
increased 39% to $5,654,369 from $4,056,636 in the first half of fiscal 1999. As
a percent of franchise revenue, general and administrative expenses have
increased from 50% in the second quarter of fiscal 1999 to 53% in the second
quarter of fiscal 2000. For the first half of fiscal 2000, general and
administrative expenses as a percentage of revenue have decreased to 48% from
50% in the first half of fiscal 2000. General administrative expenses include
all of our operating costs. The increase is primarily due to the addition of
employees and systems to service the rapidly growing network of our franchisees
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.
Company owned store operations earned $376,132 on sales of $3,757,196 in the
second quarter of fiscal 2000 compared to $183,564 on sales of $2,018,585 in the
comparable quarter last fiscal year. For the first half of fiscal 2000, Company
owned stores earned $597,159 on sales of $6,514,780 compared to $267,118 on
sales of $3,874,390 in the first half of fiscal 1999. During the first half of
fiscal 2000 we operated stores for a total of 178 store operating months,
compared to 142 store operating months in the first half of fiscal 1999. At
March 31, 2000, we had 32 operating Company stores, including the Cowboy Bar at
Denver International Airport (24 at March 31, 1999).
Stores held for resale lost $68,511 in the second quarter of fiscal 2000
compared to a loss of $93,427 on sales of $223,994 in the comparable quarter
last fiscal year. For the first half of fiscal 2000, stores held for resale lost
$97,743 on sales of $103,153 compared to a loss of $145,620 in the first half of
fiscal 1999. In the first half of fiscal 2000, we operated two stores held for
resale and in the comparable period of fiscal 1999 we operated six stores held
for resale. At December 31, 1999, we had sold or closed all stores held for
resale.
Loss on sale of Company stores was $43,595 in the first half of fiscal 2000
resulting from the December 1999 sale of one store held for resale. The fiscal
1999 loss was primarily related to the sale of a Company store held for resale
and the January 1999 closure of one store held for resale.
Japan master franchise represents payments received in the second quarter of
fiscal 1999 of $1,081,924 for the master franchise rights and $22,000 for our
share of an area director marketing agreement in Japan. We incurred direct costs
related to the revenue totaling $243,057, resulting in net revenue of $860,867.
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 were $45,614 in the second quarter of fiscal 2000 and
$153,214 in the comparable quarter of last fiscal year. For the first half of
fiscal 2000 the provision for bad debts was $213,485 and $287,505 in the first
half of fiscal 1999. As of March 31, 2000, we had an allowance for doubtful
accounts of $195,471 that we believe is adequate for future losses.
- 19 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Depreciation and amortization was $441,709 in the second quarter of fiscal 2000
and $270,992 in the comparable quarter of last fiscal year. For the first half
of fiscal 2000, depreciation and amortization was $903,694 and $630,528 in the
first half of fiscal 1999. The increase is primarily due to the acquisition and
development of new Company owned restaurants and the purchase of a corporate jet
in the first half of fiscal 2000.
Interest expense was $458,334 in the second quarter of fiscal 2000 and $87,684
in the comparable quarter last fiscal year. For the first half of fiscal 2000,
interest expense was $925,302 and $168,575 in the first half of fiscal 1999. The
increase is primarily attributable to the increase in outstanding debt. 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 10.9% (10.1% through
January 31, 2000). The proceeds of the loan were used to pay-off existing debt
of $3,320,956, the majority of which accrued interest at rates of 10% to 12.75%.
Also, on January 26, 2000, we closed on a loan in the amount of $3,180,000 from
GE Capital Business Asset Funding. The loan bears interest at 9.53% and is
payable in equal monthly installment of $52,023 for 5 years.
Other expense was $37,657 in the second quarter of fiscal 2000 compared to other
income and $5,716 in the comparable quarter last fiscal year. For the first half
fiscal 2000, other expense was $98,216 and $36,242 in the first half of fiscal
1999. The fiscal 2000 expense is primarily acquisition-related costs while the
fiscal 1999 expense is attributable to subleasing losses related to one store
previously owned by us and sold to a franchisee.
Income tax (provision) benefit was a provision of $76,178 in the second quarter
of fiscal 2000 and a provision of $365,096 in the comparable quarter of fiscal
1999. For the first half of fiscal 2000, the income tax provision was $302,545
compared to an income tax benefit of $3,457 in the first half of fiscal 1999.
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. In the first quarter of fiscal 1999, we used all of our tax net
operating loss carryforwards and incurred a tax liability. Accordingly, we
reduced the amount by which it had recorded an impairment of its deferred tax
asset in prior years and recorded the tax benefit of prior years net operating
losses.
Cumulative effect of a change in accounting principle was $84,090 (net of
applicable taxes of $41,417) for the second quarter of fiscal 1999. 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 fiscal 1999. Upon adoption, we were required to
write-off $125,507 in preopening related costs that were deferred on the balance
sheet as of December 31, 1998.
- 20 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Liquidity and Capital Resources
Net cash provided by operating activities was $917,282 in the first half of
fiscal 2000 compared to cash provided by operating activities of $3,626,664 in
the first half of fiscal 1999. The primary reasons for the decrease are an
increase in income taxes paid of $1,253,610 and an increase in interest paid of
$584,613 in fiscal 2000. The decrease also was due to a $1,493,181 decrease in
deferred initial franchise fees and other fees, partially offset by an increase
of $598,793 as a result of fewer notes receivable issued for area director fees.
Net cash used in investing activities was $13,439,031 in the first half of
fiscal 2000 compared to cash used in investing activities of $1,790,778 in the
first half of fiscal 1999. The primary reasons for the change were an increase
in purchases of property and equipment of $3,775,106 (primarily the $3.35
million acquisition of a corporate jet in October 1999), the increase in short
term investments of $2,132,670 and the $5,767,393 increase related to the
acquisition of Company owned stores in fiscal 2000. In the first half of fiscal
2000, we reacquired eight area director territories.
Net cash provided by financing activities was $12,263,489 in the first half of
fiscal 2000 compared to cash provided by financing activities of $96,842 in the
first half of fiscal 1999. The primary reasons for the change were the $17.2
million of proceeds from new debt in fiscal 2000 compared to $2.2 million of
proceeds in fiscal 1999, and the fiscal 1999 payment of $500,000 for the
redemption of the Class B Preferred Stock. Partially offsetting these increases
were fiscal 2000 increases in principal repayments of $1,904,266, common stock
repurchases of $1,114,032 and financing costs of $645,008.
In the first quarter of 1998, we tested a program under which its Area Directors
had the right to elect to have all future Franchisee leases in the Area
Director's territory signed by The Quizno's Realty Company ("QRC"), a wholly
owned subsidiary of 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 franchisee, whose personal liability is limited to one year. The
franchisee pays QRC an indemnification fee of $165 per month, pays a one-time
lease-processing fee to QRC of $2,200, and pays a security deposit to QRC equal
to two months rent. Effective March 1, 1998, 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 March 31, 2000, 12 leases had been executed
under this program and one other guaranteed lease. The franchisee has defaulted
on the rents due on two of these locations, for which we do not have replacement
franchisees. We expect to negotiate buyouts of these leases between the
landlords, the franchisees and, possibly, us. Our share of any such buyout is
expected to be immaterial. A third location has closed due to a fire and the
lease has been cancelled and the location will not re-open.
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 March 31, 2000, we had repurchased 128,000 shares at an
average price of $8.70.
- 21 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 10.9% (10.1%
through January 31, 2000), and is repayable in monthly installments of $199,201
for nine years and five months. The loan is secured by our assets of 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.
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, through our subsidiary QUIZ-DIA, Inc., we 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 Denver
International Airport. We intend to continue operating the restaurants as
Quizno's Classic Subs and the bars as operated by ASI.
On January 26, 2000, we closed on a loan in the amount of $3,180,000 from GE
Capital Business Asset Funding. The loan bears interest at 9.53% and is payable
in equal monthly installment of $52,023 for 5 years. The loan is secured by a
first security interest in the assets of QUIZ-DIA, Inc.
On December 22, 1999 we closed on a line of credit loan and were funded
$3,350,000 by Merrill Lynch Business Financial Services, Inc. The loan bears
interest at the 30 day Dealer Commercial Paper Rate plus 2.5% (equal to 8.13% at
December 31, 1999). The maximum amount of the line of credit loan is $3,350,000,
which maximum is reduced monthly based on a seven-year amortization. The line of
credit loan is secured by a first security interest in our jet aircraft. In
January 2000, the line of credit loan was paid down to zero.
- 22 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
In March 2000, we accepted Subscription Agreements for the issuance of 58,007
shares of Class E Cumulative Convertible Preferred Stock ("Class E Preferred
Stock"). As of March 31, 2000, we had received cash proceeds of $325,000 related
to the Class E Preferred Stock and the remaining proceeds of $175,020 were
received in April 2000. There are currently 150,000 authorized shares of Class E
Preferred Stock. Each share of Class E Preferred Stock is convertible into one
share of our common stock, at any time. Shares of the Class E Preferred Stock
may be redeemed by us at any time on or after April 1, 2003, at a redemption
price of $8.62 per share. Until redeemed or converted to common stock, each
Class E Preferred stockholder will receive a cumulative monthly dividend of
$0.0862 per share. The Class E Preferred Stock is junior in liquidation
preference to our Class A Preferred Stock and our Class C Preferred Stock, but
senior to our Class D Preferred Stock and common stock.
On May 5, 2000, we entered into a letter of intent to purchase certain area
director marketing rights for $1,530,000. The purchase price is to be paid in
cash of $1,147,500 at closing with the balance paid over five years at an
interest rate of 12%.
As we have in the past, we will continue to consider acquisitions of other
chains, the purchase of Quizno's restaurants from our franchisees, 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.
We have never paid cash dividends on our common stock and we do not anticipate a
change in this policy in the foreseeable future.
- 23 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended March 31, 2000
Form 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Angela Wetzel v. Quizno's Subs, Ron Newman & Quiz-Subs, Inc. (Court of Common
Pleas, Berkeley County, South Carolina, No. 00-CP-08-123) (the Wetzel
Litigation). Ron Newman is a former area director, through Quiz-Subs. In 1999,
Newman entered into negotiations with Wetzel (a Subway franchisee) to sell the
area directorship for approximately $275,000. We tentatively approved the sale,
which approval was subject to (among other conditions) Wetzel's transfer of her
existing Subway units. Subsequently, Wetzel paid Newman $275,000 for the
territory. Although Wetzel had not sold her Subway units and did not have
written consent from us for the transaction, she now claims that our
representative verbally approved the sale without the Subway sale condition.
When we refused to acknowledge the sale, Wetzel brought this litigation in South
Carolina state court, on January 20, 2000, against us, Quiz-Subs, and Newman.
Wetzel seeks specific performance (i.e., an order transferring the territory
rights to her) or, in the alternative, return of the $275,000 payment and
consequential damages.
We have denied liability and cross-claimed against Newman and Quiz-Subs. We
believe Wetzel could not have reasonably relied on any verbal statement by a
representative to pay Newman for the territory. We also believe that the
ultimate liability rests with Newman, who refused to return the payment after
being notified that we would not approve the transfer. We do not, therefore,
believe there is a probability of a material loss arising from this matter.
Wetzel has requested a jury trial. No trial date has been set.
The Quizno's Corporation v. Quiz-Subs, Inc., Ron Newman, and Stephen Gainous
(United States District Court for the District of Colorado, No. 00-213) (the
Newman Litigation). We additionally terminated Quiz-Subs area director agreement
and territory rights for failure to meet the development quota, and commenced
this litigation in the United States District Court on February 1, 2000. The
action seeks damages arising from Newman's and Quiz-Subs' failure to develop the
territory as well as indemnification from any damages or expenses incurred by us
as a result of the Wetzel Litigation. The defendants have not yet answered the
complaint or filed counterclaims. If any counterclaims are filed, we will assess
those claims and respond accordingly. We believe that any loss in this matter
would be a covered claim under our Errors and Omissions Insurance Policy.
- 24 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended March 31, 2000
Form 10-QSB
PART II - OTHER INFORMATION (continued)
Item 1. Legal Proceedings (continued)
The Quizno's Corporation v. Quizno's of Tampa Bay, Inc.; The Quizno's
Corporation v. Quizno's of Central Florida, Inc., Quizno's of Jacksonville,
Inc., David M. Black and Barbara Jill Black (United States District Court for
the District of Colorado, No. 00-253) (the Black Litigation). The Blacks,
through their various entities, were area directors in Florida. In January 2000,
we discovered that the Blacks had deposited checks for franchise fees (made
payable to The Quizno's Corporation) into their business accounts. The Blacks
then sent reduced amounts to Quizno's. For example, the Blacks would collect a
check from a prospective franchisee for $35,000, as payment for two franchise
agreements, would then deposit that check into the Blacks' account, and would
then send a check from that account to us for $20,000 (and a single franchise
agreement). The franchisee believed it had bought two franchise agreements,
whereas we believed only one agreement had been purchased. Upon learning of the
Blacks' action, we terminated the underlying area director agreements and
commenced an arbitration against Quizno's of Tampa Bay, Inc., and a federal
district court action against the other entities on January 4, 2000. Both
actions allege claims for breach of the area director agreements as well as seek
indemnification arising from the Blacks' actions. Both actions also name the
Blacks individually.
The Blacks have not filed counterclaims, but have indicated in various filings
that they intend to counterclaim for wrongful termination of the agreements. The
parties have agreed to dismiss the arbitration and consolidate the cases in the
district court action. We have entered into release agreements with certain
franchisees who, essentially, overpaid the Blacks, and have reimbursed the
overpaid amount to those franchisees. We are currently investigating whether we
have claims against the Blacks' bank for accepting checks made out to us. We
believe that we were justified in terminating the area director agreements and
that we will not incur a material loss in this matter. We also believe that any
loss in this matter would be a covered claim under our Errors and Omissions
Insurance Policy.
Other than the foregoing and the items discussed in our annual report on Form
10-KSB for the year ended September 30, 1999, there are no other pending
material legal proceedings to which we are a party or to which our property is
subject. In addition, from time to time, we are involved in litigation and
proceedings arising out of the ordinary course of our business. We do not
believe that any of the foregoing litigation will have a material adverse effect
on us.
- 25 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended March 31, 2000
Form 10-QSB
PART II - OTHER INFORMATION (continued)
Item 2. Changes in Securities and Use of Proceeds
<TABLE>
<CAPTION>
Sales of Unregistered Securities
Securities Amount of
Sold Date Consideration Purchasers Exemption
------------ ---------- --------------- -------------------- -------------
<S> <C> <C> <C>
1,507 shares of
common stock 2/17/2000 $11,115 Quizno's 401(k) Plan Section 4(2)
58,007 shares of Class E
Preferred Stock March 2000 $500,020.34 Private Investors Section 4(2)
and Rule 506
</TABLE>
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits:
Item No. Exhibit Description
--------- ---------------------
3.6 Articles of Amendment to the Articles of Incorporation
of the Company authorizing 150,000 shares of Class E
Cumulative Convertible Preferred Stock, filed with the
Colorado Secretary of State on March 22, 2000
(b) Reports on Form 8-K:
Form 8-K/A, dated January 28, 2000, reporting in Item 7 the audited
financial statements related to our purchase of the assets of ASI-DIA, Inc.
for a total of $4.875 million in cash.
- 26 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE QUIZNO'S CORPORATION
By: /s/ John L. Gallivan
John L. Gallivan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Denver, Colorado
May 15, 2000
- 27 -
Exhibit 3.6
SS: Form D-4
Submit in duplicate
Filing Fee: $25.00
This 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
to the
ARTICLES OF INCORPORATION
of the
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 adopted by the Board of Directors without shareholder
action at a meeting duly held on March 22, 2000, in accordance with the
provisions of Section 7-106-102 of the Colorado Business Corporation Act.
"RESOLVED, that Article II
of the Amended and Restated Articles of Incorporation is hereby amended by
adding the following paragraph to Article II:
"Class E Cumulative Convertible Preferred Stock.
- -----------------------------------------------
a. General. One hundred fifty thousand (150,000) shares of authorized preferred
stock are hereby designed as Class E Cumulative Convertible Preferred Stock
(the "Class E Preferred Stock").
b. Conversion.
----------
(i) Subject to the following
paragraphs, each share of Class E Preferred Stock shall be convertible into one
(1) share of the Corporation's common stock (the "Common Stock") on any of the
monthly dividend payment dates set forth in paragraph d below, at any time prior
to the redemption date after the notice of redemption provided for in paragraph
c below has been delivered.
(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 E Preferred Stock
will thereafter be entitled to receive upon conversion of his shares of Class E
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 E
Preferred Stock immediately prior to the effective time of such reorganization,
consolidation, merger, share exchange or sale, lease, exchange or transfer.
(iii) In case the Corporation shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, then the number of shares of Common Stock
issuable upon conversion of the Class E Preferred Stock immediately prior
thereto shall be adjusted so that the holders of Class E Preferred Stock shall
be entitled to receive the kind and number of shares of Common Stock or other
securities of the Corporation which they would have owned or have been entitled
to receive had such Class E Preferred Stock been converted in advance thereof.
An adjustment made pursuant to this subparagraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
c. Redemption. At the option of the Corporation, shares of Class E Preferred
Stock may be redeemed, in whole or in part, on any of the monthly dividend
payment dates set forth in paragraph d below, on or after April 1 2003, at a
redemption price of $8.62 per share, plus an amount equal to unpaid cumulative
dividends accrued to the date of redemption as provided in paragraph d below, so
long as the holder of such shares of Class E Preferred Stock is given sixty (60)
days notice of such redemption.
d. Dividends. The holder of record of each share of Class E Preferred
Stock shall receive a cumulative monthly dividend of $0.0862 per share
of Class E Preferred Stock. Dividends on the Class E Preferred Stock
shall be payable, out of funds at the time legally available for
payment of dividends, in equal monthly amounts on the first business
day of each month in each year beginning with April, 2000, for so long
as shares of the Class E Preferred Stock are outstanding, except that
dividends on the shares of Class E Preferred Stock payable on the first
dividend payment date shall commence to accrue and shall be cumulative
from and including March 22, 2000. Dividends shall be paid as provided
above, unless the Board of Directors of the Corporation determine as to
a specific dividend that it is in the best interests of the Corporation
to put such funds to other use. If such dividend is not paid as of any
such monthly dividend payment date, the right to such payment shall
accrue to the holders of the shares of the Class E Preferred Stock and
become an obligation of the Corporation until paid in full. No
dividends, other than dividends payable solely in shares ranking junior
to the Class E Preferred Stock, shall be paid or set apart for payment
on any shares ranking junior to the Class E Preferred Stock unless and
until all accrued and unpaid dividends on the Class E Preferred Stock,
shall have been paid or a sum sufficient for payment thereof set apart.
Whether another series of preferred stock is senior, substantially
equal or junior to the Class E Preferred Stock will be determined by
the Corporation's Board of Directors, subject to the voting
requirements of the Colorado Business Corporation Act. However, Class E
Preferred Stock shall be ranked junior to both the Corporation's Class
A Cumulative Convertible Preferred Stock ("Class A Preferred Stock")
and Class C Cumulative Convertible Preferred Stock ("Class C Preferred
Stock"), but shall be ranked senior to the Corporations's Class D
Subordinated Convertible Preferred Stock ("Class D Preferred Stock").
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 E
Preferred Stock shall be entitled to receive for each share of Class E
Preferred Stock, a dollar amount equal to $8.62 plus all then accrued
and unpaid cumulative dividends, before any distribution of the assets
of the Corporation shall be made to the holders of any other capital
stock, except for holders of Class A Preferred Stock and Class C
Preferred Stock, which classes shall be ranked senior to Class E
Preferred Stock in connection with the liquidation preferences under
this paragraph e. The Corporation may not pay any amount in the event
of a liquidation or winding up of the Corporation, to the holders of
any Common Stock, or any other capital stock of the Corporation ranked
junior to the Class E Preferred Stock, unless and until the Corporation
has redeemed the Class E Preferred Stock or the holders of the Class E
Preferred Stock have received their full liquidation preferences as
provided herein. However, no funds can be paid on the liquidation or
dissolution of the Corporation to the holders of the Class E Preferred
Stock, unless all amounts due and owing upon liquidation or dissolution
of the Corporation to the holders of the Class A Preferred Stock and
the Class C Preferred Stock of the Corporation and any other capital
stock ranked senior to the Class E Preferred Stock, shall have been in
full. 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 E Preferred Stock shall have no right
to vote for the election of directors or for any other purpose, provided,
however, that holders of a majority of the Class E Preferred Stock shall be
required to vote in favor of any proposal to issue a series of preferred stock
of the Corporation which is to be senior as to dividends or liquidation
preferences to the Class E Preferred Stock before such preferred stock may be
issued by the Corporation.
g. Registration Under the Securities Act of 1933.
- -------------------------------------------------
(i) Whenever the Corporation files a registration statement with the
United States Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Act"), or pursuant to any
other act passed after the date hereof, which filing provides for the
sale of securities by the Corporation to the public, or files a
Regulation A Offering Statement under the Act, the Corporation shall
offer to the holders of the Class E Preferred Stock or of any shares of
Common Stock issued upon conversion of the Class E Preferred Stock, the
opportunity to register or qualify the shares issued or to be issued
upon conversion of the Class E Preferred Stock at the holders' sole
expense, regardless of whether the holder or holders of the Class E
Preferred Stock may have previously availed themselves of any of the
registration rights described in this paragraph g; provided, however,
that in the case of a Regulation A offering, the opportunity to qualify
shall be limited to the amount of the available exemption after taking
into account the securities that the Corporation wishes to qualify.
However, if an underwriter or sales agent determines in good faith that
the then current market conditions make it inadvisable to offer selling
shareholder shares to the public or to limit the amount of such shares,
the holders shall comply with such determination. Notwithstanding
anything to the contrary, this subparagraph (i) shall not be applicable
to a registration statement on Forms S-4, S-8 or their successors or
any other inappropriate forms filed by the Corporation with the United
States Securities and Exchange Commission.
The Corporation shall deliver written notice to the holder or holders
of the Class E Preferred Stock and to any holders of the shares of
Common Stock issued upon conversion of the Class E Preferred Stock of
its intention to file a registration statement or Regulation A Offering
Statement under the Act at least 60 days prior to the filing of such
registration statement or offering statement, and the holder or holders
shall have 30 days thereafter to request in writing that the
Corporation register or qualify the shares of Common Stock to be issued
upon conversion in accordance with this subparagraph (i). Upon the
delivery of such a written request within the specified time, the
Corporation shall be obligated to include in its contemplated
registration statement or offering statement all information necessary
or advisable to register or qualify the shares issuable upon conversion
for a public offering, if the Corporation does file the contemplated
registration statement or offering statement; provided, however, that
neither the delivery of the notice by the Corporation nor the delivery
of a request by a holder shall in any way obligate the Corporation to
file a registration statement or offering statement. Furthermore,
notwithstanding the filing of a registration statement or offering
statement, the Corporation may, at any time prior to the effective date
thereof, determine not to offer the securities to which the
registration statement or offering statement relates, including the
shares to be issued upon conversion.
Holders exercising their rights hereunder shall pay all expenses
relating to their shares being sold pursuant to the registration statement,
including their pro rata share of legal, accounting, consulting, printing,
federal and state filing fees, NASD fees, out-of-pocket expenses incurred by
counsel, underwriting commissions, transfer taxes and the underwriter's
accountable and non-accountable expense allowances attributable to the offer and
sale of the shares to be issued upon conversion, accountants and consultants
retained by the Corporation, and miscellaneous expenses directly related to the
registration statement or offering statement and the offering.
(ii) In the event that the Corporation registered or qualifies the shares
issuable upon conversion pursuant to subparagraph (i) above, the Corporation
shall include in the registration statement or qualification, and the prospectus
included therein, all information and materials necessary or advisable to comply
with the applicable statutes and regulations so as to permit the public sale of
the shares issuable upon conversion. As used in subparagraph (i) of this
paragraph g., reference to the Corporation's securities shall include, but not
be limited to, any class or type of the Corporation's securities or the
securities of any of the Corporation's subsidiaries or affiliates.
(iii) In addition to the registration rights described in subparagraph
(i) above, upon the written request of any holder of the Class E
Preferred Stock or any shares issued upon conversion thereof, the
Corporation, as promptly as possible after delivery of such request,
shall make all reasonable efforts to cooperate with the requesting
holder in preparing and signing any registration statement or offering
statement under any applicable federal or state law that the holder may
desire to file in order to sell or transfer the shares issuable or
issued upon conversion. Within 10 days after the delivery of the
written request described above, the Corporation shall deliver written
notice to all other holders of the Class E Preferred Stock or any
shares issued upon conversion thereof, if any, advising them that the
Corporation is proceeding with a registration statement or offering
statement and that their shares issued or issuable upon conversion will
be included therein if they so desire and agree to pay their pro rata
share of the costs of registration or qualification and provided that
the holder delivers written notice to the Corporation of his desire to
be included and his agreement to pay his pro rata share of the cost
within 30 days after the delivery of the Corporation's notice to him.
The Corporation will supply all information necessary or advisable for
any such registration statements or offering statements; provided,
however, that all the costs and expenses of such registration
statements or offering statements shall be borne, in a manner
proportionate to the number of securities for which they indicate a
desire to register, by the holders of the Class E Preferred Stock and
the holders of shares issued upon conversion thereof who seek the
registration or qualification of their shares issuable or issued upon
conversion. In determining the amount of costs and expenses to be borne
by those holders, the only costs and expenses of the Corporation to be
included are the additional costs and expenses that would not have
otherwise been incurred by the Corporation if those holders had not
desired to file a registration statement or offering statement. As an
example, and without limitation, audit fees would not be charged to
those holders if or to the extent that the Corporation would have
incurred the same audit fees for its year-end or other use in the
absence of the registration statement or offering statement. The
holders responsible for the costs and expenses shall reimburse the
Corporation for those reimbursable costs and expenses reasonably
incurred by the Corporation within 30 days after the initial effective
date of the registration statement or qualification at issue.
No other securities of the Corporation of any type shall be included
in, be the subject of, or be publicly offered pursuant to, any registration
statement or offering statement filed within 120 days following the latest
effective date of any registration statement or offering statement filed
pursuant to this subparagraph (iii)
IN WITNESS WHEREOF, The Quizno's Corporation has caused these Articles
of Amendment to its Articles of Incorporation to be signed by its Vice President
and General Counsel, effective as of the date of filing with the Secretary of
State of the State of Colorado.
THE QUIZNO'S CORPORATION
By /s/Patrick E. Meyers
Patrick E. Meyers
Its Vice President and General Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 368,568
<SECURITIES> 6,854,532
<RECEIVABLES> 2,066,819
<ALLOWANCES> 155,471
<INVENTORY> 0
<CURRENT-ASSETS> 10,257,637
<PP&E> 11,126,132
<DEPRECIATION> 1,798,696
<TOTAL-ASSETS> 35,871,539
<CURRENT-LIABILITIES> 3,772,924
<BONDS> 0
0
375
<COMMON> 2,985
<OTHER-SE> 2,124,365
<TOTAL-LIABILITY-AND-EQUITY> 35,871,539
<SALES> 3,757,196
<TOTAL-REVENUES> 9,695,487
<CGS> 1,071,426
<TOTAL-COSTS> 3,449,575
<OTHER-EXPENSES> 5,541,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 458,334
<INCOME-PRETAX> 246,228
<INCOME-TAX> 76,178
<INCOME-CONTINUING> 170,050
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 170,050
<EPS-BASIC> .04
<EPS-DILUTED> .03
</TABLE>
