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 June 30, 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 August 9, 2000
------------------------------ ----------------
Common Stock, $0.001 par value 3,015,190 shares
<PAGE>
THE QUIZNO'S CORPORATION
Commission File Number: 000-23174
Quarter Ended June 30, 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 12
Part II - OTHER INFORMATION..............................................Page 24
Signature................................................................Page 26
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
FRANCHISE OPERATIONS:
Revenue
Continuing fees $ 4,887,736 $ 2,847,698 $12,396,289 $ 7,082,827
Initial franchise fees 1,443,236 849,603 4,365,343 2,505,440
Area director and master
franchise fees 335,306 442,444 967,028 2,269,949
Other 262,651 96,860 811,272 334,717
Interest 127,867 78,633 393,959 260,558
----------- ------------ ----------- -----------
Total revenue 7,056,796 4,315,238 18,933,891 12,453,491
----------- ------------ ----------- -----------
Expenses
Sales and royalty commissions 2,080,141 1,302,214 5,720,677 3,900,419
General and administrative 3,600,333 2,191,058 9,254,702 6,247,694
----------- ------------ ----------- -----------
Total expenses 5,680,474 3,493,272 14,975,379 10,148,113
----------- ------------ ----------- -----------
Net income from franchise
operations 1,376,322 821,966 3,958,512 2,305,378
----------- ------------ ----------- -----------
COMPANY STORE OPERATIONS:
Sales 4,217,110 2,111,782 10,731,890 5,986,172
----------- ------------ ----------- -----------
Expenses
Cost of sales 1,240,188 635,599 3,126,835 1,786,336
Cost of labor 929,278 559,811 2,376,331 1,583,172
Other store expenses 1,755,499 718,603 4,339,420 2,151,777
----------- ------------ ----------- -----------
Total expenses 3,924,965 1,914,013 9,842,586 5,521,285
----------- ------------ ----------- -----------
Net income from Company store
operations 292,145 197,769 889,304 464,887
----------- ------------ ----------- -----------
</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 Nine Months Ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
OTHER INCOME (EXPENSE):
Sales by stores held for resale $ - $ 208,845 $ 103,153 $ 863,581
Expenses related to stores held
for resale (58,031) (300,329) (258,927) (1,100,685)
Gain (loss) on sale of Company stores - 4,685 (43,595) (115,748)
Sale of Japan master franchise - 307,934 - 1,168,801
Provision for bad debts (33,817) (95,767) (247,302) (383,272)
Depreciation and amortization (533,342) (224,291) (1,437,036) (854,819)
Interest expense (467,658) (77,381) (1,392,960) (245,956)
Other expense (34,505) (120,342) (132,721) (156,584)
----------- ------------ ----------- -----------
Total other expense (1,127,353) (296,646) (3,409,388) (824,682)
----------- ------------ ----------- -----------
Net income before income taxes 541,114 723,089 1,438,428 1,945,583
Provision for income taxes (180,912) (242,231) (483,457) (238,774)
----------- ------------ ----------- -----------
Net income 360,202 480,858 954,971 1,706,809
Preferred stock dividends (52,164) (39,285) (131,790) (139,866)
----------- ------------ ----------- -----------
Net income before cumulative effect
of a change in accounting principle 308,038 441,573 823,181 1,566,943
Cumulative effect of a change in
accounting principle (net of taxes)
(Note 15) - - - (84,090)
----------- ------------ ----------- -----------
Net income applicable to common
shareholders $ 308,038 $ 441,573 $ 823,181 $ 1,482,853
=========== ============ =========== ===========
Net income per share-basic
Net income before cumulative effect
of a change in accounting principle $ 0.10 $ 0.14 $ 0.27 $ 0.51
Cumulative effect of a change in
accounting principle - - - (0.03)
----------- ------------ ----------- -----------
Basic net income per share of
common stock $ 0.10 $ 0.14 $ 0.27 $ 0.48
=========== ============ =========== ===========
Net income per share-diluted
Net income before cumulative effect
of a change in accounting principle $ 0.09 $ 0.13 $ 0.24 $ 0.44
Cumulative effect of a change in
accounting principle - - - (0.02)
----------- ------------ ----------- -----------
Diluted net income per share of
common stock $ 0.09 $ 0.13 $ 0.24 $ 0.42
=========== ============ =========== ===========
Weighted average common shares
outstanding
Basic 3,004,778 3,058,288 2,997,634 3,057,054
=========== ============ =========== ===========
Diluted 3,597,326 3,770,275 3,566,898 3,763,941
=========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
(Unaudited)
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, September 30,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 665,552 $ 626,828
Short term investments 5,236,133 4,263,877
Accounts receivable, net of allowance
for doubtful accounts of $182,383 at
June 30, 2000 and $43,793 at
September 30, 1999 1,935,546 1,047,438
Current portion of notes receivable
(Note 18) 1,039,333 519,994
Deferred tax asset 128,718 128,718
Other current assets 514,866 373,578
Assets held for resale and investment
in area directorships - 1,082,310
------------ ------------
Total current assets 9,520,148 8,042,743
------------ ------------
Property and equipment at cost, net of
accumulated depreciation and
amortization of $2,119,617 at
June 30, 2000 and $1,230,461 at
September 30, 1999 (Notes 7 and 10) 11,423,243 4,804,051
------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $1,098,145 at
June 30, 2000 and $712,759 at
September 30, 1999 (Note 10) 5,100,449 1,662,265
Investment in area directorships,
net of accumulated amortization
of $124,082 4,264,042 -
Deferred assets 2,505,816 1,726,984
Deferred tax asset 3,545,983 3,507,213
Deposits and other assets 181,442 361,189
Notes receivable, net of allowance
for doubtful accounts of $40,000 at
June 30, 2000 and $41,742 at
September 30, 1999 1,340,147 1,670,329
------------ ------------
Total other assets 16,937,879 8,927,980
------------ ------------
Total assets $ 37,881,270 $ 21,774,774
============ ============
See notes to consolidated financial statements.
(continued on next page)
(Unaudited)
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
2000 1999
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 1,939,296 $ 1,219,157
Accrued liabilities 1,265,775 544,476
Current portion of subordinated
debt - 218,546
Current portion of long term
obligations 1,454,518 337,642
Income taxes payable - 851,469
------------ ------------
Total current liabilities 4,659,589 3,171,290
Line of credit (Note 8) - -
Long term obligations (Note 9) 15,953,825 1,268,504
Subordinated debt - 1,498,791
Deferred revenue (Note 4) 14,698,652 13,722,331
------------ ------------
Total liabilities 35,312,066 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 June 30, 2000 and
September 30, 1999 ($876,000
liquidation preference) 146 146
Class C issued and outstanding
167,000 at June 30, 2000 and
September 30, 1999 ($835,000
liquidation preference) 167 167
Class D issued and outstanding 3,000
at June 30, 2000 ($9,000
liquidation preference) (Note 12) 3 -
Class E issued and outstanding 59,480
at June 30, 2000 ($512,718
liquidation preference) (Note 14) 59 -
Common stock, $.001 par value,
9,000,000 shares authorized, issued
and outstanding 3,020,208 at
June 30, 2000 and 3,074,177 at
September 30, 1999 (Note 13) 3,020 3,074
Capital in excess of par value 3,986,316 4,485,949
Accumulated deficit (1,420,507) (2,375,478)
------------ ------------
Total stockholders' equity 2,569,204 2,113,858
------------ ------------
Total liabilities and stockholders'
equity $ 37,881,270 $ 21,774,774
============ ============
See notes to consolidated financial statements.
(Unaudited)
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
June 30,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 954,971 $ 1,622,719
Adjustments to reconcile net income
to net cash provided by operating
Cumulative effect of a change in
accounting principle - 125,507
Depreciation and amortization 1,437,036 854,819
Provision for bad debts 247,302 383,272
Deferred income taxes (38,770) (600,615)
Promissory notes accepted for area
director fees (296,357) (1,031,237)
Loss on disposal of Company store 43,595 115,748
Amortization of deferred area
director fee revenue (229,628) -
Area director expenses recognized 22,963 -
Changes in assets and liabilities:
Accounts receivable (1,101,077) (530,567)
Other current assets (115,351) 134,541
Accounts payable 720,139 515,393
Accrued liabilities 721,299 425,065
Income taxes payable (851,469) (171,512)
Deferred franchise costs (191,375) (321,735)
Deferred initial franchise
fees and other fees 1,205,949 3,444,499
------------ ------------
Net cash provided by operations 2,529,227 4,965,897
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,513,728) (1,422,109)
Acceptance of other notes receivable (604,761) (331,701)
Short term investments (972,256) (3,010,171)
Proceeds from the sale of assets and
stores 137,361 213,000
Acquisition of Company owned stores (5,779,088) -
Principal payments received on notes
receivable 386,047 927,855
Investment by minority interest
owners - 150,177
Intangible and deferred assets and
deposits 82,214 (788,909)
Investments in area director
territories (2,450,396) (703,242)
------------ ------------
Net cash used in investing activities (14,714,607) (4,965,100)
------------ ------------
See notes to consolidated financial statements.
(continued on next page)
(Unaudited)
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Nine Months Ended
June 30,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 270,586 78,494
Proceeds from sale of Class D and
Class E Preferred Stock 478,611 -
Repurchase of Class D Preferred Stock (3,000) -
Principal payments on long term
obligations (3,809,761) (1,732,676)
Proceeds from issuance of notes
payable 17,180,000 2,242,187
Financing costs (646,510) (2,647)
Common stock repurchased (1,114,032) -
Dividends paid (131,790) (140,167)
Redemption of Class B Preferred Stock - (500,000)
------------ ------------
Net cash provided by (used in)
financing activities 12,224,104 (54,809)
------------ ------------
Net increase (decrease) in cash 38,724 (54,012)
Cash, beginning of period 626,828 1,058,109
------------ ------------
Cash, end of period $ 665,552 $ 1,004,097
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for
interest $ 1,218,317 $ 245,956
============ ============
Cash paid during the period for
income taxe $ 1,608,770 $ 1,009,790
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended June 30, 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 nine months ended June 30, 2000, we accepted a promissory note in the
amount of $19,446 for equipment previously held for resale. Note receivables in
the amount of $311,028 were capitalized in exchange for area director
territories repurchased during the year. Also, we issued notes payable of
$714,621 for partial payment of five area director territories repurchased
during the quarter. Finally, 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 canceled - - (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 - - 74,031 74 270,512 -
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 -
Repurchase of Series D
Convertible Preferred Stock
(Note 12) (1,000) (1) - - (2,999) -
Issuance of Series E
Convertible Preferred Stock
(Note 14) 59,480 59 - - 467,152 -
Preferred stock dividends - - - - (131,790) -
Net income - - - - - 954,971
---------- ---------- --------- --------- ---------- -----------
Balances at June 30, 2000 375,480 $ 375 3,020,208 $ 3,020 $3,986,316 $(1,420,507)
========== ========== ========= ========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
(Unaudited)
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<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 nine month periods ended June 30,
2000 and June 30, 1999, (b) the consolidated financial position at June 30,
2000 and September 30, 1999, (c) the consolidated statements of cash flows
for the nine month periods ended June 30, 2000 and June 30, 1999, and (d)
the consolidated changes in stockholders' equity for the nine month periods
ended September 30, 1999 and June 30, 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 June 30
relate to the three and nine months ended June 30, 2000. The results for
the three-month and nine-month periods ended June 30, 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 $387,108 ($129,036 for the quarter ended June 30,
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
June 30, 2000, there were 567 domestic franchises sold but not yet open
with related opening commissions totaling $1,938,375 ($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. To date, in fiscal 2000, we guaranteed three
such loans totaling $565,000.
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 were 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 twelve-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 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 was available to use, with certain
restrictions, for general corporate purposes other than working capital,
dividends, or to repurchase the majority shareholders' stock. As of June
30, 2000, we had $2,560,297 available to use for general corporate
purposes.
Certain notes payable held by us at September 30, 1999 were repaid with the
AMRESCO note proceeds.
10. On November 16, 1999, 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 installments 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 June 30, 2000, we had repurchased 128,000 shares at an
average price of $8.70, all of which were purchased in the first quarter of
fiscal 2000.
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.
(Unaudited)
- 10 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Quizno's Corporation. The note accrues interest at an annual rate of
9.25% and accrued interest and principal is due March 1, 2001.
17. In the quarter ended June 30, 2000, we repurchased five area director
territories from two area directors for $2,162,122. We issued notes payable
for $714,622 and offset notes and interest receivable from one area
director in the amount of $109,162. The balance of the purchase price was
paid in cash.
18. On May 18, 2000, we issued a note receivable to the Advertising Fund for
$500,000. On July 14, 2000, an additional amount of $500,000 was loaned to
the Advertising Fund. On July 31, 2000, the entire balance, including
accrued and unpaid interest at 12%, was repaid to us.
(Unaudited)
- 11 -
<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.
- 12 -
<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 June 30, 2000 and September 30, 1999, the
consolidated statements of operations for the three and nine months ended June
30, 2000 and 1999, the consolidated changes in stockholders' equity for the nine
months ended September 30, 1999 and June 30, 2000, respectively, and the
consolidated statements of cash flows for the nine months ended June 30, 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) historically, 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. As we grow, 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 third quarter of fiscal
2000 of $360,202, composed of income from franchise operations of $1,376,322,
income from Company owned store operations of $292,145, and less other income
and expense and taxes totaling $(1,308,265). In the comparable quarter of fiscal
1999, we earned a profit before preferred dividends of $480,858, composed of
income from franchise operations of $821,966, income from Company owned store
operations of $197,769, and less other income and expense and taxes totaling
$(538,877).
For the nine months ended June 30, 2000, we earned a profit of $954,971,
composed of income from franchise operations of $3,958,512, income from Company
owned store operations of $889,304, and less other income and expense and taxes
totaling $(3,892,845). 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 $1,706,809, composed of income from franchise operations
of $2,305,378, income from Company owned store operations of $464,887, and less
other income and expense and taxes totaling $(1,063,456).
In fiscal 1999, we recorded a significant master franchise sale for Japan that
resulted in $307,934 and $1,168,801 in other income for the quarter and nine
months ended June 30, 1999, respectively.
The following tables reflects our revenue growth by source and number of
restaurants for the third quarter and first nine months of fiscal 2000 compared
to the comparable periods in fiscal 1999:
- 13 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
<TABLE>
<CAPTION>
($ in thousands) Three Months Ended June 30, Nine Months Ended June 30,
------------------------------ --------------------------------
% %
2000 1999 Change 2000 1999 Change
------- ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Continuing fees $ 4,888 $2,848 71% $12,396 $ 7,083 75%
Initial franchise fees 1,443 849 70% 4,365 2,505 74%
Area director and master
franchise fees 335 442 (24)% 967 2,269 (57)%
Other 263 97 171% 812 335 142%
Interest 128 79 62% 394 261 51%
------- ------ ------ ------- ------- ------
Total franchise revenue 7,057 4,315 64% 18,934 12,453 52%
Sales by Company owned stores 4,217 2,112 100% 10,732 5,986 79%
Sales by Stores held for resale - 209 (100)% 103 864 (88)%
------- ------ ------ ------- ------- ------
Total Revenue $11,274 $6,636 70% $29,769 $19,303 54%
======= ====== ====== ======= ======= ======
Earnings before interest expense,
income taxes, depreciation and
amortization, preferred stock
dividends and cumulative effect
of a change in accounting
principle (EBITDA) $ 1,542 $1,025 50% $ 4,268 $3,046 40%
======= ====== ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Restaurants-Domestic and Three Months Ended June 30, Nine Months Ended June 30,
International 2000 1999 2000 1999
------------------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Restaurants open, beginning 792 509 634 438
New restaurants opened 94 68 282 181
Restaurants reopened 3 1 4 1
Restaurants closed, to reopen (1) (2) (4) (4)
Restaurants closed, Quizno's (3) (5) (6) (31) (16)
Restaurants closed, Bains - (2) (2) (2)
Restaurants sold, Bains - - - (30)
------------- ------------- -------------- --------------
Restaurants open, end 883 568 883 568
============= ============= ============== ==============
Franchises sold, domestic 130 112 314 354
Franchises sold, international 12 14 49 102
------------- ------------- -------------- --------------
Total 142 126 363 456
============= ============= ============== ==============
Initial franchise fees collected $ 2.2 million $ 1.8 million $ 5.4 million $ 5.6 million
Systemwide sales, domestic $72.0 million $40.2 million $190.3 million $107.3 million
Avg. unit volume for 1999,
domestic (1) $ 365,000 - - -
Same store sales, domestic (2) Up 9.2% Up 3.4% Up 7.7% Up 6.0%
</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 for the three and nine months ended June 30, 2000, are based
on 399 stores and 354 stores, respectively, open since the beginning of April
1999 and October 1998, respectively. 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) Four of the five Quizno's closed in the quarter ended June 30, 2000, were
non-traditional locations. For the nine months ended June 30, 2000, 21 of the 31
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 three quarters of fiscal 2000 with the first three
quarters of fiscal 1999 and the third quarter of fiscal 2000 with the third
quarter of fiscal 1999
Franchise revenue increased 64% in the third quarter of fiscal 2000 to
$7,056,796 from $4,315,238 in the same quarter last fiscal year. In the first
three quarters of fiscal 2000, franchise revenue increased 52% to $18,933,891
from $12,453,491 last year. Total revenue increased 70% in the third quarter of
fiscal 2000 to $11,273,906 from $6,635,865 in the same quarter last fiscal year.
For the first three quarters of fiscal 2000, total revenue increased 54% to
$29,768,934 from $19,303,244 last year.
Continuing fees increased 71% in the third quarter of fiscal 2000 to $4,887,736
from $2,847,698 in the third quarter of fiscal 1999. In the first three quarters
of fiscal 2000, continuing fees increased 75% to $12,396,289 from $7,082,827 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 June 30, 2000 there were 849 franchises
open, excluding Company owned stores, as compared to 540 at June 30, 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%.
Royalty fees were $4,181,260 for the third quarter of fiscal 2000 compared to
$2,279,985 for the same period last year, an increase of 83%. For the first
three quarters of fiscal 2000, royalty fees were $10,475,293 compared to
$5,727,989 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 $706,476 in the third quarter of
fiscal 2000 and $567,713 in the comparable fiscal 1999 quarter. For the first
three quarters of fiscal 2000, licensing fees were $1,920,996 and $1,354,838 in
the comparable fisca1 1999 period. Included in the fiscal 2000 first quarter and
fiscal 1999 second and third quarters 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 70% in the third quarter of fiscal 2000 to
$1,443,236 from $849,603 in the same quarter last fiscal year. For the first
three quarters of fiscal 2000, initial franchise fees increased 74% to
$4,365,343 from $2,505,440 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 three quarters of fiscal 2000, we opened 286
franchises, including 37 international restaurants, as compared to 181
franchises opened, including 32 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 June 30, 2000 were $8,930,151 and represent 567 domestic franchises sold
but not yet in operation, compared to $7,043,947 at June 30, 1999 representing
458 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 June 30, 2000 were $1,777,147.
Area director and master franchise fees decreased 24% in the third quarter of
fiscal 2000 to $335,306 from $442,444 in the same quarter last fiscal year. In
the first three quarters of fiscal 2000, area director and master franchise fees
decreased 57% to $967,028 from $2,269,949 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 $175,306 in the third quarter of fiscal 2000 and
$347,444 in the comparable fiscal 1999 quarter. In the first three quarters of
fiscal 2000, domestic area director fees recognized were $497,028 and $1,388,880
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 three quarters of fiscal 2000, we sold 6 area
directorships for $292,400 compared to 9 sold in the first three quarters of
fiscal 1999. At June 30, 2000, we had a total of 61 area directors who owned
areas encompassing approximately 65% of the population of the United States.
Since 1999, we have acquired certain area director territories that we intend to
retain and operate. At June 30, 2000, we operated 29 markets, encompassing
approximately 20% 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 $160,000 in the third quarter of fiscal 2000 and $95,000 for
the third quarter of fiscal 1999. For the first three quarters of fiscal 2000,
international master franchise fees recognized were $470,000 and $881,069 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 the fee was deferred until our
training obligation is completed. We also recognized $30,000 of previously
deferred international master franchise fees in the second quarter as we
substantially completed our training obligations under the agreements. In the
third quarter of fiscal 2000, we sold the master franchise rights to Iceland and
Mexico, Venezuela, Peru, Dominican Republic and certain other Caribbean islands
for a total of $180,000, of which $20,000 of these fees was deferred. 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 and in the third quarter of fiscal
1999, we sold the master franchising rights to parts of Central America for
$95,000.
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 nine domestic and international areas sold in the first
three quarters of fiscal 2000, three used this financing for $296,357,
representing 38% of the total domestic area director fees and international
master franchise fees received or financed in fiscal 2000. In the first three
quarters of fiscal 1999, ten used this financing for $1,272,998.
- 17 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 ourself.
Other revenue increased by 171% in the third quarter of fiscal 2000 to $262,651
from $96,860 in the third quarter of fiscal 1999. In the first three quarters of
fiscal 2000, other revenue increased by 142% to $811,272 from $334,717 in the
comparable fiscal 1999 period. Other revenue is primarily amounts paid by
equipment suppliers to reimburse design and construction costs, franchise
transfer fees and bookkeeping fees charged franchisees for which we provided
bookkeeping services. Amounts paid by equipment suppliers were $127,500 in the
third quarter of fiscal 2000 compared to $76,500 in the third quarter of fiscal
1999. In the first three quarters of fiscal 2000, amounts paid by equipment
suppliers were $475,658 compared to $238,919 in the first three quarters of
fiscal 1999. This amount will vary based on new store openings.
Sales and royalty commissions expense increased to $2,080,141 in the third
quarter of fiscal 2000 from $1,302,214 in the same quarter of fiscal 1999. In
the first three quarters of fiscal 2000, sales and royalty commissions expense
increased to $5,720,677 from $3,900,419 in the first three quarters 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
third quarter of fiscal 2000 to 37% from 42% in the comparable quarter of fiscal
1999. In the first three quarters of fiscal 2000, sales and royalty commission
expense, as a percentage of royalty and initial franchise fees, declined to 39%
from 47% in the first three quarters 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 offer franchises on our behalf,
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.
- 18 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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.
General and administrative expenses increased 64% to $3,600,333 in the third
quarter of fiscal 2000 from $2,191,058 in the comparable quarter last fiscal
year. For the first three quarters of fiscal 2000, general and administrative
expenses increased 48% to $9,254,702 from $6,247,694 in the first three quarters
of fiscal 1999. As a percent of franchise revenue, general and administrative
expenses have remained the same at 51% for both quarters ending June 30, 1999
and 2000. For the first three quarters of fiscal 2000, general and
administrative expenses as a percentage of revenue have decreased to 49% from
50% in the first half of fiscal 2000. General administrative expenses include
all of our operating costs. 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 $292,145 on sales of $4,217,110 in the
third quarter of fiscal 2000 compared to $197,769 on sales of $2,111,782 in the
comparable quarter last fiscal year. For the first three quarters of fiscal
2000, Company owned stores earned $889,304 on sales of $10,731,890 compared to
$464,887 on sales of $5,986,172 in the first three quarters of fiscal 1999.
During the first three quarters of fiscal 2000, we operated stores for a total
of 280.5 store operating months, compared to 213.3 store operating months in the
first three quarters of fiscal 1999. At June 30, 2000, we had 35 operating
Company stores, including the Cowboy Bar at Denver International Airport (24 at
June 30, 1999).
Stores held for resale lost $58,031 in the third quarter of fiscal 2000 compared
to a loss of $91,484 on sales of $208,845 in the comparable quarter last fiscal
year. For the first three quarters of fiscal 2000, stores held for resale lost
$155,774 on sales of $103,153 compared to a loss of $237,104 in the first three
quarters of fiscal 1999. In the first three quarters 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 three quarters 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 and
third quarter of fiscal 1999 of $1,081,924 and $341,424, respectively, for the
master franchise rights. In the second quarter of fiscal 1999, we also received
$22,000 for our share of an area director marketing agreement sold in Japan. In
the second quarter and third quarter of fiscal 1999, we incurred direct costs
related to the revenue totaling $243,057and $33,490, respectively, resulting in
net revenue of $860,867and $307,934, respectively. 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.
- 19 -
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Provision for bad debts were $33,817 in the third quarter of fiscal 2000 and
$95,767 in the comparable quarter of last fiscal year. For the first three
quarters of fiscal 2000, the provision for bad debts was $247,302 and $383,272
in the first three quarters of fiscal 1999. As of June 30, 2000, we had an
allowance for doubtful accounts of $222,383 that we believe is adequate for
future losses.
Depreciation and amortization was $533,342 in the third quarter of fiscal 2000
and $224,291 in the comparable quarter of last fiscal year. For the first three
quarters of fiscal 2000, depreciation and amortization was $1,437,036 and
$854,819 in the first three quarters of fiscal 1999. The increase is primarily
due to the acquisition and development of new Company owned restaurants, the
acquisition of area director territories and the purchase of a corporate jet in
fiscal 2000.
Interest expense was $467,658 in the third quarter of fiscal 2000 and $77,381 in
the comparable quarter last fiscal year. For the first three quarters of fiscal
2000, interest expense was $1,392,960 and $245,956 in the first three quarters
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 $34,505 in the third quarter of fiscal 2000 compared to
$120,342 in the comparable quarter last fiscal year. For the first three
quarters fiscal 2000, other expense was $132,721 and $156,584 in the first three
quarters 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 and acquisition-related costs.
Income tax provision was $180,912 in the third quarter of fiscal 2000 and
$242,231 in the comparable quarter of fiscal 1999. For the first three quarters
of fiscal 2000, the income tax provision was $483,457 compared to $238,774 in
the first three quarters 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 $2,529,227 in the first three
quarters of fiscal 2000 compared to cash provided by operating activities of
$4,965,897 in the first three quarters of fiscal 1999. The primary reasons for
the decrease in net cash provided by operations are an increase in income taxes
paid of $598,980 and an increase in interest paid of $972,361 in fiscal 2000.
The decrease also was due to a $2,238,550 decrease in deferred initial franchise
fees and other fees, partially offset by an increase of $734,880 as a result of
fewer notes receivable issued for area director fees and an increase of $500,980
as a result of an increase in accounts payable and accrued liabilities.
Net cash used in investing activities was $14,714,607 in the first three
quarters of fiscal 2000 compared to cash used in investing activities of
$4,965,100 in the first three quarters of fiscal 1999. The primary reasons for
the change were an increase in purchases of property and equipment of $4,091,619
(primarily the $3.35 million acquisition of a corporate jet in October 1999), an
increase in area director territory repurchases of $1,747,154 (we reacquired
fourteen area director territories in the first three quarters of fiscal 2000)
and an increase of $5,779,088 related to the acquisition of Company owned stores
in fiscal 2000. Partially offsetting these amounts was a decrease of $2,037,915
related to short term investments.
Net cash provided by financing activities was $12,224,104 in the first three
quarters of fiscal 2000 compared to cash used in financing activities of $54,809
in the first three quarters 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, proceeds of $475,611 from the sale of Class
D and Class E Preferred Stock 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 on long term obligations of
$2,077,085, common stock repurchases of $1,114,032 and financing costs of
$643,863.
In the first quarter of 1998, we tested a program under which our area directors
had the right to elect to have all future Franchisee leases in the area
director's territory signed by The Quizno's Realty Company ("QRC"), a wholly
owned subsidiary of ours. As a condition of the lease, the landlord agrees not
to look beyond QRC for payments. These locations would then be subleased by QRC
to the 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 June 30, 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.
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 June 30, 2000, we had repurchased 128,000 shares at an
average price of $8.70.
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 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 was available to use, with
certain restrictions, for general corporate purposes other than working capital,
dividends, or to repurchase the majority shareholder's stock. As of June 30,
2000, we had $2,560,297 available to use for general corporate purposes.
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, 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.
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 twelve-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.
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
In March and April 2000, we accepted Subscription Agreements for the issuance of
59,480 shares of Class E Cumulative Convertible Preferred Stock ("Class E
Preferred Stock"). As of June 30, 2000, we had received cash proceeds of
$512,718. 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.
In July 2000, the National Marketing Fund Trust and the Regional Marketing Fund
Trust, which collects and administers the national and regional advertising fees
received from franchisees, entered into a $2,000,000 revolving line of credit
with Wells Fargo Bank West, N.A. We have guaranteed this line of credit for the
National Marketing Fund Trust. The line of credit bears interest at 9.5% and
matures on March 31, 2001. As of August 7, 2000, $1.9 million had been drawn on
the line of credit.
In the quarter ended June 30, 2000, we repurchased five area director
territories from two area directors for $2,162,122. We issued notes payable for
$714,622 and offset notes and interest receivable from one area director in the
amount of $109,162. The balance of the purchase price was paid in cash.
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.
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended June 30, 2000
Form 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Quizno's Corporation v. Hot Concepts, Inc., No. 77 116 00246 99, American
Arbitration Association (Denver, Colorado); The Quizno's Corporation v.
Hampton-Davis Corp., United States District Court for the District of Colorado
(No. 99-S-1812). These actions, previously described in our annual report for
1999 filed on form 10-KSB, were dismissed pursuant to a settlement agreement
among the parties. Pursuant to the settlement agreement, we repurchased the
underlying area director territories from the defendants. No other amounts were
paid, and the parties exchanged a full release of all claims.
In re Kirwin Ventures, L.L.C., Case No. 54 114 00312 98, American Arbitration
Association; Mibichu L.L.C. v. The Quizno's Corporation, No. 98-007226-CK
(Oakland County, Michigan). These actions, previously described in our annual
report for 1999 filed on form 10-KSB, were dismissed pursuant to a settlement
agreement among the parties. Pursuant to the settlement agreement, we allowed an
unaffiliated third party to purchase one of the plaintiffs' two Quizno's
restaurants, and agreed to certain additional non-material consideration in
exchange for a full release of all claims.
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> <C>
627 shares of common
stock 5/18/2000 $4,980 Quizno's 401(k) Plan Section 4(2)
1,473 shares of Class E
Preferred Stock April 2000 $12,697.26 Private Investor Section 4(2) and Rule 506
26,000 shares of common
stock June 2000 $100,750 Quizno's Area Directors Section 4(2) and Rule 506
</TABLE>
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<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended June 30, 2000
Form 10-QSB
PART II - OTHER INFORMATION (continued)
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to our shareholders at the 2000
Annual Meeting of Shareholders held on June 22, 2000:
Proposal #1 Election of Directors
For Withheld
-------- --------
Richard E. Schaden 2,666,974 32,652
Richard F. Schaden 2,667,074 32,552
Frederick H. Schaden 2,669,474 30,152
J. Eric Lawrence 2,671,686 27,940
Mark L. Bromberg 2,671,686 27,940
Brad A. Griffin 2,671,686 27,940
Proposal #2 Approval of the increase of the number of shares authorized
under our Amended and Restarted Non-Employee Directors and
Advisors Stock Option Plan from 200,000 to 300,00
For Against Abstained
--------- ------- ---------
2,590,320 101,121 8,185
Proposal #3 Ratification and approval of our Class D Subordinated
Convertible Preferred Stock
For Against Abstained/Not Voted
--------- ------- -------------------
1,801,160 82,421 26,198/789,847
Proposal #4 Ratification of Accountants
For Against Abstained
--------- ------- ---------
2,670,095 25,625 3,906
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: Form 8-K, dated May 22, 2000, reporting in Item 5
our operating results for the second quarter of fiscal 2000.
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<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
August 14, 2000
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<PAGE>
