UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2000
TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
Colorado 84-1169286
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
(Address of Principal Executive Offices) (Zip Code)
(720) 359-3300
(Issuer's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State registrant's revenue for its most recent fiscal year: $41,924,232
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 18, 2000 was approximately
$5,963,198 (for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 2,346,766 shares of registrant's common stock outstanding as of
December 18, 2000.
Documents incorporated by reference:
None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Quizno´s Corporation was incorporated in Colorado in 1991. Our
headquarters is located at 1415 Larimer Street, Denver, CO 80202. Our
telephone number is (720) 359-3300.
We incorporated in Colorado in January 1991 as D&R, Inc. We changed
our name to The Quizno's Franchise Corporation in April 1991 and to The
Quizno's Corporation in June 1995. We do business as The Quizno's
Corporation and Quizno's. Our principal business address and that of our
subsidiaries named below is 1415 Larimer Street, Denver, Colorado 80202. In
January 1991, we purchased certain assets of Quizno's America, Inc., which
had operated, owned, and franchised Quizno's restaurants (directly and
through predecessors and affiliates) under the QUIZNO'S name since 1981. We
or our affiliates operate, and offer franchises to individuals or entities
(“Franchisees”) to operate, restaurants with carry-out facilities which sell
submarine and other sandwiches, salads, other food products and beverages,
and related services (“Restaurants”). As of November 30, 2000, there were
1026 Restaurants in operation in the United States and internationally, and
agreements were in place for the opening of an additional 695 franchised
restaurants in the United States. During the last three years, we have grown
to become the third largest submarine sandwich chain in the United States.
Additionally, we offer franchises for area director marketing
businesses in which the area director ("Area Director") acts as our sales
representative within a defined geographic area to solicit and identify
prospective franchisees, to assist us in locating and securing sites for
Restaurants within a territory, and to provide additional support before,
during, and after the Restaurant opens.
We also offer master franchise rights for international markets, in
which the master franchisee has the right to function as a franchisor to
offer and sell Restaurant franchises and area director marketing agreements
using our trademarks and service marks in a defined geographic area, usually
a country. We have master franchise agreements in place for Canada, the
United Kingdom, Japan, Australia, Switzerland, Netherlands, Luxembourg,
Belgium, Iceland, Mexico, Venezuela, Peru, Dominican Republic and other
Caribbean Islands, Taiwan, and Central America. As of December 18, 2000,
there were 110 Quizno’s Restaurants in operation in Canada, 8 in Japan, 4 in
Australia, 6 in Central America, 6 in Puerto Rico, 1 in Guam, and 1 in
Iceland.
The Area Director or master franchisee is required to open a specified
number of Restaurants annually throughout the life of the Area Director
marketing agreement or master franchise agreement.
In 1999, we changed the date of our fiscal year end to September 30.
Therefore, our 1999 fiscal year, which ended on September 30, 1999, contained
only three quarters.
On November 13, 2000, we commenced a self tender offer to purchase
all outstanding shares of our common stock, except for shares held by
Messrs Richard E. Schaden, Mr. Richard F. Schaden and Frederick H. Schaden
(the “Schadens”), at a price of $8 per share, net in cash to the seller (the
“Tender Offer”). The Tender Offer expired at midnight Monday, December 11,
2000. Shareholders tendered and we purchased 661,155 shares of our
outstanding common stock. In addition, we purchased preferred stock,
warrants and options convertible or exchangeable into 1,056,906 shares of our
common stock. In connection with the Tender Offer, we closed a loan for
$13.8 million with Levine Leichtman Capital Partners II, L.P. (“Levine”).
After the Tender Offer, as of December 18, 2000, we had 2,346,766 shares of
common stock issued and outstanding, 66.1% of which is held by the Schadens.
In October 2000, as part of the tender offer we formed a new wholly
owned subsidiary, The Quizno’s Franchise Company (QFC), which will be the
franchisor for all franchise agreements, area director agreements, and master
franchise agreements entered into after December 12, 2000. At some point in
the future, The Quizno’s Corporation may assign all of the existing
franchise, area director, and master franchise agreements to QFC.
The Restaurants
The Restaurants offer a menu of submarine style sandwiches, salads,
soups, desserts and beverages, including "Classic Lite" selections of
submarine sandwiches and salads designed for consumers who are looking for a
low-fat, healthy alternative to typical fast food products. We believe that
the submarine sandwiches offered in the Restaurants are distinctive in the
market for several reasons. Each submarine sandwich is prepared after the
customer orders and with special ingredients, recipes and techniques. These
ingredients, recipes and techniques are controlled to provide uniformity of
taste and quality among all of the Restaurants.
One of the most important distinctions of the Quizno's sandwich product
is that it is served to the customer warm. Each sandwich is prepared open
face and run through a conveyor oven that toasts the bread, melts the cheese
and enhances the flavors of the meats.
We focus on the quality of the ingredients contained in the food
products we produce and we require that certain specified ingredients, which
are generally higher quality than those that other submarine sandwich shops
use, be purchased from approved suppliers. The cheeses used in the
Restaurants are all natural. The Italian style meats include a wine-cured
Genoa salami, pepperoni and capicola, an Italian spiced ham. The turkey
breast is real turkey breast.
The Restaurants also are required to use certain products which are
prepared for us in accordance with proprietary recipes developed by us.
Foremost among these is Quizno's special recipe soft baguette style bread and
its red-wine based vinaigrette dressing used as a base on most of the
sandwiches. In addition, the Restaurants use our proprietary recipe tuna mix
blend, garlic oil blend, and marinara sauce.
The Restaurants' upscale decor is designed to convey an Italian deli
ambiance and to match the upscale quick service market niche represented by
the product. Open kitchens allow customers to watch as their sandwiches are
prepared. The decor package for the Restaurants includes reproductions of
old Italian food product labels, and hand-painted Italian style posters. The
Italian theme is prevalent throughout a Quizno’s Restaurant.
Besides a pleasant upscale environment for in-house dining, the
Restaurants offer conveniently packaged meals for carry out to serve
lunchtime office workers and to serve the home meal replacement segment of
the market.
The Restaurants are also located in mall food courts and are designed
to operate in smaller spaces while retaining the same ambiance and decor as a
traditional Quizno’s Restaurant. “Quizno’s Express” Restaurants are
typically smaller units established at such non-traditional locations as
convenience and gasoline stations, sports facilities, hospitals, and college
campuses. Quizno’s Express units offer an extensive variety of Quizno’s
sandwiches. Soups, salads and desserts are also available at Quizno’s
Express units. Quizno’s Express units will typically share common area
seating or may have very limited seating at venues designed primarily for
take out.
Concept and Strategy
Our marketing strategy is to position the Restaurants between fast food
and full-service dining. We believe that consumers are looking for a healthy
and tasty alternative to typical fast foods; in particular, they are looking
for an alternative to fast food hamburgers and fried foods. At the same
time, we believe many busy families are looking for a more convenient and
reasonably priced alternative to full-service dining. Quizno's offers all
the convenience of typical fast food in terms of quick ticket times,
affordability, and carry out and home meal replacement options, but with a
fresh, tasty alternative to fast food products. In terms of full-service
dining benefits, Quizno's offers more comfortable dining rooms than most fast
food restaurant concepts as well as other dining options -- such as catering
and delivery -- generally not available in the fast food arena. We believe
our concept is well positioned to fill a growing niche in the restaurant
business between fast food and full-service dining. The Quizno’s concept
also accommodates a variety of dining options from comfortable in-house
dining to lunchtime carry out to home meal replacement.
Our goal is to build a strong and consistently profitable nationwide
chain of Restaurants with international expansion of the chain into selected
foreign markets. The primary vehicle for achieving our planned growth has
been our Area Director marketing program and, more recently, our master
franchise program.
Our revenues are primarily derived from a royalty on all sales at
franchised Restaurants, initial franchise fees from each franchise sold, and
fees collected from Area Directors or master franchisees, as well as revenue
generated from company-owned Restaurants and license fees generated from
licensing our logos or in exchange for allowing a product company to sell
proprietary Quizno’s items. Franchisees, master franchisees and Area
Directors pay fees to us only once in connection with execution of franchise
agreements, master franchise agreements, and area director marketing
agreements, respectively. Royalties provide a long-term continuing source of
revenue. Franchise fees and royalties are expected to increase as the number
of franchised Restaurants in operation increases. We may also repurchase
certain area directorships and territories in the future as we did in fiscal
2000. The royalty rate is currently 7% for traditional Restaurants, and the
royalty rate is 8% for Quizno’s Express units; however, a small number of
franchisees operate under older agreements that set lower royalty rates at 4%
or 6%.
From time to time, we may make proposals and engage in negotiations
regarding acquisitions of material restaurant assets or other companies in
the restaurant industry, if management and the Board of Directors believe
that such proposed transaction would be in the our best interest. Our policy
is not to publicly announce such proposals until the likelihood that the
proposed transaction will be completed becomes probable.
Area Director and Master Franchise Agreements
We offer Area Directors a domestic geographical territory within which
to sell franchised Restaurants pursuant to an area director marketing
agreement. This program is designed to assist us in accelerating the
marketing and sale of franchises and the selection of Restaurant locations in
the territory. Each territory is based on areas of dominant influence of
local television broadcast stations as defined by the television broadcast
industry. Our growth strategy clusters Restaurants in particular television
markets in order to facilitate implementation of our advertising program.
Each Area Director pays us a fee based on the total of the population
in the territory. At present, the fee is $.07 per person located within the
territory, plus a training fee of $10,000. The population based portion of
this fee is deemed fully earned by us when paid and is not refundable.
Area Directors are required to market franchises for Restaurants to be
located within the territory. The Area Director agrees to open, through the
sale of franchises, a specified number of franchised Restaurants within the
territory during the term of the area director marketing agreement The sales
and opening schedules are lower in the first years of the development
period. The area director marketing agreement does not grant the Area
Director the exclusive right to market franchises or solicit franchisees in
the territory, but it does grant the Area Director the right to receive
certain fees and royalties, described in more detail below, from all
franchised Restaurants and company-owned Restaurants established in the
territory during the term of the area director marketing agreement (with
certain exceptions). We reserve the right under the area director marketing
agreement to market and sell franchises and to establish company-owned
Restaurants in a territory.
In international markets, we generally market our franchises through a
qualified person, or "Master Franchisee," from whom we receive a one-time
master franchise fee, negotiated on a case by case basis. The Master
Franchisee receives the right to sell franchises and area directorships in a
defined international market on an exclusive basis. We are paid a portion,
typically 30%, of all franchise fees, royalties and area director fees
collected by the Master Franchisee.
As of December 18, 2000, we had 58 Area Directors whose Territories
cover approximately 60% of the population of the United States. We have also
sold master franchise rights for Canada, Japan, United Kingdom, Australia,
Netherlands, Luxembourg, Belgium, Mexico, Venezuela, Peru, Dominican Republic
and other Caribbean islands, portions of Central America, Iceland,
Switzerland, Taiwan.
The area director and master franchisee agreements set increasing
minimum performance levels that require the Area Director or Master
Franchisee to develop a specified number of Restaurants in each quarter or
year (depending on the form of agreement) during the term of the agreement.
Our experience with the Area Director and Master Franchisee programs to date
indicates that while some Area Directors and Master Franchisees will exceed
their development schedules, others will fail to meet their schedules. In
our planning, we have allowed for a certain percentage of Area Directors and
Master Franchisees who will not meet their development schedules. Delays in
the sale and opening of Restaurants can occur for many reasons. The most
common are delays in the selection or acquisition of an appropriate location
for the Restaurant, delays in negotiating the terms of the lease and delays
in the franchisee financing. We may terminate an agreement if the Area
Director or Master Franchisee fails to meet the development schedule, and we
would then have the right to resell the territory to a new Area Director or
Master Franchisee.
In addition, through a required monthly minimum marketing expenditure,
the Area Director is required to actively promote the sale of our franchises
within the territory. The Area Director is required to visit with
prospective franchisees and refer appropriate locations for franchised
Restaurants within the territory to us for consideration. The Area Director
is also required to perform monthly quality assurance inspections of the
units in its area and assist franchisees within its area in opening. Our
franchise sales materials are made available to the Area Director.
Each domestic Area Director is paid a commission of 40% of the royalty
fees collected by us from each franchised Restaurant or of royalties that
would otherwise be payable by company-owned Restaurants in the territory
opened and operated during the term of the area director marketing agreement,
so long as the Area Director performs the services described above, subject
to certain exceptions in some contracts for pre-existing Restaurants in the
territory, "Turnkey" Restaurants, and conversion Restaurants for which the
Area Director is paid a flat monthly fee of $200 per Restaurant for
performing support services. Other forms of agreement exclude airport and
other non-traditional units from the commission payment obligation. Under
some forms of agreement, Area Directors are entitled to an ongoing commission
of 1% on gross sales of Restaurants open and operating in the territory on
the date the area director marketing agreement is terminated because of
failure to meet the sales or opening goals, through either the initial term
of the underlying franchise agreement or five years (15 years for area
director marketing agreements executed before January 1998), whichever is
less. This approach rewards the Area Director for selecting higher quality
franchisees and higher quality locations while discouraging the Area Director
from selecting locations that are too close together. In addition to the
foregoing, the Area Director is entitled to receive a commission of 50% of
the initial franchise fee paid to us for each franchise sold and opened
within the territory during the term of the area director marketing agreement.
We have a program under which we will finance up to 50% of the Master
Franchise and Area Director marketing fees for certain approved candidates
who have the experience and skill requirement sought by us for our Master
Franchise’s and Area Directors, but do not have sufficient cash to pay the
fee in full. The master franchise’s and Area Director is required to
personally sign a promissory note due to us for the amount financed, which
typically will bear interest at 15% per year (although we may offer a lower
interest rate in certain circumstances) and be repaid in monthly installments
over five years. The promissory note is secured by the Master Franchise’s
and Area Director marketing agreement and by other collateral unrelated to
the business.
Franchise Program
We authorize individuals and companies, within the United States,
called "Franchisees" or “Owners,” to establish and operate Restaurants at an
approved location pursuant to the terms of a franchise agreement. Under the
franchise agreement, we undertake to perform or have performed certain
services with respect to the opening and operation of a Restaurant. In
connection with the opening of a Restaurant, those services include
(i) review and approval of the proposed Restaurant location, (ii) review and
approval of construction plans for the Restaurant, (iii) identification of
sources of supply for items which are ordinarily necessary to operate a
Restaurant, (iv) an operations manual providing detailed instructions with
respect to operation of the Restaurant, (v) training with respect to our
method of operations, including operating procedures, food preparation
techniques, controls, promotion programs, management and public relations,
and (vi) pre-opening assistance. After opening of the Restaurant, we provide
continuing advice and consultation with respect to operation of the
Restaurant. From time to time, we have to take over the operation of a
Restaurant from an unsuccessful franchisee and operate the Restaurant until a
new franchisee is found. Our investment in such operations may be recovered
at the time the Restaurant is transferred to the new franchisee.
The current franchise fee for the Owner’s first Restaurant is $20,000,
$15,000 for the second, and $10,000 for the third and any additional
franchise agreement. We offer the franchise for a Quizno’s Express unit at a
reduced franchise fee of $10,000. The Owner also pays us a continuing
royalty fee of 7% of the Owner's gross sales (8% for Quizno’s Express
franchises). Old forms of the franchise agreement require royalty fee
payments at rates between 4% and 6%. “Gross sales” is defined as all sales
whether on credit or for cash, and all revenues from any source caused by the
operation of the Restaurant, whether directly or indirectly relating to the
operation thereof. Sales tax and any other state or federal tax are
excepted. The Owner also pays advertising fees to The Quizno’s National
Marketing Fund Trust and one of three Regional Marketing Fund Trusts in an
amount equal to a total of 1% to 4% of the gross sales, which are used for
advertising, marketing, and public relations programs and materials to
enhance and build the image and goodwill of the Quizno's system. There are
certain other fees that must be paid by the Franchisee to us in order to
reimburse us for costs incurred in connection with the establishment of a
Restaurant. The total average cost to a Franchisee for opening a traditional
Restaurant ranges between $170,150 and $232,150 including the initial
franchise fee, with most of the variation attributable to differences in the
costs of leasehold improvements for the Restaurant, size of the Restaurant,
and whether the unit is a traditional or Express Restaurant.
We collect weekly and monthly sales and other operating information
from each franchisee. We have agreements with most franchisees permitting us
to electronically debit the franchisees' bank accounts for the payment of
royalties, marketing fund contributions and other amounts owed to us under
the franchise agreement. This system significantly reduces the resources
needed to process receivables, improves cash flow and helps to limit past-due
accounts related to these items. Franchisees generally are required to
purchase and install an approved point of sale system that, among other
things, allows us to poll sales information daily.
We have developed certain items, such as bread and dressings for salads
and sandwiches, which are prepared for use in the Restaurants based upon
recipes developed by us and which are provided to Owners under the private
label "Quizno's." The Owner is required to purchase those items from
specified vendors for sale and use in the Restaurant. The franchise
agreement also requires the Owner to acquire specified equipment and
inventory, to establish and maintain specified signage and to operate the
Restaurant in accordance with the standards and requirements outlined in our
operations manual.
We have entered into an agreement with a national food products
distributor that allows Owners to obtain meat products, produce and other food
and non-food items necessary for operation of franchised Restaurants at prices
more favorable than those that could be obtained by individual Owners. All of
the purchasing of the ingredients for the food products offered in the
Restaurants is done centrally by us which allows for better quality
control. Each Owner then contacts the distributor directly to obtain the
items needed for the Owner's Restaurant, which are delivered by the
distributor. The distributor bills the Owner directly for all items ordered
and we are not liable for any amounts owed by the Owners. We have entered into
an agreement to change to a new National food products distributor effective
January 2001. On August 25, 2000, we formed a new wholly owned subsidiary
named American Food Distributors, Inc., a Colorado corporation primarily
engaged in the business of purchasing proprietary products from third-party
manufacturers and then reselling those products to a distributor for use
in the Restaurants (AFD). We plan to purchase and resell virtually all our
proprietary products through AFD. We anticipate that the organization of
AFD may result in certain cost efficiencies and savings that would translate
to reduced product prices for our franchisees, increased contributions to
our national and regional marketing funds, and increased revenue and earnings
for us. At this point, it is impossible to predict the extent of those amounts
or how they will be allocated.
We retain the right to approve the terms of the Owner's lease. We must
review the lease as part of the approval process. The Owner pays the costs
for the review of the lease. We also reserve the right to enter into a lease
directly with each landlord and then to sublease to the Franchisee.
The Owner, or person designated by the Owner and approved by us, is
required to devote his or her full time, attention and efforts to the
performance of the Owner's duties under the franchise agreement relating to
the operation of the Restaurant. The Owner agrees in the franchise agreement
to use his or her best efforts to produce maximum volume of gross sales in
the Restaurant. The Restaurant must be operated continuously on such days
and during such minimum hours as are required by us, unless restricted by
Owner's lease or other rules applicable to the Restaurant.
The Owner agrees to maintain books and records for the Restaurant in
accordance with the requirements and specifications set forth from time to
time by us. The Franchisee is required by the franchise agreement to be
responsible for submitting all required reports to us when and in the manner
or format required by us.
In order to provide for proper financial tracking and planning for
Owners, we began providing a restaurant bookkeeping service to our
Restaurant Owners in 1994. In mid-1998, we outsourced the bookkeeping
function. This service is intended to assure the Owners have accurate
financial records as well as to allow us to keep accurate systemwide
statistics. Franchise agreements executed after February 10, 1995, require
Owners to use this bookkeeping service for the first year of operations for
the Owner's first unit for a fee of $85 per week, including payroll.
The Owner must submit copies of all proposed advertising or promotional
materials for approval by us prior to use.
We have the right to terminate a franchise agreement for a variety of
reasons, including a Franchisee's failure to make payments when due or
failure to adhere to our policies and standards. Many state franchise laws
limit the ability of a franchisor to terminate or refuse to renew a franchise.
We expect that Restaurants operating within our franchise system will
emphasize quality "submarine" sandwiches. In order to satisfy customer
expectations regarding menus and service, we require substantial uniformity
among all Restaurants. All Restaurants must conform to our decor and menu
specifications. The Owner is not allowed to sell any goods or services at a
Restaurant other than those goods and services specified by us.
Franchise Marketing Programs
In order to facilitate the marketing of franchised Restaurants, we
devote resources for national print media, sales staff, marketing materials,
and trade shows. In addition, we have specific programs to market our
franchises, which are discussed below.
Discovery Day. Discovery Day is a day-long event regularly scheduled
in Denver to introduce potential Owners from throughout the country to the
Quizno's concept.
Toll Free Phone Line. We have installed a toll free phone line
(1-800-DELI-SUBS) which rings directly into the Franchise sales department.
The information is entered into a data base of Owner inquiries and an
informational package mailed to the caller.
Open Houses. We have an ongoing program of hosting open houses
throughout the country in conjunction with our Area Directors. Individuals
who have expressed an interest in our franchises are invited to open houses.
Computerized Data Base of Franchise Inquiries. We have installed a
computer network within our Franchise sales department for the purpose of
organizing, managing, and tracking individuals who inquire about our
franchises.
National Advertising. We continue to advertise nationally for new
franchisees on a regular and consistent basis in national, regional and local
publications.
Company-Owned Restaurants
As of December 15, 2000, we own and operate 33 Quizno's Restaurants, 22
of which are located in Colorado, and 11 are located in Kansas. In fiscal
2000, Company-owned Restaurants generated $ 1,193,730 in earnings. We also
currently own and operate one Quizno’s Restaurant held for resale, which
incurred losses totaling $ 12,634 in fiscal 2000.
While we may add new Company-owned Restaurants from time to time, we
expect most of our growth in the foreseeable future to result from the
development of franchised Restaurants.
In addition, from time to time, we acquire or assume the operation of
franchised Restaurants where the franchisee has been unable to operate
successfully for reasons unrelated to the location or the market. In such
cases, we will typically operate the Restaurant, make any required
improvements and repairs, re-staff, begin local store marketing, and
ultimately transfer the Restaurant to a new qualified Owner. Occasionally,
we may incur short term losses in such cases. However, the royalty stream
provided over the long term by the new Owner will normally offset or exceed
any such losses.
Advertising
Our advertising staff develops advertising campaigns for use at all
levels to support consumer sales in the Restaurants. Each franchised
Restaurant currently pays 1% of gross sales to the Quizno’s National
Marketing Fund Trust and up to 3% of gross sales to one of three Regional
Fund Marketing Trusts. All company-owned Restaurants must pay the
advertising fees on an equal percentage basis with all franchised
Restaurants. We use the advertising fees to create, produce, and place
advertising, in-store signs, in-store promotions, and commercial advertising;
to pay agency costs and commissions; to create and produce video, audio, and
written advertisements; to administer regional advertising programs,
including direct mail and other media advertising; to employ advertising
agencies and in-house staff assistance; and to support public relations,
market research, and other advertising and marketing activities. The
advertising may be disseminated in print, television, or radio. The coverage
has been local or regional, and, since early 1998, we have used national
cable television campaigns.
Through July 10, 2000, each traditional Restaurant was required to
spend 3% of sales for local advertising or promotions. Effective July 11,
2000 this 3% of sales was allocated into one of three Regional Advertising
Trusts.
Competition
Restaurant Operations. The restaurant industry is highly competitive
with respect to price, service, food quality and location and there are
numerous well-established competitors possessing substantially greater
financial, marketing, personnel and other resources than we possess.
We compete in the sandwich segment of the fast food industry, an
industry long dominated by hamburger chains. We believe that within the sub
sandwich segment, our largest competitors by number of stores to be Subway
and Blimpie. Subway, the nation's largest submarine sandwich restaurant
chain, has in excess of 12,000 units in the U.S., while Blimpie has grown
significantly in recent years and has approximately 2,100 domestic units.
The expansion of Subway has drawn attention to submarine sandwiches, during a
time of growing concern relating to beef and fried foods. We believe that
the submarine sandwich segment is underdeveloped, and that demand for
submarine style sandwiches will continue to grow. Other than Subway and
Blimpie, most submarine sandwich chains currently have less than 200 units
each and are primarily local or regional.
Our major competitors, including Blimpie, have followed Subway closely
in the style and quality of the product, creating very little, if any
differentiation in the market. Subway offers a low-cost product in a fast
food style restaurant with limited seating. We have positioned the
Restaurants between the traditional fast food restaurant style of our
submarine sandwich competitors and full-service dining, and have focused on
higher quality food products, to distinguish the Restaurants from their
competitors. The restaurant business can be affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns and the type, number and location of competing restaurants.
In addition, inflation, increased food costs, labor and benefits costs and
the lack of experienced management and hourly employees may adversely affect
the restaurant industry in general and our Restaurants in particular
Franchise Competition. In addition to our Restaurant operations, we
compete with fast food chains, major restaurant chains and other franchisors
for franchisees. Many franchisors, including those in the restaurant
industry, have greater market recognition and greater financial, marketing
and human resources than we have. We believe that we can compete
successfully for franchisees for several reasons. The total cost of opening
a Quizno’s Restaurant tends to be lower than that of hamburger fast food and
full-service dining restaurants. The ratio of sales revenue per restaurant
to restaurant opening costs is also better for Quizno's Restaurants than for
most of our competitors. Finally, the ambiance of Restaurants offers a
Franchisee a pride in ownership that is unique to the Quizno's concept.
We do not have significant costs associated with research and
development.
Government Regulations
We are subject to Federal Trade Commission ("FTC") regulation and
several state laws which regulate the offer and sale of franchises. We are
also subject to a number of state laws which regulate substantive aspects of
the franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires us to furnish to prospective
franchisees a franchise offering circular containing information prescribed
by the FTC Rule.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship presently exist in a substantial number of
states. State laws that regulate the offer and sale of franchises require
registration of the franchise offering with state authorities. Those that
regulate the franchise relationship generally require that the franchisor
deal with its franchisees in good faith, prohibiting interference with the
right of free association among franchisees, limiting the imposition of
standards of performance on a franchisee and regulating discrimination
against franchisees in charges, royalties or fees. Although such laws may
restrict a franchisor in the termination of a franchise agreement by, for
example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination, an opportunity to cure a
default and a repurchase of inventory or other compensation, these provisions
have not had a significant effect on our franchise operations.
In October 1999, the FTC issued proposed changes to the FTC Rule that
would effect certain disclosure obligations in connection with franchise
sales. These proposed changes are still subject to public comment, and even
if adopted as proposed, we do not think the changes would materially effect
our franchise sales or other operations. We are not aware of any other
probable pending franchise legislation that in our view is likely to affect
our operations significantly. We believe that our operations comply in all
material respects with the FTC Rule and the applicable state franchise laws.
Each franchised Restaurant, and each company-owned Restaurant, is
subject to licensing and regulation by a number of governmental authorities,
which may include health, sanitation, safety, fire, building and other
agencies in the state or municipality in which the Restaurant is located.
Difficulties in obtaining or failure to obtain the required licenses or
approvals could delay or prevent the development of a new Restaurant in a
particular area. We are subject to federal and state environmental
regulations, but these have not had a material effect on our operations.
More stringent and varied requirements of local governmental bodies with
respect to zoning, land use and environmental factors could delay or prevent
the development of a new Restaurant in a particular area.
We are also subject to state and federal labor laws that govern our
relationship with our employees, such as minimum wage requirements,
overtime, working conditions and citizenship requirements, or customers, such
as the Americans with Disability Act. Significant numbers of food service
and preparation personnel are paid at rates governed by the federal minimum
wage. Accordingly, increases in the benefits under any of these laws would
increase labor costs to us and our franchisees.
We do not have any significant costs related to environmental law
compliance.
Trademarks
We presently own the following principal trademarks or service marks
(the “Marks”). All of our primary Marks (except for the last one) are
registered on the Principal Register of the United States Patent and
Trademark Office:
Mark Registration Number Registration Date
--------------------------- --------------------- --------------------
"QUIZNO'S" service mark 1,317,420 January 29, 1985
"QUIZNO'S" service mark 1,317,421 January 29, 1985
"QUIZNO'S & Design" service
mark 1,716,834 September 15, 1992
"QUIZNO'S EXPRESS CLASSIC
SUBS" service mark 2,086,598 September 19, 1996
“QUIZNO’S SUBS OVEN BAKED
CLASSICS and DESIGN” 2,228,680 March 2, 1999
There are no presently effective determinations of the United States
Patent and Trademark Office, the trademark trial and appeal board, the
trademark administrator of any state or any court, nor are there any pending
infringement, opposition or cancellation proceedings or material litigation,
involving the Marks.
We have also filed the following trademarks or service marks
internationally:
Application or Application or
Registration Registration
Country Trademark Number Date Status
------------ ----------- -------------- --------------- ------------
Australia Quizno's App. # 789815 30 March 1999 Pending
Quizno's Subs
Australia Oven Baked
Classics App. # 789814 30 March 1999 Pending
Canada Quizno's Reg. # 489496 6 February 1998 Registered
Quizno's Subs
Canada Oven Baked
Classics (and App. # not yet
design) available Pending
Europe-CTM Quizno's App. # 1057223 28 January 1999 Pending
Quizno's Subs
Europe-CTM Oven Baked App./Reg. # 1057264 4 October 2000 Registration
Classics No. pending
Great Britain Quizno's Reg. # 1576926 18 August 1995 Registered
Quizno's Subs
Great Britain Oven Baked
Classics (and
design) App # 2197852
Japan Quizno's Reg. # 4275508 21 May 1999 Registered
Quizno's Subs
Japan Oven Baked
Classics (and App. # 17745/99 1 March 1999 Pending
(design)
Mexico Quizno's Reg. # 502259 30 August 1995 Registered
Puerto Rico Quizno's None 23 September 1997 Pending
Singapore Quizno's Reg. # 6014/94 12 September 1994 Registered
South Korea Quizno's Reg. # 29994 11 January 1996 Registered
Iceland Quizno’s App. # 1909/2000 25 May 2000 Pending
Switzerland Quizno’s App. # 06203/2000 24 May 2000 Pending
We have also filed trademark applications in several Central American
countries, all of which are currently pending. There are no agreements
currently in effect which significantly limit our right to use or license the
use of the Marks.
Employees
As of December 15, 2000, we employed 92 full-time employees and 2
part-time employees. In addition, we employed 109 full-time and 218
part-time employees in our Company-owned Restaurants. Our employees are not
covered by any collective bargaining agreement and management believes our
employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
We lease our headquarters office space of 14,866 square feet at 1415
Larimer Street, Denver, Colorado. We also lease the premises for each of
the 35 Company-owned and operated Restaurants and the Cowboy Bar at Denver
International Airport, at September 30, 2000, as follows:
1. 12201 East Arapahoe Road, #B7 Englewood, CO 80112 2,486 sq. feet
2. 6525 Gunpark Drive Boulder, CO 80301 1,976 sq. feet
3. 191 Blue River Parkway Silverthorne, CO 80498 931 sq. feet
4. 8081 East Orchard Road, #67 Greenwood Village, CO 80111 3,166 sq. feet
5. 2311 30th Street Boulder, CO 80301 1,400 sq. feet
6. 9425 South University Blvd. Highlands Ranch, CO 80126 1,919 sq. feet
7. 1275 Grant Street Denver, CO 80203 1,400 sq. feet
8. 1250 South Hover Road, Bldg. 8A Longmont, CO 80501 2,350 sq. feet
9. 1660 Lincoln Street, # 105 Denver, CO 80264 1,660 sq. feet
10. 10450 West Colfax Lakewood, CO 80215 1,992 sq. feet
11. 4495 North Washington Denver, CO 80216 1,903 sq. feet
12. 14413 West Colfax Lakewood, CO 80401 1,300 sq. feet
13. 999 18th Street, # 136 Denver, CO 80202 1,360 sq. feet
14. 270 West 14th Street Denver, CO 80204 1,700 sq. feet
15. 4403 South Tamarac Parkway Denver, CO 80237 2,420 sq. feet
16. 818 17th Street Denver, CO 80202 1,800 sq. feet
17. 2401 West Central El Dorado, KS 67042 1,800 sq. feet
18. 738 North Waco Wichita, KS 67203 1,151 sq. feet
19. 4100 East Harry, #55 Wichita, KS 67218 1,850 sq. feet
20. 3300 North Rock Road Wichita, KS 67226 1,840 sq. feet
21. 2792 South Seneca Wichita, KS 67217 1,700 sq. feet
22. 2407 West 21st Street Wichita, KS 67203 1,225 sq. feet
23. 602 North Tyler Wichita, KS 67212 1,500 sq. feet
24. 678 East 47th Street South Wichita, KS 67216 1,540 sq. feet
25. 1695 Larimer Street Denver, CO 80202 2,981 sq. feet
26. 305 McCaslin Blvd. #6 Louisville, CO 80027 1,500 sq. feet
27. 12003 Pecos St. Westminster, CO 80234 2,400 sq. feet
28. 6765 W. 120th Ave. Broomfield, CO 80020 2,100 sq. feet
29. 5131 S. Yosemite Greenwood Village, CO 80112 1,600 sq. feet
30. 1387 S. Boulder Rd., Unit G Louisville, CO 80027 2,100 sq. feet
31. 12607 Metcalf Overland Park, KS 66213 2,000 sq. feet
32. 11029 Metcalf Overland Park, KS 66120 1,520 sq. feet
33. 1213 State Street, Unit A Santa Barbara, CA 93101 1,485 sq. feet
34. 8700 Pena Blvd. Denver, CO 80249 4,209 sq. feet
35. 8900 Pena Blvd. Denver, CO 80249 1,761 sq. feet
36. 8700 Pena Blvd. Denver, CO 80249 2,724 sq. feet
ITEM 3. 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.
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.
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. The Blacks also defaulted on
payment obligations under promissory notes entered into in connection with
the sale of the area directorships. 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.
On November 3, 2000, the parties entered into a settlement. Pursuant
to the settlement agreement, we paid the defendants $20,000 and forgave the
balances owed under the promissory notes. The defendants gave up all rights
to the area director territories, and the parties exchanged a full release of
all claims. On November 16, 2000, the federal district court action was
dismissed with prejudice. The arbitration action had previously been
dismissed.
The Quizno’s Corporation v. Cy Thomas Plyler (American Arbitration
Association, Denver Colorado, No. 77 181 00203 00. On July 10, 2000, we
terminated an area director agreement with Cy Thomas Plyler, for failure to
meet the required development schedule. On the same day, we instituted this
action in the Denver office of the American Arbitration Association, in which
we sought damages for failure to comply with the agreement as well as a
declaration that the agreement was properly terminated. On August 11, 2000,
Plyler filed and answering statement denying our claims and counterclaims for
breach of contract. Plyler claims damages in excess of $1,000,000 based on
lost future revenue from the territory. He also seeks indemnification and
attorney fees. We believe that we rightfully terminated the agreement and
intend to contest the counterclaims and to pursue our claims. The case is
currently in pre-trial discovery. No trial date has been set. We believe
that any loss in this matter would be a covered claim under our Errors and
Omissions Insurance Policy.
Danny Markovitz & Lee McGowan v. The Quizno’s Corporation (District
Court for the City & County of Denver, Colorado, No. 00CV4134. On June 2,
1999, we terminated an area director agreement with Danny Markovitz & Lee
McGowan for failure to meet the required development schedule, failure to
make payments on the promissory note given in connection with the sale of the
area directorship, and failure to comply with other provisions of the
agreement and related documents. On June 20, 2000, the plaintiffs commenced
this action, alleging breach of contract, unjust enrichment, violation of the
Colorado Consumer Protection Act, fraudulent misrepresentation, fraudulent
concealment, negligent misrepresentation, intentional interference with
contract, and violations of the Colorado Securities Act as well as securities
fraud. The claims all arise from the plaintiffs’ allegation that we
wrongfully terminated the agreement and in alleged wrongful acts (failure to
timely provide a UFOC or to disclose the terms of the promissory note
collateral) taken by us in connection with the sale of the area
directorship. We have denied those claims and believe that we properly
terminated the agreement. The case is currently in pre-trial discovery and
is set for trial in June 2001. We believe that any loss in this matter would
be a covered claim under our Errors and Omissions Insurance Policy.
From time to time, we are involved in litigation and proceedings
arising out of the ordinary course of our business. There are no other
pending material legal proceedings to which we are a party or to which our
property is subject. We do not believe that any of the foregoing litigation
will have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of its fiscal year ended September 30, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the NASDAQ Small-Cap Issues Market under
the symbol "QUIZ." The following table shows high asked, low bid and close
price information for each quarter in the last two fiscal years as reported
by Prophet Information Services, Inc., a provider of online historical stock
price data for all major U.S. securities markets. Such quotations reflect
inter-dealer prices, without retail mark-ups, markdowns or commissions, and
may not necessarily represent actual transactions. On December 18, 2000, the
stock closed at $ 7.50.
Fiscal Year Ended September 30, 1999
High Low Close
-------- ------- -------
First Quarter $7.75 $6.88 $7.19
Second Quarter $7.75 $6.50 $7.25
Third Quarter $9.50 $6.94 $8.25
Fiscal Year Ended September 30, 2000
High Low Close
-------- ------- -------
First Quarter $9.00 $7.25 $7.38
Second Quarter $7.94 $5.88 $7.94
Third Quarter $8.00 $5.88 $7.00
Fourth Quarter $7.38 $5.88 $6.44
There were 93 holders of record of our Common Stock as of December 18,
2000. This number includes shareholders of record who hold stock for the benefit
of others.
The tender offer reduced the number of our outstanding shares and the
number of our shareholders. Our Board of Directors could take other actions
that would result in a second-step transaction in which all the remaining
public stockholders would receive cash for their shares. However, our Board
of Directors has not made any decision to take the company private or as to
whether, or when, a second-step transaction such as a merger or a reverse
stock split would be completed. A second-step transaction would require
approval by our Board of Directors and may require approval by our
stockholders, depending on the nature of the second-step transaction. The
members of the Schaden family owning shares would be able to control the
outcome of any stockholder vote on a second-step transaction. The Board may
also decide to deregister our shares (assuming that we meet the criteria for
such delisting), in which case we would no longer be a reporting company
under the Securities Exchange Act of 1934, nor would our shares be traded on
any public exchange.
We believe that the tender offer may result in our company no longer
meeting the net tangible asset or other requirements for continued listing on
the Nasdaq SmallCap Market. In that event, we would be traded on the
National Association of Securities Dealers, Inc. Electronic Bulletin Board
(the "OTCBB"), which may provide less liquidity and less price publicity for
remaining shareholders.
We do not expect to pay any dividends on our Common Stock in the
foreseeable future. Management currently intends to retain all available
funds for the development of our business, for use as working capital or to
repurchase common stock.
In October 1999, we announced a program to repurchase up to 200,000
shares of our common stock. The program was terminated on or about September
30, 2000, and at such time we had repurchased 144,005 shares under such
program. The prices at which shares were repurchased ranged from $6.03 to
$8.875, and the average price was $8.38.
During the last quarter of the fiscal year ending September 30, 2000,
we sold the following securities without registration with the Securities and
Exchange Commission pursuant to the exemption noted:
Securities Number Exemptions
Sold Date of Shares Consideration Purchasers Claimed
----------------- -------- --------- ------------- ---------- ------------
Common Stock 8/8/00 2,918 $20,429 Plan Quizno’s Section 4(2)
obligation 401(k) Trust
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this annual report, and in
particular in this section entitled "Management's Discussion and Analysis or
Plan of Operation," are forward-looking statements that involve risks and
uncertainties that might adversely affect our operating results in the future
in a material way. Such risks and uncertainties include, without limitation,
the effect of national and regional economic and market conditions in the
U.S. and the other countries in which we franchise Restaurants, costs of
labor and employee benefits, costs of marketing, the success or failure of
marketing efforts, costs of food and non-food items used in the operation of
the Restaurants, intensity of competition for locations and Franchisees as
well as customers, perception of food safety, spending patterns and
demographic trends, legal claims and litigation, the availability of
financing for us and our Franchisees at reasonable interest rates, the
availability and cost of land and construction, legislation and governmental
regulations, and accounting policies and practices. Many of these risks are
beyond our control. In addition, specific reference is made to the "Risk
Factors” section contained in our Prospectus, dated January 9, 1998, included
in the Registration Statement on Form S-3 filed by our company (Registration
No. 333-38691).
The principal sources of our income are continuing fees, initial
franchise fees, and, historically, area director marketing 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.
Overview
In November 1999, we announced that we had changed our fiscal year end from
December 31 to September 30. The financial statements included with this 10-KSB
filing reflect our balance sheet as of September 30, 2000 and 1999 and December
31, 1998 and the related statements of operations, stockholders’ equity and cash
flows for the year and nine months ended September 30, 2000 and 1999,
respectively, and the year ended December 31, 1998. Included below are the
statements of operations for the years ended September 30, 2000 and 1999 and the
statements of cash flows for the years ended September 30, 2000 and 1999.
Amounts for the year ended September 30, 1999 are unaudited. For purposes of
Management’s Discussion and Analysis or Plan of Operation, we believe that these
twelve-month statements and comparisons provide a more meaningful analysis.
Therefore, all comparison and analysis included in this Management’s Discussion
and Analysis or Plan of Operation will be based upon these twelve-month
statements and related data. Unless noted otherwise, all references to 2000 and
1999 refer to the years ending September 30, 2000 and 1999, respectively.
Consolidated Statements of Operations
For the Year Ended September 30,
--------------------------------
2000 1999
-------------- -------------
(Unaudited)
Franchise operations:
Revenue
Continuing fees ........................ $ 18,072,077 $ 10,412,414
Initial franchise fees ................. 5,730,662 3,610,042
Area director and master franchise fees 1,361,901 2,131,882
Other .................................. 1,064,646 508,240
Interest ............................... 526,761 355,608
------------ ------------
Total revenue ...................... 26,756,047 17,018,186
------------ ------------
Expenses
Sales and royalty commissions .......... (7,836,912) (5,302,456)
General and administrative ............. (12,867,738) (8,657,357)
------------ ------------
Total expenses ..................... (20,704,650) (13,959,813)
------------ ------------
Income from franchise operations ............... 6,051,397 3,058,373
------------ ------------
Company store operations:
Sales ....................................... 14,973,763 8,276,368
Cost of sales ............................... (4,373,303) (2,511,086)
Cost of labor ............................... (3,318,489) (2,222,855)
Other store expenses ........................ (6,088,241) (2,924,237)
------------ ------------
Total expenses ..................... (13,780,033) (7,658,178)
------------ ------------
Income from Company stores operations .......... $ 1,193,730 $ 618,190
============ ============
Other income (expenses):
Sales by stores held for resale ............. $ 194,422 $ 997,583
Loss and expenses related to stores
held for sale .............................. (387,576) (1,260,529)
Loss on sale or closure of Company stores ... (43,596) (127,809)
Sale of Japan master franchise .............. -- 1,168,801
Provision for bad debts ..................... (305,285) (354,827)
Other expenses .............................. (41,820) (68,245)
Depreciation and amortization ............... (1,994,887) (1,280,836)
Impairment of long lived assets ............. (579,246) --
Privatization and acquisition related costs . (138,164) (265,472)
Interest expense ............................ (1,898,901) (321,718)
------------ ------------
Total other expenses (5,195,053) (1,513,052)
------------ ------------
Net income before income taxes ................. 2,050,074 2,163,511
Income tax provision ........................... (747,835) (353,135)
------------ ------------
Net income ..................................... 1,302,239 1,810,376
Preferred stock dividends ...................... (186,457) (179,151)
------------ ------------
Net income before cumulative effect of changed
accounting principle .......................... 1,115,782 1,631,225
Cumulative effect of changed accounting principle
(net of taxes) ................................ -- (2,769,592)
------------ ------------
Net income (loss) applicable to common
stockholders .................................. $ 1,115,782 $ (1,138,367)
============ ============
Consolidated Statements of Cash Flows
For the Year Ended September 30,
--------------------------------
2000 1999
--------------- ------------
(Unaudited)
Cash flows from operating activities
Net income (loss) before preferred stock ....... $ 1,302,239 $ (959,216)
dividends
Adjustments to reconcile net income (loss) to
net cash provided by operating activities -
Depreciation and amortization ............... 1,919,360 1,179,690
Impairment of long lived assets ............. 579,246 --
Cumulative effect of changed accounting
principle .................................. -- 4,388,208
Provision for losses on accounts and notes
receivable ................................. 305,285 354,827
Loss on disposal of Company stores .......... 43,596 158,308
Deferred income taxes ....................... (795,877) (3,395,416)
Amortization of deferred financing costs .... 75,527 101,146
Amortization of deferred area director fee
revenue .................................... (404,934) --
Area director expenses recognized ........... 40,493 --
Promissory notes accepted for master
franchise and area director fees ........... (415,924) (1,211,237)
Other ....................................... 9,375 17,972
Changes in assets and liabilities -
Accounts receivable ..................... (1,279,762) (497,682)
Other assets ............................ (82,339) 108,968
Accounts payable ........................ 1,395,280 95,453
Accrued liabilities ..................... 951,321 384,684
Deferred franchise costs ................ (404,502) (536,385)
Deferred initial franchise fees and
other fees ............................. 3,085,559 5,174,771
Income taxes payable .................... (480,912) 851,469
------------ ------------
3,184,645 5,581,278
------------ ------------
Net cash provided by operating activities 5,843,031 6,215,560
------------ ------------
Cash flows from investing activities
Acquisition of Company owned stores ............ (5,832,376) (286,355)
Purchase of property and equipment ............. (6,073,744) (2,139,866)
Principle payments received on notes receivable 453,931 1,355,282
Investment in turnkey stores ................... -- (7,558)
Short-term investments ......................... (1,060,459) (3,060,688)
Acceptance of other notes receivable ........... (1,159,761) (362,578)
Investment by minority interest owners ......... -- 151,601
Purchase of minority interest owners ........... -- (150,000)
Intangible and deferred assets ................. (125,958) (1,262,185)
Proceeds from sale of assets and stores ........ 137,361 213,000
Deposits ....................................... 52,174 (42,805)
Area director marketing territory repurchases .. (2,497,945) (863,984)
Other investments .............................. -- (15,000)
------------ ------------
Net cash used by investing activities .... (16,106,777) (6,471,136)
------------ ------------
Cash flows from financing activities
Principal payments on long-term obligations .... (4,142,344) (1,866,919)
Proceeds from issuance of notes payable ........ 17,548,000 2,242,187
Financing costs ................................ (646,511) --
Redemption of Class B Preferred Stock .......... -- (500,000)
Proceeds from issuance of Common Stock and ..... 302,380 128,479
Preferred Stock
Proceeds from sale of Class D and Class E
Preferred Stock ............................... 478,611 --
Repurchase of Class D Preferred Stock .......... (3,000) --
Common Stock repurchased ....................... (1,219,785) --
Preferred dividends paid ....................... (186,457) (179,452)
------------ ------------
Net cash provided by (used by) financing
activities .................................... 12,130,894 (175,705)
------------ ------------
Net increase (decrease) in cash and cash
equivalents ...................................... 1,867,148 (431,281)
Cash and cash equivalents - beginning of year ..... 626,828 1,058,109
------------ ------------
Cash and cash equivalents - end of year ........... $ 2,493,976 $ 626,828
============ ============
In 2000 and 1999, before the cumulative effect of accounting changes,
we were profitable for the year. We ended the year with 972 domestic and
international Restaurants open, another 669 domestic Restaurants sold and
scheduled to open in the future, 35 Company owned Restaurants, 58 Area
Directors, and 8 international master franchisees. In 2000, we earned
$1,302,239 compared to $1,810,376 in 1999 (amounts are before preferred stock
dividends).
The following table reflects our revenue growth by source and Restaurants for
the past two years:
For the year ended
September 30,
-----------------------
2000 1999
----------- ----------
Revenue (000’s)
Continuing fees ................. $ 18,072 $ 10,412
Initial franchise fees .......... 5,731 3,610
Area director and master ........ 1,362 2,132
franchise fees
Other ........................... 1,591 864
-------- --------
Franchise revenue ............... 26,756 17,018
Sales by Company owned stores ... 14,974 8,276
Sales by stores held for resale . 194 998
-------- --------
Total revenue ................... $ 41,924 $ 26,292
======== ========
Percent increase ................ 59%
========
Earnings before interest expense,
income taxes, depreciation and
amortization, preferred stock
dividends, impairment of
long-lived assets and cumulative
effect of a change in accounting
principle (EBITDA) ............. $ 6,523 $ 3,766
======== ========
Restaurants – Domestic and
International
Restaurants open, beginning ..... 634 438
New Restaurants opened .......... 374 258
Restaurants closed, Bain’s ...... (4) --
Restaurants sold, Bain’s ........ -- (31)
Restaurants closed .............. (31) (28)
Restaurants closed, scheduled to (7) (4)
reopen
Restaurants reopened ............ 6 1
Restaurant open, end ............ 972 634
Franchises sold, domestic ....... 490 525
Franchises sold, international .. 63 52
-------- --------
Total ........................... 553 577
======== ========
Initial franchise fees collected $ 8,462 $ 6,986
(000's)
Systemwide sales, domestic ...... $ 273 $ 152
(millions)
Average unit volume, domestic (1) $390,000 $369,000
Same store sales (2) (3) Up 7.9%
(1) Average unit volumes of $390,000 and $369,000 are for the nine months ended
September 30, 2000 and 1999, respectively. Average unit volumes exclude
Restaurants located in convenience stores and gas stations and include only
Restaurants open at least one year under the same ownership.
(2) Same store sales are for the year ended September 30, 2000 compared to the
comparable period in 1999 and is based on 350 stores open all of 2000 and 1999.
Stores that transferred ownership during this period, or were in substantial
default of the franchise agreement at September 30, 2000, are excluded.
(3) Because we are and will continue to be in an aggressive growth mode over the
next few years, it is anticipated that same store sales will fluctuate as
Restaurants are included from more start up markets.
Results of Operations
Comparison of Years Ended September 30, 2000 and 1999
Franchise revenue increased 57% in 2000 to $26,756,047 from $17,018,186
in 1999. Total revenue increased 59% in 2000 to $41,924,232 from $26,292,137
in 1999. The revenue increase resulted primarily from continuing fees and
Company store sales.
Continuing fees increased 74% in 2000 to $18,072,077 from $10,412,414 in
1999. Continuing fees are comprised of royalties and licensing fees.
Royalty fees increased 82% in 2000 to $15,271,779 from $8,386,050 in
1999. Royalty fees are a percentage of each Owner’s sales paid to us and will
increase as new franchises open, as the average royalty percentage increases,
and as average unit sales increase. At September 30, 2000, there were 937
franchises open (including Bain's) compared to 607 franchises open at
September 30, 1999. The royalty rate was 5% for agreements entered into
prior to February 11, 1995, 6% for all franchise agreements entered into from
February 11, 1995 through March 31, 1998 and 7% for all agreements entered
into since March 31, 1998. The 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 further increase the
royalty rate.
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. For 2000, licensing fees were
$2,800,298 and $2,026,364 in 1999. There was no licensing fee revenue prior
to January 1, 1998.
Initial franchise fees increased 59% in 2000 to $5,730,662 from $3,610,042
in 1999. Initial franchise fees are one-time fees paid by Owners at the time
the franchise is purchased. Initial franchise fees are not recognized as
income until the period in which all of our obligations relating to the sale
have been substantially performed, which generally occurs when the franchise
opens. Our share of initial franchise fees sold by foreign master
franchisees is recognized when received. In 2000, we opened 374 franchises,
including 52 international Restaurants, as compared to 258, including 46
international Restaurants, opened in 1999. Our initial franchise fee has
been $20,000 since 1994. Owners may purchase a second franchise for $15,000
and third and subsequent franchise for $10,000. The initial franchise fee for
a Quizno’s Express franchise is $10,000 for the first, $7,500 for the second,
and $5,000 for the third and additional franchises purchased by the same
Owner. Our share of initial franchise fees for international Restaurants is
generally 30% of the franchise fee and will vary depending on the country and
the currency exchange rate.
Initial franchise fees collected by us for domestic franchise sales are
recorded as deferred initial franchise fees until the related franchise
opens. Deferred initial franchise fees at September 30, 2000 were
$10,664,506 and represent 669 domestic franchises sold but not yet in
operation, compared to $7,910,648 at September 30, 1999 representing 505
domestic franchises sold but not open. Direct costs related to the sale,
primarily sales commissions to Area Directors, are deferred on our books and
recorded as an expense at the same time as the related initial franchise fee
is recorded as income. Deferred costs paid with respect to initial franchise
fees deferred at September 30, 2000 were $1,990,275. Approximately 50% of
all domestic initial franchise fees received by us are paid to Area Directors
for sales and opening commissions.
Area director and master franchise fees were $1,361,901 in 2000 and
$2,131,882 in 1999. For analysis purposes, these amounts are not comparable.
Effective January 1, 1999, we changed our accounting policy related to the
recognition of revenue from area director marketing agreement fees to one
that recognizes these fees as revenue on a straight-line basis over the term
of the agreement, which is ten years. This change reflected a decision made
by the U.S. Securities and Exchange Commission in December 1999 relative to
the recognition of area director fee revenue. Commissions paid to the area
director upon the inception of the agreement are classified as a prepaid and
recognized as an expense over the same ten year term. The effect of the
change in the nine-month period ending September 30, 1999, was the deferral
of $4,262,701 of net revenue previously recognized in prior years. This was
reported as a cumulative effect of change in accounting principle for
$2,685,502 (net of $1,577,199 in income tax benefits) and is included in the
net loss for 1999.
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 were $672,333 in 2000 and $1,200,813 in 1999.
The fee for U.S. areas was $.03 per person in the designated area through
June 1996, $.035 from July 1996 through December 1996, $.05 from January 1997
through December 1997, $.06 from January 1998 through February 1998, and $.07
since March 1, 1998. In addition, each Area Director is required to pay a
training fee of $10,000. In 2000, we sold 6 area directorships. In 1999, we
sold 14 new area directorships including 5 existing Area Directors who
purchased additional territory. At September 30, 2000, we had a total of 58
Area Directors who owned areas encompassing approximately 60% of the
population of the United States.
International master franchise fees are one-time fees paid to us for the
right to sell franchises in a designated, exclusive, international market.
The master franchisee assumes all of our obligations and duties under the
agreement. We recognize these fees when received. International master
franchise fees earned were $689,567 in 2000 and $931,069 in 1999. The 2000
fees received were for the Switzerland, Netherlands, Luxembourg, and Belgium,
$300,000, Iceland, $80,000, Mexico, Venezuela, Peru, Dominican Republic and
other Caribbean islands, $100,000, and Taiwan, $219,567. A total of $40,000
of these fees was deferred until our training obligations are completed. In
2000, we recognized $30,000 of previously deferred fees. The 1999 fees
received were for the United Kingdom, $510,000, Japan, $125,000, Australia,
$221,069, and the rights to part of Central America, $115,000. A total of
$40,000 of the fees was deferred until our training obligations were
completed.
We offer domestic Area Director applicants financing for up to 50% of the
area fee. The amount financed is required to be paid to us in installments
over five years at interest rates between 6% and 15%. The promissory notes
are personally signed by the Area Director and, depending on the personal
financial strength of the Area Director, secured by collateral unrelated to
the area directorship. We also periodically offer payment plans to
international Master Franchisee applicants. Of the ten domestic and
international areas sold in 2000, 4 used this financing for $415,924,
representing 31% of the area director fees recognized in 2000. In 1999, a
total of $1,450,309 was financed, representing 68% of area revenue.
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 we can operate it.
Other revenue increased by 109% in 2000 to $1,064,646 from $508,240 in
1999. Other revenue is primarily amounts paid by equipment suppliers for
design and construction, franchise transfer fees and bookkeeping fees charged
Owners for whom we provided bookkeeping services. Amounts paid by equipment
suppliers were $566,158 in 2000 compared to $324,139 in 1999. This amount
will vary based on new store openings. Franchise transfer fees increased in
2000 to $248,000 from $86,500 in 1999. Since 1995, our franchise agreement
requires all new Owners to utilize our bookkeeping services, or a firm
designated by us, to provide bookkeeping services, for their first 12 months
of operations. Bookkeeping fees were $121,755 in 2000 compared to $30,888 in
1999. Bookkeeping fees are paid by the franchisee to the Company and then
remitted on to the bookkeeping service designated by the Company. These fees
represent the amounts retained by the Company to administer the bookkeeping
function.
Sales and royalty commissions expense increased 48% to $7,836,912
(37.3% of royalty and initial franchise fees) in 2000 from $5,302,456 (44.2%
of royalty and initial franchise fees) in 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 declined in 2000 as a
percentage of royalty and initial franchise fee due to the repurchase of
certain area directorships.
Our domestic Area Directors receive commissions equal to 48% of the
initial franchise fees and 40% of royalties received by us from franchises
sold, opened, and operating in the Area Director’s territory. In exchange
for these payments, the Area Director is required to market and sell
franchises, provide location selection assistance, provide opening assistance
to new owners, and perform monthly quality control reviews at each franchise
open in the Area Director’s territory.
The Area Director is entitled to receive commissions during the term of
the area director marketing agreement and in some cases, upon expiration of
the area director agreement, the commission paid is reduced to 1% of sales
for 5 years.
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 49% to $12,867,738 in
2000 from $8,657,357 in 1999. As a percent of franchise revenue, general and
administrative expenses have decreased slightly from 50.9% in 1999 to 48.1%
in 2000. General and administrative expenses include all of our operating
costs. The increase is primarily due to the addition of employees to service
the rapidly growing network of our Owners and Area Directors. 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.
We believe our general and administrative expenses are adequate and are
not excessive in relation to our size and growth.
Company owned stores earned $1,193,730 on sales of $14,973,763 in 2000
compared to $618,190 on sales of $8,276,368 in 1999. During 2000, we operated
stores for a total of 384 store operating months. In 1999, we had a total of
257 store operating months. Sales per store month increased 21.6% in 2000 to
$39,045 from $32,166 in 1999 primarily due to the acquisition of Restaurants
and other operations at Denver International Airport in November 1999.
At September 30, 2000, we had 35 (25 at September 30, 1999) Company
owned stores, including the Cowboy Bar at Denver International Airport. In
2000, we purchased seven Restaurants, including the Cowboy Bar, and opened 3
new Restaurants. In 1999, we purchased from an Owner one Restaurant.
Stores held for resale lost $193,154 on sales of $194,422 in 2000
compared to a loss of $262,946 on sales of $997,583 in 1999. At September
30, 2000 and 1999, we operated one and two stores held for resale,
respectively. In 2000, we closed one store and sold one store held for resale
and purchased one store from an Owner.
Japan master franchise income represents payments received in 1999 of
$1,423,348 for the master franchise rights of Japan. In the second quarter of
1999, we also received $22,000 for our share of an area director marketing
agreement sold in Japan. In 1999, we incurred direct costs related to the
revenue totaling $276,547 resulting in net revenue of $1,168,801. The
payments were recognized as revenue when received. Although we plan to
continue to enter into master franchise agreements internationally, we do not
expect such transactions to be of the magnitude of the Japanese transaction.
Provision for bad debts was $305,285 in 2000 compared to $354,827 in
1999. As of September 30, 2000, we had an allowance for doubtful accounts of
$272,293 that we believe is adequate for future losses.
Other expenses were $41,820 in 2000 compared to $68,245 in 1999. The
decrease in the 2000 expense was primarily due to the loss on the sale of
assets in 1999.
Depreciation and amortization was $1,994,887 in 2000 and $1,280,836 in
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.
Impairment of long-lived assets was $579,246 in 2000. At September 30,
2000, we determined that an impairment related to our carrying value of the
assets purchased in November 1997 from Bain’s was required and expensed
$579,246.
Privatization costs were $265,472 in 1999 and represents our costs
associated with a proposed going private transaction. As discussed in our
1998 Form 10-KSB, on December 29, 1998, we received a proposal from our
majority shareholders to merge the company into a new entity owned by them,
pursuant to which all of our shareholders other than themselves, would
receive cash for their company shares. On August 10, 1999, we announced that
the proposal had been withdrawn. An agreement regarding all the terms of the
transaction could not be reached with the Special Committee of the Board of
Directors evaluating the offer. In 2000, we incurred $138,164 of acquisition
related expenses.
Interest expense was $1,898,901 in 2000 and $321,718 in 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.
Income tax expense was $747,835 in 2000 and $353,135 in 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 recorded as an impairment of our deferred tax asset in
prior years and recorded the tax benefit of prior years net operating losses.
Subsequent to December 31, 1998, our provision for income taxes was recorded
at 37%.
Cumulative effect of a change in accounting principle was $2,769,592.
This amount was composed of a $2,685,502 (net of $1,577,199 in income tax
benefits) change reflected by a decision made by the U.S. Securities and
Exchange Commission in December 1999 relative to the recognition of area
director fees. As previously discussed, effective January 1, 1999, we changed
our accounting policy related to the recognition of area director marketing
agreement fees to one that recognizes such fees as revenue on a straight-line
basis over the term of the agreement, which is ten years.
Also, during April 1998, Statement of Position 98-5, “Reporting in the
Costs of Start-Up Activities” was issued. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. SOP
98-5 was required to be adopted in the second quarter of 1999. Upon
adoption, we were required to write-off $84,090 (net of $41,417 in income tax
benefits) in preopening related costs that were deferred on the balance sheet
as of December 31, 1998.
Liquidity and Capital Resources
Net cash provided by operating activities was $5,843,031 in 2000
compared to $6,215,560 in 1999, a decrease of $372,529. The fiscal 2000
amount of $5,843,031 was primarily related to net income before depreciation
and amortization of $3,297,126, an increase in deferred initial franchise
fees of $3,085,559 and an increase in accounts payable of $1,395,280,
partially offset by an increase in accounts receivable of $1,279,762 and an
increase in the deferred tax asset of $795,877.
Net cash used in investing activities was $16,106,777 in 2000 compared
to cash used in investing activities of $6,471,136 in 1999. The fiscal 2000
amount of $16,106,777 was primarily related to the acquisition and
development of Company owned Restaurants for $11,906,120 and the repurchase
of area director territories for $2,497,945.
Net cash provided by financing activities was $12,130,894 in 2000
compared to cash provided by financing activities of $175,705 in 1999. The
fiscal 2000 amount of $12,130,894 was primarily related to $17,548,000 of
proceeds from the issuance of notes payable, including the AMRESCO financing,
partially offset by payments on long-term obligations of $4,142,344 and the
repurchase of Common Stock for $1,219,785.
At September 30, 2000, we had $194,579 invested in one store held for
resale. We expect to sell the store held for resale by December 31, 2000.
In the second quarter of 1998, we tested a program under which our Area
Directors had the right to elect to have all future franchisee leases in the
Area Director’s territory signed by The Quizno's Realty Company ("QRC"), a
wholly owned subsidiary of ours. As a condition of the lease, the landlord
agrees not to look beyond QRC for payments. These locations would then be
subleased by QRC to the Owner, whose personal liability is limited to one
year. The Owner pays QRC an indemnification fee of $165 per month, pays a
one-time lease-processing fee to QRC of $2,200, and pays a security deposit
to QRC equal to two months rent. Effective March 1, 1998, we transferred
cash and other assets having a book value of approximately $500,000 to QRC in
exchange for stock and a promissory note. As of September 30, 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 December 31, 1996, we completed a debt financing for $2 million of
which $500,000 was converted to preferred stock in December 1997. On January
6, 1999, we paid off the loan and redeemed the preferred stock at a cost of
$1,854,000. As required by the loan agreement, we issued a warrant to the
lender to purchase 372,847 shares of our common stock at an exercise price of
$3.10.
On October 1, 1999, our Board of Directors authorized the purchase of up
to 200,000 shares of our common stock. Subject to applicable security laws,
repurchases may be made at such times, and in such amounts, as we deem
appropriate. As of September 30, 2000, we had repurchased 144,005 shares at
an average price of $8.38.
On October 5, 1999, we closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. “AMRESCO”. 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 company owned stores and other assets of ours
existing at September 30, 1999. The loan is part of a securitized pool and
includes a provision which could require us to pay up to another $1,555,555
depending on the amount of defaults, if any, in the loan pool. The proceeds
of the loan were used to pay-off existing debt of $3,320,956, pay costs and
fees associated with the loan of $560,000, and prepay interest and one
payment of $304,624. The balance of $9,814,420 is available to use, with
certain restrictions, for general corporate purposes other than working
capital, dividends, or to repurchase the majority shareholder’s stock.
Certain notes payable held by us at September 30, 1999 were repaid with the
AMRESCO note proceeds. As of September 30, 2000, we had $1,528,212 available
to use for general corporate purposes.
In December of 2000, AMRESCO notified us that we may be in default of
the fixed cost coverage ratio requirement in our loan agreement with AMRESCO
as the result of our loan with Levine Leichtman Capital Partners II, L.P
(LLCP). The LLCP loan was made to us in December, 2000, and is discussed
below. We have calculated the fixed cost coverage ratio in accordance with
the directions in our loan agreement with AMRESCO and have demonstrated that
we are not in violation of the requirement. We have provided our
calculations to AMRESCO, who has not agreed with our calculations, nor given
us a notice of default. We expect to resolve the issue with AMRESCO.
On October 11, 1999, our Board of Directors approved the purchase of a
corporate airplane allowing for more efficient travel by management between
areas of franchise operations. For tax purposes, the airplane qualifies for
accelerated depreciation, resulting in the deferral of income tax payments.
The $3,350,000 purchase was completed on October 13, 1999.
On November 16, 1999, we announced that our subsidiary, QUIZ-DIA, Inc.
purchased the assets of ASI-DIA, Inc. (“ASI”) for a total of $4.875 million
in cash.
Assets purchased include two Quizno’s restaurants and three bars,
including the WWW.COWBOY bar, and various other assets located on Concourses
A and B at the Denver International Airport. We intend to continue operating
the restaurants as Quizno’s Classic Subs and the bars as operated by ASI.
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.
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”). 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
September 30, 2000, $1.9 million had been drawn on the line of credit. In
addition, we loaned the National Marketing Fund Trust a total of $1,210,000 in
August of 2000, $1,030,000 of which was outstanding at September 30, 2000.
The loan is expected to be fully repaid by March 2001.
In 2000, we repurchased or reacquired fourteen area director territories
from 9 area directors for $3,472,627, inclusive of legal and other related
costs. We issued notes payable for $714,622 and offset notes and interest
receivable from three area directors in the amount of $315,850. The balance of
the purchase price was paid in cash.
On November 13, 2000 we commenced a self tender offer to purchase all
outstanding shares of our common stock except for shares held by certain
insiders at a price of $8 per share, net in cash to the seller. The tender
offer expired no December 11, 2000, and we purchased 661,115 shares of our
common stock for $5,288,920. In addition we purchased preferred stock,
warrants and options convertible into 1,056,906 shares of common stock for
$4,205,706. Costs related to the tender offer, including financing related
costs, are approximately $2,500,000.
The tender offer was financed with a loan for $13,862,260 from Levine
Leichtman Capital Partners II, L.P. (LLCP). The proceeds of the loan were
used to prepay interest for one year in the amount of $1,862,260 and to
repurchase shares and pay costs associated with the tender offer.
The promissory note bears interest at 13.25%, interest only payable
monthly, with the first twelve months prepaid, and is due in full in October,
2005. LLCP received warrants for 14% of the equity ownership of the Company.
The loan may be paid down to $7 million by September 12, 2001, with no
penalty and with a corresponding reduction in the percent of warrants.
As we have in the past, we will continue to consider acquisitions of
other chains, the purchase of Quizno's Restaurants from our Owners, and the
purchase of Quizno's area directorships from our Area Directors. From time
to time, we will make offers and enter into letters of intent for such
transactions subject to the completion of due diligence. In all such cases,
we will identify the sources of cash required to complete such transactions
prior to entering into a binding agreement.
We have never paid cash dividends on our common stock and we do not
anticipate a change in this policy in the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS
Attached hereto and filed as a part of this Form 10-KSB are the
consolidated financial statements listed in the Index to the Consolidated
Financial Statements at page F-1.
(..continued)
THE QUIZNO'S CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements and
Independent Auditors' Report
Year Ended September 30, 2000, Nine Months Ended
September 30, 1999 and the Year Ended December 31, 1998
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Table of Contents
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Quizno's Corporation and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of The Quizno's
Corporation and Subsidiaries as of September 30, 2000 and 1999 and December 31,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 2000, the nine months
ended September 30, 1999 and the year ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Quizno's
Corporation and Subsidiaries as of September 30, 2000 and 1999 and December 31,
1998 and the results of its operations and its cash flows for the year ended
September 30, 2000, the nine months ended September 30, 1999 and the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
November 20, 2000
Denver, Colorado
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, September 30, December 31,
2000 1999 1998
----------- ---------- -----------
Assets
Current assets
Cash and cash equivalents ................................................... $ 2,493,976 $ 626,828 $ 702,258
Short-term investments ...................................................... 5,324,336 4,263,877 1,541,423
Accounts receivable, net of allowance for doubtful accounts of
$222,293 (2000) and $43,793 (1999) and $20,000 (1998) ...................... 2,066,247 1,047,438 857,280
Current portion of notes receivable ......................................... 1,545,844 519,994 1,212,522
Deferred tax asset .......................................................... 221,182 128,718 81,260
Other current assets ........................................................ 481,854 373,578 266,100
Assets held for resale ...................................................... 194,579 192,923 638,395
----------- ---------- -----------
Total current assets .................................................... 12,328,018 7,153,356 5,299,238
----------- ---------- -----------
Property and equipment, net ..................................................... 11,669,240 4,804,051 3,535,222
----------- ---------- -----------
Other assets
Investment in area directorships, net of accumulated amortization
of $203,062 in 2000 and $26,232 in 1999 ..................................... 4,236,151 889,387 51,635
Intangible assets, net ...................................................... 4,600,528 1,662,265 1,553,522
Other deferred assets ....................................................... 2,782,498 1,726,984 1,119,371
Deferred tax asset .......................................................... 4,210,626 3,507,213 734,808
Deposits and other assets ................................................... 130,837 361,189 119,883
Notes receivables, net ...................................................... 1,301,435 1,670,329 1,375,872
----------- ---------- -----------
Total other assets ...................................................... 17,262,075 9,817,367 4,955,091
----------- ---------- -----------
Total assets .................................................................... $ 41,259,333 $ 21,774,774 $ 13,789,551
=========== ========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ............................................................ $ 2,614,437 $ 1,219,157 $ 1,317,085
Accrued liabilities ......................................................... 1,495,797 544,476 532,324
Current portion of long-term obligations .................................... 1,550,501 337,642 370,404
Current portion of subordinated debt ........................................ -- 218,546 244,084
Income taxes payable ........................................................ 370,557 851,469 200,000
----------- ---------- -----------
Total current liabilities ............................................... 6,031,292 3,171,290 2,663,897
----------- ---------- -----------
Long-term obligations ........................................................... 16,037,238 1,268,504 964,984
Subordinated debt ............................................................... -- 1,498,791 1,130,916
Deferred revenue ................................................................ 16,402,957 13,722,331 4,781,946
----------- ---------- -----------
Total liabilities ....................................................... 38,471,487 19,660,916 9,541,743
----------- ---------- -----------
Commitments and contingencies
Minority interest in Subsidiary ................................................. -- -- 151,601
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 shares authorized;
Series A issued and outstanding 146,000 (2000, 1999 and 1998)
($876,000 liquidation preference) .......................................... 146 146 146
Series B issued and outstanding 0 (2000), 0 (1999) and 100,000
(1998) ($500,000 liquidation preference) ................................... -- -- 100
Series C issued and outstanding 167,000 (2000, 1999, and 1998)
($835,000 liquidation preference) .......................................... 167 167 167
Series D issued and outstanding 3,000 (2000) and 0 (1999 and 1998)
($9,000 liquidation preference) ............................................ 3 -- --
Series E issued and outstanding 59,480 (2000) and 0 (1999 and 1998)
($512,718 liquidation preference) ......................................... 59 -- --
Common stock, $.001 par value; 9,000,000 shares authorized; issued
and outstanding, 3,007,921 (2000), 3,074,177 (1999)
and 3,054,459 (1998) ....................................................... 3,008 3,074 3,054
Capital in excess of par value .............................................. 3,857,702 4,485,949 5,065,247
Accumulated deficit ......................................................... (1,073,239) (2,375,478) (972,507)
----------- ---------- -----------
Total stockholders’ equity .................................... 2,787,846 2,113,858 4,096,207
----------- ---------- -----------
Total liabilities and stockholders’ equity ...................................... $ 41,259,333 $ 21,774,774 $ 13,789,551
=========== ========== ===========
See notes to consolidated financial statements.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Nine For the Year
For the Year Ended Months Ended Ended
September 30, September 30, December 31,
2000 1999 1998
------------ ------------ ------------
Franchise operations
Revenue
Continuing fees ......................................... $ 18,072,077 $ 8,682,783 $ 5,836,822
Initial franchise fees .................................. 5,730,662 2,722,959 2,883,650
Area director and master franchise fees ................. 1,361,901 776,523 3,022,276
Other ................................................... 1,064,646 370,374 604,172
Interest ................................................ 526,761 238,790 259,193
------------ ------------ ------------
Total revenue ......................................... 26,756,047 12,791,429 12,606,113
------------ ------------ ------------
Expenses
Sales and royalty commissions ........................... (7,836,912) (3,931,634) (4,457,779)
General and administrative .............................. (12,867,738) (6,509,444) (6,201,857)
------------ ------------ ------------
Total expenses ........................................ (20,704,650) (10,441,078) (10,659,636)
------------ ------------ ------------
Income from franchise operations ............................. 6,051,397 2,350,351 1,946,477
------------ ------------ ------------
Company store operations
Sales ..................................................... 14,973,763 6,420,563 6,848,737
------------ ------------ ------------
Cost of sales ............................................. (4,373,303) (1,969,433) (2,042,092)
Cost of labor ............................................. (3,318,489) (1,747,029) (1,683,225)
Other store expenses ...................................... (6,088,241) (2,169,465) (2,562,540)
------------ ------------ ------------
Total expenses ........................................ (13,780,033) (5,885,927) (6,287,857)
------------ ------------ ------------
Income from Company stores operations ........................ 1,193,730 534,636 560,880
Other income (expenses)
Sales by stores held for resale ........................... 194,422 566,841 1,281,904
Loss and expenses related to stores held for sale ......... (387,576) (777,594) (1,541,957)
Loss on sale or closure of Company stores ................. (43,596) (80,304) (47,505)
Sale of Japan master franchise ............................ -- 1,168,801 --
Provision for bad debts ................................... (305,285) (220,536) (285,308)
Other expenses ............................................ (41,820) (26,287) (47,838)
Depreciation and amortization ............................. (1,994,887) (921,300) (781,977)
Impairment of long lived assets ........................... (579,246) -- --
Privatization and acquisition related costs ............... (138,164) (265,472) --
Interest expense .......................................... (1,898,901) (240,827) (340,614)
------------ ------------ ------------
Total other expenses .................................. (5,195,053) (796,678) (1,763,295)
------------ ------------ ------------
Net income before income taxes ............................... 2,050,074 2,088,309 744,062
Income tax (provision) benefit ............................... (747,835) (721,688) 368,553
------------ ------------ ------------
Net income before preferred dividends and cumulative effect of
changes in accounting principle .............................. 1,302,239 1,366,621 1,112,615
Preferred stock dividends .................................... (186,457) (124,230) (220,890)
------------ ------------ ------------
Net income before cumulative effect of changes in accounting
principle .................................................... 1,115,782 1,242,391 891,725
Cumulative effect of changes in accounting principle (net of
taxes) ....................................................... -- (2,769,592) --
------------ ------------ ------------
Net income (loss) applicable to common stockholders .......... $ 1,115,782 $ (1,527,201) $ 891,725
============ ============ ============
Net income per share basic
Net income per share before cumulative effect of changes in
accounting principle ..................................... $ .37 $ .40 $ .30
Cumulative effect of changes in accounting principle ......... -- (.90) --
------------ ------------ ------------
Basic net income (loss) per share of common stock ............ $ .37 $ (.50) $ .30
============ ============ ============
Net income per share - diluted
Net income per share before cumulative effect of changes in
accounting principle ..................................... $ .33 $ .35 $ .26
Cumulative effect of changes in accounting principle ......... -- (.90) --
------------ ------------ ------------
Diluted net income (loss) per share of common stock .......... $ .33 $ (.55) $ .26
============ ============ ============
Weighted average common shares outstanding
Weighted average common shares outstanding – basic ........... 3,019,849 3,060,878 3,014,042
============ ============ ============
Weighted average common shares outstanding – diluted ......... 3,728,761 3,816,549 3,445,972
============ ============ ============
See notes to financial statements .....
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Convertible
Preferred Stock Common Stock Additional
------------------------- --------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------------ ----------- ------------ ------------ ---------- -----------
Balance, December 31, 1997 ... 413,000 $ 413 2,923,294 $ 2,923 $ 4,663,744 $(2,085,122) $ 2,581,958
Issuance of common stock for
exercise of options and
pursuant to employee benefit -- -- 51,165 51 222,473 -- 222,524
plan
Issuance of common stock for
exercise of options by
underwriter ................ -- -- 80,000 80 399,920 -- 400,000
Preferred stock dividends .... -- -- -- -- (220,890) -- (220,890)
Net income ................... -- -- -- -- -- 1,112,615 1,112,615
--------- ------------ ----------- ------------ ------------ ---------- -----------
Balance, December 31, 1998 ... 413,000 413 3,054,459 3,054 5,065,247 (972,507) 4,096,207
Issuance of common stock for
exercise of options and
pursuant to employee benefit -- -- 28,809 29 75,438 -- 75,467
plan
Tax benefit from exercise of
stock options .............. -- -- -- -- 14,840 -- 14,840
Shares canceled .............. -- -- (9,091) (9) (45,446) -- (45,455)
Redemption of Series B
Preferred Stock ............ (100,000) (100) -- -- (499,900) -- (500,000)
Preferred stock dividends .... -- -- -- -- (124,230) -- (124,230)
Net (loss) ................... -- -- -- -- -- (1,402,971) (1,402,971)
--------- ------------ ----------- ------------ ------------ ---------- -----------
Balance, September 30, 1999 .. 313,000 313 3,074,177 3,074 4,485,949 (2,375,478) 2,113,858
Issuance of common stock for
exercise of options and
pursuant to employee benefit
plan ....................... -- -- 77,749 78 284,413 -- 284,491
Issuance of Series D
Convertible Preferred Stock,
net ........................ 4,000 4 -- -- 11,396 -- 11,400
Repurchase of Series D
Convertible Preferred Stock .. (1,000) (1) -- -- (2,999) -- (3,000)
Tax benefit from exercise of
stock options .............. -- -- -- -- 17,889 -- 17,889
Common Stock repurchased ..... -- -- (144,005) (144) (1,219,641) -- (1,219,785)
Issuance of Series E
Convertible Preferred Stock,
net ........................ 59,480 59 -- -- 467,152 -- 467,211
Preferred stock dividends .... -- -- -- -- (186,457) -- (186,457)
Net income ................... -- -- -- -- -- 1,302,239 1,302,239
--------- ------------ ----------- ------------ ------------ ---------- -----------
Balance, September 30, 2000 .. 375,480 $ 375 3,007,921 $ 3,008 $ 3,857,702 $(1,073,239) $ 2,787,846
========= ============ =========== ============ ============ ========== ===========
See notes to financial statements.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year For the Nine For the
Ended Months Ended Year Ended
September 30, September 30, December 31,
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ................................................ $ 1,302,239 $ (1,402,971) $ 1,112,615
Adjustments to reconcile net income (loss) to net cash provided by
operating activities -
Depreciation and amortization .................................. 1,919,360 844,220 757,911
Impairment of long lived assets ................................ 579,246 -- --
Cumulative effect of a change in accounting principle .......... -- 4,388,208 --
Provision for bad debts ........................................ 305,285 220,536 285,308
Loss on disposal of Company stores ............................. 43,596 80,304 78,004
Deferred income taxes .......................................... (795,877) (2,819,863) (641,068)
Amortization of deferred financing costs ....................... 75,527 77,080 24,066
Amortization of deferred area director fee revenue ............. (404,934) -- --
Area director expenses recognized .............................. 40,493 -- --
Promissory notes accepted for area director fees ............... (415,924) (487,279) (1,599,977)
Other .......................................................... 9,375 17,972 --
Changes in assets and liabilities -
Accounts receivable .......................................... (1,279,762) (398,076) (369,279)
Other current assets ......................................... (82,339) (77,735) 109,802
Accounts payable ............................................. 1,395,280 (99,330) 251,711
Accrued liabilities .......................................... 951,321 12,152 42,476
Deferred franchise costs ..................................... (404,502) (659,547) (287,610)
Deferred initial franchise fees and other fees ............... 3,085,559 4,672,693 2,633,284
Income taxes payable ......................................... (480,912) 651,469 200,000
------------ ----------- -----------
3,184,645 6,422,804 1,484,628
------------ ----------- -----------
Net cash provided by operating activities .................. 5,843,031 5,019,833 2,597,243
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of Company owned stores .............................. (5,832,376) (286,355) --
Purchase of property and equipment ............................... (6,073,744) (1,477,962) (1,780,767)
Principle payments received on notes receivable .................. 453,931 1,221,099 889,671
Investment in turnkey stores ..................................... -- (7,558) (281,620)
Short-term investments ........................................... (1,060,459) (2,722,454) (1,003,235)
Acceptance of other notes receivable ............................. (1,159,761) (37,390) (773,307)
Investment by minority interest owners ........................... -- -- 151,601
Purchase of minority interest owners ............................. -- (150,000) --
Intangible and deferred assets ................................... (125,958) (736,458) (601,862)
Proceeds from sale of assets and stores .......................... 137,361 -- 213,000
Deposits ......................................................... 52,174 (89,749) (43,589)
Area director marketing territory repurchases .................... (2,497,945) (863,984) --
Other investments ................................................ -- (15,000) --
------------ ----------- -----------
Net cash used by investing activities ...................... (16,106,777) (5,165,811) (3,230,108)
------------ ----------- -----------
Cash flows from financing activities:
Principal payments on long-term obligations ...................... (4,142,344) (1,733,697) (505,440)
Proceeds from issuance of notes payable .......................... 17,548,000 2,338,168 877,642
Redemption of Class B Preferred Stock ............................ -- (500,000) --
Financing costs .................................................. (646,511) -- --
Proceeds from issuance of Common Stock and Preferred Stock ....... 302,380 90,307 622,524
Proceeds from sale of Class D and Class E Preferred Stock ........ 478,611 -- --
Repurchase of Class D Preferred Stock ............................ (3,000) -- --
Common Stock repurchased ......................................... (1,219,785) -- --
Preferred dividends paid ......................................... (186,457) (124,230) (220,890)
------------ ----------- -----------
Net cash provided by financing activities .................. 12,130,894 70,548 773,836
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents ................ 1,867,148 (75,430) 140,971
Cash and cash equivalents - beginning of year ....................... 626,828 702,258 561,287
------------ ----------- -----------
Cash and cash equivalents - end of year ............................. $ 2,493,976 $ 626,828 $ 702,258
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $1,716,772 (2000), $240,827
(1999) and $340,614 (1998). Cash paid during the year for income taxes was
$1,871,899 (2000), $1,198,275 (1999) and $72,515 (1998).
Supplemental disclosure of non-cash investing and financing activities:
During 2000, the Company 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, the Company issued notes
payable of $714,621 for partial payment of five area director territories
repurchased during the year and the Company purchased assets of a store in
exchange for a note payable of $143,978. Finally, a Company store held for
resale was closed and the net assets of $35,633 were written-off.
During 1999, the Company sold a store held for resale for $150,000, all of
which was in the form of a promissory note, and recorded a loss on sale of
$11,684. Also, the Company sold the franchising rights and obligations for
all but 14 of its Bain’s Deli’s franchise agreements to Bain’s Deli
Corporation for $850,000, represented by a note receivable, a reduction of
a related payable and other intangibles. In 1999, the Company recorded a
gain of $12,071 related to this sale.
Also, during 1999, the Company reached a settlement with Bain’s Deli that
resulted in the return to the Company of the 9,091 shares of Company stock
originally issued as part of the purchase of the Bain’s units in 1997 and
the cancellation of our note payable to Bain’s Deli in the amount of
$116,118.
During 1998, the Company transferred $220,227 of property and equipment to
assets of stores held for resale or under development.
Additionally in 1998, the Company reduced notes payable, pursuant to the
terms of the Bain’s purchase agreements, in the amount of $437,553.
Corresponding reductions in property and equipment ($150,000) and
intangibles ($287,553) were also recorded.
During 2000, 1999 and 1998, the Company acquired assets under capital
leases totaling $0, $124,742 and $231,085, respectively.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting
Policies
The Quizno's Corporation (the “Company”) was incorporated on January 7, 1991, in
the State of Colorado, and is primarily engaged in the business of franchising
Quizno's quick service restaurants throughout the United States, Canada, United
Kingdom, Australia, Japan, Switzerland, Netherlands, Luxembourg, Belgium,
Iceland, Taiwan, Mexico, Venezuela, Peru, Dominican Republic and Central America
featuring submarine sandwiches, salads, soups, and refreshments.
The Company’s wholly owned subsidiaries are The Quizno's Operating Company
(“QOC”) incorporated in 1994 to own and operate Company stores, S & S, Inc.
(“S") formerly the Quizno‘s Development Company ("QDC") incorporated in 1995
to develop stores to sell or lease to franchisees, The Quizno's Realty Company
(“QRC”) incorporated in 1995 to execute leases for store locations, The Quizno‘s
Acquisition Company (“QAC”) incorporated in 1997 to purchase existing unrelated
quick service restaurants, the Quizno’s Licensing Company (“QLC”) incorporated
in 1998 to license companies who use the Quizno’s logos, Quizno’s Kansas LLC
(“QKL”) organized in 1998 to purchase the assets of Stoico Restaurant Group and
QUIZ-DIA, Inc. (“DIA”) incorporated in 1999 to purchase restaurant assets at
Denver International Airport.
The following table summarizes the number of Quizno's restaurants open at
September 30, 2000:
Sold But Not
Yet In
Operation Operational Total
------------ ----------- ----------
Quizno’s
Company owned restaurants ........................ -- 26 26
Franchise restaurants – U.S., Puerto Rico and Guam 669 811 1,480
Franchise Restaurants - International ............ 170 122 292
Restaurants held for resale ...................... -- 1 1
Bains
Franchise restaurants ............................ -- 4 4
Quizno’s Kansas
Company owned restaurants ........................ -- 8 8
-------- ------ -------
839 972 1,811
======== ====== =======
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries QOC, S&S, QRC, QLC, QAC, DIA and QKL.
Change in Fiscal Year
In November 1999, the Company changed its fiscal year from December 31 to
September 30. All references in the financial statements to the year or period
ended September 30, 1999 relate to the nine months ended September 30, 1999.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory is included in other assets and is stated at the lower of cost or
market and consists of food and paper products. Cost is determined using the
first in, first out (FIFO) method.
Credit Risk
The Company grants credit in the normal course of business, primarily consisting
of royalty fees receivable and loans to area directors and its franchisees. To
reduce credit risk for U.S. franchises, the Company electronically debits the
franchisees’ bank accounts weekly for fees due the Company according to
franchise agreements entered into after 1993, and reserves the right to
terminate franchise and area director agreements for non-payment of amounts
owed.
The Company’s cash equivalents consist of short-term commercial paper with
original maturities not in excess of three months. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, balances of cash and
cash equivalents exceeded the federally insured limit by approximately
$2,609,000.
Short-Term Investments
The Company classifies its investment in corporate debt and governmental
securities with original maturities in excess of three months and less than
twelve months as short-term investments held-to-maturity. The Company has the
ability and intent to hold these securities until maturity.
Short-term investments are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Realized gains and losses
are recognized in earnings upon redemption. The specific identification method
is used to determine the cost of securities sold. Discounts or premiums are
accreted or amortized using the level-interest-yield method to the earlier of
the call date or maturity of the related security.
During 2000, unrealized gains and losses were immaterial as amortized cost
approximated market value.
Accounts Receivable/Royalties Receivable
At the time the accounts and royalties receivable are originated, the Company
considers a reserve for doubtful accounts based on the creditworthiness of the
franchisee. The provision for uncollectible amounts is continually reviewed and
adjusted to maintain the allowance at a level considered adequate to cover
future losses. The allowance is management’s best estimate of uncollectible
amounts and is determined based on historical performance that is tracked by the
Company on an ongoing basis. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
valued at the lower of fair market value or net present value of the minimum
lease payments at inception of the lease. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 10 years, and the related lease terms for leasehold improvements and
equipment under capital leases.
Deferred Financing Costs
Cost associated with obtaining debt financing are deferred and amortized on a
straight-line basis over the term of the debt.
Intangible Assets
The amounts paid by the Company for non-compete agreements are being amortized
over the term of the non-compete agreements.
The excess of the purchase price over net assets acquired for stores purchased
by the Company from unrelated third parties is recorded as goodwill and is
amortized over 15 years.
Other intangibles are recorded at cost and are amortized on the straight-line
basis over the contractual or estimated useful lives as follows:
Franchise agreements 12 years
Trademarks and other intangibles 3 - 15 years
Area Director Territory Repurchases
Costs associated with repurchasing area directory territories are deferred and
amortized on a straight-line basis over 15 years.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company looks primarily to the undiscounted future cash flows
in its assessment of whether or not long-lived assets have been impaired. At
September 30, 2000, the Company determined that an impairment related to its
carrying value of the assets purchased in November 1997 from Bain’s Deli
Franchise Associates, L.P., (“Bains”) was required and expensed $579,246.
Initial Franchise Fees and Related Franchise Costs
The Company believes it is probable that all of the deferred franchise fees will
be realized. The amount of the deferred franchise fees considered realizable,
however, could be reduced in the near term if estimates of the future franchise
openings are reduced.
Initial franchise fees paid by U.S. franchisees are recognized as revenue when
all material services and conditions required to be performed by us have been
substantially completed, which is generally when the franchise commences
operations. Initial franchise fees collected by the Company before all material
services and conditions are substantially performed are recorded as deferred
franchise sales revenue. These franchise fees are non-refundable in most
circumstances. Incremental development costs are deferred, but not in excess of
the deferred revenue and estimated cost to open the Quizno's restaurant and are
expensed when the revenue is recognized.
Area Director Marketing Agreements
The area director marketing agreement provides the area director a non-exclusive
right to sell and open franchises in a defined geographic territory in the U.S.
and requires that the area director be responsible for advertising, soliciting
and screening prospective franchisees. The agreements also require the area
director to sell and open a minimum of new franchised restaurants each year or
forfeit future rights to the territory. In addition, the area director is
responsible for identifying possible locations, providing on-site opening
assistance, and providing quality assurance services to franchises in the
defined area. The Company pays the area director 50% of the initial franchise
fee sold by the area director, and a fee of 40% of the royalty received by the
Company from each franchise within the defined area. The agreements are for a
period of ten years, with the option to extend for an additional ten years after
certain restrictive performance criteria are met. The area director is entitled
to receive commissions during the term of the area director marketing agreement
and, in certain circumstances, the area director is entitled to 1% of gross
sales for franchise restaurants operating in the territory as of the termination
date of the area director agreement. The area director marketing fee is $.07 per
person living in the area director's territory, plus a $10,000 training fee,
which is deferred until training has been completed. Prior to January 1, 1999,
the Company recognized revenue when all material services and conditions
required to be performed by the Company had been substantially completed.
Change in Accounting Method
Area Director Marketing Agreements
Effective January 1, 1999, the Company changed its accounting policy related to
the recognition of area director marketing agreement fees to one that recognizes
such fees as revenue on a straight-line basis over the term of the agreement,
which is ten years. Direct expenses attributable to the fees are classified as a
prepaid and recognized as an expense over the same ten year term. The effect of
the change in fiscal 1999 resulted in the deferral of $4,262,701 of net revenue
previously recognized in prior years. Fiscal 1999 income before the cumulative
effect adjustment included $387,108 of amortized deferred net revenue related to
area director marketing agreement fees. This change was reported as a cumulative
effect of change in accounting principle for $2,685,502 (net of $1,577,199 in
income tax benefits) and is included in the net loss in fiscal 1999. Fiscal 2000
income included $516,144 of amortized deferred net revenue related to area
director marketing agreement fees previously recognized prior to fiscal 1999.
Costs of Start-up Activities
During April 1998, Statement of Position 98-5, “Reporting in the Costs of
Start-Up Activities” was issued. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 was required to be
adopted by the first quarter of 1999. Upon adoption, the Company was required to
write-off $125,507 ($84,090 net of applicable taxes) in pre-opening 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.
International Fees
The Company grants master franchise rights for the development of
international markets. The master franchisee will enter into individual
franchise and area director agreements for development within the franchised
country, and will assume all of the franchisor’s obligations and duties under
the agreement. The Company is not a party to the individual franchise and area
director agreements. Generally, the master franchise agreement requires the
master franchisee to pay the Company a percentage, currently 30%, of all initial
franchise fees, royalties, and area fees collected by the master franchisee. The
Company recognizes these fees when received.
The master franchise agreement provides the master franchisee an exclusive right
to sell and open franchises and grant area directorships in a defined geographic
territory. The master franchisee is responsible for providing all franchisor
services in the territory and must sell and open a minimum of new franchised
restaurants each year. The fee for master franchise agreements is based on the
population of the territory and will vary depending on certain economic,
demographic and cultural factors. Revenue is recognized when all material
services and conditions required to be performed by the Company have been
substantially performed, which is generally the date the fee is paid.
Royalties and Advertising Fees
Pursuant to the various franchise agreements, U.S. franchises are required to
pay the Company royalties and advertising fees based on a percentage of sales
ranging from 4% to 8% for royalties, and 1% to 4% for advertising fees.
Royalties as required by the franchise agreement are accrued based on a
percentage of gross sales, as reported by franchisees, and are included in
accounts receivable.
The Company does not recognize any portion of the advertising fees as revenue,
nor does it accrue such fees or consolidate the accounts of any of the
advertising funds as they are paid to and disbursed out of separate legal
advertising entities.
Income Taxes
The Company calculates and records the amount of taxes payable or refundable
currently or in future years for temporary differences between the consolidated
financial statement basis and income tax basis based on the current enacted tax
laws. Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years.
Basic and Diluted Loss Per Common Share
In accordance with FAS 128, basic earnings per share are computed by dividing
net income by the number of weighted average common shares outstanding during
the year. Diluted earnings per share is computed by dividing net income by the
number of weighted average common shares outstanding during the year, including
potential common shares, which for the year ended September 30, 2000, the nine
months ended September 30, 1999 and the year ended December 31, 1998 consisted
of preferred stock, convertible debt, stock options and warrants outstanding
(Note 14).
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments, receivables, prepaids, current portion of
notes receivable, accounts payable and accrued expenses approximated fair value
as of September 30, 2000 because of the relatively short maturity of these
instruments.
The carrying amounts of long-term notes receivable approximate fair value as of
September 30, 2000 because the discounted cash flows at current rates
approximate the rates of the significant notes.
The carrying amounts of notes payable and debt issued approximate fair value as
of September 30, 2000 because interest rates on these instruments approximate
market interest rates.
Reclassifications of Prior Year Amounts
Certain reclassifications have been made to the balances for the nine months
ended September 30, 1999 and the year ended December 31, 1998 to make them
comparable to those presented for the year ended September 30, 2000, none of
which change the previously reported net income or total assets.
Recently Issued Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or loses resulting from changes in
the values of those derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The key criterion for
hedge accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. Management believes
that the adoption of SFAS No. 133 will have no material effect on its financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation (FIN 44), which was effective
July 1, 2000, except that certain conclusions in this interpretation, which
cover specific events that occur after either December 15, 2998 or January 12,
2000 are recognized on a prospective basis from July 1, 2000. This
interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material impact on the Company’s
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, which provides guidance on applying generally accepted
accounting principles to selected revenue recognition issues. Management
believes that the Company’s revenue recognition policies are in accordance with
SAB 101.
Note 2 - Acquisition of Assets
On November 16, 1999, the Company’s 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. The Company intends to continue operating the restaurants
as Quizno’s Classic Subs and the bars as operated by ASI.
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, the Company 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.
The following table summarizes the unaudited pro forma results of the Company
giving effect to the ASI acquisition as if it had occurred on January 1, 1998.
The unaudited pro forma information is not necessarily indicative of the results
of operations of the Company had this acquisition occurred at the beginning of
the years presented, nor is it necessarily indicative of future results.
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
----------------- ---------------
Revenue ......................... $ 22,847,496 $ 23,548,757
Net income ...................... $ 662,806 $ (97,129)
Basic earnings (loss) per share . $ (.54) $ (.03)
Diluted earnings (loss) per share $ (.59) $ (.03)
In January 2000, the Company purchased, for cash, 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 for these purchases has been allocated to the assets
purchased based on the fair market values at the date of acquisition, as
follows:
Equipment ............ $204,000
Leasehold improvements 330,000
Lease agreements ..... 207,000
--------
$741,000
========
Effective July 31, 1999, the Company repurchased the 30% minority interest of
QKL for $150,000.
On July 1, 1999, the Company purchased, for cash, a Quizno’s Restaurant from a
franchisee for a total purchase price of $286,355. The purchase was accounted
for under the purchase method.
The purchase price has been allocated to the assets purchased based on the fair
market values at the date of acquisition, as follows:
Equipment ............. $ 65,000
Leasehold improvements 105,000
Covenant not to compete 100,000
Lease agreement ....... 10,087
Inventory and deposit . 6,268
--------
$286,355
========
No pro forma statements of operations are presented for these purchases, as the
effect is not material to the Company’s operations.
Note 3 - Notes Receivable
Notes receivable consist of the following:
September 30, September 30, December 31,
2000 1999 1998
------------- ------------- -------------
Notes receivable related to area director
and master franchise agreements, interest
ranging from 6% to 15%, due in varying
amounts through December 2011 ............. $ 1,280,484 $ 1,540,826 $ 1,878,855
Notes receivable for sale of stores,
interest ranging from 6% to 15%,
due in varying amounts through October 2012 483,351 530,026 410,058
Note receivable from national advertising
trust, interest at 12%. (Note 8) .......... 1,030,000 -- 267,058
Note receivable from Bain’s Deli Corporation,
interest accrues at 6% if note balance not
paid down $25,000 in any one year, due
February 1, 2006. At September 30, 2000, the
Company impaired the outstanding balance on
this note of $128,884 ..................... -- 150,000 --
Other notes receivable with interest ranging
from 8% to 11%, due in varying amounts
through 2004 ............................. 103,444 11,213 32,423
------------- ------------- -------------
2,897,279 2,232,065 2,588,394
Less current portion ................. (1,545,844) (519,994) (1,212,522)
------------- ------------- -------------
1,351,435 1,712,071 1,375,872
Less allowance ....................... (50,000) (41,742) --
------------- ------------- -------------
$ 1,301,435 $ 1,670,329 $ 1,375,872
============= ============= =============
At the time notes receivable are executed, the Company reserves an allowance for
doubtful collections. The provision for uncollectible amounts is continually
reviewed and adjusted to maintain the allowance at a level considered adequate
to cover future losses. The allowance is management’s best estimate of
uncollectible amounts and is determined based on historical performance of the
notes, which is tracked by the Company on an ongoing basis. The losses
ultimately incurred could differ materially in the near term from the amounts
estimated in determining the allowance. The Company collateralizes the notes
with the area directorship agreement, assets of the store sold or other related
assets.
Future principal payments are as follows:
Year Ended September 30,
------------------------
2001............ $ 1,595,844
2002............ 415,270
2003............ 262,104
2004............ 201,181
2005............ 110,073
Thereafter...... 312,807
-----------
2,897,279
Less allowance.. (50,000)
-----------
$ 2,847,279
===========
Note 4 – Assets Held for Resale
Included in assets held for resale are the following:
September 30, September 30, December 31,
2000 1999 1998
------------- ------------ -----------
Furniture fixtures and equipment $ 75,805 $ 65,421 $221,034
Leasehold improvements ......... 78,117 108,056 383,771
Lease agreements and other ..... 40,657 19,446 33,590
-------- -------- --------
$194,579 $192,923 $638,395
======== ======== ========
During 1997, the Company acquired a store from a franchisee and also was in the
process of constructing four stores. At the end of 1997, three of the four
stores were operational and in 1998, the fourth store became operational. In
March 1998, one of the stores was sold as a franchise for a sale price of
$213,000. Cost incurred by the Company prior to the sale amounted to
approximately $234,000. In 1999, the Company sold another store as a franchise
for a sale price of $150,000 and closed one store. Costs incurred by the Company
prior to their disposal amounted to approximately $179,000 and $170,000,
respectively. In December 1999, the Company sold one store for a sales price of
$100,000 and in January 2000, the Company closed the remaining store. In July
2000, the Company acquired a store from a franchisee that the Company intends to
sell by the end of December 2000.
Note 5 - Property and Equipment
Property and equipment consist of the following:
September 30, September 30, December 31,
Life 2000 1999 1998
----------- ---------- ----------
Equipment 3-10 years $ 4,175,095 $2,014,698 $1,524,799
Furniture and fixtures 7-10 years 1,499,844 1,052,232 764,672
Leasehold improvements Lease term 3,776,503 2,286,344 1,712,215
Corporate jet 10% over 3 years 3,486,832 - -
Software 3-5 years 1,164,603 681,238 313,540
----------- ---------- ----------
14,102,877 6,034,512 4,315,226
Less accumulated depreciation and
amortization (2,433,637) (1,230,461) (780,004)
----------- ---------- ----------
Net property and equipment $11,669,240 $4,804,051 $3,535,222
=========== ========== ==========
Note 6 - Intangible Assets
Intangible assets consist of the following:
September 30, September 30, December 31,
2000 1999 1998
----------- ----------- -----------
Covenants not to compete $ 600,113 $ 600,113 $ 1,667,546
Franchise agreements 292,394 792,796 310,506
Prepaid area director marketing commissions 486,283 526,776 -
Trademarks and other 824,580 455,339 442,813
Concession agreements and acquisition costs 3,501,804 - -
----------- ----------- -----------
5,705,174 2,375,024 2,420,865
Less accumulated amortization (1,104,646) (712,759) (867,343)
----------- ----------- -----------
$ 4,600,528 $ 1,662,265 $ 1,553,522
=========== =========== ===========
At September 30, 2000, the Company recorded an impaired of $450,362 to the
carrying value of the franchise agreement related to the assets purchased in
November 1997 from Bains.
Note 7 – Other Deferred Assets
Other deferred assets consist of the following:
September 30, September 30, December 31,
2000 1999 1998
---------- ---------- ------------
Deferred franchise costs $1,990,275 $1,585,773 $ 926,226
Deferred financing costs 679,752 108,769 87,080
Other deferred costs ... 112,471 32,442 106,065
---------- ---------- ----------
$2,782,498 $1,726,984 $1,119,371
========== ========== ==========
Note 8 - Related Party Transactions
On May 18, 2000, the Company 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 the Company.
The Company had notes receivable from the Advertising Fund of $1,030,000, $0 and
$21,524 at September 30, 2000 and 1999 and December 31, 1998, respectively. The
September 2000 balance related to an off-season build-up for advertising, which
will be reimbursed to the Company in 2001.
In July 2000, the Quizno’s National Marketing Fund Trust and the Quizno’s
Regional Marketing Fund Trust (together the “marketing funds”) entered into a
$2,000,000 line of credit with Wells Fargo Bank West, N.A. The marketing funds
collect a fee of 1% and 3%, respectively, of gross sales from our franchisees
and deposits the funds into advertising funds that are used to develop
advertising to attract customers to the Restaurants and to create awareness of
the Quizno's brand image. The Company has guaranteed this line of credit. At
September 30, 2000, $1,900,000 had been drawn against this line of credit.
In September 1999, two employees of the Company purchased an area directorship
for $200,000, of which $180,000 of which was in the form of a promissory note
and $20,000 was in cash. During 2000, no payments were made on the note. In
2000, the Company paid the Area Director $20,131, in commissions and royalties.
Two directors of the Company own more than 50% in a company that owns an area
directorship. In 2000, 1999 and 1998, the Company paid the Area Director
$459,496, $142,364 and $139,358, respectively, in commissions and royalties. At
September 30, 2000, $43,747 was owed to the Company on a promissory note due
from the area director. During 1998, 1999 and 2000, payments on such notes were
$6,212, $8,000 and $11,800, respectively. The area director is also indebted to
the Company for $7,216 in connection with the resale of a Quizno’s restaurant
once operated by the area director. The area director is reducing this debt by
offsetting commissions on royalty fees from that location paid to the managing
area director. The debt is expected to be paid off in approximately 15 months.
In 1995, the Company sold an area directorship to a company owned by a director,
officer and shareholder for $150,000. During 1998, the Company paid the area
director no sales commissions and $27,664 in royalties. The area directorship
was sold in 1998 to an unrelated third party.
In 1997, the Company purchased a Quizno’s restaurant from a company in which an
executive officer is a 50% shareholder. The purchase price was $80,000 of which
$15,000 was paid in cash and $60,000 paid by issuance of the Company’s
promissory note bearing interest at 11% and payable over 4 years. During 1998,
1999 and 2000, the Company made payments pursuant to the promissory note
totaling $18,993, $14,245 and $35,219, respectively, In October of 1999 this
note was paid-off in full.
On October 13, 1999, the Company purchased a 1997 Cessna Citation 525. As of the
same date, the Company entered into an interchange agreement with Richard F.
Schaden, P.C., which is 100% owned by Richard F. Schaden. Mr. Schaden, through
his company, owns a 1996 Astra SPA. Under the interchange agreement, the parties
agreed to lease each aircraft to each other, on an as-needed basis, without
charge, although the parties will pay the operational costs of the airplane. The
Company also will pay Mr. Schaden or his company to provide services related to
the airplane operations, including for pilot and management services. In 2000,
the Company incurred costs of $31,762 under this agreement.
In December 1999, the Company entered into an agreement with Pink Sand
Corporation (“Pink Sand”), for the development rights to United States Territory
of Guam and the Commonwealth of the Northern Mariana Islands. Pink Sand is
principally owned by a director of the Company. The development agreement will
require Pink Sand to open 5 Restaurants during the term of the agreement. So
long as Pink Sand meets the development schedule, it will have the exclusive
rights to develop Restaurants in the territory. The development fee is $42,500,
payable upon execution of the agreement. The fee equals one hundred percent of
the first initial franchise fee and fifty percent of the aggregate initial
franchise fees due for all of the other Restaurants that Pink Sand must develop
under the agreement. Each time Pink Sand signs a franchise agreement for a
Restaurant to be developed within the territory, the Company will apply the
Development Fee in increments equal to fifty percent of the initial franchise
fee due for that Restaurant to reduce the additional amount Pink Sand must pay.
In February 2000, the Company 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, 2002. As of May
2000, the Company no longer employed the officer.
In August 2000, the Company advanced a director of the Company $300,000. The
advance is expected to be repaid in January 2001.
Note 9 - Long-Term Obligations and Convertible Subordinated Debt
September 30, September 30, December 31,
2000 1999 1998
------------ ---------- ----------
Various capital leases, with monthly payments
totaling approximately $2,228 including interest
at 5.6% and expiring in June 2004. Collateralized
by office equipment. In conjunction with Company’s
loan agreement with AMRESCO, $852,982 of the
September 30, 1999 balance was paid-off in October 1999. $ 99,485 $ 970,999 $ 986,077
Note payable to a company with interest payments at
10%. The note calls for monthly payments of
$10,736 and matures in January 2004. Collateralized
by the assets acquired from Bain’s Deli Franchise
Associates. In 1998, the principal balance of the
note was decreased by approximately $431,000 due
to provisions in the purchase agreement which allow
for quarterly decreases or increases in the note balance
based on certain performance standards of the franchises
acquired. In connection with a settlement with Bain’s
Deli Franchise Associates, this note was canceled in 1999. - - 116,118
Note payable to AMRESCO Commercial Finance, Inc. See
following page for detail of transaction. 13,300,732 - -
Note payable to a financing company with interest at 9.53%.
The note calls for monthly principal and interest payments
of $52,023 through January 1, 2005 and a balloon payment
of $1,184,717 in February 2005. Collateralized by a first
security interest in the assets of Quiz-DIA, Inc. 2,988,098 - -
Note payable to a financing company with interest at 9.3%.
The note calls for monthly principal and interest payments
of $5,977 and matures August 16, 2007. Collateralized by
restaurant equipment. 364,875 - -
Note payable to a financing company with interest at
10.03%. The note calls for monthly principal and interest
payments of $1,985 and matures December 31, 2006.
Collateralized by restaurant equipment. 143,197 - -
Note payable to an individual for the purchase of four
area director territories. Interest on the note accrues
at 12%. The note calls for monthly principal and
interest payments of $8,510 through May 1, 2002 and a
balloon payment of $264,664 on June 1, 2002. 368,396 - -
Note payable to a corporation for the purchase of an
area director territory. Interest on the note accrues
at 12%. The note calls for monthly principal and interest
payments of $8,000 through July 1, 2003 and a balloon
payment of $100,000 on April 1, 2001. 322,956 - -
Various notes payable. In conjunction with Company’s
loan agreement with AMRESCO, the September 30, 1999
balance was paid-off in October 1999. - 635,147 233,193
------------ ---------- ----------
17,587,739 1,606,146 1,335,388
Less current portion (1,550,501) (337,642) (370,404)
------------ ---------- ----------
$ 16,037,238 $1,268,504 $ 964,984
============ ========== ==========
On October 5, 1999, the Company closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. The loan bears interest at
10.9% (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
Company owned stores and other assets. The loan is part of a securitized pool
and includes a provision, which could require the Company to pay up to another
$1,555,555 depending on the amount of defaults 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 September
30, 2000, the Company had $1,528,212 available to use for general corporate
purposes.
On December 22, 1999, the Company 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.
Subordinated debt consists of:
September 30, September 30, December 31,
2000 1999 1998
--------- ----------- -----------
Subordinated debt payable. In conjunction with
Company’s loan agreement with AMRESCO, the
September 30, 1999 balance was paid-off in
October 1999. $ - $ 1,717,337 $ -
12.75% convertible subordinated debt, paid in
full during 1999. - - 1,375,000
--------- ----------- -----------
Less current portion - (218,546) (244,084)
--------- ----------- -----------
$ - $ 1,498,791 $ 1,130,916
========= =========== ===========
Maturities of long-term obligations and capital leases are as follows:
Long-Term Capital
Obligations Leases Total
Year Ending September 30, ------------ ------------- ------------
2001 $ 1,528,767 $ 26,739 $ 1,555,506
2002 1,838,355 26,739 1,865,094
2003 1,687,489 26,739 1,714,228
2004 1,789,051 31,733 1,820,784
2005 2,810,222 -- 2,810,222
Thereafter 7,834,369 -- 7,834,369
------------ ----------- ------------
17,488,253 111,950 17,600,203
Less amount representing interest -- (12,464) (12,464)
------------ ----------- ------------
Total principal 17,488,253 99,486 17,587,739
Less current portion (1,528,767) (21,734) (1,550,501)
------------ ----------- ------------
$ 15,959,486 $ 77,752 $ 16,037,238
============ =========== ============
Included in equipment in the accompanying 2000, 1999 and 1998 balance sheets are
assets held under capital leases in the amount of $134,722, $1,063,920 and
$1,278,925, respectively, and accumulated amortization of $13,924, $149,372 and
132,837, respectively.
Note 10 - Commitments and Contingencies
The Company leases an office facility, thirty-nine restaurant locations
(including one store held for resale) and certain equipment and vehicles under
operating lease agreements which provide for the payment of rent totaling
approximately $169,000 per month plus common area maintenance costs. One of the
restaurant locations also requires the Company to pay 6% of gross sales in
excess of $430,000 annually. Rent expense under these operating leases, totaled
$2,035,534, $762,891 and $642,447 during the periods ended September 30, 2000
and 1999 and December 31, 1998, respectively.
Future minimum rental payments for the years ending September 30 are as follows:
2001 2002 2003 2004 2005 Thereafter Total
$2,330,961 $2,185,785 $1,891,866 $1,501,255 $1,000,171 $1,133,779 $10,043,817
Minimum payments for the period ended September 30, 1999 have not been reduced
by minimum rentals of $1,450,446 due in the future under a noncancellable
sublease.
The Company has entered into employment agreements with two directors, officers,
and stockholders of the Company which provide for the payment of annual salaries
totaling $303,500 plus individual bonuses equal to six and ten percent of the
positive increase in net income before taxes, depreciation, amortization and
interest over the prior year. Bonuses accrued during 1998, 1999 and 2000 totaled
$209,000, $262,354 and $329,930, respectively. One agreement expires in December
2000 while the other agreement expires in December 2003.
The Company has entered into an employment agreement with another officer of the
Company that terminates on January 16, 2003. The annual base salary is $180,000
in 2000, $200,000 in 2001, and $220,000 for the remainder of the term. Such
amount may be adjusted from time to time by mutual agreement between the officer
and the Company. The agreement provides a $25,000 signing bonus payable on the
nine-month anniversary, and a second year signing bonus of $10,000 due on the
second year anniversary date. The agreement provides an annual performance bonus
equal to a maximum of 20% of the officer’s base salary. Under the agreement, the
officer received options to purchase 20,000 shares of the Company's stock. If
the Company terminates the agreement without cause, the Company is obligated to
pay the officer a severance payment equal to 6 months base salary.
On April 26, 1999, the Company signed a licensing agreement with the Coca-Cola
Company to purchase certain amounts of fountain syrups in return for cash
incentives. The agreement requires the Company to purchase a total of 12,000,000
gallons of fountain products and 1,000,000 cases of bottled products. If the
Company cancels the agreement, the Company would be obligated to refund a pro
rata share of the licensing fee based upon contract product not purchased.
The Company is obligated to pay an opening commission to the area director who
sold the franchise at the time the franchise opens for business. These
commissions are expensed at the time the related franchise opens for business
and are not accrued as a liability of ours until that time. At September 30,
2000, there were 669 domestic franchises sold but not yet open with related
opening commissions totaling $2,295,875 ($1,585,773 at September 30, 1999).
In 1999, the Company commenced a program called Owner in Training under which it
provides financial assistance to store managers interested in owning their own
franchise. The Company provides financial guarantees to such persons for
start-up capital loans. To date, in fiscal 2000, the Company guaranteed three
such loans totaling $565,000.
Litigation
There are various claims and lawsuits pending by and against the Company. The
settlement of some of these claims and lawsuits may result in the acquisition or
acquirement of certain area director territories. In the opinion of the
management, and supported by advice from legal counsel, these claims and
lawsuits will not result in any material adverse effect in excess of amounts
accrued in the accompanying consolidated financial statements.
Note 11 - Stockholders' Equity
Common Stock Repurchased
On October 1, 1999, the Company’s 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 the Company deems
appropriate. As of September 30, 2000, the Company had repurchased 144,005
shares at an average price of $8.38. The Company incurred legal and accounting
costs related to the repurchase of $12,351.
Convertible Preferred Stock
Series A convertible preferred stock bears a 6.5% cumulative dividend, payable
monthly and is convertible into common shares on a one for one basis and is
callable by the Company with sixty days notice. The Series A convertible
preferred stock has a liquidation preference of $6 per share plus all then
accrued and unpaid cumulative dividends.
Series B convertible preferred stock bears a 12.75% cumulative dividend, payable
monthly and is convertible after five years at the then market value of the
common stock. The Series B convertible preferred stock is redeemable at the
Company’s option and has a liquidation preference of $5.00 per share plus all
then accrued and unpaid cumulative dividends. All issued and outstanding Series
B convertible preferred stock was redeemed in full in 1999.
Series C convertible preferred stock bears a 12.00% cumulative dividend, payable
monthly and is convertible into common stock on a one-for-one basis at $5.00 per
share. The Series C convertible preferred stock is redeemable at the Company’s
option at $5.00 per share anytime after October 8, 2000, and has a liquidation
preference of $5.00 per share plus all then accrued and unpaid cumulative
dividends.
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 the Company’s Chief Executive Officer)
equal or exceed $12,000,000, and (ii) the Company’s Chief Executive Officer has
approved such conversion. The Class D Preferred Stock is not convertible before
March 31, 2001.
During 2000, the Company sold 4,000 shares of Series D convertible preferred
stock at $3.00 per share. The Company repurchased 1,000 shares of Series D
convertible preferred stock at $3.00 per share.
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. The
Company may redeem shares of the Class E Preferred Stock 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.
During 2000, the Company sold 59,480 shares of Series E convertible preferred
stock at $8.62 per share. The Company incurred legal and accounting costs
related to the sale of $45,537.
Stock Options and Warrants
The Company has established an Employee Stock Option Plan (the Plan). The
Company has reserved 670,000 shares of its Common Stock for issuance upon the
exercise of options available for grant under the Plan. Options are granted
under the plan at not less than the market price of the Company stock. The
options cannot be exercisable for more than ten years. Options granted under the
Plan will include incentive stock options (ISOs) as defined in Section 422 of
the Internal Revenue Code and non-qualified stock options (NQSOs). Under the
terms of the Plan, all officers and employees are eligible for ISOs. During the
periods ended September 30, 2000 and 1999 and December 31, 1998, 100,000,
250,500 and 117,205, options were granted under the Plan, respectively.
Additionally, the Company has established an Amended and Restated Stock Option
Plan for Non-Employee Directors and Advisors (Director Plan). The Company has
reserved 300,000 shares of common stock for issuance upon the exercise of
options granted or available for grant to non-employee directors and advisors
under the Director Plan. The Director Plan provides that any person who becomes
a non-employee director or advisor of the Company may receive an option to
purchase 4,000 shares (or a pro rata portion thereof) at their fair market value
on the date such person becomes a non-employee director or advisor, and on the
first day of each year thereafter as long as the person continues as a
non-employee director or advisor, limited to the overall number of shares
available for issuance under the Director Plan. Options that expire or are
canceled may be re-granted under the Director Plan at the discretion of the
Board of Directors. The options expire after ten years. During the periods ended
September 30, 2000 and 1999 and December 31, 1998, 37,000, 29,000 and 28,000
options were granted under the Director Plan, respectively.
The Company established an Area Director Equity Participation Rights Stock
Option Plan (AD Plan) providing for grants of stock options to area directors
beginning in 1998. During 1998, the Company granted stock options covering
60,375 shares pursuant to the AD Plan. Options are granted under the AD Plan at
the market price of the common stock for six month options or a 20% discount
(not to exceed $1.20) if the grantee exercises within seven business days of the
grant. The Company recorded $33,950 related to the inherent value of the options
granted to area directors in 1997. No amounts were recorded for inherent value
of the options for 1998. During 2000 and 1999, the Company granted options under
the AD Plan for 0 and 10,275 shares.
In 1996, the Company issued warrants to purchase 372,847 shares of its common
stock to a lender in connection with a $2,000,000 convertible subordinated loan
made to the Company. The warrants are exercisable at $3.10 per share and expire
on December 31, 2004. Additionally, in 1997, the Company issued warrants to
purchase another 42,209 shares of its common stock to the same lender in
connection with the lender’s conversion of $500,000 of the convertible
subordinated debt to Class B preferred stock. The warrants are exercisable at
$5.00 per share and do not have an expiration date. These warrants are reduced
to 20,597 if the Company meets certain earnings goals through 2000.
In connection with the Company’s public offering, the Company issued a warrant
for the underwriter to purchase up to 100,000 shares of its common stock at
$5.00 per share. During 1998, 80,000 warrants were exercised and the remaining
20,000 were cancelled. Additionally in 1997, the Company issued 33,000 warrants
to consultants that allowed the holders to purchase 33,000 shares of common
stock at $5.40 to $5.50 per share. During 2000, 8,000 of these warrants were
exercised. These warrants expire through December 2000.
In 1999, the Company reached a settlement with Bains that resulted in the return
to the Company of the 9,091 shares of Company stock originally issued as part of
the purchase of the Bains units in 1997.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation.”
Accordingly, no compensation cost has been recognized for the stock option plans
as they relate to options issued to employees and directors.
Had compensation cost for the Company’s two employee stock option plans been
determined based on the fair value at the grant date for consistent with the
provisions of SFAS No. 123, the Company’s net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
September 30, September 30, December 31,
2000 1999 1998
------------- ------------ ------------
Net income before cumulative effect of
changes in accounting principle – as reported $1,115,782 $1,242,391 $891,725
Net income before cumulative effect of changes
in accounting principle – pro forma $ 643,327 $ 662,806 $586,960
Basic earnings per share - as reported $ .37 $ .40 $ .30
Basic earnings per share - pro forma $ .21 $ .22 $ .19
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of 37% in
2000, 40% in 1999 and 42% in 1998; discount rate of 5.5%; and expected lives
from 3.5 to 10 years.
The following is a summary of options and warrants granted, exercised and
expired:
Weighted Weighted Weighted Average
Average Average Fair Exercise Price of
Exercise Value of Currently Options and–
Price of Options and Exercisable Warrants
Options and Options and Warrants Options and Currently
Warrants Warrants Granted Warrants Exercisable
-------------- --------------- ------------- --------------- -----------------
Outstanding December 31, 1998 896,538 $3.40 590,867 $2.52
Granted 279,500 $1.81 $3.50
Forfeited or exercised (60,695) $(.25)
-----------
Outstanding September 30, 1999 1,115,343 $4.29 616,925 $3.54
Granted 141,305 $.99 $3.45
Forfeited or exercised (198,245) $(.66)
-----------
Outstanding September 30, 2000 1,058,403 $4.85 680,436 $3.32
===========
September 30, 2000
---------------------------------------------------------------------------------------------
Options and
Options and Warrants Outstanding Warrants Exercisable
--------------------------------------------------------- --------------------------------
Weighted
Weighted Average Weighted
Range of Options and Average Remaining Average
Warrants Number Exercise Contractual Number Exercise
Exercisable Price Outstanding Price Life Exercisable Price
--------------------------- ------------------ ------------ ----------------- -------------- -----------
$3.00 - $5.50 709,603 $3.68 4.8 years 629,116 $2.99
$5.75 - $8.18 348,800 $7.24 5.5 years 51,320 $7.31
---------- ---------
1,058,403 $4.85 5.0 years 680,436 $3.32
========== =========
Note 12 - Income Taxes
The components of the provision for income tax expense (benefit) are as follows:
September 30, September 30, December 31,
2000 1999 1998
------------- ------------- ------------
Current income tax expense $1,369,395 $1,951,848 $ 213,500
Deferred income tax benefit (621,560) (1,230,160) (582,053)
---------- ---------- ---------
$ 747,835 $ 721,688 $(368,553)
========== ========== =========
For the period ended September 30, 1999, the net deferred tax benefit related to
the cumulative effect of changes in accounting of $1,589,703 is not reflected in
the table above.
Prior to 1998, the Company had provided for a valuation allowance against its
deferred tax asset as management had determined that it was more likely than not
that the Company would not realize its deferred tax asset. In 1998, management
determined it would be more likely than not that the Company would realize its
deferred tax asset and this has eliminated its valuation allowance against the
deferred tax asset resulting in a benefit of $582,053 reflected in the statement
of operations for the year ending December 31, 1998.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. The Company's temporary differences result primarily from depreciation,
deferred franchise fees and costs and area director fee revenues and costs,
deferred bonuses and deferred rent.
The net current and long-term deferred tax assets (liabilities) in the
accompanying balance sheet include the following items:
September 30, September 30, December 31,
2000 1999 1998
------------ ------------- ------------
Current deferred tax asset $ 221,182 $ 128,718 $ 81,260
Current deferred tax liabilities - - -
---------- ---------- ----------
Net current deferred tax asset $ 221,182 $ 128,718 $ 81,260
========== ========== ==========
Long-term deferred tax asset $6,242,732 $4,890,254 $1,673,620
Long-term deferred tax liability (2,032,106) (1,383,041) (938,812)
---------- ---------- ----------
Net long-term deferred tax asset 4,210,626 3,507,213 734,808
---------- ---------- ----------
Net deferred tax asset $4,431,808 $3,635,931 $ 816,068
========== ========== ==========
Rate Reconciliation
The reconciliation of income tax expense (benefit) by applying the Federal
statutory tax rates to the Company’s effective income tax rate is as follows:
September 30, September 30, December 31, 2000 1999 1998
Federal statutory rate 37.0% 37.0% 34.0%
Nondeductible expenses - .9 8.4
Other – deferred including utilization of NOL (.5) (3.3) (13.5)
Valuation allowance - - (78.0)
----- ---- -----
36.5% 34.6% (49.1)%
===== ==== =====
Note 13 - Employee Benefit Plan
The Company has adopted a 401(k) plan during 1995 for its employees.
Participation is voluntary and employees are eligible to participate at age 21
and after one year of employment with the Company. Effective January 1, 2000,
the Company changed its match under the 401(k) plan to match 100% of the
participants’ elective deferral contributions to the plan, up to a maximum
Company matching contribution equal to 6% of the participants’ compensation.
Starting January 1, 2000, the Company matching contributions will be 100%
vested, regardless of the participant’s years of service with the Company. As
always, the Company matching contribution is 50% in cash and 50% in Company
stock.
A participant is always 100% vested in their elective deferral contributions to
the plan.
The Company’s matching contributions prior to January 1, 2000 vest to the
participant according to the following vesting schedule:
Years of Services Percentage
----------------- ----------
1 0%
2 25%
3 50%
4 75%
5 100%
The Company has contributed $150,304, $60,427 and $31,675 to the Plan for the
periods ended September 30, 2000 and 1999 and December 31, 1998, respectively.
Note 14 – Earnings (Loss) Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
For the Year Ended For the Nine Months For the Year Ended
September 30, Ended September 30, December 31,
2000 1999 1998
------------------ ------------------- ------------------
Numerator – net income before cumulative effect of changes in
accounting principle
Numerator for basic earnings per share $ 1,115,782 $ 1,242,391 $ 891,725
Preferred dividends (net of taxes) 97,798 78,265 -
----------- ----------- ----------
Numerator for diluted earnings per share $ 1,213,580 $ 1,320,656 $ 891,725
=========== =========== ==========
Numerator for basic and diluted earnings per share – cumulative effect
of changes in accounting principle N/A $(2,769,592) N/A
===========
Denominator – weighted average shares
Denominator for basic earnings per share – weighted average shares 3,019,849 3,060,878 3,014,042
Effect of dilutive securities – convertible debt, options and
warrants 708,912 755,671 431,930
----------- ----------- ----------
Denominator for diluted earnings per share – adjusted weighted
average shares 3,728,761 3,816,549 3,445,972
=========== =========== ==========
Denominator for basic and diluted earnings per share – cumulative
effect of changes in accounting principle N/A 3,060,878 N/A
===========
Basic earnings (loss) per share $ .37 $ (.50) $ .30
=========== =========== ==========
Diluted earnings (loss) per share $ .33 $ (.55) $ .26
=========== =========== ==========
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
Note 15 – Area Director Territory Repurchases
In 2000, the Company repurchased or reacquired fourteen area director
territories from 9 area directors for $3,472,627, inclusive of legal and other
related costs. The Company issued notes payable for $714,622 and offset notes
and interest receivable from three area directors in the amount of $315,850. The
balance of the purchase price was paid in cash.
Note 16 – Transition Reporting
In October 1999, the Company changed its fiscal year from December 31 to
September 30. As such, the 1999 financial statements are as of and for the nine
months ended September 30, 1999. The 2000 and 1998 financial statements are as
of and for the twelve months ended September 30, 2000 and December 31, 1998,
respectively. For comparative purposes, the following unaudited summarized
consolidated statement of operations is presented for the twelve months ended
September 30, 1999.
For the Year Ended
(Unaudited) September 30, 1999
------------------
Total revenue $ 26,292,137
Income from franchise operations $ 3,058,373
Income from Company store operations $ 618,190
Net income before taxes $ 2,163,511
Net (loss) applicable to common shareholders $ (1,138,367)
Net (loss) per share – basic $ (.37)
Net (loss) per share – diluted $ (.43)
Note 17 – Subsequent Events
On November 13, 2000, the Company announced that it has commenced a tender offer
to purchase all outstanding shares of its common stock except for shares held by
certain insiders at a price of $8 per share, net in cash to the seller.
There are approximately three million shares of common stock outstanding, of
which approximately 51.6 percent currently are owned by Richard E. Schaden, the
President and CEO of The Quizno’s Corporation; Richard F. Schaden, Vice
President, Secretary and a Director of The Quizno’s Corporation; and Frederick
H. Schaden, a Director of The Quizno’s Corporation. All three Schadens have
indicated they would not tender their shares at this time.
The tender offer will expire at midnight Monday, December 11, 2000, unless the
Company extends it.
The tender offer is conditioned, among other things, on 51 percent of the common
shareholders besides the Schadens accepting the tender offer. The Company may
waive any such condition. It is also conditioned on the closing of a loan for up
to $12 million with Levine Leichtman Capital Partners. The funding agreement
combined with $6.2 million in available cash provide the funds necessary to
purchase all remaining common stock, all preferred shares and options converted
into common stock and warrants held by Retail & Restaurant Growth Capital, L.P.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors
The names of and other information about our Directors as of December
18, 2000, are set forth below:
Director
Nominee Age Position(s) with Company Since
-------------------- -------- ------------------------ -----------
Richard E. Schaden 36 President, Chief
Executive Officer and 1991
Director
Richard F. Schaden 62 Secretary and Director 1991
Frederick H. Schaden 54 Director 1993
J. Eric Lawrence 33 Director 1997
Mark L. Bromberg 49 Director 1997
Brad A. Griffin 50 Director 1999
John J. Todd 40 Director 2000
Each director is currently serving a one year term that will end on the
date of our 2001 Annual Meeting of Shareholders.
Director’s Biographical Information
Mr. Richard E. Schaden has been President and a Director of our company
since its inception on January 7, 1991, and was appointed as Chairman of the
Board of Directors in November 1999. Mr. Schaden had been a principal and
the chief operating officer of Schaden & Schaden, Inc., a company that owned
and operated Quizno's franchised restaurants from 1987 to 1994 when it was
sold to our company. Mr. Schaden graduated Magna Cum Laude from the
University of Colorado with a degree in Business Management and Finance. See
"Certain Transactions."
Mr. Richard F. Schaden has been Vice President, Secretary and a
Director of our company since its inception on January 7, 1991. Mr. Schaden
had been a principal of Schaden & Schaden, Inc., a company that owned and
operated Quizno's franchised restaurants from 1987 to 1994 when it was sold
to our company. Mr. Schaden is the founding partner of the law firm of
Schaden, Katzman, Lampert & McClune with offices in Bloomfield Hills,
Michigan and Broomfield, Colorado. Mr. Schaden graduated from the University
of Detroit with a Bachelor of Science in Aeronautical Engineering, received
his Juris Doctorate from the University of Detroit Law School and is an
internationally known, well-published attorney, specializing in aviation
law. Prior to entering the legal profession, Mr. Schaden was an aeronautical
engineer for Boeing Aircraft and Continental Aviation and Engineering.
Mr. Schaden has been on the board of numerous private companies. See
"Certain Transactions."
Mr. Frederick H. Schaden is an Executive Vice President of the
Automotive Consulting Group of Aon Consulting, Inc. Aon Consulting, Inc. is
a subsidiary of Aon Corporation, a publicly held company with annual revenues
of nearly $6 billion. He has been employed by Aon for over 25 years and has
served as a senior officer of its affiliates since 1981. Mr. Schaden earned
a B.S. in Business Administration from Xavier University in Cincinnati,
Ohio. See "Certain Transactions."
Mr. J. Eric Lawrence has been the General Partner of Retail &
Restaurant Growth Capital, L.P. ("RRGC"), a $60 million investment fund
focused on providing growth and expansion capital to small businesses in the
retail and restaurant industries, since December 1995. RRGC is a Small
Business Investment Company, federally licensed by the Small Business
Administration. RRGC loaned $2,000,000 to our company in 1996, and Mr.
Lawrence was elected to the Board pursuant to a contractual arrangement
between our company and RRGC. As a result of the Tender Offer and the
purchase of the outstanding warrants held by RRGC, such contract has been
terminated. Mr. Lawrence has been extensively involved in the analysis of
the financial, operational and managerial aspects of retail and restaurant
companies throughout his career. Prior to RRGC, he served as Vice President
of Strategic Retail Ventures, Inc., a boutique financial consulting and
private investment firm focusing on the needs of specialty retail and
restaurant companies from December 1993 to December 1995. Prior to SRV,
Mr. Lawrence was a Senior Consultant with Arthur Andersen, in Dallas, Texas.
Mr. Lawrence is a licensed C.P.A., and is a graduate of Southern Methodist
University with a B.B.A. in Accounting and Minor in Economics, which included
study abroad at Oxford University, Oxford, England.
Mr. Mark L. Bromberg is the President of Foodservice of the viaLink
Company, a public company providing synchronized database management services
to a wide range of retail clients since May 2000. From November 1997 to
May 2000, he served as President of Pinnacle Restaurant Group, a privately
held company that owns and operates casual dining restaurants in the
southwestern United States. Mr. Bromberg previously served as a
self-employed management consultant providing strategic planning, positioning
and senior management consulting services to the hospitality industry, for
over five years. Mr. Bromberg is the former President & CEO of East Side
Mario's Restaurants Inc., the Dallas based subsidiary of PepsiCo which he
grew from one restaurant in 1988 to 30 in 1993 when it was sold to PepsiCo.
Mr. Bromberg has been the founder and President of a number of causal dining
restaurant chains, including Mr. Greenjeans, Ginsberg & Wong and Lime
Rickey's and served as President of Prime Restaurant Group, the largest
privately-held restaurant chain in Canada. He holds a B.S. and an M.B.A.
from Cornell University and remains highly involved in foodservice education
as a curriculum advisor and guest lecturer. He is a past chairman of the
Canadian Restaurant and Foodservice Association and is a past director of the
National Restaurant Association of the U.S. Mr. Bromberg was elected to the
Board of Directors pursuant to a contractual arrangement with RRGC that
required the election of an additional Board member acceptable to RRGC. As a
result of the Tender Offer and the purchase of the outstanding warrants held
by RRGC, such contract has been terminated.
Mr. Brad A. Griffin has been the managing director of GriffCo
Development, which develops, builds, leases and manages commercial and retail
real estate, since 1994. He is also the managing director of Oasis
Investment, a company that manages investment assets and trades NASDAQ and
Exchange stocks and options.
Mr. John J. Todd was elected to the Board of Directors on September 26,
2000. Mr. Todd is the Senior Vice President and Chief Financial Officer of
Gateway Inc., a position he has held since October 1998. Before joining
Gateway, he had held financial positions with the Allied Signal companies
from 1997 to 1998, with Boston Market from 1996 to 1997 and with PepsiCo from
1988 to 1996. He received his bachelor's degree from Longwood College and
his M.B.A. from William and Mary.
Richard F. Schaden is the father of Richard E. Schaden. Frederick H.
Schaden is the brother of Richard F. Schaden and Richard E. Schaden’s uncle.
Executive Officers
The following table sets forth (i) the names of the executive officers,
(ii) their ages, and (iii) the capacities in which they serve our company:
Name Age Position(s) with the Company
------------------- ----- ---------------------------------------
Richard E. Schaden 36 President, Chief Executive Officer and Chairman of
the Board
Steven B. Shaffer 49 Executive Vice President for Operations
Robert W. Scanlon 54 Executive Vice President for Development
Robert A. Elliott 43 Executive Vice President for Marketing
Sue A. Hoover 54 Executive Vice President for Corporate Communications
Richard F. Schaden 62 Vice President, Secretary and Director
Patrick E. Meyers 41 Vice President and General Counsel
John L. Gallivan 53 Chief Financial Officer, Treasurer and Assistant
Secretary
Executive Officer’s Biographical Information
See "Director’s Biographical Information" above for a description of the
backgrounds of Richard E. Schaden and Richard F. Schaden.
Steven B. Shaffer has been our Executive Vice President for Operations
since May 22, 2000. Prior to that he had been a franchisee of the Company
since 1992, an Area Director of the Company since 1996 and a Senior Vice
President of the Company since October 1998. Mr. Shaffer graduated from the
University of Georgia in 1972.
Robert W. Scanlon has been our Executive Vice President of Development
since October 1998. Mr. Scanlon served as our Senior Vice President of Real
Estate/Design & Construction from August 1997 through September 1998. He
also served as our Senior Vice President of Concept Development and Design
from January 1997 to July 1997 and as our Vice President of Nontraditional
Development from May 1996 to December 1996. From June 1990 through April
1996, he was first Vice President of Sales and Marketing and later Vice
President of Business Development for Carts of Colorado, located in Commerce
City, Colorado, an equipment manufacturer. Mr. Scanlon graduated from the
University of Texas, with a B.S. degree in 1973.
Robert A. Elliott became our Executive Vice President of Marketing in
February 2000. Prior to joining us, he was a partner at Bozell Worldwide,
Inc., an advertising agency in Detroit, Michigan, from 1997 to 1999, and on
the marketing staff of Little Caesar Enterprises, Inc. for over 18 years,
including serving as Vice President - Marketing from 1993 to 1997.
Mr. Elliott graduated from Eastern Michigan University with a B.B.A. degree
in 1979.
Sue A. Hoover joined our company as Director of Marketing in 1991.
She was named Senior Vice President of Marketing in 1997 and was named an
Executive Vice President in October 1998. In February of 2000, she became
our Executive Vice President of Corporate Communications. Ms. Hoover
graduated from the University of Iowa with a B.A. in 1968.
Patrick E. Meyers joined our company in 1997. He had been an associate
with the Denver law firm of Moye, Giles, O'Keefe, Vermeire & Gorrell since
September 1991, and was selected as a partner of that firm in 1996. Before
that he served as a judicial law clerk to a Justice of the Colorado Supreme
Court from July 1990 to September 1991. Mr. Meyers received his J.D. degree
from the University of California, Hastings College of Law and his B.A.
degree from the University of Colorado-Denver. Mr. Meyers served as a
Director of our company from 1993 to 1997, when he resigned to become a
full-time employee of our company.
John L. Gallivan joined our company as Chief Financial Officer in 1994.
He was later elected Treasurer and Assistant Secretary. Prior to his joining
our company, he was a director and Executive Vice President of Grease Monkey
Holding Corporation of Denver, a franchisor, owner, and operator of over 200
ten-minute oil change and fluid maintenance centers in the U.S. and Mexico
from 1979 through April 1994. He is a member of the Colorado Society and the
American Institute of CPAs. He graduated from the University of Colorado at
Boulder with a bachelors degree in accounting.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the our
directors, our officers (including a person performing a policy-making
function) and persons who own more than 10% of a registered class of our
equity securities ("10% Holders") to file with the Securities and Exchange
Commission ("SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities. Directors, officers
and 10% Holders are required by SEC regulations to furnish us with copies of
all of the Section 16(a) reports they file. Based solely upon such reports,
we believe that during fiscal 2000 our directors, advisors, officers and 10%
Holders complied with all filing requirements under Section 16(a) of the
Exchange Act, except that Mr. Shaffer inadvertently failed to timely file a
Form 4. Such failure was remedied by the timely filing of his From 5 for
fiscal 2000.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
Set forth below is information about compensation during fiscal 2000 of
our five most highly compensated executive officers, including our CEO, and
two non-executive officers who would have been in the top five most highly
compensated executive officers if they had been executive officers ("Named
Officers").
Summary Compensation Table. The following table provides certain
summary information for fiscal 2000, 1999 and 1998 concerning compensation
awarded, paid to, or earned by, the Named Officers:
Annual Compensation Long-Term and Other
------------------- Compensation
----------------------------
Option 401(k) Plan
Name and Position Year(1) Salary Bonus Shares(2) Contribution(3)
----------------- --------- -------- -------- ---------- ---------------
Richard E. Schaden, 12/31/98 $181,452 $130,625 5,164 $2,000
President and 9/30/99 $196,710 $ 1,500(4) 33,000 $2,329
Chief Executive 9/30/00 $221,500 $301,500(4) 4,000 $3,997
Officer
Steven B. Shaffer, 12/31/98 $ 22,611 $ 0 4,000 $ 0
Executive Vice 9/30/99 $ 75,000 $ 8,177 18,500 $ 0
President 9/30/00 $126,000 $113,044 0 $3,192
For Operations
Patrick E. Meyers, 12/31/98 $ 84,000 $ 24,674 5,164 $ 0
Vice President and 9/30/99 $ 72,768 $ 24,674 14,000 $2,500
General Counsel 9/30/00 $126,667 $120,146 0 $2,749
Robert W. Scanlon, 12/31/98 $ 85,783 $ 28,115 5,164 $3,418
Executive Vice 9/30/99 $ 78,000 $ 10,289 9,000 $5,885
President of 9/30/00 $118,334 $ 48,067 0 $3,977
Development
Sue A. Hoover, 12/31/98 $ 90,479 $ 13,968 9,164 $3,016
Executive Vice 9/30/99 $ 73,125 $ 20,826 6,000 $3,962
President of 9/30/00 $124,167 $ 36,120 0 $7,609
Corporate
Communications
John Fitchett, 12/31/98 $ 92,000 $ 7,674 5,164 $1,051
Senior Vice 9/30/99 $ 75,000 $ 11,233 9,000 $1,916
President 9/30/00 $113,542 $121,324 0 $5,579
George Boedecker 12/31/98 $ 29,200 $ 4,343 6,000 $ 0
Senior Vice 9/30/99 $ 75,000 $ 6,212 13,000 $1,787
President 9/30/00 $115,375 $118,451 0 $5,712
Richard F. Schaden, 12/31/98 $ 83,500 $ 78,375 0 $ 0
Vice President and 9/30/99 $ 62,625 $ 0(4) 0 $ 0
Secretary 9/30/00 $ 86,979 $ 0(4) 4,000 $ 0
(1) Fiscal 1999 contained only nine months because we changed our fiscal year
end to September 30 during 1999.
(2) During fiscal 2000 and prior years, as an incentive for our eligible
employees to work to enhance our performance and assure our future success,
we granted options to purchase shares of common stock to successful employees
from time to time under our Employee Stock Option Plan. All options
indicated in this table have been granted under such Plan.
(3) We provide our employees with a 401(k) Employee's Savings Plan, pursuant
to which we contribute to each eligible employee's account an amount equal to
100% of such employee's annual contribution up to 6% of each employee’s total
compensation. Employees in 1999 were limited to a maximum contribution of
$10,000 by applicable provisions of the Internal Revenue Code. That amount
increases to $10,500 in 2000. Prior to 1999, our match was 50% of each
employee’s contribution. We have issued shares of Common Stock for 50% our
annual contribution to each account under the 401(k) Plan. In December 2000,
our directors amended the 401(k) plan to provide for 100% of matches in cash.
(4) The Company is contractually obligated to pay both Mr. Richard E. Schaden
and Mr. Richard F. Schaden a bonus based upon any positive increase in
earnings before interest, taxes, depreciation and amortization for each full
calendar year over the level of such amount for the prior full calendar year
during the term of their respective employment agreements. See “Employment
Contracts” below. During 1999, there was a change in accounting principle
resulting from a change in the Securities and Exchange Commission’s position
regarding the recognition of area director fees as income. The Commission’s
position shifted from one permitting immediate recognition to one requiring
amortization of such fees into income over several years. As a result, we
took a charge against earnings in fiscal 1999 of $2,769,592. The impact on
the Schadens from this change was that they received virtually no bonuses for
fiscal 1999. However, in future years a portion of their bonuses will result
from amortized income from area director fees that had been taken into
income, and therefore counted towards their bonuses in years prior to the
accounting change and the charge against income described above. The next
bonus calculation for the Schadens will be made for the calendar year 2000.
The Board of Directors has approved an advance of $300,000 to Richard E.
Schaden based on the expectation that his bonus will be in excess of such
amount. In addition, the Board of Directors has approved the exclusion of
certain one time non-recurring expense items in the amount of $2,916,536 from
the calculation of EBITDA for the purpose of determining the Schadens’
bonuses for 2000.
Stock Option Awards. We adopted our Employee Stock Option Plan (the
"Employee Plan") in 1993. The purposes of the Employee Plan are to enable
our company to provide opportunities for certain officers and key employees
to acquire a proprietary interest in our company, to increase incentives for
such persons to contribute to our performance and further success, and to
attract and retain individuals with exceptional business, managerial and
administrative talents, who will contribute to our progress, growth and
profitability. As of November 30, 2000, we had issued 68,091 shares upon
exercise of options under the Employee Plan and had outstanding grants of
options covering 448,226 shares currently reserved for issuance under the
Employee Plan.
Options granted under the Employee Plan include both incentive stock
options ("ISOs"), within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and non-qualified stock options
("NQOs"). Under the terms of the Employee Plan, all of our officers and
employees are eligible for ISOs. We determine which persons will receive
ISOs, the applicable exercise price, vesting provisions and the exercise
term. The terms and conditions of option grants differ and are set forth in
the optionees individual stock option agreement. Such options generally vest
over a period of one or more years and expire after up to ten years. ISOs
must satisfy the statutory requirements of the Code In order to qualify for
certain preferential treatment. Options that fail to satisfy those
requirements will be deemed NQOs and will not receive preferential treatment
under the Code. Upon exercise, shares will be issued upon payment of the
exercise price in cash, by delivery of shares of Common Stock, by delivery of
options granted under the Employee Plan or a combination of any of these
methods.
In connection with our self-tender offer that was completed on December
11, 2000, our Board of Directors has approved a profit sharing plan that all
Quizno’s employees will be able to participate in. Such plan will replace
the Employee Plan beginning in 2001.
Option information for fiscal 2000 relating to the Named Officers is
set forth below:
Option Grants in Fiscal 2000
Number of
Shares of
Common Stock Percentage of
Underlying Total Options
Options Granted to
Granted in Employees in Expiration
Name Fiscal 2000 Fiscal 2000 Date
-------------------- -------------- -------------- -------- ------------
Richard E. Schaden 4,000 2.3% $7.375 1/1/10(1)
Richard F. Schaden 4,000 2.3% $7.375 1/1/10(1)
Steven B. Shaffer 0 - - -
Patrick E. Meyers 0 - - -
Robert W. Scanlon 0 - - -
Sue A. Hoover 0 - - -
John Fitchett 8,000 4.6% $6.38 8/8/05(2)
George Boedecker 10,000 5.7% $6.57 8/8/05(2)
(1) The grants of these options were included in the grants to all
directors under our Directors and Advisors Stock Option Plan and expire on
the first to occur of the tenth anniversary of the grant date or the third
anniversary of the termination of the individual’s status as a Director or
Advisor.
(2) These options, granted under the Employee Plan, vest in equal
proportions on the second, third and fourth anniversaries of the grant.
They terminate on the fifth anniversary of the grant or ninety days after
termination of employment, if earlier.
Option Exercises and Year-End Values in Fiscal 2000
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year End at Year End(1)
Shares Value --------------------------- ---------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
----------- --------- -------- ----------- ------------- ----------- -------------
Richard E. 3,873 $12,122 5,087 34,291 $2,370 $1,381
Schaden
Richard F. 0 $ 0 4,000 0 $ 0 $ 0
Schaden
Steven B. 4,000 $12,000 0 20,000 $ 0 $6,260
Shaffer
Robert W. 0 $ 0 5,600 12,691 $16,764 $8,776
Scanlon
Sue A. Hoover 3,873 $11,619 13,200 12,091 $20,556 $6,124
Patrick E. 3,873 $14,040 22,000 15,291 $54,700 $2,020
Meyers
John Fitchett 0 $ 0 5,600 20,691 $16,764 $9,256
George 0 $ 0 1,800 25,700 $ 4,617 $5,426
Boedecker
(1) The dollar values are calculated by determining the difference between $6.44
per share, the fair market value of the Common Stock at September 30, 2000, and the
exercise price of the respective options.
Employment Contracts. On December 12, 2000, the Company entered
into a new employment agreement with Richard E. Schaden, which has a
three-year term and provides for an annual salary of $481,000. Under the
agreement, Richard E. Schaden will be entitled to an annual bonus equal to
four percent of the Company's earnings before interest, taxes, depreciation
and amortization ("EBITDA") up to the amount of EBITDA projected in the
annual budget approved by the Company's Board of Directors for that calendar
year. To the extent actual EBITDA exceeds budgeted EBITDA for that calendar
year, Richard E. Schaden will be entitled to an annual bonus of twelve
percent of the amount of such excess EBITDA. In the event Richard E. Schaden
is terminated by the Company without cause or his employment agreement is not
renewed under terms at least as favorable as exists as of the expiration date
of the employment agreement, he would be entitled to termination payments
equal to three years' base salary plus bonus (which bonus payment will not be
less than $400,000 for each year in which the severance payment is due).
Either party may terminate the agreement with 30 days' notice. Mr. Schaden
will devote his full time to company matters. Under his prior employment
agreement, his annual base salary was $220,000. That agreement provided an
annual bonus equal to 10% of any positive increase in earnings before
interest, taxes, depreciation and amortization for each full calendar year
during the term of the agreement over the level of such amount for the prior
full calendar year. Both the old and new employment agreements provide that
Mr. Schaden also receive a monthly automobile allowance of up to $620.00 plus
up to $150.00 for insurance coverage. The contracts provide that we pay
one-half of Mr. Schaden's medical insurance coverage and one-half of the cost
of disability insurance. We also pay for $1,000,000 of term life insurance
for Mr. Schaden, payable to his designated beneficiary.
On December 12, 2000, the Company entered into a new employment
agreement with Richard F. Schaden, which has a three-year term and provides
for an annual salary of $100,000. Under the agreement, Richard F. Schaden
will be entitled to an annual bonus equal to two percent of the Company's
EBITDA up to the amount of EBITDA projected in the annual budget approved by
the Company's Board of Directors for that calendar year. To the extent
actual EBITDA exceeds budgeted EBITDA for that calendar year, Richard F.
Schaden will be entitled to an annual bonus of eight percent of the amount of
such excess EBITDA. In the event Richard F. Schaden is terminated by the
Company without cause or his employment agreement is not renewed under terms
at least as favorable as exists as of the expiration date of the employment
agreement, he would be entitled to termination payments equal to three years'
base salary plus bonus (which bonus payment will not be less than $400,000
for each year in which the severance payment is due). Either party may
terminate the agreement with 30 days' notice. Mr. Schaden will not devote
his full time to company matters, but will devote such time to company
matters as we request. Mr. Schaden may take on special projects for us at
the direction of the Board of Directors and receive additional compensation
for such projects. Under his prior employment agreement, his annual base
salary was $83,500. That agreement provided an annual bonus equal to 6% of
any positive increase in earnings before interest, taxes, depreciation and
amortization for each full calendar year during the term of the agreement
over the level of such amount for the prior full calendar year.
Robert Elliott has entered into an employment agreement with us that
terminates on January 16, 2003. His contract provides that he will serve as
our Executive Vice President for Marketing. Mr. Elliott will devote his full
time to company matters. His annual base salary is $180,000 in 2000,
$200,000 in 2001, and $220,000 for the remainder of the term. Such amount
may be adjusted from time to time by mutual agreement between Mr. Elliott and
the Company. The agreement provides a $25,000 signing bonus payable on his
nine month anniversary, and a second year signing bonus of $10,000 due on his
second year anniversary date. The agreement provides an annual performance
bonus equal to a maximum of 20% of Mr. Elliott's base salary, as well as an
automobile allowance of $650.00 per month. The agreement provides that
Mr. Elliott will receive options to purchase 20,000 shares of the Company's
stock. He may receive additional options or be entitled to participate in
other employee benefit or compensation programs as provided by us from time
to time. Either party may terminate the agreement with 30 days' notice. If
we terminate the agreement without cause, we are obligated to pay Mr. Elliott
a severance payment equal to 6 months base salary. During the term of the
agreement and for 6 months after it terminates, Mr. Elliott agrees not to
work for any competitor.
None of the other executive officers have an employment agreement
with us.
Director Compensation
Directors who are not officers or employees are paid $500 per day for
each Board and Committee meeting they attend and they are reimbursed for
their reasonable expenses of attending such meetings. In addition, all
directors receive an annual grant of options to purchase 4,000 shares of
Common Stock, which immediately vest.
During fiscal 2000, we paid three of our non-employee directors, who
served all year, $2,500 each, a fourth director who attended three meetings
$1,500, and our new director John Todd, $500, as compensation for their
attendance at regular Board and Committee meetings. For their service during
fiscal 2000, all Directors received a grant of options to purchase 4,000
shares of Common Stock that immediately vested, except John Todd, who
received a grant of options to purchase 1,000 shares of Common Stock that
immediately vested.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our equity securities (common stock and three classes of preferred
stock) as of December 18, 2000, (a) by each person known to us to own
beneficially more than 5% of the Common Stock, (b) each of our Named Officers
and directors and (c) by all of our executive officers and directors named
herein as a group.
Preferred
Stock
Common Stock Common Stock Owned and
Name and Address(1) Owned(2) Percentage Percentage
---------------------------- -------------- ------------- -------------
Richard E. Schaden....... 872,384(3) 35.8% (7)
Richard F. Schaden....... 921,470(3) 37.0% (7)
Levine Leichtman Capital
Partners II, L.P,
335 North Maple Drive,
Suite 240, Beverly Hills,
CA 90210................ (4) 14.0% 0
Brad A. Griffin.......... 0 * 0
Mark L. Bromberg......... 14,000(5) * 0
J. Eric Lawrence......... 0 * 0
Frederick H. Schaden..... 28,000(5) * (7)
John J. Todd............. 1,000(5) * 0
Steven B. Shaffer........ 27,300(6) * (7)
Robert W. Scanlon........ 0 * 0
Sue A. Hoover............ 3,873(6) * 0
Patrick E. Meyers........ 15,723(6) * 0
John Fitchett............ 0(6) * (7)
George Boedecker......... 0(6) * (7)
All Executive Officers
and Directors as a Group
(13 persons)(3),(5),(6).. 1,885,223 71.3% (7)
_________________________
* Less than 1% of shares outstanding.
(1) All addresses, unless otherwise stated, are 1415 Larimer Street,
Denver, CO 80202.
(2) The persons named in the table have sole voting power with respect
to all shares of common stock shown as beneficially owned by them. A
person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date as of which the
table is presented, upon the exercise of options or warrants, or
conversion of convertible securities. The record ownership of each
beneficial owner is determined by assuming that options or warrants or
convertible securities that are held by such person and that are
exercisable or convertible within 60 days have been exercised or
converted. The total outstanding shares used to calculate each
beneficial owner's percentage also assumes that such options, warrants
or convertible securities have been exercised or converted. Our
Class A Cumulative Convertible Preferred Stock ("Class A Preferred"),
Class C Cumulative Convertible Preferred Stock ("Class C Preferred")
and Class E Cumulative Convertible Preferred Stock ("Class E
Preferred") are currently convertible into our common stock on a
1-for-1 basis.
(3) Richard E. Schaden and Richard F. Schaden beneficially own, through a
voting trust pursuant to which they are joint voting trustees,
773,667 shares of our common stock and 146,000 shares of our Class A
Preferred, and 4,000 shares of our common stock owned by a family member
for which the voting trust holds sole voting power. The remaining duration
of the voting trust agreement is four years, subject to extension. In the
table, beneficial ownership of shares, other than the 773,667 shares of
common stock, have been allocated equally to each of them. Such
773,667 shares of common stock are allocated to Richard F. Schaden in the
table, and he has been given a proxy to vote such shares. Richard E.
Schaden has withdrawn 773,667 shares of common stock from the voting trust
to use to secure a personal loan, subject, however, to an agreement to
redeposit those shares into the voting trust if they are no longer
necessary to secure such loan. Otherwise, Richard E. Schaden, individually,
4339 shares of our common stock held in his own name, 17,378 shares of our
common stock represented by exercisable stock options and 2,000 shares of
our common stock owned by a family member for which he holds sole voting
power. Richard F. Schaden, individually, beneficially owns 34,000 shares of
our Class C Preferred, 4,000 shares of our common stock represented by
currently exercisable stock options and 34,803 shares of our Class E
Preferred.
(4) We issued warrants to Levine in connection with a loan to us of $13.8
million to finance our self-tender offer for our own common stock that was
completed on December 11, 2000. Such warrants permit Levine to purchase up
to 14% of each class of our capital stock on a fully diluted basis as of
the completion of the tender offer, subject to certain adjustments for
issuances, exchanges or repurchases of our capital stock, at an exercise
price of $.01 per share.
(5) All the shares indicated as owned by Messrs. Bromberg and Todd may be
acquired through the exercise of stock options. All the shares indicated as
owned by Mr. Frederick Schaden may be acquired through the exercise of
stock options or conversion of Class C Preferred by the holder.
(6) Steven B. Shaffer, individually and through an affiliated entity,
beneficially owns 27,300 shares of our common stock. Patrick E. Meyers,
individually, beneficially owns 1,723 shares of our common stock and 14,000
shares of our common stock represented by currently exercisable stock
options. In connection with our self-tender offer for our common stock
completed on December 11, 2000, Messrs. Shaffer, Meyers, Gallivan, Fitchett
and Boedecker and Ms. Hoover converted the equity in their vested options
to purchase our common stock into pro-rata interests in a deferred
compensation plan which became effective on December 1, 2000. Ms. Hoover,
individually beneficially owns 3,873 shares of our common stock.
(7) The Company has issued and outstanding four classes of Convertible
Preferred Stock, the Class A Preferred, Class C Preferred, the Class D
Subordinated Convertible Preferred Stock (the "Class D Preferred") and
Class E Preferred. There are 146,000 shares of Class A Preferred
outstanding: 50% are beneficially owned by Richard F. Schaden and 50% are
beneficially owned by Richard E. Schaden. There are 57,000 shares of Class
C Preferred outstanding: 34,000 shares or 60.0% are held by Richard F.
Schaden and 2,000 shares or 3.5% are held by Frederick H. Schaden. There
are 3,000 shares of Class D Preferred outstanding: 1,000 shares each are
held by each of Messrs. Shaffer, Fitchett and Boedecker. There are 59,480
shares of Class E Preferred outstanding: 34,803 shares or 59% are held by
Richard F. Schaden and 1,473 shares or 2.5% are held by John L. Gallivan.
Among all executive officers and directors as a group, the following
preferred shares are beneficially owned: 100% of the Class A Preferred,
36,000 shares or 63.2% of the Class C Preferred, 1,000 shares or 33.3% of
the Class D Preferred and 36,276 shares or 61% of the Class E Preferred.
None of these classes of preferred stock are publicly traded or registered
under Section 12(b) or 12(g) of the Exchange Act.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1996, Retail & Restaurant Growth Capital, L.P. ("RRGC")
made a $2,000,000 loan to our company, a portion of which was convertible
into 372,847 shares of our Common Stock., and with interest accrued at 12.75%
per annum. If the loan were repaid before conversion, RRGC would receive a
warrant to purchase the same number of shares of our Common Stock at $3.10
per share. In connection with an amendment to the loan agreement, we also
issued a Warrant to RRGC that granted it the right to purchase up to 42,209
shares of the Common Stock at $5.00 per share. Such number of shares of
Common Stock was subject to downward adjustment if we meet certain net income
and other goals. On January 6, 1999, we paid off the loan from RRGC and
issued to RRGC the Warrant to purchase 372,847 shares of Common Stock
referred to above. In connection with the Tender Offer, all of RRGC’s
Warrants were purchased by and a Termination Agreement was signed that
terminated all of our obligations to RRGC.
Effective October 1, 1994, a wholly-owned subsidiary of our company
acquired by merger all of the assets and obligations of Schaden & Schaden,
Inc., a Colorado corporation, or "SSI", owned by Richard E. Schaden and
Richard F. Schaden. The assets of SSI included interests in several Quizno's
Classic Subs restaurants and interests in two Area Directorships. The
consideration paid by us to the Schadens, included $876,000 that was paid in
our Class A Preferred Stock. The Class A Preferred Stock is non-voting,
bears a 6.5% cumulative dividend, and became convertible on November 1, 1997
into 146,000 shares of the Common Stock. We may call the Class A Preferred
Stock upon 60 days notice. During fiscal 2000 and 1999 each preferred
shareholder received dividends of $28,470 annually. In addition, Richard F.
Schaden owns 34,000 shares of our Class C Preferred Stock and 34,803 shares
of our Class E Preferred Stock and was paid $36,386 in dividends on such
shares during fiscal 2000.
Richard F. Schaden and Frederick H. Schaden, directors of our company,
each own an interest in Illinois Food Management, Inc. (“IFM”) that owns
approximately 50% of our Chicago Area Director. We also own approximately
12% of IFM. In fiscal 2000 and 1999, respectively, we paid the Area Director
$459,496 and $142,364 as commissions on the sale of new franchises and
royalties. In early 1996, IFM requested that we extend the payment terms
relating to amounts owed to us by IFM as a result of its operations as an
Area Director. As a result of such request, we agreed to defer payment of
$63,547. IFM issued to us a promissory note in such amount payable over 6
years with an interest rate of 12% per annum. At September 30, 2000, $
55,550 was owed to us on this promissory note. During fiscal 2000 and 1999,
payments on such note were $11,800 and $8,000, respectively. IFM is also
indebted to us for $7,216 in connection with the resale of a Restaurant once
operated by IFM. IFM is reducing this debt by offsetting commissions on
royalty fees from that location paid to the managing Area Director. The debt
is expected to be reduced to zero in approximately 15 months.
In 1997, we purchased a Restaurant from a company in which Sue A.
Hoover, our Executive Vice President of Marketing, was a 42.5% shareholder.
The purchase price was $80,000 of which $15,000 was paid in cash and $65,000
paid by issuance of a promissory note bearing interest at 11% and payable
over four years. During fiscal 2000 and 1999, our company made payments
pursuant to the promissory note totaling $35,219 and $14,245, respectively.
In September 1999, Mr. Fitchett and another employee of ours purchased
an area directorship for $200,000, of which $180,000 was in the form of a
promissory note. During fiscal 2000, no payments were made on the note, and
we paid the Area Director $20,131 in commissions and royalties.
On October 13, 1999, we purchased a 1997 Cessna Citation 525. As of
the same date, we entered into an interchange agreement with Richard F.
Schaden, P.C., which is 100% owned by Richard F. Schaden. Mr. Schaden,
through his company, owns a 1980 Cessna 560 Citation V. Under the interchange
agreement, the parties agreed to lease each aircraft to each other, on an
as-needed basis, without charge, although the parties will pay the
operational costs of the airplane. We also will pay Mr. Schaden or his
company to provide services related to the airplane operations, including for
pilot and management services. During fiscal 2000, we paid Mr. Schaden or an
affiliated company $46,162 for services related to our airplane.
We entered into a Development Agreement, dated November 4, 1999, with
Pink Sand Corporation, which is principally owned by Richard F. Schaden, for
the development rights to United States Territory of Guam and the
Commonwealth of Saipan. The development agreement will require Pink Sand to
open five Restaurants during the term of the agreement. So long as Pink Sand
meets the development schedule, it will have the exclusive rights to develop
Restaurants in the territory. The development fee, paid upon execution of
the Agreement, was $42,500. The fee equals one hundred percent of the first
initial franchise fee and fifty percent of the aggregate initial franchise
fees due for all of the other Restaurants that Pink Sand must develop under
the agreement. Each time Pink Sand signs a franchise agreement for a
Restaurant to be developed within the territory, we will apply the
Development Fee in increments equal to fifty percent of the initial franchise
fee due for that Restaurant to reduce the additional amount Pink Sand must
pay. During fiscal 2000, we received payments of $14,764 in royalties from
Pink Sand.
We have guaranteed a personal loan to Richard E. Schaden from Tucker
Anthony Capital Markets, in the approximate amount of $2,100,000, which is
secured by shares of common stock in The Quizno's Corporation owned by Mr.
Schaden and other personal assets, a personal guaranty, and a partial guaranty
by Mr. Schaden's father, Richard F. Schaden. In order to protect against the
potential loss of Mr. Schaden's stock as a result of this transaction (and the
potential negative effects to us), our Board of Directors authorized a guaranty
from the Company by which we assure Tucker Anthony that upon an event of a
default in Mr. Schaden's loan, the Company will be responsible for the principal
and interest on the loan. We will enter into a reimbursement agreement with Mr.
Schaden which will require Mr. Schaden to reimburse us for any expenses or
losses suffered by us in connection with the guaranty. We do not expect to incur
any such expenses or losses, as the guaranty would only be drawn against by
Tucker Anthony if (a) Mr. Schaden's shares of common stock became insufficient
collateral (in combination with Mr. Schaden's other collateral and the
guaranties described above) and (b) Mr. Schaden defaulted on his payment
obligations under the loan.
Thomas Schaden, a brother of Richard F. Schaden and Frederick H.
Schaden, is in the insurance brokerage business and has acted as a broker for
our insurance policies, including the directors and officers policies that we
have purchased.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B. We will furnish
to our shareholders, a copy of any of the exhibits listed below upon payment
of $.25 per page to cover our costs of furnishing the exhibits.
Item No. Exhibit Description
---------- ---------------------------------------------------------------
2.1 Articles of Merger Merging Schaden & Schaden into The Quizno's
Operating Company, incorporated by reference to Exhibit 2(ii)
to the Company's Form 8-K, dated November 4, 1994.
2.2 Asset Purchase Agreement, among The Quizno’s Acquisition
Company, Bain's Deli Franchise Associates, through its General
Partner, Gemini Enterprises, Ltd., Gemini One, Inc. and Jolles
#4 Partnership, dated November 12, 1997, incorporated by
reference to Exhibit 2.1 to Firm 8-K, filed by the Company with
the SEC on November 26, 1997.
2.3 Asset Purchase Agreement among Stoico Restaurant Group, Inc.
d/b/a Stoico Food Service, Inc., Sub & Stuff, Inc. and
Spaghetti Jack’s Inc. and Quizno’s Kansas LLC, incorporated by
reference to Exhibit 2.1 to the Company’s Form 8-K, filed by
the Company with the SEC on September 1, 1998
2.4 Asset Purchase Agreement, among Quiz-DIA, Inc., Airport
services, Inc. and ASI-DIA, L.P., dated as of the 5th day of
November, 1999, incorporated by reference to Exhibit 2.3 to
Form 8-K, filed by the Company with the SEC on November 22,1999.
3.1 Amended and Restated Articles of Incorporation of the Company,
incorporated by reference to Exhibit 3(a) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
3.2 Articles of Amendment to the Articles of Incorporation of the
Company Authorizing 146,000 Shares of Class A Cumulative
Convertible Preferred Stock, incorporated by reference to
Exhibit 3.2 to the Company’s Form 10-KSB, dated March 28, 1997.
3.3 Articles of Amendment changing the Company name, incorporated
by reference to Exhibit 3.3 to the Company’s Form 10-KSB, dated
March 28, 1997.
3.4 By-laws of the Company, incorporated by reference to Exhibit 3.
to the Company’s Form 10-KSB, dated December 30, 1999.
3.5 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing 100,000 shares of Class B Preferred Stock
and 200,000 shares of Class C Cumulative Convertible Preferred
Stock, incorporated by reference to Exhibit 3.5 to the
Company’s Form 10-KSB, dated March 26, 1998.
3.6 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing 10,000 shares of Class D Cumulative
Convertible Preferred Stock, incorporated by reference to
Exhibit 3.6 to the Company’s Form 10-KSB, dated December 30,
1999.
3.7 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing 150,000 shares of Class E Cumulative
Convertible Preferred Stock.*
4.1 Form of certificate evidencing Common Stock, $.001 par value,
of the Company, incorporated by reference to Exhibit 4(a) to
the Company's Registration Statement on Form SB-2 (Reg. No.
33-72378-D).
9.1 Voting Trust Agreement between Richard E. Schaden and Richard
F. Schaden, dated July 14, 1994, incorporated by reference to
Exhibit A to the Schedule 13-D, dated July 14, 1994, filed by
Richard E. Schaden and Richard F. Schaden.
9.2 First Amendment to Voting Trust Agreement dated November 4,
1994, incorporated by reference to Exhibit A to the Amendment
No. 1 to Schedule 13-D, dated November 4, 1994, filed by
Richard E. Schaden and Richard F. Schaden.
9.3 Second Amendment to Voting Trust Agreement dated September 5,
1996, incorporated by reference to Exhibit 9.3 to the Company’s
Form 10-KSB, dated March 28, 1997.
9.4 Third Amendment to Voting Trust Agreement dated as of September
1, 1999, incorporated by reference to Exhibit 9.4 to the
Company’s Form 10-KSB, dated December 30, 1999.
9.5 Agreement of Waiver and Modification of Voting Trust Agreement
and Stock Purchase Agreement, dated August 8, 2000,
incorporated by reference to Exhibit A to the Amendment No. 5
to Schedule 13-D, dated November 15, 2000, filed on November
21, 2000 by Richard E. Schaden and Richard F. Schaden.
10.1 Employment Agreement of Mr. Richard E. Schaden, dated December
12, 2000, incorporated by reference to the form filed as
Exhibit (e)(1) to the Company’s Schedule TO filed with the
Commission on November 13, 2000.
10.2 Employment Agreement of Mr. Richard F. Schaden, dated December
12, 20000, incorporated by reference to the form filed as
Exhibit (e)(2) to the Company’s Schedule TO filed with the
Commission on November 13, 2000.
10.3 Employee Stock Option Plan, incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form
S-8 (Reg. No.333-46058), filed on September 19, 2000.
10.4 Amended and Restated Stock Option Plan for Directors and
Advisors, incorporated by reference to Exhibit 99.2 to the
Company's Registration Statement on Form S-8 (Reg.
No.333-46058), filed on September 19, 2000.
10.5 Indemnity Agreement of Richard E. Schaden, incorporated by
reference to Exhibit 10(e) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.6 Indemnity Agreement of Richard F. Schaden, incorporated by
reference to Exhibit 10(f) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.7 Indemnity Agreement of Patrick E. Meyers, incorporated by
reference to Exhibit 10(g) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.8 Indemnity Agreement of Brownell M. Bailey, incorporated by
reference to Exhibit 10(h) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.9 Indemnity Agreement of Frederick H. Schaden, incorporated by
reference to Exhibit 10(i) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.10 Indemnity Agreement of J. Eric Lawrence, incorporated by
reference to Exhibit 10.10 to the Company's Form 10-KSB, dated
March 26, 1998
10.11 Indemnity Agreement of Mark L. Bromberg, incorporated by
reference to Exhibit 10.11 to the Company's Form 10-KSB, dated
March 26, 1998
10.12 Form of Franchise Agreement*
10.13 Form of Area Director Marketing Agreement*
10.14 Headquarters Office Lease for the Company, incorporated by
reference to Exhibit 10.14(b) to the Company’s Form 10-KSB,
filed with the SEC on March 31, 1999.
10.15 The Director, Advisor and Executive Officer SAR and Deferred
Compensation Plan, effective as of December 1, 2000*
10.16 Deferment Agreement between the Company and Illinois Food
Management, Inc., dated February 27, 1996, incorporated by
reference to Exhibit 10.17 to the Company's 10-KSB, dated
March 29, 1996.
10.17 Asset Purchase Agreement between The Quizno’s Acquisition
Company and Bain’s Deli Corporation dated as of February 1,
1999, incorporated by reference to Exhibit 10.28 to the
Company’s form 10-KSB filed with the SEC on March 31, 1999.
10.18 Airplane Purchase Agreement, dated as of September 22, 1999,
between the Company and Sacramento Aviation management Company,
incorporated by reference to Exhibit 10.24 to the Company’s
Form 10-KSB, dated December 30, 1999.
10.19 Interchange Agreement, dated as of October 13, 1999, between
the Company and Richard F. Schaden, P.C., incorporated by
reference to Exhibit 10.25 to the Company’s Form 10-KSB, dated
December 30, 1999.
10.20 Form of Master Franchise Agreement, incorporated by reference
to Exhibit 10.26 to the Company’s Form 10-KSB, dated December
30, 1999.
10.21 Investment letter agreement, dated as of October 4, 1999,
between the Company and AMERESCO Commercial Finance, Inc.,
incorporated by reference to Exhibit 10.27 to the Company’s
Form 10-KSB, dated December 30, 1999.
10.22 Form of Promissory Note, dated as of October 5, 1999, issued by
the Company to AMERESCO Commercial Finance, Inc., incorporated
by reference to Exhibit 10.28 to the Company’s Form 10-KSB,
dated December 30, 1999.
10.23 Form of Pledge and Security Agreement, dated as of October 5,
1999, between the Company and AMERESCO Commercial Finance,
Inc., incorporated by reference to Exhibit 10.29 to the
Company’s Form 10-KSB, dated December 30, 1999.
10.24 Securities Purchase Agreement between the Company, its
subsidiaries and Levine Liechtman Capital Partners II, L.P.,
incorporated by reference to Exhibit (b)(1) to the Company’s
Schedule TO filed with the Commission on November 13, 2000
10.25 Form of Secured Senior Subordinated Note Due 2005 issued to
Levine Liechtman Capital Partners II, L.P., incorporated by
reference to Exhibit (b)(2) to the Company’s Schedule TO filed
with the Commission on November 13, 2000
10.26 Form of Warrant to purchase Common Stock issued to Levine
Liechtman Capital Partners II, L.P., incorporated by reference
to Exhibit (b)(3) to the Company’s Schedule TO filed with the
Commission on November 13, 2000
10.27 Form of Warrant to purchase Preferred Stock issued to Levine
Liechtman Capital Partners II, L.P., incorporated by reference
to Exhibit (b)(4) to the Company’s Schedule TO filed with the
Commission on November 13, 2000
10.28 Form of Registration Rights Agreement between the Company and
Levine Liechtman Capital Partners II, L.P., incorporated by
reference to Exhibit (b)(5) to the Company’s Schedule TO filed
with the Commission on November 13, 2000
10.29 Form of Investor Rights Agreement between the Company, Richard
E. Schaden, Richard F. Schaden and Levine Liechtman Capital
Partners II, L.P., incorporated by reference to Exhibit (b)(6)
to the Company’s Schedule TO filed with the Commission on
November 13, 2000
10.30 Form of Security Agreement between the Company, certain of its
subsidiaries and Levine Liechtman Capital Partners II, L.P.,
incorporated by reference to Exhibit (b)(7) to the Company’s
Schedule TO filed with the Commission on November 13, 2000
10.31 Form of Pledge Agreement between the Company, certain of its
subsidiaries and Levine Liechtman Capital Partners II, L.P.,
incorporated by reference to Exhibit (b)(8) to the Company’s
Schedule TO filed with the Commission on November 13, 2000
10.32 Form of Grant of Security Interest in Trademarks, Patents and
Licenses between the Company, its subsidiaries and Levine
Liechtman Capital Partners II, L.P., incorporated by reference
to Exhibit (b)(9) to the Company’s Schedule TO filed with the
Commission on November 13, 2000
10.33 Termination Agreement, dated November 6, 2000, between the
Company and Retail & Restaurant Growth Capital, L.P.,
incorporated by reference to Exhibit (d)(1) to the Company’s
Schedule TO filed with the Commission on November 13, 2000.
10.34 Form of Guaranty Agreement between the Company and Tucker
Anthony, Inc., incorporated by reference to Exhibit (d)(2) to
the Company’s Schedule TO filed with the Commission on November
13, 2000.
10.35 Reimbursement Agreement between Richard E. Schaden and the
Company*
20.1 Risk Factors Section from the Company's Prospectus dated
January 9, 1998 included in the Registration Statement on
Form S-3 filed by the Company (Registration No. 333-38691),
incorporated by reference to Exhibit 20.1 to the Company's
10-KSB, dated March 26, 1998.
21.1 List of Company subsidiaries.*
23 Consent of Ehrhardt Keefe Steiner & Hottman PC to the
incorporation by reference of its report dated November 20,
2000 appearing elsewhere in this Form 10-KSB into the
Registration Statement on Form S-8 of the Company, Reg. No.
333-46058.*
__________
o Filed with this Report.
(b) Reports on Form 8-K. We filed one report on Form 8-K during the
fiscal quarter ending September 30, 2000. The Form 8-K filing reported on an
Item 5 matter, the press release announcing the election of John J. Todd to
our Board of Directors. Such filing was made on September 29,
2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on December 29, 2000.
THE QUIZNO'S CORPORATION
By:/s/Richard E. Schaden
Richard E. Schaden,
President, Chief Executive
Officer and Chairman of the
Board of Directors
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the dates indicated.
Signature Title Date
President, Chief Executive December 29, 2000
/s/ Richard E. Schaden Officer and Chairman of the
Richard E. Schaden Board of Directors
(Principal Executive Officer)
/s/ Mark L. Bromberg Director December 29, 2000
Mark L. Bromberg
/s/ J. Eric Lawrence Director December 29, 2000
J. Eric Lawrence
/s/ Frederick H. Schaden Director December 29, 2000
Frederick H. Schaden
/s/ Brad A. Griffin Director December 29, 2000
Brad A. Griffin
/s/ John J. Todd Director December 29, 2000
John J. Todd
/s/ John L. Gallivan Chief Financial Officer December 29, 2000
John L. Gallivan and Treasurer (Principal
Financial and Accounting
Officer)
