UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the Fiscal Year Ended September 30, 1999 (Nine Month Transition
Period)
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO
----------
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)
(303) 291-0999
(Issuer's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
[ ]
State registrant's revenue for its most recent fiscal year: $20,947,634
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 17, 1999 was approximately
$11,682,385 (for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 3,049,750 shares of registrant's common stock outstanding as of
December 17, 1999.
Documents incorporated by reference:
None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
The Quizno's Corporation (the "Company"), hereby amends Items 6 and 7 of its
Form 10-KSB for the fiscal year ended December 31, 1999, as filed with the
Securities and Exchange Commission on December 30, 1999. This amendment is
filed to include amounts that were inadvertently deleted or incorrectly
formatted due to a software error. The amounts were included and correctly
formatted in the actual financial statements and text on which the EDGAR filing
was based. The errors only appeared in the EDGAR filing. The amounts that are
now being included appear in the 1998 column of other income on page 18, in
the 1997 column for other income on page F-3 and in the 1997 column for
investing activities on page F-6. The amounts that are now currectly formatted
appear in the revenue growth table on page 20.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this annual report, and in
particular in this section entitled "Management's Discussion and Analysis or
Plan of Operation," are forward-looking statements that involve risks and
uncertainties that might adversely affect our operating results in the future in
a material way. Such risks and uncertainties include, without limitation, the
effect of national and regional economic and market conditions in the U.S. and
the other countries in which we franchise Restaurants, costs of labor and
employee benefits, costs of marketing, the success or failure of marketing
efforts, costs of food and non-food items used in the operation of the
Restaurants, intensity of competition for locations and Franchisees as well as
customers, perception of food safety, spending patterns and demographic trends,
legal claims and litigation, the availability of financing for us and our
Franchisees at reasonable interest rates, the availability and cost of land and
construction, legislation and governmental regulations, and accounting policies
and practices. Many of these risks are beyond our control. In addition, specific
reference is made to the "Risk Factors" section contained in our Prospectus,
dated January 9, 1998, included in the Registration Statement on Form S-3 filed
by our company (Registration No. 333-38691).
The principal sources of our income are continuing fees, initial franchise
fees, and, historically, area director marketing fees. These sources are subject
to a variety of factors that could adversely impact our profitability in the
future, including those mentioned in the preceding paragraph. The continued
strength of the U.S. economy is a key factor to the restaurant business because
consumers tend to immediately reduce their discretionary purchases in
economically difficult times. An economic downturn would adversely affect all
three of the sources of income identified above. Because our franchises are
still concentrated in certain regions of the U.S., regional economic factors
could adversely affect our profitability. Weather, particularly severe winter
weather, will adversely affect royalty income and could affect the other sources
cited above. Culinary fashions among Americans and people in other countries in
which we franchise the Restaurants will also impact our profitability. As eating
habits change and types of cuisine move in and out of fashion, our challenge
will be to formulate a menu within the Quizno's distinctive culinary style that
appeals to an increasing market share. Finally, the intense competition in the
restaurant industry continues to challenge participants in all segments of this
industry.
As our revenues from foreign operations become more significant, our
profitability could be adversely impacted by international business risks and
political or economic instability in foreign markets. While, international
operations involve risks that do not exist in domestic operations, such as
adverse fluctuation in foreign exchange rates, monetary exchange controls,
foreign government regulation of business relationships, and uncertainty of
intellectual property protection, we believe that the potential rewards of
expanding the market for our services to selected foreign countries far
outweighs such risks.
<PAGE>
Overview
In November 1999, we announced that we had changed our fiscal year end
from December 31 to September 30. The financial statements included with this
10-KSB filing reflect our balance sheet as of September 30, 1999, December 31,
1998 and December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for the nine months ended September 30, 1999
and the twelve months ended December 31, 1998 and 1997. Included below is the
unaudited statement of operations for the twelve months ended September 30, 1999
and 1998 and the unaudited statement of cash flows for the twelve months ended
September 30, 1999 and 1998. For purposes of Management's Discussion and
Analysis or Plan of Operation, we believe that these twelve-month statements and
comparisons provide a more meaningful analysis. Therefore, all comparison and
analysis included in this Management's Discussion and Analysis or Plan of
Operation will be based upon these twelve-month statements and related data.
Unless noted otherwise, all references to 1999 and 1998 refer to the twelve
months ending September 30, 1999 and 1998, respectively.
Consolidated Statement of Operations
For the Year Ended
September 30,
------------------------------
1999 1998
------------ ------------
(Unaudited)
Franchise operations:
Revenue
Continuing fees .................. $ 10,412,414 $ 5,119,903
Initial franchise fees ........... 3,610,042 2,675,567
Area director and master franchise
fees ............................ 2,131,882 2,357,216
Other ............................ 508,240 659,263
Interest ......................... 355,608 172,582
------------ ------------
Total revenue ............ 17,018,186 10,984,531
------------ ------------
Expenses
Sales and royalty commissions .... (5,302,456) (3,607,186)
Advertising and promotion ........ (96,433) (213,700)
General and administrative
(8,560,924) (5,567,313)
Total expenses
(13,959,813) (9,388,199)
Income from franchise operations .... 3,058,373 1,596,332
------------ ------------
Company store operations:
Sales ............................ 8,276,368 6,378,379
Cost of sales .................... (2,511,086) (1,929,730)
Cost of labor .................... (2,222,855) (1,549,512)
Other store expenses
(2,924,237) (2,319,752)
Total expenses
(7,658,178) (5,798,994)
------------ ------------
Income from Company stores operations $ 618,190 $ 579,385
============ ============
<PAGE>
Consolidated Statement of Operations (continued)
For the Year Ended
September 30,
------------------------------
1999 1998
----------- -----------
(Unaudited)
Other income (expenses):
Research, development and new programs .. $ -- $ (72,161)
Sales by stores held for resale ......... 997,583 859,745
Loss and expenses related to stores held
for sale ............................... (1,260,529) (1,072,979)
Loss on sale or closure of Company stores (127,809) (120,928)
Sale of Japan master franchise .......... 1,168,801 --
Provision for bad debts ................. (354,827) (115,141)
Other expenses .......................... (68,245) (16,261)
Depreciation and amortization ........... (1,280,836) (564,766)
Privatization costs ..................... (265,472) --
Interest expense ........................ (321,718) (330,779)
----------- -----------
Total other expenses (1,513,052) (1,433,270)
----------- -----------
Net income before income taxes ............. 2,163,511 742,447
Income tax provision ....................... (353,135) --
----------- -----------
Net income (loss) .......................... 1,810,376 742,447
Preferred stock dividends .................. (179,151) (217,262)
----------- -----------
Net income before cumulative effect of
changed accounting principle .............. 1,631,225 525,185
Cumulative effect of changed accounting
principle (net of taxes) ................. (2,769,592) --
----------- -----------
Net income (loss) applicable to common
stockholders .............................. $(1,138,367) $ 525,185
=========== ===========
Consolidated Statement of Cash Flows
For the Year Ended
September 30,
----------------------------
1999 1998
----------- -----------
(Unaudited)
Cash flows from operating activities
Net income (loss) before preferred stock
dividends ............................. $ (959,216) $ 742,447
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities -
Depreciation and amortization ....... 1,179,690 564,766
Cumulative effect of changed
accounting principle ............... 4,388,208 --
Provision for losses on accounts and
notes receivable ................... 354,827 115,141
Loss on disposal of Company stores .. 158,308 120,928
Deferred income taxes ............... (3,395,416) (65,515)
Amortization of deferred financing
costs .............................. 101,146 54,072
Issuance of notes receivable for
master franchise and area director .. (1,211,237) (965,407)
marketing agreements
Other ............................... 17,972 2,660
Changes in assets and liabilities -
Accounts receivable .............. (497,682) (249,502)
Other assets ..................... 108,968 (184,110)
Accounts payable ................. 95,453 (334,563)
Accrued liabilities .............. 384,684 (71,374)
Deferred franchise costs ......... (536,385) (283,370)
Deferred initial franchise fees
and other fees .................. 5,174,771 2,010,112
Accrued income taxes ............. 851,469 --
----------- -----------
5,581,278 887,193
----------- -----------
Net cash provided by operating
activities ...................... $ 6,215,560 $ 1,456,285
=========== ===========
<PAGE>
Consolidated Statement of Cash Flows (continued)
For the Year Ended
September 30,
----------------------------
1999 1998
----------- -----------
(Unaudited)
Cash flows from investing activities
Cash paid for acquisition ............. $ (286,355) $ -
Purchase of property and equipment .... (2,139,866) (1,420,853)
Proceeds from notes receivable ........ 1,355,282 812,944
Investment in turnkey stores .......... (7,558) (546,790)
Short-term investments ................ (3,060,688) (1,203,189)
Issuance of other notes receivable .... (362,578) (631,864)
Investment by minority interest owners 151,601 --
Purchase of minority interest owners .. (150,000) --
Intangible and deferred assets ........ (1,262,185) (248,207)
Proceeds from sale of assets and stores 213,000 --
Deposits .............................. (42,805) (121,265)
Area director marketing territory
repurchases .......................... (863,984) --
Other investments ..................... (15,000) --
----------- -----------
Net cash used by investing
activities ..................... (6,471,136) (3,359,224)
----------- -----------
Cash flows from financing activities
Principal payments on long-term
obligatins ........................... (1,866,919) (377,605)
Proceeds from long-term obligations ... 2,242,187 973,924
Loan and offering costs ............. -- (56,317)
Redemption of Class B Preferred Stock (500,000) --
Proceeds from issuance of common stock
and preferred stock .................. 128,479 1,419,351
Preferred dividends paid .............. (179,452) (217,262)
----------- -----------
Net cash (used by) provided by
financing activities ........... (175,705) 1,742,091
----------- -----------
Net decrease in cash and cash equivalents (431,281) (160,848)
Cash and cash equivalents - beginning of
year .................................... 1,058,109 1,218,957
----------- -----------
Cash and cash equivalents - end of year .. $ 626,828 $ 1,058,109
=========== ===========
In 1999, before the cumulative effect of accounting changes, we were
profitable for the year and for each of the four quarters in 1999. We ended the
year with 634 Restaurants open (including 8 Bain's Deli restaurants), another
505 Restaurants sold and scheduled to open in the future, 27 Company owned
Restaurants, 79 area directorships owned by 68 Area Directors, and 5
international master franchisees. We believe we have built a strong foundation
for the Company upon which growth can continue with regular profits. In 1999,
before the cumulative effect of accounting changes, we earned $1,810,376
compared to $742,447 in 1998 (amounts are before preferred stock dividends).
On a quarterly basis, earnings before cumulative effect of changes in
accounting principle and preferred stock dividends, by business segment, reflect
continued overall improvement over the last eight quarters.
<PAGE>
Franchise Company
Quarter Ended Operations Stores Other Net
- - - - - - - - - - ------------------- ------------ ------------ ---------- -----------
December 31, 1997 357,877 102,059 (386,349) 73,587
March 31, 1998 291,888 107,384 (257,593) 141,679
June 30, 1998 482,699 166,386 (400,411) 248,674
September 30, 1998 463,868 203,556 (388,917) 278,507
December 31, 1998 708,022 83,554 (347,821) 443,755
March 31, 1999 526,519 183,564 (260,848) 449,235
June 30, 1999 535,169 197,769 (538,877) 194,061
September 30, 1999 1,288,663 153,303 (718,641) 723,325
The following table reflects our revenue growth by source and Restaurants
for the past two years:
For the year ended
September 30,
--------------------
1999 1998
------- -------
Revenue (000's)
Continuing fees ............. $10,412 $ 5,120
Initial franchise fees ...... 3,610 2,676
Area director fees .......... 2,132 2,357
Other ....................... 864 832
------- -------
Franchise revenue ........... 17,018 10,985
Sales by Company owned stores 8,276 6,378
Sales by stores held for
resale ..................... 998 860
------- -------
Total revenue ............... $26,292 $18,223
======= =======
Percent increase ............ 44%
=======
Restaurants open, beginning . 438 241
New Restaurants opened ...... 258 167
Restaurants acquired ........ -- 60
Restaurants sold ............ (31) --
Restaurants closed .......... (28) (25)
Restaurants closed, scheduled
to reopen................... (4) (5)
Restaurants reopened ........ 1 --
------- -------
Restaurant open, end ........ 634 438
======= =======
Franchises sold, domestic and
international .............. 545 361
======= =======
Initial franchise fees
collected (000's)........... $6,986 $4,785
Systemwide sales (millions).. $152 $89
Average unit volume (1)...... $369,000 $339,000
Same store sales (2) (3)..... Up 7.3%
(1) Average unit volumes of $369,000 and $339,000, are for the nine months ended
September 30, 1999 (annualized) and December 31, 1998, respectively. Average
unit volumes exclude Restaurants located in convenience stores and gas stations
and include only Restaurants open at least one year under the same ownership.
(2) Same store sales are for the nine months ended September 30, 1999 compared
to the comparable period in 1998 and is based on 228 stores open all of 1999 and
1998. Stores that transferred ownership during this period, or were in
substantial default of the franchise agreement at September 30, 1999, are
excluded.
(3) Because we are and will continue to be in an aggressive growth
mode over the next few years, it is anticipated that same store sales will
fluctuate as Restaurants are included from more start up markets. Results of
Operations
<PAGE>
Comparison of Years Ended September 30, 1999 and 1998
Franchise revenue increased 55% in 1999 to $17,018,186 from $10,984,531 in
1998. Total revenue increased 44% in 1999 to $26,292,137 from $18,222,655 in
1998. The revenue increase resulted primarily from continuing fees and Company
store sales.
Continuing fees increased 103% in 1999 to $10,412,414 from $5,119,903 in
1998. Continuing fees are comprised of royalties and licensing fees.
Royalty fees increased 74% in 1999 to $8,386,050 from $4,832,014 in 1998.
Royalty fees are a percentage of each Owner's sales paid to us and will increase
as new franchises open, as the average royalty percentage increases, and as
average unit sales increase. At September 30, 1999, there were 607 franchises
open (including Bain's) compared to 408 franchises open at September 30, 1998.
The royalty rate was 5% for agreements entered into prior to February 11, 1995,
6% for all franchise agreements entered into from February 11, 1995 through
March 31, 1998 and 7% for all agreements entered into since March 31, 1998. We
have no immediate plans to further increase the royalty rate.
Licensing fees are generated through the licensing of our trademark for
use by others. Licensing fees are expected to continue and to increase as
systemwide sales and the awareness and value of our brand increases. For 1999,
licensing fees were $2,026,364 and $287,889 in 1998. There was no licensing fee
revenue prior to January 1, 1998.
Initial franchise fees increased 35% in 1999 to $3,610,042 from $2,675,567
in 1998. Initial franchise fees are one-time fees paid by Owners at the time the
franchise is purchased. Initial franchise fees are not recognized as income
until the period in which all of our obligations relating to the sale have been
substantially performed, which generally occurs when the franchise opens. Our
share of initial franchise fees sold by foreign master franchisees is recognized
when received. In 1999, we opened 258 franchises, including 46 international
Restaurants, as compared to 167, including 22 international Restaurants, opened
in 1998. Our initial franchise fee has been $20,000 since 1994. Owners may
purchase a second franchise for $15,000 and third and subsequent franchise for
$10,000. The initial franchise fee for a Quizno's Express franchise is $10,000
for the first, $7,500 for the second, and $5,000 for the third and additional
franchises purchased by the same Owner. Our share of initial franchise fees for
international Restaurants is generally 30% of the franchise fee and will vary
depending on the country and the currency exchange rate.
Initial franchise fees collected by us for domestic franchise sales are
recorded as deferred initial franchise fees until the related franchise opens.
Deferred initial franchise fees at September 30, 1999 were $7,910,648 and
represent 505 domestic franchises sold but not yet in operation, compared to
$4,279,868 at September 30, 1998 representing 324 domestic franchises sold but
not open. Approximately 159 international franchises had been sold but were not
open at September 30, 1999 (approximately 80 at September 30, 1998). Direct
costs related to the sale, primarily sales commissions to Area Directors, are
deferred on our books and recorded as an expense at the same time as the related
initial franchise fee is recorded as income. Deferred costs paid and due at the
time of opening with respect to initial franchise fees deferred at September 30,
1999 were $1,585,773. Approximately 50% of all domestic initial franchise fees
received by us are paid to Area Directors for sales and opening commissions.
<PAGE>
We did not sell or open any Bain's franchises in 1999 or 1998, nor do we
expect to in the future.
Area director and master franchise fees were $2,131,882 in 1999 and
$2,357,216 in 1998. Domestic area director fees were $1,200,813 in 1999 and
$1,499,466 in 1998. For analysis purposes, these amounts are not comparable.
Effective January 1, 1999, we changed our accounting policy related to the
recognition of revenue from area director marketing agreement fees to one that
recognizes these fees as revenue on a straight-line basis over the term of the
agreement, which is ten years. This change reflected a decision made by the U.S.
Securities and Exchange Commission in December 1999 relative to the recognition
of area director fee revenue. Commissions paid to the area director upon the
inception of the agreement are classified as a prepaid and recognized as an
expense over the same ten year term. The effect of the change in the nine-month
period ending September 30, 1999, was the deferral of $4,262,701 of net revenue
previously recognized in prior years. This was reported as a cumulative effect
of change in accounting principle for $2,685,502 (net of $1,577,199 in income
tax benefits) and is included in the net loss for 1999.
The fee for U.S. areas was $.03 per person in the designated area through
June 1996, $.035 from July 1996 through December 1996, $.05 from January 1997
through December 1997, $.06 from January 1998 through February 1998, and $.07
since March 1, 1998. In addition, each Area Director is required to pay a
training fee of $10,000. In 1999, we sold 14 new area directorships including 5
existing Area Directors who purchased additional territory, as compared to 20
area directorships sold in 1998. At September 30, 1999, we had a total of 79
area directorships owned by 68 Area Directors who owned areas encompassing
approximately 75% of the population of the United States.
International master franchise fees are one-time fees paid to us for the
right to sell franchises in a designated, exclusive, international market. The
master franchisee assumes all of our obligations and duties under the agreement.
We recognize these fees when received. International master franchise fees
earned were $931,069 in 1999 and $857,750 in 1998. The 1999 fees received were
for the United Kingdom, $510,000, Japan, $125,000, Australia, $221,069, and the
rights to part of Central America, $115,000. A total of $40,000 of the fees have
been deferred until our training obligations are completed. The 1998 fees of
$632,750 and $225,000 were for Canada and Japan, respectively.
We offer domestic Area Director applicants financing for up to 50% of the
area fee. The amount financed is required to be paid to us in installments over
five years at interest rates between 6% and 15%. The promissory notes are
personally signed by the Area Director and, depending on the personal financial
strength of the Area Director, secured by collateral unrelated to the area
directorship. We also periodically offer payment plans to international Master
Franchisee applicants. Of the 14 domestic and international areas sold in 1999,
11 used this financing for $1,450,309, representing 68% of the area director
fees recognized in 1999. In 1998, a total of $1,083,408 was financed,
representing 46% of area revenue.
Other revenue decreased by 23% in 1999 to $508,240 from $659,263 in 1998.
Other revenue is primarily amounts paid by equipment suppliers for design and
construction, franchise transfer fees and bookkeeping fees charged Owners for
whom we provided bookkeeping services. Amounts paid by equipment suppliers were
$324,139 in 1999 compared to $298,330 in 1998. This amount will vary based on
new store openings. Franchise transfer fees increased in 1999 to $86,500 from
$46,000 in 1998. Since 1995, our franchise agreement requires all new Owners to
utilize our bookkeeping services, or a firm designated by us, to provide
bookkeeping services, for their first 12 months of operations. Bookkeeping fees
were $30,888 in 1999 compared to $286,364 in 1998. Bookkeeping fees declined,
and are expected to be immaterial in the future, because we out-sourced the
function to a third party in 1998.
<PAGE>
Sales and royalty commissions expense increased 47% to $5,302,456 (44.2%
of royalty and initial franchise fees) in 1999 from $3,607,186 (48.0% of royalty
and initial franchise fees) in 1998. Sales and royalty commissions are amounts
paid to our domestic Area Directors, commissions paid to other sales agents and
employees, and costs related to sales promotions and incentives. Sales and
royalty commission expense declined in 1999 as a percentage of royalty and
initial franchise fee due to the repurchase of certain area directorships.
Our domestic Area Directors receive commissions equal to 50% of the
initial franchise fees and 40% of royalties received by us from franchises sold,
opened, and operating in the Area Director's territory. In exchange for these
payments, the Area Director is required to market and sell franchises, provide
location selection assistance, provide opening assistance to new owners, and
perform monthly quality control reviews at each franchise open in the Area
Director's territory.
The Area Director is entitled to receive commissions during the term of
the area director marketing agreement and in some cases, upon expiration of the
area director agreement, the commission paid is reduced to 1% of sales for 5
years.
General and administrative expenses increased 54% to $8,560,924 in 1999
from $5,567,313 in 1998. As a percent of franchise revenue, general and
administrative expenses have decreased slightly from 50.7% in 1998 to 50.3% in
1999. General and administrative expenses include all of our operating costs.
The increase is primarily due to the addition of employees to service the
rapidly growing network of our Owners and Area Directors. Although general and
administrative expenses will likely continue to increase as we grow, we expect
the rate of increase to continue to decline.
We believe our general and administrative expenses are adequate and are
not excessive in relation to our size and growth.
Company owned stores earned $618,190 on sales of $8,276,368 in 1999
compared to $579,385 on sales of $6,378,379 in 1998. During 1999, we operated
stores for a total of 257 store operating months. In 1998, we had a total of 189
store operating months. Sales per store month decreased 4.7% in 1999 to $32,166
from $33,748 in 1998.
At September 30, 1999, we had 25 (24 at September 30, 1998) Company owned
stores. In 1999, we purchased from an Owner one Restaurant. During 1998, we
acquired and converted to Company owned Quizno's eight competitive sandwich
shops in Wichita, Kansas, built and opened six new Company owned Quizno's,
purchased from Owners four Restaurants, reclassified as stores held for resale
five Company owned Quizno's, and sold to an Owner one Company owned store.
Stores held for resale lost $262,946 on sales of $997,583 in 1999 compared
to a loss of $213,234 on sales of $859,745 in 1998. At September 30, 1999 and
1998, we operated two and six stores held for resale, respectively. In 1999, we
closed two stores held for resale and sold two stores to an Owner. During 1998,
eight stores were classified as stores held for resale and two Bain's units were
returned to the seller.
<PAGE>
Japan master franchise income represents payments received in 1999 of
$1,423,348 for the master franchise rights of Japan. In the second quarter of
1999, we also received $22,000 for our share of an area director marketing
agreement sold in Japan. In 1999, we incurred direct costs related to the
revenue totaling $276,547 resulting in net revenue of $1,168,801. We received
$350,000 in 1998. The payments were recognized as revenue when received.
Although we plan to continue to enter into master franchise agreements
internationally, we do not expect such transactions to be of the magnitude of
the Japanese transaction.
Provision for bad debts was $354,827 in 1999 compared to $115,141 in 1998.
The increase in the 1999 expense was primarily due to allowances for promissory
notes due for stores purchased from us and subsequently closed.
Other expenses were $68,245 in 1999 compared to $16,261 in 1998. The
increase in the 1999 expense was primarily due to the loss on the sale of
assets. The 1998 expense was primarily subleasing losses related to one store
previously owned by us and sold to an Owner.
Depreciation and amortization was $1,280,836 in 1999 and $564,766 in 1998.
The increase was due primarily to the depreciation related to assets of stores
held for resale, the acquisition and development of new Company owned
Restaurants in 1998 and certain other tangible and intangible assets with short
lives expensed beginning in late 1998. A portion of the increase is related to
certain intangible assets fully amortized in 1999 and thereafter not recurring.
Privatization costs were $265,472 in 1999 and represents our costs
associated with a proposed going private transaction. As discussed in our 1998
Form 10-KSB, on December 29, 1998, we received a proposal from our majority
shareholders to merge the company into a new entity owned by them, pursuant to
which all of our shareholders other than themselves, would receive cash for
their company shares. On August 10, 1999, we announced that the proposal had
been withdrawn. An agreement regarding all the terms of the transaction could
not be reached with the Special Committee of the Board of Directors evaluating
the offer.
Interest expense was $321,718 in 1999 and $330,779 in 1998. The decrease
was primarily attributable to a decrease in our effective interest rate. On
January 6, 1999, we paid $500,000 to redeem all of our outstanding Class B
Preferred Stock and paid off the remaining principal of our 12.75% convertible
subordinated debt. The funds used for this payoff were obtained through the
borrowing of $1,853,931 from an unrelated noteholder. This note accrues interest
at the rate of 7.75% per annum.
Income tax expense was $353,135 in 1999. There was no income tax benefit
or expense recorded in 1998. Our taxable income has historically exceeded our
book income primarily because initial franchise fees we receive are taxable
income in the year received and are book income in the year the franchise opens.
Consequently, we will not pay income taxes on this income when it is recognized
for financial reporting purposes. As of December 31, 1998, we used all of our
tax net operating loss carryforwards and incurred a tax liability. Accordingly,
in the first quarter of 1999, we reduced the amount by which we had recorded an
impairment of our deferred tax asset in prior years and recorded the tax benefit
of prior years net operating losses of $368,553. Subsequent to December 31,
1998, our provision for income taxes was recorded at 37%.
<PAGE>
Cumulative effect of a change in accounting principle was $2,769,592. This
amount was composed of a $2,685,502 (net of $1,577,199 in income tax benefits)
change reflected by a decision made by the U.S. Securities and Exchange
Commission in December 1999 relative to the recognition of area director fees.
As previously discussed, effective January 1, 1999, we changed our accounting
policy related to the recognition of area director marketing agreement fees to
one that recognizes such fees as revenue on a straight-line basis over the term
of the agreement, which is ten years.
Also, during April 1998, Statement of Position 98-5, "Reporting
in the Costs of Start-Up Activities" was issued. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. SOP
98-5 was required to be adopted in the second quarter of 1999. Upon adoption,
we were required to write-off $84,090 (net of $41,417 in income tax benefits) in
preopening related costs that were deferred on the balance sheet as of December
31, 1998.
Liquidity and Capital Resources
Net cash provided by operating activities was $6,215,560 in 1999 compared
to $1,456,285 in 1998, an improvement of $4,759,275. The primary reasons for the
improvement were the increase in net deferred franchise fees of $2,911,644, the
increase of $1,729,927 in net income before depreciation, amortization, and the
cumulative effect of changes in accounting principles, and the increase in
accounts payable, accrued liabilities and the decrease in accounts receivable
totaling $637,794. These amounts were partially offset by an increase of
$859,816 in deferred income taxes less other changes totaling $339,629.
Net cash used in investing activities was $6,471,136 in 1999 compared to
cash used by investing activities of $3,359,224 in 1998. Cash used by investing
activities for both years was primarily related to the acquisition or
development of company owned Restaurants. The primary reason for the increase in
funds used was the $1,857,499 increase associated with short-term investments.
In addition, in 1999, cash of $863,984 was used to acquire area director
territory repurchases.
Net cash used by financing activities was $175,705 in 1999 compared to
cash provided by financing activities of $1,742,091 in 1998. The 1999 amount was
primarily from financing company owned Restaurants and the redemption of the
Class B Preferred stock. The amount provided in 1998 was primarily from the sale
of Class B and Class C preferred stock.
At September 30, 1999, we had $192,923 invested in two stores held for
resale. The stores held for resale are expected to be sold or closed by December
31, 1999.
In the second quarter of 1998, we tested a program under which our Area
Directors had the right to elect to have all future franchisee leases in the
Area Director's territory signed by The Quizno's Realty Company ("QRC"), a
wholly owned subsidiary of ours. As a condition of the lease, the landlord
agrees not to look beyond QRC for payments. These locations would then be
subleased by QRC to the Owner, whose personal liability is limited to one year.
The Owner pays QRC an indemnification fee of $165 per month, pays a one-time
lease-processing fee to QRC of $2,200, and pays a security deposit to QRC equal
to two months rent. Effective March 1, 1998, we transferred cash and other
assets having a book value of approximately $500,000 to QRC in exchange for
stock and a promissory note. As of September 30, 1999, 13 leases had been
executed under this program.
<PAGE>
On December 31, 1996, we completed a debt financing for $2 million of
which $500,000 was converted to preferred stock in December 1997. On January 6,
1999, we paid off the loan and redeemed the preferred stock at a cost of
$1,854,000. As required by the loan agreement, we issued a warrant to the lender
to purchase 372,847 shares of our common stock at an exercise price of $3.10.
On October 1, 1999, our Board of Directors authorized the purchase of up
to 200,000 shares of our common stock. Subject to applicable security laws,
repurchases may be made at such times, and in such amounts, as we deem
appropriate. As of November 30, 1999, we had repurchased 61,300 shares at an
average price of $8.63.
On October 5, 1999, we closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. The loan bears interest at
10.1%, which may be adjusted to the ten-year Treasury note rate plus 4.25%
during the first 120 days, and is repayable in monthly installments of $193,344
for nine years and five months. The loan is secured by the assets of our company
owned stores and other assets of ours existing at September 30, 1999. The loan
is part of a securitized pool and includes a provision which could require us to
pay up to another $1,555,555 depending on the amount of defaults, if any, in the
loan pool. The proceeds of the loan were used to pay-off existing debt of
$3,320,956, pay costs and fees associated with the loan of $560,000, and prepay
interest and one payment of $304,624. The balance of $9,814,420 is available to
use, with certain restrictions, for general corporate purposes other than
working capital, dividends, or to repurchase the majority shareholder's stock.
Certain notes payable held by us at September 30, 1999 were repaid with the
AMRESCO note proceeds. See Note 9 of the Notes to the Consolidated Financial
Statements for the identification of the notes repaid with these proceeds.
On October 11, 1999, our Board of Directors approved the purchase of a
corporate jet allowing for more efficient travel by management between areas of
franchise operations. For tax purposes, the airplane qualifies for accelerated
depreciation, resulting in the deferral of income tax payments. The $3,350,000
purchase was completed on October 13, 1999.
On November 16, 1999, we announced that our subsidiary, QUIZ-DIA, Inc.
purchased the assets of ASI-DIA, Inc. ("ASI") for a total of $4.875 million in
cash. Assets purchased include two Quizno's restaurants and three bars,
including the WWW.COWBOY bar, and various other assets located on Concourses A
and B at the Denver International Airport. We intend to continue operating the
restaurants as Quizno's Classic Subs and the bars as operated by ASI.
As discussed in our 1998 Form 10-KSB, on December 29, 1998, we received a
proposal from our majority shareholders to merge the company into a new entity
owned by them, pursuant to which all of our shareholders other than themselves
would receive cash for their company shares. On August 10, 1999, we announced
that the proposal had been withdrawn. An agreement regarding all the terms of
the transaction could not be reached with the Special Committee of the Board of
Directors evaluating the offer.
As we have in the past, we will continue to consider acquisitions of other
chains, the purchase of Quizno's Restaurants from our Owners, and the purchase
of Quizno's area directorships from our Area Directors. From time to time, we
will make offers and enter into letters of intent for such transactions subject
to the completion of due diligence. In all such cases, we will identify the
sources of cash required to complete such transactions prior to entering into a
binding agreement.
<PAGE>
We have never paid cash dividends on our common stock and we do not
anticipate a change in this policy in the foreseeable future.
Year 2000 Disclosure
Prior to December 1, 1999, we took various steps to address the year 2000
(or Y2K) issues as they related to our computer systems and operations in
general. We reviewed our internal systems to determine what steps we could take
to minimize Y2K's potential disruptive effect on our operations. We concluded
that we were not at material risk from Y2K issues. We use current versions of
widely used, publicly available software for our accounting and other data
processing requirements. The providers of the software utilized by us have
stated that there will be no failures in the programs used by us resulting from
the year 2000. We use a small amount of customized software, all of which has
been developed by us over the last two years, and has been written to be
functional in the year 2000. We did not determine the impact, if any, that year
2000 issues might have on our vendors. However, we believe there are adequate
alternative vendors that can supply products and services to us if necessary.
Finally, our business, quick service restaurants, is not highly dependent upon
electronic data processing.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Attached hereto and filed as a part of this Form 10-KSB are the
consolidated financial statements listed in the Index to the Consolidated
Financial Statements at page F-1.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report......................................F - 1
Consolidated Financial Statements
Consolidated Balance Sheets...................................F - 2
Consolidated Statements of Operations.........................F - 3
Consolidated Statement of Stockholders' Equity................F - 5
Consolidated Statements of Cash Flows.........................F - 6
Notes to Consolidated Financial Statements........................F - 8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Quizno's Corporation and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of The Quizno's
Corporation and Subsidiaries as of the September 30, 1999 and December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the nine months ended September 30, 1999 and the
years ended December 31, 1998 and 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Quizno's
Corporation and Subsidiaries as of September 30, 1999 and December 31, 1998 and
1997 and the results of their operations and their cash flows for the nine
months ended September 30, 1999 and the years ended December 31, 1998 and 1997,
in conformity with generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
December 13, 1999
Denver, Colorado
F - 1
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------------
1999 1998 1997
------------- ------------ ------------
Assets
<S> <C> <C> <C>
Current assets
Cash and cash equivalents ............................ $ 626,828 $ 702,258 $ 561,287
Short-term investments ............................... 4,263,877 1,541,423 538,188
Accounts receivable, net of allowance for
doubtful accounts of $43,793 (1999),
$20,000 (1998) and $38,231 (1997) (Note 8) .......... 1,047,438 857,280 545,109
Current portion of notes receivable
(Notes 3 and 8) ..................................... 519,994 1,212,522 598,486
Deferred tax asset (Note 12) ......................... 128,718 81,260 --
Other current assets ................................. 373,578 266,100 375,902
Assets held for resale (Note 4) ...................... 1,082,310 690,030 593,675
------------ ------------ ------------
Total current assets ............................... 8,042,743 5,350,873 3,212,647
------------ ------------ ------------
Property and equipment, net (Notes 2 and 5) ............. 4,804,051 3,535,222 2,240,661
------------ ------------ ------------
Other assets
Intangible assets, net (Notes 2 and 6) ............... 1,662,265 1,553,522 1,651,637
Other deferred assets (Note 7) ....................... 1,726,984 1,119,371 739,762
Deferred tax asset (Note 12) ......................... 3,507,213 734,808 175,000
Deposits and other assets (Note 2) ................... 361,189 119,883 76,294
Notes receivables, net (Notes 3 and 8) ............... 1,670,329 1,375,872 734,495
------------ ------------ ------------
Total other assets ................................. 8,927,980 4,903,456 3,377,188
------------ ------------ ------------
Total assets ............................................ $ 21,774,774 $ 13,789,551 $ 8,830,496
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ..................................... $ 1,219,157 $ 1,317,085 $ 1,065,374
Accrued liabilities .................................. 544,476 532,324 489,848
Current portion of long-term obligations
(Notes 8 and 9) ..................................... 337,642 370,404 303,084
Current portion of subordinated debt
(Note 9) ............................................ 218,546 244,084 110,912
Income taxes payable (Note 12) ....................... 851,469 200,000 --
------------ ------------ ------------
Total current liabilities .......................... 3,171,290 2,663,897 1,969,218
Long-term obligations (Notes 8 and 9) ................... 1,268,504 964,984 741,570
Subordinated debt (Note 9) .............................. 1,498,791 1,130,916 1,389,088
Deferred revenue ........................................ 13,722,331 4,781,946 2,148,662
------------ ------------
Total liabilities .................................. 19,660,916 9,541,743 6,248,538
------------ ------------ ------------
Commitments and contingencies (Notes 4, 10,
13 and 15)
Minority interest in Subsidiary (Note 2) ................ -- 151,601 --
Stockholders' equity (Notes 9 and 11)
Preferred stock, $.001 par value,
1,000,000 shares authorized;
Series A issued and outstanding 146,000
(1999, 1998 and 1997) ($876,000
liquidation preference) ............................. 146 146 146
Series B issued and outstanding 0 (1999),
100,000 (1998) and 100,000 (1997)
($500,000 liquidation preference) ................... -- 100 100
Series C issued and outstanding 167,000
(1999, 1998 and 1997) ($835,000
liquidation preference) ............................. 167 167 167
Common stock, $.001 par value; 9,000,000
shares authorized; issued and outstanding,
3,074,177 (1999), 3,054,459 (1998) and
2,923,294 3,074 3,054 2,923
Capital in excess of par value ....................... 4,485,949 5,065,247 4,663,744
Accumulated deficit .................................. (2,375,478) (972,507) (2,085,122)
------------ ------------ ------------
Total stockholders' equity ................... 2,113,858 4,096,207 2,581,958
------------ ------------ ------------
Total liabilities and stockholders' equity .............. $ 21,774,774 $ 13,789,551 $ 8,830,496
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F - 2
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Nine For the Years Ended
Months Ended December 31,
September 30, --------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Franchise operations
Revenue (Note 8)
Continuing fees .................. $ 8,682,783 $ 5,836,822 $ 2,747,955
Initial franchise fees ........... 2,722,959 2,883,650 2,269,001
Area director and master
franchise fees (Note 1) ......... 776,523 3,022,276 2,139,080
Other ............................ 370,374 604,172 593,771
Interest ......................... 238,790 259,193 137,640
------------ ------------ ------------
Total revenue ................ 12,791,429 12,606,113 7,887,447
------------ ------------ ------------
Expenses
Sales and royalty commissions .... (3,877,691) (4,266,024) (2,346,476)
Advertising and promotion ........ (53,943) (191,755) (245,953)
General and administrative ....... (6,509,444) (6,201,857) (4,611,978)
------------ ------------ ------------
Total expenses ............... (10,441,078) (10,659,636) (7,204,407)
------------ ------------ ------------
Income from franchise operations ........ 2,350,351 1,946,477 683,040
------------ ------------ ------------
Company store operations
Sales ................................ 6,420,563 6,848,737 4,070,666
------------ ------------ ------------
Cost of sales ........................ (1,969,433) (2,042,092) (1,309,624)
Cost of labor ........................ (1,747,029) (1,683,225) (1,037,101)
Other store expenses ................. (2,169,465) (2,562,540) (1,432,290)
------------ ------------ ------------
Total expenses ............... (5,885,927) (6,287,857) (3,779,015)
------------ ------------ ------------
Income from Company stores operations ... 534,636 560,880 291,651
Other income (expenses)
Research, development and new programs -- -- (72,161)
Sales by stores held for resale ...... 566,841 1,281,904 149,549
Loss and expenses related to stores
held for sale ....................... (777,594) (1,541,957) (210,222)
Loss on sale or closure of Company
stores .............................. (80,304) (47,505) (120,928)
Sale of Japan master franchise ....... 1,168,801 -- --
Provision for bad debts .............. (220,536) (285,308) (49,540)
Other expenses ....................... (26,287) (47,838) (64,544)
Depreciation and amortization ........ (921,300) (781,977) (406,444)
Privatization costs .................. (265,472) -- --
Interest expense ..................... (240,827) (340,614) (290,019)
------------ ------------ ------------
Total other expenses ......... $ (796,678) $ (1,763,295) $ (1,064,309)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Nine For the Years Ended
Months Ended December 31,
September 30, ----------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) before income taxes ...... $ 2,088,309 $ 744,062 $ (89,618)
Income tax (provision) benefit (Note 12) ... (721,688) 368,553 --
----------- ----------- -----------
Net income (loss) before preferred
dividends and cumulative effect of changes
in accounting principle ................... 1,366,621 1,112,615 (89,618)
Preferred stock dividends .................. (124,230) (220,890) (93,998)
----------- ----------- -----------
Net income (loss) before cumulative effect
of changes in accounting principle ........ 1,242,391 891,725 (183,616)
Cumulative effect of changes in accounting
principle (net of taxes) (Note 1) ......... (2,769,592) -- --
----------- ----------- -----------
Net income (loss) applicable to common
stockholders .............................. $(1,527,201) $ 891,725 $ (183,616)
Net income per share - basic
Net income per share before cumulative
effect of changes in accounting principle . $ .40 $ .30 $ (.06)
Cumulative effect of changes in accounting
principle ................................. (.90) -- --
----------- ----------- -----------
Basic net income per share of common stock . $ (.50) $ .30 $ (.06)
=========== =========== ===========
Net income per share - diluted
Net income per share before cumulative
effect of changes in accounting principle . $ .35 $ .26 $ (.06)
Cumulative effect of changes in accounting
principle ................................. (.90) -- --
----------- ----------- -----------
Diluted net income per share of common stock $ (.55) $ .26 $ (.06)
=========== =========== ===========
Weighted average common shares outstanding
Weighted average common shares outstanding
- basic ................................... 3,060,878 3,014,042 2,878,310
=========== =========== ===========
Weighted average common shares outstanding
- diluted ................................. 3,816,549 3,445,972 2,878,310
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
-------------------------- -------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996 146,000 $ 146 2,864,757 $ 2,865 $ 3,233,415 $(1,995,504) $ 1,240,922
Issuance of convertible
Series C preferred
stock for cash, net
of offering costs
of $36,454 (Note 11) .... 167,000 167 -- -- 798,379 -- 798,546
Issuance of Series B
convertible preferred
stock for debt, net
of offering costs
of $44,277 (Note 9) ..... 100,000 100 -- -- 455,623 -- 455,723
Inherent value of
warrants granted to
lender in connection
with conversion at
debt to Series B
preferred stock
(NOte 9) ................ -- -- -- -- 44,277 -- 44,277
Issuance of common stock
for acquisition ......... -- -- 18,182 18 99,982 -- 100,000
Issuance of common stock
for exercise of options
pursuant to employee
benefit plan (Note 11) .. -- -- 40,355 40 92,116 -- 92,156
Inherent value of options
granted to area
directors (Note 11) ..... -- -- -- -- 33,950 -- 33,950
Preferred stock
dividens (Note 11) ...... -- -- -- -- (93,998) -- (93,998)
Net loss ................. -- -- -- -- -- (89,618) (89,618)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31,
1997 413,000 413 2,923,294 2,923 4,663,744 (2,085,122) 2,581,958
Issuance of common stock
for exercise of options
pursuant to employee
benefit plan (Note 11) .. -- -- 51,165 51 222,473 -- 222,524
Issuance of common stock
for exercise of options
by underwriter (Note 11) -- -- 80,000 80 399,920 -- 400,000
Preferred stock
dividens (Note 11) ...... -- -- -- -- (220,890) -- (220,890)
Net income ............... -- -- -- -- -- 1,112,615 1,112,615
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31,
1998 413,000 413 3,054,459 3,054 5,065,247 (972,507) 4,096,207
Issuance of common stock
for exercise of options
pursuant to employee
benefit plan (Note 11) .. -- -- 28,809 29 75,438 -- 75,467
Tax benefit from exercise
of stock options ........ -- -- -- -- 14,840 -- 14,840
Shares cancelled (Note 11) -- -- (9,091) (9) (45,446) -- (45,455)
Redemption of Series B
Preferred Stock (Note 11) (100,000) (100) -- -- (499,900) -- (500,000)
Preferred stock
dividends (Note 11) ..... -- -- -- -- (124,230) -- (124,230)
Net income ............... -- -- -- -- -- (1,402,971) (1,402,971)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30,
1999 313,000 $ 313 3,074,177 $ 3,074 $ 4,485,949 $(2,375,478) $ 2,113,858
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine For the Years Ended
Months Ended December 31,
September 30, ----------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ........................ $(1,402,971) $ 1,112,615 $ (89,618)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities -
Depreciation and amortization .......... 844,220 757,911 406,444
Cumulative effect of a change in
accounting principle .................. 4,388,208 -- --
Provision for losses on accounts and
notes receivable ..................... 220,536 285,308 (12,846)
Loss on disposal of Company stores .... 80,304 78,004 120,928
Issuance of stock for services ........ -- -- 16,349
Inherent value of options granted ..... -- -- 33,950
Deferred income taxes ................. (2,819,863) (641,068) --
Amortization of deferred financing
costs ................................ 77,080 24,066 54,072
Issuance of notes receivable for
master franchise and area director
marketing agreements ................. (487,279) (1,599,977) (354,412)
Other ................................. 17,972 -- --
Changes in assets and liabilities -
Accounts receivable ................ (398,076) (369,279) (168,661)
Other assets ....................... (77,735) 109,802 (192,997)
Accounts payable ................... (99,330) 251,711 12,346
Accrued liabilities ................ 12,152 42,476 319,120
Deferred franchise costs ........... (659,547) (287,610) 6,085
Deferred initial franchise fees and
other fees ........................ 4,672,693 2,633,284 573,191
Accrued income taxes ............... 651,469 200,000 --
----------- ----------- -----------
6,422,804 1,484,628 813,569
----------- ----------- -----------
Net cash provided by operating
activities .................... 5,019,833 2,597,243 723,951
----------- ----------- -----------
Cash flows from investing activities
Cash paid for acquisition of Company store (286,355) -- (623,800)
Purchase of property and equipment ....... (1,477,962) (1,780,767) (764,184)
Proceeds from notes receivable ........... 1,221,099 889,671 553,007
Investment in turnkey stores ............. (7,558) (281,620) (593,675)
Short-term investments ................... (2,722,454) (1,003,235) (538,188)
Issuance of other notes receivable ....... (37,390) (773,307) (455,099)
Investment by minority interest owners ... -- 151,601 --
Purchase of minority interest owners ..... (150,000) -- --
Intangible and deferred assets ........... (736,458) (601,862) (294,853)
Proceeds from sale of assets and stores .. -- 213,000 135,000
Deposits ................................. (89,749) (43,589) (38,665)
Area director marketing territory
repurchases ............................. (863,984) -- --
Other investments ........................ (15,000) -- --
----------- ----------- -----------
Net cash used by investing
activities .................... (5,165,811) (3,230,108) (2,620,457)
----------- ----------- -----------
Cash flows from financing activities
Line-of-credit ........................... -- -- (220,239)
Principal payments on long-term
obligations ............................. (1,733,697) (505,440) (347,799)
Proceeds from long-term obligations ...... 2,338,168 877,642 155,615
Redemption of Class B Preferred Stock .... (500,000) -- --
Loan costs ............................... -- -- (37,469)
Proceeds from issuance of common stock
and preferred stock ..................... 90,307 622,524 910,807
Offering costs ........................... -- -- (36,454)
Preferred dividends paid ................. (124,230) (220,890) (93,998)
----------- ----------- -----------
Net cash provided by financing
activities .................... 70,548 773,836 330,463
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents ................................ (75,430) 140,971 (1,566,043)
Cash and cash equivalents - beginning of year 702,258 561,287 2,127,330
----------- ----------- -----------
Cash and cash equivalents - end of year ..... $ 626,828 $ 702,258 $ 561,287
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $240,827 (1999), $340,614 (1998)
and $290,019 (1997). Cash paid during the year for income taxes was
$1,198,275 (1999), $72,515 (1998) and $0 1997.
Supplemental disclosure of non-cash investing and financing activities:
During 1999, the Company sold a store held for resale for $150,000, all of
which was in the form of a promissory note, and recorded a loss on sale of
$11,684. Also, the Company sold the franchising rights and obligations for
all but 14 of its Bain's Deli's franchise agreements to Bain's Deli
Corporation for $850,000, represented by a note receivable, a reduction of
a related payable and other intangibles. In 1999, the Company recorded a
gain of $12,071 related to this sale.
Also, during 1999, the Company reached a settlement with Bain's Deli that
resulted in the return to the Company of the 9,091 shares of Company stock
originally issued as part of the purchase of the Bain's units in 1997 and
the cancellation of the Company's note payable to Bain's Deli in the amount
of $116,118.
During 1998, the Company transferred $220,227 of property and equipment to
assets of stores held for resale or under development.
Additionally in 1998, the Company reduced notes payable, pursuant to the
terms of the Bain's purchase agreements, in the amount of $437,553.
Corresponding reductions in property and equipment ($150,000) and
intangibles ($287,553) were also recorded.
During 1999, 1998 and 1997, the Company acquired assets under capital
leases totaling $124,742, $231,085and $77,942, respectively.
During 1997, the Company converted $500,000 of subordinated debt to 100,000
shares of Series B convertible preferred stock net of $44,277 of deferred
offering costs.
Additionally in 1997, the Company acquired the assets of Bain's Deli
Franchise Associates, which included 52 franchise restaurants and three
company owned deli restaurants as follows:
Property and equipment $ 225,000
Non-compete agreement 1,060,000
Other assets 122,900
-----------
$ 1,407,900
===========
Acquisition costs $ (104,600)
Cash paid (623,800)
Promissory note issued (579,500)
Common stock issued (100,000)
----------
$(1,407,900)
===========
See notes to consolidated financial statements.
F - 7
<PAGE>
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
The Quizno's Corporation (the "Company") was incorporated on January 7, 1991, in
the State of Colorado, and is primarily engaged in the business of franchising
Quizno's quick service restaurants throughout the United States, Canada, United
Kingdom, Australia, Japan and Central America featuring submarine sandwiches,
salads, soups, and
refreshments.
The Company's wholly owned subsidiaries are The Quizno's Operating Company
("QOC") incorporated in 1994 to own and operate Company stores, S & S, Inc.
("S&S") formerly the Quizno's Development Company ("QDC") incorporated in 1995
to develop stores to sell or lease to franchisees, The Quizno's Realty Company
("QRC") incorporated in 1995 to execute leases for store locations, The Quizno's
Acquisition Company ("QAC") incorporated in 1997 to purchase existing unrelated
quick service restaurants, the Quizno's Licensing Company ("QLC") incorporated
in 1998 to license companies who use the Quizno's logos and QUIZ-DIA, Inc.
("DIA") incorporated in 1999 to purchase restaurant assets at Denver
International Airport. In addition, in 1998, the Company organized Quizno's
Kansas LLC ("QKL"), and purchased the assets of Stoico Restaurant Group (see
below).
The following table summarizes the number of Quizno's restaurants open at
September 30, 1999:
Sold But
Not Yet In
Operation Operational Total
--------- ----------- ------
Quizno's
Company owned restaurants ........... -- 17 17
Franchise restaurants - U.S. and
Puerto Rico ......................... 505 527 1,032
Franchise Restaurants - International 159 72 231
Restaurants held for resale ......... -- 2 2
Bain's
Franchise restaurants ............... -- 8 8
Quizno's Kansas
Company owned restaurants ........... -- 8 8
----- ----- -----
664 634 1,298
===== ===== =====
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries QOC, S&S, QRC, QLC, QAC and QKL.
Change in Fiscal Year
In November 1999, the Company changed its fiscal year from December 31 to
September 30. All references in the financial statements to the year or period
ended September 30 relate to the nine months ended September 30, 1999.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory is included in other assets and is stated at the lower of cost or
market and consists of food and paper products. Cost is determined using the
first in, first out (FIFO) method.
Credit Risk
The Company grants credit in the normal course of business, primarily consisting
of royalty fees receivable and loans to area directors and its franchisees. To
reduce credit risk for U.S. franchises, the Company electronically debits the
franchisees bank account weekly for fees due the Company according to franchise
agreements entered into after 1993, and reserves the right to terminate
franchise and area director agreements for non-payment of amounts owed.
The Company's cash equivalents consists of short-term commercial paper with
original maturities not in excess of three months. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, balances of cash and
cash equivalents exceeded the federally insured limit by approximately
$1,140,779.
Short-Term Investments
The Company classifies its investment in corporate debt securities with original
maturities in excess of three months as short-term investments held-to-maturity.
The Company has the ability and intent to hold these securities until maturity.
Short-term investments are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Realized gains and losses
are recognized in earnings upon redemption. The specific identification method
is used to determine the cost of securities sold. Discounts or premiums are
accreted or amortized using the level-interest-yield method to the earlier of
the call date or maturity of the related security.
During 1999, unrealized gains and losses were immaterial as amortized cost
approximated market value.
Accounts Receivable/Royalties Receivable
At the time the accounts and royalties receivable are originated, the Company
considers a reserve for doubtful accounts based on the creditworthiness of the
franchisee. The provision for uncollectible amounts is continually reviewed and
adjusted to maintain the allowance at a level considered adequate to cover
future losses. The allowance is management's best estimate of uncollectible
amounts and is determined based on historical performance that is tracked by the
Company on an ongoing basis. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
valued at the lower of fair market value or net present value of the minimum
lease payments at inception of the lease. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 10 years, and the related lease term for leasehold improvements and
equipment under capital leases.
Deferred Financing Costs
Cost associated with obtaining debt financing are deferred and amortized on a
straight-line basis over the term of the debt.
Intangible Assets
The amounts paid by the Company for non-compete agreements are being amortized
over the term of the non-compete agreements.
The excess of the purchase price over net assets acquired for stores purchased
by the Company from unrelated third parties is recorded as goodwill and is
amortized over 15 years.
Other intangibles are recorded at cost and are amortized on the straight-line
basis over the contractual or estimated useful lives as follows:
Franchise agreements 12 years
Trademarks and other intangibles 3 - 15
years
Area Director Territory Repurchases
Costs associated with repurchasing area directory territories are deferred and
amortized on a straight-line basis over 15 years.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company looks primarily to the undiscounted future cash flows
in its assessment of whether or not long-lived assets have been impaired. At
September 30, 1999, the Company determined no impairment was appropriate.
Initial Franchise Fees and Related Franchise Costs
Management believes it is probable that all of the deferred franchise fees will
be realized. The amount of the deferred franchise fees considered realizable,
however, could be reduced in the near term if estimates of the future franchise
openings is reduced.
Initial franchise fees paid by U.S. franchisees are recognized as revenue when
all material services and conditions required to be performed by the Company
have been substantially completed, which is generally when the franchise
commences operations. Initial franchise fees collected by the Company before all
material services and conditions are substantially performed are recorded as
deferred franchise sales revenue. These franchise fees are non-refundable in
most circumstances. Incremental development costs are deferred, but not in
excess of the deferred revenue and estimated cost to open the Quizno's
restaurant, and are expensed when the revenue is recognized.
Area Director Marketing Agreements
The area director marketing agreement provides the area director a non-exclusive
right to sell and open franchises in a defined geographic territory in the U.S.
and requires that the area director be responsible for advertising for,
soliciting and screening prospective franchisees. The agreements also require
the area director to sell and open a minimum of new franchised restaurants each
year or forfeit future rights to the territory. In addition, the area director
is responsible for identifying possible locations, providing on-site opening
assistance, and providing quality assurance services to franchises in the
defined area. The Company pays the area director 50% of the initial franchise
fee sold by the area director, and a fee of 40% of the royalty received by the
Company from each franchise within the defined area. The agreements are for a
period of ten years, with the option to extend for an additional ten years after
certain restrictive performance criteria are met. The area director is entitled
to receive commissions during the term of the area director marketing agreement
and, in certain circumstances, the area director is entitled to 1% of gross
sales for franchise restaurants operating in the territory as of the termination
date of the area director agreement. The area director marketing fee is $.07 per
person living in the area director's territory, plus a $10,000 training fee
which is deferred until training has been completed. Prior to January 1, 1999,
the Company recognized revenue when all material services and conditions
required to be performed by the Company had been substantially completed.
Change in Accounting Method for Area Director Marketing Agreements
Effective January 1, 1999, the Company changed its accounting policy related to
the recognition of area director marketing agreement fees to one that recognizes
such fees as revenue on a straight-line basis over the term of the agreement,
which is ten years. Direct expenses attributable to the fees are classified as a
prepaid and recognized as an expense over the same ten year term. The effect of
the change in fiscal 1999 resulted in the deferral of $4,262,701 of net revenue
previously recognized in prior years. Fiscal 1999 income before the cumulative
effect adjustment included $387,108 of amortized deferred net revenue related to
area director marketing agreement fees. This change was reported as a cumulative
effect of change in accounting principle for $2,685,502 (net of $1,577,199 in
income tax benefits) and is included in the net loss in fiscal 1999.
International Fees
The Company grants master franchise rights for the development of international
markets. The master franchisee will enter into individual franchise and area
director agreements for development within the franchised country, and will
assume all of the franchisor's obligations and duties under the agreement. The
Company is not a party to the individual franchise and area director agreements.
Generally, the master franchise agreement requires the master franchisee to pay
the Company a percentage, currently 30%, of all initial franchise fees,
royalties, and area fees collected by the master franchisee. The Company
recognizes these fees when received by the Company.
The master franchise agreement provides the master franchisee an exclusive right
to sell and open franchises and grant area directorships in a defined geographic
territory. The master franchisee is responsible for providing all franchisor
services in the territory and must sell and open a minimum of new franchised
restaurants each year. The fee for master franchise agreements is based on the
population of the territory and will vary depending on certain economic,
demographic and cultural factors. Revenue is recognized when all material
services and conditions required to be performed by the Company have been
substantially performed, which is generally the date the fee is paid.
Royalties and Advertising Fees
Pursuant to the various franchise agreements, U.S. franchises are required to
pay the Company royalties and advertising fees based on a percentage of sales
ranging from 4% to 8% for royalties, and 1% to 4% for advertising fees.
Royalties as required by the franchise agreement are accrued based on a
percentage of gross sales, as reported by franchisees, and are included in
accounts receivable.
The Company does not recognize any portion of the advertising fees as revenue,
nor does it accrue such fees or consolidate the accounts of any of the
advertising funds as they are paid to and disbursed out of separate legal
advertising entities.
Income Taxes
The Company calculates and records the amount of taxes payable or refundable
currently or in future years for temporary differences between the consolidated
financial statement basis and income tax basis based on the current enacted tax
laws. Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years. The Company's
temporary differences result primarily from depreciation, deferred franchise
sales and area director fee revenues and costs and net operating loss
carryforwards.
Basic and Diluted Loss Per Common Share
In accordance with FAS 128, basic earnings per share is computed by dividing net
income by the number of weighted average common shares outstanding during the
year. Diluted earnings per share is computed by dividing net income by the
number of weighted average common shares outstanding during the year, including
potential common shares, which for the nine months ended September 30, 1999 and
the years ended December 31, 1997 and 1998 consisted of preferred stock,
convertible debt, stock options and warrants outstanding (Note 14).
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments, receivables, prepaids, current portion of
notes receivable, accounts payable and accrued expenses approximated fair value
as of September 30, 1999 because of the relatively short maturity of these
instruments.
The carrying amounts of long-term notes receivable approximate fair value as of
September 30, 1999 because the discounted cash flows at current rates
approximate the rates of the significant notes.
The carrying amounts of notes payable and debt issued approximate fair value as
of September 30, 1999 because interest rates on these instruments approximate
market interest rates.
Reclassifications of Prior Year Amounts
Certain reclassifications have been made to the balances for the years ended
December 31, 1998 and 1997 to make them comparable to those presented for the
nine months ended September 30, 1999, none of which change the previously
reported net income or total assets.
Recently Issued Accounting Pronouncements
During April 1998, Statement of Position 98-5, "Reporting in the Costs of
Start-Up Activities" was issued. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 was required to be
adopted by the first quarter of 1999. Upon adoption, the Company was required to
write-off $125,507 ($84,090 net of applicable taxes) in preopening related costs
that were deferred on the balance sheet as of December 31, 1998. This write-off
was reported as a cumulative effect of a change in accounting principle.
Note 2 - Acquisition of Assets
Effective July 31, 1999, the Company repurchased the 30% minority interest of
QKL for $150,000 in cash.
On July 1, 1999, the Company purchased, for cash, a Quizno's Restaurant from a
franchisee for a total purchase price of $286,355. The purchase was accounted
for under the purchase method.
The purchase price has been allocated to the assets purchased based on the fair
market values at the date of acquisition, as follows:
Equipment $ 65,000
Leasehold improvements 105,000
Covenant not to compete 100,000
Lease Agreement 10,087
Inventory and deposit 6,268
---------
$ 286,355
=========
No pro forma statement of operations is presented as the effect is not material
to the Company's operations.
Note 3 - Notes Receivable
Notes receivable consist of the following:
December 31,
September 30, ---------------------
1999 1998 1997
----------- --------- ---------
Notes receivable related to area director
marketing agreements, interest ranging
from 6% to 15%, due in varying amounts
through December 2010. $1,540,826 $1,878,855 $ 853,028
Notes receivable for sale of stores,
interest ranging from 6% to 15%, due in
varying amounts through October 2012. 530,026 410,058 494,318
Note receivable from national advertising
trust, interest at 10%, paid in full in
February 1999. - 267,058 -
Note receivable from Bain's Deli
Corporation, interest accrues at 6% if
note balance not paid down $25,000 in any
one year, due February 1, 2006 150,000 - -
Other notes receivable with interest
ranging from 0% to 11%, due in varying
amounts through 2011. Includes $0
(1999), $21,524 (1998) and $35,524 (1997)
due from the Advertising Fund (Note 8). 11,213 32,423 125,635
----------- --------- ---------
2,232,065 2,588,394 1,472,981
Less current portion (519,994) (1,212,522) (598,486)
----------- --------- ---------
1,712,071 1,375,872 874,495
Less allowance (41,742) - (140,000)
----------- --------- ---------
$ 1,670,329 $1,375,872 $ 734,495
=========== ========== ==========
At the time notes receivable are executed, the Company reserves an allowance for
doubtful collections. The provision for uncollectible amounts is continually
reviewed and adjusted to maintain the allowance at a level considered adequate
to cover future losses. The allowance is management's best estimate of
uncollectible amounts and is determined based on historical performance of the
notes which is tracked by the Company on an ongoing basis. The losses ultimately
incurred could differ materially in the near term from the amounts estimated in
determining the allowance. The Company collateralizes the notes with the area
directorship agreement, assets of the store sold or other related assets.
Future principal payments are as follows:
Year Ended September 30,
- - - - - - - - - - ------------------------
2000 $ 519,994
2001 360,189
2002 378,702
2003 331,937
2004 205,829
Thereafter 435,414
---------
2,232,065
Less allowance (41,742)
---------
$2,190,323
==========
Note 4 - Assets Held for Resale
Included in assets held for resale are the following:
December 31,
September 30, ----------------------
1999 1998 1997
---------- ---------- ----------
Furniture fixtures and equipment $ 65,421 $ 221,034 $ -
Leasehold improvements 108,056 383,771 -
Goodwill and other 19,446 33,590 -
Area director territory repurchases 889,387 51,635 -
Stores under development - - 593,675
---------- ---------- ----------
$1,082,310 $ 690,030 $ 593,675
========== ========== ===========
During 1997, the Company acquired a store from a franchisee and also was in the
process of constructing four stores. At the end of 1997, three of the four
stores were operational and in 1998, the fourth store became operational. In
March 1998, one of the stores was sold as a franchise for a sale price of
$213,000. Cost incurred by the Company prior to the sale amounted to
approximately $234,000. In 1999, the Company sold another store as a franchise
for a sale price of $150,000 and closed one store. Costs incurred by the Company
prior to their disposal amounted to approximately $179,000 and $170,000,
respectively. The Company intends to close one store and sell the remaining
store by the end of 1999.
Note 5 - Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------
Life 1999 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Equipment 3-10 years $2,014,698 $1,524,799 $ 903,371
Furniture and fixtures 7-10 years 1,052,232 764,672 390,435
Leasehold improvements Lease term
(Note 10) 2,286,344 1,712,215 1,297,334
Software 3-5 years 681,238 313,540 113,506
---------- ---------- -----------
6,034,512 4,315,226 2,704,646
Less accumulated
depreciation and amortization (1,230,461) (780,004) (463,985)
---------- ---------- -----------
Net property and equipment $4,804,051 $3,535,222 $ 2,240,661
========== ========== ===========
</TABLE>
Depreciation expense for 1999 included depreciation on certain assets sold, or
held for resale that will not recur in future years if these assets are sold, as
is the intention of the Company.
Note 6 - Intangible Assets
Intangible assets consist of the following:
December 31,
September 30,-----------------------
1999 1998 1997
---------- ---------- -----------
Covenants not to compete $ 600,113 $1,667,546 $ 1,664,759
Franchise agreements 792,796 310,506 292,395
Prepaid area director marketing
commission 526,776 - -
Trademarks and other 455,339 442,813 318,827
---------- ---------- -----------
2,375,024 2,420,865 2,275,981
Less accumulated amortization (712,759) (867,343) (624,344)
---------- ---------- -----------
$1,662,265 $1,553,522 $ 1,651,637
========== ========== ===========
Note 7 - Other Deferred Assets
Other deferred assets consist of the following:
December 31,
September 30, -----------------------
1999 1998 1997
---------- ---------- -----------
Deferred franchise costs $1,585,773 $ 926,226 $ 638,616
Deferred financing costs 108,769 87,080 101,146
Other deferred costs 32,442 106,065 -
---------- ---------- -----------
$1,726,984 $1,119,371 $ 739,762
========== ========== ===========
Note 8 - Related Party Transactions
The Company had notes receivable from the Advertising Fund of $0, $21,524 and
$35,524 at September 30, 1999 and December 31, 1998 and 1997, respectively. The
balances related to an off season build-up for advertising which was reimbursed
to the Company in the subsequent year.
In September 1999, two employees of the Company purchased an area directorship
for $200,000, of which $180,000 of which was in the form of a promissory note
and $20,000 was in cash.
Two directors of the Company own more than 50% in a company that owns an area
directorship. In 1999, 1998 and 1997, the Company paid the Area Director
$142,364, $139,358 and $85,577, respectively, in commissions and royalties. At
September 30, 1999, $55,547 was owed to the Company on a promissory note due
from the area director. During 1997, 1998 and 1999, payments on such notes were
$4,655, $6,212 and $8,000, respectively. An additional $10,000 was paid in
November 1999 to bring the note and all accrued interest current. The area
director is also indebted to the Company for $13,075 in connection with the
resale of a Quizno's restaurant once operated by the area director. The area
director is reducing this debt by offsetting commissions on royalty fees from
that location paid to the managing area director. The debt is expected to be
paid off in approximately 24 months.
In 1995, the Company sold an area directorship to a company owned by a director,
officer and shareholder for $150,000. During 1997 and 1998, the Company paid the
area director no sales commissions and $9,259 and $27,664 in royalties,
respectively. The area directorship was sold in 1998 to an unrelated third
party.
In 1997, the Company purchased a Quizno's restaurant from a company in which an
executive officer is a 50% shareholder. The restaurant paid royalties to the
Company of $2,027 in 1997 up to the date purchased by the Company. The purchase
price was $80,000 of which $15,000 was paid in cash and $60,000 paid by issuance
of the Company's promissory note bearing interest at 11% and payable over 4
years. During 1997, 1998 and 1999, the Company made payments pursuant to the
promissory note totaling $18,839, $18,993 and $14,245, respectively. In October
of 1999, this note was paid-off in full.
Note 9 - Long-Term Obligations and Convertible Subordinated Debt
December 31,
September 30,-----------------------
1999 1998 1997
---------- ---------- ----------
Various capital leases, with monthly
payments totaling approximately $25,200
including interest at rates ranging from
9.74% to 11% and expiring through June
2004. Collateralized by restaurant and
office equipment. In conjunction with
Company's loan agreement with AMRESCO,
$852,982 of the September 30, 1999
balance was paid-off in October 1999
(Note 15). $ 970,999 $ 986,077 $ 127,770
Note payable to a financial institution,
$1,372 monthly payments including
interest at the bank index rate (8.75% at
December 31, 1998) plus 1%, through
February 2001, when any unpaid principal
and interest is due. The note is
collateralized by restaurant equipment.
In conjunction with Company's loan
agreement with AMRESCO, the September 30,
1999 balance was paid-off in October 1999
(Note 15). 23,574 35,869 52,048
Note payable to a company, with interest
at 11%. The note calls for monthly
payments of $1,583 and matures November
2001. Collateralized by the assets of
one store with a net book value of
approximately $68,000. In conjunction
with Company's loan agreement with
AMRESCO, the September 30, 1999 balance
was paid-off in October 1999 (Note 15). 35,220 46,056 59,188
Notes payable to a company, with interest
at 11%. The notes call for monthly
payments of $2,888 and mature through
July 2001. Collateralized by the assets
of two stores. In conjunction with
Company's loan agreement with AMRESCO,
the September 30, 1999 balance was
paid-off in October 1999 (Note 15). 37,470 57,526 82,833
Note payable to a company with interest
payments at 10%. The note calls for
monthly payments of $10,736 and matures
in January 2004. Collateralized by the
assets acquired from Bain's Deli
Franchise Associates. In 1998, the
principal balance of the note was
decreased by approximately $431,000 due
to provisions in the purchase agreement
which allow for quarterly decreases or
increases in the note balance based on
certain performance standards of the
franchises acquired. In connection with a
settlement with Bain's Deli Franchise
Associates, this note was cancelled in
1999. - 116,118 576,612
Note payable to a financing company with
interest at 9.5%. The note calls for
monthly principal and interest payments
of $2,106 and matures July 15, 2003.
Collateralized by restaurant equipment.
In conjunction with Company's loan
agreement with AMRESCO, the September 30,
1999 balance was paid-off in October 1999
(Note 15). 81,072 93,742 -
Note payable to a financing company with
interest at 7.92%. The note calls for
monthly principal and interest payments
of $7,528 and matures March 23, 2006.
Collateralized by restaurant equipment.
In conjunction with Company's loan
agreement with AMRESCO, the September 30,
1999 balance was paid-off in October 1999
(Note 15). 457,811 - -
Notes payable, paid in full in 1998. - - 146,203
---------- ---------- ----------
1,606,146 1,335,388 1,044,654
Less current portion (337,642) (370,404) (303,084)
---------- ---------- ----------
$1,268,504 $ 964,984 $ 741,570
========== ========== ===========
Subordinated debt consists of:
December 31,
September 30, ----------------------
1999 1998 1997
---------- --------- ---------
Subordinated debt payable to a financing
company with an initial principal balance
of $1,853,931. The note accrues interest
at the rate of 7.75% per annum and
requires monthly payments of $28,665.
The note is collateralized by all of the
restaurant equipment and furniture and
fixtures existing at six of the Company's
stores. The Company is required to
maintain certain annual cash flow
covenants under the agreement. In
conjunction with Company's loan agreement
with AMRESCO, the September 30, 1999
balance was paid-off in October 1999
(Note 15). $1,717,337 $ - $ -
12.75% convertible subordinated debt,
paid in full during 1999. - 1,375,000 1,500,000
Less current portion (218,546) (244,084) (110,912)
---------- --------- ---------
$1,498,791 $1,130,916 $ 1,389,088
========== ========== ===========
In connection with the conversion of debt to equity, the Company granted the
note holder 42,209 warrants to purchase common stock at $5.00 per share. The
inherent value of the options of $44,277 was recorded as deferred offering costs
associated with the conversion.
Maturities of long-term obligations, convertible subordinated debt and capital
leases are as follows:
Long-Term
Obligations and
Subordinated Capital
Year Ending September 30, Debt Leases Total
- - - - - - - - - - ------------------------- ----------- ----------- -----------
2000 $ 344,172 $ 302,724 $ 646,896
2001 360,471 297,946 658,417
2002 344,462 281,196 625,658
2003 366,978 231,381 598,359
2004 511,326 33,725 545,051
Thereafter 425,075 -- 425,075
----------- ----------- -----------
2,352,484 1,146,972 3,499,456
Less amount representing interest -- (175,973) (175,973)
----------- ----------- -----------
Total principal 2,352,484 970,999 3,323,483
Less current portion (344,172) (212,016) (556,188)
----------- ----------- -----------
$2,008,312 $ 758,983 $ 2,767,295
========== =========== ===========
Included in equipment in the accompanying 1999, 1998 and 1997 balance sheets are
assets held under capital leases in the amount of $1,063,920, $1,278,925 and
$161,147, respectively and accumulated amortization of $149,372, 132,837 and
$65,079, respectively.
Note 10 - Commitments and Contingencies
The Company leases an office facility, twenty-nine restaurant locations
(including stores held for resale) and certain equipment and vehicles under
operating lease agreements which provide for the payment of rent totaling
approximately $64,000 per month plus common area maintenance costs. One of the
restaurant locations also requires the Company to pay 6% of gross sales in
excess of $430,000 annually. Rent expense under these operating leases, totaled
$762,891, $642,447 and $636,874 during the periods ended September 30, 1999 and
December 31, 1998 and 1997, respectively.
Future minimum rental payments are as follows:
Year Ending September 30,
- - - - - - - - - - -------------------------
2000 $1,379,049
2001 1,394,739
2002 1,319,456
2003 1,167,023
2004 890,451
Thereafter 1,665,003
----------
$7,815,721
==========
Minimum payments for the period ended September 30, 1999 have not been reduced
by minimum rentals of $1,653,278 due in the future under a noncancellable
sublease.
The Company has entered into employment agreements with two directors, officers,
and stockholders of the Company which provide for the payment of annual salaries
totaling $192,000 plus individual bonuses equal to six and ten percent of the
positive increase in net income before taxes, depreciation, amortization and
interest over the prior year. Bonuses accrued during 1997, 1998 and 1999 totaled
$291,260, $209,000 and $262,354, respectively. One agreement expires in December
2000 while the other agreement expires in December 2003.
On April 26, 1999, the Company signed a licensing agreement with the Coca Cola
Company to purchase certain amounts of fountain syrups in return for cash
incentives. The agreements requires the Company to purchase a total of
12,000,000 gallons of fountain products and 1,000,000 cases of bottled products.
If the Company cancels the agreement, the Company would be obligated to refund a
pro rata share of the licensing fee based upon contract product not purchased.
Litigation
There are various claims and lawsuits pending by and against the Company, which,
in the opinion of the management, and supported by advice from legal counsel,
will not result in any material adverse effect in excess of amounts accrued in
the accompanying consolidated financial statements.
On August 10, 1998, the Company terminated an area director agreement and
instituted an arbitration action alleging that the area director had breached
various provisions of the area director agreement. On September 1, 1998, the
area director denied that he breached the area director agreement, alleged
fraudulent termination of the area director agreement, alleged that the Company
failed to refund or pay certain amounts due him and alleged that the Company
violated various state and federal franchise and securities laws by misstating
revenues in publicly filed documents. Hearings in this matter were held before
the American Arbitration Association from March 8-16, 1999. The Company denied
each of the area director's claims and defenses.
On April 13, 1999, the arbitration panel issued its ruling. It found that the
area director had materially breached the area director agreement and that the
Company had properly terminated that agreement. The panel therefore denied all
of the area director's claims for breach of contract and refuted his allegations
of franchise and securities law violations. While the panel did award the area
director approximately $230,000 in pre-termination commissions and costs, those
related primarily to referral commissions that the Company owed the area
director, before the Company terminated him in August 1998, for previous master
franchise and area directorship sales made. The Company had no liability for its
lawful termination of the area director's area director agreement. The panel
also ordered the area director to abide by all of the post-termination covenants
in the area director agreement.
Note 11 - Stockholders' Equity
Convertible Preferred Stock
Series A convertible preferred stock bears a 6.5% cumulative dividend, payable
monthly and is convertible into common shares on a one for one basis and is
callable by the Company with sixty days notice. The Series A convertible
preferred stock has a liquidation preference of $6 per share plus all then
accrued and unpaid cumulative dividends.
Series B convertible preferred stock bears a 12.75% cumulative dividend, payable
monthly and is convertible after five years at the then market value of the
common stock. The Series B convertible preferred stock is redeemable at the
Company's option and has a liquidation preference of $5.00 per share plus all
then accrued and unpaid cumulative dividends. All issued and outstanding Series
B convertible preferred stock was redeemed in full in 1999.
Series C convertible preferred stock bears a 12.00% cumulative dividend, payable
monthly and is convertible into common stock on a one-for-one basis at $5.00 per
share. The Series C convertible preferred stock is redeemable at the Company's
option at $5.00 per share anytime after October 8, 2000, and has a liquidation
preference of $5.00 per share plus all then accrued and unpaid cumulative
dividends.
During 1997, the Company sold 167,000 shares of Series C convertible preferred
stock at $5.00 per share. The Company incurred legal and accounting costs
related to the sale of $36,454.
Stock Options and Warrants
The Company has established an Employee Stock Option Plan (the Plan). The
Company has reserved 670,000 shares of its Common Stock for issuance upon the
exercise of options available for grant under the Plan. Options are granted
under the plan at not less than the market price of the Company stock. The
options cannot be exercisable for more than ten years. Options granted under the
Plan will include incentive stock options (ISOs) as defined in Section 422 of
the Internal Revenue Code and non-qualified stock options (NQSOs). Under the
terms of the Plan, all officers and employees are eligible for ISOs. During the
periods ended September 30, 1999 and December 31, 1998 and 1997, 250,500,
117,205 and 98,550, options were granted under the Plan, respectively.
Additionally, the Company has established an Amended and Restated Stock Option
Plan for Non-Employee Directors and Advisors (Director Plan). The Company has
reserved 200,000 shares of common stock for issuance upon the exercise of
options granted or available for grant to non-employee directors and advisors
under the Director Plan. The Director Plan provides that any person who becomes
a non-employee director or advisor of the Company may receive an option to
purchase 4,000 shares (or a pro rata portion thereof) at their fair market value
on the date such person becomes a non-employee director or advisor, and on the
first day of each year thereafter as long as the person continues as a
non-employee director or advisor, limited to the overall number of shares
available for issuance under the Director Plan. Options that expire or are
canceled may be re-granted under the Director Plan at the discretion of the
Board of Directors. The options expire after ten years. During the periods ended
September 30, 1999 and December 31, 1998 and 1997, 29,000, 28,000 and 18,000
options were granted under the Director Plan, respectively.
In 1997, the Company granted stock options covering 48,500 shares to area
directors pursuant to individual contracts. The Company established an Area
Director Equity Participation Rights Stock Option Plan (AD Plan) providing for
grants of stock options to area directors beginning in 1998. During 1998, the
Company granted stock options covering 60,375 shares pursuant to the AD Plan.
Options are granted under the AD Plan at the market price of the common stock
for six month options or a 20% discount (not to exceed $1.20) if the grantee
exercises within seven business days of the grant. The Company recorded $33,950
related to the inherent value of the options granted to area directors in 1997.
No amounts were recorded for inherent value of the options for 1998. During
1999, the Company granted options under the AD Plan for 10,275 shares.
In 1996, the Company issued warrants to purchase 372,847 shares of its common
stock to a lender in connection with a $2,000,000 convertible subordinated loan
made to the Company. The warrants are exercisable at $3.10 per share and expire
on December 31, 2004. Additionally, in 1997, the Company issued warrants to
purchase another 42,209 shares of its common stock to the same lender in
connection with the lender's conversion of $500,000 of the convertible
subordinated debt to Class B preferred stock. The warrants are exercisable at
$5.00 per share and do not have an expiration date. These warrants are reduced
to 20,597 if the Company meets certain earnings goals through 2000.
In connection with the Company's public offering, the Company issued a warrant
for the underwriter to purchase up to 100,000 shares of its common stock at
$5.00 per share. During 1998, 80,000 warrants were exercised and the remaining
20,000 were cancelled. Additionally in 1997, the Company issued 33,000 warrants
to consultants that allowed the holders to purchase 33,000 shares of common
stock at $5.40 to $5.50 per share. These warrants expire through December 2000.
In 1999, the Company reached a settlement with Bains Deli that resulted in the
return to the Company of the 9,091 shares of Company stock originally issued as
part of the purchase of the Bains units in 1997.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plans
as they relate to options issued to employees and directors.
Had compensation cost for the Company's two employee stock option plans been
determined based on the fair value at the grant date for consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
December 31,
September 30,----------------------
1999 1998 1997
---------- ---------- ----------
Net income (loss) before cumulative
effect of changes in accounting principle
= as reported $1,242,391 $ 891,725 $ (183,616)
Net income (loss) before cumulative effect
of changes in accounting principle
- pro forma $ 662,806 $ 586,960 $ (433,536)
Basic earnings (loss) per share - as
reported $ .40 $ .30 $ (.06)
Basic earnings (loss) per share - pro
forma $ .22 $ .19 $ (.15)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of 42%;
discount rate of 5.5%; and expected lives from 5 to 10 years.
The following is a summary of options and warrants granted, exercised and
expired:
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Average Fair Exercise
Exercise Value of Currently Price of
Price of Options Exercisable Options and
Options Options and Options Warrants-
and and Warrants and Currently
Warrants Warrants Granted Warrants Exercisable
----------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding December 31,
1997 888,060 $3.82 568,283 $2.17
Granted 205,580 $1.21 $1.80
Forfeited or exercised (197,102) $(1.06)
Outstanding December 31,
1998 896,538 $3.40 590,867 $2.52
Granted 279,500 $1.81 $3.50
Forfeited or exercised (60,695) $(.25)
Outstanding September 30,
1999 1,115,343 $4.29 616,925 $3.54
=========
</TABLE>
September 30, 1999
----------------------------------------------------------
Options and
Options and Warrants Outstanding Warrants Exercisable
---------------------------------- ----------------------
Weighted
Weighted Average Weighted
Range of Options and Average Remaining Average
Warrants Number Exercise Contractual Number Exercise
Exercisable Price Outstanding Price Life Exercisable Price
- - - - - - - - - - ------------------- --------- --------- ----------- ----------- ---------
$3.00 - $5.50 819,043 $3.21 5.3 years 614,965 $3.53
$5.75 - $8.18 296,300 $7.28 5.8 years 1,960 $6.64
--------- -----------
1,115,343 $4.29 5.4 years 616,925 $3.54
========= ===========
The Company granted an option during the year ended December 31, 1993, to an
area director that after this area director opened its tenth restaurant in
accordance with the area director agreement, the area director would be entitled
to purchase one percent of the then outstanding common stock of the Company for
$50,000. In 1997, the Company waived the requirement for ten restaurants and the
area director exercised the right to purchase one percent of the outstanding
common stock for $50,000 and received approximately 28,900 shares of common
stock.
Note 12 - Income Taxes
The components of the provision for income tax benefit for the year ended
September 30, 1999 and December 31, 1998 are as follows:
September 30, December 31,
1999 1998
------------ -----------
Current income tax expense $ 1,951,848 $ 213,500
Deferred income tax benefit (1,230,160) (582,053)
----------- -----------
$ 721,688 $ (368,553)
=========== ===========
For the period ended September 30, 1999, the net deferred tax benefit related to
the cumulative effect of changes in accounting of $1,589,703 is not reflected in
the table above.
Prior to 1998, the Company had provided for a valuation allowance against its
deferred tax asset as management had determined that it was more likely than not
that the Company would not realize its deferred tax asset. In 1998, management
determined it would be more likely than not that the Company would realize its
deferred tax asset and this has eliminated its valuation allowance against the
deferred tax asset resulting in a benefit of $582,053 reflected in the statement
of operations for the year ending December 31, 1998.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. In 1999, the Company's deferred income tax assets and liabilities result
primarily from differing depreciation and amortization periods of certain
assets, deferred franchise revenue and costs and the recognition of certain
expenses for financial statement purposes and not for tax purposes. For 1997,
the deferred income tax assets related primarily to net operating losses.
The net current and long-term deferred tax assets (liabilities) in the
accompanying balance sheet include the following items:
December 31,
September 30,----------------------
1999 1998 1997
----------- --------- -----------
Current deferred tax asset $ 128,718 $ 81,260 $ -
Current deferred tax liabilities - - -
----------- --------- -----------
Net current deferred tax asset $ 128,718 $ 81,260 $ -
=========== ========= ===========
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------
1999 1998 1997
----------- --------- ----------
<S> <C> <C> <C>
Long-term deferred tax asset $ 4,890,254 $1,673,620 $ 900,000
Long-term deferred tax liability (1,383,041) (938,812) -
----------- ---------- ----------
3,507,213 734,808 900,000
Less impairment - - (725,000)
----------- ---------- ----------
Net long-term deferred tax asset 3,507,213 734,808 175,000
----------- ---------- ----------
Net deferred tax asset $ 3,635,931 $ 816,068 $ 175,000
=========== ========== ==========
</TABLE>
Rate Reconciliation
The reconciliation of income tax expense (benefit) by applying the Federal
statutory tax rates to the Company's effective income tax rate is as follows:
December 31,
September 30, -----------------
1999 1998 1997
------- ------ ------
Federal statutory rate 37.0% 34.0% (34.0)%
Nondeductible expenses .9 8.4 -
Other - deferred including utilization of
NOL (3.3) (13.5) -
Valuation allowance - (78.0) 34.0
------- ------ ------
34.6% (49.1)% - %
====== ====== ======
Note 13 - Employee Benefit Plan
The Company has adopted a 401(k) plan during 1995 for its employees.
Participation is voluntary and employees are eligible to participate at age 21
and after one year of employment with the Company. The Company matches 50% of
the employee's contribution up to $10,000 of the employee's salary. The maximum
amount will increase to $10,500 in 2000.
A participant's vested benefit is fully distributed upon death or disability and
is distributed upon termination of employment according to the following vesting
schedule:
Years of Services Percentage
1 0%
2 25%
3 50%
4 75%
5 100%
The Company has contributed $60,427, $31,675 and $33,251 to the Plan for the
periods ended September 30, 1999 and December 31, 1998 and 1997, respectively.
Note 14 - Earnings (Loss) Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
For the Nine For the Years Ended
Months Ended December 31,
September 30, --------------------
1999 1998 1997
---------- --------- ---------
Numerator - net income (loss) before
cumulative effect of changes in accounting
principle
Numerator for basic earnings per share $1,242,391 $ 891,725 $(183,616)
Preferred dividends (net of taxes) 78,265 - -
---------- --------- ---------
Numerator for diluted earnings per share $1,320,656 $ 891,725 $(183,616)
========== ========= =========
Numerator for basic and diluted earnings per
share - cumulative effect of changes in
accounting principle $(2,769,592) N/A N/A
Denominator - net income (loss)
before cumulative effect of changes in
accounting principle Denominator for
basic earnings per share - weighted
average shares 3,060,878 3,014,042 2,878,310
Effect of dilutive securities - convertible
debt, options and warrants 755,671 431,930 -
------------ --------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares 3,816,549 3,445,972 2,878,310
============ ========= =========
Denominator for basic and diluted earnings
per share - cumulative effect of changes in
accounting principle 3,060,878 N/A N/A
Basic earnings (loss) per share $ (.50) $ .30 $ (.06)
============ ========= =========
Diluted earnings (loss) per share $ (.55) $ .26 $ (.06)
============ ========= =========
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
Note 15 - Subsequent Events
On October 11, 1999, the Board of Directors of the Company approved the purchase
of a corporate jet by the Company allowing for more efficient travel by
management between areas of franchise operations. For tax purposes, the airplane
qualifies for accelerated depreciation, resulting in the deferral of income tax
payments. The $3,350,000 purchase was completed on October 13, 1999.
On October 5, 1999, the Company closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. The loan bears interest at
10.1%, which may be adjusted to the ten-year treasury note rate plus 4.25%
during the first 120 days, and is repayable in monthly installments of $193,338
for nine years and five months. The loan is secured by the assets of Company
owned stores and other assets of the Company existing at September 30, 1999. The
loan is part of a securitized pool and includes a provision which could require
the Company to pay up to another $1,555,555 depending on the amount of defaults,
if any, in the loan pool. The proceeds of the loan were used to pay-off existing
debt of $3,320,956, pay costs and fees associated with the loan of $560,000, and
prepay interest and one payment of $304,624. The balance of $9,814,420 is
available to use, with certain restrictions, for general corporate purposes
other than working capital, dividends, or to repurchase the majority
shareholder's stock.
Certain notes payable held by the Company at September 30, 1999 were repaid with
the AMRESCO note proceeds. See Note 9 for the identification of the notes repaid
with these proceeds.
On November 16, 1999, the Company announced that its subsidiary, QUIZ-DIA, Inc.
purchased the assets of ASI-DIA, Inc. ("ASI") for a total of $4.875 million in
cash.
Assets purchased include two Quizno's Company restaurants and three bars,
including the WWW.COWBOY bar, and various other assets located on Concourses A
and B at Denver International Airport. The Company intends to continue operating
the restaurants as Quizno's Classic Subs and the bars as operated by ASI.
The purchase will be accounted for under the purchase method. The purchase price
will be allocated to the assets purchased based on the fair market values at the
date of acquisition.
Note 16 - Transition Reporting
In October 1999, the Company changed its fiscal year from December 31 to
September 30. As such, the 1999 financial statements are as of and for the nine
months ended September 30, 1999. The 1998 and 1997 financial statements are as
of and for the twelve months ended December 31, 1998 and 1997, respectively. For
comparative purposes, the following unaudited summarized consolidated statement
of operations is presented for the nine-month periods ended September 30, 1998
and 1997.
For the Nine Months Ended
September 30,
---------------------------
(Unaudited) 1998 1997
- - - - - - - - - - ----------- --------- -------------
Total revenue $14,223,450 $8,108,457
Income from franchise operations $ 1,238,455 $ 325,163
Income from Company store operations $ 477,326 $ 189,592
Net income (loss) before taxes $ 668,860 $ (163,205)
Net income (loss) applicable to common $ 502,891 $ (205,910)
shareholders
Net income (loss) per share - basic $ .17 $ (.07)
Net income (loss) per share - diluted $ .15 $ (.07)
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on December 21, 1999.
THE QUIZNO'S CORPORATION
By:/s/ Richard E. Schaden
-------------------------
Richard E. Schaden,
President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the dates indicated.
Signature Title Date
/s/ Richard E. Schaden President, Chief Executive April 1, 2000
- - - - - - - - - - ----------------------- Officer and Director
Richard E. Schaden (Principal Executive Officer)
/s/ Richard F. Schaden Vice President, April 1, 2000
Richard F. Schaden Secretary and Director
/s/ Mark L. Bromberg Director April 1, 2000
Mark L. Bromberg
/s/ J. Eric Lawrence Director April 1, 2000
J. Eric Lawrence
/s/ Frederick H. Schaden Director April 1, 2000
Frederick H. Schaden
Director April 1, 2000
- - - - - - - - - - -------------------
Brad A. Griffin
/s/ John L. Gallivan Chief Financial Officer April 1, 2000
John L. Gallivan and Treasurer (Principal
Financial and Accounting
Officer
