UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to
Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1169286
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
(Address of principal executive offices)
(720) 359-3300
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class February 13, 2001
------------------------------ -------------------
Common Stock, $0.001 par value 2,338,206 shares
THE QUIZNO'S CORPORATION
Commission File Number: 000-23174
Quarter Ended December 31, 2000
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statement of Stockholders' Equity (Deficit)
Notes to Consolidated Financial Statements
Management's Discussion and Analysis or Plan of Operation
Part II - OTHER INFORMATION
Signatures
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
Three Months Ended
December 31,
----------------------------
2000 1999
----------- -----------
FRANCHISE OPERATIONS:
Continuing fees ....................... $ 5,997,737 $ 3,637,481
Initial franchise fees ................ 1,546,000 1,462,430
Area director and master franchise fees 196,386 480,796
Other ................................. 409,579 227,404
Interest .............................. 185,069 130,693
----------- -----------
Total revenue ........................ 8,334,771 5,938,804
----------- -----------
Expenses
Sales and royalty commissions ......... (2,262,068) (1,757,020)
General and administrative ............ (4,397,532) (2,521,515)
----------- -----------
Total expenses ....................... (6,659,600) (4,278,535)
----------- -----------
Net income from franchise operations .... 1,675,171 1,660,269
----------- -----------
COMPANY STORE OPERATIONS: (Note 5)
Sales ................................. 4,045,686 2,860,737
----------- -----------
Cost of sales ......................... (1,202,546) (858,296)
Cost of labor ......................... (935,681) (876,522)
Other store expenses .................. (1,764,658) (934,124)
----------- -----------
Total expenses ....................... (3,902,885) (2,668,942)
----------- -----------
Net income from Company stores operations 142,801 191,795
----------- -----------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (continued)
Three Months Ended
December 31,
----------------------------
2000 1999
----------- -----------
OTHER INCOME (EXPENSE):
New company start-up costs ..................... $ (289,878) $ --
Impairment of long-lived assets (Note 5) ....... (1,217,632) --
Financing costs (Note 4) ....................... (2,205,113) --
Loss on sale of Company stores ................. (36,728) (43,595)
Provision for bad debts ......................... (65,245) (167,871)
Depreciation and amortization ................... (551,712) (443,153)
Amortization of deferred financing costs ........ (56,444) (18,832)
Interest expense ................................ (620,044) (466,968)
Other expense ................................... (1,595) (60,559)
----------- -----------
Total other income (expense) ...................... (5,044,391) (1,200,978)
----------- -----------
Net income (loss) before income taxes ............. (3,226,419) 651,086
Income tax (provision) benefit .................... 1,193,775 (226,367)
----------- -----------
Net income (loss) ................................. (2,032,644) 424,719
Preferred stock dividends ......................... (49,294) (39,285)
----------- -----------
Net income (loss) applicable to common shareholders $(2,081,938) $ 385,434
=========== ===========
Basic net income (loss) per share of common stock . $ (0.73) $ 0.13
=========== ===========
Diluted net income (loss) per share of common stock $ (0.73) $ 0.11
=========== ===========
Weighted average common shares outstanding
Basic ........................................... 2,869,610 3,058,339
=========== ===========
Diluted ......................................... 2,869,610 3,765,135
=========== ===========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
2000 2000
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 1,694,969 $ 2,493,976
Short term investments .............................. 8,216,633 5,324,336
Accounts receivable, net of allowance for doubtful
accounts of $287,538 at December 31, 2000 and
$222,293 at September 30, 2000 ..................... 2,491,799 2,066,247
Current portion of notes receivable (Note 7) ........ 1,280,688 1,545,844
Deferred tax asset .................................. 221,182 221,182
Prepaid interest ................................... 1,760,218 --
Other current assets ................................ 367,517 481,854
----------- ----------
Total current assets .................................. 16,033,006 12,133,439
----------- ----------
Property and equipment and assets held for resale at
cost, net of accumulated depreciation and amortization
of $2,709,079 at December 31, 2000 and $2,433,637 at
September 30, 2000 (Note 5) .......................... 10,580,488 11,863,819
----------- ----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$1,205,131 at December 31, 2000 and $1,104,646 at
September 30, 2000 (Note 5) ........................ 4,443,922 4,600,528
Investments in area directorships, net of accumulated
amortization of $279,704 at December 31, 2000 and
$203,062 at September 30, 2000 (Note 6) ............ 4,244,478 4,236,151
Other deferred assets (Note 4) ...................... 6,118,743 2,782,498
Deferred tax asset .................................. 4,216,929 4,210,626
Deposits and other assets ........................... 138,052 130,837
Notes receivable, net of allowance for doubtful
accounts of $50,000 at December 31, 2000 and $50,000
at September 30, 2000 .............................. 1,242,025 1,301,435
----------- ----------
Total other assets .................................... 20,404,149 17,262,075
----------- ----------
Total assets .......................................... $47,017,643 $41,259,333
=========== ==========
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, September 30,
2000 2000
------------ ------------
CURRENT LIABILITIES:
Accounts payable .................................... $ 1,827,530 $ 2,614,437
Accrued liabilities ................................. 2,122,320 1,495,797
Current portion of long term obligations ............ 1,759,182 1,550,501
Income taxes payable ................................ -- 370,557
------------ ------------
Total current liabilities ............................. 5,709,032 6,031,292
Line of credit (Note 3) ............................... -- --
Long-term obligations (Notes 4 and 8) ................. 29,655,275 16,037,238
Deferred revenue ...................................... 17,765,795 16,402,957
------------ ------------
Total liabilities ..................................... 53,130,102 38,471,487
COMMITMENTS AND CONTINGENCIES (Notes 2 and 7)
Value of warrants (Note 4) ............................ 3,373,801 --
Preferred stock, $.001 par value, 1,000,000 shares
authorized:
Series A issued and outstanding 146,000 at December 31,
2000 and September 30, 2000 ($876,000 liquidation
preference) .......................................... 146 146
Series C issued and outstanding 57,000 at December 31,
2000 and 167,000 at September 30, 1999 ($285,000
liquidation preference) .............................. 57 167
Series D issued and outstanding 3,000 at December 31,
2000 and September 30, 2000 ($9,000 liquidation
preference) .......................................... 3 3
Series E issued and outstanding 59,480 at December 31,
2000 and September 30, 2000 ($512,718 liquidation
preference) .......................................... 59 59
Common stock, $.001 par value; 9,000,000 shares
authorized; issued and outstanding 2,340,406 at
December 31, 2000 and 3,007,921 at September 30, 2000
(Note 4) ............................................. 2,340 3,008
Capital in excess of par value ........................ 407,441 3,857,702
Accumulated deficit ................................... (9,896,306) (1,073,239)
------------ ------------
Total liabilities and stockholders' equity (deficit) .. $ 47,017,643 $ 41,259,333
============ ============
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
December 31,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................. $ (2,032,644) $ 424,719
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................... 551,711 443,153
Impairment of long-lived assets .................. 1,217,632 --
Provision for losses on accounts receivable ...... 65,245 167,871
Deferred income taxes ............................ (6,303) (12,890)
Promissory notes accepted for area director fees . (94,824) (200,000)
Prior year start-up and financing costs .......... 207,896 --
Amortization of prepaid interest expense ......... 102,042 --
(Gain) loss on disposal of Company store ......... (24,419) 43,595
Amortization of deferred financing costs ......... 56,445 18,832
Amortization of deferred area director fee revenue (16,739) 146,192
Area director expenses recognized ................ 2,666 (14,619)
Other ............................................ 2,177 --
Changes in assets and liabilities:
Accounts receivable ............................ (490,797) (543,517)
Other current assets ........................... 47,591 (38,687)
Accounts payable ............................... 708,989 563,085
Accrued liabilities ............................ 626,523 67,571
Income taxes payable ........................... (1,866,453) (629,533)
Deferred franchise costs ....................... (122,100) (116,525)
Deferred initial franchise fees and other fees . 1,379,577 404,029
------------ ------------
Net cash provided by operations ..................... 314,215 723,276
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (559,138) (4,189,118)
Issuance of other notes receivable ................ (850,000) (14,000)
Short term investments ............................ (2,892,297) (982,321)
Proceeds from the sale of assets and stores ....... 320,000 100,361
Acquisition of Company owned stores .............. -- (4,959,746)
Principal payments received on notes receivable ... 1,269,390 275,126
Intangible and deferred assets and deposits ....... (37,444) 107,749
Investments in area director territories .......... (84,969) (413,790)
------------ ------------
Net cash used in investing activities ............... (2,834,458) (10,075,739)
------------ ------------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Months Ended
December 31,
------------------------------
2000 1999
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock .......................... -- 132,893
Principal payments on long term obligations .......... (377,515) (3,346,956)
Line of credit ...................................... -- 3,350,000
Proceeds from issuance of notes payable ............. 12,000,000 14,000,000
Financing costs ..................................... (1,760) (644,476)
Common Stock tendered or repurchased ................. (6,201,240) (1,114,032)
Costs associated with tender of Common Stock and
repurchase of stock options and warrants ............ (3,648,955) --
Dividends paid ....................................... (49,294) (39,285)
------------ -----------
Net cash provided by financing activities .............. 1,721,236 12,338,144
------------ -----------
Net increase (decrease) in cash ........................ (799,007) 2,985,681
Cash, beginning of period .............................. 2,493,976 626,828
------------ -----------
Cash, end of period .................................... $ 1,694,969 $ 3,612,509
============ ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest ............. $ 643,521 $ 459,409
============ ===========
Cash paid during the period for income taxes ......... $ 672,468 $ 855,450
============ ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the quarter ended December 31, 1999, the Company accepted a
promissory note in the amount of $19,446 for equipment previously held for
resale. A note receivable in the amount of $79,566 was capitalized in
exchange for an Area Director territory repurchased during the quarter.
Also, a Company store held for resale was closed and the net assets were
written-off.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible
Preferred Stock Common Stock Additional
---------------------------- ----------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
----------- --------- ------------ --------- ---------- ----------
Balances at September 30,
1999 ........................ 313,000 $ 313 3,074,177 $ 3,074 $ 4,485,949 $(2,375,478)
Issuance of common stock
for exercise of options
and pursuant to the
employee benefit plan ........ -- -- 77,749 78 284,413 --
Tax benefit from exercise
of options ................... -- -- -- -- 17,889 --
Issuance of Series D
Convertible Preferred
Stock ........................ 4,000 4 -- -- 11,396 --
Repurchase of Series D
Convertible Preferred
Stock ........................ (1,000) (1) -- -- (2,999) --
Issuance of Series E
Convertible Preferred
Stock ........................ 59,480 59 -- -- 467,152 --
Common Stock repurchased ..... -- -- (144,005) (144) (1,219,641) --
Preferred stock dividends .... -- -- -- -- (186,457) --
Net income ................... -- -- -- -- -- 1,302,239
----------- --------- ------------ --------- ---------- ----------
Balances at September 30,
2000 ........................ 375,480 375 3,007,921 3,008 3,857,702 (1,073,239)
Payment in lieu of Common
Stock contribution to the
employee benefit plan ........ -- -- (2,360) (3) (25,707) --
Conversion of Series C
Convertible Preferred
Stock ........................ (110,000) (110) 110,000 110 -- --
Common Stock tendered
(Note 4) ..................... -- -- (775,155) (775) (3,375,260) (2,825,205)
Costs associated with
tender offer (Note 4) ........ -- -- -- -- -- (3,965,218)
Preferred stock dividends .... -- -- -- -- (49,294) --
Net (loss) ................... -- -- -- -- -- (2,032,644)
----------- --------- ------------ --------- ---------- ----------
Balances at December 31,
2000 ........................ 265,480 $ 265 2,340,406 $ 2,340 $ 407,441 $(9,896,306)
=========== ========= ============ ========= ========== ==========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF
CONSOLIDATION
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of (a) the
results of consolidated operations for the three month periods ended
December 31, 2000 and December 31, 1999, (b) the consolidated financial
position at December 31, 2000 and September 30, 2000, (c) the
consolidated statements of cash flows for the three month periods ended
December 31, 2000 and December 31, 1999, and (d) the consolidated
changes in stockholders' equity (deficit) for the twelve month and
three month periods ended September 30, 2000 and December 31, 2000,
respectively, have been made.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include
all the information and footnotes required by generally accepted
accounting principles for financial statements. For further
information, refer to the audited consolidated financial statements and
notes thereto for the twelve months ended September 30, 2000, included
in our Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission filed on December 29, 2000.
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.
Certain reclassifications have been made to the balances for the three
months ended December 31, 1999 to make them comparable to those
presented for the three months ended December 31, 2000, none of which
change the previously reported net income or total assets.
In October 1999, we changed our fiscal year from December 31 to
September 30. All references in the financial statements to the period
ended December 31 relate to the three months ended December 31, 2000
and 1999. The results for the three-month period ended December 31,
2000 are not necessarily indicative of the results for the entire
fiscal year of 2001.
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. Included in income for the
quarters ended December 31, 2000 and 1999, was $129,036 of amortized
deferred net revenue related to area director marketing agreement fees
previously recognized prior to fiscal 1999.
2. COMMITMENTS AND CONTINGENCIES
Other than the items discussed in our annual report on Form 10-KSB for
the year ended September 30, 2000, there are no other pending material
legal proceedings to which we are a party or to which our property is
subject.
There are various claims and lawsuits pending by and against the
Company. The settlement of some of these claims and lawsuits may result
in the acquisition or acquirement of certain area director territories.
In the opinion of the management, and supported by advice from legal
counsel, these claims and lawsuits will not result in any material
adverse effect in excess of amounts accrued in the accompanying
consolidated financial statements.
The Company is obligated to pay an opening commission to the area
director who sold the franchise at the time the franchise opens for
business. These commissions are expensed at the time the related
franchise opens for business and are not accrued as a liability of the
Company until that time. At December 31, 2000, there were 732 domestic
franchises sold but not yet open with related opening commissions
totaling $2,454,625 ($2,295,875 at September 30, 2000).
In 1999, the Company commenced a program called Owner in Training under
which it provides financial assistance to store managers interested in
owning their own franchise. The Company provided financial guarantees
to such persons for start-up capital loans. Under the program, the
Company has guaranteed three such loans totaling $565,000. As of
December 31, 2000, there were no new candidates enrolled in this
program.
3. LINE OF CREDIT
On December 22, 1999 the Company closed on a line of credit loan and
was loaned $3,350,000 by Merrill Lynch Business Financial Services,
Inc. The loan bears interest at the 30-day Dealer Commercial Paper
Rate plus 2.5% (equal to 9.15% at November 30, 2000). The maximum
amount of the line of credit loan is $3,350,000, which maximum is
reduced monthly based on a seven-year amortization. The line of
credit loan is secured by a first security interest in the Company's
aircraft. All amounts previously borrowed under the line of credit
had been repaid as of December 31, 2000.
4. TENDER OFFER AND NOTE PAYABLE
On November 13, 2000, the Company announced that it had commenced a
tender offer to purchase all outstanding shares of its common stock,
except for shares held by certain insiders, at a price of $8 per share,
net in cash to the seller. The tender expired and the Company accepted
the tendered shares as scheduled at midnight New York City time
December 11, 2000.
Prior to the tender there were approximately three million shares of
common stock outstanding, of which approximately 51.6 percent were
owned by Richard E. Schaden, the President and CEO of The Quizno's
Corporation; Richard F. Schaden, Vice President, Secretary and a
Director of The Quizno's Corporation; and Frederick H. Schaden, a
Director of The Quizno's Corporation. The three Schadens did not
tender their shares.
As of December 31, 2000, 775,155 shares of Common Stock were tendered
for a total purchase price of $6,201,240. Direct costs related to the
tender totaled $3,965,218, which included payment for the repurchase of
531,850 stock options and 415,056 warrants.
In conjunction with the tender offer, the Company closed on a loan of
$13,862,260 with Levine Leichtman Capital Partners II, L.P. ("LLCP").
The proceeds of the loan were used to prepay interest on the loan for
one year in the amount of $1,862,260 and to repurchase shares and pay
costs associated with the tender offer.
The promissory note bears interest at 13.25 %, interest only payable
monthly, with the first twelve months prepaid, and is due in full in
October 2005. LLCP received warrants for 14% of the equity ownership of
the Company. At December 31, 2000, the warrants were valued at
$3,373,801 and
were recorded on the balance sheet as Warrants Subject to Put and as
deferred financing costs under Other Deferred Assets. The deferred
financing costs will be amortized over the life of the note. The
Company will value and adjust the carrying value of the warrants
quarterly. Included in Amortization of Deferred Financing Costs for the
quarter ended December 31, 2000 was $37,825 related to the amortization
of this cost. The loan may be paid down to $7 million by September 12,
2001, with no penalty and with a corresponding reduction in the percent
of warrants.
The Company incurred and expensed $2,205,113 of financing costs related
to the LLCP loan.
5. STORES HELD FOR RESALE
At September 30, 2000, the Company had one store classified as a store
held for resale. In October 2000, the Company reclassified 20 stores as
held for resale. During the quarter ended December 31, 2000, two stores
were sold resulting in a gain on sale of $24,419. Also, during the
quarter ended December 31, 2000, the Company incurred costs of $61,147
related to lease settlements of stores closed. As of December 31, 2000,
the Company had 19 stores classified as held for resale. Six of the 19
stores held for resale are under contract to be sold and the remaining
13 are expected to be sold in 2001.
Included on the consolidated balance sheets in property and equipment
and assets held for resale and intangible assets were the following
amounts related to stores held for resale:
December 31, September 30,
2000 2000
----------- -----------
Property and equipment ............. $ 2,757,631 $ 157,689
Intangible assets .................. 371,793 41,172
----------- -----------
3,129,424 198,861
Accumulated depreciation and
amortization ...................... (514,666) (4,282)
Reserve for impairment ............. (934,106) --
----------- -----------
Net assets of stores held for resale $ 1,680,652 $ 194,579
=========== ===========
Included in the consolidated statement of operations under Company
Store Operations were the following amounts related to stores held for
resale and Company stores:
Stores Held For Resale Company Stores
Three Months Ended Three Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales .............. $ 1,303,607 $ 103,153 $ 2,742,079 $ 2,757,584
----------- ----------- ----------- -----------
Cost of sales ...... (413,390) (43,075) (789,156) (815,221)
Costs of labor ..... (455,974) (40,575) (479,707) (835,947)
Other store expenses (642,392) (48,735) (1,122,266) (885,389)
----------- ----------- ----------- -----------
Store expenses .. (1,511,756) (132,385) (2,391,129) (2,536,557)
----------- ----------- ----------- -----------
Net loss from
stores held for
resale .......... $ (208,149) $ (29,232) $ 350,950 $ 221,027
=========== =========== =========== ===========
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. At December 31, 2000, the Company
determined that an impairment related to its carrying value of its
assets held for resale was required and expensed $934,106.
Also, during the quarter, the Company determined that an impairment was
required for certain equipment and inventory and expensed a total of
$283,526.
6. INVESTMENTS IN AREA DIRECTORSHIPS
In the quarter ended December 31, 2000, we reacquired one area
director territory for $73,924, including related legal costs.
7. RELATED PARTY TRANSACTIONS
In July 2000, the Quizno's National Marketing Fund Trust ("Advertising
Fund") and the Quizno's Regional Marketing Fund Trust (together the
"marketing funds") entered into a $2,000,000 line of credit with Wells
Fargo Bank West, N.A. The marketing funds collect a fee of 1% and 3%,
respectively, of gross sales from our franchisees and deposit the funds
into advertising funds that are used to develop advertising to attract
customers to the restaurants and to create awareness of the Quizno's
brand image. The Company has guaranteed this line of credit. At
December 31, 2000, $1.9 million had been drawn against this line of
credit. On February 1, 2001, the outstanding balance of $1.9 million,
along with accrued and unpaid interest, was repaid by the marketing
funds.
At September 30, 2000, the Company had a note receivable from the
Advertising Fund of $1,030,000. During the quarter ended December 31,
2000, the Advertising Fund made a net repayment of $380,000, along
with accrued interest through December 15, 2000. The December 31, 2000
balance of $650,000 relates to an off-season build-up for advertising,
which will be reimbursed to the Company in 2001.
8. AMRESCO COMMERCIAL FINANCE, INC.
In 1999, the Company entered into loan agreements with AMRESCO
Commercial Finance, Inc. ("AMRESCO"), in which AMRESCO loaned the
Company $14 million. The loan agreements provide, among other things,
that if the Company wishes to secure additional indebtedness, it may do
so as long as, after giving effect to such new indebtedness, the
Company meets a minimum financial ratio.
AMRESCO took the position that the LLCP indebtedness (see Note 4) would
result in the Company not achieving the required minimum ratio. The
Company and its outside financial advisors had previously calculated
the effect of the LLCP financing and concluded that the Company would
exceed the required minimum ratio, and responded accordingly to AMRESCO.
In February 2001, the Company and AMRESCO agreed to resolve the dispute
in exchange for the Company's prepayment of principle of approximately
$1,518,000 and payment of a non-refundable credit enhancement of
approximately $169,000. AMRESCO agreed to release its collateral
interest in the assets of eleven Company-owned stores. In addition, the
Company agreed to deposit into an escrow account $1.1 million until the
later of July 31, 2001 or the month the minimum ratio is met. The
Company expects to achieve this by September 30, 2001 and have the
escrowed funds released.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this 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 fuel and energy, costs of labor and employee
benefits, costs of marketing, the success or failure of marketing efforts,
costs of food and non-food items used in the operation of the restaurants,
intensity of competition for locations and franchisees as well as
customers, perception of food safety, spending patterns and demographic
trends, legal claims and litigation, the availability of financing for us
and our franchisees at reasonable interest rates, the availability and
cost of land and construction, legislation and governmental regulations,
and accounting policies and practices. Many of these risks are beyond our
control. In addition, specific reference is made to the "Risk Factors"
section contained in our Prospectus, dated January 9, 1998, included in
the Registration Statement on Form S-3 filed by our company (Registration
No. 333-38691).
The principal sources of our income are continuing fees, initial franchise
fees, and, historically, area director marketing and master franchise
fees. These sources are subject to a variety of factors that could
adversely impact our profitability in the future, including those
mentioned in the preceding paragraph. The continued strength of the U.S.
economy is a key factor to the restaurant business because consumers tend
to immediately reduce their discretionary purchases in economically
difficult times. An economic downturn would adversely affect all three of
the sources of income identified above. Because our franchises are still
concentrated in certain regions of the U.S., regional economic factors
could adversely affect our profitability. Weather, particularly severe
winter weather, will adversely affect royalty income and could affect the
other sources cited above. Culinary fashions among Americans and people
in other countries in which we franchise the Restaurants will also impact
our profitability. As eating habits change and types of cuisine move in
and out of fashion, our challenge will be to formulate a menu within the
Quizno's distinctive culinary style that appeals to an increasing market
share. Finally, the intense competition in the restaurant industry
continues to challenge participants in all segments of this industry.
As our revenues from foreign operations become more significant, our
profitability could be adversely impacted by international business risks
and political or economic instability in foreign markets. While
international operations involve risks that do not exist in domestic
operations, such as adverse fluctuation in foreign exchange rates,
monetary exchange controls, foreign government regulation of business
relationships, and uncertainty of intellectual property protection, we
believe that the potential rewards of expanding the market for our
services to selected foreign countries far outweighs such risks.
Overview
Our primary business is the franchising of Quizno's restaurants. As a
franchiser, revenue is principally derived from: (1) continuing fees, (2)
initial franchise fees, and (3) area director and master franchise fees.
Continuing fees increase as the number of franchised restaurants open
increase. Initial franchise fees are one-time fees paid upon the sale of a
franchise and vary directly with the number of franchises we can sell and
open. Area director and master franchise fees occur when a country or
exclusive area is sold and are expected to decline as the number of
remaining available markets declines. Effective January 1, 1999, we
changed our accounting policy related to the recognition of area director
marketing agreement fees to one that recognizes such fees as revenue on a
straight-line basis over the term of the agreement, which is ten years.
Each of these sources of revenue contributes to our profitability, but the
relative contribution of each source will vary as we mature. Over time
initial fees and continuing fees will generate proportionately more
revenue than area director and master franchise fees.
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.
We incurred a loss before preferred dividends in the first quarter of
fiscal 2001 of $(2,032,644), composed of income from franchise operations
of $1,675,171, income from Company owned store operations of $142,801, and
less other income and expense and taxes totaling $(3,850,616).
The following chart reflects our revenue growth by source and number of
restaurants for the first quarter of fiscal 2001 compared to the first
quarter of fiscal 2000:
Three Months Ended December 31,
2000 1999
--------------------------- ---------------------------
% Increase % Increase
Amount (Decrease)* Amount (Decrease)*
----------- -------- ----------- -------
Continuing fees ............. $ 5,997,737 65% $ 3,637,481 110%
Initial franchise fees ...... 1,546,000 6% 1,462,430 65%
Area director and master
franchise fees ............. 196,386 (59)% 480,796 (65)%
franchise fees
Other ....................... 409,579 80% 227,404 65%
Interest .................... 185,069 42% 130,693 12%
----------- -------- ----------- -------
Total franchise revenue ..... 8,334,771 40% 5,938,804 41%
Sales by Company owned stores 4,045,686 41% 2,860,737 25%
----------- -------- ----------- -------
Total Revenue ............... $12,380,457 41% $ 8,799,541 35%
=========== ======== =========== =======
* Percentage change from comparable prior fiscal year period.
Three Months Ended
December 31,
----------------------------------
2000 1999
---------------- ---------------
Restaurants open, beginning ...................... 972 634
New restaurants opened ........................... 98 100
Restaurants reopened ............................. 1 -
Restaurants closed, to reopen .................... (4) -
Restaurants closed (3) ........................... (11) (13)
Restaurants open, end ............................ 1,056 721
Franchises sold, domestic ........................ 151 97
Franchises sold, international ................... 1 21
Total ............................................ 152 118
Initial franchise fees collected ................. $2.7 million $1.8 million
Systemwide sales, domestic ....................... $83.6 million $53.1 million
Average unit volume for 1999, domestic (1) ....... $389,000 $365,000
Same store sales, domestic (2) ................... Up 4.3% Up 4.7%
1) Average unit volume is for the twelve months ended December 31, 2000.
Average unit volume excludes restaurants located in airports, convenience
stores and gas stations and includes only restaurants open at least one
year under the same ownership that are currently not in default.
2) Same store sales are based on 510 stores open since the beginning of
October 1999. Stores that transferred ownership during this period or are
in substantial default of the franchise agreement are excluded. Because we
are and will continue to be in an aggressive growth mode over the next few
years, it is anticipated that same store sales will fluctuate as units are
included from more start up markets. Excludes non-traditional units located
in convenience stores and gas stations.
3) Three of the units closed during the quarter ended December 31, 2000 were
Bains units.
Results of Operations
Comparison of the first quarter of 2001 with the first quarter of 2000
Franchise revenue increased 40% in the first quarter of 2001 to $8,334,771
from $5,938,804 in the comparable quarter last fiscal year. Total revenue
increased 41% in the first quarter of 2001 to $12,380,457 from $8,799,541
in the comparable quarter last fiscal year.
Continuing fees increased 65% in the first quarter of 2001 to $5,997,737
from $3,637,481 in the first quarter of 2000. Continuing fees are
comprised of royalties and licensing fees.
Royalty fees are a percentage of each franchisee's sales paid to us and
will increase as new franchises open, as the average royalty percentage
increases, and as average unit sales increase. At December 31, 2000 there
were 1,022 franchises open, as compared to 693 at December 31, 1999. The
royalty was 5% for agreements entered into prior to February 11, 1995, 6%
for agreements entered into from February 11, 1995 to March 31, 1998, and
7% for all franchise agreements entered into after March 31, 1998. The
royalty for Quizno's Express units is 8%. The royalty paid to us by master
franchisees on international units is approximately 2.1%. We have no
immediate plans to increase the royalty rate.
Royalty fees were $5,040,067 for the first quarter of fiscal 2001 compared
to $2,893,887 for the same period last year, an increase of 74%.
Licensing fees are fees generated through the licensing of the Quizno's
trademark for use by others, which includes fees received from product
companies to sell proprietary products to our restaurant system. Licensing
fees were $957,670 in the first quarter of fiscal 2001 and $743,594 in the
comparable fiscal 2000 quarter. Included in the fiscal 2000 first quarter
were $200,000 of non-recurring licensing fees from Coca Cola Company
related to a licensing agreement signed in April 1999.
Beginning in fiscal 2001, we began negotiating terms and prices directly
with the manufacturers of our food products. We formed a new subsidiary
and began purchasing such products in January 2001 and, in turn, selling
these products to an unaffiliated national distribution company who
supplies our restaurants. We believe this will give us better control over
our sources of proprietary products. As a result, licensing fee revenue is
expected to decrease and be replaced by the revenue and costs discussed
above.
Initial franchise fees increased 6% in the first quarter of fiscal 2001 to
$1,546,000 from $1,462,430 in the same fiscal quarter last year. Initial
franchise fees are one-time fees paid by franchisees at the time the
franchise is purchased. Initial franchise fees are not recognized as
income until the period in which all of our obligations relating to the
sale have been substantially performed, which generally occurs when the
franchise opens. Our share of initial franchise fees sold by foreign
master franchises is recognized when received. In the first quarter of
fiscal 2001, we opened 98 franchises, including 9 international
restaurants, as compared to 100 franchises opened, including 18
international restaurants, in the same period last fiscal year. Our
domestic initial franchise fee has been $20,000 since 1994. Franchisees
may purchase a second franchise for $15,000 and third and subsequent
franchise for $10,000. The initial franchise fee for a Quizno's Express
franchise is $10,000 for the first, $7,500 for the second, and $5,000 for
the third and additional franchises purchased by the same owner. Our share
of initial franchise fees for international restaurants is generally 30%
of the franchise fee and will vary depending on the country and the
currency exchange rate. Initial franchise fees for international
restaurants are recognized as revenue on receipt.
Domestic initial franchise fees collected by us are recorded as deferred
initial franchise fees until the related franchise opens. Deferred
initial franchise fees at December 31, 2000 were $11,829,506 and represent
732 domestic franchises sold but not yet in operation, compared to
$8,235,649 at December 31, 1999 representing 524 domestic franchises sold
but not open. Direct costs related to the franchise sale, primarily sales
commissions paid to area directors, are deferred on our books and recorded
as an expense at the same time as the related initial franchise fee is
recorded as income. Deferred costs paid with respect to initial franchise
fees deferred at December 31, 2000 were $2,112,375. Approximately 50% of
all initial franchisee fees received by us for franchise purchases in area
director markets are paid to area directors for sales and opening
commissions.
Area director and master franchise fees were $196,386 in the first quarter
of fiscal 2001 and $480,796 in the same fiscal quarter last year.
Effective January 1, 1999, we changed our accounting policy related to the
recognition of revenue from domestic area director marketing agreement
fees to one that recognizes these fees as revenue on a straight-line basis
over the term of the agreement, which is ten years. This change reflected
a decision made by the U.S. Securities and Exchange Commission in December
1999 relative to the recognition of area director fee revenue.
Commissions paid to the area director upon the inception of the agreement
are classified as a prepaid and recognized as an expense over the same ten
year term. The effect of the change in the nine-month period ending
September 30, 1999, was the deferral of $4,262,701 of net revenue
previously recognized in prior years.
Deferred domestic area fees are one-time fees paid to us for the right to
sell franchises on our behalf in a designated, non-exclusive area.
Domestic area director fees recognized were $176,386 in the first quarter
of fiscal 2001 and $170,796 in the comparable fiscal 2000 quarter.
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 the first quarter of fiscal 2001, we
sold 1 area directorship for $189,647 compared to 5 sold in the first
quarter of fiscal 2000. At December 31, 2000, we had a total of 59 area
directors who owned areas encompassing approximately 60% of the population
of the United States.
International master franchise fees are one-time fees paid to us for the
right to sell franchises in a designated, exclusive, international market.
The master franchisee assumes all of our obligations and duties under the
agreement. We recognize these fees when the agreement is signed.
International master franchise fees were $20,000 in the first quarter of
fiscal 2001 and $310,000 for the first quarter of fiscal 2000.
In the first quarter of fiscal 2000, we sold the master franchise rights
to Switzerland for $300,000. A total of $20,000 of this fee was deferred
until our training obligation is completed. We also recognized $30,000 of
previously deferred international master franchise fees in the quarter as
we substantially completed our training obligations under the agreements.
The international master franchise fees in the first quarter of fiscal
2001 were related to previously deferred international master franchise
fees for Iceland as we substantially completed our training obligations
under the agreement.
We offer domestic area director and master franchise applicants financing
for the area fee. The amount financed is required to be paid to us in
installments over five years at interest rates between 6% and 15%. The
promissory notes are personally signed by the Area Director and, depending
on the personal financial strength of the Area Director, secured by
collateral unrelated to the area directorship. We also periodically offer
payment plans to international Master Franchisee applicants. The one
domestic and international area sold in the first quarter of fiscal 2001
used this financing for $94,824, representing 50% of the total domestic
area director fees and international master franchise fees received or
financed in fiscal 2001. In the first quarter of fiscal 2000, one used
this financing for $200,000.
The area director and master franchise agreements set increasing minimum
performance levels that require the area director or master franchisee to
sell and open a specified number of franchised restaurants in each year
during the term of the area agreement. Our experience with the program to
date indicates that while some area directors and master franchisees will
exceed their development schedules, others will fail to meet their
schedules. In our planning, we have allowed for a certain percentage of
area directors and master franchisees that will not meet their development
schedule. Delays in the sale and opening of restaurants can occur for
many reasons. The most common are delays in the selection or acquisition
of an appropriate location for the restaurant, delays in negotiating the
terms of the lease and delays in franchisee financing. We may terminate
an area or master agreement if the area director or master franchisee
fails to meet the development schedule, and we then have the right to
resell the territory to a new area director or master franchisee or we can
operate it.
Other revenue increased by 80% in the first quarter of fiscal 2001 to
$409,579 from $227,404 in the first quarter of fiscal 2000. Other revenue
is primarily amounts paid by equipment suppliers for design and
construction, franchise transfer fees and net bookkeeping fees charged
franchisees that utilize our designated bookkeeping services provider.
Amounts paid by equipment suppliers were $133,500 in the first quarter of
fiscal 2001 compared to $181,158 in the first quarter of fiscal 2000. This
amount will vary based on new store openings. Franchise transfer fees
increased in 2001 to $116,000 from $0 in 2000. Since 1995, our franchise
agreement requires all new franchisees to utilize our bookkeeping
services, or a firm designated by us to provide bookkeeping services, for
their first 12 months of operations. Net bookkeeping fees were $47,702 in
the first quarter of fiscal 2001 compared to $20,381 in the first quarter
of fiscal 2000. Bookkeeping fees are paid by the franchisee to the Company
and then remitted on to the bookkeeping service designated by the Company.
These fees represent the amounts retained by the Company to administer the
bookkeeping function.
Sales and royalty commissions expense increased 29% in the first quarter
of fiscal 2001 to $2,262,068 (34.3% of royalty and initial franchise fees)
from $1,757,020 (40.3% of royalty and initial franchise fees) in the
comparable quarter last fiscal year. 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 2001 as a
percentage of royalty and initial franchise fee due to the repurchase and
reacquisition 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.
Our foreign master franchisees retain 70% of initial fees, area director
fees and royalties paid from franchises sold, open and operating in the
master franchisee's territory, except the Canadian master franchisee who
retained 100% of initial franchise fees in 1998 only, and the United
Kingdom master franchisee who will retain 85% of the initial franchise
fees through December 31, 2001. Under the master franchise agreement, we
have no obligation to provide services that will result in any incremental
cost to us, other than an initial training trip to the country by an
employee of ours.
General and administrative expenses increased 74% to $4,397,532 in the
first quarter of fiscal 2001 from $2,521,515 in the comparable quarter
last fiscal year. As a percent of franchise revenue, general and
administrative expenses have increased from 42% in the first quarter of
fiscal 2000 to 53% in the first quarter of fiscal 2001. General
administrative expenses include all of our operating costs. The increase
is primarily due to the addition of employees and systems to service the
rapidly growing network of our franchisees and Area Directors. In
addition, the increase for the first fiscal quarter of fiscal 2001
includes certain non-recurring expenses related to the completion of
certain information technology initiatives along with calendar year
bonuses accrued as of December 31, 2000. Although general and
administrative expenses will likely continue to increase as we grow, we
expect the rate of increase to decline.
Company owned store operations (excluding stores held for resale) earned
$350,950 on sales of $2,742,079 in the first quarter of fiscal 2001
compared to $221,027 on sales of $2,757,584 in the comparable quarter last
fiscal year. During the first quarter of fiscal 2001 we operated stores
for a total of 47 store operating months, compared to 84-store operating
months in the first quarter of fiscal 2000. Sales per store month
increased 77% in 2001 to $58,218 from $32,946 in 2000 primarily due to the
acquisition of restaurants and other operations at Denver International
Airport in November 1999. At December 31, 2000, we had 16 operating
Company stores, including the Cowboy Bar at Denver International Airport
(28 at December 31, 1999).
Stores held for resale lost $208,149, on sales of $1,303,607, in the first
quarter of fiscal 2001 compared to a loss of $29,232, on sales of
$103,153, in the comparable quarter last fiscal year. In the first quarter
of fiscal 2001, we operated twenty-one stores held for resale and in the
comparable quarter of fiscal 2000 we operated two stores held for resale.
At December 31, 2000, we had nineteen stores classified as held for
resale.
New company start-up costs were $289,878 in the first quarter of fiscal
2001. These costs relate to the start-up of a new operating company to
purchase and sell food products. These costs were primarily consulting
costs to set-up administrative and accounting systems and to finalize the
distribution contracts.
Impairment of long-lived assets was $1,217,632 in the first quarter of
fiscal 2001. During the quarter, we determined that an impairment related
to our carrying value of our assets held for resale was required and
expensed $934,106. Also, during the quarter, we determined that an
impairment was required for certain equipment and inventory and we
expensed a total of $283,526.
Financing costs were $2,205,113 in the first quarter of fiscal 2001. In
December 2000, we closed on a loan of $13,862,260 with Levine Leichtman
Capital Partners II, L.P. ("LLCP"). The proceeds of the loan were used to
prepay interest on the loan for one year in the amount of $1,862,260 and
to repurchase shares and pay costs associated with the tender offer. We
incurred and recognized $2,205,113 of financing costs, primarily legal,
consulting and closing costs related to the LLCP loan.
Loss on sale of Company stores was $36,728 in the first quarter of fiscal
2001. During the quarter ended December 31, 2000, two stores were sold
resulting in a gain on sale of $24,419. Also, during the quarter, we
incurred costs of $61,147 related to lease settlements of stores closed.
The fiscal 2000 loss was $43,595 resulting from the December 1999 sale of
one store held for resale.
Provision for bad debts was $65,245 in the first quarter of fiscal 2001
and $167,871 in the comparable quarter last fiscal year. As of December
31, 2000, we had an allowance for doubtful accounts of $337,538 that we
believe is adequate for future losses.
Depreciation and amortization was $551,712 in the first quarter of fiscal
2001 and $443,153 in the comparable quarter last fiscal year. The increase
is primarily due to the acquisition and development of new Company owned
restaurants and the repurchase and reacquisition of area director
territories since December 31, 1999.
Amortization of deferred financing costs was $56,444 in the first quarter
of fiscal 2001 and $18,832 in the comparable quarter last fiscal year. The
increase is attributable to $37,825 of amortization of the deferred
financing costs associated with the loan of $13,862,260 from Levine
Leichtman Capital Partners II, L.P. in the first quarter of fiscal 2001.
Interest expense was $620,044 in the first quarter of fiscal 2001 and
$466,968 in the comparable quarter last fiscal year. The increase is
primarily attributable to the increase in outstanding debt. On January 26,
2000, we closed on a loan in the amount of $3,180,000 from GE Capital
Business Asset Funding. The loan bears interest at 9.53% and is payable in
equal monthly installment of $52,023 for 5 years. Also, on December 12,
2000, we closed on a loan of $13,862,260 with Levine Leichtman
Capital Partners II, L.P. ("LLCP"). The proceeds of the loan were used to
prepay interest on the loan
for one year in the amount of $1,862,260 and to repurchase shares and pay
costs associated with our tender offer. The promissory note bears interest
at 13.25 %, interest only payable monthly, and is due in full in October
2005.
Other expense was $1,595 in the first quarter of fiscal 2001 and $60,559
in the comparable quarter last fiscal year. The fiscal 2000 expense is
primarily acquisition-related costs.
Income tax (provision) benefit was a benefit of $1,193,775 in the first
quarter of fiscal 2001 and a provision of $226,367 in the comparable
quarter of fiscal 2000. Our taxable income has historically exceeded our
book income primarily because initial franchise fees we receive are
taxable income in the year received and are book income in the year the
franchise opens. Consequently, we will not pay income taxes on this income
when it is recognized for financial reporting purposes. In the first
quarter of fiscal 1999, we used all of our tax net operating loss
carryforwards and incurred a tax liability. Accordingly, we reduced the
amount recorded as an impairment of our deferred tax asset in prior years
and recorded the tax benefit of prior years net operating losses.
Subsequent to December 31, 1998, our provision for income taxes was
recorded at 37%.
Liquidity and Capital Resources
Net cash provided by operating activities was $314,215 in the first
quarter of fiscal 2001 compared to cash provided by operating activities
of $723,276 in the first quarter of fiscal 2000. The fiscal 2001 amount of
$314,215 was primarily due to an increase in deferred initial franchise
fees of $1,379,577 and an increase in accounts payable and accrued
liabilities of $1,335,512. These increases were partially offset by a
decrease of $1,866,453 related to income taxes payable and a decrease of
$490,797 related to accounts receivable.
Net cash used in investing activities was $2,834,458 in the first quarter
of fiscal 2001 compared to cash used in investing activities of
$10,075,739 in the first quarter of fiscal 2000. The fiscal 2001 amount of
$2,834,458 was primarily due to an increase in short-term investments of
$2,892,297.
Net cash provided by financing activities was $1,721,236 in the first
quarter of fiscal 2001 compared to cash provided by financing activities
of $12,338,144 in the first quarter of fiscal 2000. The fiscal 2001 amount
of $1,721,236 was primarily due to the loan proceeds of $12,000,000
received from LLCP partially offset by costs of $9,850,195 related to the
repurchase of 775,155 shares of Common Stock tendered in December 2001.
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 December 31, 2000, 12 leases had
been executed under this program and one other lease guaranteed. The
franchisee has defaulted on the rents due on two of these locations, for
which we do not have replacement franchisees. We expect to negotiate
buyouts of these leases between the landlords, the franchisees and,
possibly, us. Our share of any such buyout is expected to be immaterial. A
third location has closed due to a fire and the lease was cancelled and
the location will not re-open.
On December 22, 1999 we closed on a line of credit loan and were funded
$3,350,000 by Merrill Lynch Business Financial Services, Inc. The loan
bears interest at the 30-day Dealer Commercial Paper Rate plus 2.5%
(equal to 9.15% at November 30, 2000). The maximum amount of the line of
credit loan is $3,350,000, which maximum is reduced monthly based on a
seven-year amortization. The line of credit loan is secured by a first
security interest in our aircraft. All amounts previously borrowed under
the line of credit had been repaid as of December 31, 2000.
In July 2000, the Quizno's National Marketing Fund Trust ("Advertising
Fund") and the Quizno's Regional Marketing Fund Trust (together the
"marketing funds") entered into a $2,000,000 line of credit with Wells
Fargo Bank West, N.A. The marketing funds collect a fee of 1% and 3%,
respectively, of gross sales from our franchisees and deposit the funds
into advertising funds that are used to develop advertising to attract
customers to the restaurants and to create awareness of the Quizno's
brand image. We have guaranteed this line of credit. At December 31,
2000, $1.9 million had been drawn against this line of credit. On
February 1, 2001, the outstanding balance of $1.9 million, along with
accrued and unpaid interest, was repaid by the marketing funds.
At September 30, 2000, we had a note receivable from the Advertising Fund
of $1,030,000. During the quarter ended December 31, 2000, the
Advertising Fund made a net repayment of $380,000, along with accrued
interest through December 15, 2000. The December 31, 2000 balance of
$650,000 relates to an off-season build-up for advertising, which will be
reimbursed to us in 2001.
On November 13, 2000, we announced that we had commenced a tender offer
to purchase all outstanding shares of our common stock, except for shares
held by certain insiders, at a price of $8 per share, net in cash to the
seller. The tender expired as scheduled at midnight New York City time
December 11, 2000.
Prior to the tender there were approximately three million shares of
common stock outstanding, of which approximately 51.6 percent were owned
by Richard E. Schaden, the President and CEO of The Quizno's Corporation;
Richard F. Schaden, Vice President, Secretary and a Director of The
Quizno's Corporation; and Frederick H. Schaden, a Director of The Quizno's
Corporation. The three Schadens did not tender their shares.
As of December 31, 2000, 775,155 shares of Common Stock were tendered for
a total purchase price of $6,201,240. Direct costs related to the tender
totaled $3,965,218, which included payment for the repurchase of 531,850
stock options and 415,056 warrants.
In conjunction with the tender offer, the Company closed on a loan of
$13,862,260 with Levine Leichtman Capital Partners II, L.P. ("LLCP"). The
proceeds of the loan were used to prepay interest on the loan for one year
in the amount of $1,862,260 and to repurchase shares and pay costs
associated with the tender offer.
The promissory note bears interest at 13.25 %, interest only payable
monthly, with the first twelve months prepaid, and is due in full in
October 2005. LLCP received warrants for 14% of the equity ownership of
the Company. At December 31, 2000, the warrants were valued at $3,373,801
and were recorded on the balance sheet as Warrants Subject to Put and as
deferred financing costs under Other Deferred Assets. The deferred
financing costs will be amortized over the life of the note. We will value
and adjust the carrying value of the warrants quarterly. Included in
Amortization of Deferred Financing Costs for the quarter ended December
31, 2000 was $37,825 related to the amortization of this cost. The loan
may be paid down to $7 million by September 12, 2001, with no penalty and
with a corresponding reduction in the percent of warrants.
The Company incurred and expensed $2,205,113 of financing costs related
to the LLCP loan.
At September 30, 2000, we had one store reclassified as a store held for
resale. In October 2000, we reclassified 20 stores as held for resale.
During the quarter ended December 31, 2000, two stores were sold resulting
in a gain on sale of $24,419. Also, during the quarter ended December 31,
2000, we incurred costs of $61,147 related to lease settlements of stores
closed. As of December 31, 2000, the Company had 19 stores classified as
held for resale. Six of the 19 stores held for resale are under contract
to be sold and the remaining 13 are expected to be sold in 2001.
We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recovered. At December 31, 2000, we determined that an impairment related
to our carrying value of our assets held for resale was required and
expensed $934,106.
In the quarter ended December 31, 2000, we reacquired one area director
territory for $73,924, inclusive of legal and other related costs.
In 1999, we entered into loan agreements with AMRESCO Commercial Finance,
Inc. ("AMRESCO"), in which AMRESCO loaned us $14 million. The loan
agreements provide, among other things, that if we wish to secure
additional indebtedness, we may do so as long as, after giving effect to
such new indebtedness, we meet a minimum financial ratio.
AMRESCO took the position that the LLCP indebtedness (see Note 4 of
notes to consolidated financial statements) would cause us to achieve the
required minimum ratio. We, and our outside financial advisors, had
previously calculated the effect of the LLCP financing and concluded that
we would exceed the required minimum ratio, and responded accordingly to
AMRESCO.
In February 2001, we agreed to resolve the dispute with AMRESCO in
exchange for our prepayment of principle of approximately $1,518,000 and a
payment of a non-refundable credit enhancement of approximately $169,000.
AMRESCO agreed to release its collateral interest in the assets of eleven
Company-owned stores. In addition, we agreed to deposit into an escrow
account $1.1 million until the later of July 31, 2001 or the month the
minimum ratio is met. We expect to achieve this by September 30, 2001 and
have the escrowed funds released.
As we have in the past, we will continue to consider acquisitions of other
chains, the purchase of Quizno's Restaurants from our Owners, and the
purchase of Quizno's area directorships from our Area Directors. From
time to time, we will make offers and enter into letters of intent for
such transactions subject to the completion of due diligence. In all such
cases, we will identify the sources of cash required to complete such
transactions prior to entering into a binding agreement.
We have never paid cash dividends on our common stock and we do not
anticipate a change in this policy in the foreseeable future.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended December 31, 2000
Form 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Other than the items discussed in our annual report on Form 10-KSB for the
year ended September 30, 2000, there are no other pending material legal
proceedings to which we are a party or to which our property is subject.
There are various claims and lawsuits pending by and against us. The
settlement of some of these claims and lawsuits may result in the
acquisition or acquirement of certain area director territories. In the
opinion of management, and supported by advice from legal counsel, these
claims and lawsuits will not result in any material adverse effect in
excess of amounts accrued in the accompanying consolidated financial
statements.
Item 2. Changes in Securities and Use of Proceeds
Sales of Unregistered Securities
- --------------------------------
Securities Amount of
Sold/Shares Date Consideration Purchaser(s) Exemption
- ----------------- --------- ----------------------- ---------------- -----------------
Conversion of Class C 8 holders of
110,000 shares of Convertible Preferred such Preferred Section 3 (a) 9
Common Stock 12/11/00 Stock Stock
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K:
Form 8-K, dated November 13, 2000, reporting in Item 5 the commencement
of a self-tender offer by the Company.
Form 8-K, dated November 21, 2000, reporting in Item 5 the new
agreement with a national distribution company to become the exclusive
distributor of food and paper products to the U.S.-based Quizno's
restaurant chain.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE QUIZNO'S CORPORATION
By: /s/ John L. Gallivan
John L. Gallivan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Denver, Colorado
February 19, 2001
