UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1169286
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
(Address of principal executive offices)
(720) 359-3300
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--
State the number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date.
Outstanding at
Class May 4, 2001
------------------------------ -----------
Common Stock, $0.001 par value 2,337,439 shares
THE QUIZNO'S CORPORATION
Commission File Number: 000-23174
Quarter Ended March 31, 2001
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 Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
FRANCHISE OPERATIONS:
Continuing fees (Note 9)............... $ 6,562,881 $ 3,871,071 $ 12,560,618 $ 7,508,553
Initial franchise fees ................ 1,707,473 1,459,677 3,253,473 2,922,107
Area director and master franchise fees 189,297 150,926 385,683 631,722
Other ................................. 335,519 321,218 745,098 548,621
Interest .............................. 200,643 135,399 385,712 266,092
------------ ------------ ------------ ------------
Total revenue ....................... 8,995,813 5,938,291 17,330,584 11,877,095
------------ ------------ ------------ ------------
Expenses
Sales and royalty commissions ......... (2,503,432) (1,883,516) (4,765,500) (3,640,536)
General and administrative ............ (4,243,884) (3,132,854) (8,641,416) (5,654,369)
------------ ------------ ------------ ------------
Total expenses ...................... (6,747,316) (5,016,370) (13,406,916) (9,294,905)
------------ ------------ ------------ ------------
Net income from franchise operations ..... 2,248,497 921,921 3,923,668 2,582,190
------------ ------------ ------------ ------------
COMPANY STORE OPERATIONS: (Note 5)
Sales ................................. 4,310,019 3,757,196 8,355,705 6,617,933
------------ ------------ ------------ ------------
Cost of sales ......................... (1,219,692) (1,071,426) (2,422,238) (1,929,722)
Cost of labor ......................... (901,470) (824,348) (1,837,151) (1,700,870)
Other store expenses .................. (1,769,967) (1,553,801) (3,534,625) (2,487,925)
------------ ------------ ------------ ------------
Total expenses ...................... (3,891,129) (3,449,575) (7,794,014) (6,118,517)
------------ ------------ ------------ ------------
Net income from Company stores
operations .............................. 418,890 307,621 561,691 499,416
------------ ------------ ------------ ------------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (continued)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
New company start-up costs .............. $ -- $ -- $ (289,878) $ --
Impairment of long-lived assets (Note 5) -- -- (1,217,632) --
Financing costs (Note 4) ................ (70,352) -- (2,275,465) --
Loss on sale of Company stores .......... (63,439) -- (100,167) (43,595)
Provision for bad debts .................. (75,077) (45,614) (140,322) (213,485)
Depreciation and amortization ............ (562,282) (422,855) (1,113,994) (866,008)
Amortization of deferred financing costs . (193,511) (18,854) (249,955) (37,686)
Interest expense ......................... (972,341) (458,334) (1,592,385) (925,302)
Other expense ............................ (85,409) (37,657) (87,003) (98,216)
----------- ----------- ----------- -----------
Total other income (expense) ............. (2,022,411) (983,314) (7,066,801) (2,184,292)
----------- ----------- ----------- -----------
Net income (loss) before income taxes .... 644,976 246,228 (2,581,442) 897,314
Income tax (provision) benefit ........... (238,641) (76,178) 955,134 (302,545)
----------- ----------- ----------- -----------
Net income (loss) ........................ 406,335 170,050 (1,626,308) 594,769
Preferred stock dividends ................ (45,716) (40,341) (95,010) (79,626)
----------- ----------- ----------- -----------
Net income (loss) applicable to common
shareholders ............................. $ 360,619 $ 129,709 $(1,721,318) $ 515,143
=========== =========== =========== ===========
Basic net income (loss) per share of common
stock .................................... $ 0.15 $ 0.04 $ (0.66) $ 0.17
=========== =========== =========== ===========
Diluted net income (loss) per share of
common stock ............................. $ 0.12 $ 0.03 $ (0.66) $ 0.14
=========== =========== =========== ===========
Weighted average common shares outstanding
-----------
Basic .................................... 2,345,579 2,991,388 2,610,474 2,990,259
=========== =========== =========== ===========
Diluted .................................. 3,134,670 3,822,721 2,610,474 3,782,622
=========== =========== =========== ===========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
2001 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 1,795,131 $ 2,493,976
Restricted cash (Note 8) ............................. 1,054,340 --
Short term investments ............................... 5,436,814 5,324,336
Accounts receivable, net of allowance for doubtful
accounts of $336,021 at March 31, 2001 and
$222,293 at September 30, 2000 ...................... 5,398,034 2,066,247
Current portion of notes receivable (Note 7) ......... 1,549,602 1,545,844
Deferred tax asset ................................... 221,182 221,182
Other current assets ................................. 1,745,878 481,854
----------- -----------
Total current assets ................................... 17,200,981 12,133,439
----------- -----------
Property and equipment and assets held for resale at
cost, net of accumulated depreciation and amortization
of $2,771,947 at March 31, 2001 and $2,433,637 at
September 30, 2000 (Note 5) ........................... 10,764,223 11,863,819
----------- -----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$842,275 at March 31, 2001 and $1,104,646 at
September 30, 2000 (Note 5) ......................... 4,204,282 4,600,528
Investments in area directorships, net of accumulated
amortization of $358,033 at March 31, 2001 and
$203,062 at September 30, 2000 (Note 6) ............. 4,334,047 4,236,151
Other deferred assets (Note 4) ....................... 6,363,377 2,782,498
Deferred tax asset ................................... 4,227,619 4,210,626
Deposits and other assets ............................ 118,814 130,837
Notes receivable, net of allowance for doubtful
accounts of $50,000 at March 31, 2001 and $50,000 at
September 30, 2000 .................................. 1,193,670 1,301,435
----------- -----------
Total other assets ..................................... 20,441,809 17,262,075
----------- -----------
Total assets ........................................... $48,407,013 $41,259,333
=========== ===========
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, September 30,
2001 2000
------------ ------------
CURRENT LIABILITIES:
Accounts payable .................................... $ 4,295,457 $ 2,614,437
Accrued liabilities ................................. 2,255,617 1,495,797
Current portion of long term obligations ............ 1,649,051 1,550,501
Reserve for impairment (Note 5) ..................... 414,953 --
Income taxes payable ................................ -- 370,557
------------ ------------
Total current liabilities ............................. 8,615,078 6,031,292
Line of credit (Note 3) ............................... -- --
Long term obligations (Notes 4 and 8) ................. 27,645,538 16,037,238
Deferred revenue ...................................... 18,027,345 16,402,957
------------ ------------
Total liabilities ..................................... 54,287,961 38,471,487
COMMITMENTS AND CONTINGENCIES (Notes 2 and 7)
Warrants subject to put (Note 4) ...................... 3,373,801 --
Preferred stock, $.001 par value, 1,000,000 shares
authorized:
Series A issued and outstanding 146,000 at March 31,
2001 and September 30, 2000 ($876,000 liquidation
preference) ........................................ 146 146
Series C issued and outstanding 57,000 at March 31,
2001 and 167,000 at September 30, 2000 ($285,000
liquidation preference) ............................ 57 167
Series D issued and outstanding 3,000 at March 31,
2001 and September 30, 2000 ($9,000 liquidation
preference) ........................................ 3 3
Series E issued and outstanding 59,480 at March 31,
2001 and September 30, 2000 ($512,718 liquidation
preference) ........................................ 59 59
Common stock, $.001 par value; 9,000,000 shares
authorized; issued and outstanding 2,337,439 at March
31, 2001 and 3,007,921 at September 30, 2000 (Note 4) 2,337 3,008
Capital in excess of par value ........................ 347,689 3,857,702
Accumulated deficit ................................... (9,605,040) (1,073,239)
------------ ------------
Total liabilities and stockholders' equity (deficit) .. $ 48,407,013 $ 41,259,333
============ ============
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (1,626,308) $ 594,769
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ....................... 1,113,993 866,008
Impairment of long-lived assets ..................... 1,217,632 --
Provision for losses on accounts receivable ......... 140,322 213,485
Deferred income taxes ............................... (16,993) (25,085)
Promissory notes accepted for area director fees .... (94,824) (221,357)
Prior year start-up and financing costs ............. 207,896 --
Amortization of prepaid interest expense ............ 561,229 --
Loss on disposal of Company store ................... 13,360 43,595
Amortization of deferred financing costs ............ 249,956 37,686
Amortization of deferred area director fee revenue .. (196,035) (54,322)
Interest expense accruals associated with benefit
plans .............................................. 58,468 --
Area director expenses recognized ................... 20,570 5,432
Other ............................................... 2,177 --
Changes in assets and liabilities:
Accounts receivable ............................... (3,472,109) (868,043)
Other current assets .............................. (84,527) (56,828)
Accounts payable .................................. 2,938,275 339,930
Accrued liabilities ............................... 759,820 459,036
Income taxes payable .............................. (1,627,812) (851,469)
Deferred franchise costs .......................... (557,226) (89,550)
Deferred initial franchise fees and other fees .... 1,820,423 523,995
------------ ------------
Net cash provided by operations ........................ 1,428,287 917,282
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................... (1,214,794) (4,894,545)
Issuance of other notes receivable ................... (1,425,820) (89,000)
Short term investments and restricted cash ........... (1,166,818) (2,590,655)
Proceeds from the sale of assets and stores .......... 1,148,000 137,361
Acquisition of Company owned stores ................. -- (5,767,393)
Principal payments received on notes receivable ...... 1,624,651 345,158
Intangible and deferred assets and deposits .......... (207,561) 105,959
Investments in area director territories ............. (252,866) (685,916)
------------ ------------
Net cash used in investing activities .................. (1,495,208) (13,439,031)
------------ ------------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock ....................... -- 143,778
Proceeds from sale of Class D and Class E Preferred
Stock ............................................ -- 293,583
Principal payments on long term obligations ....... (2,553,726) (3,513,897)
Proceeds from issuance of notes payable .......... 12,000,000 17,180,000
Financing costs .................................. (1,760) (646,317)
Common Stock repurchased .......................... (6,232,440) (1,114,032)
Costs associated with tender of Common Stock and
repurchase of stock options and warrants ......... (3,748,988) --
Dividends paid .................................... (95,010) (79,626)
------------ ------------
Net cash (used in) provided by financing activities . (631,924) 12,263,489
------------ ------------
Net decrease in cash ................................ (698,845) (258,260)
Cash, beginning of period ........................... 2,493,976 626,828
------------ ------------
Cash, end of period ................................. $ 1,795,131 $ 368,568
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest .......... $ 1,074,925 $ 747,329
============ ============
Cash paid during the period for income taxes ...... $ 672,468 $ 1,528,450
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 2000, we accepted a promissory note in the amount of
$19,446 for equipment previously held for resale. A note receivable in the amount of
$79,566 was capitalized in exchange for an Area Director territory repurchased during the
quarter. At March 31, 2000, we had signed Class E Preferred Stock Subscription Agreements
for $500,020, of which $175,020 was included in accounts receivable and subsequently
collected in April 2000. Also, a Company store held for resale was closed and the net
assets of $35,633 were written-off.
(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 .......... -- -- 77,749 78 284,413 --
employee benefit plan
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) (20,267) --
Issuance of common stock
for exercise of options ...... -- -- 933 1 (1) --
Conversion of Series C
Convertible Preferred
Stock ........................ (110,000) (110) 110,000 110 -- --
Common Stock tendered
(Note 4) ..................... -- -- (779,055) (779) (3,394,735) (2,836,926)
Costs associated with
tender offer (Note 4) ........ -- -- -- -- -- (4,068,567)
Preferred stock dividends .... -- -- -- -- (95,010) --
Net (loss) ................... -- -- -- -- -- (1,626,308)
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 2001 ... 265,480 $ 265 2,337,439 $ 2,337 $ 347,689 $(9,605,040)
=========== =========== =========== =========== =========== ===========
(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 and six month periods ended March 31, 2001 and March 31, 2000, (b) the
consolidated financial position at March 31, 2001 and September 30, 2000, (c) the
consolidated statements of cash flows for the six month periods ended March 31, 2001 and
March 31, 2000, and (d) the consolidated changes in stockholders' equity (deficit) for
the twelve month and six month periods ended September 30, 2000 and March 31, 2001,
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 and six months
ended March 31, 2000 to make them comparable to those presented for the three and six
months ended March 31, 2001, 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.
The results for the three and six month periods ended March 31, 2001 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 three and six months ended March 31, 2001 and 2000, was
$129,036 and $258,072, respectively, of amortized deferred net revenue related to area
director marketing agreement fees previously recognized prior to fiscal 1999.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 March 31, 2001, there were 745 domestic franchises
sold but not yet open with related opening commissions totaling $1,919,999 ($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 March 31, 2001, there were no new candidates enrolled in this program.
In April 2001, the Company was notified that one such person, for which a financial
guarantee of $185,000 had been made in January 2000, was past due on their March 2001
payment. The Company believes that a new franchisee has been located to purchase this
location and therefore will not result in any material liability for the Company.
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 March
31, 2001.
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.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. TENDER OFFER AND NOTE PAYABLE (continued)
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 March 31, 2001, 779,055 shares of Common Stock had been tendered for a total
purchase price of $6,232,440. Direct costs related to the tender totaled $4,068,567,
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, to repurchase
shares and pay costs associated with the tender offer and to increase working capital.
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 three
and six months ended March 31, 2001 was $174,507 and $212,035, respectively, 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 $2,275,465 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. During the quarter ended March
31, 2001, the Company sold twelve stores and recorded a loss of $63,440. As of March 31,
2001, the Company had seven stores classified as held for resale. The seven stores held
for resale are expected to be sold in 2001.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. STORES HELD FOR RESALE (continued)
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:
March 31, September 30,
2001 2000
----------- -----------
Property and equipment ............. $ 1,205,912 $ 157,689
Intangible assets .................. 38,867 41,172
----------- -----------
1,244,779 198,861
Accumulated depreciation and
amortization .................... (227,774) (4,282)
Reserve for impairment ............. (326,953) --
----------- -----------
Net assets of stores held for resale $ 690,052 $ 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 Three Months Ended Six Months Ended
- ---------------------- -------------------------- --------------------------
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales ................... $ 1,155,364 $ -- $ 2,458,971 $ 103,153
----------- ----------- ----------- -----------
Cost of sales ........... (364,632) -- (778,022) (43,075)
Costs of labor .......... (292,459) -- (666,977) (40,575)
Other store expenses .... (704,401) (68,511) (1,428,249) (117,246)
----------- ----------- ----------- -----------
Store expenses ....... (1,361,492) (68,511) (2,873,248) (200,896)
----------- ----------- ----------- -----------
Net loss from stores held
for resale ............. $ (206,128) $ (68,511) $ (414,277) $ (97,743)
=========== =========== =========== ===========
Company Stores* Three Months Ended Six Months Ended
- -------------- -------------------------- --------------------------
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales ................... $ 3,154,655 $ 3,757,196 $ 5,896,734 $ 6,514,780
----------- ----------- ----------- -----------
Cost of sales ........... (855,060) (1,071,426) (1,644,216) (1,886,647)
Costs of labor .......... (609,011) (824,348) (1,170,174) (1,447,053)
Other store expenses .... (1,065,566) (1,485,290) (2,106,376) (2,583,921)
----------- ----------- ----------- -----------
Store expenses ....... (2,529,637) (3,381,064) (4,920,766) (5,917,621)
----------- ----------- ----------- -----------
Net loss from stores held
for resale ............. $ 625,018 $ 376,132 $ 975,968 $ 597,159
=========== =========== =========== ===========
* INCLUDES QUIZNO'S STORES AND CERTAIN NON-QUIZNO'S OPERATIONS LOCATED AT DENVER
INTERNATIONAL AIRPORT.
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 $1,070,106. During the
quarter ended March 31, 2001, the Company offset this impairment reserve $743,153 for
losses related to the stores sold.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. STORES HELD FOR RESALE (continued)
Also, during the quarter ended December 31, 2000, the Company determined that an
impairment was required for certain equipment and inventory and expensed a total of
$147,526.
6. INVESTMENTS IN AREA DIRECTORSHIPS
In the six months ended March 31, 2001, we reacquired three area director territories
for $200,270, including related legal costs.
7. RELATED PARTY TRANSACTIONS
At September 30, 2000, the Company had a note receivable from the Advertising Fund of
$1,030,000. During the six months ended March 31, 2001, the Advertising Fund made a net
repayment of $65,000, along with accrued interest through December 15, 2000. The March
31, 2001 balance of $965,000, plus related interest of $21,479, 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.
9. DISTRIBUTION OPERATIONS
The Company's wholly owned distribution company subsidiary, American Food Distributors,
Inc. ("AFD") commenced operations in January 2001 and is in the business of buying
Quizno's proprietary products from the manufacturers and reselling those products to the
unaffiliated company approved to distribute proprietary and other products to our
franchisees. AFD has negotiated contracts with each manufacturer, and we will no longer
receive licensing fees from those manufacturers. AFD will charge a mark-up on the
products, which, in part, will replace the licensing fees, and, in part, will be paid to
the marketing funds.
(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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Overview
Our primary business is the franchising of Quizno's restaurants. As a franchisor, revenue
is principally derived from: (1) continuing fees, (2) initial franchise fees, and (3) area
director and master franchise fees. Continuing fees increase as the number of franchised
restaurants open increase. Initial franchise fees are one-time fees paid upon the sale of a
franchise and vary directly with the number of franchises we can sell and open. Area
director and master franchise fees occur when a country or exclusive area is sold and are
expected to decline as the number of remaining available markets declines. Effective
January 1, 1999, we changed our accounting policy related to the recognition of area
director marketing agreement fees to one that recognizes such fees as revenue on a
straight-line basis over the term of the agreement, which is ten years. Each of these
sources of revenue contributes to our profitability, but the relative contribution of each
source will vary as we mature. Over time initial fees and continuing fees will generate
proportionately more revenue than area director and master franchise fees.
For the six months ended March 31, 2001, we incurred a loss before preferred dividends of
$1,626,308, composed of income from franchise operations of $3,923,668, income from
Company owned store operations of $561,691 and less other income and expense and taxes
totaling $(6,111,667). In the comparable period of fiscal 2000, we earned a profit before
preferred dividends of $594,769, composed of income from franchise operations of
$2,582,190, income from Company owned store operations of $499,416, and less other income
and expense and taxes totaling $(2,486,837).
The following chart reflects our revenue growth by source and number of restaurants for the
three and six month periods of fiscal 2001 compared to the comparable periods of fiscal
2000:
($ in thousands) Three Months Ended March 31, Six Months Ended March 31,
------------------------------ ----------------------------
% %
2001 2000 Change 2001 2000 Change
------- ------- ------- ------- ------- -------
Continuing fees ............. $ 6,563 $ 3,871 70% $12,560 $ 7,508 67%
Initial franchise fees ...... 1,707 1,460 17% 3,253 2,922 11%
Area director and master
franchise fees .............. 189 151 25% 386 632 (39)%
Other ....................... 336 321 5% 745 549 36%
Interest .................... 201 135 49% 386 266 45%
------- ------- ------- ------- ------- -------
Total franchise revenue ..... 8,996 5,938 51% 17,330 11,877 46%
Sales by Company owned stores 3,155 3,757 (16)% 5,897 6,515 (9)%
Sales by Stores held for
resale ..................... 1,155 -- 100% 2,459 103 2,287%
------- ------- ------- ------- ------- -------
Total Revenue ............... $13,306 $ 9,695 37% $25,686 $18,495 39%
======= ======= ======= ======= ======= =======
Earnings before interest
expense, income taxes,
depreciation and
amortization, preferred stock
dividends (EBITDA) $ 2,373 $ 1,146 107% $ 375 $ 2,726 (75)%
======= ======= ======= ======= ======= =======
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2001 2000 2001 2000
------ ------ ------ ------
Restaurants open, beginning .. 1,056 721 972 634
New restaurants opened ....... 113 88 211 188
Restaurants reopened ......... 4 1 5 1
Restaurants closed, to reopen (5) -- (9) --
Restaurants closed, Quizno's . (9) (16) (17) (29)
Restaurants closed, Bains .... -- (2) (3) (2)
------ ------ ------ ------
Restaurants open, end ........ 1,159 792 1,159 792
====== ====== ====== ======
Franchises sold, domestic .... 109 87 260 184
Franchises sold, international 7 16 8 37
------ ------ ------ ------
Total sold ................... 116 103 268 221
====== ====== ====== ======
Initial franchise fees
collected ................... $2.0 million $1.8 million $4.6 million $3.3 million
Systemwide sales, domestic ... $87.8 million $63.9 million $172.1 million $117.0 million
Avg. unit volume, domestic (1) $389,000 $365,000 - -
Same store sales, domestic (2) Up 8.7% Up 7.6% Up 6.5% Up 6.2%
1) Average unit volume is for the twelve months ended December 31, 2000 and 1999.
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 583 stores open since the beginning of January 2000.
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.
Results of Operations
Comparison of the first two quarters of fiscal 2001 with the first two quarters of fiscal
2000 and the second quarter of fiscal 2001 with the second quarter of fiscal 2000
Franchise revenue increased 51% in the second quarter of 2001 to $8,995,813 from $5,938,291
in the comparable quarter last fiscal year. In the first two quarters of fiscal 2001,
franchise revenue increased 46% to $17,330,584 from $11,877,095 last year. Total revenue
increased 37% in the second quarter of 2001 to $13,305,832 from $9,695,487 in the
comparable quarter last fiscal year. For the first half of fiscal 2001, total revenue
increased 39% to $25,686,289 from $18,495,028 last year.
Continuing fees increased 70% in the second quarter of 2001 to $6,562,881 from $3,871,071
in the second quarter of 2000. In the first half of fiscal 2001, continuing fees increased
67% to $12,560,618 from $7,508,553 in fiscal 2000. Continuing fees are comprised of
royalties, licensing fees and distribution fees.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Royalty fees are a percentage of each franchisee's sales paid to us and will increase as
new franchises open, as the average royalty percentage increases, and as average unit sales
increase. At March 31, 2001 there were 1,135 franchises open, as compared to 761 at March
31, 2000. 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
generally 2.1%. We have no immediate plans to increase the royalty rate.
Royalty fees were $5,633,395 for the second quarter of fiscal 2001 compared to $3,400,145
for the same period last year, an increase of 66%. For the first half of fiscal 2001,
royalty fees were $10,673,462 compared to $6,294,033 for the same period last fiscal year,
an increase of 70%.
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 $93,460 in the second quarter of fiscal 2001
and $470,926 in the comparable fiscal 2000 quarter. For the first half of fiscal 2001,
licensing fees were $1,051,130 and $1,214,520 in the comparable fisca1 2000 period.
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, American Food Distributors,
Inc. ("AFD"), began purchasing such products 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
distribution fees. Distribution fees were $836,026 for the second quarter of fiscal 2001.
Initial franchise fees increased 17% in the second quarter of fiscal 2001 to $1,707,473
from $1,459,677 in the same fiscal quarter last year. For the first half of fiscal 2001,
initial franchise fees increased 11% to $3,253,473 from $2,922,107 in the same period last
fiscal year. Initial franchise fees are one-time fees paid by franchisees at the time the
franchise is purchased. Initial franchise fees are not recognized as income until the
period in which all of our obligations relating to the sale have been substantially
performed, which generally occurs when the franchise opens. Our share of initial franchise
fees sold by foreign master franchises is recognized when received. In the first two
quarters of fiscal 2001, we opened 211 franchises, including 24 international restaurants,
as compared to 189 franchises opened, including 28 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 franchises
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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Domestic initial franchise fees collected by us are recorded as deferred initial franchise
fees until the related franchise opens. Deferred initial franchise fees at March 31, 2000
were $12,069,606 and represent 745 domestic franchises sold but not yet in operation,
compared to $8,248,649 at March 31, 2000 representing 516 domestic franchises sold but not
open. Direct costs related to the franchise sale, primarily sales commissions paid to area
directors, are deferred on our books and recorded as an expense at the same time as the
related initial franchise fee is recorded as income. Deferred costs paid with respect to
initial franchise fees deferred at March 31, 2001 were $2,547,501. 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 $189,297 in the second quarter of fiscal 2001
and $150,926 in the same fiscal quarter last year. In the first half of fiscal 2001, area
director and master franchise fees were $385,683 and $631,722 in the same period last year.
Revenue from domestic area director marketing agreement fees is recognized on a
straight-line basis over the term of the agreement, which is ten years. 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.
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 $179,297 in the second quarter of fiscal 2001 and $150,926 in the comparable fiscal
2000 quarter. In the first half of fiscal 2001, domestic area director fees recognized were
$355,683 and $321,722 in the comparable fiscal 2000 period.
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 half of fiscal
2001, we sold one area directorship for $189,647 compared to 6 sold in the first half of
fiscal 2000 for $292,400. At March 31, 2001, we had a total of 67 area directors who owned
areas encompassing approximately 65% 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 $10,000 in the second quarter
of fiscal 2001 and $0 in the second quarter of fiscal 2000. For the first half of fiscal
2001, international master franchise fees recognized were $30,000 and $310,000 in the
comparable fiscal 2000 period.
In the first quarter of fiscal 2000, we sold the master franchise rights to Switzerland for
$300,000. A total of $20,000 of 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 half of fiscal 2001 were
related to previously deferred international master franchise fees for Iceland and the
United Kingdom as we substantially completed our training obligations under the agreement.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 half 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. Of the seven domestic and international areas sold in the first
half of fiscal 2000, two used this financing for $221,357, representing 37% of the total
domestic area director fees and international master franchise fees received or financed in
fiscal 2000.
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 5% in the second quarter of fiscal 2001 to $335,519 from
$321,218 in the second quarter of fiscal 2000. For the first half of fiscal 2001, other
revenue increased by 36% to $745,098 from $548,621 in the comparable fiscal 2000 period.
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 $197,000
in the second quarter of fiscal 2001 compared to $167,000 in the second quarter of fiscal
2000. For the first half of fiscal 2001, amounts paid by equipment suppliers were $330,500
compared to $348,158 in the first half of fiscal 2000. This amount will vary based on new
store openings. Franchise transfer fees decreased in the second quarter of fiscal 2001 to
$65,000 from $92,500 in the second quarter of fiscal 2000. For the first half of fiscal
2001, franchise
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
transfer fees were $181,000 compared to $92,500 in the first half of fiscal 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 $30,589 in the second quarter of fiscal
2001 compared to $33,989 in the second quarter of fiscal 2000. For the first half of fiscal
2001, net bookkeeping fees were $78,291 compared to $54,370 in the first half 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. Included in the second
quarter of fiscal 2001 was $69,036 of fees received from a vendor related to our
inventorying of equipment packages received at new stores.
Sales and royalty commissions expense increased 33% in the second quarter of fiscal 2001 to
$2,503,432 (34% of royalty and initial franchise fees) from $1,883,516 (39% of royalty and
initial franchise fees) in the comparable quarter last fiscal year. For the first half of
fiscal 2001 sales and royalty commissions expense increased 31% to $4,765,500 (34% of
royalty and initial franchise fees) from $3,640,536 (40% of royalty and initial franchise
fees) in the comparable period 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 or longer depending on the area
director agreement.
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,
the United Kingdom master franchisee who will retain 85% of the initial franchise fees
through December 31, 2001 and the Costa Rican master franchisee who will retain 100% of all
initial franchise fees. 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 35% to $4,243,884 in the second quarter of
fiscal 2001 from $3,132,854 in the comparable quarter last fiscal year. For the first half
of fiscal 2001, general and administrative expenses increased 53% to $8,641,416 from
$5,654,369 in the first half of fiscal 2000. As a percent of franchise revenue, general and
administrative expenses have decreased from 53% in the second quarter of fiscal 2000 to 49%
in the second quarter of fiscal 2001. For the first half of fiscal 2001, general and
administrative expenses as a percentage of revenue have increased to
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
50% from 48% in the first half of fiscal 2000. General administrative expenses include all
of our operating costs. The increase is primarily due to the addition of employees and
systems to service the
rapidly growing network of our franchisees and Area Directors. In addition, the increase
for the first half 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 $625,018 on sales
of $3,154,655 in the second quarter of fiscal 2001 compared to $376,132 on sales of
$3,757,196 in the comparable quarter last fiscal year. For the first half of fiscal 2001,
Company owned stores earned $975,968 on sales of $5,896,734 compared to $597,159 on sales
of $6,514,780 in the first half of fiscal 2000. During the half quarter of fiscal 2001 we
operated stores for a total of 95 store operating months, compared to 178 store operating
months in the first half of fiscal 2000. Sales per store month increased 69% in 2001 to
$62,006 from $36,682 in 2000 primarily due to the acquisition of restaurants and other
operations at Denver International Airport in November 1999. At March 31, 2001, we had 18
operating Company stores, including the Cowboy Bar at Denver International Airport (32 at
March 31, 2000).
Stores held for resale lost $206,128, on sales of $1,155,364, in the second quarter of
fiscal 2001 compared to a loss of $68,511, on sales of $0 in the comparable quarter last
fiscal year. For the first half of fiscal 2001, stores held for resale lost $414,277 on
sales of $2,458,971 compared to a loss of $97,743 on sales of $103,153 in the first half of
fiscal 2000. In the first half of fiscal 2001, we operated twenty-one stores held for
resale and in the comparable period of fiscal 2000 we operated two stores held for resale.
During the first half of fiscal 2001, we sold 14 stores held for resale. At March 31, 2001,
we had seven 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 AFD, a subsidiary of ours that purchases and sells 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 first quarter of fiscal 2001, we determined that an impairment related to our carrying
value of our assets held for resale was required and expensed $1,070,106. Also, during the
first quarter, we determined that an impairment was required for certain equipment and
inventory and we expensed a total of $147,526.
Financing costs were $70,352 and $2,275,465 in the second quarter and first half of fiscal
2001, respectively. 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 $2,275,465 of
financing costs, primarily legal, consulting and closing costs related to the LLCP loan in
the first half of fiscal 2001.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Loss on sale of Company stores was $63,439 and $100,167 in the second quarter and first
half of fiscal 2001, respectively. During the quarter ended December 31, 2000, two stores
were sold resulting in a gain on sale of $24,419. Also, during the first quarter, we
incurred costs of $61,147 related to lease settlements of stores closed. During the quarter
ended March 31, 2001, we sold twelve stores held for resale and recorded a loss of $63,439.
The fiscal 2000 loss was $43,595 resulting from the December 1999 sale of one store held
for resale.
Provision for bad debts was $75,077 in the second quarter of fiscal 2001 and $45,614 in the
comparable quarter last fiscal year. For the first half of fiscal 2001 the provision for
bad debts was $140,322 and $213,485 in the first half of fiscal 2000. As of March 31, 2001,
we had an allowance for doubtful accounts of $386,021 that we believe is adequate for
future losses.
Depreciation and amortization was $562,282 in the second quarter of fiscal 2001 and
$422,855 in the comparable quarter last fiscal year. For the first half of fiscal 2001,
depreciation and amortization was $1,113,994 and $866,008 in the first half of fiscal 2000.
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 $193,511 in the second quarter of fiscal 2001
and $18,854 in the comparable quarter last fiscal year. For the first half of fiscal 2001,
amortization of deferred financing costs was $249,955 and $37,686 in the first half of
fiscal 2000. The increase is attributable to the 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. For the quarter and the first half of fiscal
2001, this amortization totaled $174,507 and $212,035, respectively.
Interest expense was $972,341 in the second quarter of fiscal 2001 and $458,334 in the
comparable quarter last fiscal year. For the first half of fiscal 2001, interest expense
was $1,592,385 and $925,302 in the first half of fiscal 2000. 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 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 $85,408 in the second quarter of fiscal 2001 and $37,657 in the
comparable quarter last fiscal year. For the first half fiscal 2001, other expense was
$87,003 and $98,216 in the first half of fiscal 2000. The fiscal 2001 expense was primarily
pre-opening related costs. The fiscal 2000 expense was primarily acquisition-related costs.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Income tax (provision) benefit was a provision of $238,641 in the second quarter of fiscal
2001 and a provision of $76,178 in the comparable quarter of fiscal 2000. For the first
half of fiscal 2001, the income tax benefit was $955,134 compared to an income tax
provision of $302,545 in the first half 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 $1,428,287 in the first half of fiscal 2001
compared to cash provided by operating activities of $917,282 in the first half of fiscal
2000. The fiscal 2001 amount of $1,428,287 was primarily due to an increase in deferred
initial franchise fees of $1,820,423 and an increase in accounts payable and accrued
liabilities of $3,698,095. These increases were partially offset by a decrease of
$1,627,812 related to income taxes payable and a decrease of $3,472,109 related to accounts
receivable.
Net cash used in investing activities was $1,495,208 in the first half of fiscal 2001
compared to cash used in investing activities of $13,439,031 in the first half of fiscal
2000. The fiscal 2001 amount of $1,495,208 was primarily due to an increase in short-term
investments and restricted cash of $1,166,818, the purchase of property and equipment for
$1,214,794, and the issuance of notes receivable for $1,425,820, partially offset by the
proceeds of $1,148,000 from the sale of Company stores and principle payments received on
notes receivable of $1,624,651.
Net cash used in financing activities was $631,924 in the first half of fiscal 2001
compared to cash provided by financing activities of $12,263,489 in the first half of
fiscal 2000. The fiscal 2001 amount of $631,924 was primarily due to the payment of
$9,981,428 related to the repurchase of 779,055 shares of Common Stock tendered in fiscal
2001 and the principle payments of $2,553,726 on long term obligations, partially offset by
the loan proceeds of $12,000,000 received from LLCP.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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
March 31, 2001, 11 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.
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 March 31, 2001.
At September 30, 2000, we had a note receivable from the Advertising Fund of $1,030,000.
During the first half of fiscal 2001, the Advertising Fund made a net repayment of
$65,000, along with accrued interest through December 15, 2000. The March 31, 2001 balance
of $965,000, plus related interest of $21,479 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 March 31, 2001, 779,055 shares of Common Stock had been tendered for a total purchase
price of $6,232,440. Direct costs related to the tender totaled $4,068,567, 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
LLCP. The proceeds of the loan were used to prepay interest on the loan for one year in
the amount of $1,862,260, to repurchase shares and pay costs associated with the tender
offer and to increase working capital.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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
and six months ended March 31, 2001 was $174,507 and $212,035, respectively, 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 $2,275,465 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. During the quarter ended March 31, 2001, we sold twelve stores held for
resale and recorded a loss of $63,439. As of March 31, 2001, the Company had seven stores
classified as held for resale. The seven stores held for resale 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 $1,070,106.
In the first half of fiscal 2001, we reacquired three area director territories for
$200,270, 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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 franchisees, and the purchase of Quizno's area
directorships from our area directors. From time to time, we will make offers and enter
into letters of intent for such transactions subject to the completion of due diligence.
In all such cases, we will identify the sources of cash required to complete such
transactions prior to entering into a binding agreement.
We have never paid cash dividends on our common stock and we do not anticipate a change in
this policy in the foreseeable future.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended March 31, 2001
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K:
Form 8-K, dated February 22, 2001 reporting in Item 5 our operating results for the
first quarter of fiscal 2001.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE QUIZNO'S CORPORATION
By: /s/ John L. Gallivan
John L. Gallivan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Denver, Colorado
May 15, 2001
