UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 10, 2001
------------------------------ ---------------
Common Stock, $0.001 par value 2,337,439 shares
THE QUIZNO'S CORPORATION
Commission File Number: 000-23174
Quarter Ended June 30, 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 Nine Months Ended
June 30, June 30,
------------------------ -------------------------
2001 2000 2001 2000
---------- ---------- ----------- -----------
FRANCHISE OPERATIONS:
Revenue
Continuing fees (Note 9) $8,010,904 $4,887,736 $20,571,522 $12,396,289
Initial franchise fees 1,602,834 1,443,236 4,856,307 4,365,343
Area director and master franchise fees 433,428 335,306 819,111 967,028
Other 447,007 262,651 1,192,105 811,272
Interest 168,238 127,867 553,950 393,959
---------- ---------- ----------- -----------
Total revenue 10,662,411 7,056,796 27,992,995 18,933,891
---------- ---------- ----------- -----------
Expenses
Sales and royalty commissions (2,686,002) (2,080,141) (7,451,502) (5,720,677)
General and administrative (5,101,499) (3,600,333) (13,742,915) (9,254,702)
---------- ---------- ----------- -----------
Total expenses (7,787,501) (5,680,474) (21,194,417) (14,975,379)
---------- ---------- ----------- -----------
Net income from franchise operations 2,874,910 1,376,322 6,798,578 3,958,512
---------- ---------- ----------- -----------
COMPANY STORE OPERATIONS: (Note 5)
Sales 2,317,240 4,217,110 10,672,945 10,835,043
---------- ---------- ----------- -----------
Cost of sales (619,482) (1,240,320) (3,041,720) (3,170,042)
Cost of labor (466,951) (929,778) (2,304,102) (2,630,648)
Other store expenses (906,386) (1,812,898) (4,441,011) (4,300,823)
---------- ---------- ----------- -----------
Total expenses (1,992,819) (3,982,996) (9,786,833) (10,101,513)
---------- ---------- ----------- -----------
Net income from Company store operations 324,421 234,114 886,112 733,530
---------- ---------- ----------- -----------
Net income from partnership store
operations (Note 5) 61,279 - 61,279 -
---------- ---------- ----------- -----------
Net income from Company and partnership
store operations 385,700 234,114 947,391 733,530
---------- ---------- ----------- -----------
OTHER EXPENSE:
New company start-up costs (Note 10) $ (162,502) $ - $ (452,380) $ -
Impairment of long-lived assets (Note 5) (276,135) - (1,493,767) -
Financing costs (Note 4) (7,916) - (2,283,381) -
Loss on sale of Company stores (4,409) - (104,576) (43,595)
Provision for bad debts (75,116) (33,817) (215,438) (247,302)
Depreciation and amortization (543,206) (514,417) (1,657,200) (1,380,425)
Amortization of deferred financing costs (288,885) (18,925) (538,840) (56,611)
Interest expense (922,820) (467,658) (2,515,205) (1,392,960)
Other expense (120,193) (34,505) (207,194) (132,721)
---------- ---------- ----------- -----------
Total other expense (2,401,182) (1,069,322) (9,467,981) (3,253,614)
---------- ---------- ----------- -----------
Net income (loss) before income taxes 859,428 541,114 (1,722,012) 1,438,428
Income tax (provision) benefit (317,989) (180,912) 637,145 (483,457)
---------- ---------- ----------- -----------
Net income (loss) 541,439 360,202 (1,084,867) 954,971
Preferred stock dividends (44,379) (52,164) (139,389) (131,790)
---------- ---------- ----------- -----------
Net income (loss) applicable to common
shareholders $ 497,060 $ 308,038 $(1,224,256) $ 823,181
========== ========== =========== ===========
Basic net income (loss) per share of common
stock $ 0.21 $ 0.10 $ (0.49) $ 0.27
========== ========== =========== ===========
Diluted net income (loss) per share of
common stock $ 0.16 $ 0.09 $ (0.49) $ 0.24
========== ========== =========== ===========
Weighted average common shares outstanding
- ------------------------------------------
Basic 2,344,240 3,004,778 2,521,729 2,997,634
========== ========== =========== ===========
Diluted 3,129,462 3,597,326 2,521,729 3,566,898
========== ========== =========== ===========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30, September 30,
2001 2000
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 8,726,320 $ 2,493,976
Restricted cash (Note 8) 1,054,340 -
Short term investments 5,497,724 5,324,336
Accounts receivable, net of allowance for doubtful
accounts of $348,420 at June 30, 2001 and $222,293
at September 30, 2000 4,786,891 2,066,247
Current portion of notes receivable (Note 7) 462,432 1,545,844
Deferred tax asset 221,182 221,182
Other current assets 1,408,826 481,854
----------- ------------
Total current assets 22,157,715 12,133,439
----------- ------------
Property and equipment and assets held for resale at
cost, net of accumulated depreciation and amortization
of $3,329,901 at June 30, 2001 and $2,433,637 at
September 30, 2000 (Note 5) 10,311,769 11,863,819
----------- ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$950,872 at June 30, 2001 and $1,104,646 at
September 30, 2000 (Note 5) 4,114,246 4,600,528
Investments in area directorships, net of accumulated
amortization of $440,107 at June 30, 2001 and
$203,062 at September 30, 2000 (Note 6) 4,576,358 4,236,151
Other deferred assets (Note 4) 6,209,437 2,782,498
Deferred tax asset 4,254,169 4,210,626
Deposits and other assets 66,518 130,837
Notes receivable, net of allowance for doubtful
accounts of $50,000 at June 30, 2001 and $50,000 at
September 30, 2000 1,310,266 1,301,435
----------- ------------
Total other assets 20,530,994 17,262,075
----------- ------------
Total assets $53,000,478 $ 41,259,333
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 6,365,096 $ 2,614,437
Accrued liabilities 2,460,589 1,495,797
Current portion of long term obligations 1,843,460 1,550,501
Reserve for impairment (Note 5) 275,774 -
Income taxes payable - 370,557
----------- ------------
Total current liabilities 10,944,919 6,031,292
Line of credit (Note 3) - -
Long term obligations (Notes 4 and 8) 27,230,951 16,037,238
Deferred revenue 20,208,495 16,402,957
----------- ------------
Total liabilities 58,384,365 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 June 30,
2001 and September 30, 2000 ($876,000 liquidation
preference) 146 146
Series C issued and outstanding 57,000 at June 30,
2001 and 167,000 at September 30, 2000 ($285,000
liquidation preference) 57 167
Series D issued and outstanding 3,000 at June 30,
2001 and September 30, 2000 ($9,000 liquidation
preference) 3 3
Series E issued and outstanding 59,480 at June 30,
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 June
30, 2001 and 3,007,921 at September 30, 2000 (Note 4) 2,337 3,008
Capital in excess of par value 303,309 3,857,702
Accumulated deficit (9,063,599) (1,073,239)
----------- ------------
Total liabilities and stockholders' equity (deficit) $53,000,478 $ 41,259,333
=========== ============
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
June 30,
---------------------------
2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,084,867) $ 954,971
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,657,199 1,380,425
Impairment of long-lived assets 1,493,767 -
Provision for losses on accounts receivable 215,438 247,302
Deferred income taxes (43,543) (38,770)
Promissory notes accepted for area director fees (293,693) (296,357)
Prior year start-up and financing costs 207,896 -
Amortization of prepaid interest expense 1,025,518 -
Loss on disposal of Company store 17,769 43,595
Amortization of deferred financing costs 538,841 56,611
Amortization of deferred area director fee revenue (67,618) (229,628)
Interest expense accruals associated with benefit 311,036 -
plans
Area director expenses recognized 22,314 22,963
Other 2,177 -
Changes in assets and liabilities:
Accounts receivable (2,936,082) (1,101,077)
Other current assets (314,981) (115,351)
Accounts payable 4,387,630 720,139
Accrued liabilities 964,792 721,299
Income taxes payable (1,007,528) (851,469)
Deferred franchise costs (319,175) (191,375)
Deferred initial franchise fees and other fees 3,873,155 1,205,949
----------- ----------
Net cash provided by operations 8,650,045 2,529,227
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,689,950) (5,513,728)
Issuance of other notes receivable (1,682,054) (604,761)
Short term investments and restricted cash (1,227,728) (972,256)
Proceeds from the sale of assets and stores 1,442,261 137,361
Acquisition of Company owned stores - (5,779,088)
Principal payments received on notes receivable 3,050,328 386,047
Intangible and deferred assets and deposits (584,257) 82,214
Investments in area director territories (577,252) (2,450,396)
----------- ----------
Net cash used in investing activities (1,268,652) (14,714,607)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock - $ 270,586
Proceeds from sale of Class D and Class E Preferred - 478,611
Stock
Repurchase of Class D Preferred Stock - (3,000)
Principal payments on long term obligations (3,026,473) (3,809,761)
Proceeds from issuance of notes payable 12,000,000 17,180,000
Financing costs (1,760) (646,510)
Common Stock repurchased (6,232,440) (1,114,032)
Costs associated with tender of Common Stock and
repurchase of stock options and warrants (3,748,987) -
Dividends paid (139,389) (131,790)
----------- -----------
Net cash (used in) provided by financing activities (1,149,049) 12,224,104
----------- -----------
Net increase in cash 6,232,344 38,724
Cash, beginning of period 2,493,976 626,828
----------- -----------
Cash, end of period $ 8,726,320 $ 665,552
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,537,522 $ 1,218,317
=========== ===========
Cash paid during the period for income taxes $ 370,173 $ 1,608,770
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended June 30, 2000, we accepted a promissory note in the
amount of $19,446 for equipment previously held for resale. Note receivables in the
amount of $311,028 were capitalized in exchange for an Area Director territory
repurchased during the year. Also, we issued notes payable of $714,621 for partial
payment of five area director territories repurchased during the quarter. Finally, a
Company store held for resale was closed and the net assets of $35,633 were
written-off.
(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) (20,268) -
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 - - - - (139,389) -
Net (loss) - - - - - (1,084,867)
--------- -------- ---------- -------- ----------- -----------
Balances at June 30, 2001 265,480 $ 265 2,337,439 $ 2,337 $ 303,309 $(9,063,599)
========= ======== ========== ======== =========== ===========
(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 nine month periods ended June 30, 2001 and June 30,
2000, (b) the consolidated financial position at June 30, 2001 and September 30,
2000, (c) the consolidated statements of cash flows for the nine month periods ended
June 30, 2001 and June 30, 2000, and (d) the consolidated changes in stockholders'
equity (deficit) for the twelve month and nine month periods ended September 30,
2000 and June 30, 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 nine
months ended June 30, 2000 to make them comparable to those presented for the three
and nine months ended June 30, 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 nine month periods ended June 30, 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 nine months ended
June 30, 2001 and 2000, was $129,036 and $387,108, respectively, 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 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 June 30, 2001, there were 842
domestic franchises sold but not yet open with related opening commissions totaling
$2,730,650 ($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 June 30, 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 lender has not placed the note in default and is working with the
franchisee and the Company to find a new franchisee. The Company has determined
that the market value of the store is in excess of the outstanding loan amount and
therefore, no loss contingency has been recorded.
In June 2001, the Quizno's National Marketing Fund Trust and the Quizno's Regional
Marketing Fund Trust (together the "marketing funds") entered into a $4,000,000
line of credit with Wells Fargo Bank West, N.A. which matures on January 31, 2002.
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. As
of August 3, 2001, $2,800,000 had been drawn against this line of credit.
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
June 30, 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.
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 nine months
ended June 30, 2001 was $174,507 and $386,542, 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 $2,283,381 of financing costs related to the LLCP
loan.
In June 2001, the Company entered into a definitive merger agreement with a
corporation formed by Richard E. Schaden and Richard F. Schaden, the Company's
majority shareholders. Under the agreement, the new corporation will merge with the
Company, and the shareholders of the Company (other than the Schadens and certain of
their affiliates) will be entitled to receive $8.50 per share in cash. Completion
of the merger is subject to approval by holders of a majority of the Company's
outstanding common stock and receipt of a fairness opinion from the financial
advisor retained by the Special Committee of the Board of Directors in connection
with the proposed transaction. The acquirer may terminate the merger if there is a
material change in the business of the Company or the transaction. The Schadens
currently own approximately 67% of the Company's outstanding shares of common stock.
The Company expects to file definitive proxy materials for the shareholder meeting
and to act on the merger proposal as soon as practical.
5. STORES HELD FOR RESALE AND STORE OPERATIONS
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. During the quarter ended June 30, 2001, the Company sold two stores and
leased the assets of three stores to partnerships formed during the quarter. As of
June 30, 2001, the Company had three stores classified as held for resale (including
one partnership store), one of which was sold in August of 2001. The remaining
stores held for resale are expected to be sold or closed 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:
June 30, September 30,
2001 2000
----------- ------------
Property and equipment $ 450,383 $ 157,689
Intangible assets 3,194 41,172
---------- ----------
453,577 198,861
Accumulated depreciation and
amortization (40,469) (4,282)
Reserve for impairment (187,774) -
---------- ----------
Net assets of stores held for resale $ 225,334 $ 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 Nine Months Ended
---------------------- ------------------------ --------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
---------- ---------- ----------- -----------
Sales $ 303,218 $ - $ 2,762,189 $ 103,153
---------- ---------- ----------- -----------
Cost of sales (96,880) (132) (874,902) (43,207)
Costs of labor (89,831) (500) (756,808) (41,075)
Other store expenses (212,511) (57,399) (1,640,760) (174,645)
---------- ---------- ----------- -----------
Store expenses (399,222) (58,031) (3,272,470) (258,927)
---------- ---------- ----------- -----------
Net loss from stores held
for resale $ (96,004) $ (58,031) $ (510,281) $ (155,774)
========== ========== =========== ===========
Company Stores * Three Months Ended Nine Months Ended
---------------- ------------------------ --------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
---------- ---------- ----------- -----------
Sales $2,014,022 $4,217,110 $ 7,910,756 $10,731,890
---------- ---------- ----------- -----------
Cost of sales (522,602) (1,240,188) (2,166,818) (3,126,835)
Costs of labor (377,120) (929,278) (1,547,294) (2,376,331)
Other store expenses (693,875) (1,755,499) (2,800,251) (4,339,420)
---------- ---------- ------------ -----------
Store expenses (1,593,597) (3,924,965) (6,514,363) (9,842,586)
---------- ---------- ----------- -----------
Net income from Company $ 420,425 $ 292,145 $ 1,396,393 $ 889,304
stores ========== ========== =========== ===========
* 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 nine months ended June 30, 2001, the Company offset this
impairment reserve $882,332 for losses related to the stores sold.
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. During the quarter ended June 30, 2001, the Company determined that an
impairment was required, primarily for certain software assets, and expensed a total
of $276,135.
During the quarter ended June 30, 2001, we provided certain Company store managers
an opportunity to participate in the profits and losses of 18 company stores by
forming partnerships in which those managers have a 51% interest. The Company
entered into franchise agreements with each partnership and leased the underlying
furniture, fixtures and equipment for each store to the partnerships (although the
Company continues to own the furniture, fixtures and equipment, and assumes an
active role, along with our partners, in the store operations). Along with
distributions from the partnerships, the Company now receives lease rental fees on
the Company store assets and royalty fees. Included in continuing fees for the
quarter ended June 30, 2001, were royalties of $76,211 generated from these stores.
6. INVESTMENTS IN AREA DIRECTORSHIPS
In the first three quarters of fiscal 2001, the Company reacquired four area
director territories for $552,499, 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 nine months ended June 30, 2001, the Advertising Fund
repaid the outstanding principal balance along with accrued interest.
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 approximately $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.
10. RECENT DEVELOPMENTS
In June 2001, the Company entered into an agreement with a Canadian company that is
the Company's master franchisee in Canada and its principal owner to provide
management services and other assistance to the master franchisee. At this time,
the Canadian master franchise is financially distressed. In consideration for
these services, the Company will be paid certain management fees and will be issued
20% of the outstanding capital stock of the master franchisee on a fully diluted
basis. The Company will also be reimbursed for the costs of certain of our
services. In August 2001, the principal owner of the master franchisee granted the
Company, subject to certain conditions, a series of options to purchase from it up
to an additional 31% of the outstanding capital stock of the master franchisee on a
fully diluted basis at a cost determined by various valuation methods that depend
upon when the options are exercised. This last option in the series will expire on
December 31, 2003. As of June 30, 2001, there were 122 restaurants in Canada.
During the quarter ended June 30, 2001, the Company incurred $162,502 of expenses
related to the start-up of this venture.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this quarterly report, and in particular in
this section entitled "Management's Discussion and Analysis or Plan of Operation," are
forward-looking statements that involve risks and uncertainties that might adversely
affect our operating results in the future in a material way. Such risks and
uncertainties include, without limitation, the effect of national and regional
economic and market conditions in the U.S. and the other countries in which we
franchise restaurants, costs of 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 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 nine months ended June 30, 2001, we incurred a loss before preferred dividends
of $1,084,867, composed of income from franchise operations of $6,798,578, income from
Company owned store and partnership store operations of $947,391 and less other income
and expense and taxes totaling $(8,830,836). In the comparable period of fiscal 2000,
we earned a profit before preferred dividends of $954,971, composed of income from
franchise operations of $3,958,512, income from Company owned store operations of
$733,530, and less other income and expense and taxes totaling $(3,737,071).
The following chart reflects our revenue growth by source and number of restaurants
for the three and nine month periods of fiscal 2001 compared to the comparable periods
of fiscal 2000:
Three Months Ended Nine Months Ended
($ in thousands) June 30, % June 30, %
-------------------- --------------------
2001 2000 Change 2001 2000 Change
-------- -------- ------- -------- -------- -------
Continuing fees $ 8,011 $ 4,888 64% $ 20,572 $ 12,396 66%
Initial franchise fees 1,603 1,443 11% 4,856 4,365 11%
Area director and master
franchise fees 434 335 29% 819 967 (15)%
Other 447 263 70% 1,192 812 47%
Interest 168 128 32% 554 394 41%
--- -------- ------ -------- -------- ------
Total franchise revenue 10,663 7,057 51% 27,993 18,934 48%
Sales by Company owned
stores 2,014 4,217 (52)% 7,911 10,732 (26)%
Sales by Stores held for
resale 303 - 100% 2,762 103 2,578%
-------- -------- ------ -------- -------- ------
Total Revenue $ 12,980 $ 11,274 15% $ 38,666 $ 29,769 30%
======== ======== ====== ======== ======== ======
Earnings before interest
expense, income taxes,
depreciation and
amortization and preferred
stock dividends (EBITDA) $ 2,614 $ 1,542 69% $ 2,989 $ 4,268 (30)%
======== ======== ====== ======== ======== ======
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- --------- ---------
Restaurants open, beginning 1,159 792 972 634
New restaurants opened 92 94 303 282
Restaurants reopened 4 3 9 4
Restaurants closed, to reopen (9) (1) (19) (4)
Restaurants closed, Quizno's (3) (5) (5) (21) (31)
Restaurants closed, Bains - - (3) (2)
-------- -------- --------- ---------
Restaurants open, end 1,241 883 1,241 883
======== ======== ========= =========
Franchises sold, domestic 185 130 445 314
Franchises sold, international 13 12 21 49
-------- -------- --------- ---------
Total sold 198 142 466 363
======== ======== ========= =========
Initial franchise fees $3.5 million $2.2 million $8.2 million $5.4 million
collected
Systemwide sales, domestic $106.9 million $72.0 million $280.3 million $190.3 million
Avg. unit volume, domestic (1) $389,000 $365,000 - -
Same store sales, domestic (2) Up 0.6% Up 9.2% Up 4.2% Up 7.7%
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 574 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.
3) Four of the five Quizno's closed in the quarter ended June 30, 2000 and two of
the five Quizno's closed during the quarter ended June 30, 2001, were
non-traditional locations. For the nine months ended June 30, 2000, 21 of the 31
Quizno's closed were non-traditional locations. For the nine months ended June 30,
2001, 6 of the 21 Quizno's closed were non-traditional locations. Non-traditional
locations are convenience and gas units, hospitals, colleges, food courts, etc. We
have changed our site criteria to approve such locations only when the demographics
and unit economics for any such proposed unit are well above average.
Results of Operations
Comparison of the first three quarters of fiscal 2001 with the first three quarters of
fiscal 2000 and the third quarter of fiscal 2001 with the third quarter of fiscal 2000
Franchise revenue increased 51% in the third quarter of 2001 to $10,662,411 from
$7,056,796 in the comparable quarter last fiscal year. In the first three quarters of
fiscal 2001, franchise revenue increased 48% to $27,992,995 from $18,933,891 last
year. Total revenue increased 15% in the third quarter of 2001 to $12,979,651 from
$11,273,906 in the comparable quarter last fiscal year. For the first three quarters
of fiscal 2001, total revenue increased 30% to $38,665,940 from $29,768,934 last year.
Continuing fees increased 64% in the third quarter of 2001 to $8,010,904 from
$4,887,736 in the third quarter of 2000. In the first three quarters of fiscal 2001,
continuing fees increased 66% to $20,571,522 from $12,396,289 in fiscal 2000.
Continuing fees are comprised of royalties, licensing fees and distribution fees.
Royalty fees are a percentage of each franchisee's sales paid to us and will increase
as new franchises open, as the average royalty percentage increases, and as average
unit sales increase. At June 30, 2001 there were 1,236 franchises open, as compared
to 849 at June 30, 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 $6,808,033 for the third quarter of fiscal 2001 compared to
$4,181,260 for the same period last year, an increase of 63%. For the first three
quarters of fiscal 2001, royalty fees were $17,481,495 compared to $10,475,293 for the
same period last fiscal year, an increase of 67%.
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 $0 in the third quarter of
fiscal 2001 and $706,476 in the comparable fiscal 2000 quarter. For the first three
quarters of fiscal 2001, licensing fees were $1,051,130 and $1,920,996 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.
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 has been replaced by distribution fees. Distribution
fees were $1,202,871 in the third quarter of fiscal 2001 and $2,038,897 for the second
and third quarters of fiscal 2001.
Initial franchise fees increased 11% in the third quarter of fiscal 2001 to $1,602,834
from $1,443,236 in the same fiscal quarter last year. For the first three quarters of
fiscal 2001, initial franchise fees increased 11% to $4,856,307 from $4,365,343 in the
same period last fiscal year. Initial franchise fees are one-time fees paid by
franchisees at the time the franchise is purchased. Initial franchise fees are not
recognized as income until the period in which all of our obligations relating to the
sale have been substantially performed, which generally occurs when the franchise
opens. Our share of initial franchise fees sold by foreign master franchises is
recognized when received. In the first three quarters of fiscal 2001, we opened 303
franchises, including 28 international restaurants, as compared to 282 franchises
opened, including 37 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 franchisee. 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
June 30, 2001 were $13,979,606 and represent 842 domestic franchises sold but not yet
in operation, compared to $8,930,151 at June 30, 2000 representing 567 domestic
franchises sold but not open. Direct costs related to the franchise sale, primarily
sales commissions paid to area directors, are deferred on our books and recorded as an
expense at the same time as the related initial franchise fee is recorded as income.
Deferred costs paid with respect to initial franchise fees deferred at June 30, 2001
were $2,309,450. 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 $433,428 in the third quarter of fiscal
2001 and $335,306 in the same fiscal quarter last year. In the first three quarters of
fiscal 2001, area director and master franchise fees were $819,111 and $967,028 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 $183,428 in the third quarter of fiscal 2001 and $175,306 in the
comparable fiscal 2000 quarter. In the first three quarters of fiscal 2001, domestic
area director fees recognized were $539,111 and $497,028 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 three quarters of fiscal 2001, we sold four area directorships for $501,493
compared to 6 sold in the first three quarters of fiscal 2000 for $292,400. At June
30, 2001, we had a total of 61 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 $250,000 in the
third quarter of fiscal 2001 and $160,000 in the third quarter of fiscal 2000. For the
first three quarters of fiscal 2001, international master franchise fees recognized
were $280,000 and $470,000 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 the fee was deferred until our
training obligation is completed. We also recognized $30,000 of previously deferred
international master franchise fees in the second quarter as we substantially
completed our training obligations under the agreements. In the third quarter of
fiscal 2000, we sold the master franchise rights to Iceland and Mexico, Venezuela,
Peru, Dominican Republic and certain other Caribbean islands for a total of $180,000,
of which $20,000 of these fees was deferred. In the third quarter of fiscal 2001, we
sold the master franchise rights for South Korea for $250,000. Also, during the three
quarters ended June 30, 2001, we recognized $30,000 of international master franchise
fees related to previously deferred international master franchise fees for Iceland
and the United Kingdom 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
five domestic and international areas sold in the first three quarters of fiscal 2001
used this financing for $293,693, representing 39% of the total domestic area director
fees and international master franchise fees received or financed in fiscal 2001. Of
the nine domestic and international areas sold in the first three quarters of fiscal
2000, three used this financing for $296,357, representing 38% of the total domestic
area director fees and international master franchise fees received or financed in
fiscal 2000.
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 70% in the third quarter of fiscal 2001 to $447,007 from
$262,651 in the third quarter of fiscal 2000. For the first three quarters of fiscal
2001, other revenue increased by 47% to $1,192,105 from $811,272 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 $189,513 in the third quarter of fiscal 2001 compared to
$127,500 in the third quarter of fiscal 2000. For the first three quarters of fiscal
2001, amounts paid by equipment suppliers were $520,013 compared to $475,658 in the
first three quarters of fiscal 2000. This amount will vary based on new store
openings. Franchise transfer fees increased in the third quarter of fiscal 2001 to
$150,000 from $80,000 in the third quarter of fiscal 2000. For the first three
quarters of fiscal 2001, franchise transfer fees were $331,000 compared to $172,500 in
the first three quarters 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 $26,266 in the third quarter of fiscal 2001 compared to $32,394 in the third
quarter of fiscal 2000. For the first three quarters of fiscal 2001, net bookkeeping
fees were $104,558 compared to $86,764 in the first three quarters 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 first
three quarters of fiscal 2001 was $75,036 of fees received from a vendor related to
our inventorying of equipment packages received at new stores.
Sales and royalty commissions expense increased 29% in the third quarter of fiscal
2001 to $2,686,002 (32% of royalty and initial franchise fee revenue) from $2,080,141
(37% of royalty and initial franchise fee revenue) in the comparable quarter last
fiscal year. For the first three quarters of fiscal 2001 sales and royalty commissions
expense increased 30% to $7,451,502 (33% of royalty and initial franchise fee revenue)
from $5,720,677 (39% of royalty and initial franchise fee revenue) 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 revenue 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 franchisees, 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 42% to $5,101,499 in the third quarter
of fiscal 2001 from $3,600,333 in the comparable quarter last fiscal year. For the
first three quarters of fiscal 2001, general and administrative expenses increased 48%
to $13,742,915 from $9,254,702 in the first three quarters of fiscal 2000. As a
percent of franchise revenue, general and administrative expenses have decreased from
51% in the third quarter of fiscal 2000 to 48% in the third quarter of fiscal 2001. As
a percent of franchise revenue, general and administrative expenses have remained the
same at 49% for the three quarters ending June 30, 2000 and 2001. General
administrative expenses include all of our operating costs. The increase in costs 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 three quarters 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 $420,425 on
sales of $2,014,022 in the third quarter of fiscal 2001 compared to $292,145 on sales
of $4,217,110 in the comparable quarter last fiscal year. For the first three quarters
of fiscal 2001, Company owned stores earned $1,396,393 on sales of $7,910,756 compared
to $889,304 on sales of $10,731,890 in the first three quarters of fiscal 2000. During
the first three quarters of fiscal 2001, we operated stores for a total of 122.4 store
operating months, compared to 280.5 store operating months in the first three quarters
of fiscal 2000. Sales per store month increased 69% in 2001 to $64,630 from $38,260 in
2000 primarily due to the acquisition of restaurants and other operations at Denver
International Airport in November 1999. During the quarter ended June 30, 2001, we
provided certain Company store managers an opportunity to participate in the profits
and losses of 18 company stores by forming partnerships in which those managers have a
51% interest. We entered into franchise agreements with each partnership and leased
the underlying furniture, fixtures and equipment for each store to the partnerships
(although we continue to own the furniture, fixtures and equipment, and assumes an
active role, along with our partners, in the store operations). Along with
distributions from the partnerships, we now receive lease rental fees on the Company
store assets and royalty fees. Included in continuing fees for the quarter ended June
30, 2001, were royalties of $76,211 generated from these eighteen stores (three of
these stores were previously classified as stores held for resale). Also, during the
quarter ended June 30, 2001, we received $61,279 of distributions and lease fees from
these stores. At June 30, 2001, we had 3 operating Company stores, including the
Cowboy Bar at Denver International Airport (35 at June 30, 2000).
Stores held for resale lost $96,004, on sales of $303,218, in the third quarter of
fiscal 2001compared to a loss of $58,031 on sales of $0 in the third quarter of fiscal
2000. For the first three quarters of fiscal 2001, stores held for resale lost
$510,281 on sales of $2,762,189 compared to a loss of $155,774 on sales of $103,153 in
the first three quarters of fiscal 2000. At September 30, 2000, we operated one store
held for resale. In October 2000, we reclassified 20 stores as held for resale. In the
comparable period of fiscal 2000 we operated two stores held for resale. During the
first three quarters of fiscal 2001, we sold 16 stores held for resale and leased the
assets of three stores to partnerships formed during the quarter. At June 30, 2001, we
had three stores classified as held for resale (including one partnership store), of
which one store was sold in August 2001. The remaining stores held for resale are
expected to be sold or closed in 2001.
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. In June 2001, the
Company entered into an agreement with a Canadian company that is our master
franchisee in Canada and its principal owner to provide management services and other
assistance to the master franchisee. At this time, the Canadian master franchise is
financially distressed. During the quarter ended June 30, 2001, the Company incurred
$162,502 of expenses, primarily legal and administrative costs, related to the
start-up of this venture.
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. During the
quarter ended June 30, 2001, the Company determined that an impairment was required,
primarily for certain software assets, and expensed a total of $276,135.
Financing costs were $7,916 and $2,283,381 in the third quarter and first three
quarters 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.
The financing costs were primarily legal, consulting and closing costs related to the
LLCP loan.
Loss on sale of Company stores was $4,409 and $104,576 in the third quarter and first
three quarters 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. During the quarter ended June 30, 2001, we incurred
$4,409 of costs related to stores closed in a prior quarter. The fiscal 2000 loss was
$43,595 resulting from the December 1999 sale of one store held for resale.
Provision for bad debts was $75,116 in the third quarter of fiscal 2001 and $33,817 in
the comparable quarter last fiscal year. For the first three quarters of fiscal 2001
the provision for bad debts was $215,438 and $247,302 in the first three quarters of
fiscal 2000. As of June 30, 2001, we had an allowance for doubtful accounts of
$398,420 that we believe is adequate for future losses.
Depreciation and amortization was $543,206 in the third quarter of fiscal 2001 and
$514,417 in the comparable quarter last fiscal year. For the first three quarters of
fiscal 2001, depreciation and amortization was $1,657,200 and $1,380,425 in the first
three quarters of fiscal 2000. The increase is primarily due to the acquisition and
development of new Company owned restaurants, primarily the operations at Denver
International Airport, and the repurchase and reacquisition of area director
territories since December 31, 1999.
Amortization of deferred financing costs was $288,885 in the third quarter of fiscal
2001 and $18,925 in the comparable quarter last fiscal year. For the first three
quarters of fiscal 2001, amortization of deferred financing costs was $538,840 and
$56,611 in the first three quarters 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 three quarters of fiscal 2001, this
amortization totaled $174,507 and $386,542, respectively.
Interest expense was $922,820 in the third quarter of fiscal 2001 and $467,658 in the
comparable quarter last fiscal year. For the first three quarters of fiscal 2001,
interest expense was $2,515,205 and $1,392,960 in the first three quarters 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 $120,193 in the third quarter of fiscal 2001 and $34,505 in the
comparable quarter last fiscal year. For the first three quarters fiscal 2001, other
expense was $207,194 and $132,721 in the first three quarters of fiscal 2000. The
fiscal 2001 expense was primarily pre-opening related costs, one-time project proposal
costs and a sales and use tax assessment. The fiscal 2000 expense was primarily
acquisition-related costs.
Income tax (provision) benefit was a provision of $317,989 in the third quarter of
fiscal 2001 and a provision of $180,912 in the comparable quarter of fiscal 2000. For
the first three quarters of fiscal 2001, the income tax benefit was $637,145 compared
to an income tax provision of $483,457 in the first three quarters 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 $8,650,045 in the first three quarters
of fiscal 2001 compared to cash provided by operating activities of $2,529,227 in the
first three quarters of fiscal 2000. The fiscal 2001 amount of $8,650,045 was
primarily due to an increase in deferred initial franchise fees of $3,873,155 and an
increase in accounts payable and accrued liabilities of $5,352,422. These increases
were partially offset by a decrease in cash flow of $1,007,528 related to income taxes
payable and a decrease in cash flow of $2,936,082 related to accounts receivable. The
increase in cash flow from operations associated with accounts payable and accrued
liabilities and the decrease associated with accounts receivable was due primarily to
our AFD operations and the favorable payment terms negotiated with the company that
purchases proprietary products from us and resells those products to our franchisees.
Net cash used in investing activities was $1,268,652 in the first three quarters of
fiscal 2001 compared to cash used in investing activities of $14,714,607 in the first
three quarters of fiscal 2000. The fiscal 2001 amount of $1,268,652 was primarily due
to an increase in short-term investments and restricted cash of $1,227,728 and the
purchase of property and equipment and area director territories for $2,267,202,
partially offset by the proceeds of $1,442,261 from the sale of Company stores and
principle payments received on notes receivable, net of new notes issued, of
$1,368,274.
Net cash used in financing activities was $1,149,049 in the first three quarters of
fiscal 2001 compared to cash provided by financing activities of $12,224,104 in the
first three quarters of fiscal 2000. The fiscal 2001 amount of $1,149,049 was
primarily due to the payment of $9,981,427 related to the repurchase of 779,055 shares
of Common Stock tendered in fiscal 2001 and the principle payments of $3,026,473 on
long term obligations, partially offset by the loan proceeds of $12,000,000 received
from LLCP.
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 franchisee, whose
personal liability is limited to one year. The franchisee pays QRC an indemnification
fee of $165 per month, pays a one-time lease-processing fee to QRC of $2,200, and pays a
security deposit to QRC equal to two months rent. Effective March 1, 1998, we
transferred cash and other assets having a book value of approximately $500,000 to QRC
in exchange for stock and a promissory note. As of June 30, 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 June 30, 2001.
At September 30, 2000, we had a note receivable from the Advertising Fund of
$1,030,000. During the nine months ended June 30, 2001, the Advertising Fund repaid
the outstanding principal balance along with accrued interest.
In June 2001, the Quizno's National Marketing Fund Trust and the Quizno's Regional
Marketing Fund Trust (together the "marketing funds") entered into a $4,000,000 line
of credit with Wells Fargo Bank West, N.A. which matures on January 31, 2002. The
marketing funds collect a fee of 1% and 3%, respectively, of gross sales from our
franchisees and deposits the funds into advertising funds that are used to develop
advertising to attract customers to the restaurants and to create awareness of the
Quizno's brand image. We have guaranteed this line of credit. As of August 3, 2001,
$2,800,000 had been drawn against this line of credit.
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 June 30, 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 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 nine months
ended March 31, 2001 was $174,507 and $386,542, 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 $2,283,381 of financing costs related to the LLCP
loan.
In June 2001, we entered into a definitive merger agreement with a corporation formed
by Richard E. Schaden and Richard F. Schaden, our majority shareholders. Under the
agreement, the new corporation will merge with us, and the shareholders of the Company
(other than the Schadens and certain of their affiliates) will be entitled to receive
$8.50 per share in cash. Completion of the merger is subject to approval by holders
of a majority of our outstanding common stock and receipt of a fairness opinion from
the financial advisor retained by the Special Committee of the Board of Directors in
connection with the proposed transaction. The acquirer may terminate the merger if
there is a material change in the business of the Company or the transaction. The
Schadens currently own approximately 67% of our outstanding shares of common stock.
We expect to file definitive proxy materials for the shareholder meeting and to act on
the merger proposal as soon as practical.
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. During the quarter ended
June 30, 2001, we sold two stores and leased the assets of three stores to
partnerships formed during the quarter. As of June 30, 2001, we had three stores
classified as held for resale (including one partnership store), one of which was sold
in August of 2001. The remaining stores held for resale are expected to be sold or
closed 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. During the quarter
ended June 30, 2001, the Company determined that an impairment was required, primarily
for certain software assets, and expensed a total of $276,135.
In the first three quarters of fiscal 2001, we reacquired four area director
territories for $552,499, 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 not 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 approximately $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.
In June 2001, we entered into an agreement with a Canadian company that is our master
franchisee in Canada and its principal owner to provide management services and other
assistance to the master franchisee. At this time, the Canadian master franchise is
financially distressed. In consideration for these services, we will be paid certain
management fees and will be issued 20% of the outstanding capital stock of the master
franchisee on a fully diluted basis. We will also be reimbursed for the costs of
certain of our services. In August 2001, the principal owner of the master franchisee
granted us, subject to certain conditions, a series of options to purchase from it up
to an additional 31% of the outstanding capital stock of the master franchisee on a
fully diluted basis at a cost determined by various valuation methods that depend upon
when the options are exercised. This last option in the series will expire on
December 31, 2003. As of June 30, 2001, there were 122 restaurants in Canada.
At June 30, 2001, we had no material commitments for capital expenditures. Capital
expenditures for the first three quarters of fiscal 2001 are primarily Company store
remodels and upgrades, office, computer and telephone equipment, and computer
software. These capital expenditures were funded with cash generated from operations.
As a franchisor, our business is not capital intensive. We can continue to sell and
open new franchised units without any material additional capital expense. Company
owned stores do require capital to develop, but we have no commitments to add new
Company stores. Over both the short and long term we expect cash flow from operations
to continue to increase as new franchises are added. Capital expenditures will be
limited to Company store upgrades and office and systems related purchases. We do not
anticipate using a significant amount of cash for acquisitions or area director
repurchases, both of which are discretionary actions and can be timed to occur when
cash and financing are available. We will continue to use cash to service our debt to
Amresco, will also use cash to service the debt to LLCP funded in December 2000 for the
purpose of completing the tender offer and merger, and will use the proceeds of the
LLCP loan to fund the merger. Our liquidity and cash flow are expected to be sufficient
to meet our business needs and to pay our debts over both the short and long term.
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 June 30, 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 June 12, 2001 reporting in Item 5 that Brad A. Griffin, a member of
the Board of Directors of the Registrant, has resigned from the Board effective
June 12, 2001.
Form 8-K, dated May 22, 2001 reporting in Item 5 that the Registrant has received a
proposal to complete a second-step going private transaction that follows the
Company's self- tender offer late last year.
Form 8-K, dated May 16, 2001 reporting in Item 5 our operating results for the
second 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
August 20, 2001
