UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1169286
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
(Address of principal executive offices)
(720) 359-3300
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Outstanding at
Class February 13, 2001
------------------------------ -----------------
Common Stock, $0.001 par value 2,338,206 shares
THE QUIZNO'S CORPORATION
Commission File Number: 000-23174
Quarter Ended December 31, 2000
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statement of Stockholders' Equity (Deficit)
Notes to Consolidated Financial Statements
Management's Discussion and Analysis or Plan of Operation
Part II - OTHER INFORMATION
Signatures
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
Three Months Ended
December 31,
----------------------------
2000
(Restated) 1999
----------- -----------
FRANCHISE OPERATIONS:
Continuing fees ............................ $ 5,997,737 $ 3,637,481
Initial franchise fees ..................... 1,546,000 1,462,430
Area director and master franchise fees .... 196,386 480,796
Other ...................................... 409,579 227,404
Interest ................................... 185,069 130,693
----------- -----------
Total revenue ............................. 8,334,771 5,938,804
----------- -----------
Expenses
Sales and royalty commissions .............. (2,262,068) (1,757,020)
General and administrative ................. (4,397,532) (2,521,515)
----------- -----------
Total expenses ............................ (6,659,600) (4,278,535)
----------- -----------
Net income from franchise operations ......... 1,675,171 1,660,269
----------- -----------
COMPANY STORE OPERATIONS: (Note 5)
Sales ...................................... 4,045,686 2,860,737
----------- -----------
Cost of sales .............................. (1,202,546) (858,296)
Cost of labor .............................. (935,681) (876,522)
Other store expenses ....................... (1,764,658) (934,124)
----------- -----------
Total expenses ............................ (3,902,885) (2,668,942)
----------- -----------
Net income from Company stores operations .... 142,801 191,795
----------- -----------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (continued)
Three Months Ended
December 31,
--------------------------
2000
(Restated) 1999
----------- -----------
OTHER INCOME (EXPENSE):
New company start-up costs ..................... $ (186,878) $ --
Impairment of long-lived assets (Note 5) ....... (993,632) --
Financing costs (Note 4) ....................... (2,205,113) --
Loss on sale of Company stores ................. (36,728) (43,595)
Provision for bad debts ......................... (65,245) (167,871)
Depreciation and amortization ................... (615,644) (443,153)
Amortization of deferred financing costs ........ (56,444) (18,832)
Interest expense ................................ (620,044) (466,968)
Other expense ................................... (1,595) (60,559)
----------- -----------
Total other income (expense) ...................... (4,781,323) (1,200,978)
----------- -----------
Net income (loss) before income taxes ............. (2,963,351) 651,086
Income tax (provision) benefit .................... 1,096,440 (226,367)
----------- -----------
Net income (loss) ................................. (1,866,911) 424,719
Preferred stock dividends ......................... (49,294) (39,285)
----------- -----------
Net income (loss) applicable to common shareholders $(1,916,205) $ 385,434
=========== ===========
Basic net income (loss) per share of common stock . $ (0.67) $ 0.13
=========== ===========
Diluted net income (loss) per share of common stock $ (0.67) $ 0.11
=========== ===========
Weighted average common shares outstanding
Basic ........................................... 2,869,610 3,058,339
=========== ===========
Diluted ......................................... 2,869,610 3,765,135
=========== ===========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31, September 30,
2000 2000
Restated Restated
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 1,694,969 $ 2,493,976
Short term investments .............................. 8,216,633 5,324,336
Accounts receivable, net of allowance for doubtful
accounts of $287,538 at December 31, 2000 and
$222,293 at September 30, 2000 ..................... 2,491,799 2,066,247
Current portion of notes receivable (Note 7) ........ 1,280,688 1,545,844
Deferred tax asset .................................. 221,182 221,182
Prepaid interest ................................... 1,760,218 --
Other current assets ................................ 367,517 481,854
----------- -----------
Total current assets .................................. 16,033,006 12,133,439
----------- -----------
Property and equipment and assets held for resale at
cost, net of accumulated depreciation and amortization
of $2,753,879 at December 31, 2000 and $2,433,637 at
September 30, 2000 (Note 5) .......................... 10,759,688 11,863,819
----------- -----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$1,205,131 at December 31, 2000 and $1,104,646 at
September 30, 2000 (Note 5) ........................ 4,443,922 4,497,528
Investments in area directorships, net of accumulated
amortization of $263,667 at December 31, 2000 and
$167,893 at September 30, 2000 (Note 6) ............ 4,260,515 4,236,151
Other deferred assets (Note 4) ...................... 6,118,743 2,782,498
Deferred tax asset .................................. 4,216,929 4,210,626
Deposits and other assets ........................... 138,052 130,837
Notes receivable, net of allowance for doubtful
accounts of $50,000 at December 31, 2000 and $50,000
at September 30, 2000 .............................. 1,242,025 1,301,435
----------- -----------
Total other assets .................................... 20,420,186 17,159,075
----------- -----------
Total assets .......................................... $47,212,880 $41,156,333
=========== ===========
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
December 31, September 30,
2000 2000
Restated Restated
------------ ------------
CURRENT LIABILITIES:
Accounts payable .................................... $ 1,899,768 $ 2,614,437
Accrued liabilities ................................. 2,122,320 1,495,797
Current portion of long term obligations ............ 1,759,182 1,550,501
Income taxes payable ................................ -- 332,447
------------ ------------
Total current liabilities ............................. 5,781,270 5,993,182
Line of credit (Note 3) ............................... -- --
Long term obligations (Notes 4 and 8) ................. 29,655,275 16,037,238
Deferred revenue ...................................... 17,765,795 16,402,957
Warrants subject to put (Note 4) ...................... 3,373,801 --
COMMITMENTS AND CONTINGENCIES (Notes 2 and 7)
Preferred stock, $.001 par value, 1,000,000 shares
authorized:
Series A issued and outstanding 146,000 at December 31,
2000 and September 30, 2000 ($876,000 liquidation
preference) .......................................... 146 146
Series C issued and outstanding 57,000 at December 31,
2000 and 167,000 at September 30, 1999 ($285,000
liquidation preference) .............................. 57 167
Series D issued and outstanding 3,000 at December 31,
2000 and September 30, 2000 ($9,000 liquidation
preference) .......................................... 3 3
Series E issued and outstanding 59,480 at December 31,
2000 and September 30, 2000 ($512,718 liquidation
preference) .......................................... 59 59
Common stock, $.001 par value; 9,000,000 shares
authorized; issued and outstanding 2,340,406 at
December 31, 2000 and 3,007,921 at September 30, 2000
(Note 4) ............................................. 2,340 3,008
Capital in excess of par value ........................ 407,441 3,857,702
Accumulated deficit ................................... (9,773,307) (1,138,129)
------------ ------------
Total liabilities and stockholders' equity (deficit) .. $ 47,212,880 $ 41,156,333
============ ============
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
December 31,
----------------------------
2000
Restated 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................. $ (1,866,911) $ 424,719
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................... 615,643 443,153
Impairment of long-lived assets .................. 993,632 --
Provision for losses on accounts receivable ...... 65,245 167,871
Deferred income taxes ............................ (6,303) (12,890)
Promissory notes accepted for area director fees . (94,824) (200,000)
Prior year financing costs ....................... 104,896 --
Amortization of prepaid interest expense ......... 102,042 --
(Gain) loss on disposal of Company store ......... (24,419) 43,595
Amortization of deferred financing costs ......... 56,445 18,832
Amortization of deferred area director fee revenue (16,739) 146,192
Area director expenses recognized ................ 2,666 (14,619)
Other ............................................ 2,177 --
Changes in assets and liabilities:
Accounts receivable ............................ (490,797) (543,517)
Other current assets ........................... 47,591 (38,687)
Accounts payable ............................... 708,989 563,085
Accrued liabilities ............................ 626,523 67,571
Income taxes payable ........................... (1,769,118) (629,533)
Deferred franchise costs ....................... (122,100) (116,525)
Deferred initial franchise fees and other fees . 1,379,577 404,029
------------ ------------
Net cash provided by operations ..................... 314,215 723,276
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (559,138) (4,189,118)
Issuance of other notes receivable ................ (850,000) (14,000)
Short term investments ............................ (2,892,297) (982,321)
Proceeds from the sale of assets and stores ....... 320,000 100,361
Acquisition of Company owned stores .............. -- (4,959,746)
Principal payments received on notes receivable ... 1,269,390 275,126
Intangible and deferred assets and deposits ....... (37,444) 107,749
Investments in area director territories .......... (84,969) (413,790)
------------ ------------
Net cash used in investing activities ............... (2,834,458) (10,075,739)
------------ ------------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Months Ended
December 31,
----------------------------
2000
Restated 1999
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock .................... -- 132,893
Principal payments on long term obligations .... (377,515) (3,346,956)
Line of credit ................................ -- 3,350,000
Proceeds from issuance of notes payable ....... 12,000,000 14,000,000
Financing costs ............................... (1,760) (644,476)
Common Stock tendered or repurchased ........... (6,201,240) (1,114,032)
Costs associated with tender of Common Stock and
repurchase of stock options and warrants ...... (3,648,955) --
Dividends paid ................................. (49,294) (39,285)
------------ ------------
Net cash provided by financing activities ........ 1,721,236 12,338,144
------------ ------------
Net increase (decrease) in cash .................. (799,007) 2,985,681
Cash, beginning of period ........................ 2,493,976 626,828
------------ ------------
Cash, end of period .............................. $ 1,694,969 $ 3,612,509
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest ....... $ 643,521 $ 459,409
============ ============
Cash paid during the period for income taxes ... $ 672,468 $ 855,450
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the quarter ended December 31, 1999, the Company accepted a promissory note in
the amount of $19,446 for equipment previously held for resale. A note receivable in
the amount of $79,566 was capitalized in exchange for an Area Director territory
repurchased during the quarter. Also, a Company store held for resale was closed and
the net assets were written-off.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible
Preferred Stock Common Stock Additional Accumulated
-------------------------- -------------------------- Paid-in Deficit
Shares Amount Shares Amount Capital Restated
----------- ----------- ----------- ----------- ----------- -----------
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 ................... -- -- -- -- -- 1,259,505
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 2000 375,480 375 3,007,921 3,008 3,857,702 (1,115,973)
Payment in lieu of Common
Stock contribution to the
employee benefit plan ........ -- -- (2,360) (3) (25,707) --
Conversion of Series C
Convertible Preferred
Stock ........................ (110,000) (110) 110,000 110 -- --
Common Stock tendered
(Note 4) ..................... -- -- (775,155) (775) (3,375,260) (2,825,205)
Costs associated with
tender offer (Note 4) ........ -- -- -- -- -- (3,965,218)
Preferred stock dividends .... -- -- -- -- (49,294) --
Net (loss) ................... -- -- -- -- -- (1,866,911)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 265,480 $ 265 2,340,406 $ 2,340 $ 407,441 $(9,773,307)
=========== =========== =========== =========== =========== ===========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF CONSOLIDATION
In the opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement of (a) the results of consolidated
operations for the three month periods ended December 31, 2000 and December 31,
1999, (b) the consolidated financial position at December 31, 2000 and September 30,
2000, (c) the consolidated statements of cash flows for the three month periods
ended December 31, 2000 and December 31, 1999, and (d) the consolidated changes in
stockholders' equity (deficit) for the twelve month and three month periods ended
September 30, 2000 and December 31, 2000, respectively, have been made.
The accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for financial statements. For
further information, refer to the audited consolidated financial statements and
notes thereto for the twelve months ended September 30, 2000, included in our Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission filed on
December 29, 2000.
The preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain reclassifications have been made to the balances for the three months ended
December 31, 1999 to make them comparable to those presented for the three months
ended December 31, 2000, none of which change the previously reported net income or
total assets.
In October 1999, we changed our fiscal year from December 31 to September 30. All
references in the financial statements to the period ended December 31 relate to the
three months ended December 31, 2000 and 1999. The results for the three-month
period ended December 31, 2000 are not necessarily indicative of the results for the
entire fiscal year of 2001.
Effective January 1, 1999, the Company changed its accounting policy related to the
recognition of area director marketing agreement fees to one that recognizes such
fees as revenue on a straight-line basis over the term of the agreement, which is
ten years. Direct expenses attributable to the fees are classified as a prepaid and
recognized as an expense over the same ten year term. The effect of the change in
fiscal 1999 resulted in the deferral of $4,262,701 of net revenue previously
recognized in prior years. Included in income for the quarters ended December 31,
2000 and 1999, was $129,036 of amortized deferred net revenue related to area
director marketing agreement fees previously recognized prior to fiscal 1999.
(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 or
acquirement of certain area director territories. In the opinion of the management,
and supported by advice from legal counsel, these claims and lawsuits will not
result in any material adverse effect in excess of amounts accrued in the
accompanying consolidated financial statements.
The Company is obligated to pay an opening commission to the area director who sold
the franchise at the time the franchise opens for business. These commissions are
expensed at the time the related franchise opens for business and are not accrued as
a liability of the Company until that time. At December 31, 2000, there were 732
domestic franchises sold but not yet open with related opening commissions totaling
$2,454,625 ($2,295,875 at September 30, 2000).
In 1999, the Company commenced a program called Owner in Training under which it
provides financial assistance to store managers interested in owning their own
franchise. The Company provided financial guarantees to such persons for start-up
capital loans. Under the program, the Company has guaranteed three such loans
totaling $565,000. As of December 31, 2000, there were no new candidates enrolled
in this program.
3. LINE OF CREDIT
On December 22, 1999 the Company closed on a line of credit loan and was loaned
$3,350,000 by Merrill Lynch Business Financial Services, Inc. The loan bears
interest at the 30 day Dealer Commercial Paper Rate plus 2.5% (equal to 9.15% at
November 30, 2000). The maximum amount of the line of credit loan is $3,350,000,
which maximum is reduced monthly based on a seven-year amortization. The line of
credit loan is secured by a first security interest in the Company's aircraft. All
amounts previously borrowed under the line of credit had been repaid as of
December 31, 2000.
4. TENDER OFFER AND NOTE PAYABLE
On November 13, 2000, the Company announced that it had commenced a tender offer to
purchase all outstanding shares of its common stock, except for shares held by
certain insiders, at a price of $8 per share, net in cash to the seller. The tender
expired and the Company accepted the tendered shares as scheduled at midnight New
York City time December 11, 2000.
Prior to the tender there were approximately three million shares of common stock
outstanding, of which approximately 51.6 percent were owned by Richard E. Schaden,
the President and CEO of The Quizno's Corporation; Richard F. Schaden, Vice
President, Secretary and a Director of The Quizno's Corporation; and Frederick H.
Schaden, a Director of The Quizno's Corporation. The three Schadens did not tender
their shares.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. TENDER OFFER AND NOTE PAYABLE (continued)
As of December 31, 2000, 775,155 shares of Common Stock were tendered for a total
purchase price of $6,201,240. Direct costs related to the tender totaled
$3,965,218, which included payment for the repurchase of 531,850 stock options and
415,056 warrants.
In conjunction with the tender offer, the Company closed on a loan of $13,862,260
with Levine Leichtman Capital Partners II, L.P. ("LLCP"). The proceeds of the loan
were used to prepay interest on the loan for one year in the amount of $1,862,260
and to repurchase shares and pay costs associated with the tender offer.
The promissory note bears interest at 13.25 %, interest only payable monthly, with
the first twelve months prepaid, and is due in full in October 2005. LLCP received
warrants for 14% of the equity ownership of the Company. The warrants will be
adjusted to 14% of the equity ownership after completion of any merger transaction
prior to September 12, 2001. 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 accounts for these
warrants in accordance with Emerging Issues Task Force Issue No. 00-19. The value
of the warrants will be adjusted quarterly based on the underlying value of the
Company's Common Stock. Included in Amortization of Deferred Financing Costs for
the quarter ended December 31, 2000 was $37,825 related to the amortization of this
cost. The loan may be paid down to $7 million by September 12, 2001, with no
penalty and with a corresponding reduction in the percent of warrants.
The Company incurred and expensed $2,205,113 of financing costs related to the LLCP
loan.
The warrant agreement between the Company and LLCP states that upon the earlier to
occur of the maturity date of the note or the repayment in full of all principal of
the note, LLCP shall have the right, exercisable at its sole option, to require the
Company to purchase the warrant shares at fair market value, regardless of whether
the warrants have been exercised. Therefore, the Company followed the guidance in
Staff Accounting Bulletins, Topic 3C - Redeemable Preferred Stock. Although this
guidance relates to preferred stock, the Company believes that any redeemable equity
instrument, whose redemption is controlled by the holder, would fall under the
intent of this guidance. As such, the Company determined the initial carrying value
of $3,373,801 based upon the fair value at the date of issue and followed Rule
5-02.28 of Regulation S-X in not classifying the equity instrument as stockholders'
equity.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. STORES HELD FOR RESALE
At September 30, 2000, the Company had one store classified as a store held for
resale. In October 2000, the Company reclassified 20 stores as held for resale.
During the quarter ended December 31, 2000, two stores were sold resulting in a gain
on sale of $24,419. Also, during the quarter ended December 31, 2000, the Company
incurred costs of $61,147 related to lease settlements of stores closed. As of
December 31, 2000, the Company had 19 stores classified as held for resale. Six of
the 19 stores held for resale are under contract to be sold and the remaining 13 are
expected to be sold in 2001.
Included on the consolidated balance sheets in property and equipment and assets
held for resale and intangible assets were the following amounts related to stores
held for resale:
December 31, September 30,
2000 2000
------------ ------------
Property and equipment $2,757,631 $157,689
Intangible assets 371,793 41,172
----------- -----------
3,129,424 198,861
Accumulated depreciation and
amortization (514,666) (4,282)
Reserve for impairment (934,106) -
------------ -----------
Net assets of stores held for resale $1,680,652 $194,579
=========== ===========
Included in the consolidated statement of operations under Company Store Operations
were the following amounts related to stores held for resale and Company stores:
Stores Held For Resale Company Stores
---------------------- --------------
Three Months Ended Three Months Ended
------------------ ------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ----------- ------------- ------------
Sales $1,303,607 $ 103,153 $2,742,079 $2,757,584
----------- ----------- ----------- -----------
Cost of sales (413,390) (43,075) (789,156) (815,221)
Costs of labor (455,974) (40,575) (479,707) (835,947)
Other store expenses (642,392) (48,735) (1,122,266) (885,389)
------------ ----------- ------------ -----------
Store expenses (1,511,756) (132,385) (2,391,129) (2,536,557)
----------- ----------- ----------- -----------
Net loss from
stores held for
resale $ (208,149) $ (29,232) $ 350,950 $ 221,027
=========== =========== =========== ===========
The Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recovered. At December 31, 2000, the Company determined that an impairment related
to its carrying value of its assets held for resale was required and expensed
$934,106.
Also, during the quarter, the Company determined that an impairment was required
for certain equipment and inventory and expensed a total of $59,526.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. INVESTMENTS IN AREA DIRECTORSHIPS
In the quarter ended December 31, 2000, we reacquired one area director territory
for $73,924, including related legal costs.
7. RELATED PARTY TRANSACTIONS
In July 2000, the Quizno's National Marketing Fund Trust ("Advertising Fund") and
the Quizno's Regional Marketing Fund Trust (together the "marketing funds") entered
into a $2,000,000 line of credit with Wells Fargo Bank West, N.A. The marketing
funds collect a fee of 1% and 3%, respectively, of gross sales from our franchisees
and deposit the funds into advertising funds that are used to develop advertising
to attract customers to the restaurants and to create awareness of the Quizno's
brand image. The Company has guaranteed this line of credit. At December 31,
2000, $1.9 million had been drawn against this line of credit. On February 1, 2001,
the outstanding balance of $1.9 million, along with accrued and unpaid interest,
was repaid by the marketing funds.
At September 30, 2000, the Company had a note receivable from the Advertising Fund
of $1,030,000. During the quarter ended December 31, 2000, the Advertising Fund
made a net repayment of $380,000, along with accrued interest through December 15,
2000. The December 31, 2000 balance of $650,000 relates to an off-season build-up
for advertising, which will be reimbursed to the Company in 2001.
8. AMRESCO COMMERCIAL FINANCE, INC.
In 1999, the Company entered into loan agreements with AMRESCO Commercial Finance,
Inc. ("AMRESCO"), in which AMRESCO loaned the Company $14 million. The loan
agreements provide, among other things, that if the Company wishes to secure
additional indebtedness, it may do so as long as, after giving effect to such new
indebtedness, the Company meets a minimum financial ratio.
AMRESCO took the position that the LLCP indebtedness (see Note 4) would result in
the Company not achieving the required minimum ratio. The Company and its outside
financial advisors had previously calculated the effect of the LLCP financing and
concluded that the Company would exceed the required minimum ratio, and responded
accordingly to AMRESCO.
In February 2001, the Company and AMRESCO agreed to resolve the dispute in exchange
for the Company's prepayment of principle of approximately $1,518,000 and payment
of a non-refundable credit enhancement of approximately $169,000. AMRESCO agreed to
release its collateral interest in the assets of eleven Company-owned stores. In
addition, the Company agreed to deposit into an escrow account $1.1 million until
the later of July 31, 2001 or the month the minimum ratio is met. The Company
expects to achieve this by September 30, 2001 and have the escrowed funds
released.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. RESTATEMENT
Net income has been restated to reflect the tax effected expensing of start-up
costs, originally expensed in the quarter ended December 2000, in September 30,
2000, the reversal of an impairment in December 2000 and the accelerated
depreciation of these costs over five quarters starting in December 2000 and the
correction of the amortization of area director territories. These adjustments had
the following effect:
Fully Diluted
Net Basic Earnings Earnings Per
Quarter Ended December 31, 2000 Income Per Share Share
------------------------------- ------ --------- -----
As previously reported December 31,
2000 $(2,081,938) $(0.73) $(0.73)
Restatement adjustment 165,733 0.06 0.06
----------- ------ ------
As restated December 31, 2000 $(1,916,205) $(0.67) $(0.67)
=========== ======= ======
(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.
As our revenues from foreign operations become more significant, our profitability
could be adversely impacted by international business risks and political or economic
instability in foreign markets. While international operations involve risks that do
not exist in domestic operations, such as adverse fluctuation in foreign exchange
rates, monetary exchange controls, foreign government regulation of business
relationships, and uncertainty of intellectual property protection, we believe that
the potential rewards of expanding the market for our services to selected foreign
countries far outweighs such risks
We incurred a loss before preferred dividends in the first quarter of fiscal 2001 of
$(1,866,911), composed of income from franchise operations of $1,675,171, income from
Company owned store operations of $142,801, and less other income and expense and
taxes totaling $(3,684,883).
The following chart reflects our revenue growth by source and number of restaurants
for the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000:
Three Months Ended December 31,
-------------------------------
2000 1999
-------------------------- ------------------------
% Increase % Increase
Amount (Decrease) * Amount (Decrease)*
----------- ------------ ----------- -----------
Continuing fees $5,997,737 65% $3,637,481 110%
Initial franchise fees 1,546,000 6% 1,462,430 65%
Area director and master
franchise fees 196,386 (59)% 480,796 (65)%
Other 409,579 80% 227,404 65%
Interest 185,069 42% 130,693 12%
---------- -------- ---------- --------
Total franchise revenue 8,334,771 40% 5,938,804 41%
Sales by Company owned stores 4,045,686 41% 2,860,737 25%
---------- -------- ---------- --------
Total Revenue $12,380,457 41% $8,799,541 35%
=========== ======== ========== ========
* Percentage change from comparable prior fiscal year period.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Three Months Ended
December 31,
----------------------------
2000 1999
------------ ----------
Restaurants open, beginning 972 634
New restaurants opened 98 100
Restaurants reopened 1 -
Restaurants closed, to reopen (4) -
Restaurants closed (3) (11) (13)
----------- -----------
Restaurants open, end 1,056 721
=========== ===========
Franchises sold, domestic 151 97
Franchises sold, international 1 21
----------- -----------
Total 152 118
=========== ===========
Initial franchise fees collected $2.7 million $1.8 million
Systemwide sales, domestic $83.6 million $53.1 million
Average unit volume for 1999, domestic (1) $389,000 $365,000
Same store sales, domestic (2) Up 4.3% Up 4.7%
1) Average unit volume is for the twelve months ended December 31, 2000.
Average unit volume excludes restaurants located in airports, convenience
stores and gas stations and includes only restaurants open at least one
year under the same ownership that are currently not in default.
2) Same store sales are based on 510 stores open since the beginning of
October 1999. Stores that transferred ownership during this period or are
in substantial default of the franchise agreement are excluded. Because we
are and will continue to be in an aggressive growth mode over the next few
years, it is anticipated that same store sales will fluctuate as units are
included from more start up markets. Excludes non-traditional units located
in convenience stores and gas stations.
3) Three of the units closed during the quarter ended December 31, 2000 were
Bains units.
Results of Operations
Comparison of the first quarter of 2001 with the first quarter of 2000
Franchise revenue increased 40% in the first quarter of 2001 to $8,334,771 from
$5,938,804 in the comparable quarter last fiscal year. Total revenue increased 41% in
the first quarter of 2001 to $12,380,457 from $8,799,541 in the comparable quarter
last fiscal year.
Continuing fees increased 65% in the first quarter of 2001 to $5,997,737 from
$3,637,481 in the first quarter of 2000. Continuing fees are comprised of royalties
and licensing fees.
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 December 31, 2000 there were 1,022 franchises open, as
compared to 693 at December 31, 1999. The royalty was 5% for agreements entered into
prior to February 11, 1995, 6% for agreements entered into from February 11, 1995 to
March 31, 1998, and 7% for all franchise agreements entered into after March 31,
1998. The royalty for Quizno's Express units is 8%. The royalty paid to us by master
franchisees on international units is approximately 2.1%. We have no immediate plans
to increase the royalty rate.
Royalty fees were $5,040,067 for the first quarter of fiscal 2001 compared to
$2,893,887 for the same period last year, an increase of 74%.
Licensing fees are fees generated through the licensing of the Quizno's trademark for
use by others, which includes fees received from product companies to sell proprietary
products to our restaurant system. Licensing fees were $957,670 in the first quarter
of fiscal 2001 and $743,594 in the comparable fiscal 2000 quarter. Included in the
fiscal 2000 first quarter were $200,000 of non-recurring licensing fees from Coca Cola
Company related to a licensing agreement signed in April 1999.
Beginning in fiscal 2001, we began negotiating terms and prices directly with the
manufacturers of our food products. We formed a new subsidiary and began purchasing
such products in January 2001 and, in turn, selling these products to an unaffiliated
national distribution company who supplies our restaurants. We believe this will give
us better control over our sources of proprietary products. As a result, licensing fee
revenue is expected to decrease and be replaced by the revenue and costs discussed
above.
Initial franchise fees increased 6% in the first quarter of fiscal 2001 to $1,546,000
from $1,462,430 in the same fiscal quarter last year. Initial franchise fees are
one-time fees paid by franchisees at the time the franchise is purchased. Initial
franchise fees are not recognized as income until the period in which all of our
obligations relating to the sale have been substantially performed, which generally
occurs when the franchise opens. Our share of initial franchise fees sold by foreign
master franchises is recognized when received. In the first quarter of fiscal 2001, we
opened 98 franchises, including 9 international restaurants, as compared to 100
franchises opened, including 18 international restaurants, in the same period last
fiscal year. Our domestic initial franchise fee has been $20,000 since 1994.
Franchisees may purchase a second franchise for $15,000 and third and subsequent
franchise for $10,000. The initial franchise fee for a Quizno's Express franchise is
$10,000 for the first, $7,500 for the second, and $5,000 for the third and additional
franchises purchased by the same owner. Our share of initial franchise fees for
international restaurants is generally 30% of the franchise fee and will vary
depending on the country and the currency exchange rate. Initial franchise fees for
international restaurants are recognized as revenue on receipt.
Domestic initial franchise fees collected by us are recorded as deferred initial
franchise fees until the related franchise opens. Deferred initial franchise fees at
December 31, 2000 were $11,829,506 and represent 732 domestic franchises sold but not
yet in operation, compared to $8,235,649 at December 31, 1999 representing 524
domestic franchises sold but not open. Direct costs related to the franchise sale,
primarily sales commissions paid to area directors, are deferred on our books and
recorded as an expense at the same time as the related initial franchise fee is
recorded as income. Deferred costs paid with respect
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
to initial franchise fees deferred at December 31, 2000 were $2,112,375.
Approximately 50% of all initial franchisee fees received by us for franchise
purchases in area director markets are paid to area directors for sales and opening
commissions.
Area director and master franchise fees were $196,386 in the first quarter of fiscal
2001 and $480,796 in the same fiscal quarter last year. Effective January 1, 1999, we
changed our accounting policy related to the recognition of revenue from domestic area
director marketing agreement fees to one that recognizes these fees as revenue on a
straight-line basis over the term of the agreement, which is ten years. This change
reflected a decision made by the U.S. Securities and Exchange Commission in December
1999 relative to the recognition of area director fee revenue. Commissions paid to
the area director upon the inception of the agreement are classified as a prepaid and
recognized as an expense over the same ten year term. The effect of the change in the
nine-month period ending September 30, 1999, was the deferral of $4,262,701 of net
revenue previously recognized in prior years.
Deferred domestic area fees are one-time fees paid to us for the right to sell
franchises on our behalf in a designated, non-exclusive area. Domestic area director
fees recognized were $176,386 in the first quarter of fiscal 2001 and $170,796 in the
comparable fiscal 2000 quarter.
The fee for U.S. areas was $.03 per person in the designated area through June 1996,
$.035 from July 1996 through December 1996, $.05 from January 1997 through December
1997, $.06 from January 1998 through February 1998, and $.07 since March 1, 1998. In
addition, each area director is required to pay a training fee of $10,000. In the
first quarter of fiscal 2001, we sold 1 area directorship for $189,647 compared to 5
sold in the first quarter of fiscal 2000. At December 31, 2000, we had a total of 59
area directors who owned areas encompassing approximately 60% of the population of the
United States.
International master franchise fees are one-time fees paid to us for the right to sell
franchises in a designated, exclusive, international market. The master franchisee
assumes all of our obligations and duties under the agreement. We recognize these fees
when the agreement is signed. International master franchise fees were $20,000 in the
first quarter of fiscal 2001 and $310,000 for the first quarter of fiscal 2000.
In the first quarter of fiscal 2000, we sold the master franchise rights to
Switzerland for $300,000. A total of $20,000 of this fee was deferred until our
training obligation is completed. We also recognized $30,000 of previously deferred
international master franchise fees in the quarter as we substantially completed our
training obligations under the agreements. The international master franchise fees in
the first quarter of fiscal 2001 were related to previously deferred international
master franchise fees for Iceland as we substantially completed our training
obligations under the agreement.
We offer domestic area director and master franchise applicants financing for the area
fee. The amount financed is required to be paid to us in installments over five years
at interest rates between 6% and 15%. The promissory notes are personally signed by
the Area Director and, depending on the personal financial strength of the Area
Director, secured by collateral unrelated to the area directorship. We also
periodically offer payment plans to international Master Franchisee applicants. The
one domestic and international area sold in the first quarter of fiscal 2001 used this
financing for $94,824, representing 50% of the total
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
domestic area director fees and international master franchise fees received or
financed in fiscal 2001. In the first quarter of fiscal 2000, one used this financing
for $200,000.
The area director and master franchise agreements set increasing minimum performance
levels that require the area director or master franchisee to sell and open a
specified number of franchised restaurants in each year during the term of the area
agreement. Our experience with the program to date indicates that while some area
directors and master franchisees will exceed their development schedules, others will
fail to meet their schedules. In our planning, we have allowed for a certain
percentage of area directors and master franchisees that will not meet their
development schedule. Delays in the sale and opening of restaurants can occur for
many reasons. The most common are delays in the selection or acquisition of an
appropriate location for the restaurant, delays in negotiating the terms of the lease
and delays in franchisee financing. We may terminate an area or master agreement if
the area director or master franchisee fails to meet the development schedule, and we
then have the right to resell the territory to a new area director or master
franchisee or we can operate it.
Since 1999, we have repurchased 18 area directorships for a total of $4,513,137, of
which one was purchased in fiscal 2001 for $73,924. As a result of such repurchases,
we no longer have to pay the area director sales, opening and royalty commissions. The
purchase price is recorded as a prepaid commission and then expensed over the
remaining term of the underlying franchise agreements. If the franchise closes, or the
royalty from any location is impaired, the remaining prepaid royalty commission
related to the specific unit is expensed. At September 30, 2000, there were 146
franchises open and 88 franchises sold not open, in repurchased area director
territories. During fiscal 2000, we expensed $134,912 for amortization of prepaid
commissions related these franchises and expensed another $6,749 representing the
unamortized balance related to one such franchise closed. At December 31,2000, there
were 148 franchises open and 75 franchises sold not open, in repurchased area director
territories. During the quarter ended December 31, 2000, we expensed $74,906 for
amortization of prepaid commissions related these franchises and expensed another
$20,868 representing the unamortized balance related to two such franchises closed.
Other revenue increased by 80% in the first quarter of fiscal 2001 to $409,579 from
$227,404 in the first quarter of fiscal 2000. Other revenue is primarily amounts paid
by equipment suppliers for design and construction, franchise transfer fees and net
bookkeeping fees charged franchisees that utilize our designated bookkeeping services
provider. Amounts paid by equipment suppliers were $133,500 in the first quarter of
fiscal 2001 compared to $181,158 in the first quarter of fiscal 2000. This amount will
vary based on new store openings. Franchise transfer fees increased in 2001 to
$116,000 from $0 in 2000. Since 1995, our franchise agreement requires all new
franchisees to utilize our bookkeeping services, or a firm designated by us to provide
bookkeeping services, for their first 12 months of operations. Net
bookkeeping fees were $47,702 in the first quarter of fiscal 2001 compared to $20,381
in the first quarter of fiscal 2000. Bookkeeping fees are paid by the franchisee to
the Company and then remitted on to the
bookkeeping service designated by the Company. These fees represent the amounts
retained by the Company to administer the bookkeeping function.
Sales and royalty commissions expense increased 29% in the first quarter of fiscal
2001 to $2,262,068 (34.3% of royalty and initial franchise fees) from $1,757,020
(40.3% of royalty and initial franchise fees) in the comparable quarter last fiscal
year. Sales and royalty commissions are amounts paid to our
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
domestic Area Directors, commissions paid to other sales agents and employees, and
costs related to sales promotions and incentives. Sales and royalty commission expense
declined in 2001 as a percentage of royalty and initial franchise fee due to the
repurchase and reacquisition of certain area directorships.
Our domestic Area Directors receive commissions equal to 50% of the initial franchise
fees and 40% of royalties received by us from franchises sold, opened, and operating
in the area director's territory. In exchange for these payments, the Area Director is
required to market and sell franchises, provide location selection assistance, provide
opening assistance to new owners, and perform monthly quality control reviews at each
franchise open in the Area Director's territory.
The Area Director is entitled to receive commissions during the term of the area
director marketing agreement and in some cases, upon expiration of the area director
agreement, the commission paid is reduced to 1% of sales for 5 years.
Our foreign master franchisees retain 70% of initial fees, area director fees and
royalties paid from franchises sold, open and operating in the master franchisee's
territory, except the Canadian master franchisee who retained 100% of initial
franchise fees in 1998 only, and the United Kingdom master franchisee who will retain
85% of the initial franchise fees through December 31, 2001. Under the master
franchise agreement, we have no obligation to provide services that will result in any
incremental cost to us, other than an initial training trip to the country by an
employee of ours.
General and administrative expenses increased 74% to $4,397,532 in the first quarter
of fiscal 2001 from $2,521,515 in the comparable quarter last fiscal year. As a
percent of franchise revenue, general and administrative expenses have increased from
42% in the first quarter of fiscal 2000 to 53% in the first quarter of fiscal 2001.
General administrative expenses include all of our operating costs. The increase is
primarily due to the addition of employees and systems to service the rapidly growing
network of our franchisees and Area Directors. In addition, the increase for the
first fiscal quarter of fiscal 2001 includes certain non-recurring expenses related to
the completion of certain information technology initiatives along with calendar year
bonuses accrued as of December 31, 2000. Although general and administrative expenses
will likely continue to increase as we grow, we expect the rate of increase to
decline.
Company owned store operations (excluding stores held for resale) earned $350,950 on
sales of $2,742,079 in the first quarter of fiscal 2001 compared to $221,027 on sales
of $2,757,584 in the comparable quarter last fiscal year. During the first quarter of
fiscal 2001 we operated stores for a total of 47 store operating months, compared to
84 store operating months in the first quarter of fiscal 2000. Sales per store month
increased 77% in 2001 to $58,218 from $32,946 in 2000 primarily due to the acquisition
of restaurants and other operations at Denver International Airport in November 1999.
At December 31, 2000, we had 16 operating Company stores, including the Cowboy Bar at
Denver International Airport (28 at December 31, 1999).
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Stores held for resale lost $208,149, on sales of $1,303,607, in the first quarter of
fiscal 2001 compared to a loss of $29,232, on sales of $103,153, in the comparable
quarter last fiscal year. In the first quarter
of fiscal 2001, we operated twenty-one stores held for resale and in the comparable
quarter of fiscal 2000
we operated two stores held for resale. At December 31, 2000, we had nineteen stores
classified as held for resale.
New company start-up costs were $186,878 in the first quarter of fiscal 2001. These
costs relate to the start-up of a new operating company to purchase and sell food
products. These costs were primarily consulting costs to set-up administrative and
accounting systems and to finalize the distribution contracts.
Impairment of long-lived assets was $993,632 in the first quarter of fiscal 2001.
During the quarter, we determined that an impairment related to our carrying value of
our assets held for resale was required and expensed $934,106. Also, during the
quarter, we determined that an impairment was required for certain equipment and
inventory and we expensed a total of $59,526.
Financing costs were $2,205,113 in the first quarter of fiscal 2001. In December 2000,
we closed on a loan of $13,862,260 with Levine Leichtman Capital Partners II, L.P.
("LLCP"). The proceeds of the loan were used to prepay interest on the loan for one
year in the amount of $1,862,260 and to repurchase shares and pay costs associated
with the tender offer. We incurred and recognized $2,205,113 of financing costs,
primarily legal, consulting and closing costs related to the LLCP loan.
Loss on sale of Company stores was $36,728 in the first quarter of fiscal 2001. During
the quarter ended December 31, 2000, two stores were sold resulting in a gain on sale
of $24,419. Also, during the quarter, we incurred costs of $61,147 related to lease
settlements of stores closed. The fiscal 2000 loss was $43,595 resulting from the
December 1999 sale of one store held for resale.
Provision for bad debts was $65,245 in the first quarter of fiscal 2001 and $167,871
in the comparable quarter last fiscal year. As of December 31, 2000, we had an
allowance for doubtful accounts of $337,538 that we believe is adequate for future
losses.
Depreciation and amortization was $615,644 in the first quarter of fiscal 2001 and
$443,153 in the comparable quarter last fiscal year. The increase is primarily due to
the acquisition and development of new Company owned restaurants, the repurchase and
reacquisition of area director territories since December 31, 1999 and the
acceleration of depreciation associated with certain assets that will be replaced by
December 31, 2001.
Amortization of deferred financing costs was $56,444 in the first quarter of fiscal
2001 and $18,832 in the comparable quarter last fiscal year. The increase is
attributable to $37,825 of amortization of the deferred financing costs associated
with the loan of $13,862,260 from Levine Leichtman Capital Partners II, L.P. in the
first quarter of fiscal 2001.
Interest expense was $620,044 in the first quarter of fiscal 2001 and $466,968 in the
comparable quarter last fiscal year. The increase is primarily attributable to the
increase in outstanding debt. On January 26, 2000, we closed on a loan in the amount
of $3,180,000 from GE Capital Business Asset Funding. The
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
loan bears interest at 9.53% and is payable in equal monthly installment of $52,023
for 5 years. Also, on December 12, 2000, we closed on a loan of $13,862,260 with
Levine Leichtman Capital Partners II, L.P. ("LLCP"). The proceeds of the loan were
used to prepay interest on the loan for one year in the amount of $1,862,260 and to
repurchase shares and pay costs associated with our tender offer. The promissory note
bears interest at 13.25 %, interest only payable monthly, and is due in full in
October 2005.
Other expense was $1,595 in the first quarter of fiscal 2001 and $60,559 in the
comparable quarter last fiscal year. The fiscal 2000 expense is primarily
acquisition-related costs.
Income tax (provision) benefit was a benefit of $1,096,440 in the first quarter of
fiscal 2001 and a provision of $226,367 in the comparable quarter of fiscal 2000. Our
taxable income has historically exceeded our book income primarily because initial
franchise fees we receive are taxable income in the year received and are book income
in the year the franchise opens. Consequently, we will not pay income taxes on this
income when it is recognized for financial reporting purposes. In the first quarter of
fiscal 1999, we used all of our tax net operating loss carryforwards and incurred a
tax liability. Accordingly, we reduced the amount recorded as an impairment of our
deferred tax asset in prior years and recorded the tax benefit of prior years net
operating losses. Subsequent to December 31, 1998, our provision for income taxes was
recorded at 37%.
Liquidity and Capital Resources
Net cash provided by operating activities was $314,215 in the first quarter of fiscal
2001 compared to cash provided by operating activities of $723,276 in the first
quarter of fiscal 2000. The fiscal 2001 amount of $314,215 was primarily due to an
increase in deferred initial franchise fees of $1,379,577 and an increase in accounts
payable and accrue liabilities of $1,335,512. These increases were partially offset by
a decrease of $1,769,118 related to income taxes payable and a decrease of $490,797
related to accounts receivable.
Net cash used in investing activities was $2,834,458 in the first quarter of fiscal
2001 compared to cash used in investing activities of $10,075,739 in the first quarter
of fiscal 2000. The fiscal 2001 amount of $2,834,458 was primarily due to an increase
in short-term investments of $2,892,297.
Net cash provided by financing activities was $1,721,236 in the first quarter of
fiscal 2001 compared to cash provided by financing activities of $12,338,144 in the
first quarter of fiscal 2000. The fiscal 2001 amount of $1,721,236 was primarily due
to the loan proceeds of $12,000,000 received from LLCP partially offset by costs of
$9,850,195 related to the repurchase of 775,155 shares of Common Stock tendered in
December 2001.
In the second quarter of 1998, we tested a program under which our Area Directors had
the right to elect to have all future franchisee leases in the Area Director's
territory signed by The Quizno's Realty Company ("QRC"), a wholly owned subsidiary of
ours. As a condition of the lease, the landlord agrees not to look beyond QRC for
payments. These locations would then be subleased by QRC to the Owner, whose personal
liability is limited to one year. The Owner pays QRC an indemnification fee of $165
per month, pays a one-time lease-processing fee to QRC of $2,200, and pays a security
deposit to QRC equal
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
to two months rent. Effective March 1, 1998, we transferred cash and other assets
having a book value of approximately $500,000 to QRC in exchange for stock and a
promissory note. As of December 31, 2000, 12 leases had been executed under this
program and one other lease guaranteed. The franchisee has defaulted on the rents due
on two of these locations, for which we do not have replacement franchisees. We expect
to negotiate buyouts of these leases between the landlords, the franchisees and,
possibly, us. Our share of any such buyout is expected to be immaterial. A third
location has closed due to a fire and the lease was cancelled and the location will
not re-open.
On December 22, 1999 we closed on a line of credit loan and were funded $3,350,000 by
Merrill Lynch Business Financial Services, Inc. The loan bears interest at the 30 day
Dealer Commercial Paper Rate plus 2.5% (equal to 9.15% at November 30, 2000). The
maximum amount of the line of credit loan is $3,350,000, which maximum is reduced
monthly based on a seven-year amortization. The line of credit loan is secured by a
first security interest in our aircraft. All amounts previously borrowed under the
line of credit had been repaid as of December 31, 2000.
In July 2000, the Quizno's National Marketing Fund Trust ("Advertising Fund") and the
Quizno's Regional Marketing Fund Trust (together the "marketing funds") entered into a
$2,000,000 line of credit with Wells Fargo Bank West, N.A. The marketing funds
collect a fee of 1% and 3%, respectively, of gross sales from our franchisees and
deposit the funds into advertising funds that are used to develop advertising to
attract customers to the restaurants and to create awareness of the Quizno's brand
image. We have guaranteed this line of credit. At December 31, 2000, $1.9 million
had been drawn against this line of credit. On February 1, 2001, the outstanding
balance of $1.9 million, along with accrued and unpaid interest, was repaid by the
marketing funds.
At September 30, 2000, we had a note receivable from the Advertising Fund of
$1,030,000. During the quarter ended December 31, 2000, the Advertising Fund made a
net repayment of $380,000, along with accrued interest through December 15, 2000. The
December 31, 2000 balance of $650,000 relates to an off-season build-up for
advertising, which will be reimbursed to us in 2001.
On November 13, 2000, we announced that we had commenced a tender offer to purchase
all outstanding shares of our common stock, except for shares held by certain
insiders, at a price of $8 per share, net in cash to the seller. The tender expired as
scheduled at midnight New York City time December 11, 2000.
Prior to the tender there were approximately three million shares of common stock
outstanding, of which approximately 51.6 percent were owned by Richard E. Schaden, the
President and CEO of The Quizno's Corporation; Richard F. Schaden, Vice President,
Secretary and a Director of The Quizno's Corporation; and Frederick H. Schaden, a
Director of The Quizno's Corporation. The three Schadens did not tender their shares.
As of December 31, 2000, 775,155 shares of Common Stock were tendered for a total
purchase price of $6,201,240. Direct costs related to the tender totaled $3,965,218,
which included payment for the repurchase of 531,850 stock options and 415,056
warrants.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
In conjunction with the tender offer, the Company closed on a loan of $13,862,260 with
Levine Leichtman Capital Partners II, L.P. ("LLCP"). The proceeds of the loan were
used to prepay interest on the loan for one year in the amount of $1,862,260 and to
repurchase shares and pay costs associated with the tender offer.
The promissory note bears interest at 13.25 %, interest only payable monthly, with the
first twelve months prepaid, and is due in full in October 2005. LLCP received
warrants for 14% of the equity ownership of the Company. The warrants will be adjusted
to 14% of the equity ownership after completion of any merger transaction prior to
September 12, 2001. 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 accounted for these warrants in accordance
with Emerging Issues Task Force Issue No. 00-19. The value of the warrants will be
adjusted quarterly based on the underlying value of the our Common Stock. Included in
Amortization of Deferred Financing Costs for the quarter ended December 31, 2000 was
$37,825 related to the amortization of this cost. The loan may be paid down to $7
million by September 12, 2001, with no penalty and with a corresponding reduction in
the percent of warrants.
The Company incurred and expensed $2,205,113 of financing costs related to the LLCP
loan.
At September 30, 2000, we had one store reclassified as a store held for resale. In
October 2000, we reclassified 20 stores as held for resale. During the quarter ended
December 31, 2000, two stores were sold resulting in a gain on sale of $24,419. Also,
during the quarter ended December 31, 2000, we incurred costs of $61,147 related to
lease settlements of stores closed. As of December 31, 2000, the Company had 19 stores
classified as held for resale. Six of the 19 stores held for resale are under contract
to be sold and the remaining 13 are expected to be sold in 2001.
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recovered. At
December 31, 2000, we determined that an impairment related to our carrying value of
our assets held for resale was required and expensed $934,106.
In the quarter ended December 31, 2000, we reacquired one area director territory for
$73,924, inclusive of legal and other related costs.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
In 1999, we entered into loan agreements with AMRESCO Commercial Finance, Inc.
("AMRESCO"), in which AMRESCO loaned us $14 million. The loan agreements provide,
among other things, that if we wish to secure additional indebtedness, we may do so as
long as, after giving effect to such new indebtedness, we meet a minimum financial
ratio.
AMRESCO took the position that the LLCP indebtedness (see Note 4 of Notes to
Consolidated Financial Statements) would cause us to achieve the required minimum
ratio. We, and our outside financial advisors, had previously calculated the effect
of the LLCP financing and concluded that we would exceed the required minimum ratio,
and responded accordingly to AMRESCO.
In February 2001, we agreed to resolve the dispute with AMRESCO in exchange for our
prepayment of principle of approximately $1,518,000 and a payment of a non-refundable
credit enhancement of approximately $169,000. AMRESCO agreed to release its collateral
interest in the assets of eleven Company-owned stores. In addition, we agreed to
deposit into an escrow account $1.1 million until the later of July 31, 2001 or the
month the minimum ratio is met. We expect to achieve this by September 30, 2001 and
have the escrowed funds released.
As we have in the past, we will continue to consider acquisitions of other chains, the
purchase of Quizno's Restaurants from our Owners, and the purchase of Quizno's area
directorships from our Area Directors. From time to time, we will make offers and
enter into letters of intent for such transactions subject to the completion of due
diligence. In all such cases, we will identify the sources of cash required to
complete such transactions prior to entering into a binding agreement.
We have never paid cash dividends on our common stock and we do not anticipate a
change in this policy in the foreseeable future.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended December 31, 2000
Form 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Other than the items discussed in our annual report on Form 10-KSB for the year ended
September 30, 2000, there are no other pending material legal proceedings to which we
are a party or to which our property is subject.
There are various claims and lawsuits pending by and against us. The settlement of
some of these claims and lawsuits may result in the acquisition or acquirement of
certain area director territories. In the opinion of management, and supported by
advice from legal counsel, these claims and lawsuits will not result in any material
adverse effect in excess of amounts accrued in the accompanying consolidated financial
statements.
Item 2. Changes in Securities and Use of Proceeds
Sales of Unregistered Securities
Securities Amount of
Sold/Shares Date Consideration Purchaser(s) Exemption
------------------ ---- ------------- --------- ------------
Conversion of Class C 8 holders of
110,000 shares of Convertible Preferred such Preferred Section 3
Common Stock 12/11/00 Stock Stock (a) 9
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K:
Form 8-K, dated November 13, 2000, reporting in Item 5 the commencement of a self
tender offer by the Company.
Form 8-K, dated November 21, 2000, reporting in Item 5 the new agreement with a
national distribution company to become the exclusive distributor of food and paper
products to the U.S.-based Quizno's restaurant chain.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE QUIZNO'S CORPORATION
By: /s/ John L. Gallivan
--------------------
John L. Gallivan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Denver, Colorado
October 22, 2001
