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 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 2001
Restated 2000 Restated 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
============ ============ ============ ============
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (continued)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2001
Restated 2000 Restated 2000
----------- ----------- ----------- -----------
OTHER EXPENSE:
New company start-up costs (Note 10) .... $ (162,502) $ -- $ (349,380) $ --
Impairment of long-lived assets (Note 5) (276,135) -- (1,269,767) --
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 ............ (593,630) (514,417) (1,838,848) (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 ...................... (2,451,606) (1,069,322) (9,322,629) (3,253,614)
----------- ----------- ----------- -----------
Net income (loss) before income taxes .... 809,004 541,114 (1,576,660) 1,438,428
Income tax (provision) benefit ........... (299,332) (180,912) 583,365 (483,457)
----------- ----------- ----------- -----------
Net income (loss) ........................ 509,672 360,202 (993,295) 954,971
Preferred stock dividends ................ (44,379) (52,164) (139,389) (131,790)
----------- ----------- ----------- -----------
Net income (loss) applicable to common
shareholders ............................. $ 465,293 $ 308,038 $(1,132,684) $ 823,181
=========== =========== =========== ===========
Basic net income (loss) per share of common
stock .................................... $ 0.20 $ 0.10 $ (0.45) $ 0.27
=========== =========== =========== ===========
Diluted net income (loss) per share of
common stock ............................. $ 0.15 $ 0.09 $ (0.45) $ 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 Restated 2000 Restated
----------- -----------
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 $3,464,301 at June 30, 2001 and $2,433,637 at
September 30, 2000 (Note 5) ........................... 10,177,369 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 4,497,528
Investments in area directorships, net of accumulated
amortization of $452,185 at June 30, 2001 and
$167,893 at September 30, 2000 (Note 6) ............. 4,564,279 4,271,320
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 ..................................... 20,518,915 17,194,244
----------- -----------
Total assets ........................................... $52,853,999 $41,191,502
=========== ===========
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
June 30, September 30,
2001 Restated 2000 Restated
----------- -----------
CURRENT LIABILITIES:
Accounts payable ....................................... $ 6,393,779 $ 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) ........................ 51,774 --
Income taxes payable ................................... -- 345,460
------------ ------------
Total current liabilities ................................ 10,749,602 6,006,195
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
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 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 ...................................... (9,014,761) (1,115,973)
------------ ------------
Total liabilities and stockholders' equity (deficit) ..... $ 52,853,999 $ 41,191,502
============ ============
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
June 30,
----------------------------
2001
Restated 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ (993,295) $ 954,971
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ......................... 1,838,847 1,380,425
Impairment of long-lived assets ....................... 1,269,767 --
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 financing costs ............................ 104,896 --
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
plans ................................................ 311,036 --
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 ................................ (953,748) (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)
------------ ------------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Nine Months Ended
June 30,
----------------------------
2001
Restated 2000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock .......................... $ -- $ 270,586
Proceeds from sale of Class D and Class E
Preferred Stock ..................................... -- 478,611
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 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
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 ................... -- -- -- -- -- 1,259,505
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 2001 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) (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) ................... -- -- -- -- -- (993,295)
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 2001 ... 265,480 $ 265 2,337,439 $ 2,337 $ 303,309 $(9,014,761)
=========== =========== =========== =========== =========== ===========
(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.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. COMMITMENTS AND CONTINGENCIES
Other than the items discussed in our annual report on Form 10-KSB for the year ended
September 30, 2000, there are no other pending material legal proceedings to which we
are a party or to which our property is subject.
There are various claims and lawsuits pending by and against the Company. The settlement
of some of these claims and lawsuits may result in the acquisition of certain area
director territories. In the opinion of the management, and supported by advice from
legal counsel, these claims and lawsuits will not result in any material adverse effect
in excess of amounts accrued in the accompanying consolidated financial statements.
The Company is obligated to pay an opening commission to the area director who sold the
franchise at the time the franchise opens for business. These commissions are expensed
at the time the related franchise opens for business and are not accrued as a liability
of the Company until that time. At 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.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. 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 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.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. TENDER OFFER AND NOTE PAYABLE (continued)
The Company incurred and expensed $2,283,381 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.
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.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. STORES HELD FOR RESALE AND STORE OPERATIONS (continued)
Included on the consolidated balance sheets in property and equipment and assets held
for resale and intangible assets were the following amounts related to stores held for
resale:
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 (51,774) -
------------ -----------
Net assets of stores held for resale $361,334 $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, 2001 June 30, 2000 June 30, 2001 June 30, 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 $ (96,004) $ (58,031) $ (510,281) $ (155,774)
resale =========== =========== =========== ===========
Company Stores * Three Months Ended Nine Months Ended
---------------- ------------------ -----------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 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 $934,106. During the nine
months ended June, 2001, the Company incurred actual losses on the sale of these stores
in the amounts of $882,332, which was charged to the impairment reserve.
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
$59,526. 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.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. STORES HELD FOR RESALE AND STORE OPERATIONS (continued)
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.
(Unaudtited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
11. 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 June 30, 2001 Income Per Share Share
--------------------------- ------ --------- -----
As previously reported June 30,
2001 $497,060 $0.21 $0.16
Restatement adjustment (31,767) (0.01) (0.01)
-------- ------ -----
As restated June 30, 2001 $465,293 $0.20 0.15
======== ====== =====
Fully Diluted
Net Basic Earnings Earnings Per
Nine Months Ended June 30, 2001 Income Per Share Share
------------------------------ ------ --------- -----
As previously reported June 30,
2001 $(1,224,256) $ (0.49) $(0.49)
Restatement adjustment 91,572 0.04 0.04
----------- ------ ------
As restated June 30, 2001 $(1,132,684) $ (0.45) $(0.45)
=========== ====== ======
(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 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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Overview
Our primary business is the franchising of Quizno's restaurants. As a franchisor, revenue
is principally derived from: (1) continuing fees, (2) initial franchise fees, and (3) area
director and master franchise fees. Continuing fees increase as the number of franchised
restaurants open increase. Initial franchise fees are one-time fees paid upon the sale of a
franchise and vary directly with the number of franchises we can sell and open. Area
director and master franchise fees occur when a country or exclusive area is sold and are
expected to decline as the number of remaining available markets declines. Effective
January 1, 1999, we changed our accounting policy related to the recognition of area
director marketing agreement fees to one that recognizes such fees as revenue on a
straight-line basis over the term of the agreement, which is ten years. Each of these
sources of revenue contributes to our profitability, but the relative contribution of each
source will vary as we mature. Over time initial fees and continuing fees will generate
proportionately more revenue than area director and master franchise fees.
For the nine months ended June 30, 2001, we incurred a loss before preferred dividends of
$993,295, 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 $(8,739,264). 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 $(3,737,071).
The following chart reflects our revenue growth by source and number of restaurants for the
three and nine month periods of fiscal 2001 compared to the comparable periods of fiscal
2000:
($ in thousands) Three Months Ended June 30, Nine Months Ended 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 434 335 29% 819 967 (15)%
franchise fees
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 303 -- 100% 2,762 103 2,578%
resale --------- --------- ----- -------- -------- -----
$12,980 $11,274 15% $38,666 $29,769 30%
Total Revenue ======= ======= ===== ======= ======= =====
Earnings before interest
expense, income taxes,
depreciation and amortization
and preferred stock dividends
(EBITDA) $ 2,614 $ 1,542 69% $ 3,316 $4,268 (22)%
======= ======= ==== ========= ====== =====
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 (5) (5) (21) (31)
(3)
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
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Domestic initial franchise fees collected by us are recorded as deferred initial franchise
fees until the related franchise opens. Deferred initial franchise fees at 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
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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.
Since 1999, we have repurchased 21 area directorships for a total of $4,991,712, of which
four were purchased in fiscal 2001 for $552,499. 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 June
30, 2001, there were 212 franchises open and 19 franchises sold not open, in repurchased
area director territories. During the nine months ended December 31, 2000, we expensed
$243,072 for amortization of prepaid commissions related these franchises and expensed
another $41,220 representing the unamortized balance related to four such franchises closed.
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
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
New company start-up costs were $186,878 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 $993,632 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 $934,106. Also, during the
first quarter, we determined that an impairment was required for certain equipment and
inventory and we expensed a total of $59,526. 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 $593,630 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 $1,838,848 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, 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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 $299,332 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 $583,365 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%.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 $953,784 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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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. 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 our Common Stock. 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.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 $934,106. 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
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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
October 31, 2001
