SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or Rule 240.14a-12
The Quizno's Corporation
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing proxy statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies: Common
Stock, par value $0.001 per Share
2) Aggregate number of securities to which transaction applies: 2,492,817
Shares
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. Set forth amount on which filing
fee is calculated and state how it was determined: $8.50 (the
consideration to be paid per share for 2,337,439 shares of Common
Stock, par value $0.001 per share, of the Quizno's Corporation
pursuant to the merger described in this proxy statement); $6.77
(the average consideration to be paid per option to purchase Common
Stock, par value $0.001 per share, of the Quizno's Corporation
pursuant to the merger described in this proxy statement, for 155,378
options)
4) Proposed maximum aggregate value of transaction: $20,137,035
5) Total fee paid: $4,027.41
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $_________
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed: ____ __, 2001
[QUIZNO'S LOGO]
July , 2001
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of The
Quizno's Corporation to be held at 10:00 a.m. local time, on , 2001, at
, Denver Colorado, 80202.
As described in the enclosed proxy statement, at the special meeting, you
will be asked to approve a merger of Firenze Corp. with and into us. In the
merger, shares of our common stock issued and outstanding immediately prior to
the merger, excluding shares beneficially owned by (1) Richard E. Schaden,
chairman of our board of directors and our president and chief executive
officer, (2) Richard F. Schaden, a member of our board of directors and our vice
president and secretary, (3) affiliates and family members of the Schadens, and
(4) shareholders validly exercising their appraisal rights, will be converted
into the right to receive $8.50 per share, in cash, without interest.
The merger has been approved by our board of directors, upon receiving the
recommendation of a special committee of independent members of the board. The
special committee and the board concluded that the proposed merger is fair and
in the best interests of our public shareholders, and therefore, the board
recommends that you vote in favor of the merger and adopt the merger agreement.
Details of the merger and other important information are described in the
accompanying notice of special meeting and proxy statement. You are urged to
read these important documents carefully before casting your vote.
Whether or not you plan to attend the special meeting, we urge you to
complete, sign, date and promptly return the enclosed proxy card. The merger
cannot be completed unless our shareholders approve the merger agreement.
We thank you for your prompt attention to this matter and appreciate your
support.
Very truly yours,
/s/ Richard E. Schaden
President and CEO
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR COMMON STOCK AT THIS TIME. AFTER
THE MERGER IS APPROVED, SHAREHOLDERS WILL RECEIVE A LETTER OF TRANSMITTAL AND
RELATED INSTRUCTIONS.
THE QUIZNO'S CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2001
To the Shareholders of
THE QUIZNO'S CORPORATION:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of THE
QUIZNO'S CORPORATION ('Quizno's') will be held on , 2001 beginning
at 10:00 a.m. at , Denver, Colorado 80202, to consider and vote on
a proposal to approve and adopt the amended and restated merger agreement, dated
as of July 2, 2001 between us and FIRENZE CORP., pursuant to which Firenze will
be merged with and into us. A copy of the merger agreement is included in the
attached proxy statement as Annex A and is incorporated in the attached proxy
statement by reference.
We will transact no other business at the special meeting.
Any shareholder who does not wish to accept the merger consideration of
$8.50 per share and who properly demands appraisal under Colorado law will have
the right to have the fair value of his, her or its shares determined by a
Colorado court. A copy of the relevant provisions of Colorado law is included in
the attached proxy statement as Annex C. This appraisal right is subject to a
number of restrictions and technical requirements described in the attached
proxy statement.
Only shareholders of record as of the close of business on ,
2001 will be entitled to notice of the special meeting and to vote at the
special meeting and any adjournment of the meeting. Any shareholder will be able
to examine a list of holders of record, for any purpose related to the special
meeting, during the period beginning two days after the notice of the special
meeting is given continuing through the meeting and any adjournment of the
meeting. The list will be available at our corporate headquarters located at
1415 Larimer Street, Denver, Colorado 80202. Approval and adoption of the merger
agreement requires the affirmative vote by at least a majority of the
outstanding shares entitled to vote at the special meeting.
By Order of the Board of Directors,
/s/ Richard F. Schaden
Corporate Secretary
Denver, Colorado
July , 2001
EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF A SHAREHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, HE, SHE
OR IT MAY, IF SO DESIRED, REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
THE QUIZNO'S CORPORATION
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2001
This proxy statement is being furnished to holders of our common stock in
connection with the solicitation of proxies by our board of directors for use at
the special meeting of shareholders, and at any adjournment of the meeting, to
be held at , Denver, Colorado 80202, on , 2001 beginning at
10:00 a.m. The special meeting has been called to consider and vote upon a
proposal to approve and adopt the amended and restated merger agreement, dated
as of July 2, 2001, between us and Firenze Corp., pursuant to which Firenze will
be merged with and into us. A copy of the merger agreement is attached as Annex
A.
Only shareholders of record on , 2001 are entitled to receive
notice of and vote at the meeting. On that record date, there were shares of
our common stock outstanding held by approximately record holders.
Each share of our common stock will be entitled to one vote. Holders of
shares of our preferred stock have no right to vote at the meeting. The merger
must be approved by a vote of a majority of the outstanding shares of common
stock. Of those shares, approximately 67% were beneficially owned by Richard E.
Schaden and Richard F. Schaden. The Schadens have indicated they will vote for
the merger, but are not obligated to do so. A quorum for the meeting requires
that holders of a majority of the outstanding shares of common stock must be
present in person or by proxy.
The board of directors recommends that you vote 'FOR' approval of the merger
agreement and the merger.
Proxies will be voted in the manner you specify in the proxy card. If you
return your proxy but do not specify how it should be voted, your shares will be
voted for the merger. You must sign your proxy. The proxies will be voted in the
discretion of the persons named therein regarding the merger and any matters
relating to the conduct of the meeting. If your stock is held by a broker or
other custodian in 'street name,' your shares will not be voted unless you
provide specific instructions to the custodian. Proxies submitted by custodians
who have not received voting instructions will be counted for the purposes of
determining a quorum, but will not be voted for or against the merger. Because
the merger must be approved by the holders of a majority of the outstanding
shares, the failure to vote your shares, including the failure to provide
instructions to a custodian, or a decision to abstain from voting, will have the
same effect as a vote against the merger. You are urged to complete and return
your proxy or, if your shares are held in street name, to provide voting
instructions in accordance with the materials you receive from your broker or
other custodian.
This proxy statement and the accompanying form of proxy are first being
mailed to shareholders on or about , 2001.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF A
PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE A PROXY
SOLICITATION IN SUCH JURISDICTION. THE INFORMATION IN THIS PROXY STATEMENT MAY
ONLY BE ACCURATE ON THE DATE OF THIS PROXY STATEMENT.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 4
SPECIAL FACTORS............................................. 8
Background of the Merger................................ 8
Recommendations of the Special Committee and the Board
of Directors........................................... 11
Reasons for the Merger and Fairness of the Merger....... 12
Purposes of the Merger and Plans or Proposals........... 14
Opinion of Tucker Anthony............................... 14
Our Management's Forecasts.............................. 18
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 19
THE SPECIAL MEETING......................................... 21
Matters to be Considered................................ 21
Required Votes.......................................... 21
Voting and Revocation of Proxies........................ 21
Record Date; Stock Entitled to Vote; Quorum; Voting at
the Special Meeting.................................... 21
Appraisal Rights........................................ 22
Solicitation of Proxies................................. 22
CERTAIN INFORMATION CONCERNING THE COMPANY.................. 22
Recent Developments..................................... 22
Certain Transactions.................................... 22
Price Range of Shares; Dividends and Stock
Repurchases............................................ 24
Summary Unaudited Pro Forma Condensed Financial
Information............................................ 25
Interests of Certain Persons in the Merger.............. 28
THE MERGER AGREEMENT........................................ 29
The Merger.............................................. 29
Stock Options, Warrants and Preferred Stock............. 29
Conversion of Common Stock.............................. 30
Representations and Warranties.......................... 30
Covenants............................................... 31
Directors' and Officers' Indemnification................ 31
Conditions to the Merger................................ 32
Termination............................................. 32
Effect of Termination................................... 33
Amendment............................................... 33
Expenses; Termination Fees.............................. 33
Fees and Expenses....................................... 33
CERTAIN BENEFICIAL OWNERSHIP OF SHARES...................... 34
CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS.............. 36
General................................................. 36
Hart-Scott-Rodino....................................... 36
Litigation.............................................. 36
MERGER FINANCING............................................ 36
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER....... 37
STATUTORY OPINION........................................... 38
APPRAISAL RIGHTS............................................ 38
INDEPENDENT AUDITORS........................................ 39
SHAREHOLDER PROPOSALS....................................... 39
WHERE YOU CAN FIND MORE INFORMATION......................... 40
AVAILABLE INFORMATION....................................... 41
Annex A -- First Amended and Restated Merger Agreement......
Annex B -- Opinions of Tucker Anthony Sutro Capital
Markets..........................................
Annex C -- Summary of Shareholders Dissenters Rights and
Text of Article 113 of the Colorado Business
Corporation Act..................................
Annex D -- Annual Report on Form 10-KSB for the Fiscal Year
Ended September 30, 2000.........................
Annex E -- Quarterly Report on Form 10-QSB for the Period
Ended March 31, 2001.............................
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QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers are intended to address briefly some
commonly asked questions regarding the merger. These questions and answers may
not address all questions that may be important to you as a shareholder. Please
refer to the more detailed information contained elsewhere in this proxy
statement, the annexes to this proxy statement, and the documents referred to or
incorporated by reference in this proxy statement.
WHO IS FIRENZE?
Firenze Corp. is a corporation formed by Richard E. Schaden and Richard F.
Schaden to acquire us in the merger.
Richard E. Schaden is our president and chief executive officer, chairman
of our board of directors and one of our significant shareholders. Richard
F. Schaden is our vice president and corporate secretary, a member of our
board of directors and one of our significant shareholders. Richard E.
Schaden is the son of Richard F. Schaden. The Schadens are the only
directors, officers and shareholders of Firenze.
One of our lenders, Levine Leichtman Capital Partners II, L.P. will
continue to hold warrants to purchase up to 14% of each class of the
surviving company's capital stock on a fully diluted basis, subject to
certain adjustments for issuances, exchanges or repurchases of capital
stock by the surviving company, after the merger.
Affiliates of the Schadens, consisting of Frederick H. Schaden, one of our
directors, other Schaden family members and a family trust, Levine
Leichtman, and one of our executive officers, Patrick Meyers, will also
remain as shareholders or option holders with rights to purchase stock of
the surviving company.
WHAT AM I BEING ASKED TO VOTE UPON? (SEE PAGES 24-25)
Our board of directors is asking you to vote to adopt and approve a merger
agreement and merger which provides that Firenze will acquire us by merging
with and into us, and we will be the surviving corporation. Pursuant to the
merger, each share of our common stock, issued and outstanding immediately
prior to the merger will be converted into the right to receive $8.50 in
cash, without interest, other than shares beneficially owned by:
Richard E. Schaden, our chief executive officer and president;
Richard F. Schaden, our vice president and corporate secretary;
affiliates of the Schadens; and
holders who have validly exercised their appraisal rights.
WHAT WILL I RECEIVE IN THE MERGER? (SEE PAGES 31-32)
You will be entitled to receive $8.50 in cash, without interest, for each
share of common stock owned by you.
WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE FOR THE MERGER?
(SEE PAGES 14-18)
In the opinion of the board of directors, based upon the unanimous
recommendation of the special committee of the board, the terms and
provisions of the merger agreement and the merger are fair to and in the
best interests of our public shareholders, who are all shareholders other
than the Schadens and their affiliates. The board, with Richard E. Schaden,
Richard F. Schaden not present and Frederick Schaden abstaining, has
approved the merger agreement and the merger and declared it fair to and in
the best interests of our public shareholders.
The price of $8.50 per share is a 12% premium over the average closing
price for the shares on the Nasdaq SmallCap Market for the six month
trading period ended June 21, 2001. In addition, the price is a 15% premium
over the closing price for the shares on
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May 21, 2001, the date before we publicly announced the merger proposal, a
11% premium over the closing price for the shares on June 21, 2001 the date
before we announced the execution of the merger agreement, and a 26%
premium over the closing price of the common stock on November 9, 2000 the
trading date before we announced our tender offer.
HOW WILL FIRENZE FINANCE THE MERGER? (SEE PAGES 38-40)
Firenze intends to finance all of the merger consideration from the cash
held by us. Certain of this cash consists of funds borrowed under our
credit facility with Levine Leichtman.
SINCE THE SCHADENS ARE THE SOLE SHAREHOLDERS OF FIRENZE, WHAT CONFLICTS OF
INTEREST SHOULD I BE AWARE OF IN EVALUATING THE BOARD OF DIRECTORS'
RECOMMENDATION OF APPROVAL OF THE MERGER AGREEMENT AND THE MERGER?
(SEE PAGES 29-30)
The Schadens, as officers and members of our board, have a direct conflict
of interest in recommending approval of the merger agreement and the merger
because they are the sole shareholders, directors and officers of Firenze.
If the merger occurs, the Schadens and their affiliates will beneficially
own all of our outstanding common stock. As a result, the Schadens and
their affiliates will receive all of the benefit of our future earnings and
our increased value and bear the full loss of any decrease in our value,
while you will no longer receive any such benefit or bear such risk.
To counteract this conflict of interest, the recommendation of the board is
based on the unanimous recommendation of the special committee. The members
of the special committee, who are all independent directors, did not have a
conflict of interest in recommending approval of the merger agreement and
the merger.
HOW DID THE BOARD OF DIRECTORS MAKE SURE THE PRICE PER SHARE I WILL RECEIVE IN
THE PROPOSED MERGER IS FAIR? (SEE PAGES 11-23)
The board of directors formed a special committee consisting of three
directors who had no conflicts of interest with respect to the merger to
evaluate and negotiate the terms of the merger agreement with Firenze. The
special committee selected and retained legal and financial advisors to
assist it in the evaluation and negotiation of the merger agreement and
merger, and received a written fairness opinion from its financial advisor.
The special committee relied on the opinion of its financial advisor, that
as of the date of the merger agreement, and based on and subject to the
assumptions, limitations and qualifications contained in that opinion, the
merger consideration each public shareholder will have the right to receive
is fair, from a financial point of view, to that shareholder.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES TO ME OF US MERGING WITH FIRENZE?
(SEE PAGE 28)
You will receive an immediate cash payment for your shares of our common
stock that represents a premium over market prices in recent periods. This
payment will be taxable to you to the extent it exceeds your basis on your
shares. You will have the opportunity to reinvest your net of tax merger
consideration in other investments.
You will not have the opportunity to participate in our future earnings or
growth. However, you will not have to bear the risk of a decrease in our
value, whether as a result of operating or market factors.
WHAT VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT? (SEE PAGE 25)
The holders of a majority of all outstanding shares of our common stock
must vote to approve the merger agreement. As of June 21, 2001, the
Schadens beneficially owned approximately 67% of the common stock eligible
to vote at the special meeting. The Schadens have indicated that they
intend to vote their common stock in favor of the adoption of the merger
agreement although they are not obligated to do so.
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WHAT DO I NEED TO DO NOW? (SEE PAGES 25-26)
Please mark your vote on, sign, date and mail your proxy card in the
enclosed return envelope as soon as possible, so that your shares may be
represented at the special meeting.
WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER? (SEE PAGES 41-42 AND ANNEX C)
You may oppose the merger and seek appraisal of the fair value of your
shares, but only if you comply with all of the Colorado law procedures
explained on pages 38-39 and in Annex C to this proxy statement.
WHO CAN VOTE ON THE MERGER? (SEE PAGE 26)
If you are a shareholder of record as of the close of business on ,
2001, you will be entitled to notice of, and to vote at, the special
meeting to adopt and approve the merger agreement and the merger.
SHOULD I SEND MY STOCK CERTIFICATES NOW? (SEE PAGES 31-32)
No. After the merger is completed, we will send you a transmittal form and
written instructions for exchanging your share certificates.
IF MY SHARES ARE HELD IN 'STREET NAME' BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME? (SEE PAGE 26)
Your broker will vote your shares ONLY if you instruct your broker on how
to vote. You should follow the directions provided by your broker regarding
how to vote your shares.
MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
(SEE PAGE 25-26)
Yes, your vote can be changed at any time before the proxy is voted at the
special meeting. This can be done in one of two ways. First, just send in a
written revocation or another signed proxy card with a later date to
Computershare Trust Company, Inc., 12039 W. Alameda Parkway, Suite Z-2,
Lakewood, CO 80228, (303) 986-5400, our transfer agent, before the special
meeting. Or, second, you may, as long as you, and not your broker, are a
record holder of our stock, attend the special meeting and vote in person.
WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED? (SEE PAGES 33-34)
We are working toward completing the merger as quickly as possible. If the
merger agreement is approved by the shareholders and the other conditions
to the merger are satisfied, we expect to complete the merger on the day of
the special meeting.
WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO ME?
(SEE PAGES 40-41)
The cash you receive for your shares generally will be taxable for U.S.
federal income tax purposes, to the extent the cash exceeds your tax basis.
WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING? (SEE PAGES 24-25)
We do not expect that any other matters will be voted upon at the special
meeting.
WHO CAN HELP ANSWER MY QUESTIONS? (SEE PAGES 43-45)
If you have more questions about the merger or would like additional copies
of this proxy statement, you should contact Quizno's Investors Relations,
Ms. Sue Hoover, at (303) 359-3330.
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SUMMARY
The following summary is intended only to highlight information contained
elsewhere in this proxy statement. This summary is not intended to be complete
and is qualified by the more detailed information contained elsewhere in this
proxy statement, the attached annexes and the documents we refer to in this
proxy statement. You are urged to review this entire proxy statement carefully,
including its annexes and all documents referenced in this proxy statement.
OVERVIEW
We are furnishing this proxy statement to allow our shareholders to consider
and vote on a proposal to approve and adopt the merger agreement and merger. The
merger agreement provides that Firenze will be merged with and into us and our
public shareholders who do not dissent from the merger will receive $8.50 per
share for each share of our common stock that they own at the effective time of
the merger.
During the time the merger agreement was negotiated and at the time the
merger agreement was executed, Richard E. Schaden was the president and chief
executive officer and chairman of our board of directors and Richard F. Schaden
was our vice president and corporate secretary and a member of our board of
directors. The Schadens are also the sole shareholders, officers and directors
of Firenze. The Schadens, therefore, have a direct conflict of interest with
respect to the proposed transaction. As of the date of this proxy statement, the
Schadens own approximately 67% of our outstanding common stock.
In light of this conflict of interest, our board of directors formed the
special committee. The special committee is composed of three of our directors
who were not affiliated with Firenze. The special committee negotiated the terms
of the merger agreement on behalf of the board and us. In connection with the
execution of the merger agreement, both the board and the special committee
determined that the merger and the merger agreement are fair to and in the best
interests of our public shareholders.
THE QUIZNO'S CORPORATION
1415 Larimer Street
Denver, Colorado 80202
(720) 359-3000
We incorporated as a Colorado corporation in 1991 as D&R, Inc. We changed
our name to The Quizno's Franchise Corporation in April 1991 and to The Quizno's
Corporation in June 1995. We do business as The Quizno's Corporation and
Quizno's. In January 1991, we purchased assets of Quizno's America, Inc., which
had operated, owned and franchised Quizno's restaurants (directly and through
predecessors and affiliates) under the QUIZNO's'r' name since 1981. We operate,
and offer franchises to individuals or entities to operate, restaurants with
carryout facilities that sell submarine and other sandwiches, salads, other food
products and beverages and related services. As of June 20, 1001, there were
1,128 restaurants in operation in the United States and internationally, and
agreements were in place for the opening of an additional 854 franchised
restaurants in the United States. During the last three years, we have grown to
become the third largest sub sandwich chain in the United States.
Additionally, we offer franchises for area director marketing businesses in
which the area director acts as our sales representative within a defined
geographic area to solicit and identify prospective franchisees, to assist us in
locating and securing sites for restaurants within a territory, and to provide
additional support before, during and after the restaurants open.
FIRENZE CORP.
1415 Larimer Street
Denver, Colorado 80202
(720) 359-3000
Firenze is a Colorado corporation organized on April 30, 2001 specifically
for the merger and has not carried on any activities to date other than those
incident to its formation, the negotiation
4
and execution of the merger agreement and the transactions contemplated by the
merger agreement. Richard E. Schaden, our president and chief executive officer,
and his father, Richard F. Schaden, our vice president and the corporate
secretary, both of whom are on our board of directors, are the sole
shareholders, officers and directors of Firenze.
THE MERGER
EFFECT OF THE MERGER (SEE PAGE 30-31)
Pursuant to the merger agreement, Firenze will be merged directly into us
and we will be the surviving corporation. The merger will become effective when
the articles of merger are duly filed with the Secretary of State of the State
of Colorado.
MERGER CONSIDERATION (SEE PAGES 31-32)
In the merger, each share of our common stock held by our public
shareholders (excluding the Schadens and their affiliates), other than shares as
to which dissenters' rights have been validly exercised, will be converted into
the right to receive $8.50 per share in cash, without interest.
COMPANY STOCK OPTIONS AND PREFERRED STOCK (SEE PAGE 31)
At the effective time of the merger, all stock options held by persons other
than the Schadens and their affiliates, whether vested or unvested, will
automatically be converted into the right to receive an amount equal to merger
consideration in cash, less the applicable exercise price, for each share of
common stock subject to such directors stock options. At the effective time of
the merger, all stock options held by the Schadens and their affiliates, whether
vested or unvested, will be assumed by us as the surviving company.
Our authorized and issued Class C and Class E preferred stock existing as of
the date of the merger agreement, will be redeemed by Quizno's at a purchase
price not to exceed the greater of the merger consideration or the liquidation
value of each respective class of preferred stock. Our authorized and issued
Class D preferred stock will be redeemed for $3.00 per share.
CONDITIONS TO THE MERGER (SEE PAGES 33-34)
We and Firenze will not complete the merger unless a number of conditions
are satisfied or waived by us and Firenze. These include:
the merger agreement has been approved by the requisite vote of the holders
of our common stock;
Tucker Anthony will not have revoked, modified or changed its fairness
opinion in any manner adverse to the public shareholders.
Firenze will not be required to complete the merger unless the following
conditions are satisfied or waived:
we have not experienced and will not be experiencing at the time of closing
a material adverse change in our business; and
persons holding not more than 170,000 issued and outstanding shares of our
common stock will have exercised appraisal rights under Colorado law.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGES 34-35)
The merger may be abandoned, at any time before we and Firenze complete it
and before or after you approve it, in the following circumstances:
by mutual written consent of Firenze and us;
5
by Firenze if we have breached in any material respect any representation
or warranty contained in the merger agreement, or if we fail to perform in
any material respect any of our covenants, obligations or other agreements
contained in the merger agreement;
by us if Firenze has breached in any material respect any representation or
warranty contained in the merger agreement, or if Firenze fails to perform
in any material respect any of its covenants, obligations or other
agreements contained in the merger agreement;
by us if our board of directors determines, in good faith, after
consultation with and based on the advice of legal counsel, that the
failure to change its recommendation of the adoption of this agreement and
the merger could be expected to constitute a breach of its fiduciary duties
to our shareholders under applicable law.
INTEREST OF CERTAIN PERSONS IN THE MERGER (SEE PAGES 29-30)
Some of our executive officers and directors, specifically the Schadens,
have interests that are different from or in addition to the interests of other
shareholders.
OPINION OF FINANCIAL ADVISOR (SEE PAGES 19-23 AND ANNEX B)
The special committee retained Tucker Anthony Sutro Capital Markets as its
financial advisor to review with the special committee options regarding a
second step transaction and to render an opinion as to the fairness of the
merger consideration each public holder of common stock will have the right to
receive in the proposed merger, from a financial point of view, to that
shareholder. On June 21, 2001, Tucker Anthony delivered its written opinion to
the special committee that, as of the date of the opinion, and based on and
subject to the assumptions, limitations, and qualifications contained in that
opinion, the merger consideration each of our public shareholders will have the
right to receive in the proposed merger is fair, from a financial point of view,
to that shareholder.
A copy of Tucker Anthony's June 21, 2001 written opinion is attached to this
proxy statement as Annex B. You should read Tucker Anthony's opinion in its
entirety with respect to assumptions made, matters considered, and limitations
on the review undertaken by Tucker Anthony in rendering its opinion.
VOTE REQUIRED OF OUR SHAREHOLDERS (SEE PAGE 25)
The approval of our board and the affirmative vote of a majority of the
outstanding shares are required to approve the merger agreement and the merger
at a meeting of our shareholders. The Schadens, who currently beneficially own
approximately 67% of the issued and outstanding shares of our common stock, have
indicated that they intend to vote all of their shares in favor of the merger
agreement and the merger, although they are not obligated to do so. Accordingly,
the Schadens have sufficient voting power to cause the approval and adoption of
the merger agreement and the merger, without the affirmative vote of any of our
other shareholders. The merger is not conditioned on the affirmative vote of any
of our other shareholders.
APPRAISAL RIGHTS (SEE PAGES 41-42 AND ANNEX C)
You have the right to have the fair value of your shares appraised under
Colorado law in connection with the merger. To exercise your appraisal rights,
you should vote against the merger and follow the steps set forth on pages 38
and 39.
THE MERGER WILL BE A TAXABLE TRANSACTION (SEE PAGES 40-41)
The cash you receive for your common stock generally will be taxable for
U.S. federal income tax purposes to the extent the cash exceeds your tax basis.
You are urged to consult your own tax advisor concerning the federal income,
state, local, foreign and other tax consequences of the merger.
6
MERGER FINANCING (SEE PAGES 38-40)
The total amount of cash required to consummate the transactions
contemplated by the merger agreement, including payment of related fees and
expenses, is estimated to be approximately $7.8 million, which will be paid by
us out of our cash on hand.
SELECTED HISTORICAL FINANCIAL DATA
We are providing the following historical financial information to aid you
in your analysis of the financial aspects of the merger.
The following selected financial data is only summary and should be read
with our financial statements and the notes to those statements and 'Our
management's discussion and analysis of financial condition and results of
operations' incorporated by reference to this proxy statement. The statement of
operations data for the years ended December 31, 1998 and September 30, 1999 and
2000 and the balance sheet data at December 31, 1998 and September 30, 1999 and
2000, are derived from our financial statements which have been audited by our
independent auditors. The statement of operations data for the six months ended
March 31, 2000 and 2001 are derived from our unaudited financial statements of
which are included elsewhere in this document. Please note that historical
results are not necessarily indicative of the results to be expected in the
future. See Annex D and Annex E hereto.
The numbers in the table below are in thousands, except per share data.
YEAR ENDED SIX MONTHS ENDED
----------------------------- MARCH 31,
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, --------------------
1998 1999(1) 2000 2000 2001
---- ------- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue........................ $20,737 $20,948 $41,924 $18,495 $25,687
Net income/loss before income
taxes........................ $ 744 $ 2,088 $ 2,050 $ 897 $(2,581)
Interest income................ $ 259 $ 239 $ 527 $ 266 $ 386
Diluted net income (loss)...... $ 892 $(1,527) $ 1,116 $ 515 $(1,721)
Net loss per share............. $ .26 $ (.55) $ .33 $ .14 $ (.66)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments....... $ 2,244 $ 4,891 $ 7,818 $ 7,223 $ 8,286
Working capital................ $ 2,635 $ 3,982 $ 6,297 $ 6,485 $ 8,586
Total assets................... $13,790 $21,775 $41,259 $35,872 $48,407
Shareholders' equity........... $ 4,096 $ 2,114 $ 2,788 $ 2,127 $(9,255)
- ---------
(1) In 1999 we changed our fiscal year from December 31 to September 30; as a
result our fiscal year for 1999 consists only of nine months.
MARKET PRICE AND DIVIDEND INFORMATION (SEE PAGES 28-29)
On June 21, 2001, the last trading day before announcement of the execution
and delivery of the merger agreement, the closing price per share of our common
stock on The Nasdaq SmallCap Market was $7.68. On , 2001, the latest
practicable trading day before the printing of this document, the closing price
per share of our common stock on The Nasdaq SmallCap Market was $ .
We have never declared or paid cash dividends on our common stock.
7
SPECIAL FACTORS
BACKGROUND OF THE MERGER
We were incorporated in Colorado in 1991. In February 1994, we completed an
initial public offering of 1,150,000 shares of common stock at $5.00 per share.
After our initial public offering, Richard E. Schaden and Richard F. Schaden
owned approximately 59.2% of our issued and outstanding common stock.
Since our initial public offering, we believe that the public market has not
responded to our positive growth and our common stock has remained very thinly
traded, providing little liquidity for our shareholders. In addition, because of
the low trading volume and illiquidity of our common stock, we have been unable
to utilize our common stock effectively as a source of financing. Because we
have been unable to realize the principal benefits of public ownership, we have
from time to time considered various options to increase the liquidity of our
common stock, or in the alternative, acquiring all outstanding shares of our
common stock.
On December 29, 1998, Richard E. Schaden and Richard F. Schaden offered to
buy all of our outstanding shares of common stock not owned by them for between
$7.84 and $8.20 per share. Our board of directors formed a special committee of
independent directors to evaluate the proposal and to make a recommendation to
our full board of directors regarding the acceptance or rejection of the
proposal. The Schadens and the special committee discussed and negotiated the
proposal throughout the summer, but on August 9, 1999, the special committee
reported to our board of directors that the Schadens had withdrawn their
proposal, based largely on the inability of the special committee and the
Schadens to reach a mutually agreeable price per share.
At a special meeting of our board of directors on October 1, 1999, our board
authorized repurchase of up to 200,000 shares. We repurchased 144,005 shares in
the open market until September 30, 2000, when we ceased the share repurchase
program in order to avoid reducing our net tangible assets below the threshold
required for continued listing on Nasdaq.
On November 13, 2000, after discussions among management, independent
members of our board of directors and our legal and financial advisors, we
commenced a tender offer for any and all shares of our common stock at a cash
price of $8.00 per share. As part of the tender offer materials, we disclosed
that our board could take other actions that would result in a second step
transaction in which all the remaining public stockholders would receive cash
for their shares.
On December 12, 2000, we announced that our tender offer had expired. We
purchased 1,699,439 shares of our common stock, including options and warrants
to purchase 928,284 shares upon the consummation of our tender offer. We also
closed a loan for approximately $12 million principal amount and $1.8 million in
pre-paid interest with Levine Leichtman to finance our tender offer.
Since December 12, 2000, we have purchased an additional 51,522 shares of
our common stock (including options to purchase 43,622 shares) in private
unsolicited transactions in which we were approached by individual shareholders
who had wished to tender but failed to do in a timely fashion for various
reasons. We paid $8.00 per share in those transactions.
On April 11, 2001, at a special meeting of our board, management requested
that the board explore options to complete a second step to our tender offer,
which we indicated we may pursue in the tender materials. Management stated that
it had been discussing the issues that a second-step transaction would present,
and wanted to inform the board of those discussions as well as to seek the
approval of the board to continue to explore these options.
At the April 11 board meeting, the board, including the Schadens,
unanimously concluded that we should explore our options to complete a second
step to our tender offer. The board made its determination after discussing the
merits of the proposed action. The board's determination to evaluate a second
step transaction was based, among other things, on:
our small public float and limited institutional following;
our low trading volume;
8
the Schadens' indication that they were unwilling to sell their shares of
our common stock to a third party;
the board's conclusion that there is little likelihood that the liquidity
of our common stock will improve in the future; and
the poor performance of our stock price since our initial public offering.
The board then considered the qualifications of its members to serve on a
special committee of the board that would be formed to review and evaluate the
options for completing a second step, to review, evaluate and negotiate any such
proposal received by us and to report final recommendations to the full board.
Because the Schadens were expected to remain shareholders of Quizno's, the board
determined that the Schadens, in addition to Frederick Schaden, should not serve
on the special committee. The board established a special committee consisting
of Mark Bromberg, Eric Lawrence and John Todd, all of whom are non-employee
directors of Quizno's. The board established the compensation of the special
committee members $7,500 per member per month. This compensation arrangement was
established so that the amount of compensation would not be increased or
decreased if the special committee accepted or rejected any transaction proposed
by the Schadens. At that time, the special committee authorized the engagement
of Brobeck, Phleger & Harrison LLP to serve as the special committee's legal
advisor to assist in evaluating the legal issues with completing a second step
and to negotiate any proposal received by us. The special committee determined
to retain Brobeck due to its expertise and reputation as mergers and
acquisitions lawyers and as securities law counsel. Initially, Brobeck had been
retained by us to advise the board regarding a potential second-step
transaction. The special committee requested that Brobeck instead represent the
special committee. The members of the special committee determined that as a
result of Brobeck's limited engagement with us there was no conflict of interest
in the special committee retaining Brobeck as its legal advisor.
The authority of the special committee was not limited in any way by the
board. However, the Schadens informed the special committee that they were not
interested in selling their shares of our common stock to a third party. As a
result, the special committee determined that it would not investigate the
possibility of selling our company to a third party because the Schadens would
not participate in such a transaction.
During April and May, the special committee interviewed several investment
banking firms to serve as the special committee's financial advisor for the
purpose of:
evaluating our options to complete a second step transaction;
preparing financial analysis of us;
advising the special committee with respect to the fairness of any second
step proposal received by us; and
delivering a fairness opinion to the special committee in connection with
any going private proposal.
On May 9, the special committee determined it would engage Tucker Anthony
Sutro Capital Markets to serve as its financial advisor. The special committee
had agreed that the criteria for selection of an independent financial advisor
should include:
the advisor's expertise and experience in the restaurant industry;
the reputation of the advisor;
the ability of the advisor to meet the special committee's requirements and
timelines;
consideration of conflicts of interest; and
sensitivity to the fee charged, given the relative value of any potential
transaction.
The special committee determined that of the investment banks interviewed,
Tucker Anthony was in the best position to represent the special committee. The
special committee found that Tucker Anthony had a strong knowledge of our
financial affairs and business as a result of its representation of us in our
self tender offer which would help it to provide prompt and well-
9
reasoned analysis of Quiznos in a cost effective manner. The special committee
evaluated whether Tucker Anthony's prior relationship with us, including its
outstanding loan to Richard E. Schaden, created a conflict of interest. After
discussion with Brobeck, the special committee concluded that Tucker Anthony's
prior representation of us offered strong positive advantages, offsetting the
disadvantage of a potential conflict of interest. In addition, Tucker Anthony
assured the special committee that it could act independently. At this meeting,
Tucker Anthony presented the special committee with its preliminary financial
analysis of us.
On May 3, 2001, the special committee received a draft of a merger agreement
submitted on behalf of the Schadens contemplating a merger of us with and into
our wholly-owned subsidiary.
On May 14, 2001, the special committee met with its legal and financial
advisors to discuss the legal ramifications of a second step transaction and
review and discuss Tucker Anthony's updated financial analysis of us. At this
meeting, Brobeck provided a legal analysis of the potential structures of a
second step transaction. After discussion, the special committee determined that
any second step transaction should be structured as a merger with a third party
corporation.
On May 15, 2001, our management informed the special committee that, under
the terms of our credit facility, any proposal structured as a merger might be
prohibited and suggested that an alternative would be a reverse stock split.
After discussing structuring the proposed transaction as a reverse stock split,
the special committee determined that it had a strong preference to structure
any second step transaction as a merger and informed our management of its
preference. In response to the special committee's preference, management
approached its lender and received confirmation that the lender would not oppose
any transaction which completed a second step to the December tender offer.
On May 21, 2001, the Schadens made an offer to the special committee to
acquire all outstanding shares of our common stock, other than shares owned by
them and certain affiliates for $8.00 per share in order to effect the second
step transaction. The transaction was proposed as a merger of Firenze with and
into us. On the same date, the Schadens' counsel provided to Brobeck a draft of
a merger agreement containing the specific terms of the Schadens' offer. We
issued a press release on May 21, 2001 announcing the receipt of the Schadens'
offer, the formation of the special committee and the retention of Tucker
Anthony.
During May 2001, the special committee met with Tucker Anthony several times
to discuss the proposed merger consideration. During these meetings the special
committee analyzed with Tucker Anthony projections which were provided by us.
The special committee noted certain discrepancies in the projections provided by
management from the projections in our tender offer and instructed Tucker
Anthony to discuss these differences with management and to reconcile the
discrepancies. After meeting with our management numerous times, Tucker Anthony
orally provided the special committee with a detailed analysis of the current
management projections and reconcile them with the projections from our tender
offer. The special committee then determined that it disagreed with certain of
the methodologies used by management in preparing management's projections as
originally provided and requested that Tucker Anthony revise its financial
analysis of the merger eliminating certain of management's assumptions from the
original financial model. Tucker Anthony then presented the special committee
with its analysis of the merger based on management's projections as revised.
After discussions with Tucker Anthony about the terms of the proposed merger,
the special committee determined to negotiate a higher price than the $8.00
proposed by the Schadens.
On June 6, 2001, the special committee and its legal and financial advisors
met with Richard E. Schaden and the Schadens' legal counsel to negotiate the
proposed merger consideration. Patrick Meyers, our general counsel, was present
at this meeting representing our interests. The special committee stated that
$8.00 per share was not sufficient based on the information it had developed
with Tucker Anthony, and proposed a price of $8.75. Mr. Schaden responded that
they generally agreed with our projections, but that the special committee's
counter-proposal was too high. The special committee and Mr. Schaden each held
independent discussions after which the Schadens proposed $8.21 per share of
common stock. The special committee, after discussion, rejected this offer.
After further independent discussions, Mr. Schaden proposed an offer of $8.50
10
per share. After extended discussion, the special committee tentatively agreed
to a price of $8.50 per share.
On June 8, Richard E. Schaden informed the special committee that he had
received a letter from one of our shareholders, indicating that the shareholder
may be interested in making an offer to acquire all shares of common stock held
by our public shareholders. On June 11, Brobeck, counsel to the Schadens, our
general counsel and our special counsel held a teleconference to discuss how to
proceed in light of this letter. It was determined that the independent advisors
to the special committee along with Schadens' counsel should contact the
shareholder to discuss whether it was prepared to make an offer to our public
shareholders.
On June 12, representatives of Brobeck, representatives of Tucker Anthony
and counsel to the Schadens held a teleconference with the shareholder and its
legal counsel. In that telephone conference, the shareholder indicated that it
was not presenting an offer for the public shareholders, but rather was pursuing
a private transaction in which it would participate with the Schadens in the
merger. As of July 3, 2001, the shareholder has not contacted the special
committee since June 12, 2001.
In a subsequent telephone conference involving only counsel for the Schadens
and counsel for the shareholder, the Schadens (through counsel) declined to
participate in such a transaction. As of July 3, 2001, the shareholder has not
had further contact with the Schadens or their counsel.
From May 21 to June 21, Brobeck negotiated the terms of the merger agreement
with counsel for the Schadens. In particular, Brobeck and the Schadens' counsel
negotiated issues relating to conditions to closing, the scope of
representations and warranties, termination relating to the board's fiduciary
duties and termination fees.
On June 18, 2001, the special committee held a teleconference. On the
teleconference, representatives of Brobeck discussed in detail the terms of the
merger agreement. In addition, during the course of this meeting,
representatives of Tucker Anthony presented a detailed oral presentation and
analysis of the fairness of the proposed merger consideration to our public
shareholders from a financial point of view.
On June 21, 2001 the special committee, representatives of Brobeck and
representatives of Tucker Anthony held a teleconference. At this meeting, the
special committee received an oral fairness opinion (and a written opinion to
the same effect was subsequently delivered) from Tucker Anthony that as of
June 21, 2001, and based on and subject to the assumption limitations, and
qualifications contained in that opinion, the merger consideration each of our
public shareholders will have the right to receive in the merger is fair, from a
financial point of view, to that shareholder. The special committee then
unanimously determined to approve the merger agreement and declare that the
merger was fair to and in the best interests of our public shareholders, and
recommended that the board approve the merger agreement and cause us to execute
and deliver the merger agreement. The special committee then adjourned and a
meeting of the board of directors was convened immediately thereafter. At such
meeting the independent members of our board unanimously resolved to approve the
merger agreement and the merger and recommend the merger to our shareholders. We
then entered into the merger agreement with Firenze.
We issued a press release after the market closed on June 21, 2001
announcing the execution of the merger agreement.
On July 2, 2001, the merger agreement was amended and restated to add
provisions relating to the treatment of our directors and advisors stock
options.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS
On June 21, 2001, the special committee unanimously determined that the
merger and the merger agreement are fair to and in the best interests of our
public shareholders and recommended that our board and our shareholders adopt
and approve the merger agreement and the merger.
11
On June 21, 2001, the disinterested members of our board, on the unanimous
recommendation of the special committee, unanimously determined that the merger
and the merger agreement are fair to and in the best interests of our public
shareholders and recommended that our shareholders adopt the merger agreement
and approve the merger. Richard E. Schaden and Richard F. Schaden did not attend
the board meeting. Frederick Schaden attended the board meeting for quorum
purposes, but abstained from discussing and voting with respect to the merger
and the merger agreement.
REASONS FOR THE MERGER AND FAIRNESS OF THE MERGER
In reaching its determinations, the special committee relied on its
knowledge of our business, information provided by our officers, as well as the
advice of its financial advisors and legal counsel. In reaching its decision,
the special committee considered a number of factors, including the following
factors, each of which in the view of the special committee supported such
determination:
the historical trading activity of our common stock, including the fact
that the average daily trading volume of our common stock for the six
months prior to June 21, 2001 was 1,320 shares per day;
we have a small public float and we have limited prospects for creating
institutional interest in our stock or coverage by analysts;
our market capitalization was approximately $19 million as of June 21,
2001;
our stock price has not performed well since our 1994 initial public
offering priced at $5.00 per share. During that period our common stock
closed at a high of $9.125 per share in August 1999 and at a low of $2.75
per share in June 1995. During the six month trading period ended June 21,
2001, the shares closed at a high of $8.00 per share in January 2001, and
at a low of $7.12 per share in April 2001. We believe that since our tender
offer, trading prices have been inflated as a result of the public's belief
that we would complete a second step transaction to our tender offer;
public companies with low market capitalization and low float may have more
difficulty in attracting financing;
the proposed merger consideration of $8.50 per share constitutes a 12%
premium over the average closing price for our common stock on the Nasdaq
SmallCap Market for the six month period ended May 21, 2001, the date
before we announced we had received an offer from the Schadens and 31% over
the average closing price for the six month period prior to the
announcement of our tender offer;
the written opinion of Tucker Anthony delivered to the special committee on
June 21, 2001, stating that, as of June 21, 2001, and based on and subject
to the assumptions, limitations and qualifications contained in that
opinion, the merger consideration each public shareholder will have the
right to receive in the proposed merger is fair, from a financial point of
view, to that shareholder;
the limited alternative transactions available to us in view of the fact
that the Schadens indicated they have no interest in selling their shares
to a third party in the foreseeable future;
the intention of the Schadens to continue the business as a going concern,
which makes any consideration of liquidation of the company or values that
ultimately might be obtained from such a liquidation highly speculative;
certain terms and conditions of the merger agreement which the special
committee deemed favorable in reaching its decision, including the right of
our board to terminate the agreement without a termination fee in order to
proceed with a superior proposal;
the judgment of the special committee that $8.50 in cash per share as the
merger consideration is a fair price to our public shareholders for the
following reasons:
12
our conclusions based upon our detailed financial review and analysis
and the opinion of our financial advisor;
the fact that the Schadens originally proposed to acquire us for $8.00
per share, but following negotiations with the special committee, the
proposed price was increased to $8.50 per share;
our conclusion that $8.50 per share was the highest price that the
Schadens would offer and that further negotiation with the Schadens
would not result in an increase to the proposed purchase price per
share;
since May 21, 2001, the date on which we publicly disclosed the
Schadens' proposal to acquire us, no competing offers or proposals to
all shareholders by third parties were received by the special
committee or its financial or legal advisors; and
the right of any of our public shareholders to exercise appraisal
rights if he or she does not believe the merger consideration to be
fair.
The members of the special committee evaluated the factors in light of their
knowledge of our business, their knowledge of the restaurant industry and their
business judgment. While the special committee believes that these were all of
the material factors considered, the special committee did not find it
practicable to, and did not attempt to assign relative weights to the factors
considered in reaching its decision but considered these factors taken as a
whole in reaching its determination.
The special committee considered the uncertainties associated with any
financial analysis, particularly those involving projections of future
performance. The special committee recognized that these analyses are not
necessarily indicative of actual values or future results which may be
significantly more or less favorable than suggested by the analyses. The special
committee considered the potential that management was conservative in the
preparation of its financial projections.
With respect to comparing the proposed transaction with the current market
prices, the historical market prices, comparable public company trading prices,
premiums paid, purchase prices of selected going private transactions, and
discounted cash flow analysis using company forecasts, the special committee
reviewed the analysis of Tucker Anthony and expressly adopts that analysis,
which is summarized below.
The special committee believes the process it followed in approving the
merger agreement was procedurally fair and unbiased because:
the special committee consisted of all of our directors who are not our
officers or controlling shareholders or their family members;
the members of the special committee will not personally benefit from the
consummation of the merger contemplated by the merger agreement, other than
in their capacity as holders of stock options which will be converted into
the right to receive the merger consideration less the applicable exercise
price; Mark Bromberg holds stock options to acquire 14,000 shares of our
common stock and John Todd holds stock options to acquire 1,000 shares of
our common stock;
the special committee retained independent legal and financial advisors to
assist it in evaluating options in completing a second step to our tender
offer, including the Schadens' merger proposal; and
the special committee negotiated with the Schadens on an arm's length basis
and with the assistance of its advisors.
Following the meeting of the special committee on June 21, 2001, our board
held a meeting and, based upon the unanimous recommendation of the special
committee, which recommendation was adopted by our board in all respects, it
determined the merger to be fair to and in the best interests of our public
shareholders. Richard E. Schaden and Richard F. Schaden did not attend this
board meeting and Frederick Schaden abstained from voting on this proposal. Our
board of
13
directors (with the Schaden directors abstaining) recommends that you vote FOR
adoption and approval of the merger agreement and the merger.
PURPOSES OF THE MERGER AND PLANS OR PROPOSALS
The purpose of the merger is to complete a second step transaction which was
discussed as a possibility in the offer to purchase in our December 2000 tender
offer. Pursuant to the merger the Schadens through their wholly owned
corporation, Firenze, will acquire us.
If the merger agreement is approved by the holders of a majority of the
shares, and the other conditions to the closing of the merger are satisfied or
waived, we and Firenze will close the merger. At or soon after the closing of
the merger:
the public shareholders will cease to have any ownership interest in us or
rights as holders of our common stock;
the public shareholders will no longer benefit from any increases in our
value or the payment of dividends on shares of our common stock;
the public shareholders will no longer bear the risk of any decreases in
our value;
the Schadens' and their affiliates' aggregate interests in our net book
value and net earnings will increase from approximately 67% to 100%;
the Schadens and their affiliates will be the sole beneficiaries of any of
our future earnings and profits and will have the ability to benefit from
any divestitures, strategic acquisitions or other corporate opportunities
that may be pursued by us in the future;
we will be privately held, there will be no public market for the common
stock;
there will not be another meeting of our public shareholders;
the Schadens will cause Quizno's to terminate the registration of the
shares under the Exchange Act as soon as the merger is complete; and
we will no longer be required to file periodic reports with the Securities
and Exchange Commission once the registration of the shares has been
terminated.
Subsequent to the merger, the Schadens have stated to us that they have no
present intentions, plans or proposals with regard to any of the following in
regard to us, except as discussed in 'Certain Information Concerning the
Company -- Certain Transactions':
extraordinary transactions, such as a merger, reorganization or
liquidation, involving us;
purposes, sales or transfers of a material amount of our assets;
material changes in our corporate structure or business;
acquisitions by any person of our securities or the disposition of our
securities; or
material changes in our capitalization.
Nevertheless, following completion of the merger, the Schadens may initiate
a review of the company and its assets, corporate structure, capitalization,
operations, properties and personnel to determine what changes, if any, would be
desirable following the merger to enhance the operations of the company.
Under the terms of the merger agreement, we will maintain our existing
management team and our existing board of directors. Pursuant to our financing
agreement with Levine Leichtman described below, Levine Leichtman has the right
to appoint a representative to our board.
We have not made any special provision for our public stockholders to obtain
access to our corporate files, have their own counsel or their own appraisal.
14
OPINION OF TUCKER ANTHONY
Tucker Anthony delivered its written opinion to our special committee dated
June 21, 2001. A copy of the Tucker Anthony opinion, which sets forth the
assumptions, limitations, and qualifications of the opinion, is attached as
Annex B.
No limitations were imposed by us, the board of directors or the special
committee on the scope of the Tucker Anthony investigation or the procedures to
be followed by Tucker Anthony in rendering the Tucker Anthony opinion, except
that Tucker Anthony was not authorized to solicit, and did not solicit, any
indications of interest from any third party with respect to a purchase of all
or a part of our business. The Tucker Anthony opinion does not address, nor
should it be construed to address, the relative merits of the merger with any
alternative business strategy that may be available to us, the fairness of the
terms of any financing required to complete the merger, our liquidation value,
or the consequences, if any, of the merger with respect to our senior credit
facilities provided by AMRESCO Commercial Financial, Inc.
THE TUCKER ANTHONY OPINION IS FOR THE USE AND BENEFIT OF OUR SPECIAL
COMMITTEE AND WAS RENDERED TO THEM IN CONNECTION WITH THEIR CONSIDERATION OF THE
MERGER. THE TUCKER ANTHONY OPINION IS NOT INTENDED TO BE AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER OR NOT TO VOTE FOR THE MERGER.
Our special committee engaged Tucker Anthony to render the opinion referred
to above because Tucker Anthony regularly engages in the valuation of businesses
and their securities. Tucker Anthony is an investment bank whose corporate
finance activities are focused on small- to middle-market companies. Tucker
Anthony provides a full line of investment banking services to its clients,
ranging from merger and acquisition services, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Tucker Anthony previously acted
as financial adviser to our board of directors in connection with our self
tender offer completed on December 11, 2000, and received a fee for these
services, a significant portion of which was contingent upon the consummation of
the tender offer. The details of this fee arrangement were disclosed in the
tender offer materials we filed with the Securities and Exchange Commission.
Also, Tucker Anthony's parent company has entered into a Guaranty Agreement with
us, pursuant to which we have guaranteed payments of any and all amounts due
under a Margin Account Agreement between Tucker Anthony's parent company and
Richard E. Schaden, pursuant to which Mr. Schaden has borrowed approximately two
million dollars ($2,000,000). The details of this arrangement were disclosed in
the margin account agreement and the guaranty agreement, each of which we have
filed with the Securities and Exchange Commission. Additionally, prior to
April 11, 2001, Tucker Anthony represented us in our tender offer and in certain
repurchases of our common stock. The special committee determined that these
past arrangements would not prevent Tucker Anthony from providing us independent
representation with respect to the merger.
The following paragraphs summarize the financial and comparative analyses
performed by Tucker Anthony in connection with its opinion. The summary does not
represent a complete description of the analyses performed by Tucker Anthony.
In arriving at the Tucker Anthony opinion, Tucker Anthony: (a) reviewed
publicly available historical financial and operating data concerning us,
including our Annual Reports to Shareholders and Annual Reports on Form 10-KSB
for the fiscal years ended September 30, 2000 and September 30, 1999 and the
previous three fiscal years ended December 31, and the Quarterly Reports on
Form 10-QSB filed with the Commission for the four quarterly periods ended
March 31, 2000, June 30, 2000, December 31, 2000, and March 31, 2001;
(b) reviewed projected financial information prepared by our management;
(c) reviewed publicly available information concerning us; (d) conducted
discussions with our senior management and consultants concerning our business
prospects and historical financial results and projected financial information,
as presented and described in (a), (b) and (c) above; (e) reviewed the draft
Merger Agreement dated June 17, 2001; and (g) performed various financial
analyses of us, as Tucker Anthony deemed appropriate, using generally accepted
analytical methodologies.
15
In arriving at the Tucker Anthony opinion, Tucker Anthony assumed and relied
on the accuracy and completeness of the financial information we provided and
other information used by Tucker Anthony without assuming any responsibility for
independent verification of such information. Tucker Anthony further relied on
the assurances of our management that they were not aware of any facts that
would make the information we provided inaccurate or misleading. With respect to
our financial projections, Tucker Anthony assumed that the projections were
prepared in good faith in accordance with industry practice on a basis
reflecting the best currently available estimates and judgments of our
management as to our future financial performance. In arriving at the Tucker
Anthony opinion, Tucker Anthony did not conduct any physical inspection of our
properties or facilities, did not make any evaluations or appraisals of our
assets or liabilities, and was not presented with any appraisal. The Tucker
Anthony opinion was necessarily based on financial, economic, market and other
conditions as they existed on, and could be evaluated as of, its date.
The preparation of an opinion as to the fairness of the merger
consideration, from a financial point of view, involves various determinations
as to the most appropriate and relevant methods of financial and comparative
analysis and the application of those methods to the particular circumstances;
therefore, the opinion is not easily summarized. Furthermore, in arriving at the
Tucker Anthony opinion, Tucker Anthony did not attribute any particular weight
to the analyses or factors considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Tucker Anthony believes that its analyses must be considered as a
whole and that considering any portions of its analyses or any of the factors
considered by it, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying the Tucker Anthony
opinion. In its analyses, Tucker Anthony made many assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond our control. Any estimates contained in these
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
estimates. Additionally, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses actually
may be sold. Accordingly, the analyses and estimates are inherently subject to
substantial uncertainty. Subject to the foregoing, the following is a summary of
the material financial analyses presented by Tucker Anthony to our special
committee on June 21, 2001.
In connection with the Tucker Anthony opinion, Tucker Anthony performed
certain financial and comparative analyses. Tucker Anthony considered several
methods to evaluate the fairness of the merger consideration per share. These
methods included (a) public company trading analysis; (b) selected transaction
analysis, including mergers and acquisitions transactions and other take private
transactions; (c) hypothetical implied trading values based on sales, EBITDA and
earnings; (d) premiums paid in this transaction compared to average premiums
paid; (e) unleveraged after-tax discounted cash flow valuation analysis; and
(f) leveraged buy-out/ recapitalization analysis (which is intended to determine
the value a financial investor might be willing to pay to acquire all or a
controlling and substantial portion of our equity if it were interested in
pursuing such a transaction). Tucker Anthony utilized the 5-year financial
forecast provided by our management. These analyses were considered relevant to
a financial review of the terms of the merger agreement and the strategic
alternatives available to us. At a number of our special committee meetings,
Tucker Anthony reviewed these analyses with our special committee. The material
analyses and their findings are summarized below.
Comparable Public Company Trading Analysis. Tucker Anthony reviewed publicly
available financial and stock market information relating to 22 selected
companies in lines of business believed to be somewhat similar to ours. The
companies selected were in the restaurant business, however, it was noted that
there were no public companies with precisely our same mix of businesses or
financial condition. Tucker Anthony reviewed companies with a range of market
capitalizations. For the purposes of this analysis, Tucker generally focused on
the nine selected companies with market capitalizations of under $100 million
given our current market capitalization of approximately $19 million. However,
trading values for the larger capitalization selected
16
companies were also considered in Tucker Anthony's analysis. The following table
summarizes selected data reviewed as part of Tucker Anthony's analysis.
Projections for 2001 are based on estimates of First Call Corporation, a data
service that monitors and publishes compilations of earnings estimates produced
by selected research analysts regarding companies of interest to investors, for
the selected companies and management estimates for us.
COMPARABLE PUBLIC COMPANY TRADING ANALYSIS
------------------------------------------------------------------------------------
SMALL CAPITALIZATION COMPANIES LARGER CAPITALIZATION
----------------------------------- ------------------------------------
HIGH LOW MEDIAN HIGH LOW MEDIAN QUINO'S
---- --- ------ ---- --- ------ -------
LTM P/E*................ 22.2 9.1 10.5 37.5 9.2 14.4 15.7
Calendar 2001 P/E....... n.m. n.m. n.m. 30.2 8.8 13.4 9.6
LTM Sales Multiples..... 1.13 0.16 0.49 2.43 0.48 1.25 0.83
LTM EBITDA**............ 5.4 3.2 4.8 17.4 3.5 6.5 5.4
- ---------
* LTM=Latest twelve months
** EBITDA=earnings before interest, taxes, depreciation and amortization.
Based on this analysis, Tucker Anthony derived an equity value range for us
of $6.50 to $8.75 per fully diluted share. Tucker Anthony noted that the merger
consideration of $8.50 was within the indicated range.
Selected Transactions Analysis. Tucker Anthony reviewed and analyzed
selected publicly available financial, operating and stock market information
relating to 27 acquisition transactions in the restaurant industry since 1998.
The following table summarizes selected data reviewed as part of Tucker
Anthony's analysis.
SELECTED TRANSACTION ANALYSIS
-----------------------------------
HIGH LOW MEDIAN
---- --- ------
LTM Sales Multiples............................ 1.98 0.18 0.7
LTM EBITDA..................................... 14.7 2.4 6.1
Net Book Value................................. 2.2 0.3 1
- ---------
* LTM=Latest twelve months
** EBITDA=earnings before interest, taxes, depreciation and amortization.
Based on this analysis, Tucker Anthony derived an equity value range for us
of $7.00 to $8.75 per fully diluted share. Tucker Anthony noted that the merger
consideration of $8.50 was within the indicated range.
Leveraged Buy-out/Recapitalization Analysis. Tucker Anthony prepared an
analysis based on the same projections utilized in the discounted cash flow
analysis as to the value that might be paid pursuant to a recapitalization
transaction. A range of possible acquisition prices was derived by reviewing the
estimated return on equity investment, which would result from a leveraged buy-
out based on various assumptions, including the financial ratios required by the
bank financing and high yield debt markets, and interest rates. Assuming
terminal values at the end of the fifth year following a buy-out transaction
ranging from 5.0x to 5.5x EBITDA and required internal rates of return on equity
of 35%+, this methodology indicated that a recapitalization transaction could
earn a purchaser a market return on their investment at a merger consideration
of $7.50 to $8.50 per share. Tucker Anthony cautioned our special committee that
the actual price that a party would be willing to pay in a leveraged buy-out or
recapitalization transaction was dependent on various factors not included in
this methodology and, therefore, that this analysis was not necessarily
indicative of actual prices realizable or of rates of return on shares of the
common stock retained in the transaction, which rates of return may be more or
less favorable than those indicated in this analysis, are dependent on many
contingencies and, therefore, are speculative.
Premium Analysis. Tucker Anthony analyzed the premiums offered in other take
private transactions announced between January 1, 2001 and June 4, 2001, as
compiled by Securities Data
17
Corporation. This analysis incorporated 47 announced transactions, 16 of which
are still pending. Tucker Anthony compared the premiums offered versus closing
prices for each target company's 52 week high and 52 week low. The median
premium versus the 52 week high and 52 week low was (2.2%) and 81.7%,
respectively. The analysis also indicated the range of premiums relative to 52
week lows was extremely wide and Tucker Anthony informed our special committee
that Tucker Anthony focused its analysis on premiums offered relative to 52 week
highs. Tucker Anthony noted that our current stock price was probably being
influenced by the $8.00 tender offer completed in December and the May 22
announcement of an $8.00 offer, in effect providing a temporary floor to our
stock price. Tucker Anthony also noted the premium being offered in the merger
versus our 52 week high was approximately 6.3%, above the median premium offered
in other take private transactions.
Future Trading Price Analysis. Based on the management forecast of sales,
EBITDA and net income, Tucker Anthony calculated the present value of the
implied hypothetical future trading values of our common stock. Tucker Anthony
obtained this by multiplying projected stand-alone sales, EBITDA and earnings
per share for the twelve months ending June 30, 2001, and the calendar years
ended December 2001 and 2002 based on the management forecast by multiples
derived from the comparable public company trading multiples analysis. Our
implied forward stock price was discounted at an equity discount rate of 37.5%.
Based on this analysis, Tucker Anthony derived an equity value range for us of
$7.75 to $8.75 per fully diluted share. In connection with this presentation,
Tucker Anthony advised our special committee that this analysis was not
necessarily indicative of future trading ranges and that any estimate of future
market prices is speculative and subject to significant uncertainties and
contingencies, all of which are difficult to predict and beyond the control of
Tucker Anthony. Therefore, our actual trading prices might be outside the
estimated range and would depend on, and fluctuate with, changes in interest
rates, market conditions and the condition, results of operations and prospects,
financial and otherwise, and other factors that generally influence the prices
of securities. Tucker Anthony noted that the merger consideration of $8.50 was
within the indicated range.
Discounted Cash Flow Analysis. Tucker Anthony analyzed our fully diluted per
share value based on an unleveraged, after-tax discounted cash flow analysis of
our projected five-year financial performance. Tucker Anthony estimated the net
present value of our future cash flows of using the management forecast covering
the period ending December 31, 2005 and calculated a terminal value based on a
range of the multiples of projected 2005 EBITDA. In conducting this analysis,
Tucker Anthony applied discount rates ranging from 23.5% to 26.5% and terminal
value multiples ranging from 5.0x to 5.5x EBITDA. Tucker Anthony derived the
range of EBITDA multiples and discount rates on the basis of multiples of EBITDA
for public comparable companies and transactions and estimated risk adjusted
cost of capital for us. This analysis indicated a discounted cash flow valuation
ranging from approximately $13.15 per share to $16.40 per share. Tucker Anthony
noted that the merger consideration of $8.50 was below the indicated range.
The engagement letter between us and Tucker Anthony provides that we are
obligated to pay Tucker Anthony a fee of $100,000 upon delivery of the Tucker
Anthony fairness opinion to the board prior to its decision to pursue the
merger. This fee has been paid. We also agreed to pay a retainer of $10,000 per
month beginning May, 2001 and ending on the closing date of the merger. In
addition, the engagement letter between us and Tucker Anthony provides that we
will reimburse Tucker Anthony for its out-of-pocket expenses and will indemnify
Tucker Anthony and related persons against liabilities, including liabilities
under securities laws, arising out of its engagement. Further, Tucker Anthony
rendered a statutory opinion to the board in connection with the tender offer in
late 2000. We also used Tucker Anthony as the managing broker during our share
repurchase program, in which Tucker Anthony was paid commissions in connection
with the shares repurchased by us in that program.
OUR MANAGEMENT'S FORECAST
During May and June 2001, our management, in connection with the merger, has
provided the Schadens and Tucker Anthony with information about us that is not
publicly available. The
18
information provided included financial projections that contain, among other
things, the financial information set forth below. We do not, as a matter of
course, publicly disclose forward-looking information as to future revenues,
earnings or other financial information. Projections of this type are based on
estimates and assumptions that are inherently subject to significant economic,
industry and competitive uncertainties and contingencies, all of which are
difficult to predict and many of which are beyond our control. Accordingly,
there can be no assurance that the projected results would be realized or that
actual results would not be significantly higher or lower than those projected.
In addition, these projections were prepared by us solely for internal use and
not for publication or with a view to complying with the published guidelines of
the SEC regarding projections or with guidelines established by the American
Institute of Certified Public Accountants for prospective financial statements
and are included in this proxy statement only because they were furnished by our
management to the Schadens and Tucker Anthony. The financial projections
necessarily make many assumptions with respect to industry performance, general
business and economic conditions, access to markets and distribution channels,
availability and pricing of raw materials and other matters, all of which are
inherently subject to significant uncertainties and contingencies and many of
which are beyond our control. We cannot predict whether the assumptions made in
preparing the financial projections will be accurate, and actual results may be
materially higher or lower than those contained in the projections. With the
exception of the examination of this prospective financial information by Tucker
Anthony in connection with its fairness opinion, neither our independent
auditors nor any other independent accountants or financial advisors have
compiled, examined or performed any procedures with respect to this prospective
financial information, nor have they expressed any opinion or any form of
assurance on this information or its achievability, and assume no responsibility
for, and disclaim any association with, the projected financial information.
PROJECTED FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA
FRANCHISE OPERATIONS
Total Revenue from Franchise Operations........ $37,418 $44,512 $51,372 $57,724 $62,285
Income from Franchise Operations............... $ 8,317 $11,335 $15,091 $17,958 $20,811
COMPANY STORE OPERATIONS
Total Revenue from Company Owned Stores........ $15,989 $14,282 $14,715 $15,161 $15,621
Income from Company Owned Stores............... $ 1,528 $ 1,330 $ 1,233 $ 1,289 $ 1,328
NET INCOME BEFORE TAXES........................ $ (836) $ 5,139 $ 8,752 $11,499 $14,521
NET INCOME..................................... $ (526) $ 3,237 $ 5,400 $ 7,244 $ 9,148
PREFERRED STOCK DIVIDENDS...................... $ (147) $ (27) $ 0 $ 0 $ 0
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS... $ (676) $ 3,210 $ 5,400 $ 7,244 $ 9,148
DILUTED NET INCOME PER COMMON SHARE............ $ (0.22) $ 1.02 $ 1.72 $ 2.31 $ 2.92
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains or incorporates by reference certain
forward-looking statements and information relating to us that are based on the
beliefs of management as well as assumptions made by and information currently
available to us. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts, including statements regarding the completion of the merger. When used in
this document, the words 'anticipate,' 'believe,' 'estimate,' 'expect,' 'plan,'
'intend,' 'project,' 'predict,' 'may,' and 'should' and similar expressions, are
intended to identify forward-looking statements. Such statements reflect our
current view with respect to future events, including the completion of the
merger, and are subject to numerous risks, uncertainties and assumptions. Many
factors could cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by the forward-looking statements, including, among
others:
19
delays in receiving required regulatory and other approvals;
the failure of shareholders to approve the merger agreement;
general economic or market conditions;
changes in business strategy;
availability of financing on acceptable terms to fund future operations;
competitive conditions in our markets;
general economic or market conditions;
changes in technology; and
various other factors, both referenced and not referenced in this proxy
statement including those discussed in our periodic and other filings with
the SEC.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this proxy statement as anticipated, believed, estimated,
expected, planned or intended. Further information about the risks of
forward-looking statements applicable to us can be found in our Form 10-QSB for
the six months ended March 31, 2001 and our Form 10-KSB for the year ended
September 30, 2000, both of which have been incorporated herein by reference and
attached as Annex D and Annex E, respectively, to this proxy statement.
20
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED
The purpose of the special meeting is to vote upon a proposal to approve and
adopt the merger agreement. If the merger agreement is approved by our
shareholders and the other conditions to the merger are satisfied or waived,
Firenze will merge with and into us and all shares currently held by our public
shareholders will be converted into the right to receive $8.50 in cash, without
interest, other than shares as to which appraisal rights have been validly
exercised.
Representatives of our independent auditors are not expected to be present
at the special meeting.
A merger agreement is attached to this proxy statement as Annex A. See also
'The Merger Agreement' and 'The Merger' beginning on page 30 of this proxy
statement.
THE SPECIAL COMMITTEE AND THE BOARD HAVE APPROVED THE MERGER AGREEMENT AND
RECOMMEND A VOTE FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE
MERGER.
REQUIRED VOTES
The affirmative vote of at least a majority of the outstanding shares
entitled to vote thereon is required to approve and adopt the merger agreement
and the merger. The transaction is not structured so that the approval of at
least a majority of unaffiliated security holders is required.
As of June 21, 2001 the Schadens were beneficial owners of approximately 67%
of the outstanding shares of our common stock, of which all shares are eligible
to vote at the special meeting. The Schadens have indicated that they intend to
vote their shares in favor of the adoption of the merger agreement, although
they are not obligated to do so. Accordingly, the Schadens have sufficient
voting power to cause the approval and adoption of the merger agreement and the
merger without the affirmative vote of any of our other shareholders.
VOTING AND REVOCATION OF PROXIES
Shares that are entitled to vote and are represented by a proxy properly
signed and received at or prior to the special meeting, unless subsequently
properly revoked, will be voted in accordance with the instructions indicated
thereon. If a proxy is signed and returned without indicating any voting
instructions, shares represented by the proxy will be voted for the proposal to
approve and adopt the merger agreement and the merger. The board is not
currently aware of any business to be acted upon at the special meeting other
than as described in this proxy statement.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by the proxy are voted at
the special meeting by:
attending and voting in person at the special meeting,
giving notice of revocation of the proxy at the special meeting, or
delivering to our secretary a written notice of revocation or a duly
executed proxy relating to the same shares and matters to be considered at
the special meeting, bearing a date later than the proxy previously
executed.
You may revoke your proxy at any time before it is voted by delivering to
the corporate secretary of the company at 1415 Larimer Street, Denver, Colorado
80202, a written and signed revocation or a duly executed proxy bearing a later
date. In addition, if you attend the meeting, after notifying the secretary of
the meeting, you may vote in person even if you have previously submitted a
proxy.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM; VOTING AT THE SPECIAL MEETING
Only holders of shares at the record date will be entitled to receive notice
of and to vote at the special meeting. At the close of business on the record
date, there were outstanding and entitled to vote shares. Each holder of
record of common stock on the record date will
21
be entitled to one vote for each share held on all matters to be voted upon at
the special meeting. The presence, in person or by proxy, at the special meeting
of the holders of at least a majority of the shares entitled to vote is
necessary to constitute a quorum for the transaction of business.
Abstentions will be counted as present for the purpose of determining
whether a quorum is present but will not be counted as votes cast in favor of
the merger proposal. Abstentions, therefore, will have the same effect as a vote
against the merger proposal.
Brokerage firms who hold shares in 'street name' for customers will not have
the authority to vote those shares with respect to the merger if such firms have
not received voting instructions from a beneficial owner. The failure of a
broker to vote shares in the absence of instructions (a 'broker non-vote') will
be counted as present for the purpose of determining whether a quorum is present
but will not be counted as votes cast in favor of the merger proposal. Broker
non-votes, therefore, will have the same effect as a vote against the merger.
APPRAISAL RIGHTS
Each shareholder has a right to dissent from the merger, and, if the merger
is consummated, to receive 'fair value' for his or her shares in cash by
complying with the provisions of the Colorado Business Corporations Act,
including Article 113. The dissenting shareholder must deliver to us, prior to
the vote being taken on the merger agreement at the special meeting, written
notice of his or her intent to demand payment for his or her shares if the
merger is effected and must not vote in favor of approval and adoption of the
merger agreement. The full text of Article 113 of the Colorado Business
Corporations Act is attached as Annex C hereto. See 'Appraisal Rights' for a
further discussion of the rights and the legal consequences of voting shares in
favor of the approval and adoption of the merger agreement and the merger.
SOLICITATION OF PROXIES
We will bear the cost of soliciting proxies from shareholders. In addition
to soliciting proxies by mails, our officers and directors and employees,
without receiving additional compensation, may solicit proxies by telephone,
facsimile or in person. Arrangements may also be made with brokerage firms and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of shares held of record by such persons, and we will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them.
CERTAIN INFORMATION CONCERNING THE COMPANY
RECENT DEVELOPMENTS
We have 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 addition the principal
owner of the master franchisee has 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. The
master franchisee currently has franchised approximately 123 restaurants in
Canada.
CERTAIN TRANSACTIONS
Tucker Anthony, financial advisor to the special committee, has loaned to
Richard E. Schaden approximately $2,000,000 which is secured by Mr. Schaden's
shares of our common stock. In addition to his shares of common stock, the loan
is secured by Mr. Schaden's personal assets and
22
personal guaranty, as well as a guaranty from us by which we assure Tucker
Anthony and its affiliates that upon an event of a default in Mr. Schaden's
loan, we will be responsible for the principal and interest on the loan. The
guaranty will only be drawn against us by Tucker Anthony or its affiliates if
(a) Mr. Schaden defaults on his payment obligations under the loan or
(b) Mr. Schaden's shares of common stock and other collateral and guaranties
become insufficient collateral. In the event our guaranty is invoked, we have
entered into a reimbursement agreement with Mr. Schaden which requires
Mr. Schaden to reimburse us for any expenses or losses suffered by us in
connection with the guaranty. It is anticipated that the Tucker Anthony loan
will have to be refinanced at the time the Merger closes. We have initiated
discussions with an unaffiliated lender, Aviation Finance Group, LLC, to arrange
for such refinancing. Current discussions indicate the new loan to Mr. Schaden
will likely be for $2,000,000, payable over 20 years with an interest rate of
3.2 percentage points over the five-year Treasury interest rate in effect from
time to time. We expect to guaranty the loan and secure the guaranty with our
corporate jet aircraft. Mr. Schaden is expected to enter into a reimbursement
agreement similar to the one described above at the time the loan is advanced.
In the past three fiscal years, we have paid to Tucker Anthony a total not
exceeding $952,160 for various financial services. Specifically, in fiscal year
1999, we paid Tucker Anthony $8,200 in commissions in connection with certain
share repurchases by us of our common stock. In fiscal year 2000, we paid them
less than $2,500 in commissions for additional share repurchases of our common
stock and an additional $801,460 in connection with our tender offer and other
financings. To date this fiscal year, we have paid them $140,000 in connection
with this merger.
During the current fiscal year through May 31, 2001 Richard E. Schaden has
earned $258,383 as salary and $3,476 in profit sharing. Also, in fiscal 2001,
Mr. Schaden earned $425,315 in bonus under his employment contract for calendar
year 2000, and $8,680 in auto allowances. In addition, the Company has accrued
$215,729 through May 31, 2001 for 2001 bonus expected to be earned under his
employment contract. He has also been paid $18,980 in preferred stock dividends,
$5,000 for board of director fees, and reimbursed $15,057 for business and
compensatory expenses.
During the current fiscal year through May 31, 2001, Richard F. Schaden has
earned $62,792 as salary and $1,476 in profit sharing. Also, in fiscal 2001, Mr.
Schaden earned $249,188 in bonus under his employment agreement for calendar
year 2000, and $9,600 in rent. In addition, we have accrued $107,864 through
May 31, 2001 for 2001 bonus expected to be earned under his employment contract.
Richard F. Schaden is a shareholder of Illinois Food Managers, Inc., which in
turn is shareholder in Sub Development, Inc., an area director for the Company
whom we have paid $470,750 in commissions from September 30, 2000 through
May 31, 2001. He has also been paid $56,580 in preferred stock dividends and
$5,000 for board of director fees. During our tender offer, we discussed the
possibility of redeeming some or all of Richard F. Schaden's shares of our
common stock after the merger is complete in a manner that is tax advantageous
to Mr. Schaden. These discussions have been preliminary in nature and we have
not reached any agreement, nor has Mr. Schaden told us whether he would agree to
such a redemption of his shares. We expect to continue these discussions
following conclusion of the merger. However, at the present time we do not
believe we have the cash availability or financing capacity to complete such a
transaction in the foreseeable future.
In the merger agreement, we agreed that, to the fullest extent permitted
under applicable law, after the effective time of the merger we will, as the
surviving corporation, indemnify, defend and hold harmless each of our present
and former officers and directors, against all losses, claims, damages,
liabilities, costs, fees and expenses, including reasonable fees and
disbursements of counsel and judgments, fines losses, claims, liabilities and
amounts paid in settlement arising out of actions or omissions occurring at or
prior to the effective time of the merger to the full extent permitted under
applicable Colorado law, the terms of our articles of incorporation or the terms
of our bylaws, as in effect on June 21, 2001.
As the surviving corporation we agreed that we will maintain our existing
directors' and officers' liability insurance for at least six years following
the effective date of the merger. We may substitute policies with substantially
equivalent coverage and amounts which contain terms no less
23
favorable to the former directors and officers. In no event will we be required
to pay aggregate annual directors and officers premiums in excess of 200% of the
aggregate premiums paid by us in the twelve months prior to the date of the
merger agreement on an annualized basis; but if we are unable to obtain the
amount of insurance required by the merger agreement for the aggregate premium,
we will obtain as much insurance as can be obtained for an annual premium not in
excess of 200% of the aggregate directors and officers insurance premiums paid
by us in the twelve months prior to the date of the merger agreement on an
annualized basis.
During our tender offer, we discussed the possibility of redeeming some or
all of Richard F. Schaden's shares of our common stock after the merger is
complete in a manner that is tax advantageous to Mr. Schaden. These discussions
have been preliminary in nature and we have not reached any agreement, nor has
Mr. Schaden told us whether he would agree to such a redemption of his shares.
We expect to continue these discussions following conclusion of the merger.
PRICE RANGE OF SHARES; DIVIDENDS; AND STOCK REPURCHASES
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
'QUIZ.' The following table shows high asked, low bid and close price
information for each quarter in the last three fiscal years as reported by
Prophet Information Services, Inc., a provider of online historical stock price
data for all major U.S. securities markets. Such quotations reflect inter-dealer
prices, without retail mark-ups, markdowns or commissions, and may not
necessarily represent actual transactions.
FISCAL PERIOD ENDED
SEPTEMBER 30, 1999(1)
---------------------------
HIGH LOW CLOSE
---- --- -----
First Quarter........................................... $7.75 $6.88 $6.88
Second Quarter.......................................... 7.75 6.50 7.25
Third Quarter........................................... 9.50 6.94 7.88
FISCAL YEAR ENDED
SEPTEMBER 30, 2000
---------------------------
HIGH LOW CLOSE
---- --- -----
First Quarter........................................... $9.00 $7.25 $7.38
Second Quarter.......................................... 7.94 5.88 7.94
Third Quarter........................................... 8.00 5.88 7.00
Fourth Quarter.......................................... 7.38 5.88 6.44
FISCAL YEAR ENDED
SEPTEMBER 30, 2001
---------------------------
HIGH LOW CLOSE
---- --- -----
First Quarter........................................... $8.00 $6.25 $7.88
Second Quarter.......................................... 8.00 7.25 7.38
Third Quarter........................................... 8.40 7.12 8.32
- ---------
(1) In 1999 we changed our fiscal year from December 31 to September 30
resulting in a nine month fiscal year.
-------------------
On June 20, 2001, we had issued and outstanding 2,337,439 shares of our
common stock. On such date, there were 83 holders of record of our common stock.
Such number includes shareholders of record who hold stock for the benefit of
others. On May 21, 2001, the last day the shares were traded prior to the
announcement of the merger proposal, the last reported sales price per Share as
reported on Nasdaq was $7.40.
We have not declared or paid any dividends on the shares since our
inception. We do not anticipate paying cash dividends on the shares in the
foreseeable future. We intend to retain future
24
earnings to finance our operations and to fund the growth of the business. Any
payment of future dividends will be at the discretion of our board of directors
and will depend on, among other things, our earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions with
respect to the payment of dividends and other factors that our board of
directors deems relevant.
Between October 1, 1999 and September 30, 2000, we repurchased approximately
144,005 shares on the open market. The prices at which shares were repurchased
ranged from $6.03 to $8.875, and the average price per repurchased share was
$8.38. In our tender offer, which closed on December 12, 2000, we purchased
1,699,439 shares, including options and warrants at $8.00 per share. Since
December 12, 2000, we have purchased an additional 51,522 shares , including
options and warrants, at $8.00 per share in private unsolicited transactions in
which we were approached by individual shareholders.
SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information and
explanatory notes give effect to the merger and are based on the estimates and
assumptions set forth in the notes to such statements. This pro forma
information has been prepared using our historical financial statements and
should be read in conjunction with the historical financial statements and notes
included in the Form 10-KSB and the Form 10-QSB.
The pro forma condensed balance sheet information gives effect to the merger
as if it had occurred on September 30, 2000 and March 31, 2001. The pro forma
condensed statement of earnings for the year ended September 30, 2000 and for
the six months ended March 31, 2001 gives effect to the merger as if it had
occurred on October 1, 1999. The pro forma condensed financial data may not be
indicative of actual results that would have been achieved if the merger had
occurred on the dates indicated or the results that may be realized in the
future.
25
SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
FISCAL YEAR ENDED SEPTEMBER 30, 2000 SIX MONTHS ENDED MARCH 31, 2001
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
------------------------------------ ------------------------------------
PRO PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ----- ---------- ----------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Condensed Statement of
Earnings:
Income from franchise
operations................. $ 6,051 $ -- $ 6,051 $ 3,924 $ -- $ 3,924
Income from Company store
operations................. 1,194 -- 1,194 562 -- 562
Interest expense............. (1,899) -- (1,899) (1,592) -- (1,592)
Depreciation and
amortization............... (1,995) -- (1,995) (1,364) -- (1,364)
Impairment of long lived
assets..................... (579) -- (579) (1,218) -- (1,218)
Financing and acquisition
related costs.............. (138) -- (138) (2,275) -- (2,275)
Other income (expense)....... (584) -- (584) (618) -- (618)
------- ----- ------- ------- ----- -------
Earnings before income
taxes...................... 2,050 -- 2,050 (2,581) -- (2,581)
Income taxes................. (748) -- (748) 955 -- 955
Preferred stock dividends.... (186) 39(1) (147) (95) 20(1) (76)
------- ----- ------- ------- ----- -------
Net earnings (loss)
applicable to common
stockholders............... $ 1,116 $ 39 $ 1,155 $(1,721) $ 20 $(1,702)
------- ----- ------- ------- ----- -------
------- ----- ------- ------- ----- -------
Weighted average shares
outstanding;
Basic.................... 3,020 (780) 2,240 2,610 (780) 1,830
Diluted.................. 3,729 (852) 2,877 2,610 (780) 1,825
Diluted net income (loss) per
share of common stock...... $ 0.33 $ 0.40 $ (0.66) $ (0.93)
Ratio of earnings to fixed
charges.................... 2.1 2.1 (0.6) (0.6)
26
FISCAL YEAR ENDED SEPTEMBER 30, 2000 SIX MONTHS ENDED MARCH 31, 2001
-------------------------------------- --------------------------------------
PRO PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ----- ---------- ----------- -----
(DOLLARS IN THOUSANDS)
Pro Forma Condensed Balance
Sheet:
Assets
Current Assets:
Cash and short term
investments........ $ 7,818 $(7,715)(3) $ 103 $ 8,286 $(7,695)(3) $ 591
Accounts receivable &
current portion of
notes receivable... 3,612 -- 3,612 6,948 -- 6,948
Other current
assets............. 898 -- 898 1,967 -- 1,967
------- ------- ------- ------- ------- -------
Total current
assets............. 12,328 (7,715) 4,613 17,201 (7,695) 9,506
Property and
equipment, net..... 11,669 -- 11,669 10,764 -- 10,764
Intangible and
deferred assets.... 11,619 -- 11,619 14,902 -- 14,902
Deferred tax asset... 4,211 -- 4,211 4,228 -- 4,228
Other assets......... 1,432 -- 1,432 1,312 -- 1,312
------- ------- ------- ------- ------- -------
Total assets......... $41,259 $(7,715) $33,544 $48,407 $(7,695) $40,712
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Liabilities and
Stockholders' Equity
Current Liabilities:
Accounts payable and
accrued
liabilities........ $ 4,481 $-- $ 4,481 $ 6,966 $-- $ 6,966
Current portion of
long term
obligations........ 1,550 1,550 1,649 1,649
------- ------- ------- ------- ------- -------
Total current
liabilities........ 6,031 -- 6,031 8,615 -- 8,615
Line of credit....... -- -- -- --
Long term
obligations........ 16,037 16,037 27,646 27,646
Subordinated debt.... -- -- -- -- -- --
Deferred revenue..... 16,403 -- 16,403 18,027 -- 18,027
------- ------- ------- ------- ------- -------
Total liabilities.... 38,471 -- 38,471 54,288 -- 54,288
Warrants subject to
put................ -- -- 3,374 3,374
Stockholders'
Equity............. 2,788 (7,715)(1,2) (4,927) (9,255) (7,695)(1,2) (16,951)
------- ------- ------- ------- ------- -------
Total liabilities and
stockholders'
equity............. $41,259 $(7,715) $33,544 $48,407 $(7,695) $40,712
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Working capital............ $ 6,297 $(1,418) $ 8,586 $ 891
Total debt................. $17,588 $17,588 $29,295 $29,295
Book value per common
share.................... $ 0.92 $ (2.20) $ (3.55) $ (9.26)
- ---------
(1) Reflects the purchase of 899,720 common shares, options and preferred shares
for $8.50 each, less $402,692 proceeds from the exercise price of options.
(2) Reflects transaction costs of $509,000.
(3) The cost of the shares and the transaction costs are assumed to paid with
cash.
(4) For purposes of calculation the ratio of earnings to fixed charges,
'earnings' consist of earnings before income taxes, preferred stock
dividends, cumulative effect of change in accounting principle and interest
expense. 'Fixed charges' consist of interest expense.
(5) Book value per share is calculated as total stockholders' equity divided by
the number of shares outstanding at the end of the period, giving effect in
the case of the pro forma amounts to the shares repurchased as contemplated
herein.
27
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the merger and the fairness of the consideration to be
received in the merger, you should be aware that certain of our officers and
directors have interests in the merger, which are described below and which may
present them with certain actual or potential conflicts of interest.
As of June 20, 2001, the directors and executive officers as a group
beneficially owned 1,884,923 shares of our common stock on a fully diluted
basis, or 57.3% of such shares, which includes 316,654 shares issuable upon
exercise of outstanding stock options that are currently exercisable or the
conversion of shares of preferred stock. The Schadens own approximately 67% of
the outstanding shares of common stock and, if acting together, will be able to
control all matters requiring approval of our shareholders, including the
approval of the merger and the election of directors. Our board was aware of
these actual and potential conflicts of interest and considered them along with
the other matters described under 'Certain Beneficial Ownership of Shares,'
'Special Factors -- Recommendations of the Special Committee and the Board of
Directors,' and 'Special Factors -- Reasons for the Merger and Fairness of the
Merger.'
After the merger, the Schadens and their affiliates will beneficially own
100% of the outstanding shares of our common stock. In addition, Levine
Leichtman will hold warrants to purchase up to 14% of the outstanding shares of
the company on a fully-diluted basis. See 'Merger Financing.'
The members of the special committee have been and will be paid $7,500 per
month from their date of their engagement until the closing of the merger. To
date, each member has been paid $22,500. The members of the special committee
will continue to serve as our directors subsequent to the merger. Pursuant to
the merger agreement, if the merger is completed, our directors, including
members of the special committee (other than the Schadens and the affiliates),
will receive the merger consideration less the exercise price for each share of
common stock subject to such directors stock options.
Except as described herein, based on our records and on information provided
to us by our directors, executive officers and subsidiaries, neither the company
nor any associate or subsidiary of the company nor, to the best of our
knowledge, any of our directors or executive officers or any of our
subsidiaries, nor any associates or affiliates of any of the foregoing, have
effected any transactions involving the shares during the 60 business days prior
to the date hereof. Richard E. Schaden purchased 2,000 shares from his brother
on April 19, 2001 at $8.00 per share in a private transaction. Except as
otherwise described herein, neither the company nor, to the best of our
knowledge, any of our affiliates, directors or executive officers are a party to
any contract, arrangement, understanding or relationship with any other person
relating, directly or indirectly, to the merger with respect to any of our
securities, including, but not limited to, any contract, arrangement,
understanding or relationship concerning the transfer or the voting of any such
securities, joint ventures, loan or option arrangements, puts or calls,
guarantees of loans, guarantees against loss or the giving or withholding of
proxies, consents or authorizations.
Currently, the only options to purchase company common stock are held by the
Schadens, certain of our directors, including Frederick H. Schaden, members of
the special committee and one executive officer. See 'Certain Beneficial
Ownership of Shares' on page 36. The options held by the Schadens and their
affiliates will survive the merger and become obligations of the surviving
company with the same terms as they currently have. The holders of the remaining
stock options will receive payment from us in cash equal to the merger
consideration, less exercise price, for each share of common stock subject to
such directors stock options.
28
THE MERGER AGREEMENT
This section of the proxy statement describes some aspects of the merger,
including some of the provisions of the merger agreement. This description of
the merger agreement is not complete and is qualified by reference to the merger
agreement, a copy of which is attached to this proxy statement as Annex A and
which is incorporated by reference. You are urged to read the entire merger
agreement carefully.
THE MERGER
The merger agreement provides that, upon the terms and subject to the
conditions in the merger agreement, and in accordance with Colorado law, Firenze
will be merged with and into us. As a result of the merger, Firenze's corporate
existence will cease and Quizno's will continue as the surviving corporation in
accordance with Colorado law. The merger will become effective at the time the
articles of merger are filed with the Secretary of State of the State of
Colorado. The merger is expected to occur as soon as practicable after all
conditions to the merger have been satisfied or waived.
Our board of directors, based upon the recommendation of the special
committee, has approved, and deems it fair to and in the best interests of our
public shareholders to consummate the merger of Firenze with and into us. Upon
consummation of the merger, each issued and outstanding share of our common
stock other than shares beneficially owned by: (1) Richard E. Schaden, (2)
Richard F. Schaden, (3) their affiliates, and (4) holders who have validly
exercised their dissenters' rights, will be cancelled and converted
automatically into the right to receive $8.50 per share.
The merger agreement provides that our directors and officers immediately
prior to the effective time of the merger will be the directors and officers of
the surviving corporation. Subject to the merger agreement, our restated
articles of incorporation as in effect immediately prior to the effective time
of the merger, will be the restated articles of incorporation of the surviving
corporation after the merger. Subject to the merger agreement, our bylaws, as in
effect immediately prior to the effective time of the merger, will be the bylaws
of the surviving corporation after the merger. Subject to the merger agreement,
any vacancy existing in the surviving corporation's board of directors or in any
of the surviving corporation's offices, may thereafter be filled in the manner
provided by the Colorado Business Corporation Act and the surviving
corporation's articles of incorporation and bylaws.
STOCK OPTIONS, WARRANTS AND PREFERRED STOCK
At the effective time of the merger, our stock option plans and each
outstanding option to purchase shares under our plans, whether vested or
unvested, owned by the Schadens or the affiliates will be assumed by the
surviving corporation. Each such option so assumed shall continue to have, and
be subject to, the same terms and conditions set forth in our employee stock
option plan and the applicable stock option agreement immediately prior to the
effective time of the merger.
At the effective time of the merger, all stock options held by persons other
than the Schadens or the affiliates will automatically be converted into the
right to receive an amount equal to the merger consideration in cash, less the
applicable exercise price, for each share of common stock subject to such
options.
At the effective time of the merger, each of our outstanding warrants will
be assumed by the surviving corporation. Each warrant assumed by the surviving
corporation under the merger agreement shall continue to have the rights and
privileges set forth in the warrant immediately prior to the effective time of
the merger.
Our authorized and issued Class C and Class E preferred stock existing as of
the date of the merger agreement, other than shares owned by the Schadens and
their affiliates will be redeemed by us at a purchase price not to exceed the
greater of the merger consideration or the liquidation
29
value of each respective class of preferred stock, plus accumulated but unpaid
dividends, and, in the case of the Class E preferred stock, a negotiated fee to
terminate certain rights held by the Class E shareholders, which termination fee
will be subject to approval by our board of directors. Our Class D preferred
stock will be redeemed for $3.00 per share. The redemptions will close prior to
the effective time, and the preferred stock will be cancelled. Any shares of
preferred stock that have not been redeemed prior to the effective time of the
merger will be assumed by the surviving corporation.
CONVERSION OF COMMON STOCK
Once we and Firenze complete the merger, the following will occur:
each share of our common stock, issued and outstanding immediately prior to
the effective time, will, automatically, be converted into the right to
receive an amount in cash equal to $8.50 per share payable to you without
interest;
all shares of our common stock, when converted, will no longer be
outstanding and will automatically be cancelled and retired;
each share of Firenze common stock will be automatically converted into one
fully paid share of the common stock of the surviving corporation;
each share of our common stock owned by any of our subsidiaries will be
cancelled and retired and will cease to exist and no consideration will be
paid for it;
each holder of a certificate formally representing such shares will cease
to have any rights, except the right to receive the merger consideration;
we will appoint a transfer agent who will pay the merger consideration to
our public shareholders;
after the merger is completed, we will send you a transmittal form and
written instructions for exchanging your share certificates for the merger
consideration. Do not send share certificates now.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains our representations and warranties relating
to:
corporate organization, standing and power;
capital structure;
consents and approvals required for the merger;
absence of certain changes or events;
brokers;
subsidiaries;
authority to execute and validity of the agreement;
SEC documents;
state takeover statutes;
litigation; and
taxes.
The merger agreement also contains Firenze's representations and warranties
of Firenze relating to:
corporate organization, standing and power;
capital structure;
consents and approvals required for the merger;
state takeover statutes and absence of super majority provision;
litigation;
30
taxes;
undisclosed liabilities;
subsidiaries;
authority to execute and validity of the agreement;
new entity status;
brokers;
employee benefit matters;
title to properties;
board and shareholders recommendation; and
shareholder approval.
COVENANTS
In the merger agreement, we agreed that:
our business and the business of our subsidiaries will be conducted only in
the usual, regular and ordinary course and in substantially the same manner
as previously conducted, and we and our subsidiaries will use their
commercially reasonable efforts to preserve their business organization
substantially intact, keep available the services of their current officers
and employees and preserve their relationships with customers, suppliers,
licensors, licensees, distributors and others having significant business
dealings with them, in each case consistent with past practice, so that the
goodwill and ongoing business is unimpaired, to the fullest extent
possible, at the effective time of the merger.
In the merger agreement, Firenze agreed that:
Firenze will not carry on any business other than business required to
consummate the merger and other transactions contemplated by the merger
agreement; and
Firenze, or its affiliates, will not take any action that would, or that
could reasonably be expected to, result in any of Firenze's representations
and warranties set forth in the merger agreement becoming untrue.
DIRECTORS' AND OFFICERS' INDEMNIFICATION
In the merger agreement, we agreed that, to the fullest extend permitted
under applicable law, after the effective time of the merger we, as the
surviving corporation, will indemnify, defend and hold harmless each of our
present and former officers and directors, against all losses, claims, damages,
liabilities, costs, fees and expenses, including reasonable fees and
disbursements of counsel and judgments, fines losses, claims, liabilities and
amounts paid in settlement arising out of actions or omissions occurring at or
prior to the effective time of the merger to the full extent permitted under
applicable Colorado law, the terms of our articles of incorporation or the terms
of our bylaws, as in effect on June 21, 2001.
As the surviving corporation we agreed that we will maintain our existing
directors' and officers' liability insurance for at least six years following
the effective date of the merger. We may substitute policies with substantially
equivalent coverage and amounts which contain terms no less favorable to the
former directors and officers. In no event will we be required to pay aggregate
annual directors and officers premiums in excess of 200% of the aggregate
premiums paid by us in the twelve months prior to the date of the merger
agreement on an annualized basis; but if we are unable to obtain the amount of
insurance required by the merger agreement for the aggregate premium, we will
obtain as much insurance as can be obtained for an annual premium not in excess
of 200% of the aggregate director's and officer's insurance premiums paid by us
in the twelve months prior to the date of the merger agreement on an annualized
basis.
31
CONDITIONS TO THE MERGER
Under the merger agreement, the respective obligation of each party to
effect the merger is subject to the satisfaction or waiver, on or prior to the
closing date of the merger, of the following conditions:
the merger agreement has been approved by the requisite vote of the holders
of our common stock; and
no final restraining order or permanent injunction or other final order
issued by any court of competent jurisdiction or other legal prohibition
preventing the consummation of the merger are in effect; provided that,
subject to the merger agreement, the parties thereto will use reasonable
efforts to have any such injunction, order, restraint or prohibition
vacated.
Our obligation to consummate the merger is subject to the satisfaction of
the following conditions at the effective time of the merger:
Tucker Anthony shall not have revoked, modified or changed its fairness
opinion in any manner adverse to the holders of our shares.
The obligation of Firenze to consummate the merger is subject to the
satisfaction of the following conditions at the effective time of the merger:
We will not have incurred and still be incurring a material adverse change;
and
persons holding not more than 170,000 issued and outstanding shares of ours
will have exercised dissenters' rights in accordance with the requirements
and procedures set forth in the Colorado Business Corporation Act.
TERMINATION
The merger agreement may be terminated at any time prior to the effective
time of the merger, whether before or after shareholder approval is obtained:
by mutual written consent of Firenze and us;
by either Firenze or us:
if our shareholders fail to give any required approval of the merger
and the transactions contemplated hereby upon a vote at a duly held
meeting of our shareholders or at any adjournment thereof;
if any court of competent jurisdiction or any governmental,
administrative, or regulatory authority, agency or body shall have
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the merger; or
if the merger has not been consummated on or before September 30, 2001
and subject to certain conditions in the merger agreement.
by Firenze if:
We have breached in any material respect any representation or warranty
contained in the merger agreement, or failed to perform in any material
respect any of our covenants, obligations or other agreements contained
in the merger agreement; and
that breach is not curable or 20 days have elapsed subsequent to notice
by Firenze to us of that breach and that breach has not been cured
within the 20 day period.
by us if:
Firenze has breached in any material respect any representation or
warranty contained in the merger agreement, or failed to perform in any
material respect any of our covenants, obligations or other agreements
contained in the merger agreement; and
that breach is not curable or 20 days have elapsed subsequent to notice
by us to Firenze of that breach and that breach has not been cured
within the 20 day period; and
32
our board of directors determines, in good faith, after consultation
with and based on the advice of legal counsel, that the failure to
change its recommendation of the adoption of this agreement and the
merger could be expected to constitute a breach of its fiduciary duties
to our shareholders under applicable law.
EFFECT OF TERMINATION
In the event of the termination of the merger agreement, by either us or
Firenze, as provided in the merger agreement, the merger agreement will become
void and have no further effect, without any liability or obligation on the part
of either party, except that nothing in the merger agreement will relieve any
party to the merger agreement from liability or damages resulting from any
intentional breach of the merger agreement.
If the merger agreement is validly terminated, none of its provisions
survive, except for certain miscellaneous provisions including payment of
expenses.
AMENDMENT
The merger agreement may be amended by the parties, with any amendment in
writing and signed on behalf by both parties to the merger agreement, at any
time before or after any required approval of matters presented in connection
with the merger by our shareholders or the shareholders of Firenze. Provided,
however, that after any such approval, there will be made no amendment that by
law requires further approval by such shareholders without the further approval
of such shareholders.
EXPENSES; TERMINATION FEES
Generally, each party will pay its own costs incurred in connection with the
merger agreement with the transactions contemplated by the merger. If the merger
agreement is terminated by us as a result of the board's fiduciary obligations,
we shall pay to Firenze all out-of-pocket expenses incurred by Firenze and its
affiliates in connection with the merger agreement and not otherwise reimbursed
or paid by us.
FEES AND EXPENSES
The following is an estimate of expenses incurred or to be incurred in
connection with the merger.
Legal fees..................................... $250,000.00
Printing and mailing........................... 25,000.00
Filing fees.................................... 3,000.00
Financial advisor fees......................... 140,000.00
Miscellaneous.................................. 91,000.00
-----------
Total...................................... $509,000.00
-----------
-----------
33
CERTAIN BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth certain information, as of June 20, 2001,
regarding the ownership of shares by each person known by us to be the
beneficial owner of more than 5% of the outstanding shares, each of our
directors and executive officers, and all of our executive officers and
directors as a group. On such date, there were 2,337,439 shares of our common
stock outstanding.
PREFERRED STOCK
COMMON STOCK COMMON STOCK OWNED AND
NAME AND ADDRESS OWNED(1) PERCENTAGE PERCENTAGE
- ---------------- -------- ---------- ----------
Richard E. Schaden ................................ 873,384(2) 36.0% (6)
1415 Larimer Street
Denver, CO 80202
Richard F. Schaden ................................ 920,470(2) 37.1% (6)
11870 Airport Way
Broomfield, CO 80021
Levine Leichtman Capital Partners II, L.P. ........ (3) 14.0% (3)
335 North Maple Drive
Suite 240
Beverly Hills, CA 90210
Mark L. Bromberg................................... 14,000(4) * 0
J. Eric Lawrence................................... 0 * 0
Frederick H. Schaden............................... 28,000(4) 1.2% (6)
John J. Todd....................................... 1,000(4) * 0
Steven B. Shaffer.................................. 500(5) * 0
Robert W. Scanlon.................................. 0 * 0
Sue A. Hoover...................................... 3,873(5) * 0
Robert Elliott..................................... 0 -- 0
Patrick E. Meyers.................................. 15,723(5) * 0
John L. Gallivan................................... 1,473(5) * (6)
All Executive Officers and Directors as a Group
(12 persons)..................................... 1,858,423 70.6% (6)
- ---------
* Less than 1% of shares outstanding.
(1) The persons named in the table have sole voting power with respect to all
shares of common stock shown as beneficially owned by them. A person is
deemed to be the beneficial owner of securities that can be acquired by such
person within 60 days from the date as of which the table is presented, upon
the exercise of options or warrants, or conversion of convertible
securities. The record ownership of each beneficial owner is determined by
assuming that options or warrants or convertible securities that are held by
such person and that are exercisable or convertible within 60 days have been
exercised or converted. The total outstanding shares used to calculate each
beneficial owner's percentage also assumes that such options, warrants or
convertible securities have been exercised or converted. Our Class A
Cumulative Convertible Preferred Stock, Class C Cumulative Convertible
Preferred Stock and Class E Cumulative Convertible Preferred Stock are
currently convertible into our common stock on a 1-for-1 basis.
(2) Richard E. Schaden and Richard F. Schaden beneficially own, through a voting
trust pursuant to which they are joint voting trustees, 773,667 shares of
our common stock and 146,000 shares of our Class A preferred stock, and
2,000 shares of our common stock owned by a family member for which the
voting trust holds sole voting power. The remaining duration of the voting
trust agreement is three years, subject to extension. In the table,
beneficial ownership of shares, other than the 773,667 shares of common
stock, have been allocated equally to each of them. Such 773,667 shares of
common stock are allocated to Richard F. Schaden in the table, and he has
been given a proxy to vote such shares. Richard E. Schaden has pledged
773,667 shares of common stock to secure a personal loan. Mr. Schaden
retains all voting rights with
(footnotes continued on next page)
34
(footnotes continued from previous page)
respect to such shares. Richard E. Schaden, individually, beneficially owns
an additional 6,339 shares of our common stock held in his own name, 17,378
shares of our common stock represented by currently exercisable stock
options and 2,000 shares of our common stock owned by a family member for
which he holds sole voting power. Richard F. Schaden, individually,
beneficially owns 34,000 shares of our Class C preferred stock, 4,000 shares
of our common stock represented by currently exercisable stock options and
34,803 shares of our Class E preferred stock.
(3) We issued warrants to Levine Leichtman in connection with their loan to us
of $13.8 million to finance our tender offer for shares of our common stock
in December 2000. Such warrants permit Levine Leichtman to purchase up to
14% of each class of our capital stock on a fully diluted basis as of the
completion of our tender offer at an exercise price of $0.01, subject to
certain adjustments for issuances, exchanges or repurchases of our capital
stock.
(4) All the shares indicated as owned by Messrs. Bromberg and Todd may be
acquired through the exercise of stock options. All the shares indicated as
owned by Mr. Frederick Schaden may be acquired through the exercise of stock
options or conversion of Class C preferred stock.
(5) Steven B. Shaffer, individually and through an affiliated entity,
beneficially owns 5,000 shares of our common stock. Sue A. Hoover,
individually, owns 3,873 shares of our common stock. Patrick E. Meyers,
individually, beneficially owns 1,723 shares of our common stock and 14,000
shares of our common stock represented by currently exercisable stock
options. John L. Gallivan, individually, owns 1,473 shares of our Class E
preferred stock.
(6) The company has issued and outstanding four classes of Convertible Preferred
Stock: the Class A preferred stock, Class C preferred stock, the Class D
Subordinated Convertible Preferred Stock and Class E preferred stock. There
are 146,000 shares of Class A Preferred outstanding: 50% are beneficially
owned by Richard F. Schaden and 50% are beneficially owned by Richard E.
Schaden. There are 57,000 shares of Class C preferred stock outstanding:
34,000 shares or 59.6% are held by Richard F. Schaden and 2,000 shares or
3.5% are held by Frederick H. Schaden. There are 3,000 shares of Class D
preferred stock outstanding, 1,000 shares of which are owned by Mr. Shaffer.
There are 59,480 shares of Class E preferred stock outstanding: 34,803
shares or 59% are held by Richard F. Schaden and 1,473 shares or 2.5% are
held by John L. Gallivan. Among all executive officers and directors as a
group, the following preferred shares are beneficially owned: 100% of the
Class A preferred stock, 36,000 shares or 63% of the Class C preferred
stock, 1,000 shares or 33% of the Class D preferred stock and 36,276 shares
or 61% of the Class E preferred stock. None of these classes of preferred
stock are publicly traded or registered under Section 12(b) or 12(g) of the
Exchange Act.
35
CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS
GENERAL
We are not aware of any license or other regulatory permit that appears to
be material to our business that might be adversely affected by the merger, or
of any approval or other action by any domestic (federal or state) or foreign
governmental, administrative or regulatory authority or agency that would be
required prior to the merger. Should any such approval or other action be
required, it is our present intention to seek such approval or action. We do not
currently intend, however, to delay the merger pending the outcome of any such
action or the receipt of any such approval (subject to our right to decline to
purchase shares if any of the conditions in 'The merger agreement -- Conditions
to the Merger' shall have occurred). There can be no assurance that any such
approval or other action, if needed, would be obtained without substantial
effort or that adverse consequences might not result to our business, or that
certain parts of our businesses might not have to be disposed of or held
separate or other substantial conditions complied with in order to obtain such
approval or other action or in the event that such approval was not obtained or
such other action was not taken. See 'The Merger Agreement -- Conditions to the
Merger' above.
HART-SCOTT-RODINO
The merger will not require a filing or approval under the Hart-Scott-Rodino
Act.
LITIGATION
To the best of our knowledge, no lawsuits have been filed relating to the
merger.
MERGER FINANCING
The total amount of cash required to consummate the merger is estimated to
be approximately $7.8 million. This includes approximately $7.3 million to be
paid to our option holders and public shareholders and approximately $509,000
for fees and expenses, including fees of Tucker Anthony, legal and accounting,
printing and mailing costs, and other expenses.
In connection with our tender offer, we borrowed $12.0 million principal
amount and $1.8 million in pre-paid interest from Levine Leichtman Capital
Partners II, L.P. under a new credit facility. We used $6.2 million of such
borrowings to finance our tender offer. The cash remaining under the Levine
facility will be included in the cash Firenze will use to finance the merger.
The borrowers under the Levine facility are us and our subsidiaries (other
than our franchise company, which is a guarantor). We plan to repay the Levine
facility when due through internally generated funds. The Levine facility
provides that:
Any monies advanced will accrue interest at a rate of 13.25%, with the
first 12 months prepaid in the amount of $1,862,259.84 of additional
principal.
The maturity date is December 12, 2005.
Interest is required to pay only until the maturity date of the loan.
Up to $5 million of the loan may be prepaid without penalty during the
first 9 months of the term of the loan.
After the first 9 months, prepayment may not occur until 24 months after
the issue date.
Between months 24 and 35 of the term of the loan prepayment may occur, but
will result in prepayment penalties.
We are required to meet specified financial covenants for minimum EBITDA,
minimum fixed charge coverage ratio, maximum net debt (net of cash) to
EBITDA, maximum capital expenditures and liquidity.
We are subject to standard affirmative and negative covenants.
36
Levine Leichtman has a first priority lien on any of our assets not
previously collateralized. We can acquire new senior debt or refinance existing
senior debt as long as we use best efforts to obtain a junior lien for Levine
Leichtman on collateralized assets (and so long as such new or refinanced debt
does not result in a covenant violation). If we are unable to grant a junior
lien to Levine Leichtman in connection with any refinanced senior indebtedness,
the interest rate on the Levine facility will increase by 1%.
In connection with the execution of the Levine facility, we agreed to issue
to Levine Leichtman warrants to purchase up to 14% of each class of Quizno's
capital stock on a fully diluted basis as of the closing of our tender offer,
subject to certain adjustments for issuances, exchanges or repurchases of our
capital stock, at an exercise price of $0.01 per share. The warrants and related
agreements provide that:
Levine Leichtman will be entitled to receive dividends or other
distributions made to other shareholders of capital stock in accordance
with its beneficial ownership represented by the warrants.
At any time after the maturity of the loan or the early payment of the
principal balance of the loan, Levine Leichtman can cause us to repurchase
the warrant or the shares issued upon the exercise of the warrant for a
price equal to the fair market value of the shares on the date Levine
Leichtman exercises this right plus 14% of the amount of any indebtedness
issued by Quizno's to repurchase shares from Richard F. Schaden and 14% of
any interest paid to Richard F. Schaden (increased by a 5% per annum growth
factor), less the exercise price.
Levine Leichtman will have the right to require us to register the shares
issuable upon the exercise of the warrant with the Commission in the event
we effect the merger and thereafter complete an initial public offering.
Levine Leichtman has the right to participate pro rata in any sale of
shares by Richard E. Schaden and Richard F. Schaden.
Levine Leichtman, at its option, has the right to appoint a representative
of Levine Leichtman to the board as one of our directors.
The material documents comprising the Levine facility have been filed with
the Commission as exhibits to Quizno's tender offer statement on Schedule TO,
filed with the SEC on November 13, 2000. Copies of the Schedule TO may be
obtained in the manner set forth in the Section entitled 'Certain Information
Concerning the company -- Additional Information.'
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of certain federal income tax consequences of the
merger to holders of common stock. The discussion is for general information
only and does not purport to consider all aspects of federal income taxation
that might be relevant to holders of common stock. The discussion is based on
current provisions of the Internal Revenue Code of 1986, as amended, existing
regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change, possibly with
retroactive effect. The discussion applies only to shareholders who hold shares
as capital assets within the meaning of Section 1221 of the Code, and may not
apply to common stock received pursuant to compensation arrangements, common
stock held as part of a 'straddle,' 'hedge,' 'conversion transaction,'
'synthetic security,' or other integrated investment, or to certain types of
shareholders, such as financial institutions, insurance companies, tax-exempt
organizations and broker-dealers, who may be subject to special rules. In
addition, this discussion applies only to shareholders who dispose of all of
their shares of common stock for cash in the merger. Finally, this discussion
does not address the federal income tax consequences to a shareholder who, for
federal income tax purposes, is a non-resident alien individual, a foreign
corporation, a foreign partnership or a foreign estate or trust (as defined in
the Code), nor does it consider the effect of any foreign, state, local or other
tax laws.
37
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF COMMON STOCK
SHOULD CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE TAX EFFECTS TO SUCH
SHAREHOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN,
STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash for shares pursuant to the merger will be a taxable
transaction for federal income tax purposes, and may also be a taxable
transaction under applicable foreign, state, local or other tax laws. For
federal income tax purposes, the merger will be treated as a complete redemption
by us of the shares held by shareholders in exchange for cash, under Section 302
of the Code. In general, for federal income tax purposes, a shareholder will
recognize capital gain or loss equal to the difference between the shareholder's
adjusted tax basis in his common stock and the amount of cash received
therefore. Gain or loss must be determined separately for shares acquired at the
same cost in a single transaction.
Capital gain in excess of capital loss recognized by an individual investor
upon a disposition of common stock that has been held for more than 12 months
will generally be subject to a maximum tax rate of 20%. In the case of common
stock that has been held for 12 months or less, will be subject to tax at
ordinary income tax rates. There are also limitations on a shareholder's
deductibility of capital losses.
Payments in connection with the merger may be subject to 'backup
withholding' at a rate of 31%. Backup withholding does not apply if a
shareholder is a corporation or comes within certain exempt categories and, when
required, demonstrates this fact. Backup withholding also does not apply if the
shareholder provides a correct taxpayer identification number or social security
number to the transfer agent, and otherwise complies with applicable
requirements of the backup withholding rules. Our transfer agent is
Computershare Trust Company, Inc., 12039 W. Alameda Parkway, Suite Z-2,
Lakewood, CO 80228, (303) 986-5400. A shareholder who does not provide a correct
taxpayer identification number may be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding does not
constitute an additional tax and will be creditable against the shareholder's
federal income tax liability, provided that the required information is
furnished to the IRS. Each shareholder should consult with his own tax advisor
as to his qualification or exemption from backup withholding and the procedure
for obtaining an exemption. Shareholders may prevent backup withholding by
completing a Substitute Form W-9 provided by the transfer agent and submitting
it to the transfer agent.
STATUTORY OPINION
Our board has requested and received an opinion of Tucker Anthony supporting
a determination by our board under Section 7-106-401 of the Colorado Business
Corporations Act. The purpose of the opinion is to determine whether payments
that would be made under the terms of the merger would comply with Colorado
corporate law. A Colorado corporation may not make payments to shareholders for
their stock unless the corporation will be able to pay its debts as they become
due in the usual course of business and the value of the assets of the
corporation will exceed the sum of liabilities of the corporation plus the
liquidation preferences that would be due and payable to the preferred
shareholders if the corporation were to be liquidated immediately after the
completion of the merger. Although that prohibition is not by its terms
applicable to cash mergers, the board considered it prudent to obtain an opinion
in connection with the merger. A copy of the Tucker Anthony opinion is included
in Annex B to this proxy statement. The opinion should be read in its entirety
with respect to the assumptions, matters considered, and limitations of the
review undertaken by Tucker Anthony in rendering its opinion.
APPRAISAL RIGHTS
Holders of common stock may be entitled to dissenters' rights in connection
with the merger. If the merger is consummated, under applicable Colorado law,
holders of common stock who follow the appropriate procedures, including filing
a written demand for appraisal with us prior to the special meeting, and who do
not vote in favor of the merger, will be entitled to receive payment of the fair
value of their shares as appraised by a Colorado court. Under certain
38
circumstances, a holder may forfeit the right to appraisal, in which case the
holder's shares will be treated as if they had been converted, in the merger,
into a right to receive the merger consideration, without interest thereon.
A copy of the Colorado dissenters' rights statute, Article 113 of the
Colorado Business Corporations Act is attached as Annex C.
Such rights, if the statutory procedures are complied with, could lead to a
judicial determination of the fair value required to be paid in cash to such
dissenting holders for their shares. Any such judicial determination of the fair
value of shares could be based on considerations other than, or in addition to,
the cash amount paid in the merger and the market value of the shares, including
asset values and the investment value of the shares. The value so determined
could be more or less than the $8.50 per share of common stock to be paid as
consideration in the merger.
If you wish to exercise the right to demand appraisal under Article 113, you
must satisfy each of the following conditions:
You must not vote in favor of the merger.
You must deliver to us a written demand for appraisal of your common stock
before the vote on the merger agreement at the special meeting. This
written demand for appraisal must be in addition to and separate from any
proxy or vote against the merger agreement. Merely voting against, or
abstaining from voting, or failing to vote in favor of adoption of the
merger agreement will not constitute a demand for appraisal within the
meaning of Article 113.
You must continuously hold your common stock from the date you make your
demand through the merger. If you transfer your common stock before the
merger, you will lose your right to appraisal.
You must file a petition in the appropriate Colorado court demanding an
appraisal after the merger.
If you demand appraisal of your common stock under Article 113 and you fail
to perfect, or withdraw or lose, your right to appraisal, your common stock will
be converted into the merger consideration. You may withdraw a demand for
appraisal by delivering to Quizno's a written withdrawal of the demand and
acceptance of the merger consideration.
Demands for appraisal must be made in writing and must be mailed or
delivered to: Legal Department, The Quizno's Corporation, 1415 Larimer Street,
Denver, Colorado 80202.
THE FOREGOING SUMMARY OF THE RIGHTS OF OBJECTING SHAREHOLDERS DOES NOT
PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY
SHAREHOLDERS DESIRING TO EXERCISE ANY AVAILABLE DISSENTERS' RIGHTS. THE
PRESERVATION AND EXERCISE OF DISSENTERS' RIGHTS REQUIRE STRICT ADHERENCE TO THE
APPLICABLE PROVISIONS OF THE CBCA. SEE ANNEX C ATTACHED HERETO FOR A DISCUSSION
OF DISSENTERS' RIGHTS THAT MAY BE AVAILABLE.
INDEPENDENT AUDITORS
The firm of Ehrhardt Keefe Steiner & Hottman P.C. has served as Quizno's
independent auditors since 1993. The consolidated financial statements and the
related financial statement schedules as of September 30, 1999 and 2000 and for
each of the two fiscal years in the period ended September 30, 2000 included in
this proxy statement have been audited by Ehrhardt Keefe Steiner & Hottman P.C.,
independent auditors, as stated in their reports, which are included and
incorporated by reference in this proxy statement. It is not expected that
representatives of Ehrhardt Keefe Steiner & Hottman P.C. will be present at the
special meeting.
SHAREHOLDER PROPOSALS
If the merger is consummated, we will no longer have public shareholders or
public participation in any future meetings of our shareholders. However, if the
merger is not
39
consummated, our public shareholders will continue to be entitled to attend and
participate in our shareholders' meetings. Pursuant to Rule 14a-8 under the
Exchange Act promulgated by the SEC, any shareholder who wishes to present a
proposal at the next Annual Meeting of shareholders, in the event the merger is
not consummated, and who wishes to have the proposal included in Quizno's proxy
statement for that meeting, must have delivered a copy of the proposal to us at
1415 Larimer Street, Denver, Colorado 80202, Attention: Corporate Secretary, so
that it is received no later than , 2001. In order for proposals by the
shareholders not submitted in accordance with Rule 14a-8 to have been timely
within the meaning of Rule 14a-4(c) under the Exchange Act, the proposal must
have been submitted so that it was received no later than , 2002.
WHERE YOU CAN FIND MORE INFORMATION
INCORPORATION BY REFERENCE
The SEC allows us to 'incorporate by reference' information into this proxy
statement, which means that we can disclose important information by referring
you to another document filed separately with the SEC. The following documents
previously filed by us with the SEC are incorporated by reference in this proxy
statement and are deemed to be a part hereof:
Quizno's Annual Report on Form 10-KSB for the fiscal year ended September
30, 2000, filed with the SEC on December 29, 2000;
Quizno's Quarterly Report on Form 10-QSB for the period ended December 31,
2000, filed with the SEC on February 20, 2001;
Quizno's Quarterly Report on Form 10-QSB for the period ended March 31,
2001, filed with the SEC on May 15, 2001;
Quizno's Schedule TO, as amended and supplemented, related to our tender
offer completed in December 2000, as filed with the SEC on November 13 and
22, and December 7 and 12, 2000; and
Quizno's Current Reports on Form 8-K, as filed with the SEC on November 15
and 22, 2000 and February 23, May 18 and 24 and June 19, 2001.
Specifically, the information set forth in the following sections of
Quizno's Annual Report on Form 10-KSB for the fiscal year ended September 30,
2000 is incorporated by reference in this proxy statement and deemed to be a
part hereof:
Item 1: Description of Business;
Item 2: Description of Properties;
Item 6: Management's Discussions and Analysis or Plan of Operations; and
Item 7: Financial Statements.
Our Annual Report on Form 10-KSB for the fiscal year ended September 30,
2000 and Quarterly Report on Form 10-QSB for the period ended March 31, 2001 are
enclosed with this proxy statement. See Annex D and Annex E hereto. Any
statement contained in a document incorporated by reference in this proxy
statement shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained in this proxy statement modifies or replaces
the statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this proxy statement.
We undertake to provide by first class mail, without charge and within one
business day of receipt of any written or oral request, to any person to whom a
copy of this proxy statement has been delivered, a copy of any or all of the
documents referred to above which have been incorporated by reference in this
proxy statement, other than exhibits to the documents, unless the exhibits are
specifically incorporated by reference therein. Requests for copies should be
directed to the Investor Relations Department, The Quizno's Corporation, 1415
Larimer Street, Denver, Colorado 80202; telephone number: (720) 359-3300.
40
AVAILABLE INFORMATION
ADDITIONAL INFORMATION
We are subject to the informational filing requirements of the Exchange Act
and, in accordance therewith, are required to file periodic reports, proxy
statements and other information with the Commission relating to our business,
financial condition and other matters. Information as of particular dates
concerning our directors and officers, their remuneration, stock options granted
to them, the principal holders of our securities and any material interest of
such persons in transactions with us is required to be disclosed in proxy
statements distributed to our shareholders and filed with the Commission. Such
reports, proxy statements and other information should be available for
inspection at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and also should be
available for inspection at the Commission's regional offices located at Seven
World Trade Center, 13th Floor, New York, New York 10048, and the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may also be obtained by mail, upon payment of the Commission's
customary fees, by writing to its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. These materials filed by us with the Commission are also
available at the website of the Commission at .
Because the merger is a 'going private' transaction, the company, Firenze,
Richard E. Schaden and Richard F. Schaden have filed with the SEC a Rule 13e-3
Transaction Statement on Schedule 13E-3 under the Exchange Act with respect to
the merger. This proxy statement does not contain all of the information set
forth in the Schedule 13E-3 and the exhibits thereto. Copies of the Schedule
13E-3 and the exhibits thereto are available for inspection and copying at our
principal executive offices during regular business hours by any of our
interested shareholders, or a representative who has been so designated in
writing, and may be inspected and copied, or obtained by mail, by written
request directed to Investors Relations Department, The Quizno's Corporation,
1415 Larimer Street, Denver, Colorado 80202, or from the SEC as described above.
Our common stock is listed on the Nasdaq SmallCap Market (ticker symbol:
QUIZ), and materials may also be inspected at:
The National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Upon consummation of the merger, we will seek to cause the shares to be
de-listed from trading on the Nasdaq SmallCap Market and to terminate the
registration of our common stock under the Exchange Act, which will relieve us
of any obligation to file reports and forms, such as an Annual Report on Form
10-KSB, with the SEC under the Exchange Act.
A copy of the written opinion of Tucker Anthony, the financial advisor to
the special committee and the board, is attached as Annex B to this proxy
statement. The opinion is also available for inspection and copying during
regular business hours at our principal executive offices by any interested
shareholder of ours or the representative of any shareholder who has been so
designated in writing.
41
Annex A
FIRST AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
by and between
FIRENZE CORP.
and
THE QUIZNO'S CORPORATION
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER
SECTION 1.1 The Merger......................................................A-1
SECTION 1.2 Effective Time..................................................A-2
SECTION 1.3 Effects of the Merger...........................................A-2
SECTION 1.4 Articles of Incorporation and By-laws...........................A-2
SECTION 1.5 Directors and Officers..........................................A-3
SECTION 1.6 Vacancies.......................................................A-3
SECTION 1.7 Company Stock Options and Warrants..............................A-3
SECTION 1.8 Preferred Stock.................................................A-3
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock.........................................A-4
SECTION 2.2 Surrender of Certificates.......................................A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Company...................A-6
SECTION 3.2 Representations and Warranties of Firenze......................A-11
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Conduct of Business of the Company.............................A-14
SECTION 4.2 Conduct of Business of Firenze.................................A-14
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Shareholder Approval; Preparation of Proxy Statement...........A-14
SECTION 5.2 Reasonable Efforts; Notification...............................A-15
SECTION 5.3 Indemnification................................................A-16
SECTION 5.4 Fees and Expenses..............................................A-17
SECTION 5.5 Public Announcements...........................................A-17
SECTION 5.6 Purchases of Common Stock of the Other Party...................A-18
SECTION 5.7 Third Party Standstill Agreements..............................A-18
SECTION 5.8 Characterization for Federal Income Tax Purposes...............A-18
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger.....A-18
-i-
TABLE OF CONTENTS (continued)
Page
SECTION 6.2 Conditions of the Company......................................A-18
SECTION 6.3 Conditions of Firenze..........................................A-19
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 Termination....................................................A-19
SECTION 7.2 Effect of Termination..........................................A-20
SECTION 7.3 Amendment......................................................A-20
SECTION 7.4 Extension; Waiver..............................................A-20
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations and Warranties..................A-21
SECTION 8.2 Notices........................................................A-21
SECTION 8.3 Definitions....................................................A-22
SECTION 8.4 Interpretation.................................................A-23
SECTION 8.5 Counterparts...................................................A-23
SECTION 8.6 Entire Agreement; No Third-Party Beneficiaries.................A-23
SECTION 8.7 Governing Law..................................................A-23
SECTION 8.8 Assignment.....................................................A-23
SECTION 8.9 Enforcement of the Agreement...................................A-23
SECTION 8.10 Attorneys' Fee.................................................A-24
SECTION 8.11 Severability...................................................A-24
-ii-
FIRST AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated as
of ___________, 2001 by and between FIRENZE CORP., a Colorado corporation
("Firenze"), and THE QUIZNO'S CORPORATION, a Colorado corporation (the
"Company").
WHEREAS, Firenze was formed on May 1, 2001, for the sole purpose of
entering to the transactions contemplated by this Agreement;
WHEREAS, the respective Boards of Directors of Firenze and the Company
have approved, and deem it fair to, advisable and in the best interests of their
respective companies and shareholders to consummate the merger of Firenze with
and into the Company (the "Merger"), upon the terms and subject to the
conditions of this Agreement and Plan of Merger (this "Agreement"), whereby each
issued and outstanding share of the Company's common stock, $0.001 par value (a
"Company Share"), not owned by the Company, Firenze or Affiliates of the Company
or Firenze, will be paid eight dollars fifty cents ($8.50) per share ("Merger
Consideration");
WHEREAS, the Board of Directors of the Company, based upon the
recommendation of the Special Committee (as defined), has determined that the
Merger Consideration is fair to the holders of such Company Shares and has
resolved to recommend that the holders of the Company Shares approve the Merger
and adopt this Agreement upon the terms and subject to the conditions set forth
in this Agreement; and
WHEREAS, Firenze and the Company desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
hereof and in accordance with the Colorado Business Corporation Act (the
"CBCA"), Firenze will be merged with and into the Company at the Effective Time
(as defined). Following the Merger, the separate corporate existence of Firenze
will cease and the Company will continue as the surviving corporation (the
"Surviving Corporation") and will continue its corporate existence in accordance
with the CBCA.
A-1
SECTION 1.2 Effective Time. The closing of the Merger (the "Closing")
will take place at the offices of Moye, Giles, O'Keefe, Vermeire & Gorrell LLP,
in Denver, Colorado, upon the satisfaction or, to the extent permitted
hereunder, waiver of the conditions set forth in Article VI and on the date of
the meetings of the Company's shareholders to approve the Merger (the "Company
Shareholders Meeting"), and of Firenze's shareholders (the "Firenze Shareholders
Meeting"), to approve the Merger, or, at such other time and place or such other
date as agreed to by Firenze and the Company (the "Closing Date"). If such
meetings are not held or concluded on the same date, then the Closing Date will
be on the date of the latter of such meetings. As soon as practicable following
the Closing the Surviving Corporation will file the Articles of Merger required
by the CBCA with respect to the Merger and other appropriate documents (the
"Articles of Merger") executed in accordance with the relevant provisions of the
CBCA. The Merger will become effective at such time as the Articles of Merger is
duly filed with the Colorado Secretary of State (the time the Merger becomes
effective being the "Effective Time").
SECTION 1.3 Effects of the Merger. The Merger will have the effects set
forth in Section 7-111-106 of the CBCA. If at any time after the Effective Time,
the Surviving Corporation considers or is advised that any further assignments
or assurances in law or otherwise are necessary or desirable to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation, all rights, title
and interests in all real estate and other property and all privileges, powers
and franchises of Firenze and the Company, the Surviving Corporation and its
proper officers and directors, in the name and on behalf of Firenze and the
Company, will execute and deliver all such proper deeds, assignments and
assurances in law and do all things necessary and proper to vest, perfect or
confirm title to such property or rights in the Surviving Corporation and
otherwise to carry out the purpose of this Agreement, and the proper officers
and directors of the Surviving Corporation are fully authorized in the name of
the Company or otherwise to take any and all such action.
SECTION 1.4 Articles of Incorporation and By-laws.
(a) The Restated Articles of Incorporation of the Company, as
in effect immediately prior to the Effective Time, will be, from and after the
Effective Time, the Articles of Incorporation of the Surviving Corporation,
until thereafter altered, amended or repealed as provided therein and in
accordance with applicable law.
(b) The by-laws of the Company, as in effect immediately prior
to the Effective Time, will become, from and after the Effective Time, the
by-laws of the Surviving Corporation, until thereafter altered, amended or
repealed as provided therein and in accordance with applicable law.
A-2
SECTION 1.5 Directors and Officers. The directors and officers of the
Company immediately prior to the Effective Time will become, from and after the
Effective Time, the directors and officers of the Surviving Corporation, until
their respective successors are duly elected or appointed and qualified or their
earlier resignation or removal, in accordance with the Surviving Corporation's
articles of incorporation or by-laws.
SECTION 1.6 Vacancies. If at the Effective Time a vacancy exists in the
Board of Directors or in any of the offices of the Surviving Corporation, such
vacancy may thereafter be filled in the manner provided by the CBCA and the
Articles of Incorporation and By-laws of the Surviving Corporation.
SECTION 1.7 Company Stock Options and Warrants.
(a) Stock Option Plans. At the Effective Time, the Company's
Employee Stock Option Plan (the "Employee Plan"), the Company's Amended and
Restated Stock Option Plan for Directors and Advisers (the "Directors Plan")
and each outstanding option to purchase Shares under such plans owned by
Firenze or the Affilliates named on Schedue 2.1, whether vested or unvested,
will be assumed by the Surviving Corporation. Each such option so assumed by
the Surviving Corporation under this Agreement shall continue to have, and be
subject to, the same terms and conditions set forth in the Employee Plan
or the Directors Plan, as the case may be, and the applicable stock option
agreement immediately prior to the Effective Time. At the Effective Time,
each outstanding option to purchase Shares under the Employee Plan or the
Directors Plan which is not owned by Firenze or the Affiliates identified on
Schedule 2.1 will automatically be converted into the right to receive an
amount in cash equal to eight dollars and fifty cents per share ($8.50), less
the applicable exercise price of such option, without interest thereon, upon
surrender of the certificate formerly representing such option to the Company.
(b) Assumption of Warrants. At the Effective Time, each
outstanding Warrant of the Company will be assumed by the Surviving Corporation.
Each such Warrant so assumed by the Surviving Corporation under this Agreement
shall continue to have the rights and privileges set forth in the Warrant
immediately prior to the Effective Time.
SECTION 1.8 Preferred Stock. The Company's shares of Class C, Class D
and Class E Preferred Stock, issued and outstanding as of the date of
this Agreement which are not owned by the Schadens or the Affiliates identified
on Schedule 2.1 may be redeemed by the Company prior to the Effective Time.
The redemption price with respect to the Class C Preferred Stock and the
Class E Preferred Stock is not expected to exceed the greater of (i) the Merger
Consideration (paid assuming the shares of Class C and Class E Preferred
Stock are converted into Company Shares in accordance with their respective
terms) or (ii) the liquidation value of the respective class of Preferred
Stock, plus accumulated but unpaid dividends, and, in the case of the Class E
Preferred Stock, a negotiated fee to terminate certain rights held by the
Class E shareholders, which termination fee will be subject to approval by
the Company's Board of Directors. The redemption price with respect to the
Class D Preferred Stock is not expected to exceed the liquidation value of such
Preferred Stock. All shares of the Company's Class A, Class C, Class D and
Class E Preferred Stock that have not been redeemed prior to the Effective Time
will be assumed by the Surviving Corporation and shall continue to have,
and be subject to, the rights and preferences applicable to the Class A,
Class C, Class D, and Class E shares, respectively, immediately prior to
the Effective Time.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
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SECTION 2.1 Effect on Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
Company Shares:
(a) Conversion of Company Shares. At the Effective Time, each
Company Share issued and outstanding immediately prior to the Effective Time
(other than Dissenting Shares (as defined) and other than Company Shares owned
by the Company, Firenze or Affiliates of the Company or Firenze, as set forth on
Schedule 2.1) will, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive an amount in cash
equal to eight dollars and fifty cents ($8.50) per share payable to the holder
thereof, without interest thereon, upon surrender of the certificate formerly
representing such Company Shares in accordance with Section 2.2. All such
Company Shares, when so converted, will no longer be outstanding and will
automatically, by virtue of the Merger, be canceled and retired, and each holder
of a certificate formerly representing such shares will cease to have any rights
with respect thereto, except the right to receive the Merger Consideration.
(b) Firenze Owned Company Shares. At the Effective Time, the
Company Shares owned by Firenze or Affiliates of Firenze will become authorized
but unissued shares of the Surviving Corporation pursuant to Section
7-106-302(1) of the CBCA.
(c) Firenze Capital Stock. Each share of Firenze common stock
issued and outstanding immediately prior to the Effective Time will, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into one fully paid and nonassessable share of common stock of the
Surviving Corporation.
(d) Cancellation of Subsidiary-Owned Stock. Each Company Share
owned by any of the Company's subsidiaries, shall be cancelled and retired and
shall cease to exist, and no consideration shall be delivered in exchange
therefor.
(e) Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, each Company Share that is issued and outstanding
immediately prior to the Effective Time and that is held by a shareholder who
has properly exercised and perfected appraisal rights under Article 113 of the
CBCA (the "Dissenting Shares"), will not be converted into or exchangeable for
the right to receive the Merger Consideration, but will be entitled to receive
such consideration as shall be determined pursuant to Article 113 of the CBCA,
but the holder thereof will not be entitled to vote or to exercise any other
rights of a shareholder of the Company; provided, however, that if such holder
fails to perfect or has effectively withdrawn or lost its right to appraisal and
payment under the CBCA, each Company Share owned by such holder will thereupon
be deemed to have been converted into and to have become exchangeable for, as of
the Effective Time, the right to receive the Merger Consideration, without any
interest thereon, in accordance with Section 2.2, and such shares will no longer
be Dissenting Shares.
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SECTION 2.2 Surrender of Certificates.
(a) Transfer Agent. Prior to the Effective Time, the Company
will engage Computershare Trust Co., Inc., or such other bank or trust company
reasonably acceptable to the Company, to act as exchange agent (the "Transfer
Agent") for the payment of the Merger Consideration upon surrender of
Certificates (as defined).
(b) Payment of Merger Consideration. The Company will cause
there to be provided to the Transfer Agent prior to or at the Effective Time
cash or wire transferred the aggregate consideration to be paid upon the
surrender of the Company Shares pursuant to Section 2.1. Such funds shall be
invested as reasonably directed by the Surviving Corporation in reasonably
prudent investments pending payment thereof by the Transfer Agent to holders of
the Company Shares. Earnings from such investments shall be the sole and
exclusive property of the Surviving Corporation and no part of such earnings
shall accrue to the benefit of holders of Company Shares and any Taxes payable
on such earnings shall be the sole obligation of the Surviving Corporation.
(c) Exchange Procedure. As soon as practicable after the
Effective Time, the Transfer Agent will mail to each holder of record of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding Company Shares (the "Certificates"), other than the
Company, Firenze and any Affiliate of the Company or Firenze, (i) a letter of
transmittal (which will specify that delivery will be effected, and risk of loss
and title to the Certificates will pass, only upon delivery of the Certificates
to the Transfer Agent and will be in a form and have such other provisions as
the Company may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for the Merger Consideration to be
paid to the holders of the Certificates. Upon surrender of a Certificate for
cancellation to the Transfer Agent or to such other agent or agents as may be
appointed by the Surviving Corporation, together with the letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Transfer Agent, the holder of such Certificate will be entitled to receive in
exchange therefor the Merger Consideration, and the surrendered Certificate will
forthwith be canceled. If the any part of the Merger Consideration is to be paid
to a Person other than the Person in whose name the Certificate is registered,
it will be a condition of exchange that the Certificate will be properly
endorsed or otherwise in proper form for transfer and that the Person requesting
the exchange will pay any transfer or other taxes required by reason of the
exchange to a Person other than the registered holder of such Certificate or
establish to the reasonable satisfaction of the Surviving Corporation that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 2.2, each Certificate will be deemed at any time after the
Effective Time to represent only the right to receive, upon surrender of such
Certificate, the cash to be paid for such Company Shares and Preferred Shares.
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(d) No Further Ownership Rights in Company's Shares. The
Merger Consideration to be paid upon the surrender of Certificates in accordance
with the terms of this Article II will be deemed to have been exchanged and paid
in full satisfaction of all rights pertaining to the Company Shares theretofore
represented by such Certificates and there will be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the
Company Shares that were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, such Certificate will be canceled and exchanged as
provided in this Article II.
(e) At any time following six (6) months after the Effective
Time, the Surviving Corporation shall be entitled to require the Transfer Agent
to deliver to it any funds (including any earnings with respect thereto) which
had been made available to the Transfer Agent and which had not been disbursed
to holders of the Company Certificates, and thereafter such holders shall be
entitled to look only to the Surviving Corporation (subject to abandoned
property, escheat or other similar laws) and only as general creditors thereof
with respect to the Merger Consideration payable upon due surrender of their
Company Certificates, without any interest thereon. Notwithstanding the
foregoing, neither Firenze, the Surviving Corporation nor the Exchange Agent
shall be liable to any holder of a Company Certificate for Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Company. The Company
represents and warrants to Firenze as follows, subject to any exceptions
specified in the Disclosure Letter of the Company provided to Firenze on the
date hereof (the "Company Disclosure Letter") and except as expressly
contemplated by this Agreement:
(a) Organization; Standing and Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Colorado and has the requisite corporate power and authority to
carry on its business as now being conducted. The Company is duly qualified to
do business and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification necessary, other than in such jurisdictions where the failure to
be so qualified to do business or in good standing (individually, or in the
aggregate) would not have a Material Adverse Effect on the Company.
(b) Subsidiaries. Except as set forth in the exhibits to the
Company SEC Documents (as defined in Section 3.1(f)), the Company does not own,
directly or indirectly, any capital stock or other ownership interest in any
subsidiary which would be required to be listed as a subsidiary of the Company
under the rules of the Securities and Exchange Commission (the "SEC") with the
filing by the Company of an Annual Report on Form 10-K. The Company's
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subsidiaries that are corporations are corporations duly organized, validly
existing and in good standing under the laws of their respective jurisdictions
of incorporation and have the requisite corporate power and authority to carry
on their respective businesses as they are now being conducted and to own,
operate and lease the assets they now own, operate or hold under lease, except
where the failure to be so organized, existing or in good standing would not
have a Material Adverse Effect on the Company. The Company's subsidiaries that
are limited liability companies are companies duly organized, validly existing
and in good standing under the laws of their respective jurisdictions of
formation and have the requisite company power and authority to carry on their
respective businesses as they are now being conducted and to own, operate and
lease the assets they now own, operate or hold under lease, except where the
failure to be so organized, existing or in good standing would not have a
Material Adverse Effect on the Company. All the outstanding shares of capital
stock or membership interests of the Company's subsidiaries that are owned by
the Company or its subsidiaries have been duly authorized and validly issued and
are fully paid and non-assessable and were not issued in violation of any
preemptive rights or other preferential rights of subscription or purchase of
any Person other than those that have been waived or otherwise cured or
satisfied. All such stock and ownership interests are owned of record and
beneficially by the Company or by a direct or indirect wholly owned subsidiary
of the Company, free and clear of all liens, pledges, security interests,
charges, claims, rights of third parties and other encumbrances of any kind or
nature ("Liens"), except as set forth on Schedule 3.1(b).
(c) Capital Structure. The authorized capital stock of the
Company is as disclosed in the Company SEC Documents and as set forth on
Schedule 3.1(c). Except as disclosed in the Company SEC Documents or as set
forth on Schedule 3.1(c), no shares of capital stock of the Company are
authorized, reserved for issuance or issued and outstanding. All issued and
outstanding shares of Company common stock have been duly authorized and are
validly issued, fully paid, nonassessable and free of preemptive rights. Except
as disclosed in the Company SEC Documents or as set forth in Schedule 3.1(c),
the Company does not have outstanding any subscription, option, put, call,
warrant or other right or commitment to issue or any obligation or commitment to
redeem or purchase, any of its authorized capital stock or any securities
convertible into or exchangeable for any of its authorized capital stock. Except
as disclosed in the Company SEC Documents or as set forth on Schedule 3.1(c).
there are no shareholder agreements, voting agreements, voting trusts or other
similar arrangements to which the Company is a party which have the effect of
restricting or limiting the transfer, voting or other rights associated with the
capital stock of the Company.
(d) Authority; Non-contravention. The Company has the
requisite corporate power and authority to enter into this Agreement and,
subject to approval of the Merger and this Agreement by the holders of a
majority of the outstanding Company Shares as of the record date for the Company
Shareholders Meeting ("Company Shareholder Approval"), to consummate the
transactions contemplated hereby and to take such actions, if any, as shall have
been taken with respect to the matters referred to in Section 3.1(h). The
execution and delivery of this Agreement by the Company and the consummation by
the Company of the transactions
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contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of the Company, subject to Company Shareholder
Approval. This Agreement has been duly and validly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except that (i)
such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws or judicial decisions now or hereafter in
effect relating to creditors' rights generally, (ii) the remedy of specific
performance and injunctive relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be brought
and (iii) the enforceability of any indemnification provision contained herein
may be limited by applicable federal or state securities laws. The execution and
delivery of this Agreement by the Company do not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of or "put" right with
respect to any obligation or to loss of a material benefit under, or result in
the creation of any Lien, upon any of the properties or assets of the Company or
any of its significant subsidiaries under, any provision of (i) the Articles of
Incorporation or By-laws of the Company or any provision of the comparable
organizational documents of its significant subsidiaries, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease, or other agreement,
instrument, permit, concession, franchise or license applicable, to the Company
or any of its subsidiaries or their respective properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation or arbitration award applicable to the Company or any of its
subsidiaries or their respective properties or assets, other than, in the case
of clause (ii), any such conflicts, violations, defaults, rights or Liens that
individually or in the aggregate would not have a Material Adverse Effect on the
Company and would not materially impair the ability of the Company to perform
its obligations hereunder or prevent the consummation of any of the transactions
contemplated by this Agreement.
(e) Government Approval. No consent, approval, order or
authorization of, or registration, declaration, or filing with, any court,
administrative agency or commission or other governmental authority or agency,
domestic or foreign, including local authorities (each a "Governmental Entity"),
is required by or with respect to the Company in connection with the execution
and delivery of this Agreement by the Company or the consummation by the Company
of the transactions contemplated by this Agreement, except for (i) the filing by
the Company of a pre-merger notification and report form under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
(if required), (ii) the filing with the SEC of (A) a proxy statement relating to
the Company Shareholder Approval (such proxy statement as amended or
supplemented from time to time, the "Proxy Statement") and (B) such reports
under Section 13(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with this Agreement and the
transactions contemplated hereby, and (iii) the filing of the Articles of Merger
with the Colorado Secretary of State with respect to the Merger as provided in
the CBCA and appropriate documents with the relevant authorities of
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other states in which the Company is qualified to do business and such other
consents, approvals, orders, authorizations, registrations, declarations and
filings the failure of which to be obtained or made would not have a Material
Adverse Effect on the Company.
(f) SEC Documents. The Company has filed all required reports,
schedules, forms, statements and other documents with the SEC since December 31,
1997 (such documents, together with all exhibits and schedules thereto and
documents incorporated by reference therein, collectively referred to herein as
the "Company SEC Documents"). As of their respective dates, the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933 ("Securities Act") or the Exchange Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder applicable
to such Company SEC Documents, and none of the Company SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The consolidated financial statements of the Company included in the
Company SEC Documents complied in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") (except, in the case of unaudited statements, as
permitted by Form 10-Q of the Exchange Act) applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Exchange Act Regulation S-X) and
fairly present the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments and other
adjustments described therein).
(g) Absence of Certain Changes or Events. Except as disclosed
in the Company SEC Documents, since March 31, 2001, the Company has conducted
its business only in the ordinary course consistent with past practice, and
there has not been (i) any material adverse change with respect to the Company,
(ii) any entry by the Company or any of its subsidiaries into any employment,
severance or termination agreement with any such executive officer other than in
the ordinary course of business, consistent with past practice; or (iii) any
damage, destruction or loss not covered by insurance, that has or reasonably
could be expected to have a Material Adverse Effect on the Company.
(h) State Takeover Statutes. The Company has taken all action
to assure that no takeover or similar provision of the CBCA, will apply to the
Merger or any of the other transactions contemplated hereby. Except for the
Company Shareholder Approval, no other shareholder action on the part of the
Company is required for approval of the Merger, this Agreement and the
transactions contemplated by this Agreement. The Company has also taken such
other action with respect to any anti-takeover provisions in its By-laws or
Articles of Incorporation to the extent necessary to consummate the Merger on
the terms set forth in this Agreement.
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(i) Brokers. Except for Tucker Anthony Sutro Capital Markets,
Inc. ("Tucker"), whose fees are to be paid by the Company, no broker, any
investment banker or other Person, is entitled to receive from the Company or
any of its subsidiaries any investment banking, broker's, finder's or other
similar fee or commission in connection with this Agreement or the transactions
contemplated by this Agreement, including any fee for any opinion rendered by
any investment banker. The engagement letter dated May 1, 2001, between the
Company and Tucker, which was provided to Firenze prior to the date of this
Agreement, constitutes the entire understanding of the Company and Tucker with
respect to the matters referred to therein, and has not been amended or
modified, nor will it be amended or modified prior to the Effective Time.
(j) Litigation. Except as disclosed in the Company SEC
Documents, there is no claim, suit, action, proceeding or investigation pending
or, to the best of the Company's knowledge, threatened against or affecting the
Company or any of its subsidiaries that could reasonably be expected to have a
Material Adverse Effect on the Company or prevent, hinder or materially delay
the ability of the Company to consummate the transactions contemplated by this
Agreement, nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against the Company or any of its
subsidiaries having any such effect.
(k) Taxes. Each of the Company and each of its subsidiaries,
and any consolidated, combined, unitary or aggregate group for Tax (as defined
below) purposes of which the Company or any of its subsidiaries is or has been a
member, has timely filed all Tax Returns (as defined below) required to be filed
by it and has timely paid or deposited (or the Company has paid or deposited on
its behalf) all Taxes which are required to be paid or deposited except where
the failure to do so would not have a Material Adverse Effect on the Company and
its subsidiaries, taken as a whole. Each of the Tax Returns filed by the Company
or any of its subsidiaries is accurate and complete in all material respects.
The most recent consolidated financial statements of the Company contained in
the filed Company SEC Documents reflect an adequate reserve for all Taxes
payable by the Company and its subsidiaries for all taxable periods and portions
thereof through the date of such financial statements whether or not shown as
being due on any Tax Returns. No deficiencies for any Taxes have been proposed,
asserted or assessed against the Company or any of its subsidiaries; no requests
for waivers of the time to assess any such Taxes have been granted or are
pending; and there are no tax liens upon any assets of the Company or any of its
subsidiaries. There are no current examinations of any Tax Return of the Company
or any of its subsidiaries being conducted and there are no settlements or any
prior examinations which could reasonably be expected to adversely affect any
taxable period for which the statute of limitations has not run. As used herein,
"Tax" or "Taxes" will mean all taxes of any kind, including, without limitation,
those on or measured by or referred to as income, gross receipts, sales, use, ad
valorem, franchise, profits, license, withholding, payroll, employment,
estimated, excise, severance, stamp, occupation, premium, value added, property
or windfall profits taxes, customs, duties or similar fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts
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imposed by any Governmental Entity, domestic or foreign. As used herein, "Tax
Return" will mean any return, report, statement or information required to be
filed with any Governmental Entity with respect to Taxes.
SECTION 3.2 Representations and Warranties of Firenze. Firenze
represents and warrants to the Company as follows, subject to any exceptions
specified in the Disclosure Letter of Firenze provided to the Company on the
date hereof (the "Firenze Disclosure Letter") and except as expressly
contemplated by this Agreement:
(a) Organization; Standing and Power. Firenze is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Colorado and has the requisite corporate power and authority to carry
on its business as now being conducted. Firenze is duly qualified to do business
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification
necessary, other than in such jurisdictions where the failure to be so qualified
to do business (individually or in the aggregate) would not have a Material
Adverse Effect on Firenze.
(b) Subsidiaries. Firenze does not own, directly or
indirectly, any capital stock or other ownership interest in any subsidiary.
(c) Capital Structure. The authorized capital stock of Firenze
consists of ten million (10,000,000) shares of Firenze Common Stock, no par
value ("Firenze Common Stock"). As of the date of this Agreement, one thousand
(1,000) shares of Firenze Common Stock are issued and outstanding and the sole
shareholders of Firenze are Richard E. Schaden and Richard F. Schaden. Except as
stated, no shares of capital stock or other equity or voting securities of
Firenze are reserved for issuance or outstanding. All outstanding shares of
capital stock of Firenze are validly issued, fully paid and nonassessable and
not subject to preemptive rights. Except as described above, as of the date of
this Agreement there are no outstanding or authorized securities, options,
warrants, calls, rights, commitments, preemptive rights, agreements,
arrangements or undertakings of any kind to which Firenze is a party, or by
which it is bound, obligating Firenze to issue, deliver or sell, or cause to be
issued, delivered or sold, any shares of capital stock or other equity or voting
securities of, or other ownership interests in, Firenze or obligating Firenze to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking.
(d) Authority; Non-contravention. Firenze has the requisite
corporate power and authority to enter into this Agreement to consummate the
transactions contemplated hereby and to take such actions, if any, as shall have
been taken with respect to the matters referred to in Section 3.2(g). The
execution and delivery of this Agreement by Firenze and the consummation by
Firenze of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Firenze. This Agreement has been duly
executed and delivered by Firenze and constitutes a valid and binding,
obligation of Firenze, enforceable against Firenze in
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accordance with its terms, except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws or
judicial decisions now or hereafter in effect relating to creditors' rights
generally, (ii) the remedy of specific performance and injunctive relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought and (iii) the enforceability of any
indemnification provision contained herein may be limited by applicable federal
and state securities laws. The execution and delivery of this Agreement by
Firenze do not, and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
or "put" right with respect to any obligation or to loss of a material benefit
under, or result in the creation of any Lien upon any of the properties or
assets of Firenze, under any provision of (i) the Articles of Incorporation or
By-laws of Firenze or any provision of any comparable organizational documents
of its subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to Firenze or its respective properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation or arbitration award applicable to Firenze or their respective
properties or assets, other than, in the case of clause (ii), any such
conflicts, violations, defaults, rights or Liens that individually or in the
aggregate would not have a Material Adverse Effect on Firenze and would not
materially impair the ability of Firenze to perform its obligations hereunder or
prevent the consummation of any of the transactions contemplated hereby.
(e) Government Approval. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to Firenze in connection with the
execution and delivery of this Agreement by Firenze or the consummation by
Firenze of the transactions contemplated hereby, except for the filing of the
Articles of Merger with the Colorado Secretary of State with respect to the
Merger as provided in the CBCA and appropriate documents with the relevant
authorities of other states in which Firenze is qualified to do business and
such other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the "takeover" or "blue sky"
laws of various states and such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which to
be obtained or made would not have a Material Adverse Effect on Firenze.
(f) New Entity. Firenze was formed on May 1, 2001 and since
the date of inception, Firenze has not conducted any business other than action
taken in connection with the Merger.
(g) State Takeover Statutes; Absence of Supermajority
Provision. Firenze has taken all action to assure that no takeover or similar
provision of the CBCA, will apply to the Merger or any of the other transactions
contemplated hereby. No additional shareholder action on the part of Firenze is
required for approval of the Merger, this Agreement and the transactions
contemplated hereby. There are no anti-takeover provisions in the By-laws or
Articles of
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Incorporation of Firenze applicable to the transactions.
(h) Brokers. No broker, investment banker or other Person, is
entitled to receive from Firenze any investment banking, broker's, finder's or
other similar fee or commission in connection with this Agreement or the
transactions contemplated by this Agreement, including any fee for any opinion
rendered by any investment banker.
(i) Litigation. There is no claim, suit, action, proceeding or
investigation pending or, to the best of Firenze's knowledge, threatened against
or affecting Firenze, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against Firenze.
(j) Employee Benefit Matters. As used in this Section 3.2(j),
"Firenze" will include Firenze as defined in the preamble of this Agreement and
any member of a controlled group or affiliated service group, as defined in
Section 414(b), (c), (m) and (o) of the Code, of which Firenze is a member.
Firenze has no employee benefit plan or arrangement.
(k) Taxes. Firenze has not filed any Tax Returns.
(l) Title to Properties. Firenze does not own or lease any
real or personal property except Company Shares which have been contributed and
duly transferred to Firenze by Richard E. Schaden and Richard F. Schaden.
(m) Undisclosed Liabilities. Firenze does not have any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise), required by GAAP to be set forth on a financial statement or in
the notes thereto or which, individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect on Firenze.
(n) Board and Stockholder Recommendation. The Board of
Directors of Firenze, at a meeting duly called and held, has by vote of those
directors present (i) determined that this Agreement and the transactions
contemplated hereby, including the Merger and the transactions contemplated
thereby, are fair to and in the best interests of the shareholders of Firenze,
and (ii) resolved to recommend that the holders of the Firenze Common Stock
approve the Merger and the transactions contemplated thereby.
(o) Shareholder Approval. The shareholders of Firenze have
authorized the execution and delivery of this Agreement and have approved the
Merger and the transactions contemplated by this Agreement.
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ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Conduct of Business of the Company.
Ordinary Course. During the period from the date of this
Agreement to the Effective Time (except as otherwise specifically contemplated
by the terms of this Agreement), the Company will and will cause its
subsidiaries to carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and, to
the extent consistent therewith, use all reasonable efforts to preserve intact
their current business organizations, keep available the services of their
current officers and employees and preserve their relationships with customers,
suppliers, licensors, licensees, distributors and others having business
dealings with them, in each case consistent with past practice, to the end that
their goodwill and ongoing businesses will be unimpaired to the fullest extent
possible at the Effective Time.
SECTION 4.2 Conduct of Business of Firenze.
(a) Ordinary Course. Firenze has been formed specifically to
complete the transactions contemplated by this Agreement. During the period from
the date of this Agreement to the Effective Time (except as otherwise
specifically contemplated by the terms of this Agreement), Firenze will not
carry on any business other than business required to consummate the Merger and
other transactions contemplated by this Agreement.
(b) Other Actions. Firenze will not take, and will cause its
Affiliates not to take, any action that would, or that could reasonably be
expected to, result in any of the representations and warranties of Firenze set
forth in this Agreement becoming untrue.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Shareholder Approval; Preparation of Proxy Statement.
(a) Shareholder Meetings. The Company will, as soon as
practicable following the execution and delivery of this Agreement on dates to
be agreed upon between Firenze and the Company, which dates will be set taking
into account the status of pending regulatory matters pertaining to the
transactions contemplated hereby, duly call, give notice of, convene and hold
the Company Shareholders Meeting, in accordance with applicable law, for the
purpose of approving the Merger, this Agreement and the transactions
contemplated hereby. Subject to the provisions of Section 6.1 and Section 6.2
the Company will, through its Board of Directors, recommend to its shareholders
the approval and adoption of the Merger. The Company and Firenze will coordinate
and cooperate with respect to the timing of the Company
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Shareholders Meeting and will endeavor to hold such meetings as soon as
practical after the date hereof.
(b) Board Recommendation. The Board may modify its
recommendation of the merger if the Board determines in good faith that the
failure to modify its recommendation could be expected to constitute a breach of
the Board's fiduciary duties to the Company's shareholders under applicable law.
(c) Preparation of Proxy Statement/Schedule 13E-3. As soon as
practicable following the date of this Agreement, the Company will prepare and
file with the SEC the Proxy Statement/Schedule 13E-3. Firenze will provide the
Company with the information concerning Firenze required to be included in the
Proxy Statement/Schedule 13E-3. The Company will use its reasonable efforts to
cause the Proxy Statement/Schedule 13E-3 to be mailed to the Company's
shareholders as promptly as practicable after the Proxy Statement/Schedule 13E-3
has been approved by the SEC. The Company will notify Firenze promptly of the
receipt of any written or oral comments from the SEC or its staff and of any
request by the SEC or its staff for amendments or supplements to the Proxy
Statement or for additional information and will supply Firenze with copies of
all correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the Proxy
Statement/Schedule 13E-3 or the Merger.
(d) Stock Transfer Records. The Company will cause the
Transfer Agent to make stock transfer records relating to the Company available
to the extent reasonably necessary to effectuate the intent of this Agreement.
SECTION 5.2 Reasonable Efforts; Notification.
(a) Reasonable Efforts. Upon the terms and subject to the
conditions set forth in this Agreement, except to the extent otherwise required
by United States regulatory considerations and otherwise provided in this
Section 5.2(a), each of the parties agrees to use reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger, and the other transactions contemplated by this
Agreement, including (i) the obtaining of all necessary actions or non-actions,
waivers, consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities, if any) and the taking of all reasonable steps as may be necessary to
obtain an approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity, (ii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed and (iv) the execution and delivery of
any additional instruments (including any required supplemental indentures)
necessary to consummate the transactions contemplated by
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this Agreement.
Notwithstanding the foregoing, neither party will be required to agree
to any consent, approval or waiver that would require such party to take an
action that would impair the value that such party reasonably attributes to the
Merger and the transactions contemplated thereby. In connection with and without
limiting the foregoing, each of the Company and Firenze and its respective Board
of Directors will (i) take all action necessary to ensure that no state takeover
statute or similar statute or regulation is or becomes applicable to the Merger,
(ii) if any state takeover statute or similar statute or regulation becomes
applicable to the Merger, take all action necessary to ensure that the Merger
may be consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger and (iii) reasonably cooperate with each other in the arrangements
for refinancing any indebtedness of, or obtaining any necessary new financing
for, the Company and the Surviving Corporation.
(b) Notice of Material Change. The Company will give prompt
notice to Firenze, and Firenze will give prompt notice to the Company, of (i)
any representation or warranty made by it contained in this Agreement becoming
untrue or inaccurate in any respect or (ii) the failure by it to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification will affect the representations or warranties or covenants
or agreements of the parties or the conditions to the obligations of the parties
hereunder.
SECTION 5.3 Indemnification.
(a) It is understood and agreed that, subject to the
limitations on indemnification contained in the CBCA, the Company shall, to the
fullest extent permitted under applicable law and regardless of whether the
Merger becomes effective, indemnify and hold harmless, and after the Effective
Time, the Surviving Corporation shall, to the fullest extent permitted under
applicable law, indemnify, defend and hold harmless each current or former
director or officer of the Company and its subsidiaries (the "Indemnified
Parties") against all losses, claims, damages, liabilities, costs, fees and
expenses, including reasonable fees and disbursements of counsel and judgments,
fines, losses, claims, liabilities and amounts paid in settlement (provided,
that any such settlement is effected with the written consent of the Surviving
Corporation, such consent not to be unreasonably withheld) arising out of
actions or omissions occurring at or prior to the Effective Time to the full
extent permitted under applicable law, the terms of the Company's Articles of
Incorporation or the By-laws, as in effect at the date hereof.
(b) If the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other Person and will not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any Person, then and in each such case, proper provisions will be made so
that the successors and assigns of the Surviving Corporation, which will be
financially
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responsible Persons or entities, assume the obligations set forth in this
Section 5.3.
(c) The Surviving Corporation shall maintain the Company's
existing officers' and directors' liability insurance for a period of not less
than six (6) years after the Effective Date, provided, that the Surviving
Corporation may substitute therefor policies of substantially equivalent
coverage and amounts containing terms no less favorable to such former directors
or officers; provided, further, that in no event shall the Surviving Corporation
be required to pay aggregate premiums for insurance under this Section 5.3 in
excess of two hundred percent (200%) of the aggregate premiums paid by the
Company in the twelve months prior to the date of this Agreement, on an
annualized basis for such purpose; and provided, further, that if the Surviving
Corporation is unable to obtain the amount of insurance required by this Section
5.3 for such aggregate premium, the Surviving Corporation shall obtain as much
insurance as can be obtained for an annual premium not in excess of two hundred
percent (200%) of the aggregate premiums paid by the Company in the twelve
months prior to the date of this Agreement, on an annualized basis for such
purpose.
(d) All rights and obligations under this Section 5.3 will be
in addition to any rights that an Indemnified Party may have under the Articles
of Incorporation or By-Laws of the Company as in effect on the date hereof, or
pursuant to any other agreement, arrangement or document in effect prior to the
date hereof. The provisions of this Section 5.3 are intended to be for the
benefit of, and will be enforceable by, the parties hereto and each Indemnified
Party, his or her heirs and his or her representatives. This Section 5.3 will be
binding upon all successors and assigns of the Company, Firenze and the
Surviving Corporation.
SECTION 5.4 Fees and Expenses. Except as provided in Article VII and
Article VIII, all fees and expenses incurred in connection with the Merger, this
Agreement and the transactions contemplated hereby will be paid by the party
incurring such fees or expenses, whether or not the Merger is consummated.
SECTION 5.5 Public Announcements. Firenze and the Company will consult
with each other before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this Agreement and
will not issue any such press release or make any such public statement prior to
such consultation, except that each party may respond to questions from
shareholders and may respond to inquiries from financial analysts and media
representatives in a manner consistent with its past practice and each party may
make such disclosure as may be required by applicable law or by obligations
pursuant to any listing agreement with any national securities exchange without
prior consultation to the extent such consultation is not reasonably
practicable. The parties agree that the initial press release or releases to be
issued in connection with the execution of this Agreement will be mutually
agreed upon prior to the issuance thereof.
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SECTION 5.6 Purchases of Common Stock of the Other Party. During the
period from the date hereof through the Effective Time, except as otherwise
allowed under this Agreement, Firenze will not purchase any Company Shares, and
neither the Company nor any of its subsidiaries or other affiliates will
purchase any shares of Firenze Common Stock.
SECTION 5.7 Third Party Standstill Agreements. During the period from
the date of this Agreement through the Effective Time, neither the Company,
Firenze nor any subsidiaries of the Company or Firenze to the extent the same
involves a significant transaction involving the Company or Firenze will
terminate, amend, modify or waive any provision of any standstill or similar
agreement to which it is a party. During such period, the Company, Firenze and
any subsidiaries of the Company will enforce, to the fullest extent permitted
under applicable law, the provisions of any such agreement, including, but not
limited to, by obtaining injunctions to prevent any breaches of such agreement
and to enforce specifically the terms and provisions thereof in any court having
jurisdiction.
SECTION 5.8 Characterization for Federal Income Tax Purposes. For
federal income tax purposes, it is intended that the formation of Firenze be
ignored and that the entire transaction contemplated by this Agreement be
treated as a redemption of certain shares of the Company for cash within the
meaning of Section 302(b) of the Internal Revenue Code of 1986, as amended (the
"Code").
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Shareholder Approval. The Company Shareholder Approval
shall have been obtained.
(b) No Injunctions or Restraints. No final restraining order
or permanent injunction or other final order issued by any court of competent
jurisdiction or other legal prohibition preventing the consummation of the
Merger are in effect; provided, however, that the parties hereto will, subject
to Section 5.2(a), use reasonable efforts to have any such injunction, order,
restraint or prohibition vacated.
SECTION 6.2 Conditions of the Company. The obligation of the Company to
consummate the Merger is further subject to the satisfaction at the Effective
Time of the following condition: Tucker shall not have revoked, modified or
changed its fairness opinion in any manner adverse to the holders of the Company
Shares to whom the fairness opinion is addressed.
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SECTION 6.3 Conditions of Firenze. The obligation of Firenze to
consummate the Merger is subject to the satisfaction at the Effective Time of
the following conditions: the Company shall not have incurred and still be
incurring a Material Adverse Change (as defined in Section 8.3) and persons
holding not more than 170,000 issued and outstanding Company Shares shall have
exercised dissenters rights in accordance with the requirements and procedures
set forth in the CBCA.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of matters
presented in connection with the Merger by the shareholders of the Company or by
the shareholders of Firenze:
(a) by mutual written consent of Firenze and the Company;
(b) by either Firenze or the Company:
(i) if the shareholders of the Company fail to give
any required approval of the Merger and the transactions contemplated
hereby upon a vote at a duly held meeting of shareholders of the
Company or at any adjournment thereof,
(ii) if any court of competent jurisdiction or any
governmental, administrative or regulatory authority, agency or body
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger;
or
(iii) if the Merger shall not have been consummated
on or before September 30, 2001, unless the failure to consummate the
Merger is the result of a material breach of this Agreement by the
party seeking to terminate this Agreement; provided that no breach by
the Company shall relieve Firenze from closing if the breach was
previously known to Firenze or its Affiliates or is the result of
actions by Firenze or its Affiliates prior to the date of this
Agreement.
(c) by Firenze, if the Company breaches in any material
respect any of its representations or warranties herein or fails to perform in
any material respect any of its covenants, agreements or obligations under this
Agreement which breach is incapable of being cured or cannot be or has not been
cured within 20 days after the non-breaching party has given written notice of
such breach; and
A-19
(d) by the Company, if Firenze breaches in any material
respect any of its representations or warranties herein or fails to perform in
any material respect any of its covenants, agreements or obligations under this
Agreement which breach is incapable of being cured or cannot be or has not been
cured within 20 days after the non-breaching party has given written notice of
such breach; and
(e) by the Company if its Board of Directors determines, in
good faith, after consultation with and based upon the advice of legal counsel,
that the failure to change its recommendation of the adoption of this Agreement
and the Merger could be expected to constitute a breach of its fiduciary duties
to the Company's shareholders under applicable law.
SECTION 7.2 Effect of Termination.
(a) In the event of termination of this Agreement by the
Company as provided in paragraph 7(e), the Company shall pay to Firenze within
five business days of such termination all out-of-pocket expenses incurred by
Firenze and its Affiliates in connection with this Agreement and not otherwise
reimbursed or paid by the Company.
(b) In the event of termination of this Agreement by either
the Company or Firenze as provided in Section 7.1, this Agreement will forthwith
become void and have no effect, without any liability or obligation on the part
of Firenze or the Company, other than (i) the provisions of Section 5.5, Section
7.2(a) and Article VIII and (ii) such termination will not relieve any party
hereto for any intentional breach prior to such termination by a party hereto of
any of its representations or warranties or any of its covenants or agreements
set forth in this Agreement.
SECTION 7.3 Amendment. This Agreement may be amended by the parties at
any time before or after any required approval of matters presented in
connection with the Merger by the shareholders of the Company or the
shareholders of Firenze; provided, however, that after any such approval, there
will be made no amendment that by law requires further approval by such
shareholders without the further approval of such shareholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
SECTION 7.4 Extension; Waiver. At any time prior to the Effective Time,
the parties may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or the other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto or (c) subject to the
proviso of Section 7.3, waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party to any such
extension or waiver will be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise will not constitute a
waiver of such rights.
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ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations and Warranties. None of the
representations, warranties, covenants or agreements in this Agreement or in any
instrument delivered by the Company or Firenze pursuant to this Agreement will
survive the Effective Time, except any covenant or agreement of the parties
which by its terms contemplates performance after the Effective Time.
SECTION 8.2 Notices. Any notice and similar communications concerning
this Agreement ("Notice") will be in writing and will be either (a) delivered in
person (including by a nationally recognized courier service such as Federal
Express); or (b) sent to the other party by certified mail with return receipt
requested. Notices will be delivered or sent as follows or to such other address
as a party may hereafter establish by Notice given in the manner prescribed in
this Section.
(a) if to Firenze, to
Firenze Corporation
1415 Larimer Street
Denver, Colorado 80202
Attention: Richard E. Schaden
with a copy to:
Moye, Giles, O'Keefe, Vermeire & Gorrell LLP
1225 Seventeenth Street Suite 2900
Denver, Colorado 80202
Attn: John E. Moye, Esq.
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(b) if to the Company, to
The Quizno's Corporation
1415 Larimer Street
Denver, Colorado 80202
Attn: Patrick Meyers
and:
Brobeck, Phleger & Harrison
370 Interlocken Blvd. Suite 500
Broomfield, Colorado 80021
Attn: Richard Plumridge
SECTION 8.3 Definitions. For purposes of this Agreement:
(a) an "Affiliate" is those Persons listed on Schedule 2.1;
(b) "knowledge" means, with respect to any matter stated
herein to be "to the Company's knowledge," or similar language, the
actual knowledge of the Chairman of the Board, the Chief Executive
Officer, President, any Vice President, Chief Financial Officer or
General Counsel of the Company, and with respect to any matter stated
herein to be "to Firenze's knowledge," or similar language, the actual
knowledge of the Chairman of the Board, the Chief Executive Officer,
President, any Vice President or Chief Financial Officer of Firenze.
(c) "Material Adverse Effect" or "Material Adverse Change"
means, when used in connection with any Person, any change or effect
that is materially adverse to the business, properties, assets,
financial condition or results of operations of that Person and its
subsidiaries, taken as a whole; provided, however, that none of the
following conditions or events shall be deemed in themselves, either
alone or in combination, to constitute a Material Adverse Effect or a
Material Adverse Change in the Company: (i) the announcement or
pendency of the Merger, (ii) conditions affecting the general industry
in which the Company participates or the U.S. economy as a whole, (iii)
compliance with the terms of, or the taking of any action required or
contemplated by, this Agreement, or (iv) a change in the market price
or trading volume of the Company common stock.
(d) "Person" means an individual, corporation, partnership,
joint venture, limited liability company, association, trust,
unincorporated organization or other entity; and
(e) a "subsidiary" of a Person means any corporation,
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partnership or other legal entity of which securities or other
ownership interests having ordinary voting power to elect a majority of
the board of directors or other Persons performing similar functions
are directly or indirectly owned by such first mentioned Person.
SECTION 8.4 Interpretation. When a reference is made in this Agreement
to a Section, Exhibit or Schedule, such reference will be to a Section of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. The titles
and headings herein are for convenience only. In case of ambiguity or
inconsistency, the text rather than the titles or headings will control.
Whenever the word "include", "includes" or "including" are used in this
Agreement, they will be deemed to be followed by the words "without limitation".
SECTION 8.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which will be considered one and the same agreement and
will become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 8.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement (including the documents and instruments referred to herein) and the
Confidentiality Agreement (a) constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof and (b) except for the provisions of
Article II, and Section 5.3, are not intended to confer upon any Person other
than the parties any rights or remedies hereunder.
SECTION 8.7 Governing Law. This Agreement will be governed by, and
construed in accordance with, the laws of the State of Colorado, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder will be assigned by any of the parties
without the prior written consent of the other parties. This Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and assigns.
SECTION 8.9 Enforcement of the Agreement. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties will be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States located in the State of Colorado or in any other Colorado state court,
this being in addition to any other remedy to which they are entitled at law or
in equity. In addition, each of the parties hereto (a) consents to submit itself
to the personal jurisdiction of any Federal or state court sitting in the
District of Colorado in the event any dispute between the parties hereto arises
out of this Agreement solely in connection with such a suit between the parties,
(b) agrees that it will not attempt to deny or defeat such personal jurisdiction
by motion or other request for leave from any
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such court and (c) agrees that it will not bring any action relating to this
Agreement in any court other than a Federal or state court sitting in the State
of Colorado or in the District of Colorado. THE PARTIES AGREE THAT ANY ACTION OR
PROCEEDING ARISING OUT OF THIS AGREEMENT WILL BE HEARD BY A COURT SITTING
WITHOUT A JURY AND THUS HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY.
SECTION 8.10 Attorneys' Fees. In the event of any dispute hereunder, or
any default in the performance of any term or condition of this Agreement, the
prevailing party will be entitled to recover all costs and expenses associated
therewith, including reasonable attorneys' fees.
SECTION 8.11 Severability. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein will not in any way be affected or
impaired thereby. The parties will endeavor in good faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions,
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
IN WITNESS WHEREOF, Firenze and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
FIRENZE CORP. THE QUIZNO'S CORPORATION
By:_________________________________ By:_______________________________
Title:________________________________ Title:____________________________
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SCHEDULE 2.1
(Affiliates)
Richard E. Schaden
Richard F. Schaden
Frederick Schaden
Timothy M. Schaden
Patricia Wisdom
Patrick Meyers
Levine Leichtman Capital Partners II, L.P.
Voting Trust Agreement dated July 14, 1994, as amended
SCHEDULE 3.1(b)
(Liens on Subsidiary Stock)
All issued and outstanding shares of capital stock in the Company's subsidiaries
have been pledged to secure the repayment of debt owed to Levine Leichtman
Capital Partners II, L.P. and to Amresco Commercial Finance, Inc.
SCHEDULE 3.1(c)
(Capital Structure, Shareholder Agreements, Voting Agreements, Voting Trusts)
Capital Structure
Common Stock, $.001 par value; 9,000,000 shares authorized; 2,337,439 shares
issued and outstanding at June 21, 2001.
Preferred Stock, $.001 par value; 1,000,000 shares authorized;
146,000 Series A shares issued and outstanding;
57,000 Series C shares issued and outstanding;
3,000 Series D shares issued and outstanding; and
59,000 Series E shares issued and outstanding.
Except as disclosed in the Company SEC Documents, there are no (i)
subscriptions, options, puts, calls, warrants or other rights or commitments to
issue, redeem or purchase any of the Company's authorized capital stock or
securities convertible into or exchangeable for authorized capital stock or (ii)
shareholder agreements, voting agreements, voting trusts or similar arrangements
to which the Company is a party which have the effect of restricting or limiting
the transfer, voting or other rights associated with the Company's capital
stock.
Annex B
June 21, 2001
Special Committee of the Board of Directors
The Quizno's Corporation
1415 Larimer Street
Denver, CO 80202
Members of the Special Committee of the Board of Directors:
We understand that Firenze Corp. ("Firenze") proposes to merge with and
into (the "Merger") The Quizno's Corporation (the "Company") whereby all of the
shares of common stock of the Company, par value $0.001 per share (the "Common
Stock") not owned by the Company, Firenze or any affiliate of the Company or
Firenze (together "Affiliated Shareholders") and not owned by shareholders who
properly exercise dissenters' rights (the "Dissenting Shares") will be converted
into the right to receive eight dollars and fifty cents ($8.50) per share in
cash ("Merger Consideration"), subject to the terms and conditions set forth in
the draft Agreement and Plan of Merger dated June 17, 2001 (the "Merger
Agreement").
You have requested our opinion (the "Opinion") as to the fairness, from
a financial point of view, of the Merger Consideration offered to the
shareholders of the Common Stock other than the Affiliated Shareholders
("Unaffiliated Shareholders").
We note that Richard E. Schaden and Richard F. Schaden, the beneficial
owners of 59% of the common stock of the Company (fully diluted), have informed
the Company that they have no interest in selling their shares or in pursuing a
sale of the Company to a third party in the foreseeable future (the "Affiliate
Strategy").
In connection with our engagement, we were not requested to, and we did
not: (a) actively solicit third-party indications of interest in any sale
transaction; or (b) evaluate the advisability of the Affiliate Strategy from the
perspective of the Company or the Unaffiliated Shareholders.
In connection with the Opinion, we do not express an opinion with
respect to any of the following: (a) the Company's underlying business decision
to proceed with the Merger; (b) the fairness of the terms of any financing
required to complete the Merger; (c) the liquidation value of the Company; and
(d) the consequences, if any, of the Merger with respect to the senior credit
facilities provided by AMRESCO Commercial Financial, Inc.
We have undertaken such reviews, analyses, and inquiries as we deemed
necessary and appropriate under the circumstances. Among other things, we have:
(i) reviewed the Company's Annual Reports on Form 10-KSB filed with the
Securities and Exchange Commission (the "Commission") for the fiscal year ended
September 30, 2000 and the previous five fiscal years;
(ii) reviewed the Company's Quarterly Reports on Form 10-QSB filed with
the Commission filed with the Commission for the four quarterly periods ended
March 31, 2000, June 30, 2000, December 31, 2000 and March 31, 2001;
(iii) reviewed certain projected financial information prepared by
management of the Company;
(iv) reviewed certain publicly available information concerning the
Company;
(v) conducted discussions with the senior management of the Company and
consultants to the Company concerning the Company's business prospects and
historical financial results and projected financial information as presented
and described in (i), (ii), (iii), and (iv) above;
(vi) reviewed the Securities Purchase Agreement by and between the
Company, several of the Company's subsidiaries, and Levine Leichtman Capital
Partners II, L.P. dated November 12, 2000 and the ancillary documents related
thereto;
(vii) reviewed the draft Merger Agreement dated June 17, 2001; and
(viii) performed various financial analyses and studies as we deemed
appropriate, of the Company using generally accepted analytical methodologies,
including: (a) comparing the public trading multiples of companies which we
deemed comparable to the multiples derived from the proposed Merger
Consideration; (b) comparing the acquisition multiples reflected in recent
transactions for businesses which we deemed comparable to the multiples derived
from the proposed Merger Consideration associated with the Merger; (c) comparing
the market premiums paid in similar transactions to the premium being offered to
the Unaffiliated Shareholders of the Company; (d) comparing the theoretical
discounted future trading prices of the Company's common stock (based on current
trading multiples and the application of the projections referred to in clause
(iii) above and the use of sensitivity case projections that take into
consideration the Company's historical performance, the performance of other
comparable restaurant companies, and general industry trends) to the proposed
Merger Consideration associated with the Merger; (e) estimating the values a
financial investor might be willing to pay to acquire the Company if it were
interested in pursuing such a transaction; and (f) considering the values
derived from a discounted cash flow analysis using the projections referred to
in clause (iii) above.
We have assumed, at your direction and with your consent, that: (a) the
final executed form of the Merger Agreement will not differ in any material
respect from the Merger Agreement; (b) the Merger Agreement will be consummated
on the terms set forth in the Merger Agreement; (c) the Company will have
adequate financing at closing to consummate the Merger; (d) the Merger Agreement
and the related transactions will comply with applicable foreign,
B-2
federal, and state laws; and (e) there have been no material changes in the
Company's assets, financial condition, results of operations, business or
prospects since the date of the last financial statement or information made
available to us. In addition, we have made no assumption concerning, and
therefore do not consider, the possible assertion of claims, outcomes or damages
arising out of any pending or threatened litigation, possible unasserted claims
or other contingent liabilities, to which the Company or Firenze or affiliates
of the Company or Firenze is a party or may be subject.
We have not, at your direction and with your consent: (a) performed any
appraisals or valuations of specific assets or liabilities of the Company; (b)
been furnished with any appraisals or valuations of specific assets or
liabilities of the Company; (c) made a comprehensive physical inspection of the
properties or assets of the Company; or (d) undertaken any independent analysis
of any pending or threatened litigation, possible unasserted claims or other
contingent liabilities, to which either the Company or its affiliates is a party
or may be subject.
We have assumed and relied upon the accuracy and completeness of all
information supplied or otherwise made available to us by the Company (including
the estimates and projections of financial results described in clause (iii)
above) or obtained by us from other sources without assuming any responsibility
for independent verification of such information. We have assumed, in reliance
upon the assurances of the Company management, that the information provided
pertaining to the Company has been prepared on a good faith basis in accordance
with industry practice and, with respect to financial planning data, reflects
the best currently available estimates and judgment of the Company's management
as to the expected future financial performance of the Company, and that the
management of the Company is not aware of any information or facts that would
make the information provided to us incomplete or misleading.
As part of our investment banking business, we are regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. We have acted as financial adviser to the Board of Directors of the
Company in connection with a tender offer completed on December 11, 2000
("Tender Offer") and received a fee for such services, a significant portion of
which was contingent upon the consummation of the Tender Offer. The details of
this fee arrangement were disclosed in the Tender Offer materials. Also, our
parent company has entered into that certain Guaranty Agreement with the
Company, pursuant to which the Company has guaranteed payments of any and all
amounts due under that certain Margin Account Agreement between our parent
company and Richard E. Schaden, pursuant to which Mr. Schaden has borrowed two
million dollars ($2,000,000). The details of this arrangement were disclosed
in the Margin Account Agreement and the Guaranty Agreement, each of which have
been filed by the Company with the Securities and Exchange Commission. Finally,
we have rendered an opinion to the Board of Directors of the Company, dated as
of the date hereof, addressing certain financial consequences of the Merger,
as they relate to the application of Colorado Revised Statutes 7-106-401. In
addition, the Company has agreed to indemnify us for certain liabilities that
may arise out of our prior or current engagements. We bring to your attention
that, other than services provided relative to the Tender Offer and the Guaranty
Agreement, we have not previously had a material relationship to provide
investment banking or other advisory services to the Company. In the ordinary
course of our business, we
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may trade in the equity securities of the Company for our own account and for
the accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
The Opinion is furnished pursuant to our engagement letter dated May 1,
2001. You may use the Opinion solely in connection with your consideration of
the fairness of the Merger Consideration being offered to the Unaffiliated
Shareholders and for no other purpose. The Company may not furnish the Opinion
or any other material prepared by us to any other person or persons or use or
refer to the Opinion for any other purpose without our prior written consent,
which consent shall not be unreasonably withheld. The Company may use, refer to,
and reproduce in full the Opinion in any tender offer document mailed to
shareholders of the Company and in any filing with the Commission.
The Opinion is directed to the Special Committee of the Board of
Directors of the Company. This letter does not constitute a recommendation to
any shareholder with respect to whether or not to vote in favor of the Merger
under the terms and conditions of the Merger Agreement, and should not be relied
upon by any shareholder for that purpose.
The Opinion is necessarily based upon information available to us,
facts and circumstances and financial, economic, market and other conditions as
they exist and are subject to evaluation on the date of this Opinion. Unless the
Company specifically requests us to do so, we disclaim any undertaking or
obligation to advise any person of any change in any fact or matter affecting
the Opinion that may come or be brought to our attention after the date of the
Opinion.
Based upon and subject to all the foregoing, we are of the opinion that
the Merger Consideration proposed to be received by all Unaffiliated
Shareholders is fair, from a financial point of view, to such shareholders.
Very truly yours,
TUCKER ANTHONY SUTRO CAPITAL MARKETS
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
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June 21, 2001
Board of Directors
The Quizno's Corporation
1415 Larimer Street
Denver, CO 80202
Members of the Board of Directors:
We understand that Firenze Corp. ("Firenze") proposes to merge with and
into (the "Merger") The Quizno's Corporation (the "Company") whereby all of the
shares of common stock of the Company, par value $0.001 per share (the "Common
Stock") not owned by the Company, Firenze or any affiliate of the Company or
Firenze (together, the "Affiliated Shareholders," and all other shareholders,
the "Unaffiliated Shareholders") and not owned by shareholders who properly
exercise dissenters' rights (the "Dissenting Shares") will be converted into the
right to receive eight dollars and fifty cents ($8.50) per share in cash
("Merger Consideration"), subject to the terms and conditions set forth in the
draft Agreement and Plan of Merger dated June 17, 2001 (the "Merger Agreement").
You have requested our opinion (the "Opinion") as to whether, after
giving effect to the merger pursuant to the terms of the Merger Agreement (the
"Merger"), in accordance with Colorado Revised Statutes 7-106-401, (i) the
Company will be able to pay its debts as they become due in the usual course of
business and (ii) the value of the assets of the Company will exceed the sum of
the liabilities of the Company plus the liquidation preferences that would be
due and payable to the preferred shareholders if the Company were to be
liquidated immediately after the completion of the Merger.
We note that each of the following shareholders has informed the
Company that such shareholder has no interest in selling their shares or in
pursuing a sale of the Company to a third party in the foreseeable future, and
will not own any shares that will be converted into cash pursuant to the Merger
(the "Affiliate Strategy"): Richard E. Schaden, Richard F. Schaden, Frederick H.
Schaden, and other Schaden family members.
In connection with our engagement, we were not requested to, and we did
not: (a) actively solicit third-party indications of interest in any sale
transaction; or (b) evaluate the advisability of the Affiliate Strategy from the
perspective of the Company or the Unaffiliated Shareholders.
In connection with the Opinion, we do not express an opinion with
respect to any of the following: (a) the Company's underlying business decision
to proceed with the Merger; (b) the fairness of the terms of any financing
required to complete the Merger; (c) the liquidation value of the Company; and
(d) the consequences, if any, of the Merger with respect to the senior credit
facilities provided by AMRESCO Commercial Financial, Inc.
B-5
We have undertaken such reviews, analyses, and inquiries as we deemed
necessary and appropriate under the circumstances. Among other things, we have:
(i) reviewed the Company's Annual Reports on Form 10-KSB filed with the
Securities and Exchange Commission (the "Commission") for the fiscal year ended
September 30, 2000 and the previous four fiscal years;
(ii) reviewed the Company's Quarterly Reports on Form 10-QSB filed with
the Commission filed with the Commission for the four quarterly periods ended
March 31, 2000, June 30, 2000, December 31, 2000 and March 31, 2001;
(iii) reviewed certain projected financial information prepared by
management of the Company;
(iv) reviewed certain publicly available information concerning the
Company;
(v) conducted discussions with the senior management of the Company and
consultants to the Company concerning the Company's business prospects and
historical financial results and projected financial information as presented
and described in (i), (ii), (iii), and (iv) above;
(vi) reviewed the draft Merger Agreement dated June 17, 2001; and
(vii) performed various financial analyses and studies as we deemed
appropriate, of the Company using generally accepted analytical methodologies,
including: (a) comparing the public trading multiples of companies which we
deemed comparable to the multiples derived from the proposed Merger
Consideration; (b) comparing the acquisition multiples reflected in recent
transactions for businesses which we deemed comparable to the multiples derived
from the proposed Merger Consideration associated with the Merger; (c) comparing
the market premiums paid in similar transactions to the premium being offered to
the Unaffiliated Shareholders of the Company; (d) comparing the theoretical
discounted future trading prices of the Company's common stock (based on current
trading multiples and the application of the projections referred to in clause
(iii) above and the use of sensitivity case projections that take into
consideration the Company's historical performance, the performance of other
comparable restaurant companies, and general industry trends) to the proposed
Merger Consideration associated with the Merger; (e) estimating the values a
financial investor might be willing to pay to acquire the Company if it were
interested in pursuing such a transaction; and (f) considering the values
derived from a discounted cash flow analysis using the projections referred to
in clause (iii) above.
We have assumed, at your direction and with your consent, that: (a) the
final executed form of the Merger Agreement will not differ in any material
respect from the Merger Agreement; (b) the Merger Agreement will be consummated
on the terms set forth in the Merger Agreement; (c) the Company will have
adequate financing at closing to consummate the Merger; (d) the Merger Agreement
and the related transactions will comply with applicable foreign, federal, and
state laws; and (e) there have been no material changes in the Company's assets,
B-6
financial condition, results of operations, business or prospects since the date
of the last financial statement or information made available to us. In
addition, we have made no assumption concerning, and therefore do not consider,
the possible assertion of claims, outcomes or damages arising out of any pending
or threatened litigation, possible unasserted claims or other contingent
liabilities, to which the Company or Firenze or affiliates of the Company or
Firenze is a party or may be subject.
We have not, at your direction and with your consent: (a) performed any
appraisals or valuations of specific assets or liabilities of the Company; (b)
been furnished with any appraisals or valuations of specific assets or
liabilities of the Company; (c) made a comprehensive physical inspection of the
properties or assets of the Company; or (d) undertaken any independent analysis
of any pending or threatened litigation, possible unasserted claims or other
contingent liabilities, to which either the Company or its affiliates is a party
or may be subject.
We have assumed and relied upon the accuracy and completeness of all
information supplied or otherwise made available to us by the Company (including
the estimates and projections of financial results described in clause (iii)
above) or obtained by us from other sources without assuming any responsibility
for independent verification of such information. We have assumed, in reliance
upon the assurances of the Company management, that the information provided
pertaining to the Company has been prepared on a good faith basis in accordance
with industry practice and, with respect to financial planning data, reflects
the best currently available estimates and judgment of the Company's management
as to the expected future financial performance of the Company, and that the
management of the Company is not aware of any information or facts that would
make the information provided to us incomplete or misleading.
As part of our investment banking business, we are regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. We have acted as financial adviser to the Board of Directors of the
Company in connection with a tender offer completed on December 11, 2000
("Tender Offer") and received a fee for such services, a significant portion of
which was contingent upon the consummation of the Tender Offer. The details of
this fee arrangement were disclosed in the Tender Offer materials. Also, our
parent company has entered into that certain Guaranty Agreement with the
Company, pursuant to which the Company has guaranteed payments of any and all
amounts due under that certain Margin Account Agreement between our parent
company and Richard E. Schaden, pursuant to which Mr. Schaden has borrowed two
million dollars ($2,000,000). The details of this arrangement were disclosed
in the Margin Account Agreement and the Guaranty Agreement, each of which have
been filed by the Company with the Securities and Exchange Commission. Finally,
we have rendered an opinion to the Special Committee of the Board of Directors
of the Company, dated as of the date hereof, addressing the fairness from a
financial point of view, of the Merger Consideration offered to the shareholders
of the Common Stock, other than the Affiliated Shareholders. In addition, the
Company has agreed to indemnify us for certain liabilities that may arise out of
our prior or current engagements. We bring to your attention that, other than
services provided relative to the Tender Offer and the Guaranty Agreement, we
have not previously had a material relationship to provide investment banking or
other advisory services to the Company. In the ordinary course of our business,
we may trade in the equity securities of the Company for our own account and for
the accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
B-7
This opinion is delivered exclusively to the Special Committee solely
in connection with your consideration of the application of Colorado Revised
Statutes 7-106-401 and for no other purpose. The Company may not furnish the
Opinion or any other material prepared by us to any other person or persons or
use or refer to the Opinion for any other purpose without our prior written
consent, which consent shall not be unreasonably withheld.
The Opinion is directed to the Board of Directors of the Company. This
letter does not constitute a recommendation to any shareholder with respect to
whether or not to vote in favor of the Merger under the terms and conditions of
the Merger Agreement, and should not be relied upon by any shareholder for that
purpose.
The Opinion is necessarily based upon information available to us,
facts and circumstances and financial, economic, market and other conditions as
they exist and are subject to evaluation on the date of this Opinion. Unless the
Company specifically requests us to do so, we disclaim any undertaking or
obligation to advise any person of any change in any fact or matter affecting
the Opinion that may come or be brought to our attention after the date of the
Opinion.
Based upon and subject to all the foregoing, we are of the opinion
that, after giving effect to the Merger, in accordance with Colorado Revised
Statutes 7-106-401, (i) the Company will be able to pay its debts as they become
due in the usual course of business and (ii) using the methodology contained in
Schedule A attached hereto, the value of the assets of the Company will exceed
the sum of the liabilities of the Company plus the liquidation preferences that
would be due and payable to the preferred shareholders if the Company were to be
liquidated immediately after the completion of the Merger.
Very truly yours,
TUCKER ANTHONY CAPITAL MARKETS
By:
-------------------------------------
Name: David P. Prokupek
Title: CEO
B-8
Schedule A
- --------------------------------------------------------------------------------
Net Asset Value Calculation(1)
(amounts in 000's, except share price)
Low End High End
of Range of Range
-------- --------
Estimated Equity Value per Share $7.75 $8.75
Estimated Diluted Shares Outstanding-Post Transaction(2) 1,730 1,746
Equity Value Range 13,408 15,274
Less: Preferential Payments to Preferred Shareholders ($1,957) ($1,957)
- --------------------------------------------------------------------------------
Implied Incremental Value of Assets over Liabilities $11,452 $13,318
================================================================================
(1) Based upon the assumption that Total Assets Minus Total Liabilities equals
Equity Value
(2) Assumes 2.3 million share equivalents and 139,535 options with an average
strike price of $5.83; excludes preferred stock
- --------------------------------------------------------------------------------
B-9
ANNEX C
Summary of Shareholder Dissenters Rights and Text of Article 113
of the Colorado Business Corporation Act
THE FOLLOWING IS ONLY A SUMMARY OF THE PROCEDURES
FOR DISSENTING SHAREHOLDERS PRESCRIBED BY
SECTIONS 7-113-101 THROUGH 7-113-302 OF THE CBCA AND
IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF
ARTICLE 113 OF THE CBCA AS SET FORTH BELOW
Each record or beneficial shareholder of the Company may be entitled to
dissent from the merger and demand payment of the fair value of the shares of
common stock owned by such shareholder. In accordance with Section 7-113-202 of
the CBCA, in order for a shareholder to exercise dissenters' rights, such
shareholder must, prior to the taking of the vote of the shareholders on the
merger, deliver to us written notice of such shareholder's intent to demand
payment for shares in the event the merger is approved and shall not vote such
shareholder's shares in favor of the merger.
In accordance with Section 7-113-203 of the CBCA, within ten days after
the merger is approved, we must deliver a written dissenter's notice to all
shareholders who satisfy the requirements of Section 7-113-202 of the CBCA. The
dissenter's notice must state that the merger was authorized and the effective
date of the merger, set forth the address at which we will receive payment
demands and where stock certificates shall be deposited, supply a form for
demanding payment, which form shall request an address from the dissenting
shareholder to which payment is to be made, and set the date by which we must
receive the payment demand and stock certificates, which date shall not be less
than 30 days after the date the dissenter's notice was given. Furthermore, the
dissenter's notice may require that all beneficial shareholders, if any, certify
as to the assertion of dissenters' rights, and be accompanied by Article 113 of
the CBCA.
Pursuant to Section 7-113-204 of the CBCA, a shareholder receiving the
dissenter's notice and wishing to assert dissenters' rights must demand payment
in writing and deposit such shareholder's stock certificates in accordance with
the terms of the dissenter's notice. A shareholder who does not comply with the
foregoing requirements is not entitled to the fair value of such shareholder's
shares under Article 113 of the CBCA.
Upon the later of the effective date of the merger, or upon receipt of
a demand for payment by a dissenting shareholder, we must pay each dissenting
shareholder who complies with Section 7-113-204 the amount we estimate to be the
fair value of such shares, plus accrued interest in accordance with Section
7-113-206 of the CBCA. The payment must be accompanied by (i) our balance sheet
as of the end of our most recent fiscal year or, if that is not available, our
balance sheet as of the end of a fiscal year ending not more than sixteen months
before the date of payment, an income statement for that year, and, if we
customarily provide such statements to shareholders, a statement of changes in
shareholders' equity for that year and a statement of cash flow for that year,
which balance sheet and statements shall have been audited if we customarily
C-1
provide audited financial statements to shareholders, as well as the latest
available financial statements, if any, for the interim or full-year period,
which financial statements need not be audited; (ii) a statement of our
estimate of the fair value of the shares; (iii) an explanation by us of how the
interest was calculated; (iv) a statement of the dissenting shareholder's right
to demand payment under Section 7-113-209 of the CBCA; and (v) a copy of
Article 113 of the CBCA.
In the event a dissenting shareholder is dissatisfied with our
payment or offer of payment, such dissenting shareholder, pursuant to
Section 7-113-209 of the CBCA, may notify us in writing within 30 days
after we make or offer to pay each dissenting shareholder, of such
shareholder's own estimate of the fair value of such shares and the amount of
interest due, and demand payment of such shareholder's estimate, less any
payment already made by the company under Section 7-113-206, or reject the
company's offer under Section 7-113-208 and demand payment for the fair value of
the shares and interest due. A dissatisfied dissenting shareholder may effect
the foregoing if: (i) the dissenting shareholder believes that the amount paid
or offered is less than the fair value of the shares or that the interest due is
incorrectly calculated; (ii) we have failed to make payment within 60 days after
the date set by the corporation demanding payment; or (iii) we do not return the
deposited stock certificates within the time specified by Section 7-113-207 of
the CBCA. In the event a demand for payment under Section 7-113-209 remains
unresolved, we may commence a court proceeding to determine the fair value of
the shares and accrued interest within 60 days after receiving the payment
demand from a dissenting shareholder.
TITLE 7. COLORADO BUSINESS CORPORATION ACT
ARTICLE 113. DISSENTERS' RIGHTS
PART 1 RIGHT OF DISSENT - PAYMENT FOR SHARES
C.R.S. 7-113-101 (1996)
7-113-101. Definitions
For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held in a
voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring domestic or foreign corporation,
by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under section 7-113-102 and who exercises that right at the time and in
the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effective date of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at the legal rate as specified in
section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares that are
registered in the name of a nominee to the extent such owner is recognized by
the corporation as the shareholder as provided in section 7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial shareholder.
C-2
7-113-102. Right to dissent
(1) A shareholder, whether or not entitled to vote, is entitled to dissent and
obtain payment of the fair value of the shareholder's shares in the event of any
of the following corporate actions:
(a) Consummation of a plan of merger to which the
corporation is a party if:
(I) Approval by the shareholders of that
corporation is required for the merger by
section 7-111-103 or 7-111-104 or by the
articles of incorporation, or
(II) The corporation is a subsidiary that is
merged with its parent corporation under
section 7-111-104;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose
shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the
property of the corporation for which a shareholder
vote is required under section 7-112-102 (1); and
(d) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the
property of an entity controlled by the corporation
if the shareholders of the corporation were entitled
to vote upon the consent of the corporation to the
disposition pursuant to section 7-112-102 (2).
(1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or were held of record by more than two thousand
shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to
determine the shareholders entitled to receive notice
of the shareholders' meeting at which the corporate
action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to
determine shareholders entitled to sign writings
consenting to the corporate action; or
(c) The effective date of the corporate action if the
corporate action is authorized other than by a vote
of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section shall not
apply if the shareholder will receive for the shareholder's shares, pursuant to
the corporate action, anything except:
(a) Shares of the corporation surviving the consummation
of the plan of merger or share exchange;
(b) Shares of any other corporation which at the
effective date of the plan of merger or share
exchange either will be listed on a national
securities exchange registered under the federal
"Securities Exchange Act of
C-3
1934", as amended, or on the national market system
of the national association of securities dealers
automated quotation system, or will be held of record
by more than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or
cash in lieu of fractional shares.
(2) (Deleted by amendment, L. 96, p. 1321, 30, effective June 1, 1996.)
(2.5) A shareholder, whether or not entitled to vote, is entitled to dissent and
obtain payment of the fair value of the shareholder's shares in the event of a
reverse split that reduces the number of shares owned by the shareholder to a
fraction of a share or to scrip if the fractional share or scrip so created is
to be acquired for cash or the scrip is to be voided under section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair value of
the shareholder's shares in the event of any corporate action to the extent
provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the shareholder's
shares under this article may not challenge the corporate action creating such
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
7-113-103. Dissent by nominees and beneficial owners
(1) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and causes the corporation to receive written notice which states such
dissent and the name, address, and federal taxpayer identification number, if
any, of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection (1) are
determined as if the shares as to which the record shareholder dissents and the
other shares of the record shareholder were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the shares held
on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to
receive the record shareholder's written consent to
the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to
all shares beneficially owned by the beneficial
shareholder.
(3) The corporation may require that, when a record shareholder dissents with
respect to the shares held by any one or more beneficial shareholders, each such
beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-13-203.
7-113-201. Notice of dissenters' rights
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is submitted to a vote at a shareholders' meeting, the notice of the
meeting shall be given to all shareholders, whether or not entitled to vote. The
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
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article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection (1)
shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (1).
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104, any written or oral solicitation of a shareholder to execute a
writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
shall not affect any action taken pursuant to section 7-107-104 for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (2).
7-113-202. Notice of intent to demand payment
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is submitted to a vote at a shareholders' meeting and if notice of
dissenters' rights has been given to such shareholder in connection with the
action pursuant to section 7-113-201 (1), a shareholder who wishes to assert
dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is
taken, written notice of the shareholder's intention
to demand payment for the shareholder's shares if the
proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed
corporate action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104 and if notice of dissenters' rights has been given to such
shareholder in connection with the action pursuant to section 7-113-201 (2), a
shareholder who wishes to assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection (1) or (2)
of this section is not entitled to demand payment for the shareholder's shares
under this article.
7-113-203. Dissenters' notice
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized, the corporation shall give a written dissenters' notice
to all shareholders who are entitled to demand payment for their shares under
this article.
(2) The dissenters' notice required by subsection (1) of this section shall be
given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and
state the effective date or proposed effective date
of the corporate action;
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(b) State an address at which the corporation will
receive payment demands and the address of a place
where certificates for certificated shares must be
deposited;
(c) Inform holders of uncertificated shares to what
extent transfer of the shares will be restricted
after the payment demand is received;
(d) Supply a form for demanding payment, which form shall
request a dissenter to state an address to which
payment is to be made;
(e) Set the date by which the corporation must receive
the payment demand and certificates for certificated
shares, which date shall not be less than thirty days
after the date the notice required by subsection (1)
of this section is given;
(f) State the requirement contemplated in section
7-113-103 (3), if such requirement is imposed; and
(g) Be accompanied by a copy of this article.
7-113-204. Procedure to demand payment
(1) A shareholder who is given a dissenters' notice pursuant to section
7-113-203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand,
which may be the payment demand form contemplated in
section 7-113-203 (2) (d), duly completed, or may be
stated in another writing; and
(b) Deposit the shareholder's certificates for
certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1) of this
section retains all rights of a shareholder, except the right to transfer the
shares, until the effective date of the proposed corporate action giving rise to
the shareholder's exercise of dissenters' rights and has only the right to
receive payment for the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or 7-113-209 (1) (b), the demand for
payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.
7-113-205. Uncertificated shares
(1) Upon receipt of a demand for payment under section 7-13-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206. Payment
(1) Except as provided in section 7-113-208, upon the effective date of the
corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is
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stated in the payment demand, at the address shown on the corporation's current
record of shareholders for the record shareholder holding the dissenter's
shares, the amount the corporation estimates to be the fair value of the
dissenter's shares, plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its
most recent fiscal year or, if that is not available,
the corporation's balance sheet as of the end of a
fiscal year ending not more than sixteen months
before the date of payment, an income statement for
that year, and, if the corporation customarily
provides such statements to shareholders, a statement
of changes in shareholders' equity for that year and
a statement of cash flow for that year, which balance
sheet and statements shall have been audited if the
corporation customarily provides audited financial
statements to shareholders, as well as the latest
available financial statements, if any, for the
interim or full-year period, which financial
statements need not be audited;
(b) A statement of the corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand
payment under section 7-113-209; and
(e) A copy of this article.
7-113-207. Failure to take action
(1) If the effective date of the corporate action creating dissenters' rights
under section 7-113-102 does not occur within sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If the effective date of the corporate action creating dissenters' rights
under section 7-113-102 occurs more than sixty days after the date set by the
corporation by which the corporation must receive the payment demand as provided
in section 7-113-203, then the corporation shall send a new dissenters' notice,
as provided in section 7-113-203, and the provisions of sections 7-113-204 to
7-113-209 shall again be applicable.
7-113-208. Special provisions relating to shares acquired after announcement of
proposed corporate action
(1) The corporation may, in or with the dissenters' notice given pursuant to
section 7-113-203, state the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action creating dissenters'
rights under section 7-113-102 and state that the dissenter shall certify in
writing, in or with the dissenter's payment demand under section 7-113-204,
whether or not the dissenter (or the person on whose behalf dissenters' rights
are asserted) acquired beneficial ownership of the shares before that date. With
respect to any dissenter who does not so certify in writing, in or with the
payment demand, that the dissenter or the person on whose behalf the dissenter
asserts dissenters' right acquired beneficial ownership of the shares before
such date, the corporation may, in lieu of making the payment provided in
section 7-113-206, offer to make such payment if the dissenter agrees to accept
it in full satisfaction of the demand.
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(2) An offer to make payment under subsection (1) of this section shall include
or be accompanied by the information required by section 7-113-206(2).
7-113-209. Procedure if dissenter is dissatisfied with payment or offer
(1) A dissenter may give notice to the corporation in writing of the dissenter's
estimate of the fair value of the dissenter's shares and of the amount of
interest due and may demand payment of such estimate, less any payment made
under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under
section 7-113-206 or offered under section 7-113-208
is less than the fair value of the shares or that the
interest due was incorrectly calculated;
(b) The corporation fails to make payment under section
7-113-206 within sixty days after the date set by the
corporation by which the corporation must receive the
payment demand; or
(c) The corporation does not return the deposited
certificates or release the transfer restrictions
imposed on uncertificated shares as required by
section 7-113-207(1).
(2) A dissenter waives the right to demand payment under this section unless the
dissenter causes the corporation to receive the notice required by subsection
(1) of this section within thirty days after the corporation made or offered
payment for the dissenter's shares.
7-113-301. Court action
(1) If a demand for payment under section 7-113-209 remains unresolved, the
corporation may, within sixty days after receiving the payment demand, commence
a proceeding and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay to each dissenter whose demand remains
unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection (1) of
this section in the district court of the county in this state where the
corporation's principal office is located or, if the corporation has no
principal office in this state, in the district court of the county in which its
registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of this
state, whose demands remain unresolved parties to the proceeding commenced under
subsection (2) of this section as an action against their shares, and all
parties shall be served with a copy of the petition. Service on each dissenter
shall be by registered or certified mail, to the address stated in such
dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to such order. The parties to the
proceeding are entitled to the same discovery rights as parties in other civil
proceedings.
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(5) Each dissenter made a party to the proceeding commenced under subsection (2)
of this section is entitled to judgment for the amount, if any, by which the
court finds the fair value of the dissenter's shares, plus interest, exceeds the
amount paid by the corporation, or for the fair value, plus interest, of the
dissenter's shares for which the corporation is elected to withhold payment
under section 7-113-208.
7-113-302. Court costs and counsel fees
(1) The court in an appraisal proceeding commenced under section 7-113-301 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation; except that the court may assess costs against all or
some of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters acted arbitrarily, vexatiously, or not in good faith
in demanding payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any
dissenters if the court finds the corporation did not
substantially comply with the requirements of part 2
of this article; or
(b) Against either the corporation or one or more
dissenters, in favor of any other party, if the court
finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously,
or not in good faith with respect to the rights
provided by this article.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefited.
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Annex D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2000
|_| TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
Colorado 84-1169286
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
---------------- -----
(Address of Principal Executive Offices) (Zip Code)
(720) 359-3300
(Issuer's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
State registrant's revenue for its most recent fiscal year: $41,924,232
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 18, 2000 was approximately
$5,963,198 (for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 2,346,766 shares of registrant's common stock outstanding as of
December 18, 2000.
Documents incorporated by reference:
None
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Quizno's Corporation was incorporated in Colorado in 1991. Our
headquarters is located at 1415 Larimer Street, Denver, CO 80202. Our telephone
number is (720) 359-3300.
We incorporated in Colorado in January 1991 as D&R, Inc. We changed our
name to The Quizno's Franchise Corporation in April 1991 and to The Quizno's
Corporation in June 1995. We do business as The Quizno's Corporation and
Quizno's. Our principal business address and that of our subsidiaries named
below is 1415 Larimer Street, Denver, Colorado 80202. In January 1991, we
purchased certain assets of Quizno's America, Inc., which had operated, owned,
and franchised Quizno's restaurants (directly and through predecessors and
affiliates) under the QUIZNO'S name since 1981. We or our affiliates operate,
and offer franchises to individuals or entities ("Franchisees") to operate,
restaurants with carry-out facilities which sell submarine and other sandwiches,
salads, other food products and beverages, and related services ("Restaurants").
As of November 30, 2000, there were 1026 Restaurants in operation in the United
States and internationally, and agreements were in place for the opening of an
additional 695 franchised restaurants in the United States. During the last
three years, we have grown to become the third largest submarine sandwich chain
in the United States.
Additionally, we offer franchises for area director marketing businesses
in which the area director ("Area Director") acts as our sales representative
within a defined geographic area to solicit and identify prospective
franchisees, to assist us in locating and securing sites for Restaurants within
a territory, and to provide additional support before, during, and after the
Restaurant opens.
We also offer master franchise rights for international markets, in which
the master franchisee has the right to function as a franchisor to offer and
sell Restaurant franchises and area director marketing agreements using our
trademarks and service marks in a defined geographic area, usually a country. We
have master franchise agreements in place for Canada, the United Kingdom, Japan,
Australia, Switzerland, Netherlands, Luxembourg, Belgium, Iceland, Mexico,
Venezuela, Peru, Dominican Republic and other Caribbean Islands, Taiwan, and
Central America. As of December 18, 2000, there were 110 Quizno's Restaurants in
operation in Canada, 8 in Japan, 4 in Australia, 6 in Central America, 6 in
Puerto Rico, 1 in Guam, and 1 in Iceland.
The Area Director or master franchisee is required to open a specified
number of Restaurants annually throughout the life of the Area Director
marketing agreement or master franchise agreement.
In 1999, we changed the date of our fiscal year end to September 30.
Therefore, our 1999 fiscal year, which ended on September 30, 1999, contained
only three quarters.
On November 13, 2000, we commenced a self tender offer to purchase all
outstanding shares of our common stock, except for shares held by Messrs Richard
E. Schaden, Mr. Richard F. Schaden and Frederick H. Schaden (the "Schadens"), at
a price of $8 per share, net in cash to the seller (the "Tender Offer"). The
Tender Offer expired at midnight Monday, December 11, 2000. Shareholders
tendered and we purchased 661,155 shares of our outstanding common stock. In
addition, we purchased preferred stock, warrants and options convertible or
exchangeable into 1,056,906 shares of our common stock. In connection with the
Tender Offer, we closed a loan for $13.8 million with Levine Leichtman Capital
Partners II, L.P. ("Levine"). After the Tender Offer, as of December 18, 2000,
we had 2,346,766 shares of common stock issued and outstanding, 66.1% of which
is held by the Schadens.
In October 2000, as part of the tender offer we formed a new wholly owned
subsidiary, The Quizno's Franchise Company (QFC), which will be the franchisor
for all franchise agreements, area director agreements, and master franchise
agreements entered into after December 12, 2000. At some point in the future,
The Quizno's Corporation may assign all of the existing franchise, area
director, and master franchise agreements to QFC.
The Restaurants
The Restaurants offer a menu of submarine style sandwiches, salads, soups,
desserts and beverages, including "Classic Lite" selections of submarine
sandwiches and salads designed for consumers who are looking for a low-fat,
healthy alternative to typical fast food products. We believe that the submarine
sandwiches offered in the Restaurants are distinctive in the market for several
reasons. Each submarine sandwich is prepared after the customer orders and with
special ingredients, recipes and techniques. These ingredients, recipes and
techniques are controlled to provide uniformity of taste and quality among all
of the Restaurants.
One of the most important distinctions of the Quizno's sandwich product is
that it is served to the customer warm. Each sandwich is prepared open face and
run through a conveyor oven that toasts the bread, melts the cheese and enhances
the flavors of the meats.
We focus on the quality of the ingredients contained in the food products
we produce and we require that certain specified ingredients, which are
generally higher quality than those that other submarine sandwich shops use, be
purchased from approved suppliers. The cheeses used in the Restaurants are all
natural. The Italian style meats include a wine-cured Genoa salami, pepperoni
and capicola, an Italian spiced ham. The turkey breast is real turkey breast.
The Restaurants also are required to use certain products which are
prepared for us in accordance with proprietary recipes developed by us. Foremost
among these is Quizno's special recipe soft baguette style bread and its
red-wine based vinaigrette dressing used as a base on most of the sandwiches. In
addition, the Restaurants use our proprietary recipe tuna mix blend, garlic oil
blend, and marinara sauce.
The Restaurants' upscale decor is designed to convey an Italian deli
ambiance and to match the upscale quick service market niche represented by the
product. Open kitchens allow customers to watch as their sandwiches are
prepared. The decor package for the Restaurants includes reproductions of old
Italian food product labels, and hand-painted Italian style posters. The Italian
theme is prevalent throughout a Quizno's Restaurant.
Besides a pleasant upscale environment for in-house dining, the
Restaurants offer conveniently packaged meals for carry out to serve lunchtime
office workers and to serve the home meal replacement segment of the market.
The Restaurants are also located in mall food courts and are designed to
operate in smaller spaces while retaining the same ambiance and decor as a
traditional Quizno's Restaurant. "Quizno's Express" Restaurants are typically
smaller units established at such non-traditional locations as convenience and
gasoline stations, sports facilities, hospitals, and college campuses. Quizno's
Express units offer an extensive variety of Quizno's sandwiches. Soups, salads
and desserts are also available at Quizno's Express units. Quizno's Express
units will typically share common area seating or may have very limited seating
at venues designed primarily for take out.
Concept and Strategy
Our marketing strategy is to position the Restaurants between fast food
and full-service dining. We believe that consumers are looking for a healthy and
tasty alternative to typical fast foods; in particular, they are looking for an
alternative to fast food hamburgers and fried foods. At the same time, we
believe many busy families are looking for a more convenient and reasonably
priced alternative to full-service dining. Quizno's offers all the convenience
of typical fast food in terms of quick ticket times, affordability, and carry
out and home meal replacement options, but with a fresh, tasty alternative to
fast food products. In terms of full-service dining benefits, Quizno's offers
more comfortable dining rooms than most fast food restaurant concepts as well as
other dining options -- such as catering and delivery -- generally not available
in the fast food arena. We believe our concept is well positioned to fill a
growing niche in the restaurant business between fast food and full-service
dining. The Quizno's concept also accommodates a variety of dining options from
comfortable in-house dining to lunchtime carry out to home meal replacement.
Our goal is to build a strong and consistently profitable nationwide chain
of Restaurants with international expansion of the chain into selected foreign
markets. The primary vehicle for achieving our planned growth has been our Area
Director marketing program and, more recently, our master franchise program.
Our revenues are primarily derived from a royalty on all sales at
franchised Restaurants, initial franchise fees from each franchise sold, and
fees collected from Area Directors or master franchisees, as well as revenue
generated from company-owned Restaurants and license fees generated from
licensing our logos or in exchange for allowing a product company to sell
proprietary Quizno's items. Franchisees, master franchisees and Area Directors
pay fees to us only once in connection with execution of franchise agreements,
master franchise agreements, and area director marketing agreements,
respectively. Royalties provide a long-term continuing source of revenue.
Franchise fees and royalties are expected to increase as the number of
franchised Restaurants in operation increases. We may also repurchase certain
area directorships and territories in the future as we did in fiscal 2000. The
royalty rate is currently 7% for traditional Restaurants, and the royalty rate
is 8% for Quizno's Express units; however, a small number of franchisees operate
under older agreements that set lower royalty rates at 4% or 6%.
From time to time, we may make proposals and engage in negotiations
regarding acquisitions of material restaurant assets or other companies in the
restaurant industry, if management and the Board of Directors believe that such
proposed transaction would be in the our best interest. Our policy is not to
publicly announce such proposals until the likelihood that the proposed
transaction will be completed becomes probable.
Area Director and Master Franchise Agreements
We offer Area Directors a domestic geographical territory within which to
sell franchised Restaurants pursuant to an area director marketing agreement.
This program is designed to assist us in accelerating the marketing and sale of
franchises and the selection of Restaurant locations in the territory. Each
territory is based on areas of dominant influence of local television broadcast
stations as defined by the television broadcast industry. Our growth strategy
clusters Restaurants in particular television markets in order to facilitate
implementation of our advertising program.
Each Area Director pays us a fee based on the total of the population in
the territory. At present, the fee is $.07 per person located within the
territory, plus a training fee of $10,000. The population based portion of this
fee is deemed fully earned by us when paid and is not refundable.
Area Directors are required to market franchises for Restaurants to be
located within the territory. The Area Director agrees to open, through the sale
of franchises, a specified number of franchised Restaurants within the territory
during the term of the area director marketing agreement The sales and opening
schedules are lower in the first years of the development period. The area
director marketing agreement does not grant the Area Director the exclusive
right to market franchises or solicit franchisees in the territory, but it does
grant the Area Director the right to receive certain fees and royalties,
described in more detail below, from all franchised Restaurants and
company-owned Restaurants established in the territory during the term of the
area director marketing agreement (with certain exceptions). We reserve the
right under the area director marketing agreement to market and sell franchises
and to establish company-owned Restaurants in a territory.
In international markets, we generally market our franchises through a
qualified person, or "Master Franchisee," from whom we receive a one-time master
franchise fee, negotiated on a case by case basis. The Master Franchisee
receives the right to sell franchises and area directorships in a defined
international market on an exclusive basis. We are paid a portion, typically
30%, of all franchise fees, royalties and area director fees collected by the
Master Franchisee.
As of December 18, 2000, we had 58 Area Directors whose Territories cover
approximately 60% of the population of the United States. We have also sold
master franchise rights for Canada, Japan, United Kingdom, Australia,
Netherlands, Luxembourg, Belgium, Mexico, Venezuela, Peru, Dominican Republic
and other Caribbean islands, portions of Central America, Iceland, Switzerland,
Taiwan.
The area director and master franchisee agreements set increasing minimum
performance levels that require the Area Director or Master Franchisee to
develop a specified number of Restaurants in each quarter or year (depending on
the form of agreement) during the term of the agreement. Our experience with the
Area Director and Master Franchisee programs 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 who will not meet
their development schedules. 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 the franchisee financing. We may terminate
an agreement if the Area Director or Master Franchisee fails to meet the
development schedule, and we would then have the right to resell the territory
to a new Area Director or Master Franchisee.
In addition, through a required monthly minimum marketing expenditure, the
Area Director is required to actively promote the sale of our franchises within
the territory. The Area Director is required to visit with prospective
franchisees and refer appropriate locations for franchised Restaurants within
the territory to us for consideration. The Area Director is also required to
perform monthly quality assurance inspections of the units in its area and
assist franchisees within its area in opening. Our franchise sales materials are
made available to the Area Director.
Each domestic Area Director is paid a commission of 40% of the royalty
fees collected by us from each franchised Restaurant or of royalties that would
otherwise be payable by company-owned Restaurants in the territory opened and
operated during the term of the area director marketing agreement, so long as
the Area Director performs the services described above, subject to certain
exceptions in some contracts for pre-existing Restaurants in the territory,
"Turnkey" Restaurants, and conversion Restaurants for which the Area Director is
paid a flat monthly fee of $200 per Restaurant for performing support services.
Other forms of agreement exclude airport and other non-traditional units from
the commission payment obligation. Under some forms of agreement, Area Directors
are entitled to an ongoing commission of 1% on gross sales of Restaurants open
and operating in the territory on the date the area director marketing agreement
is terminated because of failure to meet the sales or opening goals, through
either the initial term of the underlying franchise agreement or five years (15
years for area director marketing agreements executed before January 1998),
whichever is less. This approach rewards the Area Director for selecting higher
quality franchisees and higher quality locations while discouraging the Area
Director from selecting locations that are too close together. In addition to
the foregoing, the Area Director is entitled to receive a commission of 50% of
the initial franchise fee paid to us for each franchise sold and opened within
the territory during the term of the area director marketing agreement.
We have a program under which we will finance up to 50% of the Master
Franchise and Area Director marketing fees for certain approved candidates who
have the experience and skill requirement sought by us for our Master
Franchise's and Area Directors, but do not have sufficient cash to pay the fee
in full. The master franchise's and Area Director is required to personally sign
a promissory note due to us for the amount financed, which typically will bear
interest at 15% per year (although we may offer a lower interest rate in certain
circumstances) and be repaid in monthly installments over five years. The
promissory note is secured by the Master Franchise's and Area Director marketing
agreement and by other collateral unrelated to the business.
Franchise Program
We authorize individuals and companies, within the United States, called
"Franchisees" or "Owners," to establish and operate Restaurants at an approved
location pursuant to the terms of a franchise agreement. Under the franchise
agreement, we undertake to perform or have performed certain services with
respect to the opening and operation of a Restaurant. In connection with the
opening of a Restaurant, those services include (i) review and approval of the
proposed Restaurant location, (ii) review and approval of construction plans for
the Restaurant, (iii) identification of sources of supply for items which are
ordinarily necessary to operate a Restaurant, (iv) an operations manual
providing detailed instructions with respect to operation of the Restaurant, (v)
training with respect to our method of operations, including operating
procedures, food preparation techniques, controls, promotion programs,
management and public relations, and (vi) pre-opening assistance. After opening
of the Restaurant, we provide continuing advice and consultation with respect to
operation of the Restaurant. From time to time, we have to take over the
operation of a Restaurant from an unsuccessful franchisee and operate the
Restaurant until a new franchisee is found. Our investment in such operations
may be recovered at the time the Restaurant is transferred to the new
franchisee.
The current franchise fee for the Owner's first Restaurant is $20,000,
$15,000 for the second, and $10,000 for the third and any additional franchise
agreement. We offer the franchise for a Quizno's Express unit at a reduced
franchise fee of $10,000. The Owner also pays us a continuing royalty fee of 7%
of the Owner's gross sales (8% for Quizno's Express franchises). Old forms of
the franchise agreement require royalty fee payments at rates between 4% and 6%.
"Gross sales" is defined as all sales whether on credit or for cash, and all
revenues from any source caused by the operation of the Restaurant, whether
directly or indirectly relating to the operation thereof. Sales tax and any
other state or federal tax are excepted. The Owner also pays advertising fees to
The Quizno's National Marketing Fund Trust and one of three Regional Marketing
Fund Trusts in an amount equal to a total of 1% to 4% of the gross sales, which
are used for advertising, marketing, and public relations programs and materials
to enhance and build the image and goodwill of the Quizno's system. There are
certain other fees that must be paid by the Franchisee to us in order to
reimburse us for costs incurred in connection with the establishment of a
Restaurant. The total average cost to a Franchisee for opening a traditional
Restaurant ranges between $170,150 and $232,150 including the initial franchise
fee, with most of the variation attributable to differences in the costs of
leasehold improvements for the Restaurant, size of the Restaurant, and whether
the unit is a traditional or Express Restaurant.
We collect weekly and monthly sales and other operating information from
each franchisee. We have agreements with most franchisees permitting us to
electronically debit the franchisees' bank accounts for the payment of
royalties, marketing fund contributions and other amounts owed to us under the
franchise agreement. This system significantly reduces the resources needed to
process receivables, improves cash flow and helps to limit past-due accounts
related to these items. Franchisees generally are required to purchase and
install an approved point of sale system that, among other things, allows us to
poll sales information daily.
We have developed certain items, such as bread and dressings for salads
and sandwiches, which are prepared for use in the Restaurants based upon recipes
developed by us and which are provided to Owners under the private label
"Quizno's." The Owner is required to purchase those items from specified vendors
for sale and use in the Restaurant. The franchise agreement also requires the
Owner to acquire specified equipment and inventory, to establish and maintain
specified signage and to operate the Restaurant in accordance with the standards
and requirements outlined in our operations manual.
We have entered into an agreement with a national food products
distributor that allows Owners to obtain meat products, produce and other food
and non-food items necessary for operation of franchised Restaurants at prices
more favorable than those that could be obtained by individual Owners. All of
the purchasing of the ingredients for the food products offered in the
Restaurants is done centrally by us which allows for better quality control.
Each Owner then contacts the distributor directly to obtain the items needed for
the Owner's Restaurant, which are delivered by the distributor. The distributor
bills the Owner directly for all items ordered and we are not liable for any
amounts owed by the Owners. We have entered into an agreement to change to a new
National food products distributor effective January 2001. On August 25, 2000,
we formed a new wholly owned subsidiary named American Food Distributors, Inc.,
a Colorado corporation primarily engaged in the business of purchasing
proprietary products from third-party manufacturers and then reselling those
products to a distributor for use in the Restaurants (AFD). We plan to purchase
and resell virtually all our proprietary products through AFD. We anticipate
that the organization of AFD may result in certain cost efficiencies and savings
that would translate to reduced product prices for our franchisees, increased
contributions to our national and regional marketing funds, and increased
revenue and earnings for us. At this point, it is impossible to predict the
extent of those amounts or how they will be allocated.
We retain the right to approve the terms of the Owner's lease. We must
review the lease as part of the approval process. The Owner pays the costs for
the review of the lease. We also reserve the right to enter into a lease
directly with each landlord and then to sublease to the Franchisee.
The Owner, or person designated by the Owner and approved by us, is
required to devote his or her full time, attention and efforts to the
performance of the Owner's duties under the franchise agreement relating to the
operation of the Restaurant. The Owner agrees in the franchise agreement to use
his or her best efforts to produce maximum volume of gross sales in the
Restaurant. The Restaurant must be operated continuously on such days and during
such minimum hours as are required by us, unless restricted by Owner's lease or
other rules applicable to the Restaurant.
The Owner agrees to maintain books and records for the Restaurant in
accordance with the requirements and specifications set forth from time to time
by us. The Franchisee is required by the franchise agreement to be responsible
for submitting all required reports to us when and in the manner or format
required by us.
In order to provide for proper financial tracking and planning for Owners,
we began providing a restaurant bookkeeping service to our Restaurant Owners in
1994. In mid-1998, we outsourced the bookkeeping function. This service is
intended to assure the Owners have accurate financial records as well as to
allow us to keep accurate systemwide statistics. Franchise agreements executed
after February 10, 1995, require Owners to use this bookkeeping service for the
first year of operations for the Owner's first unit for a fee of $85 per week,
including payroll.
The Owner must submit copies of all proposed advertising or promotional
materials for approval by us prior to use.
We have the right to terminate a franchise agreement for a variety of
reasons, including a Franchisee's failure to make payments when due or failure
to adhere to our policies and standards. Many state franchise laws limit the
ability of a franchisor to terminate or refuse to renew a franchise.
We expect that Restaurants operating within our franchise system will
emphasize quality "submarine" sandwiches. In order to satisfy customer
expectations regarding menus and service, we require substantial uniformity
among all Restaurants. All Restaurants must conform to our decor and menu
specifications. The Owner is not allowed to sell any goods or services at a
Restaurant other than those goods and services specified by us.
Franchise Marketing Programs
In order to facilitate the marketing of franchised Restaurants, we devote
resources for national print media, sales staff, marketing materials, and trade
shows. In addition, we have specific programs to market our franchises, which
are discussed below.
Discovery Day. Discovery Day is a day-long event regularly scheduled in
Denver to introduce potential Owners from throughout the country to the Quizno's
concept.
Toll Free Phone Line. We have installed a toll free phone line
(1-800-DELI-SUBS) which rings directly into the Franchise sales department. The
information is entered into a data base of Owner inquiries and an informational
package mailed to the caller.
Open Houses. We have an ongoing program of hosting open houses throughout
the country in conjunction with our Area Directors. Individuals who have
expressed an interest in our franchises are invited to open houses.
Computerized Data Base of Franchise Inquiries. We have installed a
computer network within our Franchise sales department for the purpose of
organizing, managing, and tracking individuals who inquire about our franchises.
National Advertising. We continue to advertise nationally for new
franchisees on a regular and consistent basis in national, regional and local
publications.
Company-Owned Restaurants
As of December 15, 2000, we own and operate 33 Quizno's Restaurants, 22 of
which are located in Colorado, and 11 are located in Kansas. In fiscal 2000,
Company-owned Restaurants generated $ 1,193,730 in earnings. We also currently
own and operate one Quizno's Restaurant held for resale, which incurred losses
totaling $ 12,634 in fiscal 2000.
While we may add new Company-owned Restaurants from time to time, we
expect most of our growth in the foreseeable future to result from the
development of franchised Restaurants.
In addition, from time to time, we acquire or assume the operation of
franchised Restaurants where the franchisee has been unable to operate
successfully for reasons unrelated to the location or the market. In such cases,
we will typically operate the Restaurant, make any required improvements and
repairs, re-staff, begin local store marketing, and ultimately transfer the
Restaurant to a new qualified Owner. Occasionally, we may incur short term
losses in such cases. However, the royalty stream provided over the long term by
the new Owner will normally offset or exceed any such losses.
Advertising
Our advertising staff develops advertising campaigns for use at all levels
to support consumer sales in the Restaurants. Each franchised Restaurant
currently pays 1% of gross sales to the Quizno's National Marketing Fund Trust
and up to 3% of gross sales to one of three Regional Fund Marketing Trusts. All
company-owned Restaurants must pay the advertising fees on an equal percentage
basis with all franchised Restaurants. We use the advertising fees to create,
produce, and place advertising, in-store signs, in-store promotions, and
commercial advertising; to pay agency costs and commissions; to create and
produce video, audio, and written advertisements; to administer regional
advertising programs, including direct mail and other media advertising; to
employ advertising agencies and in-house staff assistance; and to support public
relations, market research, and other advertising and marketing activities. The
advertising may be disseminated in print, television, or radio. The coverage has
been local or regional, and, since early 1998, we have used national cable
television campaigns.
Through July 10, 2000, each traditional Restaurant was required to spend
3% of sales for local advertising or promotions. Effective July 11, 2000 this 3%
of sales was allocated into one of three Regional Advertising Trusts.
Competition
Restaurant Operations. The restaurant industry is highly competitive with
respect to price, service, food quality and location and there are numerous
well-established competitors possessing substantially greater financial,
marketing, personnel and other resources than we possess.
We compete in the sandwich segment of the fast food industry, an industry
long dominated by hamburger chains. We believe that within the sub sandwich
segment, our largest competitors by number of stores to be Subway and Blimpie.
Subway, the nation's largest submarine sandwich restaurant chain, has in excess
of 12,000 units in the U.S., while Blimpie has grown significantly in recent
years and has approximately 2,100 domestic units. The expansion of Subway has
drawn attention to submarine sandwiches, during a time of growing concern
relating to beef and fried foods. We believe that the submarine sandwich segment
is underdeveloped, and that demand for submarine style sandwiches will continue
to grow. Other than Subway and Blimpie, most submarine sandwich chains currently
have less than 200 units each and are primarily local or regional.
Our major competitors, including Blimpie, have followed Subway closely in
the style and quality of the product, creating very little, if any
differentiation in the market. Subway offers a low-cost product in a fast food
style restaurant with limited seating. We have positioned the Restaurants
between the traditional fast food restaurant style of our submarine sandwich
competitors and full-service dining, and have focused on higher quality food
products, to distinguish the Restaurants from their competitors. The restaurant
business can be affected by changes in consumer tastes, national, regional or
local economic conditions, demographic trends, traffic patterns and the type,
number and location of competing restaurants. In addition, inflation, increased
food costs, labor and benefits costs and the lack of experienced management and
hourly employees may adversely affect the restaurant industry in general and our
Restaurants in particular
Franchise Competition. In addition to our Restaurant operations, we
compete with fast food chains, major restaurant chains and other franchisors for
franchisees. Many franchisors, including those in the restaurant industry, have
greater market recognition and greater financial, marketing and human resources
than we have. We believe that we can compete successfully for franchisees for
several reasons. The total cost of opening a Quizno's Restaurant tends to be
lower than that of hamburger fast food and full-service dining restaurants. The
ratio of sales revenue per restaurant to restaurant opening costs is also better
for Quizno's Restaurants than for most of our competitors. Finally, the ambiance
of Restaurants offers a Franchisee a pride in ownership that is unique to the
Quizno's concept.
We do not have significant costs associated with research and development.
Government Regulations
We are subject to Federal Trade Commission ("FTC") regulation and several
state laws which regulate the offer and sale of franchises. We are also subject
to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires us to furnish to prospective franchisees a
franchise offering circular containing information prescribed by the FTC Rule.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship presently exist in a substantial number of
states. State laws that regulate the offer and sale of franchises require
registration of the franchise offering with state authorities. Those that
regulate the franchise relationship generally require that the franchisor deal
with its franchisees in good faith, prohibiting interference with the right of
free association among franchisees, limiting the imposition of standards of
performance on a franchisee and regulating discrimination against franchisees in
charges, royalties or fees. Although such laws may restrict a franchisor in the
termination of a franchise agreement by, for example, requiring "good cause" to
exist as a basis for the termination, advance notice to the franchisee of the
termination, an opportunity to cure a default and a repurchase of inventory or
other compensation, these provisions have not had a significant effect on our
franchise operations.
In October 1999, the FTC issued proposed changes to the FTC Rule that
would effect certain disclosure obligations in connection with franchise sales.
These proposed changes are still subject to public comment, and even if adopted
as proposed, we do not think the changes would materially effect our franchise
sales or other operations. We are not aware of any other probable pending
franchise legislation that in our view is likely to affect our operations
significantly. We believe that our operations comply in all material respects
with the FTC Rule and the applicable state franchise laws.
Each franchised Restaurant, and each company-owned Restaurant, is subject
to licensing and regulation by a number of governmental authorities, which may
include health, sanitation, safety, fire, building and other agencies in the
state or municipality in which the Restaurant is located. Difficulties in
obtaining or failure to obtain the required licenses or approvals could delay or
prevent the development of a new Restaurant in a particular area. We are subject
to federal and state environmental regulations, but these have not had a
material effect on our operations. More stringent and varied requirements of
local governmental bodies with respect to zoning, land use and environmental
factors could delay or prevent the development of a new Restaurant in a
particular area.
We are also subject to state and federal labor laws that govern our
relationship with our employees, such as minimum wage requirements, overtime,
working conditions and citizenship requirements, or customers, such as the
Americans with Disability Act. Significant numbers of food service and
preparation personnel are paid at rates governed by the federal minimum wage.
Accordingly, increases in the benefits under any of these laws would increase
labor costs to us and our franchisees.
We do not have any significant costs related to environmental law
compliance.
Trademarks
We presently own the following principal trademarks or service marks (the
"Marks"). All of our primary Marks (except for the last one) are registered on
the Principal Register of the United States Patent and Trademark Office:
Mark Registration Number Registration Date
- --------------------------- --------------------- --------------------
"QUIZNO'S" service mark 1,317,420 January 29, 1985
"QUIZNO'S" service mark 1,317,421 January 29, 1985
"QUIZNO'S & Design" service
mark 1,716,834 September 15, 1992
"QUIZNO'S EXPRESS CLASSIC
SUBS" service mark 2,086,598 September 19, 1996
"QUIZNO'S SUBS OVEN BAKED
CLASSICS and DESIGN" 2,228,680 March 2, 1999
There are no presently effective determinations of the United States
Patent and Trademark Office, the trademark trial and appeal board, the trademark
administrator of any state or any court, nor are there any pending infringement,
opposition or cancellation proceedings or material litigation, involving the
Marks.
We have also filed the following trademarks or service marks
internationally:
Application or Application or
Registration Registration
Country Trademark Number Date Status
- ------------ ----------- -------------- --------------- ------------
Australia Quizno's App. # 789815 30 March 1999 Pending
- -----------------------------------------------------------------------------------------
Quizno's Subs
Australia Oven Baked
Classics App. # 789814 30 March 1999 Pending
- -----------------------------------------------------------------------------------------
Canada Quizno's Reg. # 489496 6 February 1998 Registered
- -----------------------------------------------------------------------------------------
Quizno's Subs
Canada Oven Baked
Classics (and App. # not yet
design) available Pending
- -----------------------------------------------------------------------------------------
Europe-CTM Quizno's App. # 1057223 28 January 1999 Pending
- -----------------------------------------------------------------------------------------
Quizno's Subs
Europe-CTM Oven Baked App./Reg. # 1057264 4 October 2000 Registration
Classics No. pending
- -----------------------------------------------------------------------------------------
Great Britain Quizno's Reg. # 1576926 18 August 1995 Registered
- -----------------------------------------------------------------------------------------
Quizno's Subs
Great Britain Oven Baked
Classics (and
design) App # 2197852
- -----------------------------------------------------------------------------------------
Japan Quizno's Reg. # 4275508 21 May 1999 Registered
- -----------------------------------------------------------------------------------------
Quizno's Subs
Japan Oven Baked
Classics (and App. # 17745/99 1 March 1999 Pending
(design)
- -----------------------------------------------------------------------------------------
Mexico Quizno's Reg. # 502259 30 August 1995 Registered
- -----------------------------------------------------------------------------------------
Puerto Rico Quizno's None 23 September 1997 Pending
- -----------------------------------------------------------------------------------------
Singapore Quizno's Reg. # 6014/94 12 September 1994 Registered
- -----------------------------------------------------------------------------------------
South Korea Quizno's Reg. # 29994 11 January 1996 Registered
- -----------------------------------------------------------------------------------------
Iceland Quizno's App. # 1909/2000 25 May 2000 Pending
- -----------------------------------------------------------------------------------------
Switzerland Quizno's App. # 06203/2000 24 May 2000 Pending
- -----------------------------------------------------------------------------------------
We have also filed trademark applications in several Central American
countries, all of which are currently pending. There are no agreements currently
in effect which significantly limit our right to use or license the use of the
Marks.
Employees
As of December 15, 2000, we employed 92 full-time employees and 2
part-time employees. In addition, we employed 109 full-time and 218 part-time
employees in our Company-owned Restaurants. Our employees are not covered by any
collective bargaining agreement and management believes our employee relations
are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
We lease our headquarters office space of 14,866 square feet at 1415
Larimer Street, Denver, Colorado. We also lease the premises for each of the 35
Company-owned and operated Restaurants and the Cowboy Bar at Denver
International Airport, at September 30, 2000, as follows:
1. 12201 East Arapahoe Road, #B7 Englewood, CO 80112 2,486 sq. feet
2. 6525 Gunpark Drive Boulder, CO 80301 1,976 sq. feet
3. 191 Blue River Parkway Silverthorne, CO 80498 931 sq. feet
4. 8081 East Orchard Road, #67 Greenwood Village, CO 80111 3,166 sq. feet
5. 2311 30th Street Boulder, CO 80301 1,400 sq. feet
6. 9425 South University Blvd. Highlands Ranch, CO 80126 1,919 sq. feet
7. 1275 Grant Street Denver, CO 80203 1,400 sq. feet
8. 1250 South Hover Road, Bldg. 8A Longmont, CO 80501 2,350 sq. feet
9. 1660 Lincoln Street, # 105 Denver, CO 80264 1,660 sq. feet
10. 10450 West Colfax Lakewood, CO 80215 1,992 sq. feet
11. 4495 North Washington Denver, CO 80216 1,903 sq. feet
12. 14413 West Colfax Lakewood, CO 80401 1,300 sq. feet
13. 999 18th Street, # 136 Denver, CO 80202 1,360 sq. feet
14. 270 West 14th Street Denver, CO 80204 1,700 sq. feet
15. 4403 South Tamarac Parkway Denver, CO 80237 2,420 sq. feet
16. 818 17th Street Denver, CO 80202 1,800 sq. feet
17. 2401 West Central El Dorado, KS 67042 1,800 sq. feet
18. 738 North Waco Wichita, KS 67203 1,151 sq. feet
19. 4100 East Harry, #55 Wichita, KS 67218 1,850 sq. feet
20. 3300 North Rock Road Wichita, KS 67226 1,840 sq. feet
21. 2792 South Seneca Wichita, KS 67217 1,700 sq. feet
22. 2407 West 21st Street Wichita, KS 67203 1,225 sq. feet
23. 602 North Tyler Wichita, KS 67212 1,500 sq. feet
24. 678 East 47th Street South Wichita, KS 67216 1,540 sq. feet
25. 1695 Larimer Street Denver, CO 80202 2,981 sq. feet
26. 305 McCaslin Blvd. #6 Louisville, CO 80027 1,500 sq. feet
27. 12003 Pecos St. Westminster, CO 80234 2,400 sq. feet
28. 6765 W. 120th Ave. Broomfield, CO 80020 2,100 sq. feet
29. 5131 S. Yosemite Greenwood Village, CO 80112 1,600 sq. feet
30. 1387 S. Boulder Rd., Unit G Louisville, CO 80027 2,100 sq. feet
31. 12607 Metcalf Overland Park, KS 66213 2,000 sq. feet
32. 11029 Metcalf Overland Park, KS 66120 1,520 sq. feet
33. 1213 State Street, Unit A Santa Barbara, CA 93101 1,485 sq. feet
34. 8700 Pena Blvd. Denver, CO 80249 4,209 sq. feet
35. 8900 Pena Blvd. Denver, CO 80249 1,761 sq. feet
36. 8700 Pena Blvd. Denver, CO 80249 2,724 sq. feet
ITEM 3. LEGAL PROCEEDINGS
Angela Wetzel v. Quizno's Subs, Ron Newman & Quiz-Subs, Inc. (Court of
Common Pleas, Berkeley County, South Carolina, No. 00-CP-08-123) (the Wetzel
Litigation). Ron Newman is a former area director, through Quiz-Subs. In 1999,
Newman entered into negotiations with Wetzel (a Subway franchisee) to sell the
area directorship for approximately $275,000. We tentatively approved the sale,
which approval was subject to (among other conditions) Wetzel's transfer of her
existing Subway units. Subsequently, Wetzel paid Newman $275,000 for the
territory. Although Wetzel had not sold her Subway units and did not have
written consent from us for the transaction, she now claims that our
representative verbally approved the sale without the Subway sale condition.
When we refused to acknowledge the sale, Wetzel brought this litigation in South
Carolina state court, on January 20, 2000, against us, Quiz-Subs, and Newman.
Wetzel seeks specific performance (i.e., an order transferring the territory
rights to her) or, in the alternative, return of the $275,000 payment and
consequential damages.
We have denied liability and cross-claimed against Newman and Quiz-Subs.
We believe Wetzel could not have reasonably relied on any verbal statement by a
representative to pay Newman for the territory. We also believe that the
ultimate liability rests with Newman, who refused to return the payment after
being notified that we would not approve the transfer. Wetzel has requested a
jury trial. No trial date has been set.
The Quizno's Corporation v. Quiz-Subs, Inc., Ron Newman, and Stephen
Gainous (United States District Court for the District of Colorado, No. 00-213)
(the Newman Litigation). We additionally terminated Quiz-Subs area director
agreement and territory rights for failure to meet the development quota, and
commenced this litigation in the United States District Court on February 1,
2000. The action seeks damages arising from Newman's and Quiz-Subs' failure to
develop the territory as well as indemnification from any damages or expenses
incurred by us as a result of the Wetzel Litigation. The defendants have not yet
answered the complaint or filed counterclaims. If any counterclaims are filed,
we will assess those claims and respond accordingly. We believe that any loss in
this matter would be a covered claim under our Errors and Omissions Insurance
Policy.
The Quizno's Corporation v. Quizno's of Tampa Bay, Inc.; The Quizno's
Corporation v. Quizno's of Central Florida, Inc., Quizno's of Jacksonville,
Inc., David M. Black and Barbara Jill Black (United States District Court for
the District of Colorado, No. 00-253) (the Black Litigation). The Blacks,
through their various entities, were area directors in Florida. In January 2000,
we discovered that the Blacks had deposited checks for franchise fees (made
payable to The Quizno's Corporation) into their business accounts. The Blacks
then sent reduced amounts to Quizno's. The Blacks also defaulted on payment
obligations under promissory notes entered into in connection with the sale of
the area directorships. Upon learning of the Blacks' action, we terminated the
underlying area director agreements and commenced an arbitration against
Quizno's of Tampa Bay, Inc., and a federal district court action against the
other entities on January 4, 2000. Both actions allege claims for breach of the
area director agreements as well as seek indemnification arising from the
Blacks' actions. Both actions also name the Blacks individually.
On November 3, 2000, the parties entered into a settlement. Pursuant to
the settlement agreement, we paid the defendants $20,000 and forgave the
balances owed under the promissory notes. The defendants gave up all rights to
the area director territories, and the parties exchanged a full release of all
claims. On November 16, 2000, the federal district court action was dismissed
with prejudice. The arbitration action had previously been dismissed.
The Quizno's Corporation v. Cy Thomas Plyler (American Arbitration
Association, Denver Colorado, No. 77 181 00203 00. On July 10, 2000, we
terminated an area director agreement with Cy Thomas Plyler, for failure to meet
the required development schedule. On the same day, we instituted this action in
the Denver office of the American Arbitration Association, in which we sought
damages for failure to comply with the agreement as well as a declaration that
the agreement was properly terminated. On August 11, 2000, Plyler filed and
answering statement denying our claims and counterclaims for breach of contract.
Plyler claims damages in excess of $1,000,000 based on lost future revenue from
the territory. He also seeks indemnification and attorney fees. We believe that
we rightfully terminated the agreement and intend to contest the counterclaims
and to pursue our claims. The case is currently in pre-trial discovery. No trial
date has been set. We believe that any loss in this matter would be a covered
claim under our Errors and Omissions Insurance Policy.
Danny Markovitz & Lee McGowan v. The Quizno's Corporation (District
Court for the City & County of Denver, Colorado, No. 00CV4134. On June 2, 1999,
we terminated an area director agreement with Danny Markovitz & Lee McGowan for
failure to meet the required development schedule, failure to make payments on
the promissory note given in connection with the sale of the area directorship,
and failure to comply with other provisions of the agreement and related
documents. On June 20, 2000, the plaintiffs commenced this action, alleging
breach of contract, unjust enrichment, violation of the Colorado Consumer
Protection Act, fraudulent misrepresentation, fraudulent concealment, negligent
misrepresentation, intentional interference with contract, and violations of the
Colorado Securities Act as well as securities fraud. The claims all arise from
the plaintiffs' allegation that we wrongfully terminated the agreement and in
alleged wrongful acts (failure to timely provide a UFOC or to disclose the terms
of the promissory note collateral) taken by us in connection with the sale of
the area directorship. We have denied those claims and believe that we properly
terminated the agreement. The case is currently in pre-trial discovery and is
set for trial in June 2001. We believe that any loss in this matter would be a
covered claim under our Errors and Omissions Insurance Policy.
From time to time, we are involved in litigation and proceedings arising
out of the ordinary course of our business. There are no other pending material
legal proceedings to which we are a party or to which our property is subject.
We do not believe that any of the foregoing litigation will have a material
adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of its fiscal year ended September 30, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the NASDAQ Small-Cap Issues Market under the
symbol "QUIZ." The following table shows high asked, low bid and close price
information for each quarter in the last two fiscal years as reported by Prophet
Information Services, Inc., a provider of online historical stock price data for
all major U.S. securities markets. Such quotations reflect inter-dealer prices,
without retail mark-ups, markdowns or commissions, and may not necessarily
represent actual transactions. On December 18, 2000, the stock closed at $ 7.50.
Fiscal Year Ended September 30, 1999
High Low Close
-------- ------- -------
First Quarter $7.75 $6.88 $7.19
Second Quarter $7.75 $6.50 $7.25
Third Quarter $9.50 $6.94 $8.25
Fiscal Year Ended September 30, 2000
High Low Close
-------- ------- -------
First Quarter $9.00 $7.25 $7.38
Second Quarter $7.94 $5.88 $7.94
Third Quarter $8.00 $5.88 $7.00
Fourth Quarter $7.38 $5.88 $6.44
There were 93 holders of record of our Common Stock as of December 18,
2000. This number includes shareholders of record who hold stock for the benefit
of others.
The tender offer reduced the number of our outstanding shares and the
number of our shareholders. Our Board of Directors could take other actions that
would result in a second-step transaction in which all the remaining public
stockholders would receive cash for their shares. However, our Board of
Directors has not made any decision to take the company private or as to
whether, or when, a second-step transaction such as a merger or a reverse stock
split would be completed. A second-step transaction would require approval by
our Board of Directors and may require approval by our stockholders, depending
on the nature of the second-step transaction. The members of the Schaden family
owning shares would be able to control the outcome of any stockholder vote on a
second-step transaction. The Board may also decide to deregister our shares
(assuming that we meet the criteria for such delisting), in which case we would
no longer be a reporting company under the Securities Exchange Act of 1934, nor
would our shares be traded on any public exchange.
We believe that the tender offer may result in our company no longer
meeting the net tangible asset or other requirements for continued listing on
the Nasdaq SmallCap Market. In that event, we would be traded on the National
Association of Securities Dealers, Inc. Electronic Bulletin Board (the "OTCBB"),
which may provide less liquidity and less price publicity for remaining
shareholders.
We do not expect to pay any dividends on our Common Stock in the
foreseeable future. Management currently intends to retain all available funds
for the development of our business, for use as working capital or to repurchase
common stock.
In October 1999, we announced a program to repurchase up to 200,000 shares
of our common stock. The program was terminated on or about September 30, 2000,
and at such time we had repurchased 144,005 shares under such program. The
prices at which shares were repurchased ranged from $6.03 to $8.875, and the
average price was $8.38.
During the last quarter of the fiscal year ending September 30, 2000, we
sold the following securities without registration with the Securities and
Exchange Commission pursuant to the exemption noted:
Securities Number Exemptions
Sold Date of Shares Consideration Purchasers Claimed
- ----------------- -------- --------- ------------- ---------- ------------
Common Stock 8/8/00 2,918 $20,429 Plan Quizno's Section 4(2)
obligation 401(k) Trust
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this annual report, and in
particular in this section entitled "Management's Discussion and Analysis or
Plan of Operation," are forward-looking statements that involve risks and
uncertainties that might adversely affect our operating results in the future in
a material way. Such risks and uncertainties include, without limitation, the
effect of national and regional economic and market conditions in the U.S. and
the other countries in which we franchise Restaurants, costs of labor and
employee benefits, costs of marketing, the success or failure of marketing
efforts, costs of food and non-food items used in the operation of the
Restaurants, intensity of competition for locations and Franchisees as well as
customers, perception of food safety, spending patterns and demographic trends,
legal claims and litigation, the availability of financing for us and our
Franchisees at reasonable interest rates, the availability and cost of land and
construction, legislation and governmental regulations, and accounting policies
and practices. Many of these risks are beyond our control. In addition, specific
reference is made to the "Risk Factors" section contained in our Prospectus,
dated January 9, 1998, included in the Registration Statement on Form S-3 filed
by our company (Registration No. 333-38691).
The principal sources of our income are continuing fees, initial franchise
fees, and, historically, area director marketing and master franchise fees.
These sources are subject to a variety of factors that could adversely impact
our profitability in the future, including those mentioned in the preceding
paragraph. The continued strength of the U.S. economy is a key factor to the
restaurant business because consumers tend to immediately reduce their
discretionary purchases in economically difficult times. An economic downturn
would adversely affect all three of the sources of income identified above.
Because our franchises are still concentrated in certain regions of the U.S.,
regional economic factors could adversely affect our profitability. Weather,
particularly severe winter weather, will adversely affect royalty income and
could affect the other sources cited above. Culinary fashions among Americans
and people in other countries in which we franchise the Restaurants will also
impact our profitability. As eating habits change and types of cuisine move in
and out of fashion, our challenge will be to formulate a menu within the
Quizno's distinctive culinary style that appeals to an increasing market share.
Finally, the intense competition in the restaurant industry continues to
challenge participants in all segments of this industry.
As our revenues from foreign operations become more significant, our
profitability could be adversely impacted by international business risks and
political or economic instability in foreign markets. While international
operations involve risks that do not exist in domestic operations, such as
adverse fluctuation in foreign exchange rates, monetary exchange controls,
foreign government regulation of business relationships, and uncertainty of
intellectual property protection, we believe that the potential rewards of
expanding the market for our services to selected foreign countries far
outweighs such risks.
Overview
In November 1999, we announced that we had changed our fiscal year end
from December 31 to September 30. The financial statements included with this
10-KSB filing reflect our balance sheet as of September 30, 2000 and 1999 and
December 31, 1998 and the related statements of operations, stockholders' equity
and cash flows for the year and nine months ended September 30, 2000 and 1999,
respectively, and the year ended December 31, 1998. Included below are the
statements of operations for the years ended September 30, 2000 and 1999 and the
statements of cash flows for the years ended September 30, 2000 and 1999.
Amounts for the year ended September 30, 1999 are unaudited. For purposes of
Management's Discussion and Analysis or Plan of Operation, we believe that these
twelve-month statements and comparisons provide a more meaningful analysis.
Therefore, all comparison and analysis included in this Management's Discussion
and Analysis or Plan of Operation will be based upon these twelve-month
statements and related data. Unless noted otherwise, all references to 2000 and
1999 refer to the years ending September 30, 2000 and 1999, respectively.
Consolidated Statements of Operations
For the Year Ended September 30,
-------------------------------
2000 1999
------------ ------------
(Unaudited)
Franchise operations:
Revenue
Continuing fees ......................... $ 18,072,077 $ 10,412,414
Initial franchise fees .................. 5,730,662 3,610,042
Area director and master franchise fees . 1,361,901 2,131,882
Other ................................... 1,064,646 508,240
Interest ................................ 526,761 355,608
------------ ------------
Total revenue ....................... 26,756,047 17,018,186
------------ ------------
Expenses
Sales and royalty commissions ........... (7,836,912) (5,302,456)
General and administrative .............. (12,867,738) (8,657,357)
------------ ------------
Total expenses ...................... (20,704,650) (13,959,813)
------------ ------------
Income from franchise operations ................ 6,051,397 3,058,373
------------ ------------
Company store operations:
Sales ........................................ 14,973,763 8,276,368
Cost of sales ................................ (4,373,303) (2,511,086)
Cost of labor ................................ (3,318,489) (2,222,855)
Other store expenses ......................... (6,088,241) (2,924,237)
------------ ------------
Total expenses ...................... (13,780,033) (7,658,178)
------------ ------------
Income from Company stores operations ........... $ 1,193,730 $ 618,190
============ ============
Other income (expenses):
Sales by stores held for resale .............. $ 194,422 $ 997,583
Loss and expenses related to stores
held for sale ............................... (387,576) (1,260,529)
Loss on sale or closure of Company stores .... (43,596) (127,809)
Sale of Japan master franchise ............... -- 1,168,801
Provision for bad debts ...................... (305,285) (354,827)
Other expenses ............................... (41,820) (68,245)
Depreciation and amortization ................ (1,994,887) (1,280,836)
Impairment of long lived assets .............. (579,246) --
Privatization and acquisition related costs .. (138,164) (265,472)
Interest expense ............................. (1,898,901) (321,718)
------------ ------------
Total other expenses ................ (5,195,053) (1,513,052)
------------ ------------
Net income before income taxes .................. 2,050,074 2,163,511
Income tax provision ............................ (747,835) (353,135)
------------ ------------
Net income ...................................... 1,302,239 1,810,376
Preferred stock dividends ....................... (186,457) (179,151)
------------ ------------
Net income before cumulative effect of changed
accounting principle ........................... 1,115,782 1,631,225
Cumulative effect of changed accounting principle
(net of taxes) ................................. -- (2,769,592)
------------ ------------
Net income (loss) applicable to common
stockholders ................................... $ 1,115,782 $ (1,138,367)
============ ============
Consolidated Statements of Cash Flows
For the Year Ended September 30,
------------------------------
2000 1999
------------ -----------
(Unaudited)
Cash flows from operating activities
Net income (loss) before preferred stock ....... $ 1,302,239 $ (959,216)
dividends
Adjustments to reconcile net income (loss) to
net cash provided by operating activities -
Depreciation and amortization ............... 1,919,360 1,179,690
Impairment of long lived assets ............. 579,246 --
Cumulative effect of changed accounting
principle .................................. -- 4,388,208
Provision for losses on accounts and notes
receivable ................................. 305,285 354,827
Loss on disposal of Company stores .......... 43,596 158,308
Deferred income taxes ....................... (795,877) (3,395,416)
Amortization of deferred financing costs .... 75,527 101,146
Amortization of deferred area director fee
revenue .................................... (404,934) --
Area director expenses recognized ........... 40,493 --
Promissory notes accepted for master
franchise and area director fees ........... (415,924) (1,211,237)
Other ....................................... 9,375 17,972
Changes in assets and liabilities -
Accounts receivable ..................... (1,279,762) (497,682)
Other assets ............................ (82,339) 108,968
Accounts payable ........................ 1,395,280 95,453
Accrued liabilities ..................... 951,321 384,684
Deferred franchise costs ................ (404,502) (536,385)
Deferred initial franchise fees and
other fees ............................. 3,085,559 5,174,771
Income taxes payable .................... (480,912) 851,469
------------ -----------
3,184,645 5,581,278
------------ -----------
Net cash provided by operating activities 5,843,031 6,215,560
------------ -----------
Cash flows from investing activities
Acquisition of Company owned stores ............ (5,832,376) (286,355)
Purchase of property and equipment ............. (6,073,744) (2,139,866)
Principle payments received on notes receivable 453,931 1,355,282
Investment in turnkey stores ................... -- (7,558)
Short-term investments ......................... (1,060,459) (3,060,688)
Acceptance of other notes receivable ........... (1,159,761) (362,578)
Investment by minority interest owners ......... -- 151,601
Purchase of minority interest owners ........... -- (150,000)
Intangible and deferred assets ................. (125,958) (1,262,185)
Proceeds from sale of assets and stores ........ 137,361 213,000
Deposits ....................................... 52,174 (42,805)
Area director marketing territory repurchases .. (2,497,945) (863,984)
Other investments .............................. -- (15,000)
------------ -----------
Net cash used by investing activities .... (16,106,777) (6,471,136)
------------ -----------
Cash flows from financing activities
Principal payments on long-term obligations .... (4,142,344) (1,866,919)
Proceeds from issuance of notes payable ........ 17,548,000 2,242,187
Financing costs ................................ (646,511) --
Redemption of Class B Preferred Stock .......... -- (500,000)
Proceeds from issuance of Common Stock and ..... 302,380 128,479
Preferred Stock
Proceeds from sale of Class D and Class E
Preferred Stock ............................... 478,611 --
Repurchase of Class D Preferred Stock .......... (3,000) --
Common Stock repurchased ....................... (1,219,785) --
Preferred dividends paid ....................... (186,457) (179,452)
------------ -----------
Net cash provided by (used by) financing
activities .................................... 12,130,894 (175,705)
------------ -----------
Net increase (decrease) in cash and cash
equivalents ...................................... 1,867,148 (431,281)
Cash and cash equivalents - beginning of year ..... 626,828 1,058,109
------------ -----------
Cash and cash equivalents - end of year ........... $ 2,493,976 $ 626,828
============ ===========
In 2000 and 1999, before the cumulative effect of accounting changes, we
were profitable for the year. We ended the year with 972 domestic and
international Restaurants open, another 669 domestic Restaurants sold and
scheduled to open in the future, 35 Company owned Restaurants, 58 Area
Directors, and 8 international master franchisees. In 2000, we earned $1,302,239
compared to $1,810,376 in 1999 (amounts are before preferred stock dividends).
The following table reflects our revenue growth by source and Restaurants for
the past two years:
For the year ended
September 30,
----------------------------
2000 1999
--------- ---------
Revenue (000's)
Continuing fees ........................... $ 18,072 $ 10,412
Initial franchise fees .................... 5,731 3,610
Area director and master .................. 1,362 2,132
franchise fees
Other ..................................... 1,591 864
--------- ---------
Franchise revenue ......................... 26,756 17,018
Sales by Company owned stores ............. 14,974 8,276
Sales by stores held for resale ........... 194 998
--------- ---------
Total revenue ............................. $ 41,924 $ 26,292
========= =========
Percent increase .......................... 59%
=========
Earnings before interest expense,
income taxes, depreciation and
amortization, preferred stock
dividends, impairment of
long-lived assets and cumulative
effect of a change in accounting
principle (EBITDA) ....................... $ 6,523 $ 3,766
========= =========
Restaurants -- Domestic and
International
Restaurants open, beginning ............... 634 438
New Restaurants opened .................... 374 258
Restaurants closed, Bain's ................ (4) --
Restaurants sold, Bain's .................. -- (31)
Restaurants closed ........................ (31) (28)
Restaurants closed, scheduled to .......... (7) (4)
reopen
Restaurants reopened ...................... 6 1
Restaurant open, end ...................... 972 634
Franchises sold, domestic ................. 490 525
Franchises sold, international ............ 63 52
--------- ---------
Total ..................................... 553 577
========= =========
Initial franchise fees collected .......... $ 8,462 $ 6,986
(000's)
Systemwide sales, domestic ................ $ 273 $ 152
(millions)
Average unit volume, domestic (1) ......... $ 390,000 $ 369,000
Same store sales (2) (3) Up 7.9%
(1) Average unit volumes of $390,000 and $369,000 are for the nine months ended
September 30, 2000 and 1999, respectively. Average unit volumes exclude
Restaurants located in convenience stores and gas stations and include only
Restaurants open at least one year under the same ownership.
(2) Same store sales are for the year ended September 30, 2000 compared to the
comparable period in 1999 and is based on 350 stores open all of 2000 and 1999.
Stores that transferred ownership during this period, or were in substantial
default of the franchise agreement at September 30, 2000, are excluded. (3)
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
Restaurants are included from more start up markets.
Results of Operations
Comparison of Years Ended September 30, 2000 and 1999
Franchise revenue increased 57% in 2000 to $26,756,047 from $17,018,186 in
1999. Total revenue increased 59% in 2000 to $41,924,232 from $26,292,137 in
1999. The revenue increase resulted primarily from continuing fees and Company
store sales.
Continuing fees increased 74% in 2000 to $18,072,077 from $10,412,414 in
1999. Continuing fees are comprised of royalties and licensing fees.
Royalty fees increased 82% in 2000 to $15,271,779 from $8,386,050 in 1999.
Royalty fees are a percentage of each Owner'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 September 30, 2000, there were 937 franchises
open (including Bain's) compared to 607 franchises open at September 30, 1999.
The royalty rate was 5% for agreements entered into prior to February 11, 1995,
6% for all franchise agreements entered into from February 11, 1995 through
March 31, 1998 and 7% for all agreements entered into since March 31, 1998. The
royalty for Quizno's Express units is 8%. The royalty paid to us by master
franchisees on international units is approximately 2.1%. We have no immediate
plans to further increase the royalty rate.
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 are
expected to increase as systemwide sales and the awareness and value of the
Quizno's brand increases. For 2000, licensing fees were $2,800,298 and
$2,026,364 in 1999. There was no licensing fee revenue prior to January 1, 1998.
Initial franchise fees increased 59% in 2000 to $5,730,662 from $3,610,042
in 1999. Initial franchise fees are one-time fees paid by Owners 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 franchisees is recognized
when received. In 2000, we opened 374 franchises, including 52 international
Restaurants, as compared to 258, including 46 international Restaurants, opened
in 1999. Our initial franchise fee has been $20,000 since 1994. Owners may
purchase a second franchise for $15,000 and third and subsequent franchise for
$10,000. The initial franchise fee for a Quizno's Express franchise is $10,000
for the first, $7,500 for the second, and $5,000 for the third and additional
franchises purchased by the same Owner. Our share of initial franchise fees for
international Restaurants is generally 30% of the franchise fee and will vary
depending on the country and the currency exchange rate.
Initial franchise fees collected by us for domestic franchise sales are
recorded as deferred initial franchise fees until the related franchise opens.
Deferred initial franchise fees at September 30, 2000 were $10,664,506 and
represent 669 domestic franchises sold but not yet in operation, compared to
$7,910,648 at September 30, 1999 representing 505 domestic franchises sold but
not open. Direct costs related to the sale, primarily sales commissions 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 September 30, 2000 were
$1,990,275. Approximately 50% of all domestic initial franchise fees received by
us are paid to Area Directors for sales and opening commissions.
Area director and master franchise fees were $1,361,901 in 2000 and
$2,131,882 in 1999. For analysis purposes, these amounts are not comparable.
Effective January 1, 1999, we changed our accounting policy related to the
recognition of revenue from area director marketing agreement fees to one that
recognizes these fees as revenue on a straight-line basis over the term of the
agreement, which is ten years. This change reflected a decision made by the U.S.
Securities and Exchange Commission in December 1999 relative to the recognition
of area director fee revenue. Commissions paid to the area director upon the
inception of the agreement are classified as a prepaid and recognized as an
expense over the same ten year term. The effect of the change in the nine-month
period ending September 30, 1999, was the deferral of $4,262,701 of net revenue
previously recognized in prior years. This was reported as a cumulative effect
of change in accounting principle for $2,685,502 (net of $1,577,199 in income
tax benefits) and is included in the net loss for 1999.
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 were $672,333 in 2000 and $1,200,813 in 1999.
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 2000, we sold 6 area directorships. In 1999, we sold
14 new area directorships including 5 existing Area Directors who purchased
additional territory. At September 30, 2000, we had a total of 58 Area Directors
who owned areas encompassing approximately 60% of the population of the United
States.
International master franchise fees are one-time fees paid to us for the
right to sell franchises in a designated, exclusive, international market. The
master franchisee assumes all of our obligations and duties under the agreement.
We recognize these fees when received. International master franchise fees
earned were $689,567 in 2000 and $931,069 in 1999. The 2000 fees received were
for the Switzerland, Netherlands, Luxembourg, and Belgium, $300,000, Iceland,
$80,000, Mexico, Venezuela, Peru, Dominican Republic and other Caribbean
islands, $100,000, and Taiwan, $219,567. A total of $40,000 of these fees was
deferred until our training obligations are completed. In 2000, we recognized
$30,000 of previously deferred fees. The 1999 fees received were for the United
Kingdom, $510,000, Japan, $125,000, Australia, $221,069, and the rights to part
of Central America, $115,000. A total of $40,000 of the fees was deferred until
our training obligations were completed.
We offer domestic Area Director applicants financing for up to 50% of 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. Of the ten domestic and international areas sold in 2000,
4 used this financing for $415,924, representing 31% of the area director fees
recognized in 2000. In 1999, a total of $1,450,309 was financed, representing
68% of area revenue.
The area director and master franchise agreements set increasing minimum
performance levels that require the area director or master franchisee to sell
and open a specified number of franchised restaurants in each year during the
term of the area agreement. Our experience with the program to date indicates
that while some area directors and master franchisees will exceed their
development schedules, others will fail to meet their schedules. In our
planning, we have allowed for a certain percentage of area directors and master
franchisees that will not meet their development schedule. Delays in the sale
and opening of restaurants can occur for many reasons. The most common are
delays in the selection or acquisition of an appropriate location for the
restaurant, delays in negotiating the terms of the lease and delays in
franchisee financing. We may terminate an area or master agreement if the area
director or master franchisee fails to meet the development schedule, and we
then have the right to resell the territory to a new area director or master
franchisee or we can operate it.
Other revenue increased by 109% in 2000 to $1,064,646 from $508,240 in
1999. Other revenue is primarily amounts paid by equipment suppliers for design
and construction, franchise transfer fees and bookkeeping fees charged Owners
for whom we provided bookkeeping services. Amounts paid by equipment suppliers
were $566,158 in 2000 compared to $324,139 in 1999. This amount will vary based
on new store openings. Franchise transfer fees increased in 2000 to $248,000
from $86,500 in 1999. Since 1995, our franchise agreement requires all new
Owners to utilize our bookkeeping services, or a firm designated by us, to
provide bookkeeping services, for their first 12 months of operations.
Bookkeeping fees were $121,755 in 2000 compared to $30,888 in 1999. Bookkeeping
fees are paid by the franchisee to the Company and then remitted on to the
bookkeeping service designated by the Company. These fees represent the amounts
retained by the Company to administer the bookkeeping function.
Sales and royalty commissions expense increased 48% to $7,836,912 (37.3%
of royalty and initial franchise fees) in 2000 from $5,302,456 (44.2% of royalty
and initial franchise fees) in 1999. 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 2000 as a percentage of royalty and
initial franchise fee due to the repurchase of certain area directorships.
Our domestic Area Directors receive commissions equal to 48% of the
initial franchise fees and 40% of royalties received by us from franchises sold,
opened, and operating in the Area Director's territory. In exchange for these
payments, the Area Director is required to market and sell franchises, provide
location selection assistance, provide opening assistance to new owners, and
perform monthly quality control reviews at each franchise open in the Area
Director's territory.
The Area Director is entitled to receive commissions during the term of
the area director marketing agreement and in some cases, upon expiration of the
area director agreement, the commission paid is reduced to 1% of sales for 5
years.
Our foreign master franchisees retain 70% of initial fees, area director
fees and royalties paid from franchises sold, open and operating in the master
franchisee's territory, except the Canadian master franchisee who retained 100%
of initial franchise fees in 1998 only, and the United Kingdom master franchisee
who will retain 85% of the initial franchise fees through December 31, 2001.
Under the master franchise agreement, we have no obligation to provide services
that will result in any incremental cost to us, other than an initial training
trip to the country by an employee of ours.
General and administrative expenses increased 49% to $12,867,738 in 2000
from $8,657,357 in 1999. As a percent of franchise revenue, general and
administrative expenses have decreased slightly from 50.9% in 1999 to 48.1% in
2000. General and administrative expenses include all of our operating costs.
The increase is primarily due to the addition of employees to service the
rapidly growing network of our Owners and Area Directors. General administrative
expenses include all of our operating costs. Although general and administrative
expenses will likely continue to increase as we grow, we expect the rate of
increase to continue to decline.
We believe our general and administrative expenses are adequate and are
not excessive in relation to our size and growth.
Company owned stores earned $1,193,730 on sales of $14,973,763 in 2000
compared to $618,190 on sales of $8,276,368 in 1999. During 2000, we operated
stores for a total of 384 store operating months. In 1999, we had a total of 257
store operating months. Sales per store month increased 21.6% in 2000 to $39,045
from $32,166 in 1999 primarily due to the acquisition of Restaurants and other
operations at Denver International Airport in November 1999.
At September 30, 2000, we had 35 (25 at September 30, 1999) Company owned
stores, including the Cowboy Bar at Denver International Airport. In 2000, we
purchased seven Restaurants, including the Cowboy Bar, and opened 3 new
Restaurants. In 1999, we purchased from an Owner one Restaurant.
Stores held for resale lost $193,154 on sales of $194,422 in 2000 compared
to a loss of $262,946 on sales of $997,583 in 1999. At September 30, 2000 and
1999, we operated one and two stores held for resale, respectively. In 2000, we
closed one store and sold one store held for resale and purchased one store from
an Owner.
Japan master franchise income represents payments received in 1999 of
$1,423,348 for the master franchise rights of Japan. In the second quarter of
1999, we also received $22,000 for our share of an area director marketing
agreement sold in Japan. In 1999, we incurred direct costs related to the
revenue totaling $276,547 resulting in net revenue of $1,168,801. The payments
were recognized as revenue when received. Although we plan to continue to enter
into master franchise agreements internationally, we do not expect such
transactions to be of the magnitude of the Japanese transaction.
Provision for bad debts was $305,285 in 2000 compared to $354,827 in 1999.
As of September 30, 2000, we had an allowance for doubtful accounts of $272,293
that we believe is adequate for future losses.
Other expenses were $41,820 in 2000 compared to $68,245 in 1999. The
decrease in the 2000 expense was primarily due to the loss on the sale of assets
in 1999.
Depreciation and amortization was $1,994,887 in 2000 and $1,280,836 in
1999. The increase is primarily due to the acquisition and development of new
Company owned restaurants, the acquisition of area director territories and the
purchase of a corporate jet in fiscal 2000.
Impairment of long-lived assets was $579,246 in 2000. At September 30,
2000, we determined that an impairment related to our carrying value of the
assets purchased in November 1997 from Bain's was required and expensed
$579,246.
Privatization costs were $265,472 in 1999 and represents our costs
associated with a proposed going private transaction. As discussed in our 1998
Form 10-KSB, on December 29, 1998, we received a proposal from our majority
shareholders to merge the company into a new entity owned by them, pursuant to
which all of our shareholders other than themselves, would receive cash for
their company shares. On August 10, 1999, we announced that the proposal had
been withdrawn. An agreement regarding all the terms of the transaction could
not be reached with the Special Committee of the Board of Directors evaluating
the offer. In 2000, we incurred $138,164 of acquisition related expenses.
Interest expense was $1,898,901 in 2000 and $321,718 in 1999. The increase
is primarily attributable to the increase in outstanding debt. On October 5,
1999, we closed on a loan in the principal amount of $14,000,000 from AMRESCO
Commercial Finance, Inc. The loan bears interest at 10.9% (10.1% through January
31, 2000). The proceeds of the loan were used to pay-off existing debt of
$3,320,956, the majority of which accrued interest at rates of 10% to 12.75%.
Also, 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.
Income tax expense was $747,835 in 2000 and $353,135 in 1999. 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%.
Cumulative effect of a change in accounting principle was $2,769,592. This
amount was composed of a $2,685,502 (net of $1,577,199 in income tax benefits)
change reflected by a decision made by the U.S. Securities and Exchange
Commission in December 1999 relative to the recognition of area director fees.
As previously discussed, 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.
Also, during April 1998, Statement of Position 98-5, "Reporting in the
Costs of Start-Up Activities" was issued. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 was
required to be adopted in the second quarter of 1999. Upon adoption, we were
required to write-off $84,090 (net of $41,417 in income tax benefits) in
preopening related costs that were deferred on the balance sheet as of December
31, 1998.
Liquidity and Capital Resources
Net cash provided by operating activities was $5,843,031 in 2000 compared
to $6,215,560 in 1999, a decrease of $372,529. The fiscal 2000 amount of
$5,843,031 was primarily related to net income before depreciation and
amortization of $3,297,126, an increase in deferred initial franchise fees of
$3,085,559 and an increase in accounts payable of $1,395,280, partially offset
by an increase in accounts receivable of $1,279,762 and an increase in the
deferred tax asset of $795,877.
Net cash used in investing activities was $16,106,777 in 2000 compared to
cash used in investing activities of $6,471,136 in 1999. The fiscal 2000 amount
of $16,106,777 was primarily related to the acquisition and development of
Company owned Restaurants for $11,906,120 and the repurchase of area director
territories for $2,497,945.
Net cash provided by financing activities was $12,130,894 in 2000 compared
to cash provided by financing activities of $175,705 in 1999. The fiscal 2000
amount of $12,130,894 was primarily related to $17,548,000 of proceeds from the
issuance of notes payable, including the AMRESCO financing, partially offset by
payments on long-term obligations of $4,142,344 and the repurchase of Common
Stock for $1,219,785.
At September 30, 2000, we had $194,579 invested in one store held for
resale. We expect to sell the store held for resale by December 31, 2000.
In the second quarter of 1998, we tested a program under which our Area
Directors had the right to elect to have all future franchisee leases in the
Area Director's territory signed by The Quizno's Realty Company ("QRC"), a
wholly owned subsidiary of ours. As a condition of the lease, the landlord
agrees not to look beyond QRC for payments. These locations would then be
subleased by QRC to the Owner, whose personal liability is limited to one year.
The Owner pays QRC an indemnification fee of $165 per month, pays a one-time
lease-processing fee to QRC of $2,200, and pays a security deposit to QRC equal
to two months rent. Effective March 1, 1998, we transferred cash and other
assets having a book value of approximately $500,000 to QRC in exchange for
stock and a promissory note. As of September 30, 2000, 12 leases had been
executed under this program and one other guaranteed lease. The franchisee has
defaulted on the rents due on two of these locations, for which we do not have
replacement franchisees. We expect to negotiate buyouts of these leases between
the landlords, the franchisees and, possibly, us. Our share of any such buyout
is expected to be immaterial. A third location has closed due to a fire and the
lease has been cancelled and the location will not re-open.
On December 31, 1996, we completed a debt financing for $2 million of
which $500,000 was converted to preferred stock in December 1997. On January 6,
1999, we paid off the loan and redeemed the preferred stock at a cost of
$1,854,000. As required by the loan agreement, we issued a warrant to the lender
to purchase 372,847 shares of our common stock at an exercise price of $3.10.
On October 1, 1999, our Board of Directors authorized the purchase of up
to 200,000 shares of our common stock. Subject to applicable security laws,
repurchases may be made at such times, and in such amounts, as we deem
appropriate. As of September 30, 2000, we had repurchased 144,005 shares at an
average price of $8.38.
On October 5, 1999, we closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. "AMRESCO". The loan bears
interest at 10.9% (10.1% through January 31, 2000), and is repayable in monthly
installments of $199,201 for nine years and five months. The loan is secured by
the assets of our company owned stores and other assets of ours existing at
September 30, 1999. The loan is part of a securitized pool and includes a
provision which could require us to pay up to another $1,555,555 depending on
the amount of defaults, if any, in the loan pool. The proceeds of the loan were
used to pay-off existing debt of $3,320,956, pay costs and fees associated with
the loan of $560,000, and prepay interest and one payment of $304,624. The
balance of $9,814,420 is available to use, with certain restrictions, for
general corporate purposes other than working capital, dividends, or to
repurchase the majority shareholder's stock. Certain notes payable held by us at
September 30, 1999 were repaid with the AMRESCO note proceeds. As of September
30, 2000, we had $1,528,212 available to use for general corporate purposes.
In December of 2000, AMRESCO notified us that we may be in default of the
fixed cost coverage ratio requirement in our loan agreement with AMRESCO as the
result of our loan with Levine Leichtman Capital Partners II, L.P (LLCP). The
LLCP loan was made to us in December, 2000, and is discussed below. We have
calculated the fixed cost coverage ratio in accordance with the directions in
our loan agreement with AMRESCO and have demonstrated that we are not in
violation of the requirement. We have provided our calculations to AMRESCO, who
has not agreed with our calculations, nor given us a notice of default. We
expect to resolve the issue with AMRESCO.
On October 11, 1999, our Board of Directors approved the purchase of a
corporate airplane allowing for more efficient travel by management between
areas of franchise operations. For tax purposes, the airplane qualifies for
accelerated depreciation, resulting in the deferral of income tax payments. The
$3,350,000 purchase was completed on October 13, 1999.
On November 16, 1999, we announced that our subsidiary, QUIZ-DIA, Inc.
purchased the assets of ASI-DIA, Inc. ("ASI") for a total of $4.875 million in
cash.
Assets purchased include two Quizno's restaurants and three bars,
including the WWW.COWBOY bar, and various other assets located on Concourses A
and B at the Denver International Airport. We intend to continue operating the
restaurants as Quizno's Classic Subs and the bars as operated by ASI.
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. The loan is secured
by a first security interest in the assets of QUIZ-DIA, Inc.
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 8.13% at
December 31, 1999). The maximum amount of the line of credit loan is $3,350,000,
which maximum is reduced monthly based on a twelve-year amortization. The line
of credit loan is secured by a first security interest in our jet aircraft. In
January 2000, the line of credit loan was paid down to zero.
In March and April 2000, we accepted Subscription Agreements for the
issuance of 59,480 shares of Class E Cumulative Convertible Preferred Stock
("Class E Preferred Stock"). We had received cash proceeds of $512,718. There
are currently 150,000 authorized shares of Class E Preferred Stock. Each share
of Class E Preferred Stock is convertible into one share of our common stock, at
any time. Shares of the Class E Preferred Stock may be redeemed by us at any
time on or after April 1, 2003, at a redemption price of $8.62 per share. Until
redeemed or converted to common stock, each Class E Preferred stockholder will
receive a cumulative monthly dividend of $0.0862 per share. The Class E
Preferred Stock is junior in liquidation preference to our Class A Preferred
Stock and our Class C Preferred Stock, but senior to our Class D Preferred Stock
and common stock.
In July 2000, the National Marketing Fund Trust and the Regional Marketing
Fund Trust, which collects and administers the national and regional advertising
fees received from franchisees, entered into a $2,000,000 revolving line of
credit with Wells Fargo Bank West, N.A. We have guaranteed this line of credit
for the National Marketing Fund Trust. The line of credit bears interest at 9.5%
and matures on March 31, 2001. As of September 30, 2000, $1.9 million had been
drawn on the line of credit. In addition, we loaned the National Marketing Fund
Trust a total of $1,210,000 in August of 2000, $1,030,000 of which was
outstanding at September 30, 2000. The loan is expected to be fully repaid by
March 2001.
In 2000, we repurchased or reacquired fourteen area director territories
from 9 area directors for $3,472,627, inclusive of legal and other related
costs. We issued notes payable for $714,622 and offset notes and interest
receivable from three area directors in the amount of $315,850. The balance of
the purchase price was paid in cash.
On November 13, 2000 we commenced a self 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 offer
expired no December 11, 2000, and we purchased 661,115 shares of our common
stock for $5,288,920. In addition we purchased preferred stock, warrants and
options convertible into 1,056,906 shares of common stock for $4,205,706. Costs
related to the tender offer, including financing related costs, are
approximately $2,500,000.
The tender offer was financed with a loan for $13,862,260 from Levine
Leichtman Capital Partners II, L.P. (LLCP). The proceeds of the loan were used
to prepay interest for one year in the amount of $1,862,260 and to repurchase
shares and pay costs associated with the tender offer.
The promissory note bears interest at 13.25%, interest only payable
monthly, with the first twelve months prepaid, and is due in full in October,
2005. LLCP received warrants for 14% of the equity ownership of the Company. The
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.
As we have in the past, we will continue to consider acquisitions of other
chains, the purchase of Quizno's Restaurants from our Owners, and the purchase
of Quizno's area directorships from our Area Directors. From time to time, we
will make offers and enter into letters of intent for such transactions subject
to the completion of due diligence. In all such cases, we will identify the
sources of cash required to complete such transactions prior to entering into a
binding agreement.
We have never paid cash dividends on our common stock and we do not
anticipate a change in this policy in the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS
Attached hereto and filed as a part of this Form 10-KSB are the
consolidated financial statements listed in the Index to the Consolidated
Financial Statements at page F-1.
(..continued)
THE QUIZNO'S CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements and
Independent Auditors' Report
Year Ended September 30, 2000, Nine Months Ended
September 30, 1999 and the Year Ended December 31, 1998
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Table of Contents
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Quizno's Corporation and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of The Quizno's
Corporation and Subsidiaries as of September 30, 2000 and 1999 and December 31,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 2000, the nine months
ended September 30, 1999 and the year ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Quizno's
Corporation and Subsidiaries as of September 30, 2000 and 1999 and December 31,
1998 and the results of its operations and its cash flows for the year ended
September 30, 2000, the nine months ended September 30, 1999 and the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
November 20, 2000
Denver, Colorado
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, September 30, December 31,
2000 1999 1998
------------ ------------ ------------
Assets
Current assets
Cash and cash equivalents ................................................... $ 2,493,976 $ 626,828 $ 702,258
Short-term investments ...................................................... 5,324,336 4,263,877 1,541,423
Accounts receivable, net of allowance for doubtful accounts of
$222,293 (2000) and $43,793 (1999) and $20,000 (1998) ...................... 2,066,247 1,047,438 857,280
Current portion of notes receivable ......................................... 1,545,844 519,994 1,212,522
Deferred tax asset .......................................................... 221,182 128,718 81,260
Other current assets ........................................................ 481,854 373,578 266,100
Assets held for resale ...................................................... 194,579 192,923 638,395
------------ ------------ ------------
Total current assets .................................................... 12,328,018 7,153,356 5,299,238
------------ ------------ ------------
Property and equipment, net ..................................................... 11,669,240 4,804,051 3,535,222
------------ ------------ ------------
Other assets
Investment in area directorships, net of accumulated amortization
of $203,062 in 2000 and $26,232 in 1999 ..................................... 4,236,151 889,387 51,635
Intangible assets, net ...................................................... 4,600,528 1,662,265 1,553,522
Other deferred assets ....................................................... 2,782,498 1,726,984 1,119,371
Deferred tax asset .......................................................... 4,210,626 3,507,213 734,808
Deposits and other assets ................................................... 130,837 361,189 119,883
Notes receivables, net ...................................................... 1,301,435 1,670,329 1,375,872
------------ ------------ ------------
Total other assets ...................................................... 17,262,075 9,817,367 4,955,091
------------ ------------ ------------
Total assets .................................................................... $ 41,259,333 $ 21,774,774 $ 13,789,551
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ............................................................ $ 2,614,437 $ 1,219,157 $ 1,317,085
Accrued liabilities ......................................................... 1,495,797 544,476 532,324
Current portion of long-term obligations .................................... 1,550,501 337,642 370,404
Current portion of subordinated debt ........................................ -- 218,546 244,084
Income taxes payable ........................................................ 370,557 851,469 200,000
------------ ------------ ------------
Total current liabilities ............................................... 6,031,292 3,171,290 2,663,897
------------ ------------ ------------
Long-term obligations ........................................................... 16,037,238 1,268,504 964,984
Subordinated debt ............................................................... -- 1,498,791 1,130,916
Deferred revenue ................................................................ 16,402,957 13,722,331 4,781,946
------------ ------------ ------------
Total liabilities ....................................................... 38,471,487 19,660,916 9,541,743
------------ ------------ ------------
Commitments and contingencies
Minority interest in Subsidiary ................................................. -- -- 151,601
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 shares authorized; Series A
issued and outstanding 146,000 (2000, 1999 and 1998)
($876,000 liquidation preference) .......................................... 146 146 146
Series B issued and outstanding 0 (2000), 0 (1999) and 100,000
(1998) ($500,000 liquidation preference) ................................... -- -- 100
Series C issued and outstanding 167,000 (2000, 1999, and 1998)
($835,000 liquidation preference) .......................................... 167 167 167
Series D issued and outstanding 3,000 (2000) and 0 (1999 and 1998)
($9,000 liquidation preference) ............................................ 3 -- --
Series E issued and outstanding 59,480 (2000) and 0 (1999 and 1998)
($512,718 liquidation preference) ......................................... 59 -- --
Common stock, $.001 par value; 9,000,000 shares authorized; issued
and outstanding, 3,007,921 (2000), 3,074,177 (1999)
and 3,054,459 (1998) ....................................................... 3,008 3,074 3,054
Capital in excess of par value .............................................. 3,857,702 4,485,949 5,065,247
Accumulated deficit ......................................................... (1,073,239) (2,375,478) (972,507)
------------ ------------ ------------
Total stockholders' equity .................................... 2,787,846 2,113,858 4,096,207
------------ ------------ ------------
Total liabilities and stockholders' equity ...................................... $ 41,259,333 $ 21,774,774 $ 13,789,551
============ ============ ============
See notes to consolidated financial statements.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Nine For the Year
For the Year Ended Months Ended Ended
September 30, September 30, December 31,
2000 1999 1998
------------ ------------ ------------
Franchise operations
Revenue
Continuing fees ................................................... $ 18,072,077 $ 8,682,783 $ 5,836,822
Initial franchise fees ............................................ 5,730,662 2,722,959 2,883,650
Area director and master franchise fees ........................... 1,361,901 776,523 3,022,276
Other ............................................................. 1,064,646 370,374 604,172
Interest .......................................................... 526,761 238,790 259,193
------------ ------------ ------------
Total revenue ................................................... 26,756,047 12,791,429 12,606,113
------------ ------------ ------------
Expenses
Sales and royalty commissions ..................................... (7,836,912) (3,931,634) (4,457,779)
General and administrative ........................................ (12,867,738) (6,509,444) (6,201,857)
------------ ------------ ------------
Total expenses .................................................. (20,704,650) (10,441,078) (10,659,636)
------------ ------------ ------------
Income from franchise operations ....................................... 6,051,397 2,350,351 1,946,477
------------ ------------ ------------
Company store operations
Sales ............................................................... 14,973,763 6,420,563 6,848,737
------------ ------------ ------------
Cost of sales ....................................................... (4,373,303) (1,969,433) (2,042,092)
Cost of labor ....................................................... (3,318,489) (1,747,029) (1,683,225)
Other store expenses ................................................ (6,088,241) (2,169,465) (2,562,540)
------------ ------------ ------------
Total expenses .................................................. (13,780,033) (5,885,927) (6,287,857)
------------ ------------ ------------
Income from Company stores operations .................................. 1,193,730 534,636 560,880
Other income (expenses)
Sales by stores held for resale ..................................... 194,422 566,841 1,281,904
Loss and expenses related to stores held for sale ................... (387,576) (777,594) (1,541,957)
Loss on sale or closure of Company stores ........................... (43,596) (80,304) (47,505)
Sale of Japan master franchise ...................................... -- 1,168,801 --
Provision for bad debts ............................................. (305,285) (220,536) (285,308)
Other expenses ...................................................... (41,820) (26,287) (47,838)
Depreciation and amortization ....................................... (1,994,887) (921,300) (781,977)
Impairment of long lived assets ..................................... (579,246) -- --
Privatization and acquisition related costs ......................... (138,164) (265,472) --
Interest expense .................................................... (1,898,901) (240,827) (340,614)
------------ ------------ ------------
Total other expenses ............................................ (5,195,053) (796,678) (1,763,295)
------------ ------------ ------------
Net income before income taxes ......................................... 2,050,074 2,088,309 744,062
Income tax (provision) benefit ......................................... (747,835) (721,688) 368,553
------------ ------------ ------------
Net income before preferred dividends and cumulative effect of
changes in accounting principle ........................................ 1,302,239 1,366,621 1,112,615
Preferred stock dividends .............................................. (186,457) (124,230) (220,890)
------------ ------------ ------------
Net income before cumulative effect of changes in accounting
principle .............................................................. 1,115,782 1,242,391 891,725
Cumulative effect of changes in accounting principle (net of
taxes) ................................................................. -- (2,769,592) --
------------ ------------ ------------
Net income (loss) applicable to common stockholders .................... $ 1,115,782 $ (1,527,201) $ 891,725
============ ============ ============
Net income per share basic
Net income per share before cumulative effect of changes in
accounting principle ............................................... $ .37 $ .40 $ .30
Cumulative effect of changes in accounting principle ................... -- (.90) --
------------ ------------ ------------
Basic net income (loss) per share of common stock ...................... $ .37 $ (.50) $ .30
============ ============ ============
Net income per share - diluted
Net income per share before cumulative effect of changes in
accounting principle ............................................... $ .33 $ .35 $ .26
Cumulative effect of changes in accounting principle ................... -- (.90) --
------------ ------------ ------------
Diluted net income (loss) per share of common stock .................... $ .33 $ (.55) $ .26
============ ============ ============
Weighted average common shares outstanding
Weighted average common shares outstanding -- basic .................... 3,019,849 3,060,878 3,014,042
============ ============ ============
Weighted average common shares outstanding -- diluted .................. 3,728,761 3,816,549 3,445,972
============ ============ ============
See notes to financial statements
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Convertible
Preferred Stock Common Stock Additional
------------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
-------- ------ ---------- ------- ----------- ----------- -----------
Balance, December 31, 1997 ....... 413,000 $ 413 2,923,294 $ 2,923 $ 4,663,744 $(2,085,122) $ 2,581,958
Issuance of common stock for
exercise of options and
pursuant to employee benefit ... -- -- 51,165 51 222,473 -- 222,524
plan
Issuance of common stock for
exercise of options by
underwriter .................... -- -- 80,000 80 399,920 -- 400,000
Preferred stock dividends ........ -- -- -- -- (220,890) -- (220,890)
Net income ....................... -- -- -- -- -- 1,112,615 1,112,615
-------- ----- ---------- ------- ----------- ----------- -----------
Balance, December 31, 1998 ....... 413,000 413 3,054,459 3,054 5,065,247 (972,507) 4,096,207
Issuance of common stock for
exercise of options and
pursuant to employee benefit ... -- -- 28,809 29 75,438 -- 75,467
plan
Tax benefit from exercise of
stock options .................. -- -- -- -- 14,840 -- 14,840
Shares canceled .................. -- -- (9,091) (9) (45,446) -- (45,455)
Redemption of Series B
Preferred Stock ................ (100,000) (100) -- -- (499,900) -- (500,000)
Preferred stock dividends ........ -- -- -- -- (124,230) -- (124,230)
Net (loss) ....................... -- -- -- -- -- (1,402,971) (1,402,971)
-------- ----- ---------- ------- ----------- ----------- -----------
Balance, September 30, 1999 ...... 313,000 313 3,074,177 3,074 4,485,949 (2,375,478) 2,113,858
Issuance of common stock for
exercise of options and
pursuant to employee benefit
plan ........................... -- -- 77,749 78 284,413 -- 284,491
Issuance of Series D
Convertible Preferred Stock,
net ............................ 4,000 4 -- -- 11,396 -- 11,400
Repurchase of Series D
Convertible Preferred Stock ...... (1,000) (1) -- -- (2,999) -- (3,000)
Tax benefit from exercise of
stock options .................. -- -- -- -- 17,889 -- 17,889
Common Stock repurchased ......... -- -- (144,005) (144) (1,219,641) -- (1,219,785)
Issuance of Series E
Convertible Preferred Stock,
net ............................ 59,480 59 -- -- 467,152 -- 467,211
Preferred stock dividends ........ -- -- -- -- (186,457) -- (186,457)
Net income ....................... -- -- -- -- -- 1,302,239 1,302,239
-------- ----- ---------- ------- ----------- ----------- -----------
Balance, September 30, 2000 ...... 375,480 $ 375 3,007,921 $ 3,008 $ 3,857,702 $(1,073,239) $ 2,787,846
======== ===== ========== ======= =========== =========== ===========
See notes to financial statements.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year For the Nine For the
Ended Months Ended Year Ended
September 30, September 30, December 31,
2000 1999 1998
------------ ----------- -----------
Cash flows from operating activities:
Net income (loss) ........................................................ $ 1,302,239 $(1,402,971) $ 1,112,615
Adjustments to reconcile net income (loss) to net cash provided by
operating activities -
Depreciation and amortization .......................................... 1,919,360 844,220 757,911
Impairment of long lived assets ........................................ 579,246 -- --
Cumulative effect of a change in accounting principle .................. -- 4,388,208 --
Provision for bad debts ................................................ 305,285 220,536 285,308
Loss on disposal of Company stores ..................................... 43,596 80,304 78,004
Deferred income taxes .................................................. (795,877) (2,819,863) (641,068)
Amortization of deferred financing costs ............................... 75,527 77,080 24,066
Amortization of deferred area director fee revenue ..................... (404,934) -- --
Area director expenses recognized ...................................... 40,493 -- --
Promissory notes accepted for area director fees ....................... (415,924) (487,279) (1,599,977)
Other .................................................................. 9,375 17,972 --
Changes in assets and liabilities -
Accounts receivable .................................................. (1,279,762) (398,076) (369,279)
Other current assets ................................................. (82,339) (77,735) 109,802
Accounts payable ..................................................... 1,395,280 (99,330) 251,711
Accrued liabilities .................................................. 951,321 12,152 42,476
Deferred franchise costs ............................................. (404,502) (659,547) (287,610)
Deferred initial franchise fees and other fees ....................... 3,085,559 4,672,693 2,633,284
Income taxes payable ................................................. (480,912) 651,469 200,000
------------ ----------- -----------
3,184,645 6,422,804 1,484,628
------------ ----------- -----------
Net cash provided by operating activities .......................... 5,843,031 5,019,833 2,597,243
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of Company owned stores ...................................... (5,832,376) (286,355) --
Purchase of property and equipment ....................................... (6,073,744) (1,477,962) (1,780,767)
Principle payments received on notes receivable .......................... 453,931 1,221,099 889,671
Investment in turnkey stores ............................................. -- (7,558) (281,620)
Short-term investments ................................................... (1,060,459) (2,722,454) (1,003,235)
Acceptance of other notes receivable ..................................... (1,159,761) (37,390) (773,307)
Investment by minority interest owners ................................... -- -- 151,601
Purchase of minority interest owners ..................................... -- (150,000) --
Intangible and deferred assets ........................................... (125,958) (736,458) (601,862)
Proceeds from sale of assets and stores .................................. 137,361 -- 213,000
Deposits ................................................................. 52,174 (89,749) (43,589)
Area director marketing territory repurchases ............................ (2,497,945) (863,984) --
Other investments ........................................................ -- (15,000) --
------------ ----------- -----------
Net cash used by investing activities .............................. (16,106,777) (5,165,811) (3,230,108)
------------ ----------- -----------
Cash flows from financing activities:
Principal payments on long-term obligations .............................. (4,142,344) (1,733,697) (505,440)
Proceeds from issuance of notes payable .................................. 17,548,000 2,338,168 877,642
Redemption of Class B Preferred Stock .................................... -- (500,000) --
Financing costs .......................................................... (646,511) -- --
Proceeds from issuance of Common Stock and Preferred Stock ............... 302,380 90,307 622,524
Proceeds from sale of Class D and Class E Preferred Stock ................ 478,611 -- --
Repurchase of Class D Preferred Stock .................................... (3,000) -- --
Common Stock repurchased ................................................. (1,219,785) -- --
Preferred dividends paid ................................................. (186,457) (124,230) (220,890)
------------ ----------- -----------
Net cash provided by financing activities .......................... 12,130,894 70,548 773,836
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents ........................ 1,867,148 (75,430) 140,971
Cash and cash equivalents - beginning of year ............................... 626,828 702,258 561,287
------------ ----------- -----------
Cash and cash equivalents - end of year ..................................... $ 2,493,976 $ 626,828 $ 702,258
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $1,716,772 (2000), $240,827
(1999) and $340,614 (1998). Cash paid during the year for income taxes was
$1,871,899 (2000), $1,198,275 (1999) and $72,515 (1998).
Supplemental disclosure of non-cash investing and financing activities:
During 2000, the Company 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 area director
territories repurchased during the year. Also, the Company issued notes
payable of $714,621 for partial payment of five area director territories
repurchased during the year and the Company purchased assets of a store in
exchange for a note payable of $143,978. Finally, a Company store held for
resale was closed and the net assets of $35,633 were written-off.
During 1999, the Company sold a store held for resale for $150,000, all of
which was in the form of a promissory note, and recorded a loss on sale of
$11,684. Also, the Company sold the franchising rights and obligations for
all but 14 of its Bain's Deli's franchise agreements to Bain's Deli
Corporation for $850,000, represented by a note receivable, a reduction of
a related payable and other intangibles. In 1999, the Company recorded a
gain of $12,071 related to this sale.
Also, during 1999, the Company reached a settlement with Bain's Deli that
resulted in the return to the Company of the 9,091 shares of Company stock
originally issued as part of the purchase of the Bain's units in 1997 and
the cancellation of our note payable to Bain's Deli in the amount of
$116,118.
During 1998, the Company transferred $220,227 of property and equipment to
assets of stores held for resale or under development.
Additionally in 1998, the Company reduced notes payable, pursuant to the
terms of the Bain's purchase agreements, in the amount of $437,553.
Corresponding reductions in property and equipment ($150,000) and
intangibles ($287,553) were also recorded.
During 2000, 1999 and 1998, the Company acquired assets under capital
leases totaling $0, $124,742 and $231,085, respectively.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
The Quizno's Corporation (the "Company") was incorporated on January 7, 1991, in
the State of Colorado, and is primarily engaged in the business of franchising
Quizno's quick service restaurants throughout the United States, Canada, United
Kingdom, Australia, Japan, Switzerland, Netherlands, Luxembourg, Belgium,
Iceland, Taiwan, Mexico, Venezuela, Peru, Dominican Republic and Central America
featuring submarine sandwiches, salads, soups, and refreshments.
The Company's wholly owned subsidiaries are The Quizno's Operating Company
("QOC") incorporated in 1994 to own and operate Company stores, S & S, Inc.
("S") formerly the Quizno`s Development Company ("QDC") incorporated in 1995 to
develop stores to sell or lease to franchisees, The Quizno's Realty Company
("QRC") incorporated in 1995 to execute leases for store locations, The Quizno`s
Acquisition Company ("QAC") incorporated in 1997 to purchase existing unrelated
quick service restaurants, the Quizno's Licensing Company ("QLC") incorporated
in 1998 to license companies who use the Quizno's logos, Quizno's Kansas LLC
("QKL") organized in 1998 to purchase the assets of Stoico Restaurant Group and
QUIZ-DIA, Inc. ("DIA") incorporated in 1999 to purchase restaurant assets at
Denver International Airport.
The following table summarizes the number of Quizno's restaurants open at
September 30, 2000:
Sold But Not
Yet In
Operation Operational Total
--------- ----------- -----
Quizno's
Company owned restaurants ......................... -- 26 26
Franchise restaurants - U.S., Puerto Rico and Guam 669 811 1,480
Franchise Restaurants - International ............. 170 122 292
Restaurants held for resale ....................... -- 1 1
Bains
Franchise restaurants ............................. -- 4 4
Quizno's Kansas
Company owned restaurants ......................... -- 8 8
--- ----- -----
839 972 1,811
=== ===== =====
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries QOC, S&S, QRC, QLC, QAC, DIA and QKL.
Change in Fiscal Year
In November 1999, the Company changed its fiscal year from December 31 to
September 30. All references in the financial statements to the year or period
ended September 30, 1999 relate to the nine months ended September 30, 1999.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory is included in other assets and is stated at the lower of cost or
market and consists of food and paper products. Cost is determined using the
first in, first out (FIFO) method.
Credit Risk
The Company grants credit in the normal course of business, primarily consisting
of royalty fees receivable and loans to area directors and its franchisees. To
reduce credit risk for U.S. franchises, the Company electronically debits the
franchisees' bank accounts weekly for fees due the Company according to
franchise agreements entered into after 1993, and reserves the right to
terminate franchise and area director agreements for non-payment of amounts
owed.
The Company's cash equivalents consist of short-term commercial paper with
original maturities not in excess of three months. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, balances of cash and
cash equivalents exceeded the federally insured limit by approximately
$2,609,000.
Short-Term Investments
The Company classifies its investment in corporate debt and governmental
securities with original maturities in excess of three months and less than
twelve months as short-term investments held-to-maturity. The Company has the
ability and intent to hold these securities until maturity.
Short-term investments are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Realized gains and losses
are recognized in earnings upon redemption. The specific identification method
is used to determine the cost of securities sold. Discounts or premiums are
accreted or amortized using the level-interest-yield method to the earlier of
the call date or maturity of the related security.
During 2000, unrealized gains and losses were immaterial as amortized cost
approximated market value.
Accounts Receivable/Royalties Receivable
At the time the accounts and royalties receivable are originated, the Company
considers a reserve for doubtful accounts based on the creditworthiness of the
franchisee. The provision for uncollectible amounts is continually reviewed and
adjusted to maintain the allowance at a level considered adequate to cover
future losses. The allowance is management's best estimate of uncollectible
amounts and is determined based on historical performance that is tracked by the
Company on an ongoing basis. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
valued at the lower of fair market value or net present value of the minimum
lease payments at inception of the lease. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 10 years, and the related lease terms for leasehold improvements and
equipment under capital leases.
Deferred Financing Costs
Cost associated with obtaining debt financing are deferred and amortized on a
straight-line basis over the term of the debt.
Intangible Assets
The amounts paid by the Company for non-compete agreements are being amortized
over the term of the non-compete agreements.
The excess of the purchase price over net assets acquired for stores purchased
by the Company from unrelated third parties is recorded as goodwill and is
amortized over 15 years.
Other intangibles are recorded at cost and are amortized on the straight-line
basis over the contractual or estimated useful lives as follows:
Franchise agreements 12 years
Trademarks and other intangibles 3 - 15 years
Area Director Territory Repurchases
Costs associated with repurchasing area directory territories are deferred and
amortized on a straight-line basis over 15 years.
Long-Lived Assets
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. The Company looks primarily to the undiscounted future cash flows
in its assessment of whether or not long-lived assets have been impaired. At
September 30, 2000, the Company determined that an impairment related to its
carrying value of the assets purchased in November 1997 from Bain's Deli
Franchise Associates, L.P., ("Bains") was required and expensed $579,246.
Initial Franchise Fees and Related Franchise Costs
The Company believes it is probable that all of the deferred franchise fees will
be realized. The amount of the deferred franchise fees considered realizable,
however, could be reduced in the near term if estimates of the future franchise
openings are reduced.
Initial franchise fees paid by U.S. franchisees are recognized as revenue when
all material services and conditions required to be performed by us have been
substantially completed, which is generally when the franchise commences
operations. Initial franchise fees collected by the Company before all material
services and conditions are substantially performed are recorded as deferred
franchise sales revenue. These franchise fees are non-refundable in most
circumstances. Incremental development costs are deferred, but not in excess of
the deferred revenue and estimated cost to open the Quizno's restaurant and are
expensed when the revenue is recognized.
Area Director Marketing Agreements
The area director marketing agreement provides the area director a non-exclusive
right to sell and open franchises in a defined geographic territory in the U.S.
and requires that the area director be responsible for advertising, soliciting
and screening prospective franchisees. The agreements also require the area
director to sell and open a minimum of new franchised restaurants each year or
forfeit future rights to the territory. In addition, the area director is
responsible for identifying possible locations, providing on-site opening
assistance, and providing quality assurance services to franchises in the
defined area. The Company pays the area director 50% of the initial franchise
fee sold by the area director, and a fee of 40% of the royalty received by the
Company from each franchise within the defined area. The agreements are for a
period of ten years, with the option to extend for an additional ten years after
certain restrictive performance criteria are met. The area director is entitled
to receive commissions during the term of the area director marketing agreement
and, in certain circumstances, the area director is entitled to 1% of gross
sales for franchise restaurants operating in the territory as of the termination
date of the area director agreement. The area director marketing fee is $.07 per
person living in the area director's territory, plus a $10,000 training fee,
which is deferred until training has been completed. Prior to January 1, 1999,
the Company recognized revenue when all material services and conditions
required to be performed by the Company had been substantially completed.
Change in Accounting Method
Area Director Marketing Agreements
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. Fiscal 1999 income before the cumulative
effect adjustment included $387,108 of amortized deferred net revenue related to
area director marketing agreement fees. This change was reported as a cumulative
effect of change in accounting principle for $2,685,502 (net of $1,577,199 in
income tax benefits) and is included in the net loss in fiscal 1999. Fiscal 2000
income included $516,144 of amortized deferred net revenue related to area
director marketing agreement fees previously recognized prior to fiscal 1999.
Costs of Start-up Activities
During April 1998, Statement of Position 98-5, "Reporting in the Costs of
Start-Up Activities" was issued. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 was required to be
adopted by the first quarter of 1999. Upon adoption, the Company was required to
write-off $125,507 ($84,090 net of applicable taxes) in pre-opening related
costs that were deferred on the balance sheet as of December 31, 1998. This
write-off was reported as a cumulative effect of a change in accounting
principle.
International Fees
The Company grants master franchise rights for the development of
international markets. The master franchisee will enter into individual
franchise and area director agreements for development within the franchised
country, and will assume all of the franchisor's obligations and duties under
the agreement. The Company is not a party to the individual franchise and area
director agreements. Generally, the master franchise agreement requires the
master franchisee to pay the Company a percentage, currently 30%, of all initial
franchise fees, royalties, and area fees collected by the master franchisee. The
Company recognizes these fees when received.
The master franchise agreement provides the master franchisee an exclusive right
to sell and open franchises and grant area directorships in a defined geographic
territory. The master franchisee is responsible for providing all franchisor
services in the territory and must sell and open a minimum of new franchised
restaurants each year. The fee for master franchise agreements is based on the
population of the territory and will vary depending on certain economic,
demographic and cultural factors. Revenue is recognized when all material
services and conditions required to be performed by the Company have been
substantially performed, which is generally the date the fee is paid.
Royalties and Advertising Fees
Pursuant to the various franchise agreements, U.S. franchises are required to
pay the Company royalties and advertising fees based on a percentage of sales
ranging from 4% to 8% for royalties, and 1% to 4% for advertising fees.
Royalties as required by the franchise agreement are accrued based on a
percentage of gross sales, as reported by franchisees, and are included in
accounts receivable.
The Company does not recognize any portion of the advertising fees as revenue,
nor does it accrue such fees or consolidate the accounts of any of the
advertising funds as they are paid to and disbursed out of separate legal
advertising entities.
Income Taxes
The Company calculates and records the amount of taxes payable or refundable
currently or in future years for temporary differences between the consolidated
financial statement basis and income tax basis based on the current enacted tax
laws. Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years.
Basic and Diluted Loss Per Common Share
In accordance with FAS 128, basic earnings per share are computed by dividing
net income by the number of weighted average common shares outstanding during
the year. Diluted earnings per share is computed by dividing net income by the
number of weighted average common shares outstanding during the year, including
potential common shares, which for the year ended September 30, 2000, the nine
months ended September 30, 1999 and the year ended December 31, 1998 consisted
of preferred stock, convertible debt, stock options and warrants outstanding
(Note 14).
Use of Estimates
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.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments, receivables, prepaids, current portion of
notes receivable, accounts payable and accrued expenses approximated fair value
as of September 30, 2000 because of the relatively short maturity of these
instruments.
The carrying amounts of long-term notes receivable approximate fair value as of
September 30, 2000 because the discounted cash flows at current rates
approximate the rates of the significant notes.
The carrying amounts of notes payable and debt issued approximate fair value as
of September 30, 2000 because interest rates on these instruments approximate
market interest rates.
Reclassifications of Prior Year Amounts
Certain reclassifications have been made to the balances for the nine months
ended September 30, 1999 and the year ended December 31, 1998 to make them
comparable to those presented for the year ended September 30, 2000, none of
which change the previously reported net income or total assets.
Recently Issued Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or loses resulting from changes in
the values of those derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The key criterion for
hedge accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. Management believes
that the adoption of SFAS No. 133 will have no material effect on its financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation (FIN 44), which was effective
July 1, 2000, except that certain conclusions in this interpretation, which
cover specific events that occur after either December 15, 2998 or January 12,
2000 are recognized on a prospective basis from July 1, 2000. This
interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, which provides guidance on applying generally accepted
accounting principles to selected revenue recognition issues. Management
believes that the Company's revenue recognition policies are in accordance with
SAB 101.
Note 2 - Acquisition of Assets
On November 16, 1999, the Company's subsidiary, QUIZ-DIA, Inc., purchased the
assets of ASI-DIA, Inc. ("ASI") for a total of $4.875 million in cash. Assets
purchased include two Quizno's restaurants and three bars, including the
WWW.COWBOY bar, and various other assets located on Concourses A and B at Denver
International Airport. The Company intends to continue operating the restaurants
as Quizno's Classic Subs and the bars as operated by ASI.
The purchase was accounted for under the purchase method. The purchase price was
allocated to the assets purchased based on the fair market values at the date of
acquisition as follows:
Restaurant and bar equipment $ 875,000
Furniture and fixtures ..... 370,000
Leasehold improvements ..... 265,000
Concession agreements ...... 3,365,000
----------
$4,875,000
==========
On January 26, 2000, the Company 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 installments of $52,023 for 5 years. The loan is
secured by a first security interest in the assets of QUIZ-DIA, Inc.
The following table summarizes the unaudited pro forma results of the Company
giving effect to the ASI acquisition as if it had occurred on January 1, 1998.
The unaudited pro forma information is not necessarily indicative of the results
of operations of the Company had this acquisition occurred at the beginning of
the years presented, nor is it necessarily indicative of future results.
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
----------------- ---------------
Revenue .............................. $ 22,847,496 $ 23,548,757
Net income ........................... $ 662,806 $ (97,129)
Basic earnings (loss) per share ...... $ (.54) $ (.03)
Diluted earnings (loss) per share .... $ (.59) $ (.03)
In January 2000, the Company purchased, for cash, four Quizno's Restaurants from
two franchisees for a total purchase price of $741,000.The purchases were
accounted for under the purchase method.
The purchase price for these purchases has been allocated to the assets
purchased based on the fair market values at the date of acquisition, as
follows:
Equipment ................... $204,000
Leasehold improvements ...... 330,000
Lease agreements ............ 207,000
--------
$741,000
========
Effective July 31, 1999, the Company repurchased the 30% minority interest of
QKL for $150,000.
On July 1, 1999, the Company purchased, for cash, a Quizno's Restaurant from a
franchisee for a total purchase price of $286,355. The purchase was accounted
for under the purchase method.
The purchase price has been allocated to the assets purchased based on the fair
market values at the date of acquisition, as follows:
Equipment ........................ $ 65,000
Leasehold improvements ........... 105,000
Covenant not to compete .......... 100,000
Lease agreement .................. 10,087
Inventory and deposit ............ 6,268
--------
$286,355
========
No pro forma statements of operations are presented for these purchases, as the
effect is not material to the Company's operations.
Note 3 - Notes Receivable
Notes receivable consist of the following:
September 30, September 30, December 31,
2000 1999 1998
----------- ----------- -----------
Notes receivable related to area director
and master franchise agreements,
interest ranging from 6% to 15%, due in varying
amounts through December 2011 ......................... $ 1,280,484 $ 1,540,826 $ 1,878,855
Notes receivable for sale of stores,
interest ranging from 6% to 15%,
due in varying amounts through October 2012 ........... 483,351 530,026 410,058
Note receivable from national advertising
trust, interest at 12%. (Note 8) ..................... 1,030,000 -- 267,058
Note receivable from Bain's Deli Corporation,
interest accrues at 6% if note balance not
paid down $25,000 in any one year, due
February 1, 2006. At September 30, 2000,
the Company impaired the outstanding balance on
this note of $128,884 ................................. -- 150,000 --
Other notes receivable with interest ranging
from 8% to 11%, due in varying amounts
through 2004 ......................................... 103,444 11,213 32,423
----------- ----------- -----------
2,897,279 2,232,065 2,588,394
Less current portion ............................ (1,545,844) (519,994) (1,212,522)
----------- ----------- -----------
1,351,435 1,712,071 1,375,872
Less allowance .................................. (50,000) (41,742) --
----------- ----------- -----------
$ 1,301,435 $ 1,670,329 $ 1,375,872
=========== =========== ===========
At the time notes receivable are executed, the Company reserves an allowance for
doubtful collections. The provision for uncollectible amounts is continually
reviewed and adjusted to maintain the allowance at a level considered adequate
to cover future losses. The allowance is management's best estimate of
uncollectible amounts and is determined based on historical performance of the
notes, which is tracked by the Company on an ongoing basis. The losses
ultimately incurred could differ materially in the near term from the amounts
estimated in determining the allowance. The Company collateralizes the notes
with the area directorship agreement, assets of the store sold or other related
assets.
Future principal payments are as follows:
Year Ended September 30,
2001............ $ 1,595,844
2002............ 415,270
2003............ 262,104
2004............ 201,181
2005............ 110,073
Thereafter...... 312,807
-----------
2,897,279
Less allowance.. (50,000)
-----------
$ 2,847,279
===========
Note 4 - Assets Held for Resale
Included in assets held for resale are the following:
September 30, September 30, December 31,
2000 1999 1998
------------- ------------ -----------
Furniture fixtures and equipment $ 75,805 $ 65,421 $221,034
Leasehold improvements ......... 78,117 108,056 383,771
Lease agreements and other ..... 40,657 19,446 33,590
-------- -------- --------
$194,579 $192,923 $638,395
======== ======== ========
During 1997, the Company acquired a store from a franchisee and also was in the
process of constructing four stores. At the end of 1997, three of the four
stores were operational and in 1998, the fourth store became operational. In
March 1998, one of the stores was sold as a franchise for a sale price of
$213,000. Cost incurred by the Company prior to the sale amounted to
approximately $234,000. In 1999, the Company sold another store as a franchise
for a sale price of $150,000 and closed one store. Costs incurred by the Company
prior to their disposal amounted to approximately $179,000 and $170,000,
respectively. In December 1999, the Company sold one store for a sales price of
$100,000 and in January 2000, the Company closed the remaining store. In July
2000, the Company acquired a store from a franchisee that the Company intends to
sell by the end of December 2000.
Note 5 - Property and Equipment
Property and equipment consist of the following:
September 30, September 30, December 31,
Life 2000 1999 1998
----------- ---------- ----------
Equipment 3-10 years $ 4,175,095 $2,014,698 $1,524,799
Furniture and fixtures 7-10 years 1,499,844 1,052,232 764,672
Leasehold improvements Lease term 3,776,503 2,286,344 1,712,215
Corporate jet 10% over 3 years 3,486,832 -- --
Software 3-5 years 1,164,603 681,238 313,540
----------- ---------- ----------
14,102,877 6,034,512 4,315,226
Less accumulated depreciation and
amortization (2,433,637) (1,230,461) (780,004)
----------- ---------- ----------
Net property and equipment $11,669,240 $4,804,051 $3,535,222
=========== ========== ==========
Note 6 - Intangible Assets
Intangible assets consist of the following:
September 30, September 30, December 31,
2000 1999 1998
----------- ----------- -----------
Covenants not to compete $ 600,113 $ 600,113 $ 1,667,546
Franchise agreements 292,394 792,796 310,506
Prepaid area director marketing commissions 486,283 526,776 --
Trademarks and other 824,580 455,339 442,813
Concession agreements and acquisition costs 3,501,804 -- --
----------- ----------- -----------
5,705,174 2,375,024 2,420,865
Less accumulated amortization (1,104,646) (712,759) (867,343)
----------- ----------- -----------
$ 4,600,528 $ 1,662,265 $ 1,553,522
=========== =========== ===========
At September 30, 2000, the Company recorded an impaired of $450,362 to the
carrying value of the franchise agreement related to the assets purchased in
November 1997 from Bains.
Note 7 - Other Deferred Assets
Other deferred assets consist of the following:
September 30, September 30, December 31,
2000 1999 1998
---------- ---------- ------------
Deferred franchise costs ...... $1,990,275 $1,585,773 $ 926,226
Deferred financing costs ...... 679,752 108,769 87,080
Other deferred costs .......... 112,471 32,442 106,065
---------- ---------- ----------
$2,782,498 $1,726,984 $1,119,371
========== ========== ==========
Note 8 - Related Party Transactions
On May 18, 2000, the Company issued a note receivable to the Advertising Fund
for $500,000. On July 14, 2000, an additional amount of $500,000 was loaned to
the Advertising Fund. On July 31, 2000, the entire balance, including accrued
and unpaid interest at 12%, was repaid to the Company.
The Company had notes receivable from the Advertising Fund of $1,030,000, $0 and
$21,524 at September 30, 2000 and 1999 and December 31, 1998, respectively. The
September 2000 balance related to an off-season build-up for advertising, which
will be reimbursed to the Company in 2001.
In July 2000, the Quizno's National Marketing Fund Trust and the Quizno's
Regional Marketing Fund Trust (together the "marketing funds") entered into a
$2,000,000 line of credit with Wells Fargo Bank West, N.A. The marketing funds
collect a fee of 1% and 3%, respectively, of gross sales from our franchisees
and 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. The Company has guaranteed this line of credit. At
September 30, 2000, $1,900,000 had been drawn against this line of credit.
In September 1999, two employees of the Company purchased an area directorship
for $200,000, of which $180,000 of which was in the form of a promissory note
and $20,000 was in cash. During 2000, no payments were made on the note. In
2000, the Company paid the Area Director $20,131, in commissions and royalties.
Two directors of the Company own more than 50% in a company that owns an area
directorship. In 2000, 1999 and 1998, the Company paid the Area Director
$459,496, $142,364 and $139,358, respectively, in commissions and royalties. At
September 30, 2000, $43,747 was owed to the Company on a promissory note due
from the area director. During 1998, 1999 and 2000, payments on such notes were
$6,212, $8,000 and $11,800, respectively. The area director is also indebted to
the Company for $7,216 in connection with the resale of a Quizno's restaurant
once operated by the area director. The area director is reducing this debt by
offsetting commissions on royalty fees from that location paid to the managing
area director. The debt is expected to be paid off in approximately 15 months.
In 1995, the Company sold an area directorship to a company owned by a director,
officer and shareholder for $150,000. During 1998, the Company paid the area
director no sales commissions and $27,664 in royalties. The area directorship
was sold in 1998 to an unrelated third party.
In 1997, the Company purchased a Quizno's restaurant from a company in which an
executive officer is a 50% shareholder. The purchase price was $80,000 of which
$15,000 was paid in cash and $60,000 paid by issuance of the Company's
promissory note bearing interest at 11% and payable over 4 years. During 1998,
1999 and 2000, the Company made payments pursuant to the promissory note
totaling $18,993, $14,245 and $35,219, respectively, In October of 1999 this
note was paid-off in full.
On October 13, 1999, the Company purchased a 1997 Cessna Citation 525. As of the
same date, the Company entered into an interchange agreement with Richard F.
Schaden, P.C., which is 100% owned by Richard F. Schaden. Mr. Schaden, through
his company, owns a 1996 Astra SPA. Under the interchange agreement, the parties
agreed to lease each aircraft to each other, on an as-needed basis, without
charge, although the parties will pay the operational costs of the airplane. The
Company also will pay Mr. Schaden or his company to provide services related to
the airplane operations, including for pilot and management services. In 2000,
the Company incurred costs of $31,762 under this agreement.
In December 1999, the Company entered into an agreement with Pink Sand
Corporation ("Pink Sand"), for the development rights to United States Territory
of Guam and the Commonwealth of the Northern Mariana Islands. Pink Sand is
principally owned by a director of the Company. The development agreement will
require Pink Sand to open 5 Restaurants during the term of the agreement. So
long as Pink Sand meets the development schedule, it will have the exclusive
rights to develop Restaurants in the territory. The development fee is $42,500,
payable upon execution of the agreement. The fee equals one hundred percent of
the first initial franchise fee and fifty percent of the aggregate initial
franchise fees due for all of the other Restaurants that Pink Sand must develop
under the agreement. Each time Pink Sand signs a franchise agreement for a
Restaurant to be developed within the territory, the Company will apply the
Development Fee in increments equal to fifty percent of the initial franchise
fee due for that Restaurant to reduce the additional amount Pink Sand must pay.
In February 2000, the Company entered into a $75,000 promissory note with an
officer of The Quizno's Corporation. The note accrues interest at an annual rate
of 9.25% and accrued interest and principal is due March 1, 2002. As of May
2000, the Company no longer employed the officer.
In August 2000, the Company advanced a director of the Company $300,000. The
advance is expected to be repaid in January 2001.
Note 9 - Long-Term Obligations and Convertible Subordinated Debt
September 30, September 30, December 31,
2000 1999 1998
------------ ----------- -----------
Various capital leases, with monthly payments
totaling approximately $2,228 including interest
at 5.6% and expiring in June 2004. Collateralized
by office equipment. In conjunction with Company's
loan agreement with AMRESCO, $852,982 of the
September 30, 1999 balance was paid-off in October 1999. $ 99,485 $ 970,999 $ 986,077
Note payable to a company with interest payments at
10%. The note calls for monthly payments of
$10,736 and matures in January 2004. Collateralized
by the assets acquired from Bain's Deli Franchise
Associates. In 1998, the principal balance of the
note was decreased by approximately $431,000 due
to provisions in the purchase agreement which allow
for quarterly decreases or increases in the note balance
based on certain performance standards of the franchises
acquired. In connection with a settlement with Bain's
Deli Franchise Associates, this note was canceled in 1999. -- -- 116,118
Note payable to AMRESCO Commercial Finance, Inc. See
following page for detail of transaction. 13,300,732 -- --
Note payable to a financing company with interest at 9.53%
The note calls for monthly principal and interest payments
of $52,023 through January 1, 2005 and a balloon payment
of $1,184,717 in February 2005. Collateralized by a first
security interest in the assets of Quiz-DIA, Inc. 2,988,098 -- --
Note payable to a financing company with interest at 9.3%
The note calls for monthly principal and interest payments
of $5,977 and matures August 16, 2007. Collateralized by
restaurant equipment. 364,875 -- --
Note payable to a financing company with interest at 10.03%
The note calls for monthly principal and interest payments
of $1,985 and matures December 31, 2006.
Collateralized by restaurant equipment. 143,197 -- --
Note payable to an individual for the purchase of four
area director territories. Interest on the note accrues
at 12%. The note calls for monthly principal and interest
payments of $8,510 through May 1, 2002 and a balloon
payment of $264,664 on June 1, 2002. 368,396 -- --
Note payable to a corporation for the purchase of an
area director territory. Interest on the note accrues
at 12%. The note calls for monthly principal and interest
payments of $8,000 through July 1, 2003 and a balloon
payment of $100,000 on April 1, 2001. 322,956 -- --
Various notes payable. In conjunction with Company's
loan agreement with AMRESCO, the September 30, 1999
balance was paid-off in October 1999. -- 635,147 233,193
------------ ----------- -----------
17,587,739 1,606,146 1,335,388
Less current portion (1,550,501) (337,642) (370,404)
------------ ----------- -----------
$ 16,037,238 $ 1,268,504 $ 964,984
============ =========== ===========
On October 5, 1999, the Company closed on a loan in the principal amount of
$14,000,000 from AMRESCO Commercial Finance, Inc. The loan bears interest at
10.9% (10.1% through January 31, 2000), and is repayable in monthly installments
of $199,201 for nine years and five months. The loan is secured by the assets of
Company owned stores and other assets. The loan is part of a securitized pool
and includes a provision, which could require the Company to pay up to another
$1,555,555 depending on the amount of defaults in the loan pool. The proceeds of
the loan were used to pay-off existing debt of $3,320,956, pay costs and fees
associated with the loan of $560,000, and prepay interest and one payment of
$304,624. The balance of $9,814,420 was available to use, with certain
restrictions, for general corporate purposes other than working capital,
dividends, or to repurchase the majority shareholders' stock. As of September
30, 2000, the Company had $1,528,212 available to use for general corporate
purposes.
On December 22, 1999, the Company closed on a line of credit loan and were
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
8.13% at December 31, 1999). The maximum amount of the line of credit loan is
$3,350,000, which maximum is reduced monthly based on a twelve-year
amortization. The line of credit loan is secured by a first security interest in
our jet aircraft. In December 1999, $3,350,000 was drawn on the line of credit
and in January 2000, the line of credit loan was paid down to zero.
Subordinated debt consists of:
September 30, September 30, December 31,
2000 1999 1998
---------- ----------- -----------
Subordinated debt payable. In conjunction with
Company's loan agreement with AMRESCO, the
September 30, 1999 balance was paid-off in
October 1999. $ -- $ 1,717,337 $ --
12.75% convertible subordinated debt, paid in
full during 1999. -- -- 1,375,000
---------- ----------- -----------
Less current portion -- (218,546) (244,084)
---------- ----------- -----------
$ -- $ 1,498,791 $ 1,130,916
========== =========== ===========
Maturities of long-term obligations and capital leases are as follows:
Long-Term Capital
Obligations Leases Total
Year Ending September 30, ------------ ------------- ------------
2001 $ 1,528,767 $ 26,739 $ 1,555,506
2002 1,838,355 26,739 1,865,094
2003 1,687,489 26,739 1,714,228
2004 1,789,051 31,733 1,820,784
2005 2,810,222 -- 2,810,222
Thereafter 7,834,369 -- 7,834,369
------------ ----------- ------------
17,488,253 111,950 17,600,203
Less amount representing interest -- (12,464) (12,464)
------------ ----------- ------------
Total principal 17,488,253 99,486 17,587,739
Less current portion (1,528,767) (21,734) (1,550,501)
------------ ----------- ------------
$ 15,959,486 $ 77,752 $ 16,037,238
============ =========== ============
Included in equipment in the accompanying 2000, 1999 and 1998 balance sheets are
assets held under capital leases in the amount of $134,722, $1,063,920 and
$1,278,925, respectively, and accumulated amortization of $13,924, $149,372 and
132,837, respectively.
Note 10 - Commitments and Contingencies
The Company leases an office facility, thirty-nine restaurant locations
(including one store held for resale) and certain equipment and vehicles under
operating lease agreements which provide for the payment of rent totaling
approximately $169,000 per month plus common area maintenance costs. One of the
restaurant locations also requires the Company to pay 6% of gross sales in
excess of $430,000 annually. Rent expense under these operating leases, totaled
$2,035,534, $762,891 and $642,447 during the periods ended September 30, 2000
and 1999 and December 31, 1998, respectively.
Future minimum rental payments for the years ending September 30 are as follows:
2001 2002 2003 2004 2005 Thereafter Total
$2,330,961 $2,185,785 $1,891,866 $1,501,255 $1,000,171 $1,133,779 $10,043,817
Minimum payments for the period ended September 30, 1999 have not been reduced
by minimum rentals of $1,450,446 due in the future under a noncancellable
sublease.
The Company has entered into employment agreements with two directors, officers,
and stockholders of the Company which provide for the payment of annual salaries
totaling $303,500 plus individual bonuses equal to six and ten percent of the
positive increase in net income before taxes, depreciation, amortization and
interest over the prior year. Bonuses accrued during 1998, 1999 and 2000 totaled
$209,000, $262,354 and $329,930, respectively. One agreement expires in December
2000 while the other agreement expires in December 2003.
The Company has entered into an employment agreement with another officer of the
Company that terminates on January 16, 2003. The annual base salary is $180,000
in 2000, $200,000 in 2001, and $220,000 for the remainder of the term. Such
amount may be adjusted from time to time by mutual agreement between the officer
and the Company. The agreement provides a $25,000 signing bonus payable on the
nine-month anniversary, and a second year signing bonus of $10,000 due on the
second year anniversary date. The agreement provides an annual performance bonus
equal to a maximum of 20% of the officer's base salary. Under the agreement, the
officer received options to purchase 20,000 shares of the Company's stock. If
the Company terminates the agreement without cause, the Company is obligated to
pay the officer a severance payment equal to 6 months base salary.
On April 26, 1999, the Company signed a licensing agreement with the Coca-Cola
Company to purchase certain amounts of fountain syrups in return for cash
incentives. The agreement requires the Company to purchase a total of 12,000,000
gallons of fountain products and 1,000,000 cases of bottled products. If the
Company cancels the agreement, the Company would be obligated to refund a pro
rata share of the licensing fee based upon contract product not purchased.
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 ours until that time. At September 30,
2000, there were 669 domestic franchises sold but not yet open with related
opening commissions totaling $2,295,875 ($1,585,773 at September 30, 1999).
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 provides financial guarantees to such persons for
start-up capital loans. To date, in fiscal 2000, the Company guaranteed three
such loans totaling $565,000.
Litigation
There are various claims and lawsuits pending by and against the Company. The
settlement of some of these claims and lawsuits may result in the acquisition or
acquirement of certain area director territories. In the opinion of the
management, and supported by advice from legal counsel, these claims and
lawsuits will not result in any material adverse effect in excess of amounts
accrued in the accompanying consolidated financial statements.
Note 11 - Stockholders' Equity
Common Stock Repurchased
On October 1, 1999, the Company's Board of Directors authorized the purchase of
up to 200,000 shares of our common stock. Subject to applicable security laws,
repurchases may be made at such times, and in such amounts, as the Company deems
appropriate. As of September 30, 2000, the Company had repurchased 144,005
shares at an average price of $8.38. The Company incurred legal and accounting
costs related to the repurchase of $12,351.
Convertible Preferred Stock
Series A convertible preferred stock bears a 6.5% cumulative dividend, payable
monthly and is convertible into common shares on a one for one basis and is
callable by the Company with sixty days notice. The Series A convertible
preferred stock has a liquidation preference of $6 per share plus all then
accrued and unpaid cumulative dividends.
Series B convertible preferred stock bears a 12.75% cumulative dividend, payable
monthly and is convertible after five years at the then market value of the
common stock. The Series B convertible preferred stock is redeemable at the
Company's option and has a liquidation preference of $5.00 per share plus all
then accrued and unpaid cumulative dividends. All issued and outstanding Series
B convertible preferred stock was redeemed in full in 1999.
Series C convertible preferred stock bears a 12.00% cumulative dividend, payable
monthly and is convertible into common stock on a one-for-one basis at $5.00 per
share. The Series C convertible preferred stock is redeemable at the Company's
option at $5.00 per share anytime after October 8, 2000, and has a liquidation
preference of $5.00 per share plus all then accrued and unpaid cumulative
dividends.
Each share of Class D Preferred Stock is convertible into twenty-five shares of
our common stock, at any time after (i) our earnings before income tax,
depreciation and amortization for a fiscal year (excluding such earnings derived
from extraordinary asset acquisitions after June 1, 1999, and nonrecurring or
unusual transactions, as determined by the Company's Chief Executive Officer)
equal or exceed $12,000,000, and (ii) the Company's Chief Executive Officer has
approved such conversion. The Class D Preferred Stock is not convertible before
March 31, 2001.
During 2000, the Company sold 4,000 shares of Series D convertible preferred
stock at $3.00 per share. The Company repurchased 1,000 shares of Series D
convertible preferred stock at $3.00 per share.
There are currently 150,000 authorized shares of Class E Cumulative Convertible
Preferred Stock ("Class E Preferred Stock"). Each share of Class E Preferred
Stock is convertible into one share of our common stock, at any time. The
Company may redeem shares of the Class E Preferred Stock at any time on or after
April 1, 2003, at a redemption price of $8.62 per share. Until redeemed or
converted to common stock, each Class E Preferred stockholder will receive a
cumulative monthly dividend of $0.0862 per share. The Class E Preferred Stock is
junior in liquidation preference to our Class A Preferred Stock and our Class C
Preferred Stock, but senior to our Class D Preferred Stock and common stock.
During 2000, the Company sold 59,480 shares of Series E convertible preferred
stock at $8.62 per share. The Company incurred legal and accounting costs
related to the sale of $45,537.
Stock Options and Warrants
The Company has established an Employee Stock Option Plan (the Plan). The
Company has reserved 670,000 shares of its Common Stock for issuance upon the
exercise of options available for grant under the Plan. Options are granted
under the plan at not less than the market price of the Company stock. The
options cannot be exercisable for more than ten years. Options granted under the
Plan will include incentive stock options (ISOs) as defined in Section 422 of
the Internal Revenue Code and non-qualified stock options (NQSOs). Under the
terms of the Plan, all officers and employees are eligible for ISOs. During the
periods ended September 30, 2000 and 1999 and December 31, 1998, 100,000,
250,500 and 117,205, options were granted under the Plan, respectively.
Additionally, the Company has established an Amended and Restated Stock Option
Plan for Non-Employee Directors and Advisors (Director Plan). The Company has
reserved 300,000 shares of common stock for issuance upon the exercise of
options granted or available for grant to non-employee directors and advisors
under the Director Plan. The Director Plan provides that any person who becomes
a non-employee director or advisor of the Company may receive an option to
purchase 4,000 shares (or a pro rata portion thereof) at their fair market value
on the date such person becomes a non-employee director or advisor, and on the
first day of each year thereafter as long as the person continues as a
non-employee director or advisor, limited to the overall number of shares
available for issuance under the Director Plan. Options that expire or are
canceled may be re-granted under the Director Plan at the discretion of the
Board of Directors. The options expire after ten years. During the periods ended
September 30, 2000 and 1999 and December 31, 1998, 37,000, 29,000 and 28,000
options were granted under the Director Plan, respectively.
The Company established an Area Director Equity Participation Rights Stock
Option Plan (AD Plan) providing for grants of stock options to area directors
beginning in 1998. During 1998, the Company granted stock options covering
60,375 shares pursuant to the AD Plan. Options are granted under the AD Plan at
the market price of the common stock for six month options or a 20% discount
(not to exceed $1.20) if the grantee exercises within seven business days of the
grant. The Company recorded $33,950 related to the inherent value of the options
granted to area directors in 1997. No amounts were recorded for inherent value
of the options for 1998. During 2000 and 1999, the Company granted options under
the AD Plan for 0 and 10,275 shares.
In 1996, the Company issued warrants to purchase 372,847 shares of its common
stock to a lender in connection with a $2,000,000 convertible subordinated loan
made to the Company. The warrants are exercisable at $3.10 per share and expire
on December 31, 2004. Additionally, in 1997, the Company issued warrants to
purchase another 42,209 shares of its common stock to the same lender in
connection with the lender's conversion of $500,000 of the convertible
subordinated debt to Class B preferred stock. The warrants are exercisable at
$5.00 per share and do not have an expiration date. These warrants are reduced
to 20,597 if the Company meets certain earnings goals through 2000.
In connection with the Company's public offering, the Company issued a warrant
for the underwriter to purchase up to 100,000 shares of its common stock at
$5.00 per share. During 1998, 80,000 warrants were exercised and the remaining
20,000 were cancelled. Additionally in 1997, the Company issued 33,000 warrants
to consultants that allowed the holders to purchase 33,000 shares of common
stock at $5.40 to $5.50 per share. During 2000, 8,000 of these warrants were
exercised. These warrants expire through December 2000.
In 1999, the Company reached a settlement with Bains that resulted in the return
to the Company of the 9,091 shares of Company stock originally issued as part of
the purchase of the Bains units in 1997.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plans
as they relate to options issued to employees and directors.
Had compensation cost for the Company's two employee stock option plans been
determined based on the fair value at the grant date for consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
September 30, September 30, December 31,
2000 1999 1998
------------- ------------- -------------
Net income before cumulative effect of
changes in accounting principle - as reported $ 1,115,782 $ 1,242,391 $ 891,725
Net income before cumulative effect of changes
in accounting principle - pro forma $ 643,327 $ 662,806 $ 586,960
Basic earnings per share - as reported $ .37 $ .40 $ .30
Basic earnings per share - pro forma $ .21 $ .22 $ .19
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of 37% in
2000, 40% in 1999 and 42% in 1998; discount rate of 5.5%; and expected lives
from 3.5 to 10 years.
The following is a summary of options and warrants granted, exercised and
expired:
Weighted Weighted Weighted Average
Average Average Fair Exercise Price of
Exercise Value of Currently Options and-
Price of Options and Exercisable Warrants
Options and Options and Warrants Options and Currently
Warrants Warrants Granted Warrants Exercisable
-------------- --------------- ------------- --------------- -----------------
Outstanding December 31, 1998 896,538 $3.40 590,867 $2.52
Granted 279,500 $1.81 $3.50
Forfeited or exercised (60,695) $(.25)
-----------
Outstanding September 30, 1999 1,115,343 $4.29 616,925 $3.54
Granted 141,305 $.99 $3.45
Forfeited or exercised (198,245) $(.66)
-----------
Outstanding September 30, 2000 1,058,403 $4.85 680,436 $3.32
===========
September 30, 2000
---------------------------------------------------------------------------------------------
Options and
Options and Warrants Outstanding Warrants Exercisable
--------------------------------------------------------- --------------------------------
Weighted
Weighted Average Weighted
Range of Options and Average Remaining Average
Warrants Number Exercise Contractual Number Exercise
Exercisable Price Outstanding Price Life Exercisable Price
- --------------------------- ------------------ ------------ ----------------- -------------- -----------
$3.00 - $5.50 709,603 $3.68 4.8 years 629,116 $2.99
$5.75 - $8.18 348,800 $7.24 5.5 years 51,320 $7.31
---------- ---------
1,058,403 $4.85 5.0 years 680,436 $3.32
========== =========
Note 12 - Income Taxes
The components of the provision for income tax expense (benefit) are as follows:
September 30, September 30, December 31,
2000 1999 1998
------------- ------------- ------------
Current income tax expense $1,369,395 $1,951,848 $ 213,500
Deferred income tax benefit (621,560) (1,230,160) (582,053)
---------- ---------- ---------
$ 747,835 $ 721,688 $(368,553)
========== ========== =========
For the period ended September 30, 1999, the net deferred tax benefit related to
the cumulative effect of changes in accounting of $1,589,703 is not reflected in
the table above.
Prior to 1998, the Company had provided for a valuation allowance against its
deferred tax asset as management had determined that it was more likely than not
that the Company would not realize its deferred tax asset. In 1998, management
determined it would be more likely than not that the Company would realize its
deferred tax asset and this has eliminated its valuation allowance against the
deferred tax asset resulting in a benefit of $582,053 reflected in the statement
of operations for the year ending December 31, 1998.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. The Company's temporary differences result primarily from depreciation,
deferred franchise fees and costs and area director fee revenues and costs,
deferred bonuses and deferred rent.
The net current and long-term deferred tax assets (liabilities) in the
accompanying balance sheet include the following items:
September 30, September 30, December 31,
2000 1999 1998
------------ ------------- ------------
Current deferred tax asset $ 221,182 $ 128,718 $ 81,260
Current deferred tax liabilities -- -- --
---------- ---------- ----------
Net current deferred tax asset $ 221,182 $ 128,718 $ 81,260
========== ========== ==========
Long-term deferred tax asset $6,242,732 $4,890,254 $1,673,620
Long-term deferred tax liability (2,032,106) (1,383,041) (938,812)
---------- ---------- ----------
Net long-term deferred tax asset 4,210,626 3,507,213 734,808
---------- ---------- ----------
Net deferred tax asset $4,431,808 $3,635,931 $ 816,068
========== ========== ==========
Rate Reconciliation
The reconciliation of income tax expense (benefit) by applying the Federal
statutory tax rates to the Company's effective income tax rate is as follows:
September 30, September 30, December 31, 2000 1999 1998
Federal statutory rate 37.0% 37.0% 34.0%
Nondeductible expenses -- .9 8.4
Other - deferred including utilization of NOL (.5) (3.3) (13.5)
Valuation allowance -- -- (78.0)
---- ---- ----
36.5% 34.6% (49.1)%
==== ==== =====
Note 13 - Employee Benefit Plan
The Company has adopted a 401(k) plan during 1995 for its employees.
Participation is voluntary and employees are eligible to participate at age 21
and after one year of employment with the Company. Effective January 1, 2000,
the Company changed its match under the 401(k) plan to match 100% of the
participants' elective deferral contributions to the plan, up to a maximum
Company matching contribution equal to 6% of the participants' compensation.
Starting January 1, 2000, the Company matching contributions will be 100%
vested, regardless of the participant's years of service with the Company. As
always, the Company matching contribution is 50% in cash and 50% in Company
stock.
A participant is always 100% vested in their elective deferral contributions to
the plan.
The Company's matching contributions prior to January 1, 2000 vest to the
participant according to the following vesting schedule:
Years of Services Percentage
----------------- ----------
1 0%
2 25%
3 50%
4 75%
5 100%
The Company has contributed $150,304, $60,427 and $31,675 to the Plan for the
periods ended September 30, 2000 and 1999 and December 31, 1998, respectively.
Note 14 - Earnings (Loss) Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
For the Year Ended For the Nine Months For the Year Ended
September 30, Ended September 30, December 31,
2000 1999 1998
------------------ ------------------- ------------------
Numerator -- net income before cumulative effect of changes in
accounting principle
Numerator for basic earnings per share $ 1,115,782 $ 1,242,391 $ 891,725
Preferred dividends (net of taxes) 97,798 78,265 --
----------- ----------- ----------
Numerator for diluted earnings per share $ 1,213,580 $ 1,320,656 $ 891,725
=========== =========== ==========
Numerator for basic and diluted earnings per share -- cumulative effect
of changes in accounting principle N/A $(2,769,592) N/A
===========
Denominator -- weighted average shares
Denominator for basic earnings per share -- weighted average shares 3,019,849 3,060,878 3,014,042
Effect of dilutive securities -- convertible debt, options and
warrants 708,912 755,671 431,930
----------- ----------- ----------
Denominator for diluted earnings per share -- adjusted weighted
average shares 3,728,761 3,816,549 3,445,972
=========== =========== ==========
Denominator for basic and diluted earnings per share -- cumulative
effect of changes in accounting principle N/A 3,060,878 N/A
===========
Basic earnings (loss) per share $ .37 $ (.50) $ .30
=========== =========== ==========
Diluted earnings (loss) per share $ .33 $ (.55) $ .26
=========== =========== ==========
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
Note 15 - Area Director Territory Repurchases
In 2000, the Company repurchased or reacquired fourteen area director
territories from 9 area directors for $3,472,627, inclusive of legal and other
related costs. The Company issued notes payable for $714,622 and offset notes
and interest receivable from three area directors in the amount of $315,850. The
balance of the purchase price was paid in cash.
Note 16 - Transition Reporting
In October 1999, the Company changed its fiscal year from December 31 to
September 30. As such, the 1999 financial statements are as of and for the nine
months ended September 30, 1999. The 2000 and 1998 financial statements are as
of and for the twelve months ended September 30, 2000 and December 31, 1998,
respectively. For comparative purposes, the following unaudited summarized
consolidated statement of operations is presented for the twelve months ended
September 30, 1999.
For the Year Ended
(Unaudited) September 30, 1999
------------------
Total revenue $ 26,292,137
Income from franchise operations $ 3,058,373
Income from Company store operations $ 618,190
Net income before taxes $ 2,163,511
Net (loss) applicable to common shareholders $ (1,138,367)
Net (loss) per share - basic $ (.37)
Net (loss) per share - diluted $ (.43)
Note 17 - Subsequent Events
On November 13, 2000, the Company announced that it has 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.
There are approximately three million shares of common stock outstanding, of
which approximately 51.6 percent currently are 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. All three Schadens have
indicated they would not tender their shares at this time.
The tender offer will expire at midnight Monday, December 11, 2000, unless the
Company extends it.
The tender offer is conditioned, among other things, on 51 percent of the common
shareholders besides the Schadens accepting the tender offer. The Company may
waive any such condition. It is also conditioned on the closing of a loan for up
to $12 million with Levine Leichtman Capital Partners. The funding agreement
combined with $6.2 million in available cash provide the funds necessary to
purchase all remaining common stock, all preferred shares and options converted
into common stock and warrants held by Retail & Restaurant Growth Capital, L.P.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors
The names of and other information about our Directors as of December 18,
2000, are set forth below:
Director
Nominee Age Position(s) with Company Since
- -------------------- -------- ------------------------ -----------
Richard E. Schaden 36 President, Chief
Executive Officer and 1991
Director
Richard F. Schaden 62 Secretary and Director 1991
Frederick H. Schaden 54 Director 1993
J. Eric Lawrence 33 Director 1997
Mark L. Bromberg 49 Director 1997
Brad A. Griffin 50 Director 1999
John J. Todd 40 Director 2000
Each director is currently serving a one year term that will end on the
date of our 2001 Annual Meeting of Shareholders.
Director's Biographical Information
Mr. Richard E. Schaden has been President and a Director of our company
since its inception on January 7, 1991, and was appointed as Chairman of the
Board of Directors in November 1999. Mr. Schaden had been a principal and the
chief operating officer of Schaden & Schaden, Inc., a company that owned and
operated Quizno's franchised restaurants from 1987 to 1994 when it was sold to
our company. Mr. Schaden graduated Magna Cum Laude from the University of
Colorado with a degree in Business Management and Finance. See "Certain
Transactions."
Mr. Richard F. Schaden has been Vice President, Secretary and a Director
of our company since its inception on January 7, 1991. Mr. Schaden had been a
principal of Schaden & Schaden, Inc., a company that owned and operated Quizno's
franchised restaurants from 1987 to 1994 when it was sold to our company. Mr.
Schaden is the founding partner of the law firm of Schaden, Katzman, Lampert &
McClune with offices in Bloomfield Hills, Michigan and Broomfield, Colorado. Mr.
Schaden graduated from the University of Detroit with a Bachelor of Science in
Aeronautical Engineering, received his Juris Doctorate from the University of
Detroit Law School and is an internationally known, well-published attorney,
specializing in aviation law. Prior to entering the legal profession, Mr.
Schaden was an aeronautical engineer for Boeing Aircraft and Continental
Aviation and Engineering. Mr. Schaden has been on the board of numerous private
companies. See "Certain Transactions."
Mr. Frederick H. Schaden is an Executive Vice President of the Automotive
Consulting Group of Aon Consulting, Inc. Aon Consulting, Inc. is a subsidiary of
Aon Corporation, a publicly held company with annual revenues of nearly $6
billion. He has been employed by Aon for over 25 years and has served as a
senior officer of its affiliates since 1981. Mr. Schaden earned a B.S. in
Business Administration from Xavier University in Cincinnati, Ohio. See "Certain
Transactions."
Mr. J. Eric Lawrence has been the General Partner of Retail & Restaurant
Growth Capital, L.P. ("RRGC"), a $60 million investment fund focused on
providing growth and expansion capital to small businesses in the retail and
restaurant industries, since December 1995. RRGC is a Small Business Investment
Company, federally licensed by the Small Business Administration. RRGC loaned
$2,000,000 to our company in 1996, and Mr. Lawrence was elected to the Board
pursuant to a contractual arrangement between our company and RRGC. As a result
of the Tender Offer and the purchase of the outstanding warrants held by RRGC,
such contract has been terminated. Mr. Lawrence has been extensively involved in
the analysis of the financial, operational and managerial aspects of retail and
restaurant companies throughout his career. Prior to RRGC, he served as Vice
President of Strategic Retail Ventures, Inc., a boutique financial consulting
and private investment firm focusing on the needs of specialty retail and
restaurant companies from December 1993 to December 1995. Prior to SRV, Mr.
Lawrence was a Senior Consultant with Arthur Andersen, in Dallas, Texas. Mr.
Lawrence is a licensed C.P.A., and is a graduate of Southern Methodist
University with a B.B.A. in Accounting and Minor in Economics, which included
study abroad at Oxford University, Oxford, England.
Mr. Mark L. Bromberg is the President of Foodservice of the viaLink
Company, a public company providing synchronized database management services to
a wide range of retail clients since May 2000. From November 1997 to May 2000,
he served as President of Pinnacle Restaurant Group, a privately held company
that owns and operates casual dining restaurants in the southwestern United
States. Mr. Bromberg previously served as a self-employed management consultant
providing strategic planning, positioning and senior management consulting
services to the hospitality industry, for over five years. Mr. Bromberg is the
former President & CEO of East Side Mario's Restaurants Inc., the Dallas based
subsidiary of PepsiCo which he grew from one restaurant in 1988 to 30 in 1993
when it was sold to PepsiCo. Mr. Bromberg has been the founder and President of
a number of causal dining restaurant chains, including Mr. Greenjeans, Ginsberg
& Wong and Lime Rickey's and served as President of Prime Restaurant Group, the
largest privately-held restaurant chain in Canada. He holds a B.S. and an M.B.A.
from Cornell University and remains highly involved in foodservice education as
a curriculum advisor and guest lecturer. He is a past chairman of the Canadian
Restaurant and Foodservice Association and is a past director of the National
Restaurant Association of the U.S. Mr. Bromberg was elected to the Board of
Directors pursuant to a contractual arrangement with RRGC that required the
election of an additional Board member acceptable to RRGC. As a result of the
Tender Offer and the purchase of the outstanding warrants held by RRGC, such
contract has been terminated.
Mr. Brad A. Griffin has been the managing director of GriffCo Development,
which develops, builds, leases and manages commercial and retail real estate,
since 1994. He is also the managing director of Oasis Investment, a company that
manages investment assets and trades NASDAQ and Exchange stocks and options.
Mr. John J. Todd was elected to the Board of Directors on September 26,
2000. Mr. Todd is the Senior Vice President and Chief Financial Officer of
Gateway Inc., a position he has held since October 1998. Before joining Gateway,
he had held financial positions with the Allied Signal companies from 1997 to
1998, with Boston Market from 1996 to 1997 and with PepsiCo from 1988 to 1996.
He received his bachelor's degree from Longwood College and his M.B.A. from
William and Mary.
Richard F. Schaden is the father of Richard E. Schaden. Frederick H.
Schaden is the brother of Richard F. Schaden and Richard E. Schaden's uncle.
Executive Officers
The following table sets forth (i) the names of the executive officers,
(ii) their ages, and (iii) the capacities in which they serve our company:
Name Age Position(s) with the Company
- ------------------ ----- ---------------------------------------
Richard E. Schaden 36 President, Chief Executive Officer and Chairman of
the Board
Steven B. Shaffer 49 Executive Vice President for Operations
Robert W. Scanlon 54 Executive Vice President for Development
Robert A. Elliott 43 Executive Vice President for Marketing
Sue A. Hoover 54 Executive Vice President for Corporate Communications
Richard F. Schaden 62 Vice President, Secretary and Director
Patrick E. Meyers 41 Vice President and General Counsel
John L. Gallivan 53 Chief Financial Officer, Treasurer and Assistant
Secretary
Executive Officer's Biographical Information
See "Director's Biographical Information" above for a description of the
backgrounds of Richard E. Schaden and Richard F. Schaden.
Steven B. Shaffer has been our Executive Vice President for Operations
since May 22, 2000. Prior to that he had been a franchisee of the Company since
1992, an Area Director of the Company since 1996 and a Senior Vice President of
the Company since October 1998. Mr. Shaffer graduated from the University of
Georgia in 1972.
Robert W. Scanlon has been our Executive Vice President of Development
since October 1998. Mr. Scanlon served as our Senior Vice President of Real
Estate/Design & Construction from August 1997 through September 1998. He also
served as our Senior Vice President of Concept Development and Design from
January 1997 to July 1997 and as our Vice President of Nontraditional
Development from May 1996 to December 1996. From June 1990 through April 1996,
he was first Vice President of Sales and Marketing and later Vice President of
Business Development for Carts of Colorado, located in Commerce City, Colorado,
an equipment manufacturer. Mr. Scanlon graduated from the University of Texas,
with a B.S. degree in 1973.
Robert A. Elliott became our Executive Vice President of Marketing in
February 2000. Prior to joining us, he was a partner at Bozell Worldwide, Inc.,
an advertising agency in Detroit, Michigan, from 1997 to 1999, and on the
marketing staff of Little Caesar Enterprises, Inc. for over 18 years, including
serving as Vice President - Marketing from 1993 to 1997. Mr. Elliott graduated
from Eastern Michigan University with a B.B.A. degree in 1979.
Sue A. Hoover joined our company as Director of Marketing in 1991. She was
named Senior Vice President of Marketing in 1997 and was named an Executive Vice
President in October 1998. In February of 2000, she became our Executive Vice
President of Corporate Communications. Ms. Hoover graduated from the University
of Iowa with a B.A. in 1968.
Patrick E. Meyers joined our company in 1997. He had been an associate
with the Denver law firm of Moye, Giles, O'Keefe, Vermeire & Gorrell since
September 1991, and was selected as a partner of that firm in 1996. Before that
he served as a judicial law clerk to a Justice of the Colorado Supreme Court
from July 1990 to September 1991. Mr. Meyers received his J.D. degree from the
University of California, Hastings College of Law and his B.A. degree from the
University of Colorado-Denver. Mr. Meyers served as a Director of our company
from 1993 to 1997, when he resigned to become a full-time employee of our
company.
John L. Gallivan joined our company as Chief Financial Officer in 1994. He
was later elected Treasurer and Assistant Secretary. Prior to his joining our
company, he was a director and Executive Vice President of Grease Monkey Holding
Corporation of Denver, a franchisor, owner, and operator of over 200 ten-minute
oil change and fluid maintenance centers in the U.S. and Mexico from 1979
through April 1994. He is a member of the Colorado Society and the American
Institute of CPAs. He graduated from the University of Colorado at Boulder with
a bachelors degree in accounting.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the our
directors, our officers (including a person performing a policy-making function)
and persons who own more than 10% of a registered class of our equity securities
("10% Holders") to file with the Securities and Exchange Commission ("SEC")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities. Directors, officers and 10% Holders are required by
SEC regulations to furnish us with copies of all of the Section 16(a) reports
they file. Based solely upon such reports, we believe that during fiscal 2000
our directors, advisors, officers and 10% Holders complied with all filing
requirements under Section 16(a) of the Exchange Act, except that Mr. Shaffer
inadvertently failed to timely file a Form 4. Such failure was remedied by the
timely filing of his From 5 for fiscal 2000.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
Set forth below is information about compensation during fiscal 2000 of
our five most highly compensated executive officers, including our CEO, and two
non-executive officers who would have been in the top five most highly
compensated executive officers if they had been executive officers ("Named
Officers").
Summary Compensation Table. The following table provides certain summary
information for fiscal 2000, 1999 and 1998 concerning compensation awarded, paid
to, or earned by, the Named Officers:
Annual Compensation Long-Term and Other
------------------- Compensation
----------------------------
Option 401(k) Plan
Name and Position Year(1) Salary Bonus Shares(2) Contribution(3)
- ----------------- --------- -------- -------- ---------- ---------------
Richard E. Schaden, 12/31/98 $181,452 $130,625 5,164 $2,000
President and 9/30/99 $196,710 $ 1,500(4) 33,000 $2,329
Chief Executive 9/30/00 $221,500 $301,500(4) 4,000 $3,997
Officer
Steven B. Shaffer, 12/31/98 $ 22,611 $ 0 4,000 $ 0
Executive Vice 9/30/99 $ 75,000 $ 8,177 18,500 $ 0
President 9/30/00 $126,000 $113,044 0 $3,192
For Operations
Patrick E. Meyers, 12/31/98 $ 84,000 $ 24,674 5,164 $ 0
Vice President and 9/30/99 $ 72,768 $ 24,674 14,000 $2,500
General Counsel 9/30/00 $126,667 $120,146 0 $2,749
Robert W. Scanlon, 12/31/98 $ 85,783 $ 28,115 5,164 $3,418
Executive Vice 9/30/99 $ 78,000 $ 10,289 9,000 $5,885
President of 9/30/00 $118,334 $ 48,067 0 $3,977
Development
Sue A. Hoover, 12/31/98 $ 90,479 $ 13,968 9,164 $3,016
Executive Vice 9/30/99 $ 73,125 $ 20,826 6,000 $3,962
President of 9/30/00 $124,167 $ 36,120 0 $7,609
Corporate
Communications
John Fitchett, 12/31/98 $ 92,000 $ 7,674 5,164 $1,051
Senior Vice 9/30/99 $ 75,000 $ 11,233 9,000 $1,916
President 9/30/00 $113,542 $121,324 0 $5,579
George Boedecker 12/31/98 $ 29,200 $ 4,343 6,000 $ 0
Senior Vice 9/30/99 $ 75,000 $ 6,212 13,000 $1,787
President 9/30/00 $115,375 $118,451 0 $5,712
Richard F. Schaden, 12/31/98 $ 83,500 $ 78,375 0 $ 0
Vice President and 9/30/99 $ 62,625 $ 0(4) 0 $ 0
Secretary 9/30/00 $ 86,979 $ 0(4) 4,000 $ 0
(1) Fiscal 1999 contained only nine months because we changed our fiscal year
end to September 30 during 1999.
(2) During fiscal 2000 and prior years, as an incentive for our eligible
employees to work to enhance our performance and assure our future success, we
granted options to purchase shares of common stock to successful employees from
time to time under our Employee Stock Option Plan. All options indicated in this
table have been granted under such Plan.
(3) We provide our employees with a 401(k) Employee's Savings Plan, pursuant to
which we contribute to each eligible employee's account an amount equal to 100%
of such employee's annual contribution up to 6% of each employee's total
compensation. Employees in 1999 were limited to a maximum contribution of
$10,000 by applicable provisions of the Internal Revenue Code. That amount
increases to $10,500 in 2000. Prior to 1999, our match was 50% of each
employee's contribution. We have issued shares of Common Stock for 50% our
annual contribution to each account under the 401(k) Plan. In December 2000, our
directors amended the 401(k) plan to provide for 100% of matches in cash.
(4) The Company is contractually obligated to pay both Mr. Richard E. Schaden
and Mr. Richard F. Schaden a bonus based upon any positive increase in earnings
before interest, taxes, depreciation and amortization for each full calendar
year over the level of such amount for the prior full calendar year during the
term of their respective employment agreements. See "Employment Contracts"
below. During 1999, there was a change in accounting principle resulting from a
change in the Securities and Exchange Commission's position regarding the
recognition of area director fees as income. The Commission's position shifted
from one permitting immediate recognition to one requiring amortization of such
fees into income over several years. As a result, we took a charge against
earnings in fiscal 1999 of $2,769,592. The impact on the Schadens from this
change was that they received virtually no bonuses for fiscal 1999. However, in
future years a portion of their bonuses will result from amortized income from
area director fees that had been taken into income, and therefore counted
towards their bonuses in years prior to the accounting change and the charge
against income described above. The next bonus calculation for the Schadens will
be made for the calendar year 2000. The Board of Directors has approved an
advance of $300,000 to Richard E. Schaden based on the expectation that his
bonus will be in excess of such amount. In addition, the Board of Directors has
approved the exclusion of certain one time non-recurring expense items in the
amount of $2,916,536 from the calculation of EBITDA for the purpose of
determining the Schadens' bonuses for 2000.
Stock Option Awards. We adopted our Employee Stock Option Plan (the
"Employee Plan") in 1993. The purposes of the Employee Plan are to enable our
company to provide opportunities for certain officers and key employees to
acquire a proprietary interest in our company, to increase incentives for such
persons to contribute to our performance and further success, and to attract and
retain individuals with exceptional business, managerial and administrative
talents, who will contribute to our progress, growth and profitability. As of
November 30, 2000, we had issued 68,091 shares upon exercise of options under
the Employee Plan and had outstanding grants of options covering 448,226 shares
currently reserved for issuance under the Employee Plan.
Options granted under the Employee Plan include both incentive stock
options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and non-qualified stock options ("NQOs").
Under the terms of the Employee Plan, all of our officers and employees are
eligible for ISOs. We determine which persons will receive ISOs, the applicable
exercise price, vesting provisions and the exercise term. The terms and
conditions of option grants differ and are set forth in the optionees individual
stock option agreement. Such options generally vest over a period of one or more
years and expire after up to ten years. ISOs must satisfy the statutory
requirements of the Code In order to qualify for certain preferential treatment.
Options that fail to satisfy those requirements will be deemed NQOs and will not
receive preferential treatment under the Code. Upon exercise, shares will be
issued upon payment of the exercise price in cash, by delivery of shares of
Common Stock, by delivery of options granted under the Employee Plan or a
combination of any of these methods.
In connection with our self-tender offer that was completed on December
11, 2000, our Board of Directors has approved a profit sharing plan that all
Quizno's employees will be able to participate in. Such plan will replace the
Employee Plan beginning in 2001.
Option information for fiscal 2000 relating to the Named Officers is set
forth below:
Option Grants in Fiscal 2000
Number of
Shares of
Common Stock Percentage of
Underlying Total Options
Options Granted to
Granted in Employees in Expiration
Name Fiscal 2000 Fiscal 2000 Date
- -------------------- -------------- -------------- -------- ------------
Richard E. Schaden 4,000 2.3% $7.375 1/1/10(1)
Richard F. Schaden 4,000 2.3% $7.375 1/1/10(1)
Steven B. Shaffer 0 - - -
Patrick E. Meyers 0 - - -
Robert W. Scanlon 0 - - -
Sue A. Hoover 0 - - -
John Fitchett 8,000 4.6% $6.38 8/8/05(2)
George Boedecker 10,000 5.7% $6.57 8/8/05(2)
- ----------
(1) The grants of these options were included in the grants to all directors
under our Directors and Advisors Stock Option Plan and expire on the first
to occur of the tenth anniversary of the grant date or the third
anniversary of the termination of the individual's status as a Director or
Advisor.
(2) These options, granted under the Employee Plan, vest in equal proportions
on the second, third and fourth anniversaries of the grant. They terminate
on the fifth anniversary of the grant or ninety days after termination of
employment, if earlier.
Option Exercises and Year-End Values in Fiscal 2000
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year End at Year End(1)
Shares Value ----------------------------- -----------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- -------- ----------- ------------- ----------- -------------
Richard E. Schaden 3,873 $12,122 5,087 34,291 $ 2,370 $1,381
Richard F. Schaden 0 $ 0 4,000 0 $ 0 $ 0
Steven B. Shaffer 4,000 $12,000 0 20,000 $ 0 $6,260
Robert W. Scanlon 0 $ 0 5,600 12,691 $16,764 $8,776
Sue A. Hoover 3,873 $11,619 13,200 12,091 $20,556 $6,124
Patrick E. Meyers 3,873 $14,040 22,000 15,291 $54,700 $2,020
John Fitchett 0 $ 0 5,600 20,691 $16,764 $9,256
George Boedecker 0 $ 0 1,800 25,700 $ 4,617 $5,426
- ----------
(1) The dollar values are calculated by determining the difference between $6.44
per share, the fair market value of the Common Stock at September 30, 2000, and
the exercise price of the respective options.
Employment Contracts. On December 12, 2000, the Company entered into
a new employment agreement with Richard E. Schaden, which has a three-year term
and provides for an annual salary of $481,000. Under the agreement, Richard E.
Schaden will be entitled to an annual bonus equal to four percent of the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") up to the amount of EBITDA projected in the annual budget approved by
the Company's Board of Directors for that calendar year. To the extent actual
EBITDA exceeds budgeted EBITDA for that calendar year, Richard E. Schaden will
be entitled to an annual bonus of twelve percent of the amount of such excess
EBITDA. In the event Richard E. Schaden is terminated by the Company without
cause or his employment agreement is not renewed under terms at least as
favorable as exists as of the expiration date of the employment agreement, he
would be entitled to termination payments equal to three years' base salary plus
bonus (which bonus payment will not be less than $400,000 for each year in which
the severance payment is due). Either party may terminate the agreement with 30
days' notice. Mr. Schaden will devote his full time to company matters. Under
his prior employment agreement, his annual base salary was $220,000. That
agreement provided an annual bonus equal to 10% of any positive increase in
earnings before interest, taxes, depreciation and amortization for each full
calendar year during the term of the agreement over the level of such amount for
the prior full calendar year. Both the old and new employment agreements provide
that Mr. Schaden also receive a monthly automobile allowance of up to $620.00
plus up to $150.00 for insurance coverage. The contracts provide that we pay
one-half of Mr. Schaden's medical insurance coverage and one-half of the cost of
disability insurance. We also pay for $1,000,000 of term life insurance for Mr.
Schaden, payable to his designated beneficiary.
On December 12, 2000, the Company entered into a new employment agreement
with Richard F. Schaden, which has a three-year term and provides for an annual
salary of $100,000. Under the agreement, Richard F. Schaden will be entitled to
an annual bonus equal to two percent of the Company's EBITDA up to the amount of
EBITDA projected in the annual budget approved by the Company's Board of
Directors for that calendar year. To the extent actual EBITDA exceeds budgeted
EBITDA for that calendar year, Richard F. Schaden will be entitled to an annual
bonus of eight percent of the amount of such excess EBITDA. In the event Richard
F. Schaden is terminated by the Company without cause or his employment
agreement is not renewed under terms at least as favorable as exists as of the
expiration date of the employment agreement, he would be entitled to termination
payments equal to three years' base salary plus bonus (which bonus payment will
not be less than $400,000 for each year in which the severance payment is due).
Either party may terminate the agreement with 30 days' notice. Mr. Schaden will
not devote his full time to company matters, but will devote such time to
company matters as we request. Mr. Schaden may take on special projects for us
at the direction of the Board of Directors and receive additional compensation
for such projects. Under his prior employment agreement, his annual base salary
was $83,500. That agreement provided an annual bonus equal to 6% of any positive
increase in earnings before interest, taxes, depreciation and amortization for
each full calendar year during the term of the agreement over the level of such
amount for the prior full calendar year.
Robert Elliott has entered into an employment agreement with us that
terminates on January 16, 2003. His contract provides that he will serve as our
Executive Vice President for Marketing. Mr. Elliott will devote his full time to
company matters. His annual base salary is $180,000 in 2000, $200,000 in 2001,
and $220,000 for the remainder of the term. Such amount may be adjusted from
time to time by mutual agreement between Mr. Elliott and the Company. The
agreement provides a $25,000 signing bonus payable on his nine month
anniversary, and a second year signing bonus of $10,000 due on his second year
anniversary date. The agreement provides an annual performance bonus equal to a
maximum of 20% of Mr. Elliott's base salary, as well as an automobile allowance
of $650.00 per month. The agreement provides that Mr. Elliott will receive
options to purchase 20,000 shares of the Company's stock. He may receive
additional options or be entitled to participate in other employee benefit or
compensation programs as provided by us from time to time. Either party may
terminate the agreement with 30 days' notice. If we terminate the agreement
without cause, we are obligated to pay Mr. Elliott a severance payment equal to
6 months base salary. During the term of the agreement and for 6 months after it
terminates, Mr. Elliott agrees not to work for any competitor.
None of the other executive officers have an employment agreement with us.
Director Compensation
Directors who are not officers or employees are paid $500 per day for each
Board and Committee meeting they attend and they are reimbursed for their
reasonable expenses of attending such meetings. In addition, all directors
receive an annual grant of options to purchase 4,000 shares of Common Stock,
which immediately vest.
During fiscal 2000, we paid three of our non-employee directors, who
served all year, $2,500 each, a fourth director who attended three meetings
$1,500, and our new director John Todd, $500, as compensation for their
attendance at regular Board and Committee meetings. For their service during
fiscal 2000, all Directors received a grant of options to purchase 4,000 shares
of Common Stock that immediately vested, except John Todd, who received a grant
of options to purchase 1,000 shares of Common Stock that immediately vested.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our equity securities (common stock and three classes of preferred
stock) as of December 18, 2000, (a) by each person known to us to own
beneficially more than 5% of the Common Stock, (b) each of our Named Officers
and directors and (c) by all of our executive officers and directors named
herein as a group.
Preferred
Stock
Common Stock Common Stock Owned and
Name and Address(1) Owned(2) Percentage Percentage
- ------------------- ------------ ------------ ----------
Richard E. Schaden .............. 872,384(3) 35.8% (7)
Richard F. Schaden .............. 921,470(3) 37.0% (7)
Levine Leichtman Capital
Partners II, L.P,
335 North Maple Drive,
Suite 240, Beverly Hills,
CA 90210 ....................... (4) 14.0% 0
Brad A. Griffin ................. 0 * 0
Mark L. Bromberg ................ 14,000(5) * 0
J. Eric Lawrence ................ 0 * 0
Frederick H. Schaden ............ 28,000(5) * (7)
John J. Todd .................... 1,000(5) * 0
Steven B. Shaffer ............... 27,300(6) * (7)
Robert W. Scanlon ............... 0 * 0
Sue A. Hoover ................... 3,873(6) * 0
Patrick E. Meyers ............... 15,723(6) * 0
John Fitchett ................... 0(6) * (7)
George Boedecker ................ 0(6) * (7)
All Executive Officers
and Directors as a Group
(13 persons)(3),(5),(6) ......... 1,885,223 71.3% (7)
- ----------
* Less than 1% of shares outstanding.
(1) All addresses, unless otherwise stated, are 1415 Larimer Street, Denver,
CO 80202.
(2) The persons named in the table have sole voting power with respect to all
shares of common stock shown as beneficially owned by them. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days from the date as of which the table is
presented, upon the exercise of options or warrants, or conversion of
convertible securities. The record ownership of each beneficial owner is
determined by assuming that options or warrants or convertible securities
that are held by such person and that are exercisable or convertible
within 60 days have been exercised or converted. The total outstanding
shares used to calculate each beneficial owner's percentage also assumes
that such options, warrants or convertible securities have been exercised
or converted. Our Class A Cumulative Convertible Preferred Stock ("Class A
Preferred"), Class C Cumulative Convertible Preferred Stock ("Class C
Preferred") and Class E Cumulative Convertible Preferred Stock ("Class E
Preferred") are currently convertible into our common stock on a 1-for-1
basis.
(3) Richard E. Schaden and Richard F. Schaden beneficially own, through a
voting trust pursuant to which they are joint voting trustees, 773,667
shares of our common stock and 146,000 shares of our Class A Preferred,
and 4,000 shares of our common stock owned by a family member for which
the voting trust holds sole voting power. The remaining duration of the
voting trust agreement is four years, subject to extension. In the table,
beneficial ownership of shares, other than the 773,667 shares of common
stock, have been allocated equally to each of them. Such 773,667 shares of
common stock are allocated to Richard F. Schaden in the table, and he has
been given a proxy to vote such shares. Richard E. Schaden has withdrawn
773,667 shares of common stock from the voting trust to use to secure a
personal loan, subject, however, to an agreement to redeposit those shares
into the voting trust if they are no longer necessary to secure such loan.
Otherwise, Richard E. Schaden, individually, 4339 shares of our common
stock held in his own name, 17,378 shares of our common stock represented
by exercisable stock options and 2,000 shares of our common stock owned by
a family member for which he holds sole voting power. Richard F. Schaden,
individually, beneficially owns 34,000 shares of our Class C Preferred,
4,000 shares of our common stock represented by currently exercisable
stock options and 34,803 shares of our Class E Preferred.
(4) We issued warrants to Levine in connection with a loan to us of $13.8
million to finance our self-tender offer for our own common stock that was
completed on December 11, 2000. Such warrants permit Levine to purchase up
to 14% of each class of our capital stock on a fully diluted basis as of
the completion of the tender offer, subject to certain adjustments for
issuances, exchanges or repurchases of our capital stock, at an exercise
price of $.01 per share.
(5) All the shares indicated as owned by Messrs. Bromberg and Todd may be
acquired through the exercise of stock options. All the shares indicated
as owned by Mr. Frederick Schaden may be acquired through the exercise of
stock options or conversion of Class C Preferred by the holder.
(6) Steven B. Shaffer, individually and through an affiliated entity,
beneficially owns 27,300 shares of our common stock. Patrick E. Meyers,
individually, beneficially owns 1,723 shares of our common stock and
14,000 shares of our common stock represented by currently exercisable
stock options. In connection with our self-tender offer for our common
stock completed on December 11, 2000, Messrs. Shaffer, Meyers, Gallivan,
Fitchett and Boedecker and Ms. Hoover converted the equity in their vested
options to purchase our common stock into pro-rata interests in a deferred
compensation plan which became effective on December 1, 2000. Ms. Hoover,
individually beneficially owns 3,873 shares of our common stock.
(7) The Company has issued and outstanding four classes of Convertible
Preferred Stock, the Class A Preferred, Class C Preferred, the Class D
Subordinated Convertible Preferred Stock (the "Class D Preferred") and
Class E Preferred. There are 146,000 shares of Class A Preferred
outstanding: 50% are beneficially owned by Richard F. Schaden and 50% are
beneficially owned by Richard E. Schaden. There are 57,000 shares of Class
C Preferred outstanding: 34,000 shares or 60.0% are held by Richard F.
Schaden and 2,000 shares or 3.5% are held by Frederick H. Schaden. There
are 3,000 shares of Class D Preferred outstanding: 1,000 shares each are
held by each of Messrs. Shaffer, Fitchett and Boedecker. There are 59,480
shares of Class E Preferred outstanding: 34,803 shares or 59% are held by
Richard F. Schaden and 1,473 shares or 2.5% are held by John L. Gallivan.
Among all executive officers and directors as a group, the following
preferred shares are beneficially owned: 100% of the Class A Preferred,
36,000 shares or 63.2% of the Class C Preferred, 1,000 shares or 33.3% of
the Class D Preferred and 36,276 shares or 61% of the Class E Preferred.
None of these classes of preferred stock are publicly traded or registered
under Section 12(b) or 12(g) of the Exchange Act.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1996, Retail & Restaurant Growth Capital, L.P. ("RRGC")
made a $2,000,000 loan to our company, a portion of which was convertible into
372,847 shares of our Common Stock., and with interest accrued at 12.75% per
annum. If the loan were repaid before conversion, RRGC would receive a warrant
to purchase the same number of shares of our Common Stock at $3.10 per share. In
connection with an amendment to the loan agreement, we also issued a Warrant to
RRGC that granted it the right to purchase up to 42,209 shares of the Common
Stock at $5.00 per share. Such number of shares of Common Stock was subject to
downward adjustment if we meet certain net income and other goals. On January 6,
1999, we paid off the loan from RRGC and issued to RRGC the Warrant to purchase
372,847 shares of Common Stock referred to above. In connection with the Tender
Offer, all of RRGC's Warrants were purchased by and a Termination Agreement was
signed that terminated all of our obligations to RRGC.
Effective October 1, 1994, a wholly-owned subsidiary of our company
acquired by merger all of the assets and obligations of Schaden & Schaden, Inc.,
a Colorado corporation, or "SSI", owned by Richard E. Schaden and Richard F.
Schaden. The assets of SSI included interests in several Quizno's Classic Subs
restaurants and interests in two Area Directorships. The consideration paid by
us to the Schadens, included $876,000 that was paid in our Class A Preferred
Stock. The Class A Preferred Stock is non-voting, bears a 6.5% cumulative
dividend, and became convertible on November 1, 1997 into 146,000 shares of the
Common Stock. We may call the Class A Preferred Stock upon 60 days notice.
During fiscal 2000 and 1999 each preferred shareholder received dividends of
$28,470 annually. In addition, Richard F. Schaden owns 34,000 shares of our
Class C Preferred Stock and 34,803 shares of our Class E Preferred Stock and was
paid $36,386 in dividends on such shares during fiscal 2000.
Richard F. Schaden and Frederick H. Schaden, directors of our company,
each own an interest in Illinois Food Management, Inc. ("IFM") that owns
approximately 50% of our Chicago Area Director. We also own approximately 12% of
IFM. In fiscal 2000 and 1999, respectively, we paid the Area Director $459,496
and $142,364 as commissions on the sale of new franchises and royalties. In
early 1996, IFM requested that we extend the payment terms relating to amounts
owed to us by IFM as a result of its operations as an Area Director. As a result
of such request, we agreed to defer payment of $63,547. IFM issued to us a
promissory note in such amount payable over 6 years with an interest rate of 12%
per annum. At September 30, 2000, $ 55,550 was owed to us on this promissory
note. During fiscal 2000 and 1999, payments on such note were $11,800 and
$8,000, respectively. IFM is also indebted to us for $7,216 in connection with
the resale of a Restaurant once operated by IFM. IFM is reducing this debt by
offsetting commissions on royalty fees from that location paid to the managing
Area Director. The debt is expected to be reduced to zero in approximately 15
months.
In 1997, we purchased a Restaurant from a company in which Sue A. Hoover,
our Executive Vice President of Marketing, was a 42.5% shareholder. The purchase
price was $80,000 of which $15,000 was paid in cash and $65,000 paid by issuance
of a promissory note bearing interest at 11% and payable over four years. During
fiscal 2000 and 1999, our company made payments pursuant to the promissory note
totaling $35,219 and $14,245, respectively.
In September 1999, Mr. Fitchett and another employee of ours purchased an
area directorship for $200,000, of which $180,000 was in the form of a
promissory note. During fiscal 2000, no payments were made on the note, and we
paid the Area Director $20,131 in commissions and royalties.
On October 13, 1999, we purchased a 1997 Cessna Citation 525. As of the
same date, we entered into an interchange agreement with Richard F. Schaden,
P.C., which is 100% owned by Richard F. Schaden. Mr. Schaden, through his
company, owns a 1980 Cessna 560 Citation V. Under the interchange agreement, the
parties agreed to lease each aircraft to each other, on an as-needed basis,
without charge, although the parties will pay the operational costs of the
airplane. We also will pay Mr. Schaden or his company to provide services
related to the airplane operations, including for pilot and management services.
During fiscal 2000, we paid Mr. Schaden or an affiliated company $46,162 for
services related to our airplane.
We entered into a Development Agreement, dated November 4, 1999, with Pink
Sand Corporation, which is principally owned by Richard F. Schaden, for the
development rights to United States Territory of Guam and the Commonwealth of
Saipan. The development agreement will require Pink Sand to open five
Restaurants during the term of the agreement. So long as Pink Sand meets the
development schedule, it will have the exclusive rights to develop Restaurants
in the territory. The development fee, paid upon execution of the Agreement, was
$42,500. The fee equals one hundred percent of the first initial franchise fee
and fifty percent of the aggregate initial franchise fees due for all of the
other Restaurants that Pink Sand must develop under the agreement. Each time
Pink Sand signs a franchise agreement for a Restaurant to be developed within
the territory, we will apply the Development Fee in increments equal to fifty
percent of the initial franchise fee due for that Restaurant to reduce the
additional amount Pink Sand must pay. During fiscal 2000, we received payments
of $14,764 in royalties from Pink Sand.
We have guaranteed a personal loan to Richard E. Schaden from Tucker
Anthony Capital Markets, in the approximate amount of $2,100,000, which is
secured by shares of common stock in The Quizno's Corporation owned by Mr.
Schaden and other personal assets, a personal guaranty, and a partial guaranty
by Mr. Schaden's father, Richard F. Schaden. In order to protect against the
potential loss of Mr. Schaden's stock as a result of this transaction (and the
potential negative effects to us), our Board of Directors authorized a guaranty
from the Company by which we assure Tucker Anthony that upon an event of a
default in Mr. Schaden's loan, the Company will be responsible for the principal
and interest on the loan. We will enter into a reimbursement agreement with Mr.
Schaden which will require Mr. Schaden to reimburse us for any expenses or
losses suffered by us in connection with the guaranty. We do not expect to incur
any such expenses or losses, as the guaranty would only be drawn against by
Tucker Anthony if (a) Mr. Schaden's shares of common stock became insufficient
collateral (in combination with Mr. Schaden's other collateral and the
guaranties described above) and (b) Mr. Schaden defaulted on his payment
obligations under the loan.
Thomas Schaden, a brother of Richard F. Schaden and Frederick H. Schaden,
is in the insurance brokerage business and has acted as a broker for our
insurance policies, including the directors and officers policies that we have
purchased.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B. We will furnish to
our shareholders, a copy of any of the exhibits listed below upon payment of
$.25 per page to cover our costs of furnishing the exhibits.
Item No. Exhibit Description
- ---------- ---------------------------------------------------------------
2.1 Articles of Merger Merging Schaden & Schaden into The Quizno's
Operating Company, incorporated by reference to Exhibit 2(ii)
to the Company's Form 8-K, dated November 4, 1994.
2.2 Asset Purchase Agreement, among The Quizno's Acquisition
Company, Bain's Deli Franchise Associates, through its General
Partner, Gemini Enterprises, Ltd., Gemini One, Inc. and Jolles
#4 Partnership, dated November 12, 1997, incorporated by
reference to Exhibit 2.1 to Firm 8-K, filed by the Company with
the SEC on November 26, 1997.
2.3 Asset Purchase Agreement among Stoico Restaurant Group, Inc.
d/b/a Stoico Food Service, Inc., Sub & Stuff, Inc. and
Spaghetti Jack's Inc. and Quizno's Kansas LLC, incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K, filed by
the Company with the SEC on September 1, 1998
2.4 Asset Purchase Agreement, among Quiz-DIA, Inc., Airport
services, Inc. and ASI-DIA, L.P., dated as of the 5th day of
November, 1999, incorporated by reference to Exhibit 2.3 to
Form 8-K, filed by the Company with the SEC on November 22,1999.
3.1 Amended and Restated Articles of Incorporation of the Company,
incorporated by reference to Exhibit 3(a) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
3.2 Articles of Amendment to the Articles of Incorporation of the
Company Authorizing 146,000 Shares of Class A Cumulative
Convertible Preferred Stock, incorporated by reference to
Exhibit 3.2 to the Company's Form 10-KSB, dated March 28, 1997.
3.3 Articles of Amendment changing the Company name, incorporated
by reference to Exhibit 3.3 to the Company's Form 10-KSB, dated
March 28, 1997.
3.4 By-laws of the Company, incorporated by reference to Exhibit 3.
to the Company's Form 10-KSB, dated December 30, 1999.
3.5 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing 100,000 shares of Class B Preferred Stock and
200,000 shares of Class C Cumulative Convertible Preferred Stock,
incorporated by reference to Exhibit 3.5 to the Company's Form
10-KSB, dated March 26, 1998.
3.6 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing 10,000 shares of Class D Cumulative
Convertible Preferred Stock, incorporated by reference to
Exhibit 3.6 to the Company's Form 10-KSB, dated December 30,
1999.
3.7 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing 150,000 shares of Class E Cumulative
Convertible Preferred Stock.*
4.1 Form of certificate evidencing Common Stock, $.001 par value,
of the Company, incorporated by reference to Exhibit 4(a) to
the Company's Registration Statement on Form SB-2 (Reg. No.
33-72378-D).
9.1 Voting Trust Agreement between Richard E. Schaden and Richard
F. Schaden, dated July 14, 1994, incorporated by reference to
Exhibit A to the Schedule 13-D, dated July 14, 1994, filed by
Richard E. Schaden and Richard F. Schaden.
9.2 First Amendment to Voting Trust Agreement dated November 4,
1994, incorporated by reference to Exhibit A to the Amendment
No. 1 to Schedule 13-D, dated November 4, 1994, filed by
Richard E. Schaden and Richard F. Schaden.
9.3 Second Amendment to Voting Trust Agreement dated September 5,
1996, incorporated by reference to Exhibit 9.3 to the Company's
Form 10-KSB, dated March 28, 1997.
9.4 Third Amendment to Voting Trust Agreement dated as of September 1,
1999, incorporated by reference to Exhibit 9.4 to the Company's
Form 10-KSB, dated December 30, 1999.
9.5 Agreement of Waiver and Modification of Voting Trust Agreement
and Stock Purchase Agreement, dated August 8, 2000,
incorporated by reference to Exhibit A to the Amendment No. 5
to Schedule 13-D, dated November 15, 2000, filed on November
21, 2000 by Richard E. Schaden and Richard F. Schaden.
10.1 Employment Agreement of Mr. Richard E. Schaden, dated December
12, 2000, incorporated by reference to the form filed as
Exhibit (e)(1) to the Company's Schedule TO filed with the
Commission on November 13, 2000.
10.2 Employment Agreement of Mr. Richard F. Schaden, dated December
12, 20000, incorporated by reference to the form filed as
Exhibit (e)(2) to the Company's Schedule TO filed with the
Commission on November 13, 2000.
10.3 Employee Stock Option Plan, incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8 (Reg.
No.333-46058), filed on September 19, 2000.
10.4 Amended and Restated Stock Option Plan for Directors and Advisors,
incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (Reg. No.333-46058), filed on
September 19, 2000.
10.5 Indemnity Agreement of Richard E. Schaden, incorporated by
reference to Exhibit 10(e) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.6 Indemnity Agreement of Richard F. Schaden, incorporated by
reference to Exhibit 10(f) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.7 Indemnity Agreement of Patrick E. Meyers, incorporated by
reference to Exhibit 10(g) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.8 Indemnity Agreement of Brownell M. Bailey, incorporated by
reference to Exhibit 10(h) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.9 Indemnity Agreement of Frederick H. Schaden, incorporated by
reference to Exhibit 10(i) to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-72378-D).
10.10 Indemnity Agreement of J. Eric Lawrence, incorporated by
reference to Exhibit 10.10 to the Company's Form 10-KSB, dated
March 26, 1998
10.11 Indemnity Agreement of Mark L. Bromberg, incorporated by
reference to Exhibit 10.11 to the Company's Form 10-KSB, dated
March 26, 1998
10.12 Form of Franchise Agreement*
10.13 Form of Area Director Marketing Agreement*
10.14 Headquarters Office Lease for the Company, incorporated by
reference to Exhibit 10.14(b) to the Company's Form 10-KSB, filed
with the SEC on March 31, 1999.
10.15 The Director, Advisor and Executive Officer SAR and Deferred
Compensation Plan, effective as of December 1, 2000*
10.16 Deferment Agreement between the Company and Illinois Food
Management, Inc., dated February 27, 1996, incorporated by
reference to Exhibit 10.17 to the Company's 10-KSB, dated
March 29, 1996.
10.17 Asset Purchase Agreement between The Quizno's Acquisition Company
and Bain's Deli Corporation dated as of February 1, 1999,
incorporated by reference to Exhibit 10.28 to the Company's form
10-KSB filed with the SEC on March 31, 1999.
10.18 Airplane Purchase Agreement, dated as of September 22, 1999,
between the Company and Sacramento Aviation management Company,
incorporated by reference to Exhibit 10.24 to the Company's Form
10-KSB, dated December 30, 1999.
10.19 Interchange Agreement, dated as of October 13, 1999, between
the Company and Richard F. Schaden, P.C., incorporated by
reference to Exhibit 10.25 to the Company's Form 10-KSB, dated
December 30, 1999.
10.20 Form of Master Franchise Agreement, incorporated by reference to
Exhibit 10.26 to the Company's Form 10-KSB, dated December 30,
1999.
10.21 Investment letter agreement, dated as of October 4, 1999, between
the Company and AMERESCO Commercial Finance, Inc., incorporated by
reference to Exhibit 10.27 to the Company's Form 10-KSB, dated
December 30, 1999.
10.22 Form of Promissory Note, dated as of October 5, 1999, issued by
the Company to AMERESCO Commercial Finance, Inc., incorporated by
reference to Exhibit 10.28 to the Company's Form 10-KSB, dated
December 30, 1999.
10.23 Form of Pledge and Security Agreement, dated as of October 5,
1999, between the Company and AMERESCO Commercial Finance, Inc.,
incorporated by reference to Exhibit 10.29 to the Company's Form
10-KSB, dated December 30, 1999.
10.24 Securities Purchase Agreement between the Company, its
subsidiaries and Levine Liechtman Capital Partners II, L.P.,
incorporated by reference to Exhibit (b)(1) to the Company's
Schedule TO filed with the Commission on November 13, 2000
10.25 Form of Secured Senior Subordinated Note Due 2005 issued to
Levine Liechtman Capital Partners II, L.P., incorporated by
reference to Exhibit (b)(2) to the Company's Schedule TO filed
with the Commission on November 13, 2000
10.26 Form of Warrant to purchase Common Stock issued to Levine
Liechtman Capital Partners II, L.P., incorporated by reference
to Exhibit (b)(3) to the Company's Schedule TO filed with the
Commission on November 13, 2000
10.27 Form of Warrant to purchase Preferred Stock issued to Levine
Liechtman Capital Partners II, L.P., incorporated by reference
to Exhibit (b)(4) to the Company's Schedule TO filed with the
Commission on November 13, 2000
10.28 Form of Registration Rights Agreement between the Company and
Levine Liechtman Capital Partners II, L.P., incorporated by
reference to Exhibit (b)(5) to the Company's Schedule TO filed
with the Commission on November 13, 2000
10.29 Form of Investor Rights Agreement between the Company, Richard
E. Schaden, Richard F. Schaden and Levine Liechtman Capital
Partners II, L.P., incorporated by reference to Exhibit (b)(6)
to the Company's Schedule TO filed with the Commission on
November 13, 2000
10.30 Form of Security Agreement between the Company, certain of its
subsidiaries and Levine Liechtman Capital Partners II, L.P.,
incorporated by reference to Exhibit (b)(7) to the Company's
Schedule TO filed with the Commission on November 13, 2000
10.31 Form of Pledge Agreement between the Company, certain of its
subsidiaries and Levine Liechtman Capital Partners II, L.P.,
incorporated by reference to Exhibit (b)(8) to the Company's
Schedule TO filed with the Commission on November 13, 2000
10.32 Form of Grant of Security Interest in Trademarks, Patents and
Licenses between the Company, its subsidiaries and Levine
Liechtman Capital Partners II, L.P., incorporated by reference to
Exhibit (b)(9) to the Company's Schedule TO filed with the
Commission on November 13, 2000
10.33 Termination Agreement, dated November 6, 2000, between the Company
and Retail & Restaurant Growth Capital, L.P., incorporated by
reference to Exhibit (d)(1) to the Company's Schedule TO filed
with the Commission on November 13, 2000.
10.34 Form of Guaranty Agreement between the Company and Tucker
Anthony, Inc., incorporated by reference to Exhibit (d)(2) to
the Company's Schedule TO filed with the Commission on November
13, 2000.
10.35 Reimbursement Agreement between Richard E. Schaden and the
Company*
20.1 Risk Factors Section from the Company's Prospectus dated January
9, 1998 included in the Registration Statement on Form S-3 filed
by the Company (Registration No. 333-38691), incorporated by
reference to Exhibit 20.1 to the Company's 10-KSB, dated March 26,
1998.
21.1 List of Company subsidiaries.*
23 Consent of Ehrhardt Keefe Steiner & Hottman PC to the
incorporation by reference of its report dated November 20,
2000 appearing elsewhere in this Form 10-KSB into the
Registration Statement on Form S-8 of the Company, Reg. No.
333-46058.*
- ----------
o Filed with this Report.
(b) Reports on Form 8-K. We filed one report on Form 8-K during the fiscal
quarter ending September 30, 2000. The Form 8-K filing reported on an Item 5
matter, the press release announcing the election of John J. Todd to our Board
of Directors. Such filing was made on September 29, 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on December 29, 2000.
THE QUIZNO'S CORPORATION
By: /s/Richard E. Schaden
---------------------------
Richard E. Schaden,
President, Chief Executive
Officer and Chairman of the
Board of Directors
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the dates indicated.
Signature Title Date
/s/ Richard E. Schaden President, Chief Executive December 29, 2000
- ------------------------- Officer and Chairman of the
Richard E. Schaden Board of Directors
(Principal Executive Officer)
/s/ Mark L. Bromberg Director December 29, 2000
- -------------------------
Mark L. Bromberg
/s/ J. Eric Lawrence Director December 29, 2000
- -------------------------
J. Eric Lawrence
/s/ Frederick H. Schaden Director December 29, 2000
- -------------------------
Frederick H. Schaden
/s/ Brad A. Griffin Director December 29, 2000
- -------------------------
Brad A. Griffin
/s/ John J. Todd Director December 29, 2000
- -------------------------
John J. Todd
/s/ John L. Gallivan Chief Financial Officer December 29, 2000
- ------------------------- and Treasurer (Principal
John L. Gallivan Financial and Accounting
Officer)
Annex E
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1169286
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 Larimer Street
Denver, Colorado 80202
(Address of principal executive offices)
(720) 359-3300
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Outstanding at
Class May 4, 2001
------------------------------ -----------
Common Stock, $0.001 par value 2,337,439 shares
THE QUIZNO'S CORPORATION
Commission File Number: 000-23174
Quarter Ended March 31, 2001
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statement of Stockholders' Equity (Deficit)
Notes to Consolidated Financial Statements
Management's Discussion and Analysis or Plan of Operation
Part II - OTHER INFORMATION
Signatures
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
FRANCHISE OPERATIONS:
Continuing fees (Note 9)............... $ 6,562,881 $ 3,871,071 $ 12,560,618 $ 7,508,553
Initial franchise fees ................ 1,707,473 1,459,677 3,253,473 2,922,107
Area director and master franchise fees 189,297 150,926 385,683 631,722
Other ................................. 335,519 321,218 745,098 548,621
Interest .............................. 200,643 135,399 385,712 266,092
------------ ------------ ------------ ------------
Total revenue ....................... 8,995,813 5,938,291 17,330,584 11,877,095
------------ ------------ ------------ ------------
Expenses
Sales and royalty commissions ......... (2,503,432) (1,883,516) (4,765,500) (3,640,536)
General and administrative ............ (4,243,884) (3,132,854) (8,641,416) (5,654,369)
------------ ------------ ------------ ------------
Total expenses ...................... (6,747,316) (5,016,370) (13,406,916) (9,294,905)
------------ ------------ ------------ ------------
Net income from franchise operations ..... 2,248,497 921,921 3,923,668 2,582,190
------------ ------------ ------------ ------------
COMPANY STORE OPERATIONS: (Note 5)
Sales ................................. 4,310,019 3,757,196 8,355,705 6,617,933
------------ ------------ ------------ ------------
Cost of sales ......................... (1,219,692) (1,071,426) (2,422,238) (1,929,722)
Cost of labor ......................... (901,470) (824,348) (1,837,151) (1,700,870)
Other store expenses .................. (1,769,967) (1,553,801) (3,534,625) (2,487,925)
------------ ------------ ------------ ------------
Total expenses ...................... (3,891,129) (3,449,575) (7,794,014) (6,118,517)
------------ ------------ ------------ ------------
Net income from Company stores
operations .............................. 418,890 307,621 561,691 499,416
------------ ------------ ------------ ------------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (continued)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
New company start-up costs .............. $ -- $ -- $ (289,878) $ --
Impairment of long-lived assets (Note 5) -- -- (1,217,632) --
Financing costs (Note 4) ................ (70,352) -- (2,275,465) --
Loss on sale of Company stores .......... (63,439) -- (100,167) (43,595)
Provision for bad debts .................. (75,077) (45,614) (140,322) (213,485)
Depreciation and amortization ............ (562,282) (422,855) (1,113,994) (866,008)
Amortization of deferred financing costs . (193,511) (18,854) (249,955) (37,686)
Interest expense ......................... (972,341) (458,334) (1,592,385) (925,302)
Other expense ............................ (85,409) (37,657) (87,003) (98,216)
----------- ----------- ----------- -----------
Total other income (expense) ............. (2,022,411) (983,314) (7,066,801) (2,184,292)
----------- ----------- ----------- -----------
Net income (loss) before income taxes .... 644,976 246,228 (2,581,442) 897,314
Income tax (provision) benefit ........... (238,641) (76,178) 955,134 (302,545)
----------- ----------- ----------- -----------
Net income (loss) ........................ 406,335 170,050 (1,626,308) 594,769
Preferred stock dividends ................ (45,716) (40,341) (95,010) (79,626)
----------- ----------- ----------- -----------
Net income (loss) applicable to common
shareholders ............................. $ 360,619 $ 129,709 $(1,721,318) $ 515,143
=========== =========== =========== ===========
Basic net income (loss) per share of common
stock .................................... $ 0.15 $ 0.04 $ (0.66) $ 0.17
=========== =========== =========== ===========
Diluted net income (loss) per share of
common stock ............................. $ 0.12 $ 0.03 $ (0.66) $ 0.14
=========== =========== =========== ===========
Weighted average common shares outstanding
-----------
Basic .................................... 2,345,579 2,991,388 2,610,474 2,990,259
=========== =========== =========== ===========
Diluted .................................. 3,134,670 3,822,721 2,610,474 3,782,622
=========== =========== =========== ===========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
2001 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 1,795,131 $ 2,493,976
Restricted cash (Note 8) ............................. 1,054,340 --
Short term investments ............................... 5,436,814 5,324,336
Accounts receivable, net of allowance for doubtful
accounts of $336,021 at March 31, 2001 and
$222,293 at September 30, 2000 ...................... 5,398,034 2,066,247
Current portion of notes receivable (Note 7) ......... 1,549,602 1,545,844
Deferred tax asset ................................... 221,182 221,182
Other current assets ................................. 1,745,878 481,854
----------- -----------
Total current assets ................................... 17,200,981 12,133,439
----------- -----------
Property and equipment and assets held for resale at cost, net of accumulated
depreciation and amortization of $2,771,947 at March 31, 2001 and $2,433,637 at
September 30, 2000 (Note 5) ........................... 10,764,223 11,863,819
----------- -----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$842,275 at March 31, 2001 and $1,104,646 at
September 30, 2000 (Note 5) ......................... 4,204,282 4,600,528
Investments in area directorships, net of accumulated
amortization of $358,033 at March 31, 2001 and
$203,062 at September 30, 2000 (Note 6) ............. 4,334,047 4,236,151
Other deferred assets (Note 4) ....................... 6,363,377 2,782,498
Deferred tax asset ................................... 4,227,619 4,210,626
Deposits and other assets ............................ 118,814 130,837
Notes receivable, net of allowance for doubtful
accounts of $50,000 at March 31, 2001 and $50,000 at
September 30, 2000 .................................. 1,193,670 1,301,435
----------- -----------
Total other assets ..................................... 20,441,809 17,262,075
----------- -----------
Total assets ........................................... $48,407,013 $41,259,333
=========== ===========
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, September 30,
2001 2000
------------ ------------
CURRENT LIABILITIES:
Accounts payable .................................... $ 4,295,457 $ 2,614,437
Accrued liabilities ................................. 2,255,617 1,495,797
Current portion of long term obligations ............ 1,649,051 1,550,501
Reserve for impairment (Note 5) ..................... 414,953 --
Income taxes payable ................................ -- 370,557
------------ ------------
Total current liabilities ............................. 8,615,078 6,031,292
Line of credit (Note 3) ............................... -- --
Long term obligations (Notes 4 and 8) ................. 27,645,538 16,037,238
Deferred revenue ...................................... 18,027,345 16,402,957
------------ ------------
Total liabilities ..................................... 54,287,961 38,471,487
COMMITMENTS AND CONTINGENCIES (Notes 2 and 7)
Warrants subject to put (Note 4) ...................... 3,373,801 --
Preferred stock, $.001 par value, 1,000,000 shares authorized:
Series A issued and outstanding 146,000 at March 31,
2001 and September 30, 2000 ($876,000 liquidation
preference) ........................................ 146 146
Series C issued and outstanding 57,000 at March 31,
2001 and 167,000 at September 30, 2000 ($285,000
liquidation preference) ............................ 57 167
Series D issued and outstanding 3,000 at March 31,
2001 and September 30, 2000 ($9,000 liquidation
preference) ........................................ 3 3
Series E issued and outstanding 59,480 at March 31,
2001 and September 30, 2000 ($512,718 liquidation
preference) ........................................ 59 59
Common stock, $.001 par value; 9,000,000 shares
authorized; issued and outstanding 2,337,439 at March
31, 2001 and 3,007,921 at September 30, 2000 (Note 4) 2,337 3,008
Capital in excess of par value ........................ 347,689 3,857,702
Accumulated deficit ................................... (9,605,040) (1,073,239)
------------ ------------
Total liabilities and stockholders' equity (deficit) .. $ 48,407,013 $ 41,259,333
============ ============
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (1,626,308) $ 594,769
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ....................... 1,113,993 866,008
Impairment of long-lived assets ..................... 1,217,632 --
Provision for losses on accounts receivable ......... 140,322 213,485
Deferred income taxes ............................... (16,993) (25,085)
Promissory notes accepted for area director fees .... (94,824) (221,357)
Prior year start-up and financing costs ............. 207,896 --
Amortization of prepaid interest expense ............ 561,229 --
Loss on disposal of Company store ................... 13,360 43,595
Amortization of deferred financing costs ............ 249,956 37,686
Amortization of deferred area director fee revenue .. (196,035) (54,322)
Interest expense accruals associated with benefit
plans .............................................. 58,468 --
Area director expenses recognized ................... 20,570 5,432
Other ............................................... 2,177 --
Changes in assets and liabilities:
Accounts receivable ............................... (3,472,109) (868,043)
Other current assets .............................. (84,527) (56,828)
Accounts payable .................................. 2,938,275 339,930
Accrued liabilities ............................... 759,820 459,036
Income taxes payable .............................. (1,627,812) (851,469)
Deferred franchise costs .......................... (557,226) (89,550)
Deferred initial franchise fees and other fees .... 1,820,423 523,995
------------ ------------
Net cash provided by operations ........................ 1,428,287 917,282
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................... (1,214,794) (4,894,545)
Issuance of other notes receivable ................... (1,425,820) (89,000)
Short term investments and restricted cash ........... (1,166,818) (2,590,655)
Proceeds from the sale of assets and stores .......... 1,148,000 137,361
Acquisition of Company owned stores ................. -- (5,767,393)
Principal payments received on notes receivable ...... 1,624,651 345,158
Intangible and deferred assets and deposits .......... (207,561) 105,959
Investments in area director territories ............. (252,866) (685,916)
------------ ------------
Net cash used in investing activities .................. (1,495,208) (13,439,031)
------------ ------------
(continued on next page)
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock ....................... -- 143,778
Proceeds from sale of Class D and Class E Preferred
Stock ............................................ -- 293,583
Principal payments on long term obligations ....... (2,553,726) (3,513,897)
Proceeds from issuance of notes payable .......... 12,000,000 17,180,000
Financing costs .................................. (1,760) (646,317)
Common Stock repurchased .......................... (6,232,440) (1,114,032)
Costs associated with tender of Common Stock and
repurchase of stock options and warrants ......... (3,748,988) --
Dividends paid .................................... (95,010) (79,626)
------------ ------------
Net cash (used in) provided by financing activities . (631,924) 12,263,489
------------ ------------
Net decrease in cash ................................ (698,845) (258,260)
Cash, beginning of period ........................... 2,493,976 626,828
------------ ------------
Cash, end of period ................................. $ 1,795,131 $ 368,568
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest .......... $ 1,074,925 $ 747,329
============ ============
Cash paid during the period for income taxes ...... $ 672,468 $ 1,528,450
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 2000, we accepted a promissory note in the
amount of $19,446 for equipment previously held for resale. A note receivable in
the amount of $79,566 was capitalized in exchange for an Area Director territory
repurchased during the quarter. At March 31, 2000, we had signed Class E
Preferred Stock Subscription Agreements for $500,020, of which $175,020 was
included in accounts receivable and subsequently collected in April 2000. Also,
a Company store held for resale was closed and the net assets of $35,633 were
written-off.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible
Preferred Stock Common Stock Additional
-------------------------- -------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30,
1999 ........................ 313,000 $ 313 3,074,177 $ 3,074 $ 4,485,949 $(2,375,478)
Issuance of common stock
for exercise of options
and pursuant to the .......... -- -- 77,749 78 284,413 --
employee benefit plan
Tax benefit from exercise
of options ................... -- -- -- -- 17,889 --
Issuance of Series D
Convertible Preferred
Stock ........................ 4,000 4 -- -- 11,396 --
Repurchase of Series D
Convertible Preferred Stock .. (1,000) (1) -- -- (2,999) --
Issuance of Series E
Convertible Preferred
Stock ........................ 59,480 59 -- -- 467,152 --
Common Stock repurchased ..... -- -- (144,005) (144) (1,219,641) --
Preferred stock dividends .... -- -- -- -- (186,457) --
Net income ................... -- -- -- -- -- 1,302,239
----------- ----------- ---------- ----------- ----------- -----------
Balances at September 30,
2000 ........................ 375,480 375 3,007,921 3,008 3,857,702 (1,073,239)
Payment in lieu of Common
Stock contribution to the
employee benefit plan ........ -- -- (2,360) (3) (20,267) --
Issuance of common stock
for exercise of options ...... -- -- 933 1 (1) --
Conversion of Series C
Convertible Preferred
Stock ........................ (110,000) (110) 110,000 110 -- --
Common Stock tendered
(Note 4) ..................... -- -- (779,055) (779) (3,394,735) (2,836,926)
Costs associated with
tender offer (Note 4) ........ -- -- -- -- -- (4,068,567)
Preferred stock dividends .... -- -- -- -- (95,010) --
Net (loss) ................... -- -- -- -- -- (1,626,308)
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 2001 ... 265,480 $ 265 2,337,439 $ 2,337 $ 347,689 $(9,605,040)
=========== =========== =========== =========== =========== ===========
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF CONSOLIDATION
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
consolidated operations for the three and six month periods ended March 31,
2001 and March 31, 2000, (b) the consolidated financial position at March 31,
2001 and September 30, 2000, (c) the consolidated statements of cash flows
for the six month periods ended March 31, 2001 and March 31, 2000, and (d)
the consolidated changes in stockholders' equity (deficit) for the twelve
month and six month periods ended September 30, 2000 and March 31, 2001,
respectively, have been made.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for financial statements. For further information, refer to the
audited consolidated financial statements and notes thereto for the twelve
months ended September 30, 2000, included in our Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission filed on December 29, 2000.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain reclassifications have been made to the balances for the three and
six months ended March 31, 2000 to make them comparable to those presented
for the three and six months ended March 31, 2001, none of which change the
previously reported net income or total assets.
In October 1999, we changed our fiscal year from December 31 to September 30.
The results for the three and six month periods ended March 31, 2001 are not
necessarily indicative of the results for the entire fiscal year of 2001.
Effective January 1, 1999, the Company changed its accounting policy related
to the recognition of area director marketing agreement fees to one that
recognizes such fees as revenue on a straight-line basis over the term of the
agreement, which is ten years. Direct expenses attributable to the fees are
classified as a prepaid and recognized as an expense over the same ten year
term. The effect of the change in fiscal 1999 resulted in the deferral of
$4,262,701 of net revenue previously recognized in prior years. Included in
income for the three and six months ended March 31, 2001 and 2000, was
$129,036 and $258,072, respectively, of amortized deferred net revenue
related to area director marketing agreement fees previously recognized prior
to fiscal 1999.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. COMMITMENTS AND CONTINGENCIES
Other than the items discussed in our annual report on Form 10-KSB for the
year ended September 30, 2000, there are no other pending material legal
proceedings to which we are a party or to which our property is subject.
There are various claims and lawsuits pending by and against the Company. The
settlement of some of these claims and lawsuits may result in the acquisition
of certain area director territories. In the opinion of the management, and
supported by advice from legal counsel, these claims and lawsuits will not
result in any material adverse effect in excess of amounts accrued in the
accompanying consolidated financial statements.
The Company is obligated to pay an opening commission to the area director
who sold the franchise at the time the franchise opens for business. These
commissions are expensed at the time the related franchise opens for business
and are not accrued as a liability of the Company until that time. At March
31, 2001, there were 745 domestic franchises sold but not yet open with
related opening commissions totaling $1,919,999 ($2,295,875 at September 30,
2000).
In 1999, the Company commenced a program called Owner in Training under which
it provides financial assistance to store managers interested in owning their
own franchise. The Company provided financial guarantees to such persons for
start-up capital loans. Under the program, the Company has guaranteed three
such loans totaling $565,000. As of March 31, 2001, there were no new
candidates enrolled in this program.
In April 2001, the Company was notified that one such person, for which a
financial guarantee of $185,000 had been made in January 2000, was past due
on their March 2001 payment. The Company believes that a new franchisee has
been located to purchase this location and therefore will not result in any
material liability for the Company.
3. LINE OF CREDIT
On December 22, 1999 the Company closed on a line of credit loan and was
loaned $3,350,000 by Merrill Lynch Business Financial Services, Inc. The loan
bears interest at the 30 day Dealer Commercial Paper Rate plus 2.5% (equal to
9.15% at November 30, 2000). The maximum amount of the line of credit loan is
$3,350,000, which maximum is reduced monthly based on a seven-year
amortization. The line of credit loan is secured by a first security interest
in the Company's aircraft.
All amounts previously borrowed under the line of credit had been repaid as
of March 31, 2001.
4. TENDER OFFER AND NOTE PAYABLE
On November 13, 2000, the Company announced that it had commenced a tender
offer to purchase all outstanding shares of its common stock, except for
shares held by certain insiders, at a price of $8 per share, net in cash to
the seller. The tender expired and the Company accepted the tendered shares
as scheduled at midnight New York City time December 11, 2000.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. TENDER OFFER AND NOTE PAYABLE (continued)
Prior to the tender there were approximately three million shares of common
stock outstanding, of which approximately 51.6 percent were owned by Richard
E. Schaden, the President and CEO of The Quizno's Corporation; Richard F.
Schaden, Vice President, Secretary and a Director of The Quizno's
Corporation; and Frederick H. Schaden, a Director of The Quizno's
Corporation. The three Schadens did not tender their shares.
As of March 31, 2001, 779,055 shares of Common Stock had been tendered for a
total purchase price of $6,232,440. Direct costs related to the tender
totaled $4,068,567, which included payment for the repurchase of 531,850
stock options and 415,056 warrants.
In conjunction with the tender offer, the Company closed on a loan of
$13,862,260 with Levine Leichtman Capital Partners II, L.P. ("LLCP"). The
proceeds of the loan were used to prepay interest on the loan for one year in
the amount of $1,862,260, to repurchase shares and pay costs associated with
the tender offer and to increase working capital.
The promissory note bears interest at 13.25%, interest only payable monthly,
with the first twelve months prepaid, and is due in full in October 2005.
LLCP received warrants for 14% of the equity ownership of the Company. At
December 31, 2000, the warrants were valued at $3,373,801 and were recorded
on the balance sheet as Warrants Subject to Put and as deferred financing
costs under Other Deferred Assets. The deferred financing costs will be
amortized over the life of the note. The Company will value and adjust the
carrying value of the warrants quarterly. Included in Amortization of
Deferred Financing Costs for the three and six months ended March 31, 2001
was $174,507 and $212,035, respectively, related to the amortization of this
cost. The loan may be paid down to $7 million by September 12, 2001, with no
penalty and with a corresponding reduction in the percent of warrants.
The Company incurred and expensed $2,275,465 of financing costs related to
the LLCP loan.
5. STORES HELD FOR RESALE
At September 30, 2000, the Company had one store classified as a store held
for resale. In October 2000, the Company reclassified 20 stores as held for
resale. During the quarter ended December 31, 2000, two stores were sold
resulting in a gain on sale of $24,419. Also, during the quarter ended
December 31, 2000, the Company incurred costs of $61,147 related to lease
settlements of stores closed. During the quarter ended March 31, 2001, the
Company sold twelve stores and recorded a loss of $63,440. As of March 31,
2001, the Company had seven stores classified as held for resale. The seven
stores held for resale are expected to be sold in 2001.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. STORES HELD FOR RESALE (continued)
Included on the consolidated balance sheets in property and equipment and
assets held for resale and intangible assets were the following amounts
related to stores held for resale:
March 31, September 30,
2001 2000
----------- -----------
Property and equipment ............. $ 1,205,912 $ 157,689
Intangible assets .................. 38,867 41,172
----------- -----------
1,244,779 198,861
Accumulated depreciation and
amortization .................... (227,774) (4,282)
Reserve for impairment ............. (326,953) --
----------- -----------
Net assets of stores held for resale $ 690,052 $ 194,579
=========== ===========
Included in the consolidated statement of operations under Company Store
Operations were the following amounts related to stores held for resale and
Company stores:
Stores Held for Resale Three Months Ended Six Months Ended
- ---------------------- -------------------------- --------------------------
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales ................... $ 1,155,364 $ -- $ 2,458,971 $ 103,153
----------- ----------- ----------- -----------
Cost of sales ........... (364,632) -- (778,022) (43,075)
Costs of labor .......... (292,459) -- (666,977) (40,575)
Other store expenses .... (704,401) (68,511) (1,428,249) (117,246)
----------- ----------- ----------- -----------
Store expenses ....... (1,361,492) (68,511) (2,873,248) (200,896)
----------- ----------- ----------- -----------
Net loss from stores held
for resale ............. $ (206,128) $ (68,511) $ (414,277) $ (97,743)
=========== =========== =========== ===========
Company Stores* Three Months Ended Six Months Ended
- -------------- -------------------------- --------------------------
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales ................... $ 3,154,655 $ 3,757,196 $ 5,896,734 $ 6,514,780
----------- ----------- ----------- -----------
Cost of sales ........... (855,060) (1,071,426) (1,644,216) (1,886,647)
Costs of labor .......... (609,011) (824,348) (1,170,174) (1,447,053)
Other store expenses .... (1,065,566) (1,485,290) (2,106,376) (2,583,921)
----------- ----------- ----------- -----------
Store expenses ....... (2,529,637) (3,381,064) (4,920,766) (5,917,621)
----------- ----------- ----------- -----------
Net loss from stores held
for resale ............. $ 625,018 $ 376,132 $ 975,968 $ 597,159
=========== =========== =========== ===========
* INCLUDES QUIZNO'S STORES AND CERTAIN NON-QUIZNO'S OPERATIONS LOCATED AT
DENVER INTERNATIONAL AIRPORT.
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not be recovered. At December 31, 2000, the Company determined that an
impairment related to its carrying value of its assets held for resale was
required and expensed $1,070,106. During the quarter ended March 31, 2001,
the Company offset this impairment reserve $743,153 for losses related to the
stores sold.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. STORES HELD FOR RESALE (continued)
Also, during the quarter ended December 31, 2000, the Company determined that
an impairment was required for certain equipment and inventory and expensed a
total of $147,526.
6. INVESTMENTS IN AREA DIRECTORSHIPS
In the six months ended March 31, 2001, we reacquired three area director
territories for $200,270, including related legal costs.
7. RELATED PARTY TRANSACTIONS
At September 30, 2000, the Company had a note receivable from the Advertising
Fund of $1,030,000. During the six months ended March 31, 2001, the
Advertising Fund made a net repayment of $65,000, along with accrued interest
through December 15, 2000. The March 31, 2001 balance of $965,000, plus
related interest of $21,479, relates to an off-season build-up for
advertising, which will be reimbursed to the Company in 2001.
8. AMRESCO COMMERCIAL FINANCE, INC.
In 1999, the Company entered into loan agreements with AMRESCO Commercial
Finance, Inc. ("AMRESCO"), in which AMRESCO loaned the Company $14 million.
The loan agreements provide, among other things, that if the Company wishes
to secure additional indebtedness, it may do so as long as, after giving
effect to such new indebtedness, the Company meets a minimum financial ratio.
AMRESCO took the position that the LLCP indebtedness (see Note 4) would
result in the Company not achieving the required minimum ratio. The Company
and its outside financial advisors had previously calculated the effect of
the LLCP financing and concluded that the Company would exceed the required
minimum ratio, and responded accordingly to AMRESCO.
In February 2001, the Company and AMRESCO agreed to resolve the dispute in
exchange for the Company's prepayment of principle of approximately
$1,518,000 and payment of a non-refundable credit enhancement of
approximately $169,000. AMRESCO agreed to release its collateral interest in
the assets of eleven Company-owned stores. In addition, the Company agreed to
deposit into an escrow account $1.1 million until the later of July 31, 2001
or the month the minimum ratio is met. The Company expects to achieve this by
September 30, 2001 and have the escrowed funds released.
9. DISTRIBUTION OPERATIONS
The Company's wholly owned distribution company subsidiary, American Food
Distributors, Inc. ("AFD") commenced operations in January 2001 and is in the
business of buying Quizno's proprietary products from the manufacturers and
reselling those products to the unaffiliated company approved to distribute
proprietary and other products to our franchisees. AFD has negotiated
contracts with each manufacturer, and we will no longer receive licensing
fees from those manufacturers. AFD will charge a mark-up on the products,
which, in part, will replace the licensing fees, and, in part, will be paid
to the marketing funds.
(Unaudited)
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this annual report, and in particular in
this section entitled "Management's Discussion and Analysis or Plan of
Operation," are forward-looking statements that involve risks and uncertainties
that might adversely affect our operating results in the future in a material
way. Such risks and uncertainties include, without limitation, the effect of
national and regional economic and market conditions in the U.S. and the other
countries in which we franchise restaurants, costs of fuel and energy, costs of
labor and employee benefits, costs of marketing, the success or failure of
marketing efforts, costs of food and non-food items used in the operation of the
restaurants, intensity of competition for locations and franchisees as well as
customers, perception of food safety, spending patterns and demographic trends,
legal claims and litigation, the availability of financing for us and our
franchisees at reasonable interest rates, the availability and cost of land and
construction, legislation and governmental regulations, and accounting policies
and practices. Many of these risks are beyond our control. In addition, specific
reference is made to the "Risk Factors" section contained in our Prospectus,
dated January 9, 1998, included in the Registration Statement on Form S-3 filed
by our company (Registration No. 333-38691).
The principal sources of our income are continuing fees, initial franchise fees,
and, historically, area director marketing and master franchise fees. These
sources are subject to a variety of factors that could adversely impact our
profitability in the future, including those mentioned in the preceding
paragraph. The continued strength of the U.S. economy is a key factor to the
restaurant business because consumers tend to immediately reduce their
discretionary purchases in economically difficult times. An economic downturn
would adversely affect all three of the sources of income identified above.
Because our franchises are still concentrated in certain regions of the U.S.,
regional economic factors could adversely affect our profitability. Weather,
particularly severe winter weather, will adversely affect royalty income and
could affect the other sources cited above. Culinary fashions among Americans
and people in other countries in which we franchise the restaurants will also
impact our profitability. As eating habits change and types of cuisine move in
and out of fashion, our challenge will be to formulate a menu within the
Quizno's distinctive culinary style that appeals to an increasing market share.
Finally, the intense competition in the restaurant industry continues to
challenge participants in all segments of this industry.
As our revenues from foreign operations become more significant, our
profitability could be adversely impacted by international business risks and
political or economic instability in foreign markets. While international
operations involve risks that do not exist in domestic operations, such as
adverse fluctuation in foreign exchange rates, monetary exchange controls,
foreign government regulation of business relationships, and uncertainty of
intellectual property protection, we believe that the potential rewards of
expanding the market for our services to selected foreign countries far
outweighs such risks.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Overview
Our primary business is the franchising of Quizno's restaurants. As a
franchisor, revenue is principally derived from: (1) continuing fees, (2)
initial franchise fees, and (3) area director and master franchise fees.
Continuing fees increase as the number of franchised restaurants open increase.
Initial franchise fees are one-time fees paid upon the sale of a franchise and
vary directly with the number of franchises we can sell and open. Area director
and master franchise fees occur when a country or exclusive area is sold and are
expected to decline as the number of remaining available markets declines.
Effective January 1, 1999, we changed our accounting policy related to the
recognition of area director marketing agreement fees to one that recognizes
such fees as revenue on a straight-line basis over the term of the agreement,
which is ten years. Each of these sources of revenue contributes to our
profitability, but the relative contribution of each source will vary as we
mature. Over time initial fees and continuing fees will generate proportionately
more revenue than area director and master franchise fees.
For the six months ended March 31, 2001, we incurred a loss before preferred
dividends of $1,626,308, composed of income from franchise operations of
$3,923,668, income from Company owned store operations of $561,691 and less
other income and expense and taxes totaling $(6,111,667). In the comparable
period of fiscal 2000, we earned a profit before preferred dividends of
$594,769, composed of income from franchise operations of $2,582,190, income
from Company owned store operations of $499,416, and less other income and
expense and taxes totaling $(2,486,837).
The following chart reflects our revenue growth by source and number of
restaurants for the three and six month periods of fiscal 2001 compared to the
comparable periods of fiscal 2000:
($ in thousands) Three Months Ended March 31, Six Months Ended March 31,
------------------------------ ----------------------------
% %
2001 2000 Change 2001 2000 Change
------- ------- ------- ------- ------- -------
Continuing fees ............. $ 6,563 $ 3,871 70% $12,560 $ 7,508 67%
Initial franchise fees ...... 1,707 1,460 17% 3,253 2,922 11%
Area director and master
franchise fees .............. 189 151 25% 386 632 (39)%
Other ....................... 336 321 5% 745 549 36%
Interest .................... 201 135 49% 386 266 45%
------- ------- ------- ------- ------- -------
Total franchise revenue ..... 8,996 5,938 51% 17,330 11,877 46%
Sales by Company owned stores 3,155 3,757 (16)% 5,897 6,515 (9)%
Sales by Stores held for
resale ..................... 1,155 -- 100% 2,459 103 2,287%
------- ------- ------- ------- ------- -------
Total Revenue ............... $13,306 $ 9,695 37% $25,686 $18,495 39%
======= ======= ======= ======= ======= =======
Earnings before interest
expense, income taxes,
depreciation and
amortization, preferred stock
dividends (EBITDA) $ 2,373 $ 1,146 107% $ 375 $ 2,726 (75)%
======= ======= ======= ======= ======= =======
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2001 2000 2001 2000
------ ------ ------ ------
Restaurants open, beginning .. 1,056 721 972 634
New restaurants opened ....... 113 88 211 188
Restaurants reopened ......... 4 1 5 1
Restaurants closed, to reopen (5) -- (9) --
Restaurants closed, Quizno's . (9) (16) (17) (29)
Restaurants closed, Bains .... -- (2) (3) (2)
------ ------ ------ ------
Restaurants open, end ........ 1,159 792 1,159 792
====== ====== ====== ======
Franchises sold, domestic .... 109 87 260 184
Franchises sold, international 7 16 8 37
------ ------ ------ ------
Total sold ................... 116 103 268 221
====== ====== ====== ======
Initial franchise fees
collected ................... $2.0 million $1.8 million $4.6 million $3.3 million
Systemwide sales, domestic ... $87.8 million $63.9 million $172.1 million $117.0 million
Avg. unit volume, domestic (1) $389,000 $365,000 - -
Same store sales, domestic (2) Up 8.7% Up 7.6% Up 6.5% Up 6.2%
1) Average unit volume is for the twelve months ended December 31, 2000 and
1999. Average unit volume excludes restaurants located in airports,
convenience stores and gas stations and includes only restaurants open at
least one year under the same ownership that are currently not in default.
2) Same store sales are based on 583 stores open since the beginning of
January 2000.
Stores that transferred ownership during this period or are in substantial
default of the franchise agreement are excluded. Because we are and will
continue to be in an aggressive growth mode over the next few years, it is
anticipated that same store sales will fluctuate as units are included from
more start up markets. Excludes non-traditional units located in convenience
stores and gas stations.
Results of Operations
Comparison of the first two quarters of fiscal 2001 with the first two quarters
of fiscal 2000 and the second quarter of fiscal 2001 with the second quarter of
fiscal 2000
Franchise revenue increased 51% in the second quarter of 2001 to $8,995,813 from
$5,938,291 in the comparable quarter last fiscal year. In the first two quarters
of fiscal 2001, franchise revenue increased 46% to $17,330,584 from $11,877,095
last year. Total revenue increased 37% in the second quarter of 2001 to
$13,305,832 from $9,695,487 in the comparable quarter last fiscal year. For the
first half of fiscal 2001, total revenue increased 39% to $25,686,289 from
$18,495,028 last year.
Continuing fees increased 70% in the second quarter of 2001 to $6,562,881 from
$3,871,071 in the second quarter of 2000. In the first half of fiscal 2001,
continuing fees increased 67% to $12,560,618 from $7,508,553 in fiscal 2000.
Continuing fees are comprised of royalties, licensing fees and distribution
fees.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Royalty fees are a percentage of each franchisee's sales paid to us and will
increase as new franchises open, as the average royalty percentage increases,
and as average unit sales increase. At March 31, 2001 there were 1,135
franchises open, as compared to 761 at March 31, 2000. The royalty was 5% for
agreements entered into prior to February 11, 1995, 6% for agreements entered
into from February 11, 1995 to March 31, 1998, and 7% for all franchise
agreements entered into after March 31, 1998. The royalty for Quizno's Express
units is 8%. The royalty paid to us by master franchisees on international units
is generally 2.1%. We have no immediate plans to increase the royalty rate.
Royalty fees were $5,633,395 for the second quarter of fiscal 2001 compared to
$3,400,145 for the same period last year, an increase of 66%. For the first half
of fiscal 2001, royalty fees were $10,673,462 compared to $6,294,033 for the
same period last fiscal year, an increase of 70%.
Licensing fees are fees generated through the licensing of the Quizno's
trademark for use by others, which includes fees received from product companies
to sell proprietary products to our restaurant system. Licensing fees were
$93,460 in the second quarter of fiscal 2001 and $470,926 in the comparable
fiscal 2000 quarter. For the first half of fiscal 2001, licensing fees were
$1,051,130 and $1,214,520 in the comparable fisca1 2000 period. Included in the
fiscal 2000 first quarter were $200,000 of non-recurring licensing fees from
Coca Cola Company related to a licensing agreement signed in April 1999.
Beginning in fiscal 2001, we began negotiating terms and prices directly with
the manufacturers of our food products. We formed a new subsidiary, American
Food Distributors, Inc. ("AFD"), began purchasing such products and, in turn,
selling these products to an unaffiliated national distribution company who
supplies our restaurants. We believe this will give us better control over our
sources of proprietary products. As a result, licensing fee revenue is expected
to decrease and be replaced by distribution fees. Distribution fees were
$836,026 for the second quarter of fiscal 2001.
Initial franchise fees increased 17% in the second quarter of fiscal 2001 to
$1,707,473 from $1,459,677 in the same fiscal quarter last year. For the first
half of fiscal 2001, initial franchise fees increased 11% to $3,253,473 from
$2,922,107 in the same period last fiscal year. Initial franchise fees are
one-time fees paid by franchisees at the time the franchise is purchased.
Initial franchise fees are not recognized as income until the period in which
all of our obligations relating to the sale have been substantially performed,
which generally occurs when the franchise opens. Our share of initial franchise
fees sold by foreign master franchises is recognized when received. In the first
two quarters of fiscal 2001, we opened 211 franchises, including 24
international restaurants, as compared to 189 franchises opened, including 28
international restaurants, in the same period last fiscal year. Our domestic
initial franchise fee has been $20,000 since 1994. Franchisees may purchase a
second franchise for $15,000 and third and subsequent franchises for $10,000.
The initial franchise fee for a Quizno's Express franchise is $10,000 for the
first, $7,500 for the second, and $5,000 for the third and additional franchises
purchased by the same owner. Our share of initial franchise fees for
international restaurants is generally 30% of the franchise fee and will vary
depending on the country and the currency exchange rate. Initial franchise fees
for international restaurants are recognized as revenue on receipt.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Domestic initial franchise fees collected by us are recorded as deferred initial
franchise fees until the related franchise opens. Deferred initial franchise
fees at March 31, 2000 were $12,069,606 and represent 745 domestic franchises
sold but not yet in operation, compared to $8,248,649 at March 31, 2000
representing 516 domestic franchises sold but not open. Direct costs related to
the franchise sale, primarily sales commissions paid to area directors, are
deferred on our books and recorded as an expense at the same time as the related
initial franchise fee is recorded as income. Deferred costs paid with respect to
initial franchise fees deferred at March 31, 2001 were $2,547,501. Approximately
50% of all initial franchisee fees received by us for franchise purchases in
area director markets are paid to area directors for sales and opening
commissions.
Area director and master franchise fees were $189,297 in the second quarter of
fiscal 2001 and $150,926 in the same fiscal quarter last year. In the first half
of fiscal 2001, area director and master franchise fees were $385,683 and
$631,722 in the same period last year. Revenue from domestic area director
marketing agreement fees is recognized on a straight-line basis over the term of
the agreement, which is ten years. Commissions paid to the area director upon
the inception of the agreement are classified as a prepaid and recognized as an
expense over the same ten year term.
Deferred domestic area fees are one-time fees paid to us for the right to sell
franchises on our behalf in a designated, non-exclusive area. Domestic area
director fees recognized were $179,297 in the second quarter of fiscal 2001 and
$150,926 in the comparable fiscal 2000 quarter. In the first half of fiscal
2001, domestic area director fees recognized were $355,683 and $321,722 in the
comparable fiscal 2000 period.
The fee for U.S. areas was $.03 per person in the designated area through June
1996, $.035 from July 1996 through December 1996, $.05 from January 1997 through
December 1997, $.06 from January 1998 through February 1998, and $.07 since
March 1, 1998. In addition, each area director is required to pay a training fee
of $10,000. In the first half of fiscal 2001, we sold one area directorship for
$189,647 compared to 6 sold in the first half of fiscal 2000 for $292,400. At
March 31, 2001, we had a total of 67 area directors who owned areas encompassing
approximately 65% of the population of the United States.
International master franchise fees are one-time fees paid to us for the right
to sell franchises in a designated, exclusive, international market. The master
franchisee assumes all of our obligations and duties under the agreement. We
recognize these fees when the agreement is signed. International master
franchise fees were $10,000 in the second quarter of fiscal 2001 and $0 in the
second quarter of fiscal 2000. For the first half of fiscal 2001, international
master franchise fees recognized were $30,000 and $310,000 in the comparable
fiscal 2000 period.
In the first quarter of fiscal 2000, we sold the master franchise rights to
Switzerland for $300,000. A total of $20,000 of this fee was deferred until our
training obligation is completed. We also recognized $30,000 of previously
deferred international master franchise fees in the quarter as we substantially
completed our training obligations under the agreements. The international
master franchise fees in the first half of fiscal 2001 were related to
previously deferred international master franchise fees for Iceland and the
United Kingdom as we substantially completed our training obligations under the
agreement.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
We offer domestic area director and master franchise applicants financing for
the area fee. The amount financed is required to be paid to us in installments
over five years at interest rates between 6% and 15%. The promissory notes are
personally signed by the area director and, depending on the personal financial
strength of the area director, secured by collateral unrelated to the area
directorship. We also periodically offer payment plans to international master
franchisee applicants. The one domestic and international area sold in the first
half of fiscal 2001 used this financing for $94,824, representing 50% of the
total domestic area director fees and international master franchise fees
received or financed in fiscal 2001. Of the seven domestic and international
areas sold in the first half of fiscal 2000, two used this financing for
$221,357, representing 37% of the total domestic area director fees and
international master franchise fees received or financed in fiscal 2000.
The area director and master franchise agreements set increasing minimum
performance levels that require the area director or master franchisee to sell
and open a specified number of franchised restaurants in each year during the
term of the area agreement. Our experience with the program to date indicates
that while some area directors and master franchisees will exceed their
development schedules, others will fail to meet their schedules. In our
planning, we have allowed for a certain percentage of area directors and master
franchisees that will not meet their development schedule. Delays in the sale
and opening of restaurants can occur for many reasons. The most common are
delays in the selection or acquisition of an appropriate location for the
restaurant, delays in negotiating the terms of the lease and delays in
franchisee financing. We may terminate an area or master agreement if the area
director or master franchisee fails to meet the development schedule, and we
then have the right to resell the territory to a new area director or master
franchisee or we can operate it.
Other revenue increased by 5% in the second quarter of fiscal 2001 to $335,519
from $321,218 in the second quarter of fiscal 2000. For the first half of fiscal
2001, other revenue increased by 36% to $745,098 from $548,621 in the comparable
fiscal 2000 period. Other revenue is primarily amounts paid by equipment
suppliers for design and construction, franchise transfer fees and net
bookkeeping fees charged franchisees that utilize our designated bookkeeping
services provider. Amounts paid by equipment suppliers were $197,000 in the
second quarter of fiscal 2001 compared to $167,000 in the second quarter of
fiscal 2000. For the first half of fiscal 2001, amounts paid by equipment
suppliers were $330,500 compared to $348,158 in the first half of fiscal 2000.
This amount will vary based on new store openings. Franchise transfer fees
decreased in the second quarter of fiscal 2001 to $65,000 from $92,500 in the
second quarter of fiscal 2000. For the first half of fiscal 2001, franchise
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
transfer fees were $181,000 compared to $92,500 in the first half of fiscal
2000. Since 1995, our franchise agreement requires all new franchisees to
utilize our bookkeeping services, or a firm designated by us to provide
bookkeeping services, for their first 12 months of operations. Net bookkeeping
fees were $30,589 in the second quarter of fiscal 2001 compared to $33,989 in
the second quarter of fiscal 2000. For the first half of fiscal 2001, net
bookkeeping fees were $78,291 compared to $54,370 in the first half of fiscal
2000. Bookkeeping fees are paid by the franchisee to the Company and then
remitted on to the bookkeeping service designated by the Company. These fees
represent the amounts retained by the Company to administer the bookkeeping
function. Included in the second quarter of fiscal 2001 was $69,036 of fees
received from a vendor related to our inventorying of equipment packages
received at new stores.
Sales and royalty commissions expense increased 33% in the second quarter of
fiscal 2001 to $2,503,432 (34% of royalty and initial franchise fees) from
$1,883,516 (39% of royalty and initial franchise fees) in the comparable quarter
last fiscal year. For the first half of fiscal 2001 sales and royalty
commissions expense increased 31% to $4,765,500 (34% of royalty and initial
franchise fees) from $3,640,536 (40% of royalty and initial franchise fees) in
the comparable period last fiscal year. Sales and royalty commissions are
amounts paid to our domestic area directors, commissions paid to other sales
agents and employees, and costs related to sales promotions and incentives.
Sales and royalty commission expense declined in 2001 as a percentage of royalty
and initial franchise fee due to the repurchase and reacquisition of certain
area directorships. Our domestic area directors receive commissions equal to 50%
of the initial franchise fees and 40% of royalties received by us from
franchises sold, opened, and operating in the area director's territory. In
exchange for these payments, the area director is required to market and sell
franchises, provide location selection assistance, provide opening assistance to
new owners, and perform monthly quality control reviews at each franchise open
in the area director's territory.
The area director is entitled to receive commissions during the term of the area
director marketing agreement and in some cases, upon expiration of the area
director agreement, the commission paid is reduced to 1% of sales for 5 years or
longer depending on the area director agreement.
Our foreign master franchisees retain 70% of initial fees, area director fees
and royalties paid from franchises sold, open and operating in the master
franchisee's territory, except the Canadian master franchisee who retained 100%
of initial franchise fees in 1998 only, the United Kingdom master franchisee who
will retain 85% of the initial franchise fees through December 31, 2001 and the
Costa Rican master franchisee who will retain 100% of all initial franchise
fees. Under the master franchise agreement, we have no obligation to provide
services that will result in any incremental cost to us, other than an initial
training trip to the country by an employee of ours.
General and administrative expenses increased 35% to $4,243,884 in the second
quarter of fiscal 2001 from $3,132,854 in the comparable quarter last fiscal
year. For the first half of fiscal 2001, general and administrative expenses
increased 53% to $8,641,416 from $5,654,369 in the first half of fiscal 2000. As
a percent of franchise revenue, general and administrative expenses have
decreased from 53% in the second quarter of fiscal 2000 to 49% in the second
quarter of fiscal 2001. For the first half of fiscal 2001, general and
administrative expenses as a percentage of revenue have increased to
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
50% from 48% in the first half of fiscal 2000. General administrative expenses
include all of our operating costs. The increase is primarily due to the
addition of employees and systems to service the rapidly growing network of our
franchisees and Area Directors. In addition, the increase for the first half of
fiscal 2001 includes certain non-recurring expenses related to the completion of
certain information technology initiatives along with calendar year bonuses
accrued as of December 31, 2000. Although general and administrative expenses
will likely continue to increase as we grow, we expect the rate of increase to
decline.
Company owned store operations (excluding stores held for resale) earned
$625,018 on sales of $3,154,655 in the second quarter of fiscal 2001 compared to
$376,132 on sales of $3,757,196 in the comparable quarter last fiscal year. For
the first half of fiscal 2001, Company owned stores earned $975,968 on sales of
$5,896,734 compared to $597,159 on sales of $6,514,780 in the first half of
fiscal 2000. During the half quarter of fiscal 2001 we operated stores for a
total of 95 store operating months, compared to 178 store operating months in
the first half of fiscal 2000. Sales per store month increased 69% in 2001 to
$62,006 from $36,682 in 2000 primarily due to the acquisition of restaurants and
other operations at Denver International Airport in November 1999. At March 31,
2001, we had 18 operating Company stores, including the Cowboy Bar at Denver
International Airport (32 at March 31, 2000).
Stores held for resale lost $206,128, on sales of $1,155,364, in the second
quarter of fiscal 2001 compared to a loss of $68,511, on sales of $0 in the
comparable quarter last fiscal year. For the first half of fiscal 2001, stores
held for resale lost $414,277 on sales of $2,458,971 compared to a loss of
$97,743 on sales of $103,153 in the first half of fiscal 2000. In the first half
of fiscal 2001, we operated twenty-one stores held for resale and in the
comparable period of fiscal 2000 we operated two stores held for resale. During
the first half of fiscal 2001, we sold 14 stores held for resale. At March 31,
2001, we had seven stores classified as held for resale.
New company start-up costs were $289,878 in the first quarter of fiscal 2001.
These costs relate to the start-up of AFD, a subsidiary of ours that purchases
and sells food products. These costs were primarily consulting costs to set-up
administrative and accounting systems and to finalize the distribution
contracts.
Impairment of long-lived assets was $1,217,632 in the first quarter of fiscal
2001. During the first quarter of fiscal 2001, we determined that an impairment
related to our carrying value of our assets held for resale was required and
expensed $1,070,106. Also, during the first quarter, we determined that an
impairment was required for certain equipment and inventory and we expensed a
total of $147,526.
Financing costs were $70,352 and $2,275,465 in the second quarter and first half
of fiscal 2001, respectively. In December 2000, we closed on a loan of
$13,862,260 with Levine Leichtman Capital Partners II, L.P. ("LLCP"). The
proceeds of the loan were used to prepay interest on the loan for one year in
the amount of $1,862,260 and to repurchase shares and pay costs associated with
the tender offer. We incurred and recognized $2,275,465 of financing costs,
primarily legal, consulting and closing costs related to the LLCP loan in the
first half of fiscal 2001.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Loss on sale of Company stores was $63,439 and $100,167 in the second quarter
and first half of fiscal 2001, respectively. During the quarter ended December
31, 2000, two stores were sold resulting in a gain on sale of $24,419. Also,
during the first quarter, we incurred costs of $61,147 related to lease
settlements of stores closed. During the quarter ended March 31, 2001, we sold
twelve stores held for resale and recorded a loss of $63,439. The fiscal 2000
loss was $43,595 resulting from the December 1999 sale of one store held for
resale.
Provision for bad debts was $75,077 in the second quarter of fiscal 2001 and
$45,614 in the comparable quarter last fiscal year. For the first half of fiscal
2001 the provision for bad debts was $140,322 and $213,485 in the first half of
fiscal 2000. As of March 31, 2001, we had an allowance for doubtful accounts of
$386,021 that we believe is adequate for future losses.
Depreciation and amortization was $562,282 in the second quarter of fiscal 2001
and $422,855 in the comparable quarter last fiscal year. For the first half of
fiscal 2001, depreciation and amortization was $1,113,994 and $866,008 in the
first half of fiscal 2000. The increase is primarily due to the acquisition and
development of new Company owned restaurants and the repurchase and
reacquisition of area director territories since December 31, 1999.
Amortization of deferred financing costs was $193,511 in the second quarter of
fiscal 2001 and $18,854 in the comparable quarter last fiscal year. For the
first half of fiscal 2001, amortization of deferred financing costs was $249,955
and $37,686 in the first half of fiscal 2000. The increase is attributable to
the amortization of the deferred financing costs associated with the loan of
$13,862,260 from Levine Leichtman Capital Partners II, L.P. in the first quarter
of fiscal 2001. For the quarter and the first half of fiscal 2001, this
amortization totaled $174,507 and $212,035, respectively.
Interest expense was $972,341 in the second quarter of fiscal 2001 and $458,334
in the comparable quarter last fiscal year. For the first half of fiscal 2001,
interest expense was $1,592,385 and $925,302 in the first half of fiscal 2000.
The increase is primarily attributable to the increase in outstanding debt. On
January 26, 2000, we closed on a loan in the amount of $3,180,000 from GE
Capital Business Asset Funding. The loan bears interest at 9.53% and is payable
in equal monthly installment of $52,023 for 5 years. Also, on December 12, 2000,
we closed on a loan of $13,862,260 with LLCP. The proceeds of the loan were used
to prepay interest on the loan for one year in the amount of $1,862,260 and to
repurchase shares and pay costs associated with our tender offer. The promissory
note bears interest at 13.25%, interest only payable monthly, and is due in full
in October 2005.
Other expense was $85,408 in the second quarter of fiscal 2001 and $37,657 in
the comparable quarter last fiscal year. For the first half fiscal 2001, other
expense was $87,003 and $98,216 in the first half of fiscal 2000. The fiscal
2001 expense was primarily pre-opening related costs. The fiscal 2000 expense
was primarily acquisition-related costs.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Income tax (provision) benefit was a provision of $238,641 in the second quarter
of fiscal 2001 and a provision of $76,178 in the comparable quarter of fiscal
2000. For the first half of fiscal 2001, the income tax benefit was $955,134
compared to an income tax provision of $302,545 in the first half of fiscal
2000. Our taxable income has historically exceeded our book income primarily
because initial franchise fees we receive are taxable income in the year
received and are book income in the year the franchise opens. Consequently, we
will not pay income taxes on this income when it is recognized for financial
reporting purposes. In the first quarter of fiscal 1999, we used all of our tax
net operating loss carryforwards and incurred a tax liability. Accordingly, we
reduced the amount recorded as an impairment of our deferred tax asset in prior
years and recorded the tax benefit of prior years net operating losses.
Subsequent to December 31, 1998, our provision for income taxes was recorded at
37%.
Liquidity and Capital Resources
Net cash provided by operating activities was $1,428,287 in the first half of
fiscal 2001 compared to cash provided by operating activities of $917,282 in the
first half of fiscal 2000. The fiscal 2001 amount of $1,428,287 was primarily
due to an increase in deferred initial franchise fees of $1,820,423 and an
increase in accounts payable and accrued liabilities of $3,698,095. These
increases were partially offset by a decrease of $1,627,812 related to income
taxes payable and a decrease of $3,472,109 related to accounts receivable.
Net cash used in investing activities was $1,495,208 in the first half of fiscal
2001 compared to cash used in investing activities of $13,439,031 in the first
half of fiscal 2000. The fiscal 2001 amount of $1,495,208 was primarily due to
an increase in short-term investments and restricted cash of $1,166,818, the
purchase of property and equipment for $1,214,794, and the issuance of notes
receivable for $1,425,820, partially offset by the proceeds of $1,148,000 from
the sale of Company stores and principle payments received on notes receivable
of $1,624,651.
Net cash used in financing activities was $631,924 in the first half of fiscal
2001 compared to cash provided by financing activities of $12,263,489 in the
first half of fiscal 2000. The fiscal 2001 amount of $631,924 was primarily due
to the payment of $9,981,428 related to the repurchase of 779,055 shares of
Common Stock tendered in fiscal 2001 and the principle payments of $2,553,726 on
long term obligations, partially offset by the loan proceeds of $12,000,000
received from LLCP.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
In the second quarter of 1998, we tested a program under which our Area
Directors had the right to elect to have all future franchisee leases in the
Area Director's territory signed by The Quizno's Realty Company ("QRC"), a
wholly owned subsidiary of ours. As a condition of the lease, the landlord
agrees not to look beyond QRC for payments. These locations would then be
subleased by QRC to the Owner, whose personal liability is limited to one year.
The Owner pays QRC an indemnification fee of $165 per month, pays a one-time
lease-processing fee to QRC of $2,200, and pays a security deposit to QRC equal
to two months rent. Effective March 1, 1998, we transferred cash and other
assets having a book value of approximately $500,000 to QRC in exchange for
stock and a promissory note. As of March 31, 2001, 11 leases had been executed
under this program and one other lease guaranteed. The franchisee has defaulted
on the rents due on two of these locations, for which we do not have replacement
franchisees. We expect to negotiate buyouts of these leases between the
landlords, the franchisees and, possibly, us. Our share of any such buyout is
expected to be immaterial.
On December 22, 1999 we closed on a line of credit loan and were funded
$3,350,000 by Merrill Lynch Business Financial Services, Inc. The loan bears
interest at the 30 day Dealer Commercial Paper Rate plus 2.5% (equal to 9.15% at
November 30, 2000). The maximum amount of the line of credit loan is $3,350,000,
which maximum is reduced monthly based on a seven-year amortization. The line of
credit loan is secured by a first security interest in our aircraft. All amounts
previously borrowed under the line of credit had been repaid as of March 31,
2001.
At September 30, 2000, we had a note receivable from the Advertising Fund of
$1,030,000. During the first half of fiscal 2001, the Advertising Fund made a
net repayment of $65,000, along with accrued interest through December 15, 2000.
The March 31, 2001 balance of $965,000, plus related interest of $21,479 relates
to an off-season build-up for advertising, which will be reimbursed to us in
2001.
On November 13, 2000, we announced that we had commenced a tender offer to
purchase all outstanding shares of our common stock, except for shares held by
certain insiders, at a price of $8 per share, net in cash to the seller. The
tender expired as scheduled at midnight New York City time December 11, 2000.
Prior to the tender there were approximately three million shares of common
stock outstanding, of which approximately 51.6 percent were owned by Richard E.
Schaden, the President and CEO of The Quizno's Corporation; Richard F. Schaden,
Vice President, Secretary and a Director of The Quizno's Corporation; and
Frederick H. Schaden, a Director of The Quizno's Corporation. The three Schadens
did not tender their shares.
As of March 31, 2001, 779,055 shares of Common Stock had been tendered for a
total purchase price of $6,232,440. Direct costs related to the tender totaled
$4,068,567, which included payment for the repurchase of 531,850 stock options
and 415,056 warrants.
In conjunction with the tender offer, the Company closed on a loan of
$13,862,260 with LLCP. The proceeds of the loan were used to prepay interest on
the loan for one year in the amount of $1,862,260, to repurchase shares and pay
costs associated with the tender offer and to increase working capital.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
The promissory note bears interest at 13.25 %, interest only payable monthly,
with the first twelve months prepaid, and is due in full in October 2005. LLCP
received warrants for 14% of the equity ownership of the Company. At December
31, 2000, the warrants were valued at $3,373,801 and were recorded on the
balance sheet as Warrants Subject to Put and as deferred financing costs under
Other Deferred Assets. The deferred financing costs will be amortized over the
life of the note. We will value and adjust the carrying value of the warrants
quarterly. Included in Amortization of Deferred Financing Costs for the quarter
and six months ended March 31, 2001 was $174,507 and $212,035, respectively,
related to the amortization of this cost. The loan may be paid down to $7
million by September 12, 2001, with no penalty and with a corresponding
reduction in the percent of warrants.
The Company incurred and expensed $2,275,465 of financing costs related to the
LLCP loan.
At September 30, 2000, we had one store reclassified as a store held for resale.
In October 2000, we reclassified 20 stores as held for resale. During the
quarter ended December 31, 2000, two stores were sold resulting in a gain on
sale of $24,419. Also, during the quarter ended December 31, 2000, we incurred
costs of $61,147 related to lease settlements of stores closed. During the
quarter ended March 31, 2001, we sold twelve stores held for resale and recorded
a loss of $63,439. As of March 31, 2001, the Company had seven stores classified
as held for resale. The seven stores held for resale are expected to be sold in
2001.
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recovered. At December 31, 2000, we determined that an impairment related to our
carrying value of our assets held for resale was required and expensed
$1,070,106.
In the first half of fiscal 2001, we reacquired three area director territories
for $200,270, inclusive of legal and other related costs.
In 1999, we entered into loan agreements with AMRESCO Commercial Finance, Inc.
("AMRESCO"), in which AMRESCO loaned us $14 million. The loan agreements
provide, among other things, that if we wish to secure additional indebtedness,
we may do so as long as, after giving effect to such new indebtedness, we meet a
minimum financial ratio.
AMRESCO took the position that the LLCP indebtedness (see Note 4 of Notes to
Consolidated Financial Statements) would cause us to achieve the required
minimum ratio. We, and our outside financial advisors, had previously calculated
the effect of the LLCP financing and concluded that we would exceed the required
minimum ratio, and responded accordingly to AMRESCO.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
In February 2001, we agreed to resolve the dispute with AMRESCO in exchange for
our prepayment of principle of approximately $1,518,000 and a payment of a
non-refundable credit enhancement of approximately $169,000. AMRESCO agreed to
release its collateral interest in the assets of eleven Company-owned stores. In
addition, we agreed to deposit into an escrow account $1.1 million until the
later of July 31, 2001 or the month the minimum ratio is met. We expect to
achieve this by September 30, 2001 and have the escrowed funds released.
As we have in the past, we will continue to consider acquisitions of other
chains, the purchase of Quizno's restaurants from our franchisees, and the
purchase of Quizno's area directorships from our area directors. From time to
time, we will make offers and enter into letters of intent for such transactions
subject to the completion of due diligence. In all such cases, we will identify
the sources of cash required to complete such transactions prior to entering
into a binding agreement.
We have never paid cash dividends on our common stock and we do not anticipate a
change in this policy in the foreseeable future.
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
Commission File Number: 000-23174
Quarter Ended March 31, 2001
Form 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Other than the items discussed in our annual report on Form 10-KSB for the year
ended September 30, 2000, there are no other pending material legal proceedings
to which we are a party or to which our property is subject.
There are various claims and lawsuits pending by and against us. The settlement
of some of these claims and lawsuits may result in the acquisition or
acquirement of certain area director territories. In the opinion of management,
and supported by advice from legal counsel, these claims and lawsuits will not
result in any material adverse effect in excess of amounts accrued in the
accompanying consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K:
Form 8-K, dated February 22, 2001 reporting in Item 5 our operating results
for the first quarter of fiscal 2001.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE QUIZNO'S CORPORATION
By: /s/ John L. Gallivan
John L. Gallivan
Chief Financial Officer
(Principal Financial and Accounting Officer)
Denver, Colorado
May 15, 2001
Appendix 1
THE QUIZNO'S CORPORATION
PROXY
Special Meeting of Shareholders, ______, 2001
This Proxy is Solicited on Behalf of the Board of Directors of
The Quizno's Corporation
The undersigned revokes all previous proxies, acknowledges receipt of
the Notice of the Special Meeting of Shareholders to be held on _____, 2001 and
the Proxy Statement and appoints Patrick E. Meyers and John L. Gallivan and each
of them, the Proxy of the undersigned, with full power of substitution, to vote
all shares of Common Stock of The Quizno's Corporation ("Quizno's") which the
undersigned is entitled to vote, either on his or her own behalf or on behalf of
any entity or entities, at the Special Meeting of Shareholders of the Company to
be held at __________, __________, ____________ on ______, _________, 2001 at
10:00 a.m. Mountain Time (the "Special Meeting"), and at any adjournment or
postponement thereof, with the same force and effect as the undersigned might or
could do if personally present thereat.
The Board of Directors recommends a vote FOR the listed proposal. This
proxy, when properly executed, will be voted in the manner directed herein by
the undersigned shareholder(s). If no specification is made, this Proxy will be
voted FOR the proposal listed above. In their discretion, the proxies are
authorized to vote upon such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof, as they determine
in their sole discretion is in the best interest of the Quizno's.
---------- ----------- -----------
1. FOR AGAINST ABSTAIN To approve the agreement and plan of merger among Firenze Corp. and
Quizno's (the "Merger Agreement") and the merger pursuant to which
Firenze Corp. will be merged with and into Quizno's and Quizno's will
continue as the surviving corporation and whereby shares of Quizno's
common stock issued and outstanding immediately prior to the merger,
excluding shares beneficially owned by (1) Richard E. Schaden, (2)
Richard F. Schaden, (3) certain of the Schadens' affiliates and family
members, and (4) shareholders validly exercising their appraisal
rights, will be converted into the right to receive $8.50 per share, in
cash, without interest.
---------- ----------- -----------
Please print the name(s) appearing on
each share certificate(s) over which
you have voting authority: _____________________________________________
(Print name(s) on certificate)
Please sign your name: _____________________________ Date:_____________
(Authorized Signature(s))