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things,hrcach $,er. hcldin Janu.e.v Fcb.uaq 1998. Thc panies and ofits i"nchise a!r$$eol Hcarings arecurrentty cngaged tbcprcparado! po3l.bering of briafs.andr dccision $c arbiBdror cxpected by is il i! the Second at on adduced rheharines. Corlpsll],beli.vcsit \ilt th. Quartcr1998.Bascd rhcevldcDcc prcl"il orl all clsir.s. Therearno otherpending malerial lagalproceedings $hich theCompan], a pany or to which lo is the propen-r of$e Compan)'issubjecr Froin time ro rime,the Compsny ilvolvgd it litigarioD and is cotrlsc irs busincss. of Foceedingsarisingour ofrhe ordinary ITEM 4. SIIBMISSION OF MATTERSTO A VOTE OF SECURITT'HOLI}ERS
No maner weresubnincdo a !o!a ofsecuriryholdcrs ofthe Company duriogrhefounh quarter of ils fiscalyeai crdd DccrtDbr l, t 99?, ! PART II ITEM5. MARXETTORCOMMONEQUTT'ANDRELATEDSTOCTGOLDERMATTENS
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The Cotnparr).'s ConrttonStockis tradedin the N-ASDAQ Small-Cap lssuesMalket utder rhe sf,.nbol"QUIZ." Thefollo*ilg tablesho{s highaskcd lo\^ bid priceinfornarionfor eachqualrerin and lhc lasrt\"o ca.lcndar ysrs a5repond by theNASDAQSrock quot tion3rcflcriarerMarke! Inc. Such deal.prices. rl,ilhoutrerailmarr(-ups. ot commissions. nay notneafssadly and drarkdowns rcprEemacrual transa.dons. March:3.1998. stock OD rhe elosed S5.56 t5.7Jasked. bid. Fiscal YearEnded Decenber 1996 31, Filsr Quene' Second Quanar Tttird Qu:ncr FounhQuanet
H.te!
$1.15
si.38 $2.E8 s3.00
Lau
Lasl Trade $:.5i 63.13 53.11 Last Tr.d $3.1l
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53.50 ${,38
FiscalYcarErdedDecmbcrt, lg97 3 FirstQuarler Second Qualter Third Qqancr FounhQuancr Hiah $3.6!
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$3.00 S].EI s1.50
s.|.44 s6.88
$6.38
s4.13 s5.00 s1.88
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TherewercapproximaEly holders 128 ofrecord(andapproxirhalelJ beneficial 500 orwers)ofthe Compary_'s Cornmon StockasofMarch:3. 1998.Thftrsrnumbcr includes sharholders ofrcord who hold stockfor thc benefu ofodcrr TheCompan.! notaxpact pry anydividends iis Common does lo on Srock thefoaeseeabte in hlure. Ma[age&enlcurently inrends aebinall rvailabte lo fundsfo. thedevelopnenl business for usc ofirs and as)vorliingcapital.
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Case 1:04-cv-00725-RPM
Document 45-7
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Durilg drc l.st qlan r of l99Z tt. followi4l scctltdcs ria|. sold b.vthc Compary rrirtoua regi$mtionwirb rheSccuririas Exchare pursualrlo &c cxamption Commissiotr ard notad: Securiti.t Sold Class B Preferred Date November I l. t997 Nomberof Cotrsidlladoo Sbaras Purchiraa!
Ercmp.ion
Cl2itn!d
r00.000
sh6res
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Exchangc fo! of $500,000 dbr $8i5.000
Rcuil & Rcgularion D Rcsrau'ant Gro*lh Capital Fund
Priva!e Lvestols Selle6of Dusless
Preferrcd Cornrnon
OcroberNovembcr. 1997
Novcmbcr l?, 1997 DecclDber 4, 1997
167-000 shares 18,t82 shares
47i shr'es
R.gutation D
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of $100.000 acquisiiioh prce plan $2.3?5 obligadoD
Regulation D
Conrmoo Stock ITEM 6. Oven,ierr'
Seaion4(2) Quiao's 401(K)Plsn
MANAGEMENT'SDISCUSSION.{\'D ANALYSIS OF FIN,4TCIAL CONDITIONAliD RESIJLTSOF OPERATIONS
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1997\'as a mile$oneyearfor theCompaflt. br rhelirn q!.rsIter I99? rheComFay rcponeda of loss of$(2i7.906Ifollosd a lorsof$(49j56) in thesecond guaner. p66r ofs104,056 rhelhird by a in quan r. anda profir of S73.586 thcfou{h quanr.Combined. CornpqvEponeda lossof$(89.6t8) in rhe for rheyear.l Onaquanerl]. basis. eamings business reflectlhesamc bt segment continued improvement rhe over lasreightquanersF.mchise Opel"lions Comprrly --Slg!g!-
Other
Nf
lsl Quaner 1996 2ndQuafler 1996 3rdQuaner 1996 4th Quaner 1996 I si QuanerI 997 2nd QuanerI 99? ird Quaner 1997 {th Quaner 997 I
s( 6.::e) ll9.i99 (14r.937) 2E.6jj 1.211 r0_r.6il ?t.{.261 357,876
5 9.J67 l7:l I 5j.62: 6.431 W 10.?79 I r8.i.t7 t0?.0J9
$(196$6) $(193.04r) (13l-064) 25.j48 076,816) (265-lll) {621.422) (586,1i5) (226.141) (2t?,906) (2:3.266) (49.356) (228.530) 104.058 (386.349) 73.586
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'Amounlsrrc befoc Dcf.ncd eock dirid.nds. li Tqclrt|)0 OON'IDEI{TAT,
Case 1:04-cv-00725-RPM
Document 45-7
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nct Thc following is q surma4' of rhc cotnpaby's incorhefiom iaichise operationi. Cohpanystorcopararions. otf,crcbargcs thelasrfourycarsi and fo!
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1991
Irarchise Opemtions:
R!due
tee6
s 4.574.603
1gt
1994
$ 7.887.447
Expenses (loss) Income
(Z;09,$?
tllJ:n
19.866 2,680,521
683.040
5 3.313.37? $ 1,849.739 1i.045-505\ e.2l8.69t) ( 368.952r i29.867 3.01t.195 603,4E5 ( 630.440)
( lo.y)>)
elBla4.SloletQE!4isrr:
Revenue Expenses (loss) IJrcomc 4-010.666
GJ29.0.19
t9t.6il
eJ93.6!a
86.834
G-L4,!zrl
r 67.626)
qhcr.ehelcss:
NeiaprogrEms research and and ( 72.161) delelopneni against Rcserves arnollttsdueahe Compani { 49.540) ko\'ision for litigario[ selrlemcnt.
legal costs end senlement Loss on sroreclo$rrcs Loss rclaled to slorls h.ld ior rcsala Othcr DepreciaaionaDdarnottizaaion ( (
2l7J2l) 224,063) l34,5oo)
( (
| 0,564) rj.780)
( (
954) lil82)
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r?0.9:8)
6n,6731 64,541) 4MJ4t ( 76,&.2) ( 104,844) ( 288.43J) ( 130339) ( 43,625) ( 253,459) ( 3:6.869)
r75.000
( 131,96:) ( 58.1371 r 358.t24)
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Irtcrcn exFtse Total othet \et tossbefoteprcfelrad nockdilidcnds
c-?99"q!9i L_99,!5:) cJlt 946) r.0q,L89 (1.125.568) { 55i.Eri)
sr 89.518) s(r.018960
$L3gt!te)
$LJ>!)
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prirhary business rhc franchising Quizno Rastaurents. a is of TheCompany's As s franchisor. r.\enue is delircd fioni (l) area direcror tnarkcting f!es. (2) initid franchise fecs.and (i) royahies paidb) ils Or\re6. Areadireclorfeesoccu onl],oncefor eachexclllsive arca3old. Itidal frarchisefeesa't oncrirncfcespaidupor lhe saleofa franchise varydirctly u/ith tha md (he number offtanchiss Compan) sellard open. Ro$lties.or!theothe!hand, ongoingfees can arc paidb)_ franchiscd andincrcase the number franchisd of restauEDls as rciauranlsincrease. Thc goalis !o jrlcre3s!rolarli.s aslhr rno$ sttbleaDd Cornprtr],'s teliablesoucc ofro,enlrc. Eachof lhese sourccs of ofrcvenue contributc theprofirabilhy theCompany, lherclatitecontribution to but of eschsource van,asthaCompant vfill ma$res-O\.e. dne initial franchise androl'altieswill fees gcnemte proponionarcty than rnorcrevenue aiaditctormarkdingfccs,
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s The following tablc .stl.crs rh. Compnry r.wnue growh bv solace and the for Company reslauaattts thepastfouryars: s YearEndcd Dcc.mbar I . 3
I OA< 1997 j Rol,alties 5 2.747,95 s 1.590.673 s 1.046.3?9 hitial franchis!fes 2.269,001 L164,500 593J50 AGadirccrorfecs 2.139.080 t.4ll.5i5 1.319640 '!iin\: iot c?i Orher 731.41I F.anchise reveruc 1-887jr'I47 4.574,603 Salcs Company b]ov'ned srolcs 4.0?0,666 2.680,J21 3,01t,r95 Salcsb!, nore b.ld for rcsale --149149 Toul revelue tzJllJgi 16l:9.09?
6.)oa
w
I9S4
$ 779,249 390,000 i54.099 1.E49,739 503,485
I i90
]l&
12.64?"U:
40
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operrbegiiring Restaulanrs Na$,rcsrauranb opcncd 140 acquired Restaura.nts Resraurants ciosed (t6) Re$aurarG closedschcdulcd rcopen(i) ro Ratallrar,l ope[ eBd Nev, frarchises sold I80 Inirial franchise collecrd $!-9r9.945 fees SFiemwidesales SJi millior Averagg volumqr) unft t3 r 6.159 Sarne srorcsales ti) |r) Up L39o
(lr
r05 (t:) (3
t72
66 39
o)
-,.=loi
u!
g
$?t 0-000 Sl9 millioD $163.000 Up4,1o/.
50
51.0.10.188 516mitlion $3:t.000 Do\n 7.i%
51.?.{3.846 $i5million $300,t80 Do$n.?%
Excludrsunitslocat d i. on!eni!n.. sroK &d gc sr.rions.tnclud.!onl)-unirsopo ar l.er oG !r$ uDdct Sam.3toi. sd.! for 199? ba!.d on5: srortsop.i all of 1995 199j. Srorca is and shich rnnrf.rrcd olvn.Ghip do.ing rhk p.riod. or *!r. in rubErairiald.taoh ot d!. fEacnitc lrNh.nr !l D.c.tnbd 31, t99?. .r. B.caus.lhr Corp.n,' h lnd sillconrinuc |o b. in anaggRssitc lro\tlh ftodc o\crlhc ncxr f.r} y.!'5. ir is a icipal.d thal5.m. slorcs6lca ltu6r!.r. s urir5!c itratod.dfrnn nor. s$n !p n.rkct!. rill
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Case 1:04-cv-00725-RPM
Document 45-7
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DulitE I 997sc
vrc asscrforh in rhcfouo\iring storesalEs lrbla:
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Rsults ofOpeptions Compalison YealsE dedDecambe.L 1997 1996 ol 5 and Franchisr rwenueincrcascd in 1997 $7,887.447 $4.574,603 1996. ?3% ra frorn in To|3l rcvcnuc increased in 1997 $l:.107.66? 6290 Aom57.486.495 1996. Thc rcvEnue lo in imreaseresuiacd from drcfollowingirms. iBord.ofimpacr: Company no.e ssles. royalr-v feesinitial franchise fecs andarea fees. di.ecror Royrltvfes ircreascd to $2,747.955 $1.590,673 1996. ?:7o Som i, Royahtfees are a perccabgc each of paidro theCornprny wiU incrqse ss naw ftanchtss Ownelssalcs and open astheaveoge royalt)pcrcentage increases. asavcmge salcs and uli increase decrease_ or _At Deccmber31. 199?rheic $re 308 franchises opn(includingBain's)as compared t47 at to Dccember , 1996.TheroyalJ.' illcreased 670 all Quiato's -11 r,!"s ro foa lranchisc agreemenb enrerl(I into afterFeb'ruary 1995.Therc-vatt-' Quizros Express 10. for unirsts 8olo.The Codtan),Ni incrca3e royak).. 79lo all non-express the lo for agreerDnrs franchis enrercd after Mqrch j I . into
t998.
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lncluded 5I Bainsft&chises arc acquired Nov.mber I 997whichpa:v oD 12. loyalrics al r esranging iom 0/o to 5%.andaccounr $7?i17 i! 1997 for royallvrevenue, approxirnacly 6.-i90 ofrhe increqse. Company The recorded rol,aly rcvenue tom approximalely halfofthe one Bain s ftanchisccs compl] andpa! fecs.TheCompal.v aggrcssiv.l!, thal pursuing is co[ecdonof rotalaiesfiom $e otherBain'sfrahchisces will record revenue and tha whrn &td if the fiinds are collecied.Bains franchiseG donolconvh lrill beEquiredaopayroyahias wbo putsualt to their existingBains fraDchise a4[gernenas. Company The expects ber*eeht 0 ard 20 Bain,s fraruhisccs ma,r conven Quizro's 1998 1999. ro it and
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Case 1:04-cv-00725-RPM
Document 45-7
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Tbpu.chas paidby lheContpatrf,fo.rhc schain cakulatcd w.s B6in knowing Fic. thebif6 nutrberofnon-paying i! thechri!. Th.anouarpsidbI rheCotnpan], based fiEtlchiss was on a muhiplc of rcnEl royalrics paid ard Dovaluawasascdbed &e noD.!@ying to fianchiscs. Howevg'.&e Compony therilhl to collaclcunent past foyaities. has 6nd due \'hich $tll bercpoaed asihcome wheocollcctcd. I liti.l fralrbisc fcc!iDcreas edgs%in1997 to$2,269,001 $| .| 64-500 I 996. from in Initial Aancbise areonerimcfecs tees paidby Owners $e rirr thefranchise purcbared. ar is Initial falrchise feasara ror recoglizedas inconc rrrrij thc peiod in $hich all of thc Cotnpany s obligadons relating thesa.lc bcen to havc pcrfor'hcd*iich generally subs.anrially occu$whenihg franchise opers In 197, rbl Compant opcned iraDcbises codtpded 6?opened 1996. 140 as !o in TheCompany's initial *archisefaahas becn $20,000 sirc! 1994.Oraner's purchasesecond mat 8 t'ancbise S15,000 $i!d ard subsqucn! for and fancbiseforSI0.000. Theinirial flanchise for lee a Quizio's Extrncss franchise S10.000 thefirst.$?.i00forrlrcsccond. t5.000for the&i!d is for and atd addirional pulcbsscd thc same frarchises by Owrer. Forfoua rDontls during 996lheCornpan], I ofrer.dapproved e:dsting fianchisecs the rjghr to pwchase additioraltarcbisc fo. ver-1 one cunenllyelfeclivcFaffhise agreemcd an for injial fceofs1..000.TheCoapanv 75such sold ialchises, l4 of triich $!.e opeDed tg96 aod in 199?.il ofwhich wercrcnninaled. 29 ofrrt{.h arcplair.d to openin 1998. and lnitial fanchisefccscollescd by dle Codpanyarc .ecorded defenedinirial as j franchise unrilrhrcls:ed fecs fianchise ope$. Dferred inidalfranchisc arDcccmbcr I . 199? fces t{ere5:.14E.662 rcpr.s.r| 4, Sarchises butlot ycrin opcralio[ compared $ l -J75.4? and sold lo I at DecemberI , 1996 i rcpreseming tranchis.s butnotopen.Thdeclin thcnumbf, of sold l jO in unopencd franchiscs thelow pcrunh averaec h 1996 duro lhc saleof ?j Sanchises rxas atd fcc for S1.000disclssd primaril] sales above.DiEcr cosEElaredlo tbesale. cohmissions arca lo dirccrors. defered &e books theCompant rccorded anespense thesame are oo anii of as at drt|eas lhe relatcdinitial Fanchise is recordcd incorne.Defer.d cosas 6nddrrcarrhedmeof paid fee as opening rrih acspecl initialiianchise defcned Dcccmber I99? r.l]gre lo fes ar ]1. S6jg.6t6. Approximately ofall initialIianchi*e feesreceived fie Companl. paidlo area 5flo bf are dircctoIs for sales opoing commissions. and TheCompany nol sellor openanl Bainl fmnchbs I 997nor docsft exDecl did in Io in thefr)rure. Aree Dir.ctor Mark.ting Fets increasei _il9i jD 1997lo S2.139.080 fronr S| .4I I .555in I 996.Areadiedor markering arconcrimefcespaidto $e Comp?.n! therigha fccs for jn to scllfranchiscs adesignared. non-e\clusivc. including arca. intemarional marlqs. Thcfcefor U.S. arcas v/as$.03pcr pcrson the dcsi-qnared tkough Junc1996.S.0j5 from Jul]. 1996 in area tluoughDecebber 996,t.05 &omJan@,,* I 199? tluoogh Dccernbcr997.$.06fromJanuawl gg8 I lhroughFebruary 1998. $.07 and siDc.NlarchI . 1996, In addirion. c.ch a'eadirectoris rcqui*d 10 pa!'a lrainingfceofl I 5,000 t 0.000 ($ rhrcugh JuncI 996).Thepopulation ponronoithe fee based is deemed fully ear,red rheCompan). b!' l,lhan area direcror thc narketingag.eament signed is and ls tecognizd incomcin tltaapcriod..ln 1997.ll' CofDpany 2E ncw areadirectorshrps as sold includirg 12cxfuriDg direcors\ito purchas.d ara addirionsl rfriroD.. compaleil 22 alea as to direcrorships in 1996.A! Dac.mb.r31. 1997. Compant a btat of76 arca sold the had dirlclorsq,ho ornredalcascncotnpassiDg approximatelt oflhe populadon thc UniredStares. ?lolo of
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Case 1:04-cv-00725-RPM
Document 45-7
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Page 7 of 43
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flnancingfor up lo 5Woof thc area ofers ar dirertor applicanrs Thc Compsny is irt dirrcto! ma*cting fce. TheanounrlinaDccd Gquir.d to bc paid to the CoEpaDy iEtallmcms penonallysignedby thcarla dircctoratd, prorrissolv ovarfive ]"ars at l5% intclesl. The notes ar dircctol securcd collateral|er.lated ro rhe depcnding $r pe$onaltimrcial sucngth area of by on area directorship,usually a s.cond mo(gaga on thc arca dirccto!'s homc. Of the 28 area directorships sold in i997, 12 uscdrhis financingfor $354312. rcprcse ing lTyo of lhe ara directorma*eting feesrccognizd | 99?.lD I 996,amralof 5?36,407 f[uDcrd lepresnriag w8s itt ?o% areadircctorfce revenue. I of a There noarcadirectoFin theBai[ s s!'srem theCompany and does inrendto not sell an],Bain'sar'ea directorsNps tle ftture. in Oth.r rcveru. increascd li9% in 1997 $i93.771fior! 3248-094 1996. b_! ro iu Ofier revenucis primarily booklcepingfeeschargcd Owne.'s for whom the Cornpany provided aod paid equipma suppliers dcsignaDd booklieeping services amounts b).for coDsEuction. Since 1995,rhe Compan],'s franchisc alremmtrcquircsall new fanchiscesIo utilizc lb CompsIty's booklceeping serviccs dlei. lirsl 12monrhs operatioas.The currentfee per storeis $t0 pct fo. of ,ckfor sll frar$hiseagreernenrs week.The feewill beircreased $85Fer\ ro exccuted aftcr Match i | . | 998. BooLkeeping $re$t26.958 1997 fees ir coopard $189,055 1996. to ir| Slles and .otaltv comDbsioDJ cxpeNcinctrased156% $2.346,746 1997 to in tor! S91a.726 1996. Salesand .o!,altv conoissions are .mouqrspaid to the areadircqors oftha in Coftpao) underi$ areadirecbr program irDplerne edMsrch 1995. The Cornpn!, areedirecrors s receivccorrmissionsequal b 5el6 of tbc iririal fEnchise feesand 4flo of ro]'atries teceived the Compa!.'-' by ftorDfralchiscs sold.opened,and operatingin thc alea dircclor's .crdtor.v. ID cxchange thcsepaymcDlj-the alea director is for rcquired ro market and scll franchiscs. provide locaaion prcvide openiDg selectionassisrancc' assistancc ner orvrel! , andFerfom nomhly qudjle connol.gr,iews eachf,.anchise in dre to aI open areadirector'sterdtory. The Area Dircctoris endlled receirecommissions a periodof 15 vears to for followingtheopening ofeachfranchised R.staurarl. notwirhsbnding cxpiration thc'.frea the of Direcro! Agreemcnt (unlcssthc Arca Dirccbr Agreemcnt lcriniMled lpon the occurrcnce ao is of wenr ofdefault). Uponcviradon ofthe agreemmt. corlulissionpaidis rcdlc.d to l% ofsrles lhe for thercmainder ollhc l5 years,Subsequenr yenretd, rhisperiod*as reduced a nraxrmum rai o of j !'ears. ceneral ard rdmtnbtrative increased to $4.611,978 1997ftom expenses 36% in S3.a00.60? 1996. As a perceor ftanchise geneml adninistrativeerDcnses in revenu. and of havc fallen from 8096in 1995.14Vo | 996,to 580/" 1997. cen.ral and admioistmrivecxpenscs in in includesll the opcratingcos6 ofthe Compan). The inoeaseis primarily due ro rhe additioDof emplo}_ees service iapidlt gro*ing ncrwoak to thc ofQuizto's o$nersat|daaea direcroJs. Although generajand adminislratile expenses will likll, continuelo increascas rhe Conpany grows. managemenr cxpecEthe rateof increase decline. lo TheCompar! believes gcneral adainisnaliveexpcnses adequate are and ils at and toa in axcessi\.e in.eladon aodc sizaandlxowtb of theConpany-.
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Case 1:04-cv-00725-RPM
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fom sal.s by cornp&oy own.d !to.* incrssed b! 52% in 1997rc $4.070-666 lotal of I l8 $ore ope!'ad4 $oresfor a opetEEd 52.680-521 1996.During 199?lhe Company in pet monrhs. Sales storc month had montbs. h I 996, the Compan]' a toial of 82 storeoptating the ca$cdS291.651 at Duri4 1997. Compaly increased io 1997 $34,49? 5.570 to from$32.689. '17 3l- 1997tlle Conpanyhad (aight compsny storcscompred $86,834 1996.Al De.crnber ro in plus only dutirg baseball 3 atDecember I , I 996)opentingCompsntsrorcs onestolc*'hich opcralcs season. and in Direct rt.il .dvcrlisirg was53.053 1997 S120.936 196. Directreuil in on advenisirg is ihc costfor dir.q rctail advenisinS behalfoifralchised sto.es.Pliorro I996 the Compary bad not mada anl suchconribudon altd the Compan!'has no plais to makc such conniburions 1998. in was compated Sl?:95 in 1996. ro R...ercb rod devclopment $69,108 1997 in ploducts rcsearch,lest, e!lualenewco4cepts, ard Research devclopme arccosts and incurred1o and mcnufterns. wcrezeroin I 997ard $79,090 No!-traditioBll dv.lopmDtprognm expens.s in 1996. ln t 996 thc Company fomed ald srafed a departrnc for $e pulpose dcvelopinga of programro sell fialchi'es ard placcQllrrDo! uDirsi, lon-traditional locatorJ suchas airpons, hospilals.convenience srores ga5suions. sponsarcnas. ltr 1997,thcco$ ofopemringtiis and clc. programuas rollcd into $e Cornpany's c$ale departnmt. real on in to Storeshald for rcsrlc lost $60,673 sal.s of S149,549 I 99?compared a loss on of576.:14? sales companlopemled siore heldfot resaie on of$231.371 1996.ln 1997.1he h for lbreerrlonlhq whicli srore!.!"ssold!o a &anchisee thelilst quanerof I 997,andone nore for iD ten monrhsu'trichwasrhenclosed.In 1996,the Company operald one$ore for six months.aod which was in 1996. onestorefor threealoDths and onenore for two moDlhs. borhsoldio frdnchisees no (onc at thenclosed. At Decembcr 1997. Company the opraaed sto.es held for resale il,
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fle CorDpalyhasjn fie pastalld mall cominue lhe funuero acguirc Ekcover in or franchised storcsfrom Olvners sugcessfully rcasons whohavebccnunabla operalc ro for umelated to thelocationor lhc ma*c!. ln such will cases. Compao!, lypically op.rat thcre$aurant,make lhc an! requiredimprolemenGandrepairs. re-stafi,begi! localstoremarketing- uliimately transfer and the resrauranr a new qualifiedOq,ner.Occasionall)r Company !o may in thafuture,as it hasin tha rrhereit lakesoverandre-markets franchised the pasr.incur shontenn op.ratinglosses cases i|l a paid oler $e Jongrern bI the nen o\vrjcxr,lill Doroally offsd or store. Hotl!-er. &e rol"ltjes e\ceed suchlosses, $'as Losson salcor closura in oI3tor* h.ld for resale $l?0.918 ! 997anozcrorn iossrepresenrs co$ for onesloreclosedin 1997locatedon a shoppiag cenlerpad 1996. The the \1hererheanchor rcsu[ing in t"ffic flo$ insufficient Enanrceased operndons \r"s notreplaced. and lo suppo( a Quiao's .csrauranl. ProvisioD litigationsenlneatwas$13"1.500 1996. 1997. for in In therewasno prorision for lirigcion scnlemcnt. The 1996amounrincludes$1i,500 relaed b a scdeIne
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agreebe rcschcd 1996 in whichsun \rsspaidin 1997, witha prviot5arca director, $95.000 rcservcd DcclFbcr3l, 1996, ditecllcgalcosts al associaEd claims.Thc 1996chdge wirh and of $95-000 to relarcs a porenrially adverse oadebyone dircctor.Theclaimwassenledin clairn area 1998 a paynent benadeof$68.000. reserv litigrtionlossis $95,000 Dcccmber for to The fo! ar 3 1 .I 9 9 7 _ was Proviriotr brd debts $49.540 l9? compared32?4,063 1996.The for in lo in I 996expnse includes addirior theCompan]" an ro srcservcs 73.000 thc4thquarrer I 996 of$l in of made based management's or and evalualion ofbusiness indusEv factonocculiogitr 1996 having a negarive impacr thecollecribili! of certain on amoqlts tie Compaty.Theallowance due for
doubtful accounrs promissory and notesis $178,?ji a! Deccdrber I. 1997. JI were564.j44 in 1997cornpared $104.844 I9%. The 1997 Other rpenss ro in expnse primarilysubleasing is previouslt orxncd theCompanyand losses relaledto two srorcs by sold to franchises.The 1996expense includesa onetime loss on the saleof a $ore locaradin Missouri and soldby theComparyro a fia<see ia 1996. ptussubleasing losses. Deprciatiol amonization $404.644 1997 $228.435 1996.The lnd was and in io increase primarily duero tbeacquisirion developmenl eigh.t|ew Comparyowneds{ores is 6nd of and rhe acquisitionoftie Bain! chainin 1997. IDlertsl crpdrc lli 5:90.019in It97 andS60.063 19t6. Thc incrcasc in is primarill amibutableto fic jnlqrcslon con\enible subordinacddcba jl. borowed on December I s96. $:.000.0OC *rou-qh Novernber 1997 51,500.000 November I gg7thoueh 11. aod fiom t?. December l. 1997. i Liquldit!' and Clpital Resources Netctsb proridedby operating activili6 $'as $23.951in I997compared cash ro usedb! operaring aclivities an of5410.96lin 1996. improvemenr $1.1j4.915.The primar_v of reasonfor the iErprovement fiom I 996to I 997 is the | 997 losswhichiaslesstbanthe 1996 lo*s b\' 59:9.150. \t crlh used inrsfing u"s in ectivides 91,620.457 1997 in compated cash to used b! iNesting .ctiviries ofS?80.651 1996.Csshused inves.ing iD bf acrivities botbyears for was primarilyrclaEd theacquisirion de,reloprnenr ro ofCornpanl. or owned srores. Inaddirion, 1997 in cash\,\as used10acquircBaiD's \zs invested shoi term A mtedcorporate and in bonds. Netc!3hproridedbl firuDcin actiriaies g \ras$3i0.46iin 1997 compared cash lo provided financing by activiries 1.6i.1.513 1996.Theamounr provided 1997 !'riinarily of$ in in $"s from fte saleofprcferrcdstockless principalpa)'lnents debr. Theamounr on pro!.idedin I 996 $.as primaril.... pnoceeds convenible the of$. subordinated financing $2 million. debr for At Decrnber i997.tie Companlhad$i9j.675 invested Cornpaoy 31. in owned lumkev tslauranls offarcdfor sale.Onesuchleslauranlis underconract to be sold for Eash tltc in firs quancr of I 998. Theotherreslaulanls expacted bc sold for cashin I 98. to ale
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scquircd rcatauraDt h the fun quanr of 1998.th. Compaa,v onc fiom ! &anchise for 550.000 cashaDd cDtered leasrs thedevelopmcm for ofthr lcw Cortrpimy inro stores a cost al ofapproxirnatel.r$350,000. to mosrofwhich i! expecred bc financcd. In $e firsr quanerof I 998theCompan:i announcedprognm underwhich irs area a dircctorswill havea light 1o.lect to haveall futuretalchiser ieases the areadirecto/s terrirotl. in ("TQRC); a wholly ownedsubsidiary signedbt The Quiznos RealfvCompar.y ofthc Company. As a condilion ofthe leas. landlordwillagreenot to looft beyordTQRCfor payme s. These the locadons $tuld thcnbc subleased TQRCro ftc frauchisee by whose personal liabilir-v limited to is oneyear. Thc franchis.cwill paJ" TQRCanindmdficadon of$ 165irr rnorth psy a oDetime fec ieaseprocessi[gfeeto TQRCof$2200. andpay. security deposi to TQRC equaltotwo montbs rem. Elfccrive March l. 1998.tbeCompan!,transfelred ad odEr assets cash havinga book vaiue ofapproximareil"$500.000 TQRCin etchrngcfor $ock sDda promksol.v ro rg!c. Ths Compary expeers tbar l0% ro 20% ofall newfranchis locations bedevcloped will ude! rhis prograrn. As ir hasi! $e past,lhe Company coatinucro coDside! will acquisitions ofother chains.the plrchaseofQuizno'5re$aurants &omi$ franchisees. thepurchase euizto s atca and of directorships from its area direcors. Fromti$e to dmetbeCohpsnywiUmakeofrersandenre!lrtro let e.sofinrenr forsuch rnnsacriorssubjeclto dle coDpletio! ofdue diljgerce Il alr suc! cases, lhe Compa$ $,ill idemif' the sources cashrcquiredto compleresuch harEaqrions of Fior ro enterin_e a binding agreemenl into On Decembd 1996. Company 3t. the complcrda deh ffnucilg fot $t millioi of (hich 5500.000 \rs convned prcfeded ro $ock in t)cenber1997. Thc $1.500-000 is loan palable inlere$onlyal l:.7j70. $15.9J7.t0 non$. rlrclgh June199E. src$ ard principal pq i paJmcnF $34.141 of ftorD Jul), 1998 through Novcober 2001.anda final balloon pa!"'lents of 5!8?.195 Deccmber 2001.Anyoutganding on 31. balance theloanis duein full ifrie Comptry on h3sa secondal,public offering ot ils slock.ln conrccrio! wirh the loan.the lenderhasfic rish ro purchasc 3?:.847sharcs oflhe Conparl's common srock $3.10 sharc. fot per Thelcnderhasagrcd subordinale securit-v irs lo inlcrcars olhcr lcndeE includins ro a lineotcrediriendcr. arnounts ro a roral for up of5700.000. December t 99?.theCompani, At 31. had s l 88.929of suc ,'senior' h debrou6randi.g. thusleaving another l -071available.The $51 Compan;"intendsto armngea *orkin_ecapital line oa credit for rhis amounrard k currentlv negotialing jth intercsrcd 1^ lenders. ln November I 997.rheCompanl- thelender of and agreed conven$500,000 to of$e principal amounl of rbe S! million debt to a rew classof prefenedstock (ClassB). Class B prefened stockhasa cumularilc dividend i2.?5%. callable anydmeb:rth CompaDy, of is ar aod is con\.enibleinto cornmob srockafier fjve yearcat the then-cunent marketElue. ln con ecrion \ ith this cor\lrsio4 the Cornpar) giantedto $e lerder42.209commonstockpurchas w!|ran$ xercisableat 55 per sharc. The numberof *arrnls declinelo 20.j86 over threc yea6 if the prefened srocliis rlolcalled rheConpaoy, dividends bl.' all have beenpaid.andcenainspecified camingsleyelshavebeenrcached. Olhcr tharlthe above. Compan!. does havcanycommitments co lacts lo the not or build. acquile.or sell ajry sddilionalCompany o\lncd $ores.
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Sinceirs inccprio&the Corlp@y hrs incutrd losrestotalirlg $2085,12?.thlough p.imatilytluough ri. saleofcommo!, Deccmbcr 1997.Th. CompsDy fuE.lcedth6c losscs 31, has stock and tuougb thc is$rancc ofprefered srockas well as conveniblesubondinared deb!. The posidvein $at for fte six months Compary'strendsare ended 3lDecember 1997,it had a profir beforcprefenedsock dividends in of of$177.644. As seen ils $arerhem cashflows for 1997.the CorDparygcncrated cashfrom opcration $724,000-Th. Compan], ofapproximateiy believesits abilir) ro generat cash'low, combinedwirh additionalfinrncing. if !qce!sar]', will generare suficient cashlo supponh5operalions thenen twelvemorllhs. for the Company! restaurartsales,and tlErefore ro-vallies. duting the morlths of Noiember rhnough February get&rallylowerdueto thc locarionof mostof irs rcstauranB, ale ! c.r 2000Disclosure TheCompan], uses cuhcnrve$iors of widelyuse4 publicly available softwa& lor i6 accoundng othcrdstaprocessing and rcquirements. Fot'idersofthe softwar!urilizcd by rhe The Companyhsve$aled thalrhec will beno failu.esin ahc proeralns uscdby the Comp@ny resulailg frorn rhe ]ear 2000. Tlr Companyb3s no customized software. The Comfany has aor ],a detenninedtie impacl if any. ahalyear 2000 issucsmay have on i$ vendo6. Howcver, tbe Coanpany believs &eaearc adequate altedative!ndolstbat cansupplyprcducrs and scrvicesto tbc Companl ifaecessar,v. quicksenicere$auranb.is not higNy Finally,thgCompany's business, depcndDr upoDclc.ronic dara proccssiag. concturioatheCompany h doeslror bclicvc jr is sr 6 Forw'r d-LookingSrgrem.rrs Cenaininformationdiscussed $is Form Io-KSB.addin panjcularin thesectionentitled in "ManagemeDls Discussion Analysisol FinancialConditionand Resuhs OFr-arions. are and of for$ardlookiDg staleme s lhat involve dsks and uncertainries might adverselyaJfecrthe rhat Compaaysoperadng resultsin the futurc in a mlte.ial $rt. Suchrisksahd uDcenaintics include. uiihout limitation.rheeffectofnationalandregional .conomicandmarketcondidons ihc United iD SMrs in olhercountries whichlranchises sold.costs laborandernDloveene{i$. cosrs 8nd are of in t ofmarlieringcos6of fogdandnon-food used theoperarion items in oflhe Restauran6. imensitl ofcomperition for locations franchisees, urll ascusiomers, perception food saieq, legal and as of claims.ard theavsilabiliryoffirancing for rheCompan-v irs franchisees. and Ma'|y oflheserisk arc beyond comol ofthe Company. addidon. lhe ln specific refereoce made is tolhe ''RiskFaclors prospectus. conainedin rheCompanl's January I 996.rclaled rh. Rcgistration ro dared 9. Slalemcnl on Forms-l filedb-.- Company (Rcgjsralion jj3-38691). rhe No. As descibed carlier. $e Company's principalsources iocomeare royalt-vfecs. inirial of franchise fees. area and directormalkedng are fees.These sources subjecito a \aricB offa.lo$ tha! could adversel-v impactthepro{ilabilil../ irt ofthe Cornpan} rhcfuNre.includingrhose rbenlioned ih the precedingfaiagraph. The continuedsrcngth of the U.S. economl is a liey lactor to the restaurafibusiness bccause consumen purchases tendto imnedialelyredNe lheiadisclerionary in economicalltdiffcuh tirhes.An ecolomicdo.v,,rtum uould advenel-r, affectall threofthe above rdentificd sou.ces ofitrcome. Bccause Compan],'s firnchisesarc still concentaredin a fc$ tbe regionsofrhc U.S..regionaleconomic lacrorscouldadvcrs.l) aff.ct thc Comparyt profitabiliq. Weatber. paniculad)'svere winrerweather, adversl). *ill afred roylllv incomeandcould afrect
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thc o$cr sourccs anongAmcricatls pcoplein other counrics and cftcdabove. culina4' fashions profibbility. As catinghsbits chat4e in {'hich frdnchises sold ' ill alsoitnpad dlc Cornpanys arc and !?es of cuisim morc id 6ndout oftashion tle cottpat]'! clalhtge will be !o foF ulata a to menulrirhin rhe Compant'sdistiicli\ culina4.sq*ledat appeals an ircreasingmoJkershare. participat s in all Firall). ihe imense compedrion theftsrruran!indlsr4 conrinues chalienge lo in segments this industrl . of ITEM?. FINANCIALSTATEMENTS
A[achcd heretoand filcd as a Dan of this Fo.m IO-KSBare &e consolidded lirancial Finarrcial sralcments iage F-1. at shrernents ibied jr thelldex ro dreConsolidated ITEII 8, CHANGES I\- AND DISAGRf,EMTNTSWITH .ACCOUNTAI\iTS ON DISCLOSURE ACCOUNTTNC AND FINANCTAL
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None. P.{RT III ITEM 9. DIRTCTORS. EXECUTIVE OFFICERS, PROMOTERS ANI' CONTROL PERSONS;COMPLIANCE wTnI SECTION r6(a) OF THE EXCHANGE ACT EXECLTTNE COIIPLNS.4TIOTi OT CERTAIN BENEFTCIAL O\I'I'iERS AND SECURITY O\\T{ERSHTP MANAGEMENT AN'DRELATEDTRA.NSACTIONS CERTAIN RELATIOI{SHIPS
tTEl\t 10. ITEy t l. ITEt412.
The informadon rhe required theabole four llemsis omited because Compatlyintends b) to RcgllSlioD nor laterrhan120days to 6le a proxvsratement thcComrnission with pursuant l4A afterthe closcof lhe fiscal !,earin accodance uith GenerNl InslruclionE(3) to Fotth I o-KSB. Thc infonnadoDcalledlor b_!$ese hemsis iDcopomred hcrrin by refereoce the pmxy $aiement. to ITEIVII3, EXIIIBITS AND RTPORTSON FORM 8.}i
Exhibirs requircd lrerp60i otRegulalion S-B. TheComponl*ill fumishto its o,ta) shaiholders recordasof rherecorddalefor irs | 998Amual Meeringof Srockhoidcrs. copy of of a anl-ofthe c\hibils listed bclowuponpaymcnt pct pagcto coyerrhc costsoflhc ComparyofS.2i of fumishing cxhibirs. thc lrcm \o. :.1 Exhibit Descriorio! & Aniclsof \lergerMerging ioto Schade[ Schaden Th. Q{ianos Opcr.ting brCompanl. incolporarcd .cfficncc to Exhibir 2(ii) lo lhe Compan!'sForm 8-K.filed Norcmber.l.199{.
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Bain's Agr!.ster,, atrotlg Thc Quiao's AcquisirionCornpan;'. AssetPulcbas. drough its Gcncnl ?ar6Icl. Gcqtti EDlerPrises. Fr.nchiscAssociaE+ D.li Ltd-, GcminiOn ,lnc. Aod Joucs#4 Panlership.d.Icd Norstrbcr 12. 1997. bI iDcorpgratcd rcfcrcnc!to Exhibii:.1 rc Form8'K. filed by the Compaquid th! sEConNovemt,'t 1991. 26. and Anicles of Incorpoiatioo theCompar!, incorporated of Amended Resrated on b-vrefcrcnce Exhibit3(a)ro rhe Compar/s RegisrationStatemert Foro to SB"2(Reg. 3i-?378-D). No. Anicles ofAocrdtnent to |hc Anicles oflncorporationoftbe Coaryany 146,000 ofclass A Cumuiative aurborizing shares CoNeniblc hdelred to Form 10. Srock.hco.porared reference Exhibir3.2 to rbeCompan)/s bv 28. KSg.ds&dMarch 197. lhe nlme ircclorated by Aniclesof Amndment cbanging Company relcrebce Exhibit3.3ro tb. Cornpan/sFonn 10-KsB,dared to Mdrh 28, t99i. By-lawsofthc ComFan!,. incorporated rcfereDce E:&ibit 3,4to the by ro CompahX's Fonn 10-KSB,dslcdMarch28, 1997.
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.q,nicles .Amendrn0r Anicles of lrcorporalionof thc Compatry of ro authorizing ofclass B PreferedStockard 200.000 shares of 100.000 shares ClassC Cumulative d Slock. CoNenible Pref.E Formofcrtifcatc evidcncing CommonStock.$.001parvalu.of the Companr-. incoryorakdby rfercncc Erhibir 4.1 to $c Componr's to R.gishation Sr6remenr FonnS-3(Reg. 3:3-38691). No. on Formof Reprcsentatilt!lvarEal, incorporared rcferEnce Exhibit 4(b) to b!, to (Reg. 33-72378-D). lie Corhpan,,"'s Regisrradon Statement FormSB-2 on No.
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Voting Tlusr Agreenrenr and between Richrrd E. Schaden RichardF. Sch.dcn. datedJul-v 4. 19 . )ncotpomrcd refocrcc to.glhibjt A to theSchedDlc | by I i-D. daled Jull 14.1994, Richard Schaden Richard E. aDd F. tiled bJSchad.h. Fi6l Amendmenr Vol;DgTrust A8r.emefi datedNovernber I 994, to 4, incorporated referencc Exiibir a !o thaAmcndment I to Schedule b).. ro No, l3-D. dated November 1994.liled Richard Schadcn Richard 4. brE. and F. Schaden. Second Amendment voring Tru$ Agreemem lo datedScpternber 1996. 5. incorpomted refctcnce Exhibit 9.3 ro thc Colnpan!,'s by to Form Io-KSB, dated March | 997. 28.
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E. Etnploymcni Agre.menlof M.. Richatd Schaden. incorpoatcdb! rcfcrelce to Exiibir l0(a) ro theCompan]''s R.girft.ioa Sta.cmenr Fonn SB.2 (Reg. on Nb. 3i-72378-D). Etnplol.rnenr F. AgrecmeDr Mr. Richard Schadcn" of incorporared refcrena bv to Ethibit lo(b) to rheCompanl's Rc-qislrEtion Su.erneif on FoIm SB-2(Rcg. No.i3.7:i78-D,. Employee Srock OprionPlan.incorporaGd referer:.e Exhibir 99.1ro ihe b] to Compary!Regin$rion Sutcmenr FormS-8(Reg. on No.3j3-45549).
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.qmetrded Re$ared and SrockOpdonPlanfor Non.Emplo-vec Drccrorsand Advisorsircorpordrcd reference Exhibir99.2ro fie Compan! ro b).. t Registrarion Sracmerro[ Fonn S.8(Reg. 3i3-45S49). No. Indcmniqv Agreerr'.rllbcru,ecD Compan)- RicbardE. Schadc[ lhe and incorporated refereDce Ex-hibilI 0(e)io fie ComparysRcgisbarion by ro Sbleme onForm SB-2(Reg. 3i-72:?8-D). No. lnderuir.r Agrecmeflben{eerdle Compart ard RichardF. Schadn, incorporared reierence E)$ibit l0(D to rheCompany's bl lo Rcgi$larion Sraremerl lom SB.2fReg No. 53.2378-D). on lnd.rnniq -{grecDenr benrcerrheCompantud Patlick E. Meyer$ iDcorporared rfernce E\hibft I 0(g)ro d|Compaot's b] ro Regi$rarion (Rcg. .3i.72j78-D). Stateme onFondSB-2 No. InderNit)-Agtement brween CompanlandBrornell M. Bailel $e incorporared rcfe(ence Exhibit I 0(h)to $e Compary.,'s to b! Regisustion Stalemenr Forn SB-. (Re-s. -1:-2i78-Dl. on No. lndemlirt -Agieeme bervean CompnnlandFredericliH- Schadeo. thc incorporated reference Eyhibir lo(i) ro rheCompany's bt ro Regisrrarion Slaremem FormSB-: iReg. on No.3i-72378.D). lndemniF -{grc.menr bei$een Cornpanl J.EricLawrence. the and Indemnitl-{ereemen be$een rheCompan}- \,lark L. Bromberg. and Fonn of Fraltchise Asreement. Formof .{rca Directorivlarkering Agreemlll. incoporarcdbt referenc to lvtarch:8.1997. Exbibill0.l2 rorhCompanl l0-KSBdsied s Oftice Leasc rhl Company. for incorporared reference Exhibir i 0.i { to b)10 $e Cortlpany's Io.KSB.dared t\'larh18. 1997. Forh
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and A8rccrne[tbcrwren$e Company Mt Am.n&!.!r to EmployBrcrr dated FrbnE y 29. I 996.incorpolaLdby trfelencc to RicherdE. ScbadcD. I Exhibir I 0.I 5 ro lhe CompEny'sGKSB, daEdMarch29. I 996. Ageementbetweeo Companra Mr. the to Amcndmcnl EDployrDeDt to darcdFebruary 1996,iilcotpotatcdby refercnce 29, RichardF. SchadcD29, !o-KSB. d March 1996. dat Exhibir10.16 theCompany's to lhc Deferrne Agregnc between Conpanysnd lllittois FoodManagemenl to . incoryoratd by rcfercnce Exhibit 10.17ro lnc.. datedFebruar,v l 27. the Cornpany's ltrKSB, &red Match29, 1996. l'l-entncnr Agreedcntben!enlhe Codlpatyatd RcBil andResrautaat limitcd pann rsbip,dalcd as of crowdr Capital.L"P.('Rl,Gc"). a Delavrarc by Dec.mber31, 1996,incoryor-arcd ftfctenc. ro Erhibir 10.18to $e Forro lo-KsB, datedMa'ch 28, 1997. Company's Ptomissory Note (with Fodlr of wadant Seniorsubordinared Convenible atrached) issued the Company RRGC-datedDecenber! I - I 996, to by l3D filed b;vRRGC ro ircorpo!"aled refercr,ce Exhibit 99(a)ro Schedule by with thc SECon ]anuar.r9, I 997. and Seculi! Agreement tbe between Company RRGC,datedas of December 10 31. 1996,ilcorporarcdbr-rcference Exhibh 10.20o the Company'sFotm I o-KSB. datedMarch28. I 997. ard rhe between Company RRGC.dalcdas of StockioldcE Agreemcnl to b-v Dcccmbcr31. 1996,incorporared rcfcrence E:dribit99(b)lo Schedule 9. l3D filed b], RRGC,filed *'irh the SECon January 1997ConvcniblcPromissory Note and S.nior Subotdinarcd Amended Restated by issucdbl rheComparyro RRGC.incorporated referenc.to Exhibit 99(c).o 4. schedulel3D/A filed by RRGCwith fie SECon Dccember 1997. Agrcerne betwcen RRGCtnd rhe Cornpan!'. First Amendmenr lnvestlnent !o dared Ocrober 1997. 8. warant 1oPurchase ofcomthon StockofThc Quialo's cor?oration. Shares ro datedasof NovembcrI I . I 99? andissued RRGC. betwen Conpaq- ard RRGC. the Firsr Arnendmenr SecudDAgrecment ro dated ofNolemberI l. I99?. as Agrament amonglhc Compan)'. Tha Securitv AmendedandResrared of Decmber 1996. and 31. Compan1/ RRGC.dated,s Quizno'sOperaring
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Licln:e Agrecmett betwcen quizro's'sAcquisitioo The Co.trpany Jolles and *4 P.rrtccldp. dacd asofl,lovcmbcr I 99?,inco.po.aled rcfcreoce 12. b:/ to Exhibir99.1to Fom 8.K filcd byth! Compan], fte Sec November wirh in ?6. 1991Risk Facron Seaion from the Compar\''sProspctus daredJaluary 9. 1998 inciudedin rhe Regisuadon Form S-3 filed bl- rheCompanJ Statemc orl (Regisnation 33j-38691 No. ). Lis! of Companysubsidialies.
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(b) Repons on Form 8-K. The Compan!, liled one Repofi on Forn 8-K duling the lasr quanerof I97. Suchliling 'nasmadeonNovedbcr 16-1997- ametlded a Form 8-lgA filed and by on December 1997arldrlatedro rheacquisirion 31. and ofihe asscrs busiDess ofBain s Deli b]'the Compan}.
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I I I
SIGNATURES uriih Act In accordance S.crion or l5(dl of theSecurides Exchargc ol1934,$e Rcgisnam li undeFigtred. lbereu[bdu\, authodzed March caused repon besi$ed oni1s this ro behalfb)'$e on 26.t998. CORPOR.ATION THEQUIZNO'S
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OricinalSianed Bro*nell M- Bailer bl Bro\aiell:\,1.Baile!, I f I I t Orisinal Siqned MarkL. Brombers br r\rar* L. BromberC CrririnalSrcnedb\ J. FricLauiEnce J EricLasrence
By:Oricinal Sienedbv Richad E. Schader Riqh.rd E. schadcn, aad President Cbicf Execudve Officcr Io accordance wirh fie Securiries Act Excbange of I 934.this Iepon hasbeeD signcdbelow b], the follouing personson behalfof the Regisranrand in the capacities indicaredand on thc dates indicared-
Siqnature
Title Chief President, Executive officerandDiiector (Principal Execurive Ofncer) Vice PresidenrSecretan and Dirclor Direclor Director Diaeclo!
Date March25, I 998
O.icinalSiqned Richard Schaden b\ E.
Richa.d Schaden E. Richad Schaden F.
Origina! Sisnedbr. RichardF. Schaden
March 1998 25. March 1998 26, March 1998 24 March 1998 26. March 1998 26. March 1998 ?6.
OrisinalSrdned Frederick Schaden Dirccror b\' H. Frederick Schaden H.
I ffiPJtrFM* I I I
Omcer ChiefFinancial (Pdncipal and Treasurer and Financial Accounting Ofiicer)
:6
TQCortr5 l. co FIDENT|
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I I I I
D APPENDIX r0-QSB-9/30/97
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TQCor?lt c():(FlI)SNI'IAL
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COMMISSION SECURTIIES ANDEXCEANGE UMIED STATES D.C. Washinglou' 20549
FORMlo-QSB
TO 13 PURSUANT SDCTTON OR I5(O OT CX)QUARTERIY REPORT ACT OTT934 EXCEANGE THE,SECTJRITIES
For theq@rtldy pedodrldd SgpllgE!419J!9!
OR ( ) TRANSTTTON TO PURSUANT SECTION OR ls(d) 13 REPORT ACT OFT934 OF TEE SECURITIES EXCIIANGE
For the traBsilio! perlod frcrn to f.iIG Comml6lion NrDbtr 00G231?4
THE QTIIZNO'S CORPORATION
{fl.n !i!l. ofrcgirF&l .5 slacifi.d h ic chand)
I l I I I
(Sratc oibcrjurirdicrjo!of of ircopodioo ororg.rt:iio!)
Colorrdo
8+11692E6
ErDploycr 0.R-S. Idcntificanod No.)
! 099 lSrhStre.i'Sultr2850 De!v.t, Coloildo 80202
(Ad&.sB of pri'cjPrl dlcrda. off ce!)
(305) 29r-{D99
(Rcei'rmlt's lclcphorelulbct, includ'lf afta codc)
Checkqhether jssuer(l) hasfilcd all rcrons rcauiredto bc filed b], Sectio! ll or 15(d)of$e ExchmgcAct duringthc pasrl? rronths(or for suchshoner periodthat thc registrartwssrequirdto ile sucbr!pon!), ard (2) ha5besnsubjq to suchfiling requirancnts thepast90 days. for Y6:L NO Sarc theDumbqofsharcsouisrandirg each of of ofrlF issuelsclasses conEon stoch asoflbc lae$ piacticable date.
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Con|lnon p.rvrlue Stoch50.001
Oulstltdilg rt 2, Novmber 1998 3,051,3E9 shaig
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I I I I
CORPoRATION Tm QUIZNO'S
Fil CommlslioD Nuben 00G23u4 Qwrtcr Elded Septrsbet30' 1998
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I
FORMTO-QSB Prrt I FINANCIAL INTORMATION
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ofOperations................. Statem.rts Consolidaled
I .....'.....-..Page
ColsolidaredBal.oceShc1s
.......Page3
Consolidared Statamer(s ofcashF1ows...,..........
5 ......,........,Page
Equity. Co6olidated Starqndtaf Stockl&ldcrs'
? .--..,........Pagc
NorcstoConsolidatcdFinancialStatements........
...,-.........Pa9e8
MarBgment's Discussion Analysis Financial and of Condilion Plso Opqrtioo.........-.....,.......,,.,. or of
9 .-.,...... ..Page
aQcaltr,
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I I I
hitial Faichise fces ldrercgl
AND Tgr QUZNO'S CORPOnATION SUESIDIARIES OF STATEMEMS OPERATIONS
TbI.eMortbs EDdd Se9tpb. 30! 199? 19
NineMooths EDded Seotepbcr30. 1997 t99t $4,10?,191 5lJ35,243 1996,561 1J90,001 1,666,917 1,448,?81 466,306 400,814 142,375 t07,433 8,319.3s6 s282272 2,841259 t49265 4.I50,377 ?,140901 l,238,455
d oo, ql,
oPE )f Rlrc HrsE Mrrot rs: ConriDuirg fces I
sr,532,4n s 728,?58
788,500 6t3,932 89,30t ?43, 553,031 146,261 23.t87 2,t 237 51,609 |,216974
1 0?o ot(
lffi'*
SrlesandloyallvcorrDirsions ard I Advenising promotion
t General and adrninisb.alive
l:;n|:"*""
6t,u5
3,(D2.989 I,t91,535 .49,100 1,386.486 2,629,121 463.858
1.718.625 440,66I
expenses r Total
Det
1J80,549 l8l,5t8 3,195,043
iocoltre frob lr.rchis. op.rartolt
214,261
lsltllP
325,163
JioMPA],ty sTonE oPERATrOh'S: ComProto*'nedsrores Srlsobl ar srores a Costofsales Company Cofl oflaborat Company srores I OtherCqlpslv 6g6t"""'*ta,
25852t9 E80,333 694,988 924306 2.495,47 I89.592
?97,915
1::::::l1H':".-,.",",.*,--o-fiB I
396,r50 t.06't,191
116.347
1,500,439 1,2t1,399 |,807,768 4,515,505 411,326
{continued on nett page)
I I I I I I
runaudired)
I
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loo""
STJBSIDIARIES TSE QUIZNO5 CORPORATION.AND (CO!tt!U!dI STATEMEMSOFOPERATIONS
Tbrc! Mortbs Erded SeDtmb.t30. NlI. Moutbs EtrdGd Sep&pber30, t998 1991
r998
I qo?
t oTEEn INCOME(TXPENSE)u lSNlcs by stor6 hcld for resrlc Expcnses rclatcdto storesheldfor resale Prcvision for baddcb6 I
Dipreciatiqn arronizatioD atd expenic ll'|rcrest
lToasl ottr.r erD.L.e Not ircoEe oo!s) Preferr.d stock dividends
s 29,6E0 s435,778 (54E,363) (45,484) (7,000) (6,427) (33,829) l , 4 lI (t32,673\ (98,328) (78,643\ (73J89) (388,917) c28.550)
278,50i (55.524) 104,058 o4.235) s E9-E23
$ 85r,162 Q 9s9,022)
$ 140,966 (196,265) (r5 (r5,416) r,017) (5,880) (54,163) (422,441J (264,119) (218,963) Q59,723\ (677,960\ 0,046.921) 568,860 0 65,969) (163,205) (42,7051 $(205,9r0)
l:r'i:""TsTl;::i*'""
a *t r*.o 0os6) ihare pcr lnxot ot .ommonrtOck
$ 502,891 s 0.15 4360,571
q_941
4.349.781 0.D7
L__-(o{Z)
2,867,868
l-u,"u
*",r0,"o"'.-g conlro!shrr.s 3.+27.408 $ 0.03
outltlndiug
nei per I Bastc iocoor possy slere avengeaooDo! IBrsic woighted 13trlre oubtardilg
q__--qJZ
3,03E,496 2.667.666
3.04?.51I
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I
CORPORAflONANDSUBSTDIARIES Tgf, QUTZNO'S BAIANCE SMETS CONSOLIDATED
ASSETS Sept mber 30, 1998 CUXRENT ASSETS: C4shand cashcquivalots Shon t
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31, Deceeber 199? 5 561,287 s38,188 545,109 598,486
-^- -:_
$ 1,058,109 1203,189 663,76 1,527,044 423,M6 99s,A47 s,870.601
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3212.647
2.642,490
2,164,89E
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1,511,150 1,462,8U 81,048 66,429 405,001 J,526.432 $12.039.523
1,727,400 914,762 16,294
134,495 3.452,951
$ 8,830.496
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I I I I I I I I I I
AI\ID T{E QUIZNO'SCORPORATION SUBSIDIARIES EALAIICf, SIIEETS CONSOLIDATED EQUTry LhBILTTIf,S ANDSTOCKHOLI'ERS' SepteDber 30,
lw
CAR-RENT LUBILfiIES' paysble Accounrs Accruedliabilitics Culrenrponion of suboldinaRd debt curmt portion oflorg tclr! obligations Total cuncrl Ii.bilitles Lorg terD obligations CoDvrrtiblc srbordilated dcbt -D.fcrred iDitial trelcllss tces MiDoritv irtcrest i! consolidatad sobsidiar! Totd liabilitic3
Deccober 3l, 1997 . 5 1,065,374 489,84E r l0B12 303.084 1859,2r8 741,570 1,389,088 2,148,662
s I,122,307 t59,192 300,000 200,004 1,782,103 968,sO1 1,150,000 4,279,86E 146,449 8326,927
SToCICIoLDEBS'Egwry:
Prferod slocl, 5.001par veluq I ,000,000 lhares authorized; ScdcsA issuedard outstardirg 146,000 1998 in asd 1997(5876000liquidatioD prefcrer.e) SeriesB issucdard oursianding 00,000in 1998 I and 1997(5500,000 liquidalio[ plcfcrence) Series issud outswding 16?,@0 1998 C and in and !997 (5815,000 liquidationpr.fcrencc) Com'ton stock,$.001par valuc;9,000,000 shares authorizcd; issudandoutrraardirg 3,049,951 in 199E,2,923.294197 in Capital excess in ofpat value Accumulared delicit Tolal stockiolderr'equi] Total li.br'litL. ard stoctbolden' eqtit-v
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146
146
r00
161
100 167
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J,U)U
Q.416,262)
4,663,744 (2,0E5,t22', 2,581,95E $ 8,830.4!)6.
(lJtlaBditcd)
TQC0Itr3 conPtDENtur'
Case 1:04-cv-00725-RPM
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AND 6I'BSIDIARIES Tf,f, QI'IZNO'SCORPORATION OF CONSOLIDATED STATf,II{ENTS CASE FI.O}I/IS
Nhe Molilr Erded 3q SeDtcEbGr
1998
CASH FLOWS FNOM OPEMTNG ACTI'ZNES: (lossl Nct IDcome AdjusBcnts !o rcconcilenetirrcode(loss)to Detcash providcdby opcratingactiviries: Dcprcciationard arroniadoD Provisio! for loasaro! accouDts tlceivable Issudrc! ofstock for scri.icrs Issuancc ofrrock oplioDs swicca for Promissory Dotcsaccepted {ts directorfcs for Changes asscas lirbilitic6: in .nd Rcsdcrcd cash Accountsrqccivabl Othrcurrqrt asset5 Accountspayable Accrued,iab itics DeterrcdFarchisecosts Defenedtax asscr Dcfcned inidal t"archiscfce5 Nt casbprovidd by operdlois CASII FLOWS FROM INYESTI']^JG ACTIMNES: Increaa in s,rDn tqE invesElcrts Purchase propeltyandcquipDcol of Storasheld for resale devalophcnt costs hocccds &om saleof tuibkey units Dcvelopment Compdty o*m.d slores of Acquisition of CodpanyowDrd$oras Ditosal ofpropcrty rnd cquipr0aot Acceptalccof Dorcs rcceivable Principalpa\anents reccivcdo! nolesreceivable Irltzigiblr asscts Otharasscts l\iet crsb rrcd ir itrvlailg sctivities
(connnuedon next page)
t997 $ 063,205) 264,119 10,500 r3,6E9 33,950 (s53,824) t5,744 (188,83?) 002,536) 403,837 60,438 6942;; t63,627
$ 668,E60
77,1 (876,019)
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(196,44;
p6,mr)
(330,055) (4t0,772) (65,5r5)
t rlt ?fllt
r,401,516 (665,001) (212,@4) (401,774
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(35r,367) (375340)
(448,119) 755,488 (76,135)
o84,403) (159,820) 431,315 (287,040) 9249 Q1r,354') 495,55t (122,?8r) (7,933) (697,2161
(90,s33) ( |,924,783)
(tJnaudited) 5
rQatr?2. co!{ilDE\nAL
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ANI} SUESID'ARIES fET QUIZNOSCORPORArION
I I I I
STATEMEMS OF CASSr.Lows (cortbuld) CoNSOLIDATED NtneMorths Erded SeDteoblr30. I99t tw
CASN FLOWS FROM FIN/NCING AC'TIWIIES: Proceeds ftoq issuaDac ofnotls payabla Proclds60It| 9l ofsaock Principal paymctrBo! lorg t!!r obligarions hincipal paymlts on tin6 ofcrdir Fitancing andollcring cosb DvideD& paid Net cssb provi.d by (ugdin) lilarciDg activiti.s Nct itcrcase ir ctsh Casb, begiDDhgof priod Ca!b, ald ofperiod SAP?LEMENTAL DISCLOSANES F O CASN FLOY INFONMANON: Cashpaid during thc periodfor interest 913,623 627,U9 (372218\ (4j,097) (t65,668) l,@0,089
.
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t72,370 75,808 (342t12) Q20239') (t7,606) .(42,705) G74,784\ (908,373)
496,n2 561,28?
q{9$!2
ry.!lg:1
$_g!J!:ES:
$_-2eJ23_
SAPPLEMENTAL DISCLOSURES NOI|-CASH INWSTINC AND FINANCING ACAW OF
Du.ing the firs! qurner of 1998, Company theareadircctoEtrbrighrsfor CaBade $70!t,000. the sold for thc Coripan.v received Sl74o00 in cashand$528.000 the fom of a noreEceivablebearing6yointelrs| and in due i$ fiv quanerlypliacipaliDstallmenrs ofsl05,600plus acsued interest.Thc last installrnentis due Jtlne20. 1999. Begiruing in 1998the Company offersils areadirectorsa perfonnancc inc.ltive ofshort sld long tcfm cornmor slockpulchase options.Theshorttenr opfjonsallow thr aradirctor0opurhasc 6xednu.rber . of shaEsfur sevc!days!t a discoullofthg lesser 20%or S1.20 priceoflhe shrres of &!m thcmarket on lhe gran! alate.The long lem optioossllow the a,eadirectorto puchasea lixed numberofshgles fo! six monrhsa. rnarLet pricc or dle g!a4.date. In dc frsl ahre quanerc 1998&e Companygranaed of 27,402 shortterm optionsand2?,423loog rermoptions,ofwhich 23,?68and 17,158 lespedivcly,wereg(ercised asof Septcnber30, 1998. h colDection with lhis prograrn, Companyhesrccordcdancxpcnscin the the firsr ahrec quanersof I 998 of$ I 3,590r?resenting rircdiscourrs.
t I I I T I
Gnaudnd)
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tQCtl?r5
COIiFIDENTIAL
Case 1:04-cv-00725-RPM
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TEE QUIZNO'SCORPORAIIONANDSUESIDIARIES CONSOLIITATED STATEMEM OFSTOCKSOI,I'ERS'EQINTY
s!o.k PrllcrEd Sbu.r
Brleocts rt J.!u.ry I, 199, lssulrc. ofScricsC prcfcltcdsro.l for crsL a.r ofofi.rEg coirsof536,45a Issu.nc.ofscri8 g Drct ficd 3bct for dlbt D.rof oFcring'cosrs of54.t.277 tnhcle[rvahc of nock wallrlls ,rr!t dro lcrdlr i! .arr.clio! *ih @1!r!io! of dlbt t6 S.ri.! B pr.fdrcd srocl Is$ancaof corbon nocl for rc$risitiol I5sDalar co&ooo srock ot &r.xrraiJr of opdors b!!r.or vrluc ofoFdoasgr&cd rorrca Prcf.Fcdsbcl dividdds N.r los! Brl.rc.. rt D.{!nb..3lt t99?
Issudc! ofcorltlo! sro.t !!si!.r| cmtloyc. bcnfir pla. to
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CoDvddblc
ConE'o! Srocl Shr'.s Aoounr
AddiEonsl
8sl*I
Accwnrlar.d
-4!!g4! 145,0003 146
t67,000 t6i
2,864,757 2,E65 t 3,2:3,415 t0,99s504) S
. 7983?9 455,523
100,000
t(rc
44,2n
lE,lE2 40355
t8 40
9,9E2 92,tl5
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33r50
{93.998)
(E9.Ot6), 4tl
2923,2N 1J48 80,000 40925 4,383
2,923 2 60 4l 1
4,553J44 8,135 399820 218,894 371 (165,55e)
12985,t721
Issu.nc!of con|rlor srocl for rcrcis.of optioB by ud.ryrft?r
I$uarc! of coFuio! stocl fo. cx'rcis! of optiods bj. lr.a dirccroF
Issualcc ofcorrnor $ock fo'.x.lrtu of opnors pu.rsuur er tb. crlployle b.mfil Prcfsrrld stoc&dtvid.lds N.l uaoin! 8!hnce3 .t S.pt |nbar 30, l9r8
668.860
4r_t.000 5
4tJ
3.049.931 3
3.050
g.H1q4!A
(Unauditcd) 7
lQcl|rrt coNtlDEfatraL
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TE! QI'XZNO'SCORTORATION AND SUBSIDIT.RIFJ NOTESTO CONSOLIDATED FTNANCIAL STATEMENTS I. colsisliDg only of mrmal [lqrring adjusBl'nts In $c opioion of rranagcrnd , all adjusErcnrs' oPsadonsfor tle.thrce and nirc of neccssary a faL staaernent (a) l}e .esultsof coDsolids!9d fot oronthpctiods cded S.ptenber 30. 1998and Seplcober30' 1997,(b) the couolidated financial posilio; at Sptembet 1998,(c) the cotsolid.ted statelrentsof crsh oows for rbenin T oorh 30, periodseo
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3. The results for the tbcc alrd nire monrh pdiods lodcd Septembq30' 1998are lot Dcccssadly indicadvcof thc rcsultsfor |hc cltite fiscrl vearof I 998. The Company is obliSated o pay an openingcoDmi$sionio tle 4ea ditec{ot vho sold fte al ftadahise lhe time lie fanchiseopenstor busi[ess. ThesccoDrtrissiolsareaxPElBed the rima !t a.Dd lhc rctaledftancNscop@rfot busitrcss arcDotacctuedasa liabilitv of*E ComPatyuiil that time. At Septembet 1998,lhere were324 Fanchiselsold but not yet opcnwi$ rclatcdopcnitrg 30, coorn[trlissions otolalirg I05;6?5($5l0,437 at D.cqtlba 3l, 1997). 51, to !n the secotrd of Quatrtcr 1998$c Corpany hasleclassificdroyaltv feerevenuc a new statement of operationsaccountcalld coodnuingfecs. Cootinuilg fes will bc coDFiscd-of royalty fee reverDgplus oibcr fcas geoer.tdfrom the liccnsiDgof the Quizro's tradeEratt to vendots arld sdppliers of the Quiano'sft.lnchise sy$em. See Matagehents Discussionaod Analysis of fot FinancialCondilionor PlaD OD.l-ation dctails. of
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ANI' SIJBSIDIARIES TSE QUIZNO'SCORPONATION AND ANAIYSIS OF FINANCIAL MANAGEMEM'S DISCUSSION COIII)ITION OR PLANOF OPERATION Ovrvitr Thc Coopanyearncd profit in the third quanerot 1998of $278t0?, composcd incomeioo a of talchise opslstions ofS463,E68, ilcomefom Coqtpoyoeld slorcopcrrtions $203,556, less and of othercbrgesroraliltg $388,917. TheCompaly's pioary blsincssis thet-anchisiDg Quiao'sRcstauranrs. a franchisor, of As revenue is ptitlcip.lll, dctivrd tolor (l ) arca tcca,(2) itrida!f-drchis.fees, (3) coltiluirg fces.Area fces rDd occur whcD couaE)o! cxclusivc is sold,andarccxpacted dcclittc thcDumb6ofrcmaitting a area to as a!"ailable malkets dccliD6. I!ftial i.nchise fccsoe ooetimefecspaiduponthc salcofa fiaachise andvarydirec0ywith thenumber iarchisestheCompary scll andopcrl. Corrritubgfces,o! of cm theotie. had, iltcrease rheDumbcf, as ofianchisedrstaurauts ilcreasc, Eacl ofties sourccs oDeo gorEibutc thc FofiBbility of rbr CoBpany, 6e rclarivcconEibutio!of each of revetrue to but sou&e will vary as fhc CoEpanymahrcs. Over tima iaitial feesaad co$inuitg fcas will gncratr pmponionarel_v revenue area morc tban fees. Tbe folloviog char ictlcctslhe Companys growth soulcc@d olqlber of rcstaurarlts revnue by for thethird qranet andfirst threq!a!te!sof 1998 comprrcd thirdquancrendffrsf &rec quctersof the
?b! Morlir D.dd SeptadDer30, 1997 1998 Coniinurr fecs Iniual fi-anchis.fces fuca feas Odlcr btcrcsr Tolal fanchisc EvcnuE Sal6 by Cotlpany ost|cd slorcs salcs by Sroresheld for nsalc
Nit. Morals End.d
S.prepber 30, 199t r99? $4,107,191 $ 1,735143 1,996,567 1J90,001 t,ffi9t1 1,44E,781 466,306 4@,$4 t42.315 t07A33
$ r,532y'u s 72EJ58
788,500 6t1,932 89,301 58,845
743,000 553,03t 146,261 23.1a7
t.nE.625 '435.178
4,992,9J2 2.6t5r19
).z6zJr2
wntr35"
Ir10,966
lQc0lrzt
Case 1:04-cv-00725-RPM
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AND SUBSIDIARIES CORPORATION TgE QUIZNO'S AND DTSCUSSION ANALYSISOT ENATTdAL MANACEMENT'S (corttnued) CoNDtTtONORPLANOF OPERATION
I I I
End.d Nhe Mon&,s
t998 open,bcginning (l) Rcslaulanrs New r!$lurants opcncd R.3tal!an6 acquircd RestattElts closed,Quizto's Rcstarra s clos.d, Bains Rasiawaits opcn.end Ne* tlnchiscs sold tnirial i'anchisr feascoll.ciad Systcntwidcsalcs Avcragc unir volmc for 1997(2) Samcstorc $lcs (2) sa!(crnocrJlt -1997
8 (5) (4) --41!'
r<
391 4t
203 42
(4) (4
-
'-44 '-44
{l
(ls) (E) -7lr36 $4,187J00 millio! S?1.4 Vp ll3%
1998 327 126 8
.r99?
156 99 (14)
-T4T
t.l6 s2323,NO $37-0 rnilion s3l6:59 w 2-3%
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S28.0million
s1,003,000 uP8. .hs.s;
$15.6tnilliotr $15.6nillioa
s1,021,162
Vp 3.5V. vp3.54
(l ) (2)
of Ircludes 52 Bai!'s Deli ua s openat ibe begiDtlitrg 1998,8 of wbich bavsiDcccloscd. Tbe Compaay acquiledthc BaiD's Deli &arcbissyst o on November12, 199?. Same srore salesis bas.d on ll2 srorcsop.D silcc thc bcgirrlring of 1997. Stote which transfeEed owturshipduringthis pcriodor rtE in subslsltial defaqltofthe Astchisagedenl ara gowth modeover lhe cxcluded. Becausc Corbl,any andwill coDtinu be itr al! rggrssive !o rhe is rtexl fe\ ycars,ir js arlicipatedthatsamcstorcsalgswill fluctuatcas units aIEincluded&o'r mote sun up markcts. Exclud$ tor-fadiional urits locatedi! conve[icncestoresatd gas starions, andincludesonly units ope[ all of 199?.
Re3ultsof Operdons Comlariso! of tbe lirst three qrariers of 1998wltb tbe lirit tbree qusners of 199t atrd tb. ihlrd qu.rter of1998rvith th.lhiral quarterofl99? Franchiserevenueircreased41% in ftr third quanerot 199810 S3,092,989 fiom $2,194,237 rbe s.me in quarterlasl -vear. tle lirsa thEe quancrsof I99& tdchise tevcnue incrcasd 59% to 38,379356 by For fiom 55,2E:r72 last year.Toral rwenus incrased 56% ia the third quaner of l99E ro 55,307,392fiom 33,409,661 rhe ssmequanerla$ year,and75% i! lb filst tlue quane$ of l99E le $142?3,450 from in s6.108.45?. ContinuiDgfeesincreased &orIt$728,758 the ttdrd in llopl" in $e third quaner 1998to $1,532,411 of quafterof 199?.For thc first threequaners 199E,.oDtinuing 137%compatld lo rhe li6t feas increased of threcquaitersof 1997. Continuingfeesa.comp.ised of.oyalties and licensbg fes. Ro],alty fecs are a percentage cach Fanchisee's as of salespaid lo the Companyand will increaEe new ftanchisesopen. as th avqrageroyalty prceniagc rncrelses,and as averageunit srhs itcrcasc. At Sept.rnber30, 1998therr were408 ftanchises,24 hcld lor resalcopcn Conpaiy ownedstoresand 6 stores (including Bain's)as compaleilto 241 et Septenber 1997. The loyalty was 5olo agtecmenB entffed 30, for I intoprio.lo February 1995, lor agrqcmenls entcred ftom February l, 1995 March31, 1998, into to 11, 6% and 7% for all franchisgagreeltres edtcrrdinto 8flcr M.rch 31, 1998. Thc royalty for Qriarot Exprcss unirsis 8%.
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ANDSUBSIDIARIES TEE QIIIZNO'SCORPORATION MANAGEII&.NT'S DTSCUS$ON AI\D ANALYSIS FINANCIAL OF CONDnON OR PLANOF oPERATION(coDtiDued) were$1,469,522 thcthirdquafler 1998 Roy.lryfees of coopaEd S728,758 thes8llepcriodlasr to for for year,anin6.ase of 102%.FortheDio period rdedScptcurbcr loyalty fees ircreascd monlh 30, 120% to S3,81 9,302 Fotn 51,73 5243'tn1997 . lncludd 44 Bain! tuochiss sre 6cquM i! Novcrlbtl997,whicl payroyaltirsrt t"riot,s lalcs up !o 5%, andacc.untfor S2003mi! royalty lcvcnuc thc 6rstlbrecqurn.rs of 1998, for alptoximatcty 8olo of tic incfcase. Tbc CoepaDy r.cord6 royaltyrevclue froh Bain,s6archisc6 whrrthc imds atc
collected. Licensing fees arc feesgeneErcdrbroughtho liceasiag of lhr Qui6o'r radqEart for usc by othef,s, Licensingfccs arc cxpccted continucesdlo increse systcmwid ro as sal6 aDdthc ar1atjcd.sr valuc ed oftbc Quiano'sbraridincreases. in Lic.dsing feeswere3282,889 thc 6rst tblec qurrtds of l99g a[d $O ir| 199?.For rhe third quaneiof 1998, liceDsiDg $'er. S62,E89, fees Iultial frarchlsc feesilcrcasd6% i! tbe third qtisrtcrof 1998to $7E8,500 frodr 3743,000 ia rbc sanc quaret last ycar. For the firsrtthrcc quan rs of 199E, initial tralchisc f.cs incrcasd 26% to $1p96,567 .omparedto $1,590,001 the 6rst rce ouaners 197. Initial ianchisc faeseE ooc tiEc fecaDaid for of by F&chisees at the timc the Fanchisc purchascd.Initial &archisefesare oot rccoglizcd as iocomc is until the p6iod in which ell of the Coopany'sobliptions telatirlg to the sale havc bclo substantially performed.which generallyoccurswhcd thc Fanchiscopcns- ld thc 6r$ tbrcc qlstcas of t99& the CoEpany opened122 ianclises ed 4 Companyowncd rmirs as compdtd to 98 Faichis6 ard ote Companyownedurjl opencd thesadcpcriod lall ycar. in tnitial Aanchisefeescollectcdby rheComprny arc recordedas dcfetredinitial fanchise ftcs uatii the relalcd franchiseopens. Deflrcd inirja] Falchisc fe.s st Sc?tcE$cr30, l99g wcre S4J79,g6g alrd represqra 324 francldscssold but lor y.( in opcratiorl cofip.rd to S2269,756st Sq,tcfltu 30, 199? reprcscming170 fi'anchises bur not open.Thc Compaly sold 306 ncw ftarchiscs for S4,1E7,500 sold in lhe ffst rhrecquanerE 199E, of ofwhich 145weresold ia thr frst quanr,86 in the s.ondqudcr, and 75 in the third quaner.Tha recordsales the first quancrwerc due,in pan, to a royalty incrcascfrorn in 6rb ro'Jyo eff*tiv. for franchisrspurchrsed ancr Mtch 31, 199E.Direct cosrsrelaiedto tbe irrchile saie,ptimarily salcscommissions paid ro ar.a dircctors,are defcnedoD lhe books ofthe Companyald recordedas an cxpenscar the sarnetinrc a! rhe rclatcd iritial franchisefee is .c.rded as income. Dcfencd costs paid with respecl to initirl tarchise fes defered ar &Dtenbcr 30, l99g wcle Sf .M9.388. Approxirnately5Sloof all injtial tancbisec feesreceived tbe Cornpanyarc paid to arca by directo$ for sales and opening comttrjssions,.The Companyhas nor sold oi oj
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AND SUBSII'IARIES CORPORATTON TSE QTNZNO'S Al{D ANAIISIS oFrIN4'{cIAL MANAGEII'IEM'S DISCUSSION CONDmON OR PLAII OF OPERATION(cortbocd) quaricr to itl Dotneslicateafeeswele 5588932h thethitd qusnetot l99t coEParrd $553,031 thc sErnc year. For $e nine monthsendedScprember 1998don6lic arc8 fccs ra'cr$927,9[7 versus 30, tas! was 5.05per p.r6@ ioll Ja$udy 1997{mugb Dcccober b $1,448,?81 1997.Thc fee for U.S. areas 1997,$.06 6'omJalu!ry 1998tbough lebrualy 1998,.trdS.0?siaceMa.ch l, 199E. lD sdditioq each cea direoor is requiredb pay a railirg fcc of Slq000. Thc populstio! basedportion of th fc is as agrc.dedtit sigbcdeDdis lecogEized ilcom' in dcctled fuly eamed 0rc Compalywbcnthc area by tbat period. i! lntcmationallia$cr Fanchise we,t S225,OOOlb tbild $.tto of 1998ad$739'000 for lbe niqe fees Inonth! eDded Scptembq30, 1998.Thrcwert no ilrcraatioaalaaner fraocbisefecs iD thc fiIst lhce qurnersof I 997. 10 the thid quaner of 1998thc Cornpanysold lh. dastcr 8@9hisrights for J
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