Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 1 of 30
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
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 2 of 30
[THZS PAGE INTENTIONALLY LEFT BLANK]
TQC00293
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 3 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page -
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. .. . ... . .... .. .. ... .. . . . . .... . . .
. .....
..
. . ..
..
.. . .
. . ..
c
F-2
F-3 F-4 F-6 F-7
..
. .
. . . . ....
... ...... .. . . .. .. . . .. . .
.. . . .
.. .. .
.. .
F-9
F-1
TQC00294
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 4 of 30
INDEPENDENT AUDITORS'REPORT
To the Board of Directors and Stockholders THEQUIZNO'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. O r responsibility is to u 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. As described in Note 18, the financial statements for the year ended September 30,2000 have been restated.
.
November 20, 2000 Denver, Colorado
F-2
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 5 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
zoo0
Restated
-
September 30,
1999 -
-
December 31,
1998 -
ASSETS
Current assets Cash and cash equivalents ............................................ Short-term investments.. .............................................. Accounts receivable, net of allowance for doubtful accounts of $222,293 (2000) and $43,793 (1999) and $20,000 (1998) .............. Current portion of notes receivable ................................... Deferred tax asset .................................................... Other current assets .................................................. Assets held for resale.. ............................................... Total current assets.. ............................................. Property and equipment, net .............................................. Other assets Investment in area directorships, net of accumulated amortization of $167,893 in 2000 and $26,232 in 1999 ............................... Intangible assets, net.. ................................................ Other deferred assets ....................................... ... ........ Deferred tax asset .................................................... Deposits and other assets. ............................................ Notes receivables, net ................................................. Total other assets ................................................. Total assets ..................................................
LIABILITIES AND STOCKHOLDERS' EQUITY
$ 2,493,976
$
5,324,336 2,066,247 1,545,844 221,182 481,854 194,579 12,328,018 11,669,240
626,828 4,263,877 1,047,438 519,994 128,718 373,578 192,923 7,153,356 4,804,051
$
702,258 1,541,423 857,280 1,212,522 81,260 266,100 638,395 5,299,238 3,535,222
4,271,320 889,387 4,497,528 . 1,662,265 2,782,498 1,726,984 4.210.626 3,507,213 361.189 '1307837 1,670;329 1,301,435 17,194,244 9,817,367 $41,191,502 $21,774,774
$ 2,614,437
$ 1,219,157
51,635 1,553,522 1,119,371 734,808 1 9.883 1 1,3751872 4,955,091 $13,789,551
~~
Current liabilities Accounts payable ..................................................... Accrued liabilities. .................................................... Current portion of long-term obligations .............................. Current portion of subordinated debt ................................. Income taxes payable ................................................. Total current liabilities. ........................................... Long-term obligations ..................................................... Subordinated debt.. ....................................................... Deferred revenue ......................................................... Total liabilities ................................................... Commitments and contingencies Minority interest in subsidiary ............................................. Stockhdlders' equity Preferred stock. S.001 Dar value. 1.OOO.000 shares authorized Series A --~ _ ~ ~ . issued and outstandhg 146,006 (2000, 1999 and 1998) ($876,000 liquidation preference) .............................................. Series B issued and outstanding 0 (20001, 0 (1999) and 100,000 (1998) ($500,000 liquidation preference) .................................... Series C issued and outstanding 167,000 (2000, 1999, and 1998) ($835,000 liquidation preference) .................................... Series D issued and outstanding 3,000 (2000) and 0 (1999 and 1998) ($9,000 liquidation preference) ...................................... Series E issued and outstanding 59,480 (2000) and 0 (1999 and 1998) ($512,718 liquidation preference) .................................... Common stock, $.001 par value; 9,MK),OOO shares authorized; issued and outstanding, 3,007,921 (2000), 3,074,177 (1999) and 3,054,459 (1998) .............................................................. Capital in excess of par value ......................................... Accumulated deficit ................................................... Total stockholders' equity. ........................................ Total liabilities and stockholders' equity ......................
~
1,495,797 1,550,501
-
345.460 6,006,195 16,037,238
-
16,402,957 38.446.390
544,476 337;642 218,546 851.469 3,171,290 1,268,504 1.498.791 13;722I331 19,660,916
$ 1,317,085
532,324 370,404 244,084 200.000 2,663,897 964,984 1.130.916 4;781:946 9.541.743
151,601
146
146
146 100
167 3
59
167
167
3,008 3,857,702 (1,115,973) 2,745,112 $41,191,502
3,074 3,054 5,065,247 4,485,949 (972,507) (2,375,478) 2,113,858 4,096,207 $21,774,774 $13,789,551
See notes to consolidated financial statements. E3
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 6 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended 0 September 3 , 2000 Restated
-
For the Nine Months Ended September 30, 1999 -
For the Year Ended December 31,
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 1,168,801 Sale of Japan master franchise ................ 1,064,646 370,374 604,172 Other ......................................... Interest. ....................................... 526,761 238,790 259,193 12,606,113 Total revenue ............................. 26,756,047 13,960,230 Expenses (7,836,912) Sales and royalty commissions.. ............... (3,931,634) (4,457,779) General and administrative .................... (6,509,444) (6,201,857) (12,867,738) (20,704,650) (10,441,078) (10,659,636) Total expenses ............................ 6,051,397 3,519,152 1,946,477 Income from franchise operations ...................... Company store operations 14,973,763 6,420,563 6,848,737 Sales.. ............................................. (1,969,433) (2,042,092) (4,373,303) Cost of sales.. ..................................... (1,683,225) (1,747,029) Cost of labor ...................................... (3,318,489) (2,562,540) (6,088,241) (2,169,465) Other store expenses .............................. (6,287,857) (13,780,033) (5,885,927) Total expenses ............................ Income from Company stores operations ............... 1,193,730 534,636 560,880 Other income (expenses) 566,841 1,281,904 194,422 Sales by stores held for resale.. ................... 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) (103,000) New company start-up costs ....................... Provision for bad debts.. .......................... (305,285) (220,536) (285,308) (41,820) (26,287) (47,838) Other expenses .................................... Depreciation and amortization ..................... (1,959,718) (921,300) (781,977) (579,246) Impairment of long lived assets .................... Privatization and acquisition related costs .......... (138,164) (265,472) Interest expense .................................. .... (1,898,901) (240,827) (340,614) Total other expenses ...................... $ (5,262,884) $ (1,965,479) $ (1,763,295)
See notes to consolidated financial statements.
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 7 of 30
~
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS-(Continued)
For the Year Ended September 30,
2000
For the Nine Months Ended September 30,
1999 -
Ended December 31,
1998
or tie Year
Restated
Net income before income taxes .......................... Income tax (provision) benefit. ............................ Net income before preferred dividends and cumulative n effect of changes i accounting principle ................ Preferred stock dividends. ................................. Net income before cumulative effect of changes in accounting principle ..................................... Cumulative effect of changes in accounting prbciple (net of taxes) ................................................ Net income (loss) applicable to common stockholders ..... Net income per s h a r e b a s i c Net income per share before cumulative effect of changes in accounting principle ..................... Cumulative effect of changes in accounting principle.. Basic net income (loss) per share of common stock ....... Net income per share-diiuted Net income per share before cumulative effect of changes in accounting principle ..................... Cumulative effect of changes in accounting principle. . Diluted net income (loss) per share of common stock., ... Weighted average common shares outstanding Weighted average common shares outstanding-basic Weighted average common shares outstandingdiluted. .............................................
$1,982,243 (722,73 8) 1,259,505 (186,457) 1,073,048
$ 2,088,309 (721,688)
$ 744,062 368,553
1,366,621 (124,230) 1,242,393 (2,769,592) $(1,527,201)-
1,112,615 (220,890) 891,725
$1,073,048
$ 891,725
$ $
-
.36 .36
$
$
-
.30 .30
$
$
-
.31 .31
$
$
-
.26,
.26 3,014,042 3,445,972
3,019,849 3,728,761
3,060,878 3,816,549
See notes to consolidated financial statements.
F-5
TQC00298
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 8 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Convertible Preferred Stock Shares Amount Common Stock Shares Amount Additional Paid-in Capital Accumulated Deficit Restated
- - - - -
Total Restated
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 51,165 51 222,473 to employee benefit plan. ....... 222,524 Issuance of common stock for exercise of options by underwriter ..................... 80,000 80 399,920 400,000 Preferred stock dividends. ......... (220,890) (220,890) 1,112,615 1,112,615 Net income. ....................... -4,096,207 413 3,054,459 3,054 5,065,247 (972,507) Balance, December 31, 1998....... 413,000 Issuance of common stock for exercise of options and pursuant to employee benefit plan ........ 28,809 29 75,438 75,467 Tax benefit from exercise of stock 14,840 14,840 options .......................... Shares canceled .................... (45,455) (9) (45,446) (9,091) Redemption of Series B Preferred (499,900) (100,000) (100) (500,000) Stock ........................... (124,230) Preferred stock dividends. ......... (124,230) (1,402,971) (1,402,971) Net (loss) ......................... -2,113,858 313 3,074,177 3,074 4,485,949 (2,375,478) Balance, September 30, 1999 ...... 313,000 Issuance of common stock for exercise of options and pursuant 77,749 78 284,413 to employee benefit plan ........ 284,491 Issuance of Series D Convertible 11,396 11,400 Preferred Stock, net.. ........... 4,000 4 Repurchase of Series D (1) (2,999) Convertible Preferred Stock.. ... (1,000) (3,000) Tax benefit from exercise of stock options.. ........................ 17,889 17,889 (1,219,785) Common Stock repurchased ....... - (144,005) (144) (1,219,641) Issuance of Series E Convertible Preferred Stock, net ............. 59,480 59 467,152 467,211 Preferred stock dividends. ......... (186,457) (186,457) 1,259,505 1.259.505 Net income. ....................... -Balance, September 30, 2000 ...... - 375,480 $ 375 3,007,921 $3,008 $ 3,857,702 $(1,115,973) $ 2,745,112
- -
See notes to consolidated financial statements. F-6
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 9 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30,
Restated
u) "
For the Nine Months Ended September 30, 1999
-
For the Year Ended December 31, 1998
-
Cash flows from operating activities: Net income (loss) .............................................. $ Adjustments to reconcile net income (loss) to net cash provided by operating activitiesDepreciation and amortization ............................. Impairment of long lived assets ............................ Cumulative effect of a change in accounting principle, ..... Provision for bad debts .................................... Loss on disposal of Company stores ....................... Deferred income taxes ..................................... Amortization of deferred financing costs ................... Amortization of deferred area director fee revenue ........ Area director expenses recognized ......................... Promissory notes accepted for area director fees ........... Other.. .................................................... Changes in assets and liabilitiesAccounts receivable ................................... Other current assets ................................... Accounts payable.. .................................... Accrued liabilities ..................................... Deferred franchise costs ............................... Deferred initial franchise fees and other fees .......... Income taxes payable.. ................................
~~
1,259,505 $(1,402,971) $ 1,112,615 1,884,191 579,246 844,220
4,388,208 285,308 305,285 220,536 78,004 80,304 43,596 (795,877) (2,819,863) (641,068) . 77,080 24,066 75,527 (404,934) 40,493 (415,924) (487,279) (1,599,977) 17,972 9,375 -
-
757,911
-
-
Net cash provided by operating activities ......... Cash flows from investing activities: Acquisition of Company owned stores. ......................... ?,832,3761 (286,3551 Purchase of property and equipment ........................... 6,073,744 (1,477,962 (1,780,767) 453,931 1,221,099 889,671 Principle payments received on notes receivable ................ Investment 111 turnkey stores ................................... (7,5581 (281,6201 Short-term investments ......................................... 1,060,459 (2,722,454 (1,003,235 Acceptance of other notes receivable. .......................... 11,159,7611 (37,390 (773,307 Investment by minority interest owners. ........................ 151,601 Purchase of minority interest owners ........................... 150,000 (22,958) 1736,4581 (601,862) Intangible and deferred assets .................................. Proceeds from sale of assets and stores ........................ Deposits.. ...................................................... Area director marketing temtory repurchases .................. Other investments .............................................. Net cash used by investing activities .............. (16,003,777) (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) 17,548,000 2,338,168 877,642 Proceeds from issuance of notes payable ....................... Redemption of Class B Preferred Stock ........................ (500,000) (646,511) Financing costs. ................................................ 90,307 622,524 Proceeds from issuance of Common Stock and Preferred Stock 302,380 478,611 Proceeds from sale of Class D and Class E Preferred Stock ... Repurchase of Class D Preferred Stock ........................ (3,000 Common Stock repurchased .................................... (1,219,785 (124,230) (220,890) (186,457 Preferred dividends paid.. ...................................... 70,548 773,836 Net cash provided by linancing activities .......... 12,130,894 (75,430) 140,971 Net increase (decrease) in cash and cash equivalents ............... 1,867,148 Cash and cash equivalents-beginning of year ...................... 702,258 561,287 626,828 Cash and cash equivalents-end of year ............................ $ 2,493,976 $ 626,828 $I 702,258
(398,076 (1,279,762 (369,279) (82,3391 109,802 1,395,280 251,711 99,330 951.321 42,476 12,152 (404;502) (659,547) (287,610) 3,085,559 4,672,693 2,633,284 200,000 (506,009) - 651,469 4,480,526 6,422,804 1,484,628 5,740,031 5,019,833 2,597,243
~
I
-
See notes to consolidated financial statements. F-7
BQC00300
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 10 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH nOWS-(Continued) Supplemental disclosure of cash Row 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 hancing 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 wntten-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 n purchase agreements, in the amount of $437,553. Corresponding reductions i 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.
--
See notes to consolidated financial statements.
F-8
TQC00301
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 11 of 30
THE QUIZNO'S CORPORATION'AND SUBSIDIARIES
NOTES TO CONSOLIDATED FLNANCJAL STATEMENTS Note l-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&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:
Not Yet In
Sold But
Operation
Operational
Total
26 1,480 292 1 4 8 -
Quizno's Company owned restaurants ................................ Franchise restaurants-U.S., Puerto Rico and Guam ........ Franchise Restaurants-International ........................ Restaurants held for resale. .................................. Bains Franchise restaurants ........................................
Quizno's Kansas Company owned restaurants
669 170
839 -
26 811 122 1
4
8 972 -
................................
181 ,1 -
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. F-9
TQC00302
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 12 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FLNANCIAL STATEMENTS-(Continued)
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 In vestments 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-tomaturity. 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 specilic 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 Iosses 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. Equipmedidunder 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.
F-10
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 13 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F I N l w C I A L STATEMEPJTS-(Continued)
The excess of the purchase price over net assets acquired for stores purchased by the Co-mpany 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 The costs associated with repurchasing area director territories are allocated at the time of purchase to the existing franchise locations and locations sold and to be opened in the area director territory. The acquisition costs are recorded as a prepaid royalty commission and expensed on a straight line basis over the remaining term of the individual underlying franchise agreements. Franchise agreements typically have a term of 15 years. I the franchise closes, the remaining prepaid royal^ f commission related to that specific unit is expensed in the current period. . 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 a l of the deferred franchise fees will be realized. The l 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 generaJly 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, F-11
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 14 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 rezeived. The master franchise agreement provides the master franchisee an exclusive right to sell and open franchises and grant area directorships in a defhed 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.
F-12
PQC00305
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 15 of 30
THE QUIZNO'S CORPORATION AND SUBSIDLARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Royalties as required by the franchise agreement are accrued based on a percentage of gross kales, 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 wt FAS 128, basic earnings per share are computed by dividing net income by the ih 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 w r a t outstanding (Note 14). arns 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. Reclassifcations of Prior Year Amounts Certain reclassscations 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 F-13
TQC00306
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 16 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 f o s SFAS No. 133 is effective for fiscal years beginning after June 15,2000. Management believes that lw. 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 4 ) which was effective July 1, 2000, except that certain 4, conclusions in this interpretation, which cover specific events that occur after either December 15,1998 or January 12,2000 are recognized on a prospective basis from July 1,2000. This interpretation clarifies the application of AF'B 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 ( S A B ) 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 W . C O W B 0 Y 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 ............................... $ 875,000 370,000 Furniture and fixtures ........................................ 265,000 Leasehold improvements ..................................... 3,365,000 Concession agreements. ...................................... $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 foima results of the Company giving effect to the AS1 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 September 30, 1999 Year Ended December 31,
1998
Revenue
................................................
$22,847,496
$
$23,548,757
$ $
Net income
............................................. Basic earnings (loss) per share.. ........................ Diluted earnings (loss) per share .......................
F-14
662,806 (S4) (~9)
(97,129) ~03)
$
$
TQC00307
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 17 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continucd)
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: $204,000 Equipment.. ................................................... Leasehold improvements....................................... 330,000 Lease agreements. ............................................. 207,000 L $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 , tc?tal 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 6,268 Inventory and deposit ......................................... $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
September 30, 1999 December 31, 1998
Notes receivable consist of the following:
2000
-
-
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 410,058 530,026 2012. .................................................... 483,351 Note receivable from national advertising trust, interest at 267,058 1,030,000 12%. (Note 8) .......................................... 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 32,423 103,444 11%, due in varying amounts through 2004.............. 11,213 2,588,394 2,897,279 2,232,065 (1,212,522) Less current portion .................................. (519,994) (1,545,&F4) 1,375,872 1,351,435 1,712,071 (41,742) Less allowance ........................................ (50,Ow $ 1,301,435 $1,670,329 $ 1,375,872
-
F-15
TQC00308
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 18 of 30
THE QUIZNO'S CORPORATION AND SUBSIDLAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-( Continued)
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 0 September 3 ,
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:
ZOO0 September 30, 1999
-
December 31,
1998 -
Furniture k t u r e s and equipment ....................... $ 75,805 $ 65,421 78,117 108,056 Leasehold improvements.. .............................. Lease agreements and other ............................ 40,657 19,446 $194,579 $192,923
$221,034 383,771 33,590 $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 f& 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.
F-16
TQC00309
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 19 of 30
THE QUIZNO'S CORPORATION AM) SUBSIDIARIES
NOTES TO CONSOLDATED FINANCIAL STATEMENTS-(Continued) Note 5-Property
and Equipment
Property and equipment consist of the following:
LiEe September 30,
2ooo
Equipment. ..... .... .. . .. . . ... ... . Furniture and fixtures .. .... . . . . Leasehold improvements.. . . . ..... . . Corporate j e t . . . .. . ... .. Software . .. ... . ...... ... ... . . .. .
.. . . . . . .. .. . .. . .. .... .... .. . . .. .. . . .
..
1999 -
December 31, 1998
-
3-10years 7-10years
Lease term 10% over 3 years 3-5years
$ 41505 $20468 $,2,9 ,7,9 ,1,9 15479
14984 10222 ,9,4 ,5,3 7462 6,7 37653 22634 17225 ,7,0 ,8,4 ,1,1 34682 ,8,3 3350 1,4 11463 ,6,0 6128 8,3 ,1,2 1,0,7 60452 43526 41287 ,3,1 (,3,3) (,3,6) (8,0) 24367 12041 7004 $16920 $ 48401 $,3,2 1,6,4 ,0,5 35522
Less accumulated depreciation and amortization .. .. ...... ..... .. .. . . ... Net property and equipment ...........
Based upon market values for the Company's plane, the Company has determined that its residual 0 value w i l l be approximately 90% of cost after three years. Therefore, the Company is depreciating 1 % of the cost of the plane over three years. The plane is expected to be disposed of at the end of three years.
Note 6-Intangible
Assets
Intangible assets consist of the following:
Covenants not to compete ......... ................. Franchise agreements.. . .. ., . . ... . , .. .. . Prepaid area director marketing commissions , . . . . Trademarks and other .............................. Concession agreements and acquisition costs . ..
.. . .. .
... . . . .. ....
Less accumulated amortization
... ... .......... . ... .
u) " 1999 1998 $ 6013 $ 6013 $,6,4 0,1 0,1 16756 7276 9,9 2234 9,9 3056 1,0 5676 2,7 4623 8,8 4539 5,3 7150 2,8 4283 4,1 35184 ,0,0 ,7,2 ,2,6 56214 23504 24085 ,0,7 (,0,4) (1,5) (6,4) 11466 7279 8733 $44758 $,6,6 $,5,2 ,9,2 16225 15352
September 30,
December 31,
At September 30,2000, Company recorded an impairment of $ 5 , 6 to the carrying value of the 4032 the franchise agreement related to the assets purchased i November 1 9 from Bains. n 97
Note 7-Other
Deferred Assets
Other deferred assets consist of the following:
1998 1999 $,9,7 $,8,7 $ 9626 19025 15573 2,2 6972 7,5 8,8 700 1879 0,6 1241 1,7 32,442 1605 0,6 $,8,9 $,2,8 $,1,7 27248 17694 11931
2000 -
September 3 , 0
December 31,
Deferred franchise costs ... .. . . . . .. . .. . . . . . , . . Deferred financing costs . . , . . .. . . . . . . .. .. .. ., . . . Other deferred costs ................................
.
. .. . .. . .
. ..
F-17
TQC00310
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 20 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT.S-(Continued) 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 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 199TCessna Citation 525. As of the same date, the Company entered into an interchange agreement with Richard E 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 il development agreement wl 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
F-18
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 21 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F"cILAL STATEMENTS-(Continued)
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 temtory, the Company will apply the Development Fee in increments equal to s f t y 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-Tern Obligations and Convertible Subordinated Debt
A ZOO0 1999
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 $ 99,485 1999 .................................................... 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, t h i s note was canceled in 1999 .................................................... 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, I ~ c .......................................... 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 ..................
December 31, 1998 -
$ 970,999
$ 986,077
-
116,118
-
-
2,988,098
-
-
364,875
-
-
(table continued on next page) F-19
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 22 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (table continued from previous page)
September 30,
2000 -
December 31,
1999 -
1998 -
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 ............ 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 ................... 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 ................... Various notes payable. In conjunction with Company's loan agreement with AMRESCO, the September 30, 1999 balance was paid-off in October 1999 .............. Less current portion. ......................................
143,197
-
-
368,396
-
-
322,956
635,147 1,606,146 (337,642) $1,268,504
233,193 1,335,388 (370,404)
$ 964,984
17,587,739 (1,550,501) $16,037,238
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 M e d Lynch Business Financial Services, Inc. The loan beak 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.
F-20
TQC00313
Case 1:04-cv-00725-RPM
Document 41-19
Filed 07/01/2005
Page 23 of 30
THE QUIZNO'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Subordinated debt consists oE
September
2000 -
30,
December 31,
1998 -
1999 -
Subordinated debt payable. In conjunction with Company's loan agreement with AMEZESCO, the September 30, 1999 balance was paid-off in October 1999 ..................................... ul 12.75% convertible subordinated debt, paid in f l during 1999 ....................................... Less current portion ............................
$
-
$1,717,337
$
-
$ -
1,375,000 (218,546) (244,084) $1,498,791 $1,130,916
Capital
Maturities of long-term obligations and capital leases are as follows:
Year Ending 0 September 3 , Long-Term Obligations
e
26,739 26,739 31,733
.
Total
$ 1,555,506
2001 .............................................. 2002 .............................................. 2003 .............................................. 2004 .............................................. 2005 .............................................. Thereafter ........................................ Less amount representing interest ................ Total principal.. .................................. Less current portion ..............................
` $ 1,528,767 $ 26,739
1,865,094 1,714,228 1,820,784 2,810,222 7,834,369 111,950 17,600,203 (12,464) (12,464) 17,488,253 99,486 17,587,739 (1,528,767) (21,734) (1,550,501) $15,959,486 $ 77,752 $16,037,238
1,838,355 1,687,489 1,789,051 2,810,222 7,834,369 17,488,253
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 Septeniber 30 are as follows:
2001 2002 -
2003
$1,891,866
2004
$1,501,255
2505 -
Thereafter
$2,330,961
$2,185,785
$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 an