Free Motion for Partial Summary Judgment - District Court of Colorado - Colorado

Case 1:04-cv-00725-RPM

Document 41-18

Filed 07/01/2005

Page 1 of 21

Deferred domestic area fees are one-time fees paid to us for the right to sell franchises on our behalf in a designated, non-exclusive area. Domestic area director fees were $672,333 in 2000 and $1,200,813 in 1999. The fee for U.S. areas was $.03 per person in the designated area through June 1996, $.035 from July 1996 through December 1996, $.05 from January 1997 through December 1997, $.06 from January 1998 through February 1998, and $.07 since March 1, 1998. In addition, each Area Director is required to pay a training fee of $10,000. In 2000, we sold 6 area directorships. In 1999, we sold 14 new area directorships including 5 existing Area Directors who purchased additional territory. At September 30, 2000, we had a total of 58 Area Directors who owned areas encompassing approximately 60% of the population of the United States. International master franchise fees are one-time fees paid to us for the right to sell franchises in a designated, exclusive, international market. The master franchisee assumes all of our obligations and duties under the agreement. We recognize these fees when received. International master franchise fees earned were $689,567 in 2000 and $931,069 in 1999. The 2000 fees received were for the Switzerland, Netherlands, Luxembourg, and Belgium, $300,000, Iceland, $80,000, Mexico, Venezuela, Peru, Dominican Republic and other Caribbean islands, $100,000, and Taiwan, $219,567. A total of $40,000 of these fees was deferred until our training obligations are completed. In 2000, we recognized $30,000 of previously deferred fees. The 1999 fees received were for the United Kingdom, $510,000, Japan, $125,000, Australia, $221,069, and the rights to part of Central America, $115,000. A total of $40,000 of the fees was deferred until our training obligations were completed. We offer domestic Area Director applicants financing for up to 50% of the area fee. The amount financed is required to be paid to us in installments over five years at interest rates between 6% and 15%. The promissory notes are personally signed by the Area Director and, depending on the personal financial strength of the Area Director, secured by collateral unrelated to the area directorship. We also periodically offer payment plans to international Master Franchisee applicants. Of the ten domestic and international areas sold in 2000,4 used this financing for $415,924, representing 31% of the area director fees recognized in 2000. In 1999, a total of $1,450,309 was financed, representing 68% of area revenue. The area director and master franchise agreements set increasing minimum performance levels that require the area director or master franchisee to sell and open a specified number of franchised restaurants in each year during the term of the area agreement. Our experience with the program to date indicates that while some area directors and master franchisees will exceed their development schedules, others will fail to meet their schedules. In our planning, we have allowed for a certain percentage of area directors and master franchisees that w l not meet their development schedule. i l Delays in the sale and opening of restaurants can occur for many reasons. The most common are delays in the selection or acquisition of an appropriate location for the restaurant, delays in negotiating the terms of the lease and delays in franchisee financing. We may terminate an area or master agreement if the area director or master franchisee fails to meet the development schedule, and we then have the right to resell the territory to a new area director or master franchisee or we can operate it. Since 1999, we have repurchased 17 area directorships for a total of $4,439,213, of which 14 were purchased in fiscal 2000 for $3,472,627. As a result of such repurchases, we no longer have to pay the area director sales, opening and royalty commissions. The purchase price is recorded as a prepaid commission and then expensed over the remaining term of the underlying franchise agreements. If the franchise closes, or the royalty from any location is impaired, the remaining prepaid royalty commission related to the specific unit is expensed. At September 30, 2000, there were 146 franchises open and 88 franchises sold not open, in repurchased area director territories. During fiscal 2000, we expensed $134,912 for amortization of prepaid commissions related these franchises and expensed another $6,749 representing the unamortized balance related to one such franchise closed. At September 30, 1999, there were 76 franchises open and 93 franchises sold not open, in repurchased area director territories. During 1999, we expensed $26,232 for amortization of prepaid commissions related these franchises. During 1999, none of these franchises closed. Japan master franchise income represents payments received in 1999 of $1,423,348 for the master franchise rights of Japan. In the second quarter of 1999, we also received $22,000 for our share of an area director marketing agreement sold in Japan. In 1999, we incurred direct costs related to the revenue totaling $276,547 resulting in net revenue of $1,168,801. The payments were recognized as 22

TWO0271

Case 1:04-cv-00725-RPM

Document 41-18

Filed 07/01/2005

Page 2 of 21

I

revenue when received. Although we plan to continue to enter into master franchise agreements. internationally, we do not expect such transactions to be of the magnitude of the Japanese transaction. Other revenue increased by 109% in 2000 to $1,064,646 from $508,240 in 1999. Other revenue is primarily amounts paid by equipment suppliers for design and construction, franchise transfer fees and bookkeeping fees charged Owners for whom we provided bookkeeping services. Amounts paid by equipment suppliers were $566,158 in 2000 compared to $324,139 in 1999. This amount will vary based on new store openings. Franchise transfer fees increased in 2000 to..$248,000 from $86,500 in 1999. Since 1995, our franchise agreement requires all new Owners to utilize our bookkeeping services, or a firm designated by us, to provide bookkeeping services, for their fist 12 months of operations. Bookkeeping fees were $121,755 in 2000 compared to $30,888 in 1999. Bookkeeping fees are paid by the franchisee to the Company and then remitted on to the bookkeeping service designated by the Company. These fees represent the amounts retained by the Company to administer the bookkeeping function. Sales and royalty commissions expense increased 48% to $7,836,912 (37.3% of royalty and initial franchise fees) in 2000 from $5,302,456 (44.2% of royalty and initial franchise fees) in 1999. Sales and royalty commissions are amounts paid to our domestic Area Directors, commissions paid to other sales agents and employees, and costs related to sales promotions and incentives. Sales and royalty commission expense declined in 2000 as a percentage of royalty and initial franchise fee due to the repurchase of certain area directorships. O r domestic Area Directors receive commissions equal to 48% of the initial franchise fees and u 40% of royalties received by us from franchises sold, opened, and operating in the Area Director's territory. In exchange for these payments, the Area Director is required to market and sell franchises, provide location selection assistance, provide opening assistance to new owners, and perform monthly quality control reviews at each franchise open in the Area Director's temtory. The Area Director is entitled to receive commissions during the term of the area director marketing agreement and in some cases, upon expiration of the area director agreement, the commission paid is reduced to 1%of sales for 5 years. O r foreign master franchisees retain 70% of initial fees, area director fees and royalties paid from u franchises sold, open and operating in the master franchisee's territory, except the Canadian master franchisee who retained 100°h of initial franchise fees i 1998 only, and the United Kingdom master n franchisee who will retain 85% of the initial franchise fees through December 31, 2001. Under the master franchise agreement, we have no obligation to provide services that will result in any incremental cost to us, other than an initial training trip to the country by an employee of ours. General and administrative expenses increased 49% to $12,867,738 in 2000 from $8,657,357 in 1999. As a percent of franchise revenue, general and administrative expenses have increased slightly from 47.6% in 1999 to 48.1% in 2000. General and administrative expenses include all of our operating costs. The increase is primarily due to the addition of employees to service the rapidly growing network of our Owners and Area Directors. -General administrative expenses include all of our operating costs. Although general and administrative expenses will likely continue to increase as we grow, we expect the rate of increase to decline. We believe our general and administrative expenses are adequate and are not excessive in relation to our size and growth. Company owned stores earned $1,193,730 on sales of $14,973,763 in 2000 compared to $618,190 on sales of $8,276,368 in 1999. During 2000, we operated stores for a total of 384 store operating months. In 1999, we had a total of 257 store operating months. Sales per store month increased 21.6% in 2000 to $39,045 from $32,166 in 1999 primarily due to the acquisition of Restaurants and other operations at Denver International Airport in November 1999. At September 30, 2000, we had 35 (25 at September 30, 1999) Company owned stores, including the Cowboy Bar at Denver International Axport. In 2000, we purchased seven Restaurants, including the Cowboy Bar, and opened 3 new Restaurants. In 1999, we purchased from an Owner one Restaurant. Stores held for resale lost $193,154 on sales of $194,422 in 2000 compared to a loss of $262,946 on sales of $997,583 in 1999. At September 30, 2000 and 1999, we operated one and two stores held for resale, respectively. In 2000, we closed one store and sold one store held for resale and purchased one store from an Owner. 23

TQC00272

Case 1:04-cv-00725-RPM

Document 41-18

Filed 07/01/2005

Page 3 of 21

New Company start-up costs were $103,000 in 2000 compared to $0 in 1999. These costs relate to the start-up of a new operating company to purchase and sell food products. These costs were primarily consulting costs to set-up administrative and accounting systems and to finalize the distribution contracts. Provision for bad debts was $305,285 in 2000 compared to $354,827 in 1999. As of September 30, 2000, we had an allowance for doubtful accounts of $272,293 that we believe is adequate for future losses. Other expenses were $41,820 in 2000 compared to $68,245 in 1999. The decrease in the 2000 expense was primarily due to the loss on the sale of assets in 1999. Depreciation and amortization was $1,959,718 in 2000 and $1,280,836 in 1999. The increase is primarily due to the acquisition and development of new Company owned restaurants, the acquisition of area director territories and the purchase of a corporate jet in fiscal 2000. Impairment of long-lived assets was $579,246 in 2000. At September 30, 2000, we determined that an impairment related to our carrying value of the assets purchased in November 1997 from Bain's was required and expensed $579,246. Privatization costs were $265,472 in 1999 and represents our costs associated with a proposed going private transaction. As discussed in our 1998 Form 10-KSB, on December 29, 1998, we received a proposal from our majority shareholders to merge the company into a new entity owned by them, pursuant to which all of our shareholders other than themselves, would receive cash for their company shares. On August 10, 1999, we announced that the proposal had been withdrawn. An agreement regarding all the terms of the transaction could not be reached with the Special Committee of the Board of Directors evaluating the offer. In 2000, we incurred $138,164 of acquisition related expenses. Interest expense was $1,898,901 in 2000 and $321,718 in 1999. The increase is primarily attributable to the increase in outstanding debt. On October 5,1999, we closed on a loan in the principal amount of $14,000,000 from AMRESCO Commercial Finance, Inc. The loan bears interest at 10.9% (10.1% through January 31, 2000). The proceeds of the loan were used to pay-off existing debt of $3,320,956, the majority of which accrued interest at rates of 10% to 12.75%. Also, on January 26,2000, we closed on a loan in the amount of $3,180,000 from GE Capital Business Asset Funding. The loan bears interest at 9.53% and is payable in equal monthly installments of $52,023 for 5 years. Income tax expense was $722,738 in 2000 and $353,135 in 1999. O r taxable income has historically u exceeded our book income primarily because initial franchise fees we receive are taxable income in the year received and are book income in the year the franchise opens. Consequently, we will not pay income taxes on this income when it is recognized for financial reporting purposes. In the first quarter of fiscal 1999, we used all of our tax net operating loss carryforwards and incurred a tax liability. Accordingly, we reduced the amount recorded as an impairment of our deferred tax asset in prior years and recorded the tax benefit of prior years net operating losses. Subsequent to December 31, 1998, our provision for income taxes was recorded at 37%. Cumulative effect of a change in accounting principie was $2,769,592. T i amount was composed hs of a $2,685,502 (net of $1,577,199 in income tax benefits) change reflected by a decision made by the U.S. Securities and Exchange Commission in December 1899 relative to the recognition of area director fees. As previously discussed, effective January 1,1999, we changed our accounting policy related to the recognition of area director marketing agreement fees to one that recognizes such fees as revenue on a straight-line basis over the term of the agreement, which is ten years. Also, during April 1998, Statement of Position 98-5, "Reporting in the Costs of Start-up Activities" was issued. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 was required to be adopted in the second quarter of 1999. Upon adoption, we were required to write-off $84,090 (net of $41,417 in income tax benefits) in preopening related costs that were deferred on the balance sheet as of December 31, 1998. Liquidity and Capital Resources Net cash provided by operating activities was $5,740,031 in 2000 compared to $6,215,560 in 1999, a decrease of $475,529. The fiscal 2000 amount of $5,740,031 was primarily related to net income before depreciation and amortization of $3,219,223, an increase in deferred initial fxanchise fees of $3,085,559
24

Case 1:04-cv-00725-RPM
i

Document 41-18

Filed 07/01/2005

Page 4 of 21

and an increase in accounts payable of $1,395,280, partially offset by an increase in accounts receivable of $1,279,762 and an increase in the deferred tax asset of $795,877. Net cash used in investing activities was $16, 003,777 in 2000 compared to cash used in investing activities of $6,471,136 in 1999. The fiscal 2000 amount of $16, 003,777 was primarily related- to the acquisition and development of Company owned Restaurants for $11,906,120 and the repurchase of area director territories for $2,497,945. Net cash provided by financing activities was $12,130,894 in -2000 compared to cash provided by financing activities of $175,705 in 1999. The fiscal 2000 amount of $12,130,894 was primarily related to $17,548,000 of proceeds from the issuance of notes payable, including the AMRESCO financing, partially offset by payments on long-term obligations of $4,142,344 and the repurchase of Common Stock for $1,219,785. At September 30,2000, we had $194,579 invested in one store held for resale. We expect to sell the store held for resale by December 31, 2000. In the second quarter of 1998, we tested a program under which our Area Directors had the right to elect to have all future franchisee leases in the Area Director's territory signed by The Quizno's Realty Company ("QRC"), a wholly owned subsidiary of ours. As a condition of the lease, the landlord agrees not to look beyond QRC for payments. These locations would then be subleased by QRC to the Owner, whose personal liability is limited to one year. The Owner pays QRC an indemnification fee of $165 per month, pays a one-time lease-processing fee to QRC of $2,200, and pays a security deposit to QRC equal to two months rent. Effective March 1, 1998,'we transferred cash and other assets having a book value of approximately $500,000 to QRC in exchange for stock and a promissory note. As of September 30, 2000, 12 leases had been executed under this program and one other guaranteed lease. The franchisee has defaulted on the rents due on two of these locations, for which we do not have replacement franchisees. We expect to negotiate buyouts of these leases between the landlords, the franchisees and, possibly, us. Our share of any such buyout is expected to be immaterial. A third location has closed due to a fire and the lease has been cancelled and the location will not re-open. On December 31, 1996, we completed a debt financing for $2 million of which $500,000 was converted to preferred stock in December 1997. On January 6,1999, we paid off the loan and redeemed the preferred stock at a cost of $1,854,000. As required by the loan agreement, we issued a warrant to the lender to purchase 372,847 shares of our common stock at an exercise price of $3.10. On October 1,1999, our Board of Directors authorized the purchase of up to 200,000 shares of our common stock. Subject to applicable security laws, repurchases may be made at such times, and in such amounts, as we deem appropriate. As of September 30, 2000, we had repurchased 144,005 shares at an average price of $8.38. O n October 5,1999, we closed on a loan in the principal amount of $14,000,000 from AMRESCO Commercial Finance, Inc. "AMRESCO". The loan bears interest at 10.9% (10.1% through January 31, 2000), and is repayable in monthly installments of $199,201 for nine years and five months. The loan is secured by the assets of our company owned stores and other assets of ours existing at September 30, 1999. The loan is part of a securitized pool and includes a provision which could require us to pay up to another $1,555,555 depending on the amount of defaults, if any, in the loan pool. The proceeds of the loan were used to payoff existing debt of $3,320,956, pay costs and fees associated with the loan of $560,000, and prepay interest and one payment of $304,624. The balance of $9,814,420 is available to use, with certain restrictions, for general corporate purposes other than working capital, dividends, or to repurchase the majority shareholder's stock. Certain notes payable held by us at September 30, 1999 s were repaid with the AMRESCO note proceeds. A of September 30,2000, we had $1,528,212 available to use for general corporate purposes. In December of 2000, AMRESCO notified us that we may be in default of the fixed cost coverage ratio requirement in our loan agreement with AMRESCO as the result of our loan with Levine Leichtman Capital Partners 1 ,L.P (LLCP). The LLCP loan was made to us in December, 2000, and is 1 discussed below. We have calculated the fixed cost coverage ratio in accordance with the directions in our loan agreement with AMRESCO and have demonstrated that we are not in violation of the requirement. We have provided our calculations to AMRESCO, who has not agreed with our calculations, nor given us a notice of default. We expect to resolve the issue with AMRESCO. 25

TQ600274

Case 1:04-cv-00725-RPM

Document 41-18

Filed 07/01/2005

Page 5 of 21

On October 11, 1999, our Board of Directors approved the purchase of a corporate airplane allowing for more efficient travel by management between areas of franchise operations. For tax purposes, the airplane qualifies for accelerated depreciation, resulting in the deferral of income tax payments. The $3,350,000 purchase was completed on October 13, 1999. On November 16,1999, we announced that our subsidiary, QUIZ-DIA, Inc. purchased the assets of ASI-DIA, Inc. ("ASI") for a total of $4.875 million in cash. Assets purchased include two Quizno's restaurants and three bars, including the wwW.COWBOY bar, and various other assets located on Concourses A and B at the Denver International Airport. We intend to continue operating the restaurants as Quizno's Classic Subs and the bars as operated by ASI. On January 26, 2000, we closed on a loan in the amount of $3,180,000 from GE Capital Business Asset Funding. The loan bears interest at 9.53% and is payable in equal monthly installments of $52,023 for 5 years. The loan is secured by a &st security interest in the assets of QUIZ-DIA, Inc. On December 22, 1999 we closed on a line of credit loan and were funded $3,350,000 by Merxill Lynch Business Financial Services, jnc. The loan bears interest at the 30 day Dealer Commercial Paper Rate plus 2.5% (equal to 8.13% at December 31,1999). The maximum amount of the line of credit loan is $3,350,000, which maximum is reduced monthly based on a twelve-year amortization. The line of credit loan is secured by a first security interest in our jet aircraft. In January 2000, the line of credit loan was paid down to zero. In March and April 2000, we accepted Subscription Agreements for the issuance of 59,480 shares of Class E Cumulative Convertible Preferred Stock ("Class E Preferred Stock"). We had received cash proceeds of $512,718. There are currently 150,000 authorized shares of Class E Preferred Stock. Each share of Class E Preferred Stock is convertible into one share of our common stock, at any time. Shares of the Class E Preferred Stock may be redeemed by us at any time on or after April 1, 2003, at a redemption price of $8.62 per share. Until redeemed or converted to common stock, each Class E Preferred stockholder will receive a cumulative monthly dividend of $0.0862 per share. The Class E Preferred Stock is junior in liquidation preference to our Class A Preferred Stock and our Class C Preferred Stock, but senior to our Class D Preferred Stock and common stock. In July 2000, the National Marketing Fund Trust and the Regional Marketing Fund Trust, which collects and administers the national and regional advertising fees received from franchisees, entered into a $2,000,000 revolving line of credit with Wells Fargo Bank West, N.A. We have guaranteed this line of credit for the National Marketing Fund Trust. The line of credit bears interest at 9.5% and matures on March 31, 2001. As of September 30, 2000, $1.9 million had been drawn on the line of credit. In addition, we loaned the National Marketing Fund Trust a total of $1,210,000 in August of 2000, $1,030,000 of which was outstanding at September 30,2000. The loan is expected to be fully repaid by March 2001. In 2000, we repurchased or reacquired fourteen area director territories from 9 area directors for $3,472,627, inclusive of legal and other related costs. We issued notes payable for $714,622 and offset notes and interest receivable from three area directors in the amount of $315,850. The balance of the purchase price was paid in cash. On November 13,2000 we commenced a self tender offer to purchase all outstanding shares of our common stock except for shares held by certain insidersAt a price of $8 per share, net in cash to the seller. The tender offer expired on December 11,2000, and iGe purchased 661,115 shares of our common stock for $5,288,920. In addition we purchased preferred stock, warrants and options convertible into 1,056,906 shares of common stock for $4,205,706. Costs related to the tender offer, including financing related costs, are approximately $2,500,000. The tender offer was financed with a loan for $13,862,260 from Levine Leichtman Capital Partners 11, L.P. (LLCP). The proceeds of the loan were used to prepay interest for one year in the amount of $1,862,260 and to repurchase shares and pay costs associated with the tender offer. The promissory note bears interest at 13.25 %, interest only payable monthly, with the first twelve months prepaid, and is due in full in October, 2005. LLCP received warrants for 14% of the equity ownership of the Company. The warrants will be adjusted to 14% of the equity ownership after completion of any merger transaction prior to September 12,2001. The loan may be paid down to $7 million by September 12, 2001, with no penalty and with a corresponding reduction in the percent of warrants.
26

Case 1:04-cv-00725-RPM

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As we have in the past, we will continue to consider.acquisitions of other chains, the purchase of Quizno's Restaurants from our Owners, and the purchase of Quizno's area directorships from our Area Directors. From time to time, we will make offers and enter into letters of intent for such transactions subject to the completion of due diligence. In all such cases, we will identify the sources of cash required to complete such transactions prior to entering into a binding agreement. We have never paid cash dividends on our common stock and we do not anticipate a change in this policy in the foreseeable future. At September 30,2000, the Company had no material commitments for capital expenditures but has a budget to spend approximately $2,014,000 for Company store remodels and upgrades, office, computer and telephone equipment, and for computer software in fiscal 2001. These capital expenditures will be funded with cash generated from operations. As a franchisor, the Company's business is not capital intensive. The Company can continue to sell and open new franchised units without any additional capital expense. Company owned stores do require capital to develop, but the Company has no commitments to add new Company stores. Over both the short and long term the Company expects cash flow from operations to continue to increase as new franchises are added. Capital expenditures will be limited to Company store upgrades and office and systems related purchases. The Company does not anticipate using a signilicant amount of cash for acquisitions or area director repurchases, both of which are discretionary actions and can be timed to occur when cash and fmancing are available. The Company will continue to use cash to service its debt to Amresco, will also use cash to service the debt to LLCP funded in December 2000 for the purpose of completing the tender offer and merger, and will use the proceeds of the LLCP loan to fund the merger. The Company's liquidity and cash flow are expected to be sufficient to meet its business needs and to pay its debts over both the short and long term.

Item 7. Financial Statements Attached hereto and Ned as a part of this Form 10-KSBare the consolidated financial statements listed in the Index to the Consolidated Financial Statements at page F-1. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.

27

TQC00276

Case 1:04-cv-00725-RPM

Document 41-18

Filed 07/01/2005

Page 7 of 21

PART III
Item 9. Directors, Executive OfJicers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

Directors The names of and other information about our Directors as of December 18, 2000, are set forth below
Nominee

4 3
36

Position(@ with Company

Director Since

-

President, Chief Executive Officer 1991 and Director 62 Secretary and Director 1991 54 Director 1993 33 Director 1997 49 Director 1997 50 Director 1999 40 Director 2000 Each director is currently serving a one year term that will end on the date of our 2001 Annual Meeting of Shareholders. Richard E. Schaden

............ Richard F. Schaden.. ........... Frederick H. Schaden .......... J. Eric Lawrence ............... Mark L. Bromberg ............. Brad A. Griffin ................. John J. Todd ...................

Director's Biographical Information Mr. Richard E. Schaden has been President and a Director of our company since its inception on January 7, 1991, and was appointed as Chairman of the Board of Directors in November 1999. Mr. Schaden had been a principal and the chief operating officer of Schaden & Schaden, Inc., a company that owned and operated Quizno's franchised restaurants from 1987 to 1994 when it was sold to our company. Mr. Schaden graduated Magna Cum Laude from the University of Colorado with a degree in Business Management and Finance. See "Certain Transactions." Mr. Richard E Schaden has been Vice President, Secretary and a Director of our company since its inception on January 7,1991. Mr. Schaden had been a principal of Schaden & Schaden, Inc., a company that owned and operated Quizno's franchised restaurants from 1987 to 1994 when it was sold to our company. Mr. Schaden is the founding partner of the law fr of Schaden, Katzman, Lampert & im McClune with offices in Bloomfield Hls Michigan and Broomfield, Colorado. Mr. Schaden graduated il, from the University of Detroit with a Bachelor of Science in Aeronautical Engineering, received his Juris Doctorate from the University of Detroit Law School and is an internationally known, wellpublished attorney, specializing in aviation law. Prior to entering the legal profession, Mr. Schaden was an aeronautical engineer for Boeing Aircraft and Continental Aviation and Engineering. Mr. Schaden has been on the board of numerous private companies. See Tertain Transactions.'' Mr. Frederick H. Schaden is an Executive Vice President of the Automotive Consulting Group of Aon Consulting, Inc. Aon Consulting, Inc. is a subsidiary Aon Corporation, a publicly held company with annual revenues of nearly $6 billion. He has been employed by Aon for over 25 years and has served as a senior officer of its affiliates since 1981. Mr. Schaden earned a B.S. in Business Administration from Xavier University in Cincinnati, Ohio. See "Certain Transactions." Mr. J. Eric Lawrence has been the General Partner of Retail & Restaurant Growth Capital, L.P. ("RRGC"), a $60 million investment fund focused on providing growth and expansion capital to small businesses in the retail and restaurant industries, since December 1995. RRGC is a Small Business Investment Company, federally licensed by the Small Business Administration. RRGC loaned $2,000,000 to our company in 1996, and Mr. Lawrence was elected to the Board pursuant to a contractual arrangement between our company and RRGC. As a result of the Tender Offer and the purchase of the outstanding warrants held by RRGC, such contract has been terminated. Mr. Lawrence has been extensively involved in the analysis of the financial, operational and managerial aspects of retail and restaurant companies throughout his career. Prior to RRGC, he served as Vice President of Strategic Retail Ventures, Inc., a boutique financial consulting and private investment firm focusing on
28

TQC00277

Case 1:04-cv-00725-RPM

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the needs of specialty retail and restaurant companies from December 1993 to December 1995. Prior to SRV, Mr. Lawrence was a Senior Consultant with Arthur Andersen, in Dallas, Texas. Mr. Lawrence is a licensed C.P.A., and is a graduate of Southern Methodist University with a B.B.A. in Accounting and Minor in Economics, which included study abroad at Oxford University, Oxford, England. Mr. Mark L. Bromberg is the President of Foodservice of the viaLink Company, a public company providing synchronized database management services to a wide range of retail clients since May 2000. From November 1997 to May 2000, he served as President of Pinnacle Restaurant Group, a privately held company that owns and operates casual dining restaurants in the southwestern United States. Mr. Bromberg previously served as a self-employed management consultant providing strategic planning, positioning and senior management consulting services to the hospitality industry, for over five years. Mr. Bromberg is the former President L CEO of East Side Mario's Restaurahints Inc., the Dallas k based subsidiary of PepsiCo which he grew from one restaurant in 1988 to 30 in 1993 when it was sold to PepsiCo. Mr. Bromberg has been the founder and President of a number of causal dining restaurant chains, including Mr. Greenjeans, Ginsberg & Wong and Lime Rickey's and served as President of Prime Restaurant Group, the largest privately-held restaurant chain in Canada. He holds a B.S. and an M.B.A. from Cornell University and remains highly involved in foodsemice education as a curriculum advisor and guest lecturer. He is a past chairman of the Canadian Restaurant and Foodservice Association and is a past director of the National Restaurant Association of the US. Mr. Bromberg was elected to the Board of Directors pursuant to a contractual arrangement with RRGC that required the election of an additional Board member acceptable to RRGC. A a result of the Tender Offer and the s purchase of the outstanding warrants held by RRGC, such contract has been terminated. Mr. Brad A. Griffin has been the managing director of GriffCo Development, which develops, builds, leases and manages commercial and retail real estate, since 1994. He is also the managing director of Oasis Investment, a company that manages investment assets and trades NASDAQ and Exchange stocks and options. Mr. John J. Todd was elected to the Board of Directors on September 26, 2000. Mr. Todd is the Senior Vice President and Chief Financial Officer of Gateway Inc., a position he has held since October 1998. Before joining Gateway, he had held financial positions with the Allied Signal companies from 1997 to 1998, with Boston Market from 1996 to 1997 and with PepsiCo from 1988 to 1996. He received his bachelor's degree from Longwood College and his M.B.A. from William and Mary. Richard E Schaden is the father of Richard E. Schaden. Frederick H. Schaden is the brother of Richard F. Schaden and Richard E. Schaden's uncle.

Executive Officers The following table sets forth (i) the names of the executive officers, (ii) their ages, and (E) the capacities in which they serve our company:
Name Position(s) wt the Company ih

Richard E. Schaden

Steven B. 49 Robert W. Scanlon ....... 54 Robert A. Elliott ......... 43 Sue A. Hoover ........... 54 Richard F. Schaden ....... Patrick E. Meyers .. ...... John L. Gallivan . ........ 62 41 53

...... Shaffer .........

36

President, Chief Executive Officer and Chairman of the Board Executive Vice President for Operations Executive Vice President for Development Executive Vice President for Marketing Executive Vice President for Corporate Communications Vice President, Secretary and Director Vice President and General Counsel Chief Financial Officer, Treasurer and Assistant Secretary

Executive Officer's Biographical Information See "Director's Biographical Information" above for a description of the backgrounds of Richard E. Schaden and Richard F. Schaden.
29

TQC00278

Case 1:04-cv-00725-RPM

Document 41-18

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Steven B. Shaffer has been our Executive Vice President for Operations since May 22,2000. Prior to that he had been a franchisee of the Company since 1992, an Area Director of the Company since 1996 and a Senior Vice President of the Company since October 1998. Mr. Shaffer graduated from the University of Georgia in 1972. Robert W. Scanlon has been our Executive Vice President of Development since October 1998. Mr. Scanlon served as our Senior Vice President of Real Estatemesign & Construction from August 1997 through September 1998. He also served as our Senior Vice President of Concept Development and Design from January 1997 to July 1997 and as our Vice President of Nontraditional Development from May 1996 to December 1996. From June 1990 through April 1996, he was first Vice President of Sales and Marketing and later Vice President of Business Development for Carts of Colorado, located in Commerce City, Colorado, an equipment manufacturer. Mr. Scanlon graduated from the University of Texas, with a B.S. degree in 1973. Robert A. Elliott became our Executive Vice President of Marketing in February 2000. Prior to joining us, he was a partner at Bozell Worldwide, Inc., an advertising agency in Detroit, Michigan, from 1997 to 1999, and on the marketing staff of Little Caesar Enterprises, Inc. for over 18 years, including serving as Vice President-Marketing from 1993 to 1997. Mr. Elliott graduated from Eastern Michigan University with a B.B.A. degree in 1979. Sue A. Hoover joined our company as Director of Marketing in 1991. She was named Senior Vice President of Marketing in 1997 and was named an Executive Vice President in October 1998. In February of 2000, she became our Executive Vice President of Corporate Communications. Ms. Hoover graduated from the University of Iowa with a B.A. in 1968. Patrick E. Meyers joined our company in 1997. He had been an associate with the Denver law firm of Moye, Giles, O'Keefe, Vermeire & Gorrell since September 1991, and was selected as a partner of that firm in 1996. Before that he served as a judicial law clerk to a Justice of the Colorado Supreme Court from July 1990 to September 1991. Mr. Meyers received his J.D. degree from the University of California, Hastings College of Law and his B.A. degree from the University of Colorado-Denver. Mr. Meyers served as a Director of our company from 1993 to 1997, when he resigned to become a fulltime employee of our company. John L. Gallivan joined our company as Chief Financial Officer in 1994. He was later elected Treasurer and Assistant Secretary. Prior to his joining our company, he was a director and Executive Vice President of Grease Monkey Holding Corporation of Denver, a franchisor, owner, and operator of over 200 ten-minute oil change and fluid maintenance centers in the U.S. and Mexico from 1979 through April 1994. He is a member of the Colorado Society and the American Institute of CPAs. He graduated from the University of Colorado at Boulder with a bachelors degree in accounting.

Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires that our directors, our officers (including a person performing a policy-making function) and persons who own more than 10% of a registered class of our equity securities ("10% Holders'? to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities. Directors, officers and 10% Holders are required by SEC regulations to furnish us with copies of all of the Section 16(a) reports they file. Based solely upon such reports, we believe that during fiscal 2000 our directors, advisors, officers and 10% Holders complied with all filing requirements under Section 16(a) of the Exchange Act, except that Mr. Shaffer inadvertently failed to timely file a Form 4. Such failure was remedied by the timely filing of his From 5 for fiscal 2000.

Item 10. Executive Compensation

Executive Compensation
Set forth below is information about compensation during fiscal 2000 of our five most highly compensated executive officers, including our CEO, and two non-executive officers who would have

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been in the top five most highly compensated executive officers if they had been executive officers ("Named Officers").

Summary Compensation Table. The following table provides certain summary information for fiscal 2000,1999 and 1998 concerning compensation awarded, paid to, or earned by, the Named Officers:
Annual Compeqsation Salary Bonus Year(1)

Name and Position

-

Long-Term and Other Comoensation . . ~ ~. Option Sol&) Plan Shares(2) Contribution(3)
~

Richard E. Schaden, ...................... President and Chief Executive Officer Steven B. Shaffer, ........................ Executive Vice President For Operations Patrick E. Meyers,. ....................... Vice President and General Counsel Robert W. Scanlon,. ...................... Executive Vice President of Development Sue A. Hoover,............. .............. Executive Vice President of Corporate Communications John Fitchett,............................. Senior Vice President George Boedecker ........................ Senior Vice President
I

. Richard F Schaden, ...................... Vice President and Secretary

12/31/98 9/30/99 9/30/00 12131198 9/30/99 9/30/00 12/31/98 9130199 9/30/00 12/31/98 9130199 9130100 12/31/98 9130199 9130100 12/31/98 9130199 9/30/00 12/31/98 9/30/99 9/30/00 12/31/98 9130199 9/30/00

$181,452 196,710 221,500 $ 22,611 75,000 126,000 $ 84,000 72,768 126,667 $ 85,783 78,000 118,334 $ 90,479 73,125 124,167 $ 92,000 75,000 113,542 $292,000 75,000 115,375 $ 83,500 62,625 86,979

$

0 8,177 113,044 $ 24,674 24,674 120,146 $ 28,115 10,289 48,067 $ 13,968 20,826 36,120 $ 7,674 11,233 121,324 $ 4,343 6,212 118,451 $ 78,375

5,164 33,000 4,000 4,000 18,500 0 5,164 14,000 0 5,164 9,000
0 9,164 6,000 0 5,164 9,000 0 6,000 13,000 0 0 0 4,000

$2,000 2,329 3,997 $ 0 0 3,192 $ 0 2,500 2,749 $3,418 5,885 3,977 $3,016 .3;962 7,609 $1,051 1,916 5,579 $ 0 1,787 5,712 $ 0 0 0

(1)Fiscal 1999 contained only nine months because we changed our fiscal year end to September 30 during 1999.

(2) During fiscal 2000 and prior years, as an incentive for our eligible employees to work to enhance our performance and assure our future success, we granted options to purchase shares of common stock to successful employees from time to time under our Employee Stock Option Plan. All options indicated in this table have been granted under such Plan.

(3) We provide our employees with a 401(k) Employee's Savings Plan, pursuant to which we contribute to each eligible employee's account an amount equal to 100% of such employee's annual contribution up to 6% of each employee's total compensation. Employees in 1999 were limited to a maximum contribution of $10,000 by applicable provisions of the Internal Revenue Code. That amount increases to $10,500 in 2000. Prior to 1999, our match was 50% of each employee's contribution. We have issued shares of Common Stock for 50% of our annual contribution to each account under the 401(k) Plan. In December 2000, our directors amended the 401(k) plan to provide for 100% of matches in cash.
(4) The Company is contractually obligated to pay both Mr. Richard E. Schaden and Mr. Richard E Schaden a bonus based upon any positive increase in earnings before interest, taxes, depreciation and amortization for each full calendar year over the level of such amount for the prior full calendar year during the term of their respective employment agreements. See "Employment Contracts" below. During 1999, there was a change in accounting principle resulting from a change in thd Securities and Exchange Commission's position regarding the recognition of area director fees as (footnotes continued on next page) 31

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(footnotes continued from previous page)
income. The Commission's position shifted from one permitting immediate recognition to one requiring amortization of such fees into income over several years. As a result, we took a charge against earnings in fiscal 1999 of $2,769,592. The impact on the Schadens from this change was that they received virtually no bonuses for fiscal 1999. However, in future years a portion of their bonuses will result from amortized income from area director fees that had been taken into income, and therefore counted towards their bonuses in years prior to the accounting change and the charge against income described above. The next bonus calculation for the Schadens will be made for the calendar year 2000. The Board of Directors has approved an advance of $300,000 to Richard E. Schaden based on the expectation that his bonus will be in excess of such amount. In addition, the Board of Directors has approved the exclusion of certain one time non-recurring expense items in the amount of $2,916,536 from the calculation of EBITDA for the purpose of determining the Schadens' bonuses for 2000. Stock Option Awards. We adopted our Employee Stock Option Plan (the "Employee Plan") in 1993. The purposes of the Employee Plan are to enable our company to provide opportunities for certain officers and key employees to acquire a proprietary interest in our company, to increase incentives for such persons to contribute to our performance and further success, and to attract and retain individuals with exceptional business, managerial and administrative talents, who will contribute to our progress, growth and profitability. As of November 30, 2000, we had issued 68,091 shares upon exercise of options under the Employee Plan and had outstanding grants of options covering 448,226 shares currently reserved for issuance under the Employee Plan. Options granted under the Employee Plan include both incentive stock options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQOS~~). Under the terms of the Employee Plan, all of our officers and employees are eligible for ISOs. We determine which persons will receive ISOs, the applicable exercise price, vesting provisions and the exercise term. The terms and conditions of option grants differ and are set forth in the optionees individual stock option agreement. Such options generally vest over a period of one or more years and expire after up to ten years. ISOs must satisfy the statutory requirements of the Code In order to qualify for certain preferential treatment. Options that fail to satisfy those requirements will be deemed NQOs and will not receive preferential treatment under the Code. Upon exercise, shares will be issued upon payment of the exercise price in cash, by delivery of shares of Common Stock, by delivery of options granted under the Employee Plan or a combination of any of these methods. In connection with our self-tender offer that was completed on December 11, 2000, our Board of Directors has approved a profit sharing plan that all Quizno's employees will be able to participate in. Such plan will replace the Employee Plan beginning in 2001. Option information for fiscal 2000 relating to the Named Officers is set forth below:

Option Grants in Fiscal 2000

-Number of Shares of Common Stock Underlying Options Granted i Fiscal 2000 n Percentage of Total Options Granted to Employees in Fiscal 2000 E iration `%ate

Name Richard E. Schaden ....................... Richard F. Schaden ...................... Steven B. Shaffer ........................ Patrick E. Meyers. ....................... Robert W. Scanlon ....................... Sue A. Hoover ........................... John Fitchett ............................. George Boedecker .......................

-

4,000 4,000 0 0 0 0 8,000

2.3% 2.3%

$7.375 $7.375

-

l/l/lO(1) l/l/lO(l)

4.6%

$ 6.38

-

10,000

8/8/05(2) 5.7% $ 6.57 8/8/05(2) (footnotes on next page)

32

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(footnotes from previous page)

(1)The grants of these options were included in the grants to all directors under om Directors and Advisors Stock Option Plan and expire on the first to occur of the tenth anniversary of the grant date or the third anniversary of the termination of the individual`s status as a Director or Advisor. (2) These options, granted under the Employee Plan, vest in equal proportions on the second, third and fourth anniversaries of the grant. They terminate on the fifth anniversary of the grant or ninety days after termination of employment, if earlier. Option Exercises and Year-End Values in Fiscal 2000
Number of Shares Underlying Unexercised 0 tions at 4mr-Ena Exercisable Unexercisable Value of Unexercised In-the-Money 0 tions at Year-En& Exercisable Unexercisable

Name
Richard E. Schaden Richard E Schaden.. Steven B. Shaffer.. .. Robert W. Scanlon .. Sue A. Hoover ...... Patrick E. Meyers ... John Fitchett . .... .. George Boedecker ..

Shares

Value

Exercised Realized - -

.

3,873 0 4,000 0 3,873 3,873 0 0

$12,122 0 $12,000 0 $11,619 $14,040 0 0

5,087 4,000 0 5,600 13,200. 22,000 5,600 1,800

34,291 0 20,000 12,691 12,091 15,291 20,691 25,700

$ 2,370 0 0 $16,764 $20,556 $54,700 $16,764 $ 4,617

$1,381 0 $6,260 $8,776 $6,124 $2,020 $9,256 $5,426

(1)The dollar values are calculated by determining the difference between $6.44 per share, the fair market value of the Common Stock at September 30, 2000, and the exercise price of the respective options. Employment Contracts. On December 12, 2000, the Company entered into a new employment agreement with Richard E. Schaden, which has a three-year term and provides for an annual salary of $481,000. Under the agreement, Richard E. Schaden will be entitled to an annual bonus equal to four percent of the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") up to the amount of EBITDA projected in the annual budget approved by the Company's Board of Directors for that calendar year. To the extent actual EBITDA exceeds budgeted EBITDA for that calendar year, Richard E. Schaden will be entitled to an annual bonus of twelve percent of the amount of such excess EBITDA. In the event Richard E. Schaden is terminated by the Company without cause or his employment agreement is not renewed under terms at least as favorable as exists as of the expiration date of the employment agreement, he would be entitled to termination payments equal to three years' base salary plus bonus (which bonus payment will not be less than $400,000 for each year in which the severance payment is due). Either party may terminate the agreement with 30 days' notice. Mr. Schaden will devote his f l time to company matters. Under his prior employment agreement, his ul annual base salary was $220,000. That agreement provided an annual bonus equal to 10% of any ul positive increase in earnings before interest, taxes, depreciation and amortization for each fl calendar ul year during the term of the agreement over the level of such amount for the prior f l calendar year. Both the old and new employment agreements provide that Mr. Schaden also receive a monthly automobile allowance of up to $620.00 plus up to $150.00 for insurance coverage. The contracts provide that we pay one-half of Mr. Schaden's medical insurance coverage and one-half of the cost of disability insurance. We also pay for $1,000,000 of term life insurance for h4.r. Schaden, payable to his designated beneficiary. O n December 12, 2000, the Company entered into a new employment agreement with Richard F. Schaden, which has a three-year term and provides for an annual salary of $100,000. Under the agreement, Richard E Schaden will be entitled to an annual bonus equal to two percent of the Company's EBITDA up to the amount of EBITDA projected in the annual budget approved by the Company's Board of Directors for that calendar year. To the extent actual EBITDA exceeds budgeted
33

I

i

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EBITDA for that calendar year, Richard E Schaden will be entitled to an annual bonus of eight percent of the amount of such excess EBITDA. In the event Richard E Schaden is terminated by the Company without cause or his employment agreement is not renewed under terms at least as favorable as exists as of the expiration date of the employment agreement, he would be entitled to termination payments equal to three years' base salary plus bonus (which bonus payment will not be less than $400,000 for each year in which the severance payment is due). Either party may terminate the agreement with 30 days' notice. Mr. Schaden will not devote his full time to company matters, but will devote such time to company matters as we request. Mr. Schaden may take on special projects for us at the direction of the Board of Directors and receive additional compensation for such projects. Under his prior employment agreement, his annual base salary was $83,500. That agreement provided an annual bonus equal to 6% of any positive increase in earnings before interest, taxes, depreciation and amortization for each full calendar year during the term of the agreement over the level of such amount for the prior full calendar year. Robert Elliott has entered into an employment agreement with us that terminates on January 16, 2003. His contract pro+ides that he will serve as our Executive Vice President for Marketing. Mr. Elliott will devote his fl time to company matters. His annual base salary is $180,000 in 2000, $200,000 in ul 2001, and $220,000 for the remainder of the term. Such amount may be adjusted from time to time by mutual agreement between Mr. Elliott and the Company. The agreement provides a $25,000 signing bonus payable on his nine month anniversary, and a second year signing bonus of $10,000 due on his second year anniversary date. The agreement provides an annual performance bonus equal to a maximum of 20% of Mr. Elliott's base salary, as well as an automobile allowance of $650.00 per month. The agreement provides that Mr. Elliott will receive options to purchase 20,000 shares of the Company's stock. He may receive additional options or be entitled to participate in other employee benefit or compensation programs as provided by us from time to time. Either party may terminate the agreement with 30 days' notice. If we terminate the agreement without cause, we are obligated to pay Mr. Elliott a severance payment equal to 6 months base salary. During the term of the agreement and for 6 months after it terminates, Mr. Elliott agrees not to work for any competitor. None of the other executive officers have an employment agreement with us.
Director Compensation

Directors who are not officers or employees are paid $500 per day for each Board and Committee meeting they attend and they are reimbursed for their reasonable expenses of attending such meetings. In addition, all directors receive an annual grant of options to purchase 4,000 shares of Common Stock, which immediately vest. During fiscal 2000, we paid three of our non-employee directors, who served all year, $2,500 each, a fourth director who attended three meetings $1,500, and our new director John Todd, $500, as compensation for their attendance at regular Board and Committee meetings. For their service during fiscal 2000, all Directors received a grant of options to purchase 4,000 shares of Common Stock that immediately vested, except John Todd, who received a grant of options to purchase 1,000 shares of Common Stock that immediately vested.
? r

Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding beneficial ownership of our equity securities (common stock and three classes of preferred stock) as of December 18, 2000, (a) by each person known to us to own beneficially more than 5% of the Common Stock, (b) each of our Named Officers and directors and (c) by all of our executive officers and directors named herein as a group.

34

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Name and Address(1)

Common Stock Owned(2)

Common Stock Percentage

Preferred Stock Owned and Percentage

Richard E. Schaden ........................... Richard E Schaden ........................... Levine Leichtman Capital .................... Partners 11, L.P, 355 North Maple Drive, Suite 240 Beverly Hills, CA 90210 Brad A. Gifn ............................... rfi Mark L. Bromberg. ........................... J. Eric Lawrence.. ............................ Frederick H. Schaden. ........................ John J. Todd .................................. Steven B. Shaffer ............................. Robert W. Scanlon. ........................... Sue A. Hoover ............................... Patrick E. Meyers ............................. John Fitchett.. ................................ George Boedecker ............................ All Executive Officers and Directors as a Group (13 persons)(3),(5),(6) ............... Less than 1% of shares outstanding.

872,384 (3) 921,470 (3) (4)

35.8% 37.0% 14.0%

(7) (7) (0)

0 14,000 (5)

0
28,000 (5) 1,000 ( 5 ) 27,300 (6)

0 3,873 (6) 15,723 (6) 0 (6) 0 (6)
1,885,223

* * * * * * * * *

*

*

71.3% -

: k

(1) All addresses, unless otherwise stated, are 1415 Larimer Street, Denver, CO -80202. (2) The persons named in the table have sole voting power with respect to all shares of common stock shown as beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date as of which the table is presented, upon the exercise of options or warrants, or conversion of convertible securities. The record ownership of each beneficial owner is determined by assuming that options or warrants or convertible securities that are held by such person and that are exercisable or convertible within 60 days have been exercised or converted. The total outstanding shares used to calculate each beneficial owner's percentage also assumes that such options, warrants or convertible securities have been exercised or converted. O r Class A Cumulative Convertible Preferred Stock ("Class A u Preferred"), Class C Cumulative Convertible Preferred Stock ("Class C Preferred") and Class E Cumulative Convertible Preferred Stock ("Class E Preferred") are currently convertible into our common stock on a l-for-1 basis. (3) Richard E. Schaden and Richard F. Schaden beneficially own, through a voting trust pursuant to which they are joint voting trustees, 773,667 shares of our common stock and 146,000 shares of our Class A Preferred, and 4,000 shares of our common stock owned by a family member for which the voting trust holds sole voting power. The remaining duration of the voting trust agreement is four years, subject to extension. In the table, beneficial ownership of shares, other than the 773,667 shares of common stock, have been allocated equally to each of them. Such 773,667 shares o common f stock are allocated to Richard F. Schaden in the table, and he has been given a proxy to vote such shares. Richard E. Schaden has withdrawn 773,667 shares of common stock from the voting trust to use to secure a personal loan, subject, however, to an agreement to redeposit those shares into the voting trust if they are no longer necessary to secure such loan. Otherwise, Richard E. Schaden, i individually, beneficially owns 1,084 shares of our common stock allocated to h m under our 401(k) Plan, 4,339 shares of our common stock held in his own name, 17,378 shares of our common stock represented by exercisable stock options and 2,000 shares of our common stock owned by a family member for which he holds sole voting power. Richard E Schaden, individually, beneficially owns 34,000 shares of our Class C Preferred, 4,000 shares of our common stock represented by currently exercisable stock options and 34,803 shares of our Class E Preferred. (foomotes continued on next page)

35

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(footnotes continued from previous page)
(4) We issued warrants to Levine in connection with a loan to us of $13.8 million to finance our selftender offer for our own common stock that was completed on December 11, 2000. Such warrants permit Levine to purchase up to 14% of each class of our capital stock on a fully diluted basis as of the completion of the tender offer, subject to certain adjustments for issuances, exchanges or repurchases of our capital stock, at an exercise price of $.01 per share. ( 5 ) All the shares indicated as owned by Messrs. Bromberg and Todd may be acquired through the exercise of stock options. All the shares indicated as owned by Messrs. Frederick Schaden may be acquired through the exercise of stock options or conversion of Class C Preferred by the holder. (6) Steven B. Shaffer, individually and through an affiliated entity, beneficially owns 27,300 shares of our common stock. Patrick E. Meyers, individually, beneficially owns 1,723 shares of our common stock and 14,000 shares of our common stock represented by currently exercisable stock options. In connection with our self-tender offer for our common stock completed on December 11, 2000, Messrs. Shaffer, Meyers, Gallivan, Fitchett and Boedecker and Ms. Hoover converted the equity in their vested options to purchase our common stock into pro-rata interests in a deferred compensation plan which became effective on December 1, 2000. Ms. Hoover, individually beneficially owns 3,873 shares of our common stock. (7) The Company has issued and outstanding four classes of Convertible Preferred Stock, the Class A Preferred, Class C Preferred, the Class D Subordinated Convertible Preferred Stock (the "Class D Preferred") and Class E Preferred. There are 146,000 shares of Class A Preferred outstanding: 50% are beneficially owned by Richard E Schaden and 50% are beneficially owned by Richard E. Schaden. There are 57,000 shares of Class C Preferred outstanding: 34,000 shares or 60.0% are held by Richard E Schaden and 2,000 shares or 3.5% are held by Frederick H. Schaden. There are 3,000 shares of Class D Preferred outstanding: 1,000 shares each are held by each of Messrs. Shaffer, Fitchett and Boedecker. There are 59,480 shares of Class E Preferred outstanding: 34,803 shares or 59% are held by Richard E Schaden and 1,473 shares or 2.5% are held by John L. Gallivan. Among all executive officers and directors as a group, the following prefened shares are beneficially owned 100% of the Class A Preferred, 36,000 shares or 63.2% of the Class C Preferred, 1,000 shares or 33.3% of the Class D Preferred and 36,276 shares or 61% of the Class E Preferred. None of these classes of preferred stock are publicly traded or registered under Section 12(b) or 12(g) of the Exchange Act.

Item 12. Certain Relationships and Related Transactions On December 31, 1996, Retail & Restaurant Growth Capital, L.P. ("RRGC") made a $2,000,000 loan to our company, a portion of which was convertible into 372,847 shares of our Common Stock., and with interest accrued at 12.75% per annum. If the loan were repaid before conversion, RRGC would receive a warrant to purchase the same number of shares of our Common Stock at $3.10 per share. In connection with an amendment to the loan agreement, we also issued a Warrant to RRGC that granted it the right to purchase up to 42,209 shares of the Commgn Stock at $5.00 per share. Such number of shares of Common Stock was subject to downward adjustmeht if we meet certain net income and other goals. O n January 6, 1999, we paid off the loan from RRGC and issued to RRGC the Warrant to purchase 372,847 shares of Common Stock referred to above. In connection with the Tender Offer, all of RRGC's Warrants were purchased by and a Termination Agreement was signed that terminated all of our obligations to RRGC. Effective October 1,1994; a wholly-owned subsidiary of our company acquired by merger all of the assets and obligations of Schaden & Schaden, Inc., a Colorado corporation, or "SSI", owned by Richard E. Schaden and Richard E Schaden. The assets of SSI included interests in several Quizno's Classic Subs restaurants and interests in two Area Directorships. The consideration paid by us to the Schadens, included $876,000 that was paid in our Class A Preferred Stock. The Class A Preferred Stock is nonvoting, bears a 6.5% cumulative dividend, and became convertible on November 1, 1997 into 146,000 shares of the Common Stock. We may call the Class A Preferred Stock upon 60 days notice. During fiscal 2000 and 1999 each preferred shareholder received dividends of $28,470 annually. In addition,
36

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Richard F. Schaden owns 34,000 shares of our Class C Preferred Stock and 34,803 shares of our Class .E Preferred Stock and was paid $36,386 in dividends on such shares during fiscal 20000. . Richard F Schaden and Frederick H. Schaden, directors of our company, each own an interest in Illinois Food Management, Inc. ("IFM") that owns approximately 50% of our Chicago Area Director. We also own approximately 12% of IFM.In fiscal 2000 and 1999, respectively, we paid the Area Director $459,496 and $142,364 as commissions on the sale of new franchises and royalties. In early 1996, IFM requested that we extend the payment terms relating to amounts owed to us by IFM as a result of its operations as an Area Director. As a result of such request, we agreed to defer payment of $63,547. IFM issued to us a promissory note in such amount payable over 6 years with an interest rate of 12% per annum. At September 30, 2000, $ 55,550 was owed to us on this promissory note. During fiscal 2000 and 1999, payments on such note were $11,800 and $8,000, respectively. IF&lis also indebted to