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

Case 1:04-cv-00725-RPM

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ANNEX E

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,D.C. 20549

FORM10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR lS(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30,2000

c TRANSITION REPORT UNDER SECTION 13 OR E(d) OF THE SECURITIES EXCHANGE ]
ACT OF 1934 FOR THE TRANSITION PERIOD FROM Commission File Number 000-23174

TO

THE QUIZNO'S CORPORATION
(Exact name of s a l business issuer as specified in its charter) ml

Colorado
(State or other jurisdiction of incorporation or organization)

84-ll69286
(I.R.S. Employer Identification No.)

1415 Larimer Street Denver, Colorado
(Address of Principal Executive Offices)

80202
(Zip Code)

(720) 359-3300
(Issuek telephone number including area code)

Securities Registered pursuant to Section l2(b) of the Act: None Securities Registered pursuant to Section l2(g) of the Act: Common Stock, $.001 par value Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part 1 1of this Form 10-KSB or any amendment to this 1 Form 10-KSB. State registrant's revenue for its most recent fiscal year: $41,924,232 The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of December 18,2000 was approximately $5,963,198 (for purposes of the foregoing calculation only, each of the registrant's officers and directors is deemed to be an a m a t e ) . There were 2,346,766 shares of registrant's common stock outstanding as of December 18, 2000. Documents incorporated by reference: None 'Ikansitional Small Business Disclosure Format (Check one): Yes

c No ]

TQC00250

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TABLE OF CONTENTS
Page No.

PART I
ITEM ITEM ITEM ITEM

1 . 2. 3.

4.

DESCRIPTION OF BUSINESS .......................................... DESCRIPTION OF PROPERTY ......................................... LEGAL PROCEEDINGS. ............................................... SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............................................................

3 13 13
15

PART I I
ITEM 5. ITEM 6. ITEM 7. ITEM 8. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ............................................ MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.. ........................................................... FINANCIAL STATEMENTS ............................................. CHANGES I AND DISAGREEMENTS WITH ACCOUNTANTS ON N ACCOUNTING AND FINANCIAL DISCLOSURE ..................... DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ................................................. EXECUTIVE COMPENSATION ......................................... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................................... CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.. .... EXHIBITS AND REPORTS ON FORM 8-K ............................

16

17 27
27

PART II I
ITEM 9. ITEM 10. ITEM 11. ITEM 12. ITEM 13.
28 30

34 36 38

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RART I

Item 1 Description o Business . f
General
The Quizno's Corporation was incorporated in Colorado in 1991. Our headquarters is located at u 1415 Larimer Street, Denver, CO 80202. O r telephone number is (720) 359-3300. We incorporated in Colorado in January 1991 as D&R, Inc. We changed our name to The Quizno's Franchise Corporation in April 1991 and to The Quizno's Corporation in June 1995. We do business as The Quizno's Corporation and Quizno's. Our principal business address and that of our subsidiaries named below is 1415 Larimer Street, Denver, Colorado 80202. In January 1991, we purchased certain assets of Quizno's America, Inc., which had operated, owned, and franchised Quizno's restaurants (directly and through predecessors and affiliates) under the QUIZNO'S name since 1981. We or our afliliates operate, and offer franchises to individuals or entities ("Franchisees") to operate, restaurants with carry-out facilities which sell submarine and other sandwiches, salads, other food products and beverages, and related services ("Restaurants"). As of November 30, 2000, there were 1,026 Restaurants in operation in the United States and internationally, and agreements were in place for the opening of an additional 695 franchised restaurants i the United States. During the last three years, we n have grown to become the third largest submarine sandwich chain in the United States. Additionally, we offer franchises for area director marketing businesses in which the area director ("Area Director") acts as our sales representative within a defined geographic area to solicit and identify prospective franchisees, to assist us in locating and securing sites for Restaurants within a territory, and to provide additional support before, during, and after the Restaurant opens. We also offer master franchise rights for international markets, in which the master franchisee has the right to function as a franchisor to offer and sell Restaurant franchises and area director marketing agreements using our trademarks and service marks in a defined geographic area, usually a country. We have master franchise agreements in place for Canada, the United Kingdom, Japan, Australia, Switzerland, Netherlands, Luxembourg, Belgium, Iceland, Mexico, Venezuela, Peru, Dominican Republic and other Caribbean Islands, Taiwan, and Central America. As of December 18,2000, there were 110 Quizno's Restaurants in operation in Canada, 8 in Japan, 4 in Australia, 6 in Central America, 6 in Puerto Rico, 1 in Guam,and 1 in Iceland, The Area Director or master franchisee is required to open a specified number of Restaurants

annually throughout the life of the Area Director marketing agreement or master franchise agreement.
In 1999, we changed the date of our fiscal year end to September 30. Therefore, our 1999 f k a l year, which ended on September 30, 1999, contained only three quarters.

On November 13,2000, we commenced a self tender offer to purchase all outstanding shares of our common stock, except for shares held by Messrs Richard E. Schaden, Mr. Richard E Schaden and Frederick H. Schaden (the "Schadens"), at a price of $8 per share, net in cash to the seller (the "Tender Offer"). The Tender Offer expired at midnight Monday, December 11,2000. Shareholders tendered and we purchased 661,155 shares of our outstanding common stock. In addition, we purchased preferred stock, warrants and options convertible or exchangeable into 1,056,906 shares of our common stock. In connection with the Tender Offer, we closed a loan for $13.8 million with Levine Leichtman Capital Partners 11, L.P. (``Levine"). After the Tender Offer, as of December 18, 2000, we had 2,346,766 shares s of common stock issued and outstanding, 66.1% of which i held by the Schadens.

In October 2000, as part of the tender offer we formed a new wholly owned subsidiary, The
Quizno's Franchise Company (QFC), which will be the franchisor for all franchise agreements, area

director agreements, and master franchise agreements entered into after December 12, 2000. At some point in the future, The Quizno's Corporation may assign all of the existing franchise, area director, and master franchise agreements to QFC. 3

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The Restaurants
The Restaurants offer a menu of submarine style sandwiches, salads, soups, desserts and beverages, including "Classic Lite" selections of submarine sandwiches and salads designed for consumers who are looking for a low-fat, healthy alternative to typical fast food products. We believe that the submarine sandwiches offered in the Restaurants are distinctive in the market for several reasons. Each submarine sandwich is prepared after the customer orders and with special ingredients, recipes and techniques. These ingredients, recipes and techniques are controlled to provide uniformity of taste and quality among all of the Restaurants. One of the most important distinctions of the Quizno's sandwich product is that it is served to the customer warm. Each sandwich is prepared open face and run through a conveyor oven that toasts the bread, melts the cheese and enhances the flavors of the meats.

n We focus on the quality of the ingredients contained i the food products we produce and we require that certain specified ingredients, which are generally higher quality than those that other submarine sandwich shops use, be purchased from approved suppliers. The cheeses used in the Restaurants are all natural. The Italian style meats include a wine-cured Genoa salami, pepperoni and capicola, an Italian spiced ham. The turkey breast is real turkey breast.
The Restaurants also are required to use certain products which are prepared for us in accordance with proprietary recipes developed by us. Foremost among these is Quizno's special recipe soft baguette style bread and its red-wine based vinaigrette dressing used as a base on most of the sandwiches. In addition, the Restaurants use our proprietary recipe tuna mix blend, garlic ol blend, and marinara i sauce. The Restaurants' upscale decor is designed to convey an Italian deli ambiance and to match the upscale quick service market niche represented by the product. Open kitchens allow customers to watch as their sandwiches are prepared. The decor package for the Restaurants includes reproductions of old Italian food product labels, and hand-painted Italian style posters. The Italian theme is prevalent throughout a Quizno's Restaurant. Besides a pleasant upscale environment for in-house dining, the Restaurants offer conveniently packaged meals for carry out to serve lunchtime office workers and to serve the home meal replacement segment of the market.

n The Restaurants are also located in mall food courts and are designed to operate i smaller spaces while retaining the same ambiance and decor as a traditional Quizno's Restaurant. "Quizno's Express" Restaurants are typically smaller units established at such non-traditional locations as convenience and gasoline stations, sports facilities, hospitals, and college campuses. Quizno's Express units offer an extensive variety of Quizno's sandwiches. Soups, salads and desserts are also available at Quizno's Express units. Quizno's Express units will typically share common area seating or may have very limited seating at venues designed primarily for take out. Concept and Strategy
Our marketing strategy is to position the Restaurants between fast food and full-service dining. We believe that consumers are looking for a healthy and tasty alternative to typical fast foods; in particular, they are looking for an alternative to fast food hamburgers and fried foods. At the same time, we believe many busy families are looking for a more convenient and reasonably priced alternative to fullservice dining. Quizno's offers all the convenience of typical fast food in terms of quick ticket times, affordability, and carry out and home meal replacement options, but with a fresh, tasty alternative to fast food products. In terms of full-service dining benefits, Quizno's offers more comfortable dining rooms than most fast food restaurant concepts as well as other dining options-such as catering and delivery-generally not available in the fast food arena. We believe our concept is well positioned to fill a growing niche in the restaurant business between fast food and full-service dining. The Quizno's concept dso accommodates a variety of dining options from comfortable in-house dining to lunchtime carry out to home meal replacement.
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Our goal is to build a strong and consistently profitable nationwide chain of Restaurants with international expansion of the chain into selected foreign markets. The primary vehicle for achieving our planned growth has been our Area Director marketing program and, more recently, our master franchise program. Our revenues are primarily derived from a royalty on all sales at franchised Restaurants, initial franchise fees from each franchise sold, and fees collected from Area Directors or master franchisees, as well as revenue generated from company-owned Restaurants and license fees generated from licensing our logos or in exchange for allowing a product company to sell proprietary Quizno's items. Franchisees, master franchisees and Area Directors pay fees to us only once in connection with execution of franchise agreements, master franchise agreements, and area director marketing agreements, respectively. Royalties provide a long-term continuing source of revenue. Franchise fees and royalties are expected to increase as the number of franchised Restaurants in operation increases. We may also repurchase certain area directorships and territories in the future as we did in fiscal 2000. The royalty rate is currently 7% for traditional Restaurants, and the royalty rate is 8% for Quizno's Express units; however, a small number of franchisees operate under older agreements that set lower royalty rates at 4% or 6%. From time to time, we may make proposals and engage in negotiations regarding acquisitions of material restaurant assets or other companies in the restaurant industry, if management and the Board of Directors believe that such proposed transaction would be in our best interest. Our policy is not to publicly announce such proposals until the likelihood that the proposed transaction will be completed becomes probable.

I

Area Director and Master Franchise Agreements
I

We offer Area Directors a domestic geographical territory within which to sell franchised Restaurants pursuant to an area director marketing agreement. This program is designed to assist us in accelerating the marketing and sale of franchises and the selection of Restaurant locations in the temtory. Each temtory is based on areas of dominant influence of local television broadcast stations as defined by the television broadcast industry. O r growth strategy clusters Restaurants in particular u television markets in order to facilitate implementation of our advertising program. Each Area Director pays us a fee based on the total of the population in the territory. At present, the fee is $.07 per person located within the territory, plus a training fee of $10,000. The population based portion of this fee is deemed fully earned by us when paid and is not refundable. Area Directors are required to market franchises for Restaurants to be located within the temtory. The Area Director agrees to open, through the sale of franchises, a specified number of franchised Restaurants within the temtory during the term of the area director marketing agreement The sales and opening schedules are lower in the first years of the development period. The area director marketing agreement does not grant the Area Director the exclusive right to market franchises or solicit franchisees in the territory, but it does grant the Area Director the right to receive certain fees and royalties, described in more detail below, from all franchised Restaurants and company-owned Restaurants established in the territory during the term of the area director marketing agreement (with certain exceptions). We reserve the right under the area director marketing agreement to market and sell franchises and to establish company-owned Restaurants in a temtory.

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!

i

In international markets, we generally market our franchises through a qualsed person, or "Master Franchisee," from whom we receive a one-time master franchise fee, negotiated on a case by case basis. The Master Franchisee receives the right to sell franchises and area directorships in a defined international market on an exclusive basis. We are paid a portion, typically 30%, o all franchise fees, f royalties and area director fees collected by the Master Franchisee.
As of December 18,2000, we had 58 Area Directors whose Temtories cover approximately 60% of the population of the United States. We have also sold master franchise rights for Canada, Japan, United Kingdom, Australia, Netherlands, Luxembourg, Belgium, Mexico, Venezuela, Peru, Dominican Republic and other Caribbean islands, portions of Central America, Iceland, Switzerland, Taiwan.
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The area director and master franchisee agreements set increasing minimum performance levels that require the Area Director or Master Franchisee to develop a specified number of Restaurants in each quarter or year (depending on the form of agreement) during the term of the agreement. Our experience with the Area Director and Master Franchisee programs to date indicates that while some Area Directors and Master Franchisees will exceed their development schedules, others will fail to meet their schedules. In our planning, we have allowed for a certain percentage of Area Directors and Master Franchisees who will not meet their development schedules. Delays in the sale and opening of Restaurants can occur for many reasons. The most common are delays in the selection or acquisition of an appropriate location for the Restaurant, delays in negotiating the terms of the lease and delays in the franchisee financing. We may terminate an agreement if the Area Director or Master Franchisee fails to meet the development schedule, and we would then have the right to resell the temtory to a new Area Director or Master Franchisee. Master franchise agreements require a minimum number of openings i the defined territory after a n certain period of time from the date the agreement is signed. The time for the first unit to be opened in the territory is usually one y ear. Thus, there are certain countries for which a master franchise agreement has been sold that either have not reached the first date at which a unit is required to be open or are included in a larger defined territory which includes other countries where units are open. In addition, through a required monthly minimum marketing expenditure, the Area Director is required to actively promote the sale of our franchises within the territory. The Area Director is required to visit with prospective franchisees and refer appropriate locations for franchised Restaurants within the temtory to US for consideration. The Area Director is also required to perform monthly quality assurance inspections of the units in its area and assist franchisees within its area in opening. Our franchise sales materials are made available to the Area Director. Each domestic Area Director is paid a commission of 40% of the royalty fees collected by us from each franchised Restaurant or of royalties that would otherwise be payable by company-owned Restaurants in the territory opened and 'operated during the term of the area director marketing agreement, so long as the Area Director performs the services described above, subject to certain exceptions in some contracts for pre-existing Restaurants in the territory, "Turnkey" Restaurants, and conversion Restaurants for which the Area Director is paid a flat monthly fee of $200 per Restaurant for performing support services. Other forms of agreement exclude airport and other non-traditional units from the commission payment obligation. Under some forms of agreement, Area Directors are entitled to an ongoing commission of 1%on gross sales of Restaurants open and operating in the temtory on the date the area director marketing agreement is terminated because of failure to meet the sales or opening goals, through either the initial term of the underlying franchise agreement or five years (15 years for area director marketing agreements executed before January 1998), whichever is less. This approach rewards the Area Director for selecting higher quality franchisees and higher quality locations while discouraging the Area Director from selecting locations that are too close together. In addition to the foregoing, the Area Director is entitled to receive a commission of 50% of the initial franchise fee paid to us for each franchise sold and opened within the temtory during the term of the area director marketing agreement. We have a program under which we will finance up tb 50% of the Master Franchise and Area Director marketing fees for certain approved candidates who have the experience and skill requirement sought by us for our Master Franchise's and Area Directors, but do not have sufficient cash to pay the fee in full. The master franchise's and Area Director is required to personally sign a promissory note due to us for the amount financed, which typically will bear interest at 15% per year (although we may offer a lower interest rate in certain circumstances) and be repaid in monthly installments over five years. The promissory note is secured by the Master Franchise's and Area Director marketing agreement and by other collateral unrelated to the business.

Franchise Program We authorize individuals and companies, within the United States, called "Franchisees" or "Owners," to establish and operate Restaurants at an approved location pursuant to the terms of a franchise agreement. Under the franchise agreement, we undertake to perform or have performed
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certain services with respect to the opening and operation of a Restaurant. In connection with the opening of a Restaurant, those services include (i) review and approval of the proposed Restaurant location, (ii) review and approval of construction plans for the Restaurant, (iii) identification of sources of supply for items which are ordinarily necessary to operate a Restaurant, (iv) an operations manual providing detailed instructions with respect to operation of the Restaurant, (v) training with respect to our method of operations, including operating procedures, food preparation techniques, controls, promotion programs, management and public relations, and (vi) pie-opening assistance. M e r opening of the Restaurant, we provide continuing advice and consultation with respect to operation of the Restaurant. From time to time, we have to take over the operation of a Restaurant from an unsuccessful franchisee and operate the Restaurant until a new franchisee is found.-O r investment in u such operations may be recovered at the time the Restaurant is transferred to the new franchisee. The current franchise fee for the Owner's first Restaurant is $20,000, $15,000 for the second, and $10,000 for the third and any additional franchise agreement. We offer the franchise for a Quizno's Express unit at a reduced franchise fee of $10,000. The Owner also pays us a continuing royalty fee of 7% of the Owner's gross sales (8% for Quizno's Express franchises). Old forms of the franchise agreement require royalty fee payments at rates between 4% and 6%. The royalty rate was 5% for franchise agreements entered into prior to February 11, 1995, and there were 23 such franchises operating at September 30,2000. The royalty rate was 6% for franchisee agreements entered into from February 11,1995 through March 31,1998 and there were 283 such franchises operating at September 30,2000. There was one franchise with a 4% royalty and one with 0% royalty operating at September 30,. 2000. The proceeding is for domestic franchises. The remainder of the franchisees pay a 7% or 8% royalty. The 35 Company owned stores open at September 30, 2000 do not pay a royalty. "Gross sales" is defined as all sales whether on credit or for cash, and all revenues from any source caused by the operation of the Restaurant, whether directly or indirectly relating to the operation thereof. Sales tax and any other state or federal tax are excepted. The Owner also pays advertising fees to The Quizno's National Marketing Fund Trust and one of three Regional Marketing Fund Trusts in an amount equal to a total of 1% to 4% of the gross sales, which are used for advertising, marketing, and public relations programs and materials to enhance and build the image and goodwill of the Quizno's system. There are certain other fees that must be paid by the Franchisee to us in order to reimburse us for costs incurred in connection with the establishment of a Restaurant. The total average cost to a Franchisee for opening a traditional Restaurant ranges between $170,150 and $232,150 including the initial franchise fee, with most of the variation attributable to differences in the costs of leasehold improvements for the Restaurant, size of the Restaurant, and whether the unit is a traditional or Express Restaurant. We collect weekly and monthly sales and other operating information from each franchisee. We have agreements with most franchisees permitting us to electronically debit the franchisees' bank accounts for the payment of royalties, marketing fund contributions and other amounts owed to us under the franchise agreement. This system s i w c a n t l y reduces the resources needed to process receivables, improves cash flow and helps to limit past-due accounts related to these items. Franchisees generally are required to purchase and install an approved point of sale system that, among other things, allows us to poll sales information daily. We have developed certain items, such as bread and dressings for salads and sandwiches, which are prepared for use in the Restaurants based upon recipes developed by us and which are provided to Owners under the private label "Quizno's.'' The Owner is required to purchase those items from speciiied vendors for sale and use in the Restaurant. The franchise agreement also requires the Owner to acquire specified equipment and inventory, to establish and maintain specified signage and to operate the Restaurant in accordance with the standards and requirements outlined in our operations manual. We have entered into an agreement with a national food products distributor that allows Owners to obtain meat products, produce and other food and non-food items necessary for operation of franchised Restaurants at prices more favorable than those that could be obtained by individual Owners. All of the purchasing of the ingredients for the food products offered in the Restaurants is done centrally by us which allows for better quality control. Each Owner then contacts the distributor directly to obtain the items needed for the Owner's Restaurant, which are delivered by the distributor. The distributor bills the Owner directly for all items ordered and we are not liable for any amounts owed by the Owners. We 7
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I

TQC00256

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have entered into an agreement to change to a new National food products distributor effective January 2001. On August 25, 2000, we formed a new wholly owned subsidiary named American Food Distributors, Inc., a Colorado corporation primarily engaged in the business of purchasing proprietary products from third-party manufacturers and then reselling those products to a distributor for use in the Restaurants ( M D ) . We plan to purchase and resell virtually all our proprietary products through AFD. We anticipate that the organization of AFD may result in certain cost efficiencies and savings that would translate to reduced product prices for our franchisees, increased contributions to our national and regional marketing funds, and increased revenue and earnings for us. At this point, it is impossible to predict the extent of those amounts or how they will be allocated. We retain the right to approve the terms of the Owner's lease. We must review the lease as part of the approval process. The Owner pays the costs for the review of the lease. We also reserve the right to enter into a lease directly with each landlord and then to sublease to the Franchisee. The Owner, or person designated by the Owner and approved by us, is required to devote his or her full time, attention and efforts to the performance of the Owner's duties under the franchise agreement relating to the operation of the Restaurant. The Owner agrees in the franchise agreement to use his or her best efforts to produce maximum volume of gross sales in the Restaurant. The Restaurant must be operated continuously on such days and during such minimum hours as are required by us, unless restricted by Owner's lease or other rules applicable to the Restaurant. The Owner agrees to maintain books and records for the Restaurant in accordance with the requirements and specifications set forth from time to time by us. The Franchisee is required by the franchise agreement to be responsible for submitting all required reports to us when and in the manner or format required by us. In order to provide for proper financial tracking and planning for Owners, we began providing a restaurant bookkeeping service to our Restaurant Owners in 1994. In mid-1998, we outsourced the bookkeeping function. This service is intended to assure the Owners have accurate financial records as well as to allow us to keep accurate systemwide statistics. Franchise agreements executed after February 10,1995, require Owners to use this bookkeeping service for the first year of operations for the Owner's first unit for a fee of $85 per week. The Owner must submit copies of all proposed advertising or promotional materials for approval by us prior to use. We have the right to terminate a franchise agreement for a variety of reasons, including a Franchisee's failure to make payments when due or failure to adhere to our policies and standards. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. We expect that Restaurants operating within our franchise system will emphasize quality "submarine" sandwiches. In order to satisfy customer expectations regarding menus and service, we require substantial uniformity among all Restaurants. All Restaurants must conform to our decor and menu specifications. The Owner is not allowed to sell any goods or services at a Restaurant other than those goods and services specified by us. -

Franchise Marketing Programs In order to facilitate the marketing of franchised Restaurants, we devote resources for national print media, sales staff, marketing materials, and trade shows. In addition, we have specific programs to market our franchises, which are discussed below. Discovery Day. Discovery Day is a day-long event regularly scheduled in Denver to introduce potential Owners from throughout the country to the Quizno's concept. Toll Free Phone Line. We have installed a toll free phone line (1-800-DELI-SUBS) which rings directly into the Franchise sales department. The information is entered into a data base of Owner inquiries and an informational package mailed to the caller. Open Houses. We have an ongoing program of hosting open houses throughout the country in conjunction with our Area Directors. Individuals who have expressed an interest in our franchises are invited to open houses.
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TQC00257

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Computerized Data Base of Franchise Inquiries. We have installed a computer network within our Franchise sales department for the purpose of organizing, managing, and tracking individuals who inquire about our franchises. National Advertising. We continue to advertise nationally for new franchisees on a regular and consistent basis in national, regional and local publications.

Company-Owned Restaurants As of December 15,2000, we own and operate 33 Quizno's Restaurants, 22 of which are located in 1 Colorado, and 1 are located in Kansas. In fiscal 2000, Company-owned Restaurants generated $1,193,730 in earnings. We also currently own and operate one Quizno's Restaurant held for resale, which incurred losses totaling $ 12,634 i fiscal 2000. n While we may add new Company-owned Restaurants f o time to time, we expect most of our rm growth in the foreseeable future to result from the development of franchised Restaurants. In addition, from time to time, we acquire or assume the operation of franchised Restaurants where the franchisee has been unable to operate successfully for reasons unrelated to the location or the market. In such cases, we will typically operate the Restaurant, make any required improvements and repairs, re-staff, begin local store marketing, and ultimately transfer the Restaurant to a new qualified Owner. Occasionally, we may incur short term losses in such cases. However, the royalty stream provided over the long term by the new Owner will normally offset or exceed any such losses.
Advertising Our advertising staff develops advertising campaigns for use at al levels to support consumer sales l in the Restaurants. Each franchised Restaurant currently pays 1% of gross sales to the Quizno's National Marketing Fund Trust and up to 3% of gross sales to one of three Regional Fund Marketing Trusts. All company-owned Restaurants must pay the advertising fees on an equal percentage basis with all franchised Restaurants. We use the advertising fees to create, produce, and place advertising, in-store signs, in-store promotions, and commercial advertising; to pay agency costs and commissions; to create and produce video, audio, and written advertisements; to administer regional advertising programs, including direct mail and other media advertising; to employ advertising agencies and in-house staff assistance; and to support public relations, market research, and other advertising and marketing activities. The advertising may be disseminated in print, television, or radio. The coverage has been local or regional, and, since early 1998, we have used national cable television campaigns. Through July 10, 2000, each traditional Restaurant was required to spend 3% of sales for local advertising or promotions. Effective July 11, 2000 this 3% of sales was allocated into one of three Regional Advertising Tmsts.

Competition Restaurant Operations. The restaurant industry is highly competitive with respect to price. service, food quality and location and there are numerous well-established competitors possessing substantially greater financial, marketing, personnel and other resources than we possess. We compete in the sandwich segment of the fast food industry, an industry long dominated by hamburger chains. We believe that within the sub sandwich segment, our largest competitors by number of stores to be Subway and Blimpie. Subway, the nation's largest submarine sandwich restaurant chain, has in excess of 12,000 units in the U.S., while Blimpie has grown significantly in recent years and has approximately 2,100 domestic units. The expansion of Subway has drawn attention to submarine sandwiches, during a time of growing concern relating to beef and fried foods. We believe that the il submarine sandwich segment is underdeveloped, and that demand for submarine style sandwiches wl continue to grow, Other than Subway and Blimpie, most submarine sandwich chains currently have less than 200 units each and are primarily local or regional. Our major competitors, including Blimpie, have followed Subway closely in the style and quality of the product, creating very little, if any differentiation in the market. Subway offers a low-cost product in

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TQC00258

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a fast food style restaurant with limited seating. We have positioned the Restaurants between the traditional fast food restaurant style of our submarine sandwich competitors and full-service dining, and have focused on higher quality food products, to distinguish the Restaurants from their competitors. The restaurant business can be affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. In addition, inflation, increased food costs, labor and benefits costs and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and our Restaurants in particular.
Franchise Competition. In addition to our Restaurant operations, we compete with fast food chains, major restaurant chains and other franchisors for franchisees. Many franchisors, including those in the restaurant industry, have greater market recognition and greater financial, marketing and human resources than we have. We believe that we can compete successfully for franchisees for several reasons. The total cost of opening a Quizno's Restaurant tends to be lower than that of hamburger fast food and full-service dining restaurants. The ratio of sales revenue per restaurant to restaurant opening costs is also better for Quizno's Restaurants than for most of our competitors. Finally, the ambiance of Restaurants offers a Franchisee a pride in ownership that is unique to the Quizno's concept.

We do not have significant costs associated with research and development.

Government Regulations
We are subject to Federal Trade Commission ("FTC") regulation and several state laws which regulate the offer and sale of franchises. We are also subject to a number of state laws which regulate substantive aspects of the franchisor-franchisee relationship. The FTC's Trade Regulation Rule on Franchising (the "FTC Rule") requires us to furnish to prospective franchisees a franchise offering circular containing information prescribed by the FTC Rule. The following is a summary of the information required in the FTC offering circular:
a

A description of the franchisor, its predecessors and affiliates, and the business experience of the franchisors key employees. A summary of litigation involving the franchisor. The initial franchise fee and other fees paid by the franchisee to the franchisor, the total estimated initial investment by franchisee, restrictions on franchisee's sources of products and services, and franchisee's and franchisor's obligations under the franchise agreement. Sources of financing available to franchisee. Whether or not the franchisee has a protected territory. The franchisor's trademarks patents, copyrights and proprietary information. Franchisee's requirement to operate the business, restrictions on what the franchisee can sell, requirements upon renewal, termination, or transfer of the franchise agreement, and provisions for dispute resolution. Any public figures paid by the franchisors and any sales or earnings claims made by the franchisor.

e

e

e

e

The offering circular includes a list of locations, franchisor's financial statements and copies of the franchise agreement and related contracts. State laws that regulate the offer and sale of franchises and the franchisor-banchisee relationship presently exist in a substantial number of states. State laws that regulate the offer and sale of franchises require registration of the franchise offering with state authorities. Those that regulate the franchise relationship generally require that the franchisor deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees, limiting the imposition of standards of performance on a franchisee and regulating discrimination against franchisees in charges, royalties or fees. Although such laws may restrict a franchisor in the termination of a franchise agreement by, for example, requiring "good cause" to exist as a basis for the termination, advance notice to the franchisee

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!

of the termination, an opportunity to cure a default and a repurchase of inventory or other compensation, these provisions have not had a significant effect on our franchise operations.

In October 1999, the FTC issued proposed changes to the FTC Rule that would effect c-ertain disclosure obligations in connection with franchise sales. These proposed changes are still subject to public comment, and even if adopted as proposed, we do not think the changes would materially effect our franchise sales or other operations. We are not aware of any other probable pending franchise legislation that in our view is likely to affect our operations significantly. We believe that our operations comply in all material respects with the FTC Rule and the applicable state franchise laws.
Each franchised Restaurant, and each company-owned Restaurant, is subject to licensing and regulation by a number of governmental authorities, which may include health, sanitation, safety, fire, building and other agencies in the state or municipality in which the Restaurant is located. Difficulties in obtaining or failure to obtain the required licenses or approvals could delay or prevent the development of a new Restaurant in a particular area. We are subject to federal and state environmental regulations, but these have not had a material effect on our operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent the development of a new Restaurant in a particular area. We are also subject to state and federal labor laws that govern our relationship with our employees, such as minimum wage requirements, overtime, working conditions and citizenship requirements, or customers, such as the Americans with Disability Act. Significant numbers of food service and preparation personnel are paid at rates governed by the federal minimum wage. Accordingly, increases in the benefits under any of these laws would increase labor costs to us and our franchisees. We do not have any significant costs related to environmental law compliance.

Trademarks
We presently own the following principal trademarks or service marks (the "Marks"). All of our primary Marks (except for the last one) are registered on the Principal Register of the United States Patent and Trademark Office:
Re 'stration

amber

Registration Date

"QUIZNO'S" service mark .............................. "QUIZNO'S" service mark .............................. "QUIZNO'S & Design" service mark ................... "QUIZNO'S EXPRESS CLASSIC SUBS" service mark "QUIZNO'S SUBS OVEN BAKED CLASSICS and DESIGN .............................................

1,317,420 1,317,421 1,716,834 2,086,598 2,228,680

January 29, 1985 January 29, 1985 September 15, 1992 September 19, 1996 March 2, 1999

There are no presently effective determinations of the United States Patent and Trademark Office, the trademark trial and appeal board, the trademark administrator of any state or any court, nor are there any pending infringement, opposition or cancellation proceedings or material litigation, involving the Marks.

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We have also filed the following trademarks or service marks internationally:
Country Trademark Application or Registration Number Application or Registration Date Status -

Australia Australia

30 March 1999 Pending App. # 789815 Quizno's 30 March 1999 Pending Quizno's Subs App. # 789814 Oven Baked Classics Canada Quizno's Reg. # 489496 6 February 1998 Registered Canada Quizno's Subs App. # not yet Pending Oven Baked available Classics (and design) Europe-CTM Quizno's App. # 1057223 28 January 1999 Pending Europe-CTM Quizno's Subs App.lReg. # 4 October 2000 Registration No. Oven Baked 1057264 pending Classics Great Britain Quizno's Reg. # 1576926 18 August 1995 Registered App. # 2197852 Great Britain Quizno's Subs Oven Baked Classics (and design) 21 May 1999 Registered Japan Quizno's Reg. # 4275508 1 March 1999 Pending Japan Quizno's Subs App. # 17745199 Oven Baked Classics (and design) Mexico Quizno's Reg. # 502259 30 August 1995 Registered Puerto Rico Quizno's 23 September 1997 Pending None Singapore Quizno's Reg. # 6014194 12 September 1994 Registered South Korea Quizno's Reg. # 29994 11 January 1996 Registered Iceland Quizno's Pending App. # 190912000 25 May 2000 Switzerland Quizno's App. # 0620312000 24 May 2000 Pending We have also filed trademark applications in several Central American countries, all of which are currently pending. There are no agreements currently in effect which significantly limit our right to use or license the use of the Marks.

Employees As of December 15, 2000, we employed 92 full-time employees and 2 part-time employees. In addition, we employed 109 full-time and 218 part-time employees in our Company-owned Restaurants. Our employees are not covered by any collective bargaining-agreement and management believes our emplqyee relations are excellent.

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Item 2. Description of Property
We lease our headquarters office space of 14,866 square feet at 1415 Larimer Street, Denver, Colorado. We also lease the premises for each of the 35 Company-owned and operated Restaurants and the Cowboy Bar at Denver International Airport, at September 30, 2000, as follows: 2,486 sq. feet Englewood, CO 80112 1. 12201 East Arapahoe Road, #B7 Boulder, CO 80301 1,976 sq. feet 2. 6525 Gunpark Drive Silverthorne, CO 80498 931 sq. feet 3. 191 Blue River Parkway Greenwood Village, CO 80111 3,166 sq. feet 4 8081 East Orchard Road, #67 . Boulder, CO 80301 1,400 sq. feet 5. 2311 30th Street 1,919 sq. feet Highlands Ranch, CO 80126 6. 9425 South University Blvd. 1,400 sq. feet Denver, CO 80203 7. 1275 Grant Street 2,350 sq. feet Longmont, CO 80501 8. 1250 South Hover Road, Bldg. 8A Denver, CO 80264 1,660 sq. feet 9. 1660 Lincoln Street, # 105 Lakewood, CO 80215 1,992 sq. feet 10. 10450 West Colfax Denver, CO 80216 1,903 sq. feet 1 . 4495 North Washington 1 Lakewood, CO 80401 1,300 sq. feet 12. 14413 West Colfax Denver, CO 80202 1,360 sq. feet 13. 999 18th Street, # 136 Denver, CO 80204 1,700 sq. feet 14. 270 West 14th Street Denver, CO 80237 2,420 sq. feet 15. 4403 South Tamarac Parkway Denver, CO 80202 1,800 sq. feet 16. 818 17th Street El Dorado, KS 67042 1,800 sq. feet 17. 2401 West Central Wichita, KS 67203 1,151 sq. feet 18. 738 North Wac0 1,850 sq. feet Wichita, KS 67218 19. 4100 East Harry, #55 Wichita, KS 67226 1,840 sq. feet 20. 3300 North Rock Road Wichita, KS 67217 1,700 sq. feet 21. 2792 South Seneca 1,225 sq. feet Wichita, KS 67203 22. 2407 West 21st Street 1,500 sq. feet Wichita, KS 67212 23. 602 North Tyler Wichita, KS 67216 1,540 sq. feet 24. 678 East 47th Street South 2,981 sq. feet Denver, CO 80202 25. 1695 Larimer Street Louisville, CO 80027 1,500 sq. feet 26. 305 McCaslin Blvd. #6 2,400 sq. feet Westminster, CO 80234 27. 12003 Pecos St. Broomfield, CO 80020 2,100 sq. feet 28. 6765 W. 120th Ave. Greenwood Village, CO 80112 1,600 sq. feet 29. 5131 S . Yosemite Louisville, CO 80027 2,100 sq. feet 30. 1387 S. Boulder Rd., Unit G Overland Park, KS 66213 2,000 sq. feet 31. 12607 Metcalf 1,520 sq. feet Overland Park, KS 66120 32. 11029 Metcalf 1,485 sq. feet Santa Barbara, CA 93101 33. 1213 State Street, Unit A 4,209 sq. feet Denver, CO 80249 34. 8700 Pena Blvd. 1,761 sq. feet Denver, CO 80249 35. 8900 Pena Blvd. 2,724 sq. feet Denver, CO 80249 36. 8700 Pena Blvd.

I

I

Item 3. Legal Proceedings
Angela Wetzel v. Quizno's Subs, Ron Newman & Quiz-Subs, Inc. (Court of Common Pleas, Berkeley County, South Carolina, No. 00-CP-08-123) (the Wetzel Litigation). Ron Newman is a former area director, through Quiz-Subs. In 1999, Newman entered into negotiations with Wetzel (a Subway franchisee) to sell the area directorship for approximately $275,000. We tentatively approved the sale, which approval was subject to (among other conditions) Wetzel's transfer of her existing Subway units. Subsequently, Wetzel paid Newman $275,000 for the territory. Although Wetzel had not sold her Subway units and did not have written consent from us for the transaction, she now claims that our representative verbally approved the sale without the Subway sale condition. When we refused to acknowledge the sale, Wetzel brought this litigation in South Carolina state court, on January 20,2000, against us, Quiz-Subs, and Newman. Wetzel seeks specific performance (i.e., an order transferring the territory rights to her) or, in the alternative, return of the $275,000 payment and consequential damages. 13

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We have denied liability and cross-claimed against Newman and Quiz-Subs. We believe Wetzel could not have reasonably relied on any verbal statement by a representative to pay Newman for the temtory. We also believe that the ultimate liability rests with Newman, who refused to return the payment after being notified that we would not approve the transfer. Wetzel has requested a jury trial. No trial date has been set.

The Quizno's Corporation v. Quiz-Subs, Inc., Ron Newman, and Stephen Gainous (United States District Court for the District of Colorado, No. 00-213) (the Newman Litigation). We additionally terminated Quiz-Subs area director agreement and territory rights for failure to meet the development quota, and commenced this litigation in the United States District Court on February 1, 2000. The action seeks damages arising from Newman's and Quiz-Subs' failure to develop the territory as well as indemnification from any damages or expenses incurred by us as a result of the Wetzel Litigation. The defendants have not yet answered the complaint or filed counterclaims. If any counterclaims are filed, we will assess those claims and respond accordingly. We believe that any loss in this matter would be a covered claim under our Errors and Omissions Insurance Policy. The Quizno's Corporation v. Quizno's of Tampa Bay, Inc.; The Quizno's Corporation v. Quizno's of Central Florida, Inc., Quizno's of Jacksonville, Inc., David M. Black and Barbara Jill Black (United States District Court for the District of Colorado, No. 00-253) (the Black Litigation). The Blacks, through their various entities, were area directors in Florida. In January 2000, we discovered that the Blacks had deposited checks for franchise fees (made payable to The Quizno's Corporation) into their business accounts. The Blacks then sent reduced amounts to Quizno's. The Blacks also defaulted on payment obligations under promissory notes entered into in connection with the sale of the area directorships. Upon learning of the Blacks' action, we terminated the underlying area director agreements and commenced an arbitration against Quizno's of Tampa Bay, Inc., and a federal district court action against the other entities on January 4, 2000. Both actions allege claims for breach of the area director agreements as well as seek indemnification arising from the Blacks' actions. Both actions also name the Blacks individually.

On November 3,2000, the parties entered into a settlement. Pursuant to the settlement agreement, we paid the defendants $20,000 and forgave the balances owed under the promissory notes. The defendants gave up all rights to the area director territories, and the parties exchanged a full release of al claims. On November 16, 2000, the federal district court action was dismissed with prejudice. The l arbitration action had previously been dismissed.
The Quizno's Corporation v. Cy Thomas Plyler (American Arbitration Association, Denver Colorado, No. 77 181 00203 00. On July 10, 2000, we terminated an area director agreement with Cy Thomas Plyler, for failure to meet the required development schedule. On the same day, we instituted this action in the Denver office of the American Arbitration Association, in which we sought damages for failure to comply with the agreement as well as a declaration that the agreement was properly terminated. On August 11, 2000, Plyler filed an answering statement denying our claims and counterclaims for breach of contract. Plyler claims damages in excess of $1,000,000 based on lost future revenue from the territory. He also seeks i n d e d c a t i p and attorney fees. We believe that we rightfully terminated the agreement and intend to contest the counterclaims and to pursue our claims. The case is currently in pre-trial discovery. No trial date has been set. We believe that any loss i this n matter would be a covered claim under our Errors and Omissions Insurance Policy. Danny Markovitz & Lee McGowan v. The Quizno's Corporation (District Court for the City & County of Denver, Colorado, No. OOCV4134. On June 2, 1999, we terminated an area director agreement with Danny Markovitz & Lee McGowan for failure to meet the required development schedule, failure to make payments on the promissory note given in connection with the sale of the area directorship, and failure to comply with other provisions of the agreement and related documents. On June 20, 2000, the plaintiffs commenced this action, alleging breach of contract, unjust enrichment, violation of the Colorado Consumer Protection Act, fraudulent misrepresentation, fraudulent concealment, negligent misrepresentation, intentional interference with contract, and violations of the Colorado Securities Act as well as securities fraud. The claims all arise from the plaintiffs' allegation that we wrongfully terminated the agreement and alleged wrongful acts (failure to timely provide a UFOC or to disclose the terms of the promissory note collateral) taken by us in connection with the
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sale of the area directorship. We have denied those claims and believe that we properly terminated the ' agreement. The case is currently in pre-trial discovery and is set for trial in June 2001. We believe that any loss in this matter would be a covered claim under our Errors and Omissions Insurance Policy. From time to time, we are involved in litigation and proceedings arising out of the ordinary Eourse of our business. There are no other pending material legal proceedings to which we are a party or to which our property is subject. We do not believe that any of the foregoing litigation will have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders of the Company during the fourth quarter of its fiscal year ended September 30, 2000.

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PART I I
Item 5. Market for Common Equity and Related Stockholder Matters
Our Common Stock is traded in the NASDAQ Small-Cap Issues Market under the symbol "QUIZ." The following table shows high asked, low bid and close price information for each quarter in the last two fiscal years as reported by Prophet Information Services, Znc., a provider of online historical stock price data for all major US. securities markets. Such quotations reflect inter-dealer prices, without retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions. On December 18, 2000, the stock closed at $7.50.

Fiscal Year Ended September 30, 1999
High LOW Close - - -

First Quarter .............................................. Second Quarter ........................................ ;. . Third Quarter .............................................

$7.75

$7.75
$9.50
High -

$6.88 $6.50 $6.94
Low

$7.19 $7.25 $8.25
Close -

Fiscal Year Ended September 30, 2000
_ .

First Quarter ............................................... Second Quarter ............................................ Third Quarter .............................................. Fourth Quarter .............................................

$9.00 7.94 8.00 7.38

$7.25 5.88 5.88 5.88

$7.38 7.94 7.00 6.44

There were 93 holders of record of our Common Stock as of December 18, 2000. This number includes shareholders of record who hold stock for the benefit of others. The tender offer reduced the number of our outstanding shares and the number of our shareholders. Our Board of Directors could take other actions that would result in a second-step transaction in which all the remaining public stockholders would receive cash for their shares. However, our Board of Directors has not made any decision to take the company private or as to whether, or when, a second-step transaction such as a merger or a reverse stock split would be completed. A second-step transaction would require approval by our Board of Directors and may require approval by our stockholders, depending on the nature of the second-step transaction. The members of the Schaden family owning shares would be able to control the outcome of any stockholder vote on a second-step transaction. The Board may also decide to deregister our shares (assuming that we meet the criteria for such delisting), in which case we would no longer be a reporting company under the Securities Exchange Act of 1934, nor would our shares be traded on any public exchange.

-

We believe that the tender offer may result in our company no longer meeting the net tangible asset or other requirements for continued listing on the uasdaq SmallCap Market. In that event, we would be traded on the National Association of Securities Dealers, Inc. Electronic Bulletin Board (the "OTCBB"), which may provide less liquidity and less price publicity for remaining shareholders.
We do not expect to pay any dividends on our Common Stock in the foreseeable future. Management currently intends to retain all available funds for the development of our business, for use as working capital or to repurchase common stock. In October 1999, we announced a program to repurchase up to 200,000 shares of our common stock. The program was terminated on or about September 30, 2000, and at such time we had repurchased 144,005 shares under such program. The prices at which shares were repurchased ranged from $6.03 to $8.875, and the average price was $8.38. During the last quarter of the fiscal year ending September 30, 2000, we sold the following securities without registration with the Securities and Exchange Commission pursuant to the exemption noted

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Securities Sold

-

Date

Number of

Shares
2,918

Consideration

Purchasers

Exemptions Claimed

Common Stock ............ 8/8/00

$20,429 Plan obligation

Quizno's 401(k) Trust

Section 4(2)

Item 6. Management's Discussion and Analysis or Plan of Operation

Forward-Looking Statements
Certain of the information discussed in this annual report, and in particular in this section entitled "Management's Discussion and Analysis or Plan of Operation," are fonvard-looking statements that involve risks and uncertainties that might adversely affect our operating results in the future in a material way. Such risks and uncertainties include, without limitation, the effect of national and regional economic and market conditions in the U.S. and the other countries in which we franchise Restaurants, costs of labor and employee benefits, costs of marketing, the success or failure of marketing efforts, costs of food and non-food items used in the operation of the Restaurants, intensity of competition for locations and Franchisees as well as customers, perception of food safety, spending patterns and demographic trends, legal claims and litigation, the availability of financing for us and our Franchisees at reasonable interest rates, the availability and cost of land and construction, legislation and governmental regulations, and accounting policies and practices. Many of these risks are beyond our control. In addition, specific reference is made to the "Risk Factors" section contained in our Prospectus, dated January 9, 1998, included in the Registration Statement on Form S-3 filed by our company (Registration No. 333-38691). The principal sources of our income are continuing fees, initial franchise fees, and, historically, area director marketing and master franchise fees. These sources are subject to a variety of factors that could adversely impact our profitability in the future, including those mentioned in the preceding paragraph. The continued strength of the U.S. economy is a key factor to the restaurant business because consumers tend to immediately reduce their discretionary purchases in economically difficult times. An economic downturn would adversely affect all three of the sources of income identified above. Because our franchises are still concentrated in certain regions of the U.S., regional economic factors could adversely affect our profitability. Weather, particularly severe winter weather, will adversely affect royalty income and could affect the other sources cited above. Culinary fashions among Americans and people in other countries in which we franchise the Restaurants will also impact our profitability. As eating habits change and types of cuisine move in and out of fashion, our challenge will be to formulate a menu within the Quizno's distinctive culinary style that appeals to an increasing market share. Finally, the intense competition i the restaurant industry continues to challenge participants in all segments of n this industry.

As our revenues from foreign operations become more significant, our profitability could be adversely impacted by international business risks and political or economic instability in foreign markets. While international operations involve risks that do not exist in domestic operations, such as adverse fluctuation in foreign exchange rates, monetary exchange controls, foreign government regulation of business relationships, and uncertainty of intellectual property protection, we believe that the potential rewards of expanding the market for our services to selected foreign countries far outweighs such risks.
Overview

In November 1999, we announced that we had changed our fiscal year end from December 31 to September 30. The financial statements included with t i 10-KSB filing reflect our balance sheet as of hs September 30, 2000 and 1999 and December 31, 1998 and the related statements of operations, stockholders' equity and cash flows for the year and nine months ended September 30,2000 and 1999, respectively, and the year ended December 31, 1998. Included below are the statements of operations for the years ended September 30,2000 and 1999 and the statements of cash flows the years ended for September 30, 2000 and 1999. Amount for the year ended September 30, 1999 are unaudited. For
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purposes of Management's Discussion and Analysis or Plan of Operation, we believe that these twelvemonth statements and comparisons provide a more meaningful analysis. Therefore, all comparison and analysis included in this Management's Discussion and Analysis or Plan of Operation will be based upon these twelve-month statements and related data. Unless noted otherwise, all references to 2000 and 1999 refer to the years ending September 30, 2000 and 1999, respectively.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended September 30, 2000 1999
_ .

(Unzted)

Franchise operations: Revenue Continuing fees ............................................... $ 18,072,077 $ 10,412,414 Initial franchise fees.. ... . ... .. . .. . . . .... . .. . . . . . . ... . , . . . . . ... 5,730,662 3,610,042 Area director and master franchise fees ....................... 1,361,901 2,131,882 Sale of Japan master franchise .......... . .. .................. . 1,168,801 Other . .. . . . . . ..... .. .. . . . . . . . ... . . ... . . , ... . . .. .. .. . ... . . . . . . 508,240 1,064,646 Interest ... .. . . . . . .. . . .. . . .. . . ... . . . . . ... . ., . . . . . .. . . . . .. . . . 526,761 355,608 Total revenue.. . .. . . ... .. . . .. .. . . .. . . ... . ... ... . .. . . . . . 18,186,987 26,756,047 Expenses Sales and royalty commissions .. . . . .. .... ... . . . .. .. . . . . . ..,. . . (7,836,912) (5,302,456) General and administrative. . . . . . .... .. . . . . . . .... . . . ..... . . , .. . (12,867,738) (8,657,357) Total expenses . ... ..... .... . . .. . ... . .. . . ... .. .. . , .. .. . . . (20,704,650) (13,959,813) Income from franchise operations , . , . . . . . .. , . . . . . . . . ..... .. . . . . .. . .. . . . 6,051,397 4,227,174 Company store operations: Sales .. ... . .. . .. . . . . . . ,.. .. .. .. , ... . . . . . .. . . , . . .. . .. . . ... .. .. ..,.. . 14,973,763 8,276,368 Cost of sales ...................................................... (4,373,303) (2,511,086) Cost of labor .................., ................................... (3,318,489) (2,222,855) Other store expenses . .. . .. ... . , . . . . .. ... .. , . . , . ......, .