DENVER/PRNewswire — The Quizno’s Corporation (Nasdaq: QUIZ – news; the “Company”) today announced that it is mailing the attached letter to its shareholders. The attachments to the letter will be included in the mailing and are available on our website ( www.quiznos.com ) and in our filings with the Securities Exchange Commission ( www.sec.gov ).
The shareholders’ meeting to vote on the merger of Firenze Corp. with and into the Company that has been adjourned to December 14, 2001 at 10:00 am will again be adjourned to and will reconvene at 10:00 am Friday, December 21, 2001, at the Oxford Hotel, 1600 17th Street, Denver, Colorado 80202.
The Shareholder letter is as follows:
On November 5, 2001, we sent our shareholders a notice of special meeting and proxy statement describing a proposal to approve and adopt a merger agreement between us and Firenze Corp., pursuant to which Firenze will be merged into us. If the merger is approved, our public shareholders who do not exercise dissenters’ rights will receive $8.50 per share for each share of our common stock that they own. The special meeting of shareholders’ was originally scheduled for November 30, 2001. It has been adjourned and is currently set to reconvene Friday December 14, 2001 at 10:00 am, at which time it will be adjourned again and will reconvene at 10:00 am December 21, 2001, at the Oxford Hotel in Denver, Colorado.
Richard E. Schaden is the president and chief executive officer and chairman of our board of directors and Richard F. Schaden is our vice president and corporate secretary and a member of our board of directors. The Schadens are also the sole shareholders, officers and directors of Firenze. The Schadens, therefore, have a direct conflict of interest with respect to the proposed transaction. The Schadens own approximately 67% of our outstanding common stock. In light of this conflict of interest, our board of directors formed the special committee. The special committee is composed of three of our directors who are not affiliated with Firenze. The special committee negotiated the terms of the merger agreement on behalf of the board and us. In connection with the execution of the merger agreement, both the board and the special committee determined that the merger and the merger agreement are fair to and in the best interests of our public shareholders.
Our proxy statement described various letters and proposals received from a shareholder in September and October 2001, and correspondence from the committee responding to those proposals. The shareholder, Fagan Capital, Inc., generally outlined its willingness to purchase shares from our minority shareholders, but only if certain conditions were met, including the requirement that we grant Fagan a put option, which in turn required approval by one of our lenders, Levine Leichtman Capital Partners II, L.P. under the terms of the existing loan which was entered into in connection with our tender offer in December 2000. The other proposed conditions included board representation for the minority shareholders, or alternatively that the Schadens grant Fagan an option to acquire all of our shares (including those owned by the Schadens) for $15 per share. None of the proposals was in the form of a definitive offer that could be accepted to create a binding transaction between Fagan and us. Fagan asserted that it was prepared to discuss proposals that could result in our shareholders receiving in excess of $10 per share. As noted in the proxy statement, the special committee considered and evaluated the Fagan proposals, and determined it could not agree to the proposals, particularly the requirement of a put option. Levine Leichtman had informed the special committee it would not consent to the put option. The committee notified Fagan, however, that the committee would facilitate a discussion between Levine Leichtman and Fagan, would review any agreement reached between Fagan and Levine Leichtman, and would enter into negotiations with Fagan under appropriate circumstances. The committee requested that any subsequent offer from Fagan be made in the form of a binding offer with definitive documents.
On October 26, 2001 Fagan’s counsel, Schulte, Roth & Zabel, LLP, responded to the special committee noting the benefits of the Fagan proposal, asked the special committee to announce its withdrawal of support for the Schaden proposal and commence negotiations with Fagan. The letter also noted the necessity of a third party consent to the put option included in the Fagan proposal, but declined the invitation to negotiate directly with Levine Leichtman.
By letter dated October 29, 2001, Brobeck, Phleger & Harrison, LLP responded to the Schulte letter on behalf of the special committee. The committee had asked Levine Leichtman if it would consent to the put option condition, and Levine Leichtman declined. The committee again noted that the terms of Fagan’s current proposal would cause an event of default under the Levine Leichtman facility. The committee also offered to facilitate discussions between Fagan and Levine Leichtman to allow Fagan to make a feasible proposal which the committee would help negotiate. The committee informed Fagan that it remained willing to negotiate an offer with Fagan whenever Fagan presented to the special committee an offer which would be acceptable to the independent third parties whose consent would be required. Such consent would have been required from Levine Leichtman, and may have been required from AMRESCO, with whom we had a loan agreement dating back to 1999, depending on the form of the offer made by Fagan. The special committee also noted that although it could not force the Schadens to negotiate with Fagan, the committee remained willing to facilitate a meeting with the Schadens if it would result in a higher price for the minority shareholders. Finally, the special committee noted that it remained willing to consider any definitive proposals Fagan actually made.
Schulte responded by letter dated November 1, 2001, reiterating some prior arguments and noting the potential higher price and non-coercive features of the Fagan proposal. It alleged the committee breached its obligations to the minority shareholders because it failed to negotiate Fagan’s purportedly 25 percent higher proposal on the grounds that Levine Leichtman’s approval was required for the put option. Schulte also challenged our disclosure of the Fagan proposal as focusing only on Fagan’s put option condition. It also noted that William Fagan had scheduled a meeting with Richard E. Schaden and expressed hope that progress could be made at the meeting. No proposals were made by Schulte to obtain the third party consent necessary to implement the Fagan proposal. Schulte expressed the view that no prudent businessman would make a minority investment without a necessary liquidity provision, such as the put option proposed by Fagan.
On November 5, 2001, Richard E. Schaden met with William Fagan in Denver, Colorado. Mr. Fagan proposed a number of possible transactions between Fagan and Firenze, which seemed to suggest that the minority shareholders be allowed to remain shareholders in a private company or alternatively, that minority shareholders be permitted to voluntarily sell their shares to us for $8.50 per share. As a third alternative, a voting trust for minority shareholders would be created, where Fagan would act as trustee, and where we would grant a right for the voting trust to put its shares to us for fair market value at a future date. Mr. Fagan also proposed that he would buy additional shares of stock of the company for a premium so that the company could use the money to pay the minority shareholders a higher price. He suggested that he would purchase shares at $10.63 per share if he could have a right to put the newly issued shares back to us at fair market value in the future.
Mr. Schaden indicated he was not interested in pursuing a transaction with Mr. Fagan. Mr. Schaden believed it was not in our best interest to continue as a public company, or as a private company with a potentially large number of minority shareholders. Mr. Schaden agreed with the committee’s analysis and conclusion that the public market has not responded to our positive growth. Hence, he believed we had not realized the principal benefits of public ownership. In reaching that conclusion, Mr. Schaden relied on the factors relied upon by the committee and discussed below. Mr. Schaden also understood that our common stock has remained very thinly traded, providing little liquidity for our shareholders. He believed that minority shareholders in a private company would have virtually no liquidity. For that reason, Mr. Schaden did not want to pursue Mr. Fagan’s first alternative. Mr. Fagan’s second alternative also held out the prospect of remaining minority or public shareholders, which Mr. Schaden did not believe was in our interest. The third alternative, the voting trust, required a put option, which was unacceptable because it would have required approval from Levine Leichtman, which as discussed was not available. There were no agreements or understandings reached.
On November 13, 2001, a lawsuit titled Sebesta v. Schaden, et al., was commenced by Edward C. Sebesta against us, Richard E. Schaden, Richard F. Schaden, and four other present or former directors, in the District Court for the City and County of Denver. The complaint alleges that the defendants breached their fiduciary duties by wrongfully supporting the proposed merger with Firenze and by failing to adequately disclose information concerning proposals made by Fagan, the special committee’s responses and alleged conflicts of interest. Plaintiff sought a temporary restraining order or TRO to preclude us from holding our November 30, 2001 shareholders’ meeting until corrective disclosures were made and disseminated. On November 28, 2001, the court heard and denied plaintiff’s motion, finding that the plaintiff had not satisfied any of the requirements for obtaining injunctive relief. The Court specifically held “… the plaintiff has come into this Court with unclean hands seeking relief when, in fact, the plaintiff, and its agents, have been less than candid, less than accurate in its representations, in terms of its own offer in terms of it being conditional, and any request for relief would not serve the public’s interest.” We filed an answer denying any wrongdoing.
On November 27, 2001, three days before the scheduled shareholders’ meeting and on the eve of the TRO hearing, Fagan delivered a letter to the special committee which outlined in general terms apparently three different proposals. It became a major focus of the hearing for the TRO described in the paragraph above. The first appeared to propose to amend the current merger to provide $9.50 per share to minority shareholders, allowing them an option to continue as shareholders after the merger, with Fagan buying shares in the surviving entity and no put option required. Fagan also expressed its continued interest in purchasing the minority shares for $10.63 per share, but only if we agreed to the put option, and alternatively indicated its willingness to explore purchasing all of the shares (including the shares held by the Schadens and their affiliates) for $15 per share. Fagan stated that its proposal would expire on December 10, 2001. The committee noted that all three of the apparent proposals required third party consents as follows:
— the $9.50 proposal would require the Schadens to agree to amend the Firenze merger agreement
— the $10.63 proposal would require consent from Levine Leichtman which had previously been refused
— the $15 proposal would require the separate consents of AMRESCO and Levine Leichtman under the terms of their respective existing loan agreements and a willingness of the Schadens to sell their shares
There was no indication by Fagan that the third parties had approved or been approached. The committee further noted that since the proposals were general in nature and did not specify a particular form or structure, it could not determine what other consents or approvals might be required.
The committee responded to Fagan on November 28, 2001. It stated that it had engaged in a lengthy, detailed process attempting to determine whether Fagan would ever be prepared to make a bona fide offer in a form that could be accepted for the benefit of our minority shareholders, and noted that Fagan had failed to make such an offer. The committee expressed its concern that the timing of Fagan’s November 27 letter was designed more to disrupt the shareholders’ meeting, and that it was not a sincere expression of interest in acquiring the minority shares. The committee noted that the letter did not contain sufficient information to constitute a binding offer that the committee could recommend. Nevertheless, the committee told Fagan it was willing to immediately pursue a transaction with Fagan that would ensure the minority shareholders would receive $9.50 per share, with no put option which would require third party consent. It noted that time was of the essence since there was a binding agreement providing the minority shareholders $8.50 in cash scheduled to close on November 30, 2001. The committee once again asked Fagan for a binding offer with definitive documents and stated it was prepared to negotiate such an offer through the close of business on November 29, 2001.
The committee did not receive an offer in the requested form of a binding offer with definitive documents that could be accepted by us. The committee considered this a necessary and typical requirement for a company to accept a superior offer and meet the requirements of the Firenze merger agreement commonly referred to as a “fiduciary out.”
Instead, on November 29, the special committee received a three-page letter from Fagan covering a number of topics. Among other things, the letter asserted that Fagan had made an “UNCONDITIONAL $9.50 OFFER” and referred to the $10.63 and $15 or higher proposals. It asked that the committee propose a transaction structure and provide a form of definitive agreement. Fagan also requested written confirmation that our board of directors (including the Schadens) support the transaction. While asserting the $9.50 proposal was unconditional, the November 29 letter did not remove the conditions in the November 27 proposal, including that:
— the current merger be amended
— the holders be allowed to continue as shareholders following the merger
— Fagan not purchase the shares from the holders directly, but instead purchase shares of the surviving company’s common stock
— “the foregoing proposal is subject to reaching a mutually satisfactory definitive agreement providing for standard terms”
The committee met by telephone on November 29th to consider the various proposals from Mr. Fagan. The committee noted that the Fagan November 29 letter did not cure the deficiencies noted in the committee’s November 28 letter and described in more detail in the prior three paragraphs. It also noted that the committee had been requesting such a binding offer from Fagan for almost three months, since at least September 7, 2001. Nonetheless, it decided to continue discussions with Mr. Fagan in an attempt to see if a feasible binding agreement could be reached that would be of greater benefit to the company and its shareholders than the current agreement at $8.50 per share. The committee responded in writing that same day. It noted that Fagan failed to provide the requested definitive legal documentation for execution and again asked Fagan for a definitive offer. Given the last minute nature of the proposal, it requested funds in escrow or a personal guaranty to provide certainty. Fagan responded by letter the next morning, November 30, 2001. Fagan repeated the requests of its November 29, 2001, letter but did not provide the documentation asked for by the committee.
We determined to delay the shareholders’ meeting to provide additional disclosure to our shareholders on the recent developments. We adjourned the shareholders’ meeting until 10:00 am the following Tuesday, December 4, 2001.
On December 3, 2001, Fagan sent to the special committee a signed form of investment agreement and personal guaranty of Fagan’s obligations signed by William and Laura Fagan. Among other things, the investment agreement provided that:
— Parties were Fagan, us and Firenze
— Firenze and we would amend the Firenze merger agreement in a number of respects and in a form acceptable to Fagan
— Fagan would fund Firenze to have it buy shares from minority shareholders who wished to sell their shares for $9.50 per share
— Fagan would receive an equivalent number of shares in the surviving company
— Minority shareholders who did not wish to sell their shares would be allowed to remain shareholders
— We must agree not go private or delist from trading without the affirmative vote of the majority of the minority shareholders
— The proposal would expire 5:00 pm (CST) on December 5, 2001
The investment agreement, guaranty letter and cover letter are exhibits to a Form SC 13D/A filed with the Securities Exchange Commission by Fagan and various other shareholders on December 6, 2001.
The committee met on December 3, 2001 and consulted with its financial advisor and Brobeck on the merits of the Fagan proposal. It noted that the proposal would require the approval of Firenze since it would amend the existing merger agreement between Firenze and us. The committee instructed Brobeck to explore with Schulte and counsel for Firenze whether changes to the proposed agreement could be made to make it mutually acceptable. Brobeck asked Schulte whether the covenant against going private or delisting could be shortened or deleted. Schulte indicated a willingness to discuss with Fagan shortening the covenant against going private or delisting but no definitive timeframe was set. Brobeck also noted that the proposed investment agreement would require approval from the Schadens and Schulte indicated that Fagan was willing to be flexible with regard to various structures, although no information was provided which indicated that any change to the proposed form would eliminate the necessity of the Schadens’ approval. Brobeck asked Schadens’ counsel if Firenze would raise its $8.50 offer and whether the Schadens would support a $9.50 offer in the form proposed by Fagan. The Schadens’ counsel responded that Firenze would not raise its price and would not respond to a hypothetical proposal from Fagan. No material progress was made with either Fagan or Firenze.
The committee reconvened that evening and heard presentations from us, Richard E. Schaden and Schadens’ counsel. Mr. Schaden indicated that the uncertainty associated with the various delays to their proposed transaction was likely impeding the company’s ability to carry on its business. We likewise noted that the many allegations in the press were negatively affecting our ability to sell franchises. Mr. Schaden also noted that the Firenze merger was a more certain deal in that it was not subject to third party consents or other conditions that were unlikely to be satisfied. The committee asked several questions of Mr. Schaden. In response to a request, Mr. Schaden declined to increase the merger consideration above $8.50. Mr. Schaden renewed his position that the Schadens’ shares were not for sale. Mr. Schaden declined to indicate whether he would support the Fagan $9.50 proposal until he knew the definitive terms, structure and conditions. Mr. Schaden, Schadens’ counsel and we then left the meeting.
The committee then reviewed and discussed the current state of the proposals as alternatives to the current binding merger agreement with Firenze, and concluded as follows:
— the $9.50 proposal appeared to be a possibility if a modification could be reached on the limitations requested by Fagan on us going private or delisting from trading
— Fagan was free to launch an unconditional $9.50 per share tender offer, without the consent or approval of the special committee or us
— the Schadens refused to increase the price of the current merger
— the $10.63 proposal was not possible without the consent of Levine Leichtman, which had been refused
— the $15.00 proposal was not possible since the Schadens did not wish to sell
The committee noted it was hampered by the lack of definitive terms and conditions of the Fagan $9.50 proposal. It determined the best opportunity for compromise was to propose to Fagan and the Schadens a shortening of the time period of the requested limitations on the company going private, and ask if either had ideas to bridge the differences. The committee decided that Mr. Bromberg should call Mr. Fagan to negotiate and Brobeck should call Schulte and Schadens’ counsel again to see if an agreement could be reached. No significant changes were made by any of the parties.
The committee reconvened on December 4, 2001 to further consider the fairness of the existing merger agreement and whether any changes could be made to any of the Fagan proposals to deliver additional value to the minority shareholders. Among other things, the committee reanalyzed its conclusion that it was not in the interests of us and our shareholders to remain public, for the reasons expressed in the proxy statement and saw no reason to change its conclusion. Those reasons included:
— our small public float and limited institutional following in our stock or coverage by analysts;
— our low trading volume
— the Schadens’ indication that they were unwilling to sell their shares of our common stock to a third party
— the board’s conclusion that there is little likelihood that the liquidity of our common stock will improve in the future
— the poor performance of our stock price since our initial public offering
Based on its review of the historical stock performance and the analysis of its financial advisor, the special committee believes that:
— absent special transactions such as the self tender offer in late 2000 and the current merger agreement, the stock price is likely to trade below $8.50 per share
— the low volume means that any attempt by our shareholders to sell shares in any volume would likely depress the price
As a result, the committee determined it would be difficult for the shareholders to obtain $8.50 for a significant number of shares.
Upon the announcement of the Firenze merger, the stock price moved up to the range of $8.50. The committee believes that the publicity generated by the various Fagan proposals moved the price closer to the $9.00 range. When Fagan announced it was unlikely a transaction would be completed, the price tended back to the $8.50 level. The committee believes that absent a transaction involving the stock, it is likely the stock price would decrease and return to lower volume. This analysis supports the conclusion that $8.50 per share in cash is fair to the minority shareholders.
The Schadens, we and Firenze expressly adopted and agreed with the committee’s analysis and its conclusion.
It reviewed its conclusions of the prior meeting that there was no available alternative to the current merger which could be implemented, and decided this had not changed. However, the committee decided to continue its efforts to develop a transaction with Fagan which would result in our shareholders receiving $9.50 a share. On the same date, two members of the special committee called Mr. Fagan and informed him that his proposal would not be accepted, principally because of the proposed restriction on going private and the prohibition on delisting from securities trading.
We adjourned the December 4, 2001 shareholders’ meeting.
On December 5, 2001, Fagan delivered a letter to the committee noting its proposal had expired and indicating it could not enter into an agreement that would allow us to go private or effect a transaction which would cause it to cease to be a shareholder. Fagan said it would not initiate further contacts with the committee, but that it was still interested in pursuing a transaction with us.
On December 6, 2001, the special committee met to explore alternatives to structure a transaction that could actually get done, meet our objectives and get additional cash consideration to the minority shareholders. It also determined to establish a process to reach a final result in our best interests and in the best interests of our shareholders. These results are detailed in the next two paragraphs.
On December 7, 2001, Brobeck contacted Schulte to indicate that the committee was still interested in a transaction with Fagan, and that a definitive proposal would be made. Later that day, the committee sent Fagan a form of definitive agreement, which if signed by Fagan, would result in our minority shareholders receiving $9.50 per share from Fagan for each of their shares. The agreement was intended to firmly obligate Fagan to pay our shareholders $9.50 a share and contains various provisions designed to assure that the transaction actually occurs, including a requirement that Fagan escrow the merger price. The agreement would not limit our ability to go private or effect a transaction that would cause Fagan to cease to be a shareholder. The material terms of the proposed merger agreement provided that:
Fagan would create a new company into which we would be merged we would be the surviving company if approved by our shareholders, each shareholder other than the Schadens, certain of their affiliates, the Fagans and Levine Leichtman, would receive $9.50 per share in cash for each share of their stock
Fagan would pay the $9.50 for each share of stock repurchased, and would escrow the amount estimated to be needed to buy the minority shares Fagan would receive one share for every share repurchased from the minority shareholders, so that at the end of the transaction, Fagan would own approximately 30% of us
In the committee’s opinion, the principal differences from Fagan’s last proposal were:
— Fagan would be required to purchase all the minority shares for $9.50 per share
— Fagan would be required to pay the purchase price
— the agreement would not limit our ability to go private or effect a transaction that would cause Fagan to cease to be a shareholder
Although in a prior letter to Fagan, the committee had offered to substitute a personal guaranty from William and Laura Fagan for escrowed funds, this accommodation was due to Mr. Fagan’s claim that he could not escrow the funds within the time period requested by the committee. The committee believed, however, that escrowed funds would help ensure that a Fagan transaction would close, if the current $8.50 merger were to be terminated. Given the new time frame for Fagan to respond to the December 7 merger offer, the committee felt Fagan had ample time to comply with an escrow requirement and therefore did not offer Fagan a guaranty option.
The committee said it would be available to negotiate the agreement until 5:00 pm the following Tuesday, December 11, 2001, and encouraged Fagan and its representatives to be present at the committee’s counsel’s offices on December 11 to adequately respond to any last minute changes. The committee indicated it would not extend the deadline. The committee informed Fagan that the Schadens and Firenze had agreed not to oppose the transaction as set forth in the documents sent to Fagan. They also informed Fagan that Firenze waived the condition of its merger with us related to any material adverse change and dissenters’ rights and that the Schadens would take all corporate and shareholder action as may be necessary for Firenze to approve the Firenze merger.
The committee set the 5:00 pm December 11, 2001 deadline because of the numerous proposals Fagan made since the announcement of the Firenze merger — none of which developed into a transaction. The committee was concerned that Fagan’s actions have delayed the process, increased the overall transaction costs to us and caused deal risk to the minority shareholders and that Fagan did not intend to enter into a transaction more favorable to our minority shareholders. It continues to be concerned by the conditions attached to Fagan’s proposals and, especially in its most recent proposals, their timing and proximity to our special shareholders’ meeting.
In an interview that appeared in the Rocky Mountain News on December 11, 2001, Mr. Fagan is quoted as saying “It’s grossly deficient … If they stick to their 5 pm deadline, I’d say there’s 0 percent chance we’ll have an agreement.” He is also quoted as saying, “If the company would grant me standard minority shareholder protection, we could get a deal done. There is no such thing as making a minority investment in a private company without that.”
By letter dated December 10, 2001, Schulte explained that Fagan had been unable to review the materials until the 10th. It alleges that the committee has no interest in seriously considering an alternative proposal and reiterated previous arguments as to why Fagan’s prior proposed agreement was superior. The letter states six conditions before Fagan would consider a detailed response:
(i) Fagan would like to further discuss alternatives to a coercive
transaction, including allowing the minority shareholders to retain
their interests in the surviving company or at least a meaningful
vote with respect to the transaction; furthermore, Fagan’s counsel
noted that Fagan was open to structuring the transaction such that
the company could become a private company;
(ii) Schulte indicated that before it could consider if the agreement
sent by the special committee on December 7, 2001 constituted a
serious offer, it first needed for the committee to be ready to
disclose the current voting results of the minority shareholders,
as well as explain the rationale for any changes to the terms of
the existing Schaden proposal and an explanation as to why Fagan
must become an actual party to the merger agreement as opposed to
merely funding the purchase price as originally contemplated in the
earlier Fagan proposal;
(iii) Schulte indicated that no third party would expend substantial time
and money to provide a superior transaction for minority holders
unless it had some protection against an immediate squeeze out;
therefore, Schulte indicated that it would like to discuss various
alternatives and suggested that alternatives could include
precluding the Schadens from squeezing out Fagan for some
reasonable period of time and using an investment banker, as
opposed to the courts, to run a fair market determination process;
(iv) Schulte indicated that the 5:00 p.m. Tuesday deadline was
unreasonably short and shouldn’t be adhered to by the special
committee in light of the pending Fagan proposals;
(v) Schulte indicated that in light of the large percentage of minority
shareholders that have expressed an intent to dissent from the
Schaden transaction, potential for a better transaction exists and
that additional time should be allotted to bring a more favorable
transaction to the minority shareholders, and further suggested
that delaying action until after the company published its 2001
financial results would facilitate this objective and allow the
parties to reassess the fairness of the current proposal; and
(vi) Schulte suggested that Fagan needed to better understand the
Schadens’ willingness to support an alternative proposal before
Fagan could expend more time and money on such a proposal.
Two members of the special committee repeatedly called Mr. Fagan on the afternoon of December 11th to determine what conditions Mr. Fagan would require on “squeezed-out” protection to see if a deal could still be consummated and sent a fax and e-mail to that effect. Mr. Fagan did not return any of the calls. Schulte did e-mail Brobeck near the end of the business day reiterating the request for the committee to respond in writing, but to the committee’s disappointment, Fagan was unavailable to talk in person prior to the proposal deadline to see if a superior deal could be reached.
Following these events, the special committee met during the day and evening on December 11th with its financial advisor and legal counsel and it reviewed and discussed its original recommendation, based on the factors discussed above. As a result, the special committee determined not to change its recommendation that the Firenze merger is fair and in the best interests of our public shareholders.
SOURCE: The Quizno’s Corporation