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Three months later, Kane has yet to rule on the February hearing, and Meyers is no longer the company's chief legal officer. Quiznos has a new CEO, who came on after Baber's suicide and the TSFA terminations, and he's replaced some of the company's longtime leaders, including Meyers. And even as the new corporate management works on repairing franchisee relations, the TSFA is gaining momentum. It now has class actions pending in Michigan and Illinois as well as Wisconsin, and claims a membership of 500 -- 10 percent of all Quiznos stores.
Jimmy Lambatos, the chef behind the Classic Italian and other original Quiznos specialties, moved to Colorado from New York with his parents in 1970. He was going to college to keep from getting drafted when he took a job at the Colorado Mine Company restaurant in Glendale, where he fell in love with the food business. When the chefs walked out one night, Lambatos was baptized by fire. He became the chef and, later, the manager. By the time he left, he was ready to open his own restaurant. "I thought there was a huge need at the time for Denver to step up to their culinary aspirations," he says.
Lambatos partnered with Todd Disner, and in 1978 they opened Footers, a trendy, whitewashed, New York-style Italian joint, in Capitol Hill.
A couple of years later, Disner leased a former gas station he owned at the corner of 13th Avenue and Grant Street to a group wanting to open a submarine sandwich shop. Lambatos watched the new place struggle and quickly go out of business. "It didn't take off 'cause it was your standard sandwich," Lambatos says. "It was more of a Subway thing. Soft bread instead of crusty bread. It wasn't a New York, East Coast-style sandwich where you had a lot of flavors in the thing."
Lambatos knew he could do a better sandwich, like the ones back home. Sandwiches that came out of a pizza oven dripping with cheese and olive oil. "One of the first things I learned is that if you put anything in the oven, it's going to taste a whole lot better," he says. "Flavors seem to come out of food when they're heated up."
He ran with the idea, and in 1981, Lambatos and Disner opened the first Quiznos (so named because they liked the letters Q and Z). The tasty toasted sandwiches, with their generous layers of meat and cheese, were an instant success. So much so that a group of waiters at Footers wanted in on the concept; the owners agreed to let them open a second Quiznos in Boulder. "It, too, was an instant success, and my partner thought we needed to start franchising these things," Lambatos says. "And lo and behold, before 1985 we had fourteen stores."
But even as the sandwiches' popularity was growing, the business itself was falling apart. The franchise contracts hadn't been crafted tightly enough, and there weren't enough royalties coming in to support the money being paid out on advertising. Disner and Lambatos decided to split in 1988.
Lambatos got Footers Catering, which he still owns and runs today. Disner took Footers, which he subsequently closed, and the Quiznos stores. In 1991, Disner sold Quiznos to Rick Schaden, who had opened three franchises after graduating from the University of Colorado, and his father, Dick Schaden, a prominent aviation attorney who made his money suing airlines after plane crashes.
The Schadens took the company public in 1994, and the concept -- centered around a hearty sandwich made with the highest-quality ingredients -- continued to grow quietly. (Requests to interview company officials for this story were declined through press-relations contact Jessica Beffa; she refused to answer any questions, including those regarding the Quiznos product, franchisee relations, the company's growth or litigation. "It is not appropriate for us to address these questions at this time," Beffa explained via e-mail.)
When, in late 2001, the Schadens took the company private once again, some bought-out shareholders questioned the amount paid per share. In 2002, Denver attorney Jay Horowitz, on behalf of Texas investor William Fagan, claimed in Denver District Court that the Schadens had cheated the company's public shareholders out of millions.
The resulting trial, involving several shareholders, revealed Quiznos to be an extraordinarily successful endeavor that had grown from forty stores and $14.2 million in annual sales in 1994 to 1,400 stores and $428 million in 2001, and that neither the market nor the company's own stockholders had been aware of the restaurant's strength or prospects. Horowitz alleged that was because the Schadens wanted to buy the company back before the stockholders could realize its value.
Starting in December 1998, Horowitz argued, the Schadens spent millions of dollars of the company's funds -- money generated by the public's investment -- to retain investment banks, financial consultants and lawyers to craft a private takeover. Then, in 2001, they proposed a merger in which they would buy the remaining Quiznos stock at its market value of $8.50 a share. They didn't put out an offer to see what other investors would pay for the company, and they refused Fagan's offer to buy Quiznos at $15 a share. They did, as required by federal securities law, send stockholders a proxy statement explaining the transaction.
Missing from that November 5, 2001, notice, however, were many telling details. For instance, a projection for store sales and openings in future years failed to acknowledge that the company had already exceeded those numbers. There was also no mention of an upcoming Super Bowl sponsorship and commercial. Nor did the document explain that Quiznos was selling all of its corporate stores in favor of franchisee-owned stores, thus eliminating the up-front risks by requiring individual owners to pay capital costs. Most significant, the statement did not disclose plans for a food subsidiary that was expected to generate $15 million in annual profits as soon as 2002.
Instead of simply licensing suppliers as the company had done in the past, American Food Distributors would now purchase Quiznos products and sell them to franchisees at a markup. In 2002, AFD alone generated a $20 million profit.
On January 8, 2004, after 24 days of testimony, Judge Robert McGahey Jr. ruled that the fair value of each share was $32.50. He awarded the stockholders the $24 difference per share, plus interest and attorneys' fees. "The 'true status' of Quizno's as a company on the verge of a growth explosion was obviously known to the Schadens," McGahey wrote in his judgment, "but they told other shareholders little, if anything, of substance concerning that potential growth explosion.... I find the proxy statement to have been an exercise in obfuscation."
Suits from other bought-out shareholders, and the Schadens' ex-wives, soon followed.
By the time that ruling came in 2004, the chain had surpassed 2,500 stores, and Lambatos, who stayed friendly with Rick Schaden after selling out, had been present for many of the openings. He'd even been the official face of Quiznos.
In 2002, the company's ad agency was looking for a spokesperson who could sell their toasted subs, and after seeing footage of Lambatos catering a cocktail party, executives decided he was the ideal Chef Jimmy, a character so obsessed with creating the perfect sandwich that he let everything else in his life go -- including his pants. The first spot aired on national television during the 2003 Super Bowl. |