SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended February 20, 2000
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______________ to ____________________
Commission file number 0-23420
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QUALITY DINING, INC.
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(Exact name of registrant as specified in its charter)
Indiana 35-1804902
- ------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4220 Edison Lakes Parkway, Mishawaka, Indiana 4654
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(Address of principal executive offices and zip code)
(219) 271-4600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 __X____ No ________
The number of shares of the registrant's common stock outstanding as of
March 20, 2000 was 12,285,103.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 20, 2000
INDEX
Page
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PART I. - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations....................3
Consolidated Balance Sheets..............................4
Consolidated Statements of Cash Flows....................5
Notes to Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........15
Part II - Other Information
Item 1. Legal Proceedings.......................................20
Item 2. Changes in Securities...................................20
Item 3. Defaults upon Senior Securities.........................20
Item 4. Submission of Matters to a Vote of Security Holders.....20
Item 5. Other Information.......................................20
Item 6. Exhibits and Reports on Form 8-K........................20
Signatures........................................................21
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Sixteen Weeks Ended
February 20, February 14,
2000 1999
Revenues: ----------- -----------
Burger King $ 24,511 $ 23,355
Grady's American Grill 21,757 23,675
Chili's Grill & Bar 17,513 16,381
Italian Dining Division 4,987 4,647
------- -------
Total revenues 68,768 68,058
------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 19,491 20,280
Payroll and benefits 20,291 19,696
Depreciation and amortization 3,409 3,378
Other operating expenses 16,311 16,201
------- -------
Total restaurant operating expenses 59,502 59,555
------- -------
Income from restaurant operations 9,266 8,503
General and administrative expense 5,177 4,762
Amortization of intangibles 276 328
------- -------
Operating income 3,813 3,413
------- -------
Other income (expense):
Interest expense (3,427) (3,307)
Gain (loss)on sale of
property and equipment 13 (65)
Interest income 16 42
Other income (expense), net 119 135
------- -------
Total other expense, net (3,279) (3,195)
------- -------
Income before income taxes 534 218
Income tax provision 308 131
------- -------
Net income $ 226 $ 87
======= =======
Basic net income per share $ 0.02 $ 0.01
======= =======
Diluted net income per share $ 0.02 $ 0.01
======= =======
Weighted average shares outstanding:
Basic 12,530 12,599
======= =======
Diluted 12,538 12,629
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
February 20, October 31,
2000 1999
ASSETS ----------- ----------
- ------
Current assets:
Cash and cash equivalents $ 1,524 $ 1,019
Accounts receivable 2,377 1,946
Inventories 1,866 1,876
Deferred income taxes 2,428 2,630
Other current assets 2,141 1,787
------- -------
Total current assets 10,336 9,258
------- -------
Property and equipment, net 128,317 128,349
------- -------
Other assets:
Deferred income taxes 7,572 7,370
Trademarks, net 11,886 11,988
Franchise fees and development costs, net 8,662 8,748
Goodwill, net 7,887 8,053
Notes receivable, less allowance 10,294 10,294
Liquor licenses, net 2,679 2,686
Other 2,422 2,291
------- -------
Total other assets 51,402 51,430
------- -------
Total assets $ 190,055 $ 189,037
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized leases
and long-term debt $ 1,523 $ 1,471
Accounts payable 9,163 8,673
Accrued liabilities 17,925 17,076
------- -------
Total current liabilities 28,611 27,220
Long-term debt 108,209 107,384
Capitalized leases principally to related
parties, less current portion 5,286 5,431
------- -------
Total liabilities 142,106 140,035
------- -------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued
Common stock, without par value: 50,000,000
shares authorized; 12,876,209 and 12,619,444
shares issued, respectively 28 28
Additional paid-in capital 237,086 236,881
Accumulated deficit (187,003) (187,229)
Unearned compensation (605) (428)
------- -------
49,506 49,252
Less treasury stock, at cost, 582,500
and 20,000 shares, respectively 1,557 250
------- -------
Total stockholders' equity 47,949 49,002
------- -------
Total liabilities and stockholders' equity $ 190,055 $ 189,037
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Sixteen Weeks Ended
February 20, February 14,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income $ 226 $ 87
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 3,501 3,474
Amortization of other assets 554 743
Loss(gain)on sale of property and equipment (13) 65
Amortization of unearned compensation 28 -
Changes in current assets and current liabilities:
Net increase in current assets (775) (1,168)
Net increase (decrease) current liabilities 1,339 (1,748)
------- -------
Net cash provided by operating activities 4,860 1,453
------- -------
Cash flows from investing activities:
Purchase of note receivable - (4,294)
Proceeds from sales of property and equipment 27 907
Purchase of property and equipment (3,483) (832)
Purchase of other assets (326) (194)
Other 2 -
------- -------
Net cash used in investing activities (3,780) (4,413)
------- -------
Cash flows from financing activities:
Borrowings of long-term debt 14,700 4,300
Repayment of long-term debt (13,823) (3,300)
Purchase of treasury stock (1,307) -
Repayment of capitalized lease obligations (145) (110)
------- -------
Net cash provided (used) by financing activities (575) 890
------- -------
Net increase (decrease) in cash and cash equivalents 505 (2,070)
Cash and cash equivalents, beginning of period 1,019 3,351
------- -------
Cash and cash equivalents, end of period $ 1,524 $ 1,281
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 20, 2000
(Unaudited)
Note 1: Description of Business.
Nature of Business Quality Dining, Inc. (the "Company") operates four
distinct restaurant concepts. It owns the Grady's American Grill(R) and
two Italian Dining concepts and operates Burger King(R) restaurants and
Chili's Grill & Bar(T) ("Chili's"(R)) as a franchisee of Burger King
Corporation and Brinker International, Inc. ("Brinker"), respectively.
The Company operates its Italian Dining restaurants under the tradenames
of Spageddies Italian Kitchenr ("Spageddies"(R)) and Papa Vino's Italian
Kitchen(R) ("Papa Vino's"(R)). As of February 20, 2000, the Company
operated 143 restaurants, including 71 Burger King restaurants, 28
Chili's, 36 Grady's American Grill restaurants, three Spageddies and
five Papa Vino's.
Note 2: Basis of Presentation.
The accompanying consolidated financial statements include the accounts
of Quality Dining, Inc. and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X promulgated by the
Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for annual financial statement reporting purposes.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the sixteen week period ended
February 20, 2000 are not necessarily indicative of the results that may
be expected for the 52-week year ending October 29, 2000.
These financial statements should be read in conjunction with the
Company's audited financial statements for the fiscal year ended October
31, 1999 included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Note 3: Disposition of Bagel-Related Businesses
On October 20, 1997, the Company sold its bagel-related businesses to
Mr. Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by
them and their affiliates. The Company's board of directors determined
to sell the bagel-related businesses after a careful evaluation of the
future prospects for the bagel business, the competitive environment
that then existed in the bagel segment, and the historical performance
of the Company's bagel-related businesses. The sale included the stock
of Bruegger's Corporation and the stock of all of the other bagel-
related businesses. The total proceeds from the sale were $45,164,000.
The consideration included the issuance by Bruegger's Corporation of a
junior subordinated note in the amount of $10,000,000, which was
recorded as $6,000,000 due to a $4,000,000 reserve for legal
indemnification, the transfer of 4,310,740 shares of the Company's
common stock valued at $21,823,000, owned by Messrs. Brue and Dressell,
which were retired, a receivable for purchase price adjustment of
$500,000, and $16,841,000 in cash. The subordinated note has an annual
interest rate of 12%
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
and matures in October 2004. Interest will be accrued and added to the
principal amount of the note through October 2000 and will be paid in
cash for the remaining life of the note. The Company has not recognized
any interest income from this note. The Company will continue to review
the financial condition of Bruegger's Corporation based upon available
information to assess the collectability of the note. The cash component
of the proceeds included an adjustment for the calculation of the net
working capital deficit. The calculation used was subject to final
adjustment and is being disputed by Messrs. Brue and Dressell. See Note
8 - Contingencies.
Note 4: Commitments.
As of February 20, 2000, the Company had commitments aggregating
approximately $485,000 for restaurant construction and the purchase of
new equipment.
Note 5: Long-Term Debt.
On August 3, 1999 the Company completed the refinancing of its existing
debt with a financing package totaling $125,066,000, consisting of a
$76,000,000 revolving credit agreement and a $49,066,000 mortgage
facility, as described below. The revolving credit agreement was
executed with Chase Bank of Texas, as agent for a group of six banks,
providing for borrowings of up to $76,000,000 with interest payable at
the adjusted LIBOR rate plus a contractual spread. The Company had
$15,344,000 available under its revolving credit agreement as of
February 20, 2000. The revolving credit agreement is collateralized by
the stock of certain subsidiaries of the Company, the $10 million junior
subordinated note issued by Bruegger's Corporation, certain interests in
the Company's franchise agreements with Brinker and Burger King
Corporation and substantially all of the Company's personal property not
pledged in the mortgage financing. The revolving credit agreement will
mature on October 31, 2002, at which time all amounts outstanding
thereunder are due.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt
and fixed charge coverage ratios, limitations on the incurrence of
additional indebtedness, limitations on consolidated capital
expenditures, restrictions on the payment of dividends (other than stock
dividends) and limitations on the purchase or redemption of shares of
the Company's capital stock.
The $49,066,000 mortgage facility has 34 separate mortgage notes and the
term of each mortgage note is either 15 or 20 years. The notes have
fixed rates of interest of either 9.79% or 9.94%. The notes require
equal monthly interest and principal payments. The Company used the
proceeds of the mortgage facility to repay indebtedness under its
existing revolving credit agreement. The mortgage notes are
collateralized by a first mortgage/deed of trust and security agreement
on the real estate, improvements and equipment on 19 of the Company's
Chili's restaurants and 15 of the Company's Burger King restaurants. The
mortgage notes contain, among other provisions, certain restrictive
covenants including maintenance of a consolidated fixed charge coverage
ratio for the financed properties.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
Note 6: Earnings Per Share
During the first quarter of fiscal 2000 the Company acquired and retired
562,500 shares of common stock for $1,307,488. During the first quarter
of fiscal 2000 the Company issued 102,360 shares of restricted stock.
The Company had outstanding at February 20, 2000 common shares totaling
12,293,709. The Company has also granted options to purchase common
shares to its employees and outside directors. These options have a
dilutive effect on the calculation of earnings per share. The following
is a reconciliation of the numerators and denominators of the basic and
diluted earnings per share computation as required by SFAS 128.
Quarter ended
February 20, February 14,
Basic earnings per share: 2000 1999
----------- -----------
Income available to common
shareholders (numerator) $ 226,000 $ 87,000
Weighted average common shares ========== ==========
outstanding (denominator) 12,530,000 12,599,000
========== ==========
Basic earnings per share $ 0.02 $ 0.01
========== ==========
Quarter ended
February 20, February 14,
Diluted earnings per share: 2000 1999
Income available to common ----------- -----------
shareholders (numerator) $ 226,000 $ 87,000
Weighted average common shares ========== ==========
outstanding 12,530,000 12,599,000
Effect of dilutive securities:
Options on common stock 8,000 30,000
Total common shares and dilutive ---------- ----------
securities (denominator) 12,538,000 12,629,000
========== ==========
Diluted earnings per share $ 0.02 $ 0.01
========== ==========
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
Note 7 Segment Reporting:
The Company operates four distinct restaurant concepts in the food-
service industry. It owns the Grady's American Grill and two Italian
Dining concepts and operates Burger King restaurants and Chili's Grill &
Bar as a franchisee of Burger King Corporation and Brinker
International, Inc., respectively. The Company has identified each
restaurant concept as an operating segment based on management structure
and internal reporting. For purposes of applying SFAS 131, the Company
considers the Grady's American Grill, the two Italian concepts and
Chili's Grill & Bar to be similar and have aggregated them into a single
reportable operating segment (Full Service). The Company considers the
Burger King restaurants as a separate reportable segment (Quick
Service). Summarized financial information concerning the Company's
reportable segments is shown in the following table. The "other" column
includes corporate related items and income and expense not allocated to
reportable segments.
Full Quick
(Dollars in thousands) Service Service Other Total
- -----------------------------------------------------------------------------
First quarter fiscal 2000
- -------------------------
Revenues $ 44,257 $ 24,511 $ - $ 68,768
Income from restaurant
Operations 5,007 4,218 41 9,266
Operating income 3,136 1,874 (1,197) $ 3,813
Interest expense (3,427)
Other income 148
-------
Income before income taxes $ 534
=======
Total assets 129,999 34,880 25,176 $190,055
Depreciation and
amortization 2,667 920 468 4,055
First quarter fiscal 1999
- -------------------------
Revenues $ 44,703 $ 23,355 $ - $ 68,058
Income from restaurant
Operations 4,599 3,863 41 8,503
Operating income 2,218 1,852 (657) $ 3,413
Interest expense (3,307)
Other income 112
-------
Income before income taxes $ 218
=======
Total assets 134,325 33,540 27,639 $195,504
Depreciation and
amortization 2,638 987 592 4,217
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
Note 8: Contingencies
The Company and certain of its officers and directors are parties to
various legal proceedings relating to the Company's purchase, operation
and financing of the Company's bagel-related businesses.
Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation,
and Mark Ratterman, Chris Galloway and Peter Shipman, principals of
Quality Baking, LLC, commenced an action on July 9, 1997 filed in the
United States District Court, for the Eastern District of Missouri,
Eastern Division, against the Company, Bruegger's Corporation,
Bruegger's Franchise Corporation, Nordahl L. Brue, Michael J. Dressell,
Daniel B. Fitzpatrick and John C. Firth.
On April 22, 1998, the Court granted the defendants' Motion to Transfer
this matter to the United States District Court for the Northern
District of Indiana. The complaint alleged that the plaintiffs
purchased their franchises based upon financial representations that did
not materialize, that they purchased preferred stock in Bruegger's
Corporation based upon false representations, that the defendants
falsely represented their intentions with respect to repurchasing
bakeries from the plaintiffs, and that the defendants violated implied
covenants of good faith and fair dealing. On July 28, 1999, the court
dismissed all counts against all of the individual defendants, dismissed
the count alleging violations of implied covenants of good faith and
fair dealing and dismissed all fraud claims against the Company. On
February 22, 2000, the Court granted the defendants' motions for summary
judgment on all remaining counts of the plaintiffs' complaint.
D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises,
Inc., franchisees of Bruegger's Franchise Corporation, and Ken Wagnon,
Dan Carney, Jay Wagnon and Patrick Beatty, principals of the foregoing
franchisees, commenced an action on July 16, 1997 in the United States
District Court for the District of Maryland, against Bruegger's
Corporation, Bruegger's Franchise Corporation, Quality Dining, Inc.,
Daniel B. Fitzpatrick, Michael J. Dressell and Nordahl L. Brue, alleging
that the plaintiffs purchased their franchises based upon financial
representations that did not materialize, that they purchased preferred
stock in Bruegger's Corporation based upon false representations, that
Bruegger's Corporation falsely represented its intentions with respect
to purchasing bakeries from the plaintiffs or providing financing to the
plaintiffs, and that the defendants violated implied covenants of good
faith and fair dealing.
On or about April 15, 1997, Texas Commerce Bank National Association
("Texas Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd.,
a Florida limited partnership ("BFBC"). At the time of the Loan, BFBC
was a franchisee under franchise agreements with Bruegger's Franchise
Corporation (the "Franchisor"). The Company at that time was an
affiliate of the Franchisor. In connection with the Loan and as an
accommodation of BFBC, the Company executed to Texas Commerce a
"Guaranty". By the terms of the Guaranty the Company agreed that upon
maturity of the Loan by default or otherwise that it would either (1)
pay the Loan obligations or (2) buy the Loan and all of the related loan
documents (the "Loan Documents") from Texas Commerce or its successors.
In addition several principals of BFBC (the "Principal Guarantors")
guaranteed
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
repayment of the Loan by each executing a "Principal Guaranty". On
November 10, 1998, Texas Commerce (1) declared that the Loan was in
default, (2) notified BFBC, the Principal Guarantors and the Company
that all of the Loan obligations were due and payable, and (3) demanded
payment.
The Company elected to satisfy its obligations under the Guaranty by
purchasing the Loan from Texas Commerce. On November 24, 1998, the
Company bought the Loan for $4,294,000. Thereafter, the Company sold
the Loan to its Texas affiliate Grady's American Grill, L.P.
("Grady's"). On November 30, 1998 Grady's commenced an action seeking
to recover the amount of the Loan from one of the Principal Guarantors,
Michael K. Reilly ("Reilly"). As part of this action Grady's also seeks
to enforce a Subordination Agreement that was one of the Loan Documents
against MKR Investments, L.P., a partnership ("MKR"). Reilly is the
general partner of MKR. This action is pending in the United States
District Court for the Southern District of Texas Houston Division as
Case No. H-98-4015. Reilly has denied liability and filed a counterclaim
against Grady's alleging that Grady's engaged in unfair trade practices,
violated Florida's "Rico" statute, engaged in a civil conspiracy and
violated state and federal securities laws in connection with the
Principal Guaranty (the "Counterclaims"). Reilly also filed a third
party complaint against Quality Dining, Inc., Grady's American Grill
Restaurant Corporation, David M. Findlay, Daniel B. Fitzpatrick,
Bruegger's Corporation, Bruegger's Franchise Corporation, Champlain
Management Services, Inc., Nordahl L. Brue, Michael J. Dressell and Ed
Davis ("Third Party Defendants") alleging that Reilly invested in BFBC
based upon false representations, that the Third Party Defendants
violated state franchise statutes, committed unfair trade practices,
violated covenants of good faith and fair dealing, violated the state
"Rico" statute and violated state and federal securities laws in
connection with the Principal Guaranty. In addition, BFBC and certain of
its affiliates, including the Principal Guarantors ("Intervenors") have
intervened and asserted claims against Grady's and the Third Party
Defendants that are similar to those asserted in the counter claims and
the third party complaint. In addition, the Company and Bruegger's
Corporation are currently disputing the nature and extent of their
indemnity obligations, if any, to the other with respect to this
litigation. Based upon the currently available information, the Company
does not believe that these matters will have a materially adverse
effect on the Company's financial position or results of operations.
However, there can be no assurance that the Company will be able to
realize sufficient value from Reilly to satisfy the amount of the Loan
or that the Company will not incur any liability as a result of the
Counterclaims or third party complaints filed by Reilly and the
Intervenors.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
In each of the above cases, one or more present or former officers and
directors of the Company were named as party defendants and the Company
has and/or is advancing defense costs on their behalf. Pursuant to the
Share Exchange Agreement by and among Quality Dining, Inc., Bruegger's
Corporation, Nordahl L. Brue and Michael J. Dressell, ("Share Exchange
Agreement") the Agreement and Plan of Merger by and among Quality
Dining, Inc., Bagel Disposition Corporation and Lethe, LLC, and certain
other related agreements entered into as part of the disposition of the
Company's bagel-related businesses, the Company is responsible for 50%
of the first $14 million of franchise related litigation expenses,
inclusive of attorney's fees, costs, expenses, settlements and judgments
(collectively "Franchise Damages"). Bruegger's Corporation and certain
of its affiliates are obligated to indemnify the Company from all other
Franchise Damages. The Company is obligated to pay the first $3 million
of its share of Franchise Damages in cash. As of February 20, 2000, the
Company has satisfied this obligation. The remaining $4 million of the
Company's share of Franchise Damages is payable by crediting amounts
owed to the Company pursuant to the $10 million junior subordinated note
issued to the Company by Bruegger's Corporation. However, the Company
and Bruegger's Corporation are currently disputing the nature and extent
of their indemnity obligations under the Share Exchange Agreement.
Through October 31, 1999, the outstanding balance due under the junior
subordinated note has been reduced by $600,000 in respect of Franchise
Damages. Based upon the currently available information, the Company
does not believe that these cases individually or in the aggregate will
have a material adverse effect on the Company's financial position and
results of operations but there can be no assurance thereof. Such
assessment is based in part upon the Company's belief that Bruegger's
Corporation has and will continue to have the ability to perform its
indemnity obligations.
On or about September 10, 1999, Bruegger's Corporation, Lethe LLC,
Nordahl L. Brue, and Michael J. Dressel commenced an action against the
Company in the United States District Court for the District of Vermont
alleging that the Company breached various provisions of the Share
Exchange Agreement which arise out of the ongoing dispute concerning the
net working capital adjustment contemplated by the Share Exchange
Agreement. On February 1, 2000, the Company filed counter-claims
against Bruegger's Corporation for the working capital adjustment to
which it believes it is entitled. See Item I BUSINESS-Disposition of
Bagel-Related Businesses. Additionally, on or about September 13, 1999,
Messrs. Brue and Dressell asserted a claim for breach of representations
and warranties under the Share Exchange Agreement. The Company does not
expect the ultimate resolution of these disputes to have a material
adverse effect on the Company's financial position or results of
operations but there can be no assurance thereof.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
James T. Bies filed a shareholder derivative action in the United States
District Court for the Southern District of Michigan on October 14,
1997. A derivative action is an action on behalf of the Company in
which any recovery against the defendants would be payable to the
Company. The complaint named as defendants 12 individuals who are
current or former directors or officers of the Company. The complaint
alleged that the individual defendants as directors breached fiduciary
duties to the Company by approving certain transactions in 1997
involving loans to Bagel Acquisition Corporation that allegedly
benefited Daniel B. Fitzpatrick, the Company's Chairman, President and
Chief Executive Officer. The plaintiff also alleged that individual
defendants participated in a "conspiracy to waste, dissipate, and
improperly use funds, property and assets" of the Company for the
benefit of Bagel Acquisition Corporation and Mr. Fitzpatrick. The
plaintiff alleged that the Company and its shareholders had been damaged
in an amount in excess of $28,000,000. The relief sought also included
the appointment of a receiver, an accounting and attorney's fees. On
April 27, 1998, the Court dismissed the complaint without prejudice, for
failure to make a "demand" upon the Company's board of directors that
the Company institute the action. By letter dated May 12, 1998, Mr. Bies
demanded that the Company pursue these claims against the defendants.
In accordance with the Indiana Business Corporation Law ("IBCL"), the
board of directors appointed a special committee of three disinterested
outside directors and one other disinterested person to investigate the
allegations. The three disinterested outside directors were Messrs.
Decio, Lewis and Murphy (named defendants in the action) and the
disinterested person was David T. Link, Dean of the University of Notre
Dame Law School. As required by the IBCL, the special committee was
charged with evaluating the claim and determining whether it was in the
best interests of the Company to pursue this matter. Subsequent to the
establishment of the special committee, Mr. Bies refiled his action on
July 30, 1998. As a result of its investigation of Mr. Bies' demand,
the special committee determined that the claims identified by Mr. Bies
were without merit and that it would not be in the Company's best
interests to pursue them. Based on that determination, on January 6,
1999, the special committee filed a motion to dismiss or alternatively
for summary judgment, which was denied on April 20, 1999 essentially
because the Court was unable to determine, on the record before it,
whether the special committee was disinterested. After conducting
discovery, the plaintiff determined that the conclusions reached by the
special committee were correct and that the allegations of wrongful
conduct by the defendants were without merit. Consequently, the
plaintiff withdrew his challenge to the merits of the determination of
the special committee and to the "disinterestedness" of its members. As
a result, on February 29, 2000, the court dismissed the lawsuit. The
Company agreed to reimburse the plaintiff approximately $39,000
representing the costs and attorney's fees he incurred in this matter.
The Company is involved in various other legal proceedings incidental to
the conduct of its business, including employment discrimination claims.
Based upon currently available information, the Company does not expect
that any such proceedings will have a material adverse effect on the
Company's financial position or results of operations but there can be
no assurance thereof.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 20, 2000
(Unaudited)
Note 9: Franchisee Commitment
On January 27, 2000 the Company executed a "Franchisee Commitment" in
which it agreed to undertake certain "Transformational Initiatives"
including capital improvements and other routine maintenance in its
Burger King restaurants. The capital improvements include the
installation of signage bearing the new Burger King logo and the
installation of a new drive-through ordering system. The Company is
required to complete these capital improvements by December 31, 2001.
In addition, the Company agreed to perform, as necessary, certain
routine maintenance such as exterior painting, sealing and striping of
parking lots and upgraded landscaping. The Company is required to
complete this maintenance by September 30, 2000. In consideration for
executing the Franchisee Commitment, the Company is entitled to receive
"Transformational Payments" totaling approximately $3.9 million in two
equal installments. The first installment was received on March 14,
2000 and the Company expects to receive the second installment prior to
the end of the current fiscal year. The portion of the Transformational
Payments that corresponds to the amount required for the capital
improvements will be recognized as income over the useful life of the
capital improvements. The portion of the Transformational Payments that
corresponds to the required routine maintenance will be recognized as
income over the period during which maintenance is performed. The
remaining balance of the Transformational Payments will be recognized as
income ratably over the term of the Franchisee Commitment.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company has a 52/53-week fiscal year ending on the last Sunday in
October of each year. The current fiscal year is 52 weeks long and ends
October 29, 2000. The first quarter of the Company's fiscal year
consists of 16 weeks with all subsequent quarters being 12 weeks in
duration.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages which certain items of revenue and expense bear to total
revenues.
Sixteen weeks Ended
February 20, February 14,
2000 1999
----------- -----------
Total revenues 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 28.3 29.8
Payroll and benefits 29.5 28.9
Depreciation and amortization 5.0 5.0
Other operating expenses 23.7 23.8
----- -----
Total restaurant operating expenses 86.5 87.5
----- -----
Income from restaurant operations 13.5 12.5
General and administrative expenses 7.5 7.0
Amortization of intangibles 0.4 0.5
----- -----
Operating income 5.6 5.0
----- -----
Other income (expense):
Interest expense (5.0) (4.9)
Interest income - 0.1
Other income, net 0.2 0.1
----- -----
Total other expense, net (4.8) (4.7)
----- -----
Income before income taxes 0.8 0.3
Income tax provision 0.4 0.2
----- -----
Net income 0.4% 0.1%
===== =====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Restaurant sales in the first quarter of fiscal 2000 were $68,768,000,
an increase of $710,000, compared to restaurant sales of $68,058,000 in
the first quarter of fiscal 1999.
The Company's Burger King restaurant sales increased $1,156,000 to
$24,511,000 in the first quarter of fiscal 2000 when compared to
restaurant sales of $23,355,000 in the same period of fiscal 1999. The
Company's Burger King restaurants had average weekly sales of $21,749 in
the first quarter of fiscal 2000 versus $20,852 in the same period in
fiscal 1999. The Company had increased revenue of $603,000 due to
additional sales weeks from two new restaurants opened during fiscal
2000 and one restaurant opened in fiscal 1999 which was open for its
first full year in fiscal 2000.
Sales in the Company's Grady's American Grill restaurant division were
$21,757,000 in the first quarter of fiscal 2000 compared to sales of
$23,675,000 in the same period in fiscal 1999. The majority of the
decrease was attributable to the disposition of three units in fiscal
1999. During the first quarter of fiscal 2000, the absence of these
units contributed approximately $1,160,000 to the sales decrease. The
Company's Grady's American Grill restaurants had average weekly sales of
$37,773 in the first quarter of fiscal 2000 versus $38,844 in the same
period in fiscal 1999. The Company has implemented expanded marketing,
operational and menu initiatives intended to stimulate sales at its
Grady's American Grill restaurants. Due to the competitive nature of the
restaurant industry, these initiatives have not to date achieved the
intended results and there can be no assurances that these initiatives
will achieve the intended results.
The Company's Chili's Grill & Bar restaurant sales increased $1,132,000
to $17,513,000 in the first quarter of fiscal 2000 compared to
restaurant sales of $16,381,000 in the same period in fiscal 1999.
Average weekly sales were $39,091 in the first quarter of fiscal 2000
versus $36,566 in the same period in fiscal 1999.
The Company's Italian Dining Division restaurant sales increased
$340,000 to $4,987,000 in the first quarter of fiscal 2000 when compared
to restaurant sales of $4,647,000 in the same period in fiscal 1999.
Average weekly sales were $38,958 in the first quarter of fiscal 2000
versus $36,301 in fiscal 1999.
Total restaurant operating expenses were 86.5% of revenues in the first
quarter of fiscal 2000 versus 87.5% in the first quarter of fiscal 1999.
The following factors influenced the operating margins:
Food and beverage costs were $19,491,000, or 28.3% of total revenues, in
the first quarter of fiscal 2000, compared to $20,280,000, or 29.8% of
total revenues, in the same period in fiscal 1999. Food and beverage
costs improved as a percentage of total revenues in both the Company's
Quick Service and Full Service segments. The improvements were mainly
due to increased store level efficiencies and favorable commodity prices
that resulted in lower food costs at all of the Company's concepts.
Payroll and benefits were $20,291,000, in the first quarter of fiscal
2000, compared to $19,696,000 in the same period in fiscal 1999. As a
percentage of total revenues, payroll and benefits increased to 29.5% in
the first quarter of fiscal 2000 from 28.9% in the same period of fiscal
1999. Payroll and benefit costs, as a percentage of total revenues,
increased in both the Company's Quick Service and Full Service segments.
The Company has increased hourly wages at each of its restaurant
concepts due to the high level of competition to attract qualified
employees.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Depreciation and amortization expense was $3,409,000 in the first
quarter of fiscal 2000 compared to $3,378,000 in the first quarter of
fiscal 1999. As a percentage of total restaurant sales, depreciation
and amortization remained consistent at 5.0% for the first quarter of
fiscal 2000 compared to the same period in fiscal 1999.
Other restaurant operating expenses include rent and utilities,
royalties, promotional expense, repairs and maintenance, property taxes
and insurance. Other restaurant operating expenses were $16,311,000 in
the first quarter of fiscal 2000 compared to $16,201,000 in the same
period of fiscal 1999. As a percentage of total revenues, other
restaurant operating expenses remained relatively consistent at 23.7% in
the first quarter of fiscal 2000 compared to 23.8% in the same period of
fiscal 1999.
Income from restaurant operations increased $763,000 to $9,266,000, or
13.5% of revenues, in the first quarter of fiscal 2000 compared to
$8,503,0000, or 12.5% of revenues, in the comparable period of fiscal
1999. Income from restaurant operations in the Company's Quick Service
segment increased by $355,000. Income from restaurant operations in the
Company's Full Service segment increased by $408,000. The increases were
mainly due to increased sales and lower food and beverage costs as
discussed above.
General and administrative expenses were $5,177,000 in the first quarter
of fiscal 2000 compared to $4,762,000 in the first quarter of fiscal
1999. As a percentage of total restaurant sales, general and
administrative expenses increased to 7.5% in the first quarter of fiscal
2000 from 7.0% in the first quarter of fiscal 1999. The increase in
general and administrative expenses is mainly due to the unanticipated
expenses related to the Company's proxy contest with NBO, LLC. During
the quarter, the Company incurred expenses totaling approximately
$350,000 related to this event.
Amortization of intangibles, as a percentage of revenues, remained
relatively consistent at 0.4% for the first quarter of fiscal 2000
compared to 0.5% for the same period in fiscal 1999.
Total other expenses, as a percentage of revenues, were 4.8% for the
first quarter of fiscal 2000 versus 4.7% during the comparable period in
fiscal 1999. The increase was primarily due to higher interest rates on
the Company's long-term debt. During the fourth quarter of fiscal 1999,
the Company put in place a mortgage facility with a higher fixed
interest rate. In addition, the interest rate associated with the
Company's floating rate bank debt increased.
The provision for income taxes includes federal and state income taxes
using the Company's estimated effective income tax rate for the
respective fiscal year. The Company's effective income tax rate was
57.7% for the sixteen weeks ended February 20, 2000 compared to 60.0%
for the sixteen weeks ended February 14, 1999.
For the first quarter of fiscal 2000, the Company reported net income of
$226,000 compared to net income of $87,000 for the first quarter of
fiscal 1999.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $1,524,000 at February 20,
2000, an increase of $505,000 from the $1,019,000 at October 31, 1999.
Principal uses of funds consisted of: (i) expenditures for property and
equipment ($3,483,000) and (ii) purchase of 562,500 shares of the
Company's stock ($1,307,000). Principal sources of funds consisted of
(i) those provided by operations ($4,860,000)and (ii) net borrowings of
long-term debt ($877,000).
The Company's primary cash requirements in fiscal 2000 will be capital
expenditures in connection with the opening of new restaurants,
remodeling of existing restaurants, maintenance expenditures, purchases
of the Company's stock, Burger King-Transformational Initiatives (see
note 9) and the reduction of debt under the Company's debt agreements.
The Company's capital expenditures for fiscal 2000 are expected to range
from $10,000,000 to $13,000,000. During fiscal 2000, the Company
anticipates opening three to four Burger King restaurants and one to
three full service restaurants. As of February 20, 2000 the Company has
opened two Burger King restaurants in Fiscal 2000. The actual amount of
the Company's cash requirements for capital expenditures depends in part
on the number of new restaurants opened, whether the Company owns or
leases new units and the actual expense related to remodeling and
maintenance of existing units.
On August 3, 1999 the Company completed the refinancing of its existing
debt with a financing package totaling $125,066,000, consisting of a
$76,000,000 revolving credit agreement and a $49,066,000 mortgage
facility, as described below. The revolving credit agreement was
executed with Chase Bank of Texas, as agent for a group of six banks,
providing for borrowings of up to $76,000,000 with interest payable at
the adjusted LIBOR rate plus a contractual spread. The Company had
$15,344,000 available under its revolving credit agreement as of
February 20, 2000. The revolving credit agreement is collateralized by
the stock of certain subsidiaries of the Company, the $10 million junior
subordinated note issued by Bruegger's Corporation, certain interests in
the Company's franchise agreements with Brinker and Burger King
Corporation and substantially all of the Company's personal property not
pledged in the mortgage financing. The revolving credit agreement will
mature on October 31, 2002, at which time all amounts outstanding
thereunder are due.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt
and fixed charge coverage ratios, limitations on the incurrence of
additional indebtedness, limitations on consolidated capital
expenditures, restrictions on the payment of dividends (other than stock
dividends) and limitations on the purchase or redemption of shares of
the Company's capital stock.
The $49,066,000 mortgage facility has 34 separate mortgage notes and the
term of each mortgage note is either 15 or 20 years. The notes have
fixed rates of interest of either 9.79% or 9.94%. The notes require
equal monthly interest and principal payments. The Company used the
proceeds of the mortgage facility to repay indebtedness under its
existing revolving credit agreement.
The mortgage notes are collateralized by a first mortgage/deed of trust
and security agreement on the real estate, improvements and equipment on
19 of the Company's Chili's restaurants and 15 of the Company's Burger
King restaurants. The mortgage notes contain, among other provisions,
certain restrictive covenants including maintenance of a consolidated
fixed charge coverage ratio for the financed properties.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company anticipates that its cash flows from operations, together
with amounts available under its revolving credit agreement, will be
sufficient to fund its planned internal expansion and other internal
operating cash requirements through the end of fiscal 2000.
IMPACT OF YEAR 2000
The term "Year 2000" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery and equipment as
the year 2000 is approached and thereafter. These problems generally
arise from the fact that most of the world's computer hardware and
software has historically used only two digits to identify the year in a
date, often meaning that the computer will fail to distinguish dates in
the "2000's" from dates in the "1900's."
The Company's State of Readiness.
As of February 20, 2000, the Company had not experienced any Year 2000
related disruptions to its own internal systems nor have any third party
vendors experienced any Year 2000 disruptions that have materially
affected their ability to do business with the Company.
Remaining Risks Presented by Year 2000 Problems.
Although the Company and its third party vendors do not appear to have
suffered any significant Year 2000 related disruptions as a result of
the roll over from 1999 to 2000, it is possible that certain Year 2000
problems may exist but have not yet materialized.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the Company
for periods beginning in fiscal year 2001. The Company is currently not
involved in derivative instruments or hedging activities, and
therefore, will measure the impact of this statement as it becomes
necessary.
This report contains certain forward-looking statements, including
statements about the Company's development plans, that involve a number
of risks and uncertainties. Among the factors that could cause actual
results to differ materially are the following: the availability and
cost of suitable locations for new restaurants; the availability of
capital to the Company; the ability of the Company to develop and
operate its restaurants; the hiring, training and retention of skilled
corporate and restaurant management and other restaurant personnel; the
integration and assimilation of acquired concepts; the overall success
of the Company's franchisors; the ability to obtain the necessary
government approvals and third-party consents; the ability of the
Company to modify or redesign its computer systems to work properly in
the year 2000 and the cost thereof; and changes in governmental
regulations, including increases in the minimum wage.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 8 to the unaudited consolidated financial statements of the Company
included in Part I of this report is incorporated herein by reference.
Item 2. Changes in Securities
None
Items 3. Defaults upon Senior Securities
None
Item 4 Submission of Matters to Vote of Security Holders
On March 7, 2000, the Company held its annual meeting of shareholders.
At the meeting, the shareholders elected the following directors by the
vote indicated to serve until the year 2003 annual meeting of
shareholders.
For Withheld
------------ ----------
Daniel B. Fitzpatrick 6,674,516 48,881
Philip J. Faccenda 6,676,110 47,287
In addition, the following directors continue in office until the annual
meeting of shareholders in the year indicated:
Term Expires
------------
James K. Fitzpatrick 2001
Ezra H. Friedlander 2001
Steven M. Lewis 2001
Bruce M. Jacobson 2002
Christopher J. Murphy, III 2002
The non-binding proposal recommending that the Board of Directors
terminate the Company's Rights Agreement was defeated by the following
vote:
For 3,529,644; Against 6,403,732; Abstentions and Broker non-votes 133,797
PricewaterhouseCoopers LLP was approved as auditors for the Company for
2000 by the following vote:
For 9,915,224; Against 112,670; Abstentions and Broker non-votes 39,279
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is
set forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining, Inc.
(Registrant)
Date: March 30, 2000 By: /s/Jeanne M. Yoder
Vice President & Controller
(Principal accounting officer)
INDEX TO EXHIBITS
Exhibit Description
- ------------- ---------------
27 Financial Data Schedule
10-AZ Franchisee Commitment-Burger King
Exhibit 10-AZ
FRANCHISEE COMMITMENT
This Franchisee Commitment (the "Commitment") dated as of January 27,
2000, is from the individual, individuals, entity and/or entities listed
on Schedule 1 hereto (collectively, the "Franchisees") to Burger King
Corporation ("BKC").
INTRODUCTION
BKC and Franchisees are parties to Franchisee Agreements for the Burger
Kingr restaurants listed on Schedule 1 attached hereto (individually, a
"Restaurant" and collectively, the "Restaurants").
BKC and Coca-Cola have entered into the Coca-Cola Soft Drink Agreement
regarding the sale of certain Coca-Cola beverages to and by Burger King
restaurants located in the United States.
BKC and Dr Pepper have entered into the Dr Pepper Soft Drink Agreement
regarding the sale of certain Dr Pepper beverages to and by Burger King
restaurants located in the United States.
Pursuant to the Coca-Cola Soft Drink Agreement, Coca-Cola has agreed,
among other things, to make available to Burger King franchisees an
upfront transformation investment (the "Coca-Cola Funds") to be used in
connection with the Transformation Initiatives.
Pursuant to the Dr Pepper Agreement, Dr Pepper has agreed, among other
things, to make available to Burger King franchisees an upfront
transformation investment (the "Dr Pepper Funds") to be used in
connection with the Transformation Initiatives.
Pursuant to the Trust Agreement, Coca-Cola and Dr Pepper have agreed to
deposit the Coca-Cola and Dr Pepper Funds into a Trust Account with the
Trustee, to be used by Qualified Franchisees for the Transformation
Initiatives and for other restaurant transformation purposes.
The Franchisees desire to become Beneficiaries under the Trust
Agreement. The Franchisees are therefore willing to execute and deliver
this document to evidence their commitment to the purposes of the Soft
Drink Agreements and the Transformation Initiatives and to use the
Payment Amount for the purposes described herein.
Definitions. The definitions set forth in this Section shall apply to
the following terms when used with initial capital letters in this
Commitment and any attachments, Exhibits, or amendments hereto.
ADI. Area of Dominant Influence.
Beneficiaries. Those Burger King franchisees who execute a Franchisee
Commitment.
BKC. Burger King Corporation, a Florida corporation.
Burger King System. The system of BKC-owned and franchised Burger King
restaurants in the U.S.
Class A Qualified Restaurants. Those Burger King restaurants that were
open for business in the U.S. under valid Franchise Agreements as of the
First Installment Qualifying Date and on the date hereof. Class A
Qualified Restaurants do not include those Burger King restaurants with
franchise agreements that expire on or before June 30, 2002 if BKC has
determined that they are ineligible for successor. Class A Qualified
Restaurants include Limited Menu Restaurants.
Class B Qualified Restaurants. Those Burger King restaurants that were
open for business in the U.S. under valid Franchise Agreements as of the
Second Installment Qualifying Date. Class B Qualified Restaurants do
not include those Burger King restaurants with franchise agreements that
expire on or before June 30, 2002 if BKC has determined that they are
ineligible for successor. Class B Qualified Restaurants exclude Limited
Menu Restaurants.
Coca-Cola. The Coca-Cola Company, a Delaware corporation.
Coca-Cola Soft Drink Agreement. The Soft Drink Agreement dated as of
October 20, 1999 by and between BKC and Coca-Cola.
Drive-Thru Approval Date. The date upon which BKC approves and mandates
the Drive-Thru 2000 Package.
Drive-Thru 2000 Package. One of the Transformation Initiatives
currently being considered by BKC for use in the Burger King System.
The Drive-Thru 2000 Package will consist of those items of equipment and
other components approved and mandated by BKC.
Dr Pepper. Dr Pepper/Seven Up, Inc., a Delaware corporation.
Dr Pepper Soft Drink Agreement. The Soft Drink Agreement dated as of
December 23, 1999 by and between BKC and Dr Pepper.
First Installment Qualifying Date. December 1, 1999.
Grantors. Collectively, Coca-Cola and Dr Pepper.
Have It Your Way Kitchen. One of the Transformation Initiatives
currently being considered by BKC for use in the Burger King System.
The "Have It Your Way Kitchen" is a new kitchen operating system and
includes a new flexible broiler.
Limited Menu Restaurant. A Burger King restaurant facility without a
drive-thru that serves a limited menu of Burger King products.
NFA. The National Franchisee Association, Inc.
Payment Amount. The sum of up to $56,000 per Qualified Restaurant.
Qualified Franchisee. A Burger King franchisee who (i) owns one or more
Qualified Restaurants, and (ii) executes and delivers this Commitment
with respect to all of its Qualified Restaurants.
Qualified Restaurants. Collectively, the Class A Qualified Restaurants
and the Class B Qualified Restaurants.
RSI. Restaurant Services, inc., the exclusive purchasing agent for the
Burger King System.
Second Installment Qualifying Date. A specific date which is sixty (60)
d0ays after the Drive-Thru Approval Date.
Soft Drink Agreements. Collectively, the Coca-Cola Soft Drink Agreement
and the Dr Pepper Soft Drink Agreement.
Transformation Initiatives. The initiatives and associated expenses
which BKC has determined or may determine are critical elements of BKC's
transformation and marketing strategy intended to increase Burger King
restaurant sales, including soft drink sales, which currently include,
without limitation, those initiatives currently referred to as the
"Drive-Thru 2000 Package," "Have It Your Way Kitchen" and/or the
"Integrated Supply Chain Management Initiative."
Trust Account. The Trust Account established by the Grantors for the
benefit of the Beneficiaries pursuant to the Trust Agreement.
Trust Agreement. The Trust Agreement dated as of December 23, 1999 by
and among the Grantors, the Trustees and the Beneficiaries.
Trustee. Citibank, N.A., a national banking association.
Representations and Warranties of Franchisees. The Franchisees, jointly
and severally, represent and warrant to BKC as follows:
All of the Restaurants listed on Schedule 1 are Class A Qualified
Restaurants.
The Franchisees serve COCA-COLAr products supplied under supply
agreements with BKC at all of their Class A Qualified Restaurants.
The Franchisees either currently serve or will serve Dr Pepperr at all
of their Class A Qualified Restaurants by December 31, 2000 under supply
agreements with BKC.
This Commitment constitutes a valid and binding obligation of the
Franchisees enforceable in accordance with its terms to the extent
permitted under applicable law, subject as to enforcement only to
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforceability of creditors' rights generally.
Acknowledgments of Franchisees.
The Franchisees hereby acknowledge and agree that they are obligated
under their Franchise Agreements to install signage bearing the new
"Burger King Bun Halves and Crescent" logo at all of their Burger King
Restaurants in the U.S. at their sole cost and expense by no later than
December 31, 2001.
The Franchisees hereby acknowledge and agree that they are obligated to
maintain their Restaurants in good condition and repair to the extent
necessary to bring their Restaurants into compliance with the Franchise
Agreements, including, without limitation, painting their restaurant
buildings, resealing and restriping restaurant parking lots, upgrading
restaurant landscaping, and that doing so is in the best interests of
the Franchisees and the Burger King System.
For Restaurants with a Drive-Thru, the Franchisees hereby acknowledge
and agree that, once BKC mandates the Drive-Thru 2000 Package for use in
the Burger King System, they will be obligated under their Franchise
Agreements to install the Drive-Thru 2000 Package at the Restaurants by
no later than December 31, 2001 at their sole cost and expense. Any
work in connection with the Drive-Thru 2000 Package will be performed in
a good and workmanlike manner using only equipment approved by BKC. If
the Franchisees' Class B Qualified Restaurants including Restaurants not
listed on Schedule 1 the Franchisees will also install the Drive-Thru
2000 Package at those additional Restaurants by no later than December
31, 2001.
The Franchisees agree that the purchase of all equipment for the Drive-
Thru 2000 Package will be arranged through RSI, and that the Franchisees
will be responsible for obtaining all necessary approvals and consents
from governmental agencies, if any, to implement the Drive-Thru 2000
Package and for payment of all costs, expenses and fees associated
therewith, including, but not limited to, contractors and materialmen.
Additional Covenants of Franchisees.
The Franchisees will be responsible for the costs associated with the
roll-out of the Drive-Thru 2000 Package to the Restaurants, as
determined by RSI. In addition, the Franchisees will be responsible for
the costs associated with the training if employees, managers and crew
in connection with the training of employees, managers and crew in
connection with the Drive-Thru 2000 Package, and for roll-out and
training costs in connection with the Have It Your Way Kitchen
initiative, only if the Have It Your Way Kitchen is approved and
mandated by BKC at some future date. These obligations may include
attendance by the Franchisees and/or any in-restaurant personnel at such
training sessions as BKC may reasonably require at such time and
locations as may be reasonably designated by BKC.
The Franchisees agree to use the First Installment of the Payment Amount
to (a) install new signage in accordance with Section 3.1 above, (b)
"spruce up" the Restaurants in accordance with Section 3.2 above, and
(c) reseal and restripe restaurant parking lots in accordance with
Section 3.2 above. The Franchisees further agree that the work required
under Section 3.2 will be completed by September 30, 2000, unless the
Franchisees elect to "early successor" a Restaurant under BKC's Early
Successor Incentive Programs, in which case the work will be completed
within the time frames established under such programs.
Payment Procedure; Timing of Payments. The Payment Amount is payable in
two (2) installments as follows:
Upon execution and delivery to BKC of this Commitment, the Franchisees
will be eligible to receive $28,000 per Restaurant (the "First
Installment"). To receive the First Installment on or about March 15,
2000, the Franchisees must return this Commitment by no later than
January 31, 2000. If the Franchisees return this Commitment after
January 31, 2000 (but before July 31, 2000), the First Installment will
be included with the payment of the Second Installment (as defined
below). Upon receipt of this Commitment, BKC will verify that the
Restaurants listed in Schedule 1 are Class A Qualified Restaurants. BKC
will then advise the Trustee that the Franchisees are eligible to
receive the First Installment with respect to their Class A Qualified
Restaurants, and the Trustee will disburse the First Installment to the
Franchisees in accordance with an established payment schedule. The
Franchisees are eligible to receive the First Installment for any
Limited Menu Restaurants included in Schedule 1.
Following the Drive-Thru Approval Date (but prior to March 31, 2001),
the Franchisees may seek payment in the amount of $28,000 for each of
their Class B Qualified Restaurants (the "Second Installment") by
executing and delivering to BKC a Beneficiary's Certificate in the form
to be provided by BKC. The Beneficiary's Certificate should list of all
the Franchisees' Class B Qualified Restaurants.
On September 30, 2000 or the date upon which the NFA endorses the Drive-
Thru 2000 Package, whichever is earlier, BKC will advise the Trustee
that the Franchisees are eligible to receive the Second Installment with
respect to their Class B Qualified Restaurants, provided that BKC has
previously received the executed Beneficiary's Certificate from the
Franchisees and verified that the Restaurants listed in the Certificate
are Class B Qualified Restaurants. Thereafter, the Trustee will
disburse the Second Installment to the Franchisees in accordance with an
established payment schedule. The Franchisees acknowledge that they
will not be eligible to receive the Second Installment for any Limited
Menu Restaurants, as determined by BKC.
By no later than July 31, 2001, the Trustee will disburse any residual
funds remaining in the Trust Account based upon the proportion that the
number of Qualified Restaurants owned by the Franchisees bears to the
total number of Qualified Restaurants owned by all Beneficiaries. For
illustration purposes only, if a Franchisee owns eight (8) Restaurants,
and there are 8,000 Qualified Restaurants and the residual funds are
$100,000 then the Franchise will receive 8/8000 or (1/1000) of the
$100,000 residual, or a total of $100 from the residual funds.
The Trustee will disburse all of the installments to the Franchisees on
a "first come, first served" basis. Accordingly, if there are
insufficient funds in the Trust Account to pay any installment, the
Franchisees will have to defer receipt of payment until the Grantors
deposit additional funds in the Trust Account in accordance with the
funding schedules set forth in the Trust Agreement.
Accounting Rights. BKC shall have the right to require the Franchisees
to provide an accounting of Franchisees' use of the Payment Amount to
the extent necessary under this Commitment.
Default.
The Franchisees acknowledge that the failure to install new signage as
mandated by BKC and to paint their restaurant buildings, reseal and
restripe parking lots and upgrade restaurant landscaping to the extent
necessary to bring their Restaurants into compliance with the Franchise
Agreements shall constitute events of default under the Franchise
Agreements and this Commitment. The Franchisees further acknowledge
that once BKC has mandated the Drive-Thru 2000 Package for use in the
Burger King System, the failure to implement the Drive-Thru 2000 Package
by December 31, 2001 shall constitute an event of default under the
Franchise Agreements and this Commitment. In such event, if any such
failure continues after notice of default and the expiration of any
applicable cure period, BKC may proceed to protect and enforce its
rights either by suit in equity and/or by action at law pursuant to the
terms of the Franchise Agreements. In addition, the Trustee may seek to
recover the Payment Amount paid to the Franchisees with respect to the
Restaurants.
Franchisees hereby acknowledge that their compliance with the terms of
this Commitment is critical to BKC's transformation and marketing
strategy intended to increase Burger King restaurant sales due to the
fact that the signage and the Drive-Thru 2000 Package must be installed
in at least 67% of the Burger King Restaurants in an ADI in order to
advertise the initiative to consumers. The Franchisees further
acknowledge that the remedy at law for any breach or threatened breach
of this Commitment is inadequate. Accordingly, Franchisees hereby waive
any right to object to specific performance or other equitable relief as
a remedy for any such breach. The Franchisees further agree to waive
any requirement for the securing or posting of any bond in connection
with such remedy. Such remedy shall not be deemed to be the exclusive
remedy for such breach, but shall be in addition to other remedies
available at law or in equity to BKC.
In any litigation to enforce the terms of this Commitment, the
prevailing party shall recover and the losing party shall pay the
reasonable attorneys' fees and costs incurred by the prevailing party.
Amendments to Franchise Agreements. To the extent that any provisions
of this Commitment impose additional obligations on the Franchisees or
confer additional rights or remedies on BKC than the obligations, rights
and remedies set forth in the Franchise Agreements, the Franchise
Agreements are hereby amended accordingly.
Limited Release Relating to Administration of Trust Account. In
consideration for all amounts paid to the Franchisees hereunder in
accordance with the provisions hereof, the Franchisees, jointly and for
themselves, their respective officers, directors, partners,
shareholders, successors, assigns, personal representatives and
affiliates (collectively, the "Releasing Parties"), release, acquit,
satisfy and forever discharge, BKC, Coca-Cola, Dr Pepper and the
Trustee, and their respective successors, predecessors, counsel,
insurers, assigns, officers, directors, employees, affiliates and
agents, past and present (collectively, the "Released Parties"), from
and against all claims, actions, causes of action, demands, damages,
costs, suits, debts, covenants, controversies and any other liabilities
whatsoever, whether known or unknown, liquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal or equitable, which the
Releasing Parties ever had, now have, can, shall or may have, against
the Released Parties relating (a) the establishment and funding of the
Trust, (b) the distribution of the Coca-Cola Funds and Dr Pepper Funds
in accordance with the provisions of the Trust Agreement, (c) the
eligibility requirements described herein, and (d) any determination of
eligibility with respect to the Franchisees' Restaurants.
Termination of Commitment. Once the Franchisees have discharged all of
their duties and obligations under this Commitment, as determined by BKC
in its reasonable discretion, this Commitment shall terminate in its
entirety and be of no further force and effect, and to the extent that
this Commitment constitutes an amendment to the Franchise Agreements,
such amendment shall terminate in its entirety and be of no further
force and effect.
Governing Law; Jurisdiction and Venue. This Commitment shall be
governed by the laws of the State of Florida, without reference to
principles of conflicts of laws. The Franchisees hereby agree that the
U.S. District Court for the Southern District of Florida, or only if
such court lacks jurisdiction, the 11th Judicial Circuit (or its
successor) in and for Miami-Dade County, Florida, shall be the venue and
exclusive proper forum in which to adjudicate any case or controversy
under or in connection with this Commitment.
FRANCHISEES
NAME OF OPERATING COMPANY
OR ENTITY
Bravokilo, Inc.
By: /s/ Daniel B. Fitzpatrick
Daniel B. Fitzpatrick
Its: President
Quality Dining, Inc.
By: /s/ Daniel B. Fitzpatrick
Daniel B. Fitzpatrick
Its: President
SCHEDULE 1
NAME OF FRANCHISE GROUP: Bravokilo, Inc.
FRANCHISE GROUP NUMBER:10679
PERSON OR ENTITY TO WHOM PAYMENT SHOULD BE MADE (PAYEE):
Bravokilo, Inc.
PAYEE'S TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER (AS APPLICABLE):
35-1913159
List of Class A Qualified Restaurants
Restaurant
Number Street Address City, State & Zip
- ---------- -------------- -----------------------
328 2035 M-139 Benton Harbor, MI 49022
458 3436 Henry Street North Shores, MI 49444
467 3956 South Franklin Michigan City, IN 46360
509 32704 Grand River Avenue Farmington, MI 48024
519 823 East Michigan Avenue Ypsilanti, MI 48198
527 20905 Ecorse Road Taylor, MI 48180
637 28333 Ford Road Garden City, MI 48135
764 25538 South Woodward Avenue Royal Oak, MI 48067
810 9525 Telegraph Road Taylor, MI 48180
889 2170 Rawsonville Road Belleville, MI 48111
988 8489 West Grand River Ave Brighton, MI 48116
1606 2051 Washington Avenue St. Joseph, MI 49085
2624 18737 West Road Woodhaven, MI 48183
3172 1945 Pipestone Road Benton Harbor, MI 49022
3260 14808 Michigan Avenue Dearborn, MI 48126
3722 121 West LaSalle Avenue South Bend, IN 46601
4102 2775 E. Highland Rd. Highland, MI 48356
4124 2021 North Michigan Street Plymouth, IN 46563
4216 530 West McKinley Avenue Mishawaka, IN 46545
4276 1709 Elkhart Road Goshen, IN 46526
4435 1012 W. State Road 2 West LaPorte, IN 46350-8057
4505 5809 Grape Road Mishawaka, IN 46545
4814 11550 Belleville Road Belleville, MI 48111
5118 10382 Highland Road Hartland, MI 48353
5188 928 Terrace Street Muskegon, MI 49443
5193 4626 Red Arrow Highway Stevensville, MI 49127
5250 232 East Pettit Avenue Ft. Wayne, IN 46806
5298 2801 East Lincolnway East Mishawaka, IN 46544
5323 7616 Lincolnway East Fort Wayne, IN 46803
5397 2920 Frontage Road Warsaw, IN 46580
5398 52803 U.S. 33 North South Bend, IN 46637
5413 1918 North Jefferson Street Huntington, IN 46750
5603 2184 East Grand River Road Howell, MI 48843
5753 3710 East State Street Ft. Wayne, IN 46805
5790 6402 West Jefferson Street Ft. Wayne, IN 46804
Times Corners
5987 752 Lagrange South Haven, MI 49090
5988 1255 West Main Street Fremont, MI 49412
6389 499 North Main Street Columbia City, IN 46725
6485 1804 N. Wayne Street Angola, IN 46703
6509 39601 Grand River Novi, MI 48375
6574 4852 Western Avenue South Bend, IN 46619
6622 1113 Ireland Road South Bend, IN 46614
6843 3123 Holton-Whitehall Road Whitehall, MI 49461
7014 657 North Main Street Bluffton, IN 46714
7055 2171 South Bend Avenue South Bend, IN 46637
7060 618 Fairview Boulevard Kendallville, IN 46755
7113 903 Spruce Street Dowagiac, MI 49047
7433 1911 Lincoln Way East Goshen, IN 46526
8203 6225 Lima Road Ft. Wayne, IN 46818
8448 3403 Portage Avenue South Bend, IN 46628
8664 1205 East Market Street Nappanee, IN 46550
8665 1436 West Plymouth Street Bremen, IN 46506
9012 1105 West 7th Street Auburn, IN 46706
9028 8180 Mason Street Newaygo, MI 49337
9157 334 North 13th Street Decatur, IN 46733
9349 2037 US 31 Plymouth, IN 46563
9352 111 S. St. Joseph Street South Bend, IN 46601
Closed December, 1999
9461 3733 North M-140 Watervliet, MI 49098
9506 12757 State Road 23 Granger, IN 46530
9640 2190 Holton Road North Muskegon, MI 49445
9713 1610 North Meridian Portland, IN 47371
10436 324 East Jefferson Street Fort Wayne, IN 46802
10440 608 West Talmer North Judson, IN 46366
10568 Market Centre Shopping Ctr. Goshen, IN 46526
4014 Elkhart Road, Outlot A
11248 151 South Zeeb Road Ann Arbor, MI 48103
11347 5822 Telegraph Road Taylor, MI 48180
11365 413 East Dupont Road Ft. Wayne, IN 46845
11739 5202 East 1200 North Syracuse, IN 46527
12551 806 South Heaton Street Knox, IN 46534
2689 27517 Telegraph Road Flat Rock, MI 48134*
Total Qualified Restaurants 70
Less BK 9352 -1
--
69
BK 2689/12980 +1
--
70
==
* Closed 10/23/99 with the approval of BKC - offset with BK 12980,
23400 Telegraph Rd., Brownstown Township, MI 48134 Opened 12/21/99