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 August 4, 2002
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
QUALITY DINING, INC.
(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 46545
----------------------------------------------------
(Address of principal executive offices and zip code)
(574) 271-4600
-------------------------------------------------
(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 September 16, 2002 was 11,609,099.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 4, 2002
INDEX
Page
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.........17
Item 3. Quantitative and Qualitative Disclosures About Market
Risk..................................................28
Part II - Other Information
Item 1. Legal Proceedings...........................................29
Item 2. Changes in Securities.................................29
Item 3. Defaults upon Senior Securities.......................29
Item 4. Submission of Matters to a Vote of Security Holders...29
Item 5. Other Information.......................................29
Item 6. Exhibits and Reports on Form 8-K......................29
Signatures......................................................29
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Twelve Weeks Ended Forty Weeks Ended
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
Revenues: ------ ------ ------ ------
Burger King $ 29,816 $ 19,098 $ 93,623 $ 59,057
Chili's Grill & Bar 17,527 15,995 57,776 52,475
Grady's American Grill 8,490 13,182 37,970 47,970
Italian Dining Division 3,676 3,860 12,813 13,118
------- ------- ------- -------
Total revenues 59,509 52,135 202,182 172,620
------- ------- ------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 16,558 14,707 57,374 48,734
Payroll and benefits 17,439 15,249 60,302 50,474
Depreciation and amortization 2,448 2,699 8,176 8,901
Other operating expenses 14,930 13,332 50,760 42,833
------- ------- ------- -------
Total restaurant operating expenses 51,375 45,987 176,612 150,942
------- ------- ------- -------
Income from restaurant operations 8,134 6,148 25,570 21,678
General and administrative 4,531 3,199 14,796 11,449
Facility closing costs (211) - (7) 216
Amortization of intangibles 98 211 326 681
------- ------- ------- -------
Operating income 3,716 2,738 10,455 9,332
------- ------- ------- -------
Other income (expense):
Interest expense (1,881) (2,286) (6,596) (8,150)
Gain (loss) on sale of property
and equipment 269 (64) 439 (60)
Interest income 7 4 15 17
Other income (expense), net (69) 68 650 743
------- ------- ------- -------
Total other expense, net (1,674) (2,278) (5,492) (7,450)
------- ------- ------- -------
Income before income taxes 2,042 460 4,963 1,882
Income tax provision 324 247 1,080 1,104
------- ------- ------- -------
Net income $ 1,718 $ 213 $ 3,883 $ 778
======= ======= ======= =======
Basic net income per share $ 0.15 $ 0.02 $ 0.35 $ 0.07
======= ======= ======= =======
Diluted net income per share $ 0.15 $ 0.02 $ 0.34 $ 0.07
======= ======= ======= =======
Weighted average shares outstanding:
Basic 11,270 11,590 11,227 11,654
======= ======= ======= =======
Diluted 11,617 11,610 11,476 11,671
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
August 4, October 28,
2002 2001
ASSETS ------- -------
Current assets:
Cash and cash equivalents $ 1,651 $ 2,070
Accounts receivable 1,331 1,842
Inventories 1,883 2,042
Deferred income taxes 2,467 1,999
Other current assets 2,580 2,042
------- -------
Total current assets 9,912 9,995
------- -------
Property and equipment, net 110,932 119,433
------- -------
Other assets:
Deferred income taxes 7,533 8,001
Trademarks, net 5,881 6,405
Franchise fees and development fees, net 9,508 10,029
Goodwill 7,960 8,068
Liquor licenses, net 2,690 2,757
Other 3,410 2,550
------- -------
Total other assets 36,982 37,810
------- -------
Total assets $ 157,826 $ 167,238
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized leases
and long-term debt $ 1,941 $ 1,808
Accounts payable 11,795 10,735
Accrued liabilities 20,417 20,857
------- -------
Total current liabilities 34,153 33,400
Long-term debt 95,301 108,964
Capitalized leases, principally to related
parties, less current portion 3,842 4,230
------- -------
Total liabilities 133,296 146,594
------- -------
Common stock subject to redemption - 264
------- -------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued - -
Common stock, without par value: 50,000,000
shares authorized; 12,848,099 and 12,940,736
shares issued, respectively 28 28
Additional paid-in capital 237,013 237,002
Accumulated deficit (208,587) (212,470)
Unearned compensation (301) (557)
------- -------
28,153 24,003
Treasury stock, at cost, 1,359,000
and 1,360,573 shares, respectively (3,623) (3,623)
------- -------
Total stockholders' equity 24,530 20,380
------- -------
Total liabilities and stockholders' equity $ 157,826 $ 167,238
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Forty Weeks Ended
August 4, August 5,
2002 2001
Cash flows from operating activities: ------- -------
Net income $ 3,883 $ 778
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 7,919 8,923
Amortization of other assets 1,232 1,442
Loss (gain) on sale of property and equipment (439) 60
Amortization of unearned compensation 267 81
Changes in current assets and current liabilities:
Net increase in current assets 132 359
Net increase (decrease)in current liabilities 620 (1,442)
------- -------
Net cash provided by operating activities 13,614 10,201
------- -------
Cash flows from investing activities:
Proceeds from sales of property and equipment 11,457 144
Purchase of property and equipment (10,036) (7,815)
Purchase of other assets (787) (731)
Other (16) -
------- -------
Net cash used in investing activities 618 (8,402)
------- -------
Cash flows from financing activities:
Borrowings of long-term debt 77,590 45,250
Repayment of long-term debt (91,139) (45,622)
Payment for stock subject to redemption (264) -
Purchase of treasury stock - (1,925)
Repayment of capitalized lease obligations (369) (368)
Loan financing fees (469) -
------- -------
Net cash used by financing activities (14,651) (2,665)
------- -------
Net decrease in cash and cash equivalents (419) (866)
Cash and cash equivalents, beginning of period 2,070 2,912
------- -------
Cash and cash equivalents, end of period $ 1,651 $ 2,046
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 4, 2002
(Unaudited)
Note 1: Description 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(R) ("Chili's") 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 Kitchen(R)
("Spageddies"(R)) and Papa Vino's Italian Kitchen ("Papa Vino's").
As of August 4, 2002, the Company operated 179 restaurants,
including 116 Burger King restaurants, 33 Chili's, 22 Grady's
American Grill restaurants, three Spageddies and five Papa
Vino's.
Note 2: Summary of Significant Accounting Policies
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 accounting
principles generally accepted in the United States of America 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 40-week period ended August 4, 2002 are
not necessarily indicative of the results that may be expected
for the 52-week year ending October 27, 2002.
These financial statements should be read in conjunction with the
Company's audited financial statements for the fiscal year ended
October 28, 2001 included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission.
Adoption of Statement of Financial Accounting Standards No. 141
and No. 142
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires that the purchase method
of accounting be used for business combinations initiated after
June 30, 2001. SFAS 141 also establishes criteria that must be
used to determine whether acquired intangible assets should be
recognized separately from goodwill in the Company's financial
statements. Under SFAS 142, amortization of goodwill, including
goodwill recorded in past business combinations, will discontinue
upon adoption of this standard. In addition, goodwill and
indefinite-lived intangible assets will be tested for impairment
in accordance with the provisions of SFAS 142. SFAS 142 is
effective for fiscal years beginning after December 15, 2001.
The Company has early adopted the provisions of SFAS 142, in the
first quarter of fiscal 2002. SFAS 142 allows up to six months
from the date of adoption to complete the transitional goodwill
impairment test which requires the comparison of the fair value
of a
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 4, 2002
(Unaudited)
reporting unit to its carrying value (using amounts measured as
of the beginning of the year of adoption) to determine whether
there is an indicated transitional goodwill impairment. The
quantification of an impairment requires the calculation of an
"implied" fair value for a reporting unit's goodwill. If the
implied fair value of the reporting unit's goodwill is less than
its recorded goodwill, a transitional goodwill impairment charge
is recognized and reported as a cumulative effect of a change in
accounting principle. The Company completed the impairment
testing of goodwill during the second quarter of fiscal 2002 and
determined that there is no transitional goodwill impairment.
Intangible Assets
- -----------------
As of August 4, 2002
--------------------------
Gross Carrying Accumulated
Amount Amortization
($000s) ($000s)
Amortized intangible assets: ------- -------
Trademarks $ 7,637 $ (1,756)
Franchise fees and development fees 14,578 (5,070)
------- -------
Total $ 22,215 $ (6,826)
======= =======
The Company's intangible asset amortization expense for the forty
weeks ended August 4, 2002 was $887,000. The estimated
intangible amortization expense for each of the next five years
is $1,153,000.
In the fourth quarter of fiscal 2001, the Company recorded an
impairment charge related to certain Grady's American Grill
restaurants that resulted in a reduction of the net book value of
the Grady's American Grill trademark by $4,920,000. In
conjunction with the Company's impairment assessment, the Company
revised its estimate of the remaining useful life of the
trademark to 15 years. The original estimated life of the
trademark had been 40 years. As a result of these changes, net
income for the forty weeks ended August 4, 2002, was decreased by
$71,000, which is approximately $0.01 per diluted share.
Goodwill
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 restaurants 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. The Company has two operating segments with goodwill
- - Chili's Grill & Bar and Burger King. The Company had a total
of $7,960,000 in goodwill as of August 4, 2002. The Chili's
Grill and Bar operating segment had $6,902,000 of goodwill and
the Burger King operating segment had $1,058,000 of goodwill.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 4, 2002
(Unaudited)
Adoption of Statement 142
- -------------------------
The following table reports the comparative impact the adoption
of Statement 142 has on the reported results of operations.
Forty Weeks Ended
August 4, August 5,
2002 2001
------- -------
($000s except for earnings-per-share amounts)
Reported net income $ 3,883 $ 778
Add back: Goodwill amortization - 416
------- -------
Adjusted net income $ 3,883 $ 1,194
======= =======
Basic earnings per share:
Reported net income $ 0.35 $ 0.07
Goodwill amortization - 0.03
------- -------
Adjusted net income $ 0.35 $ 0.10
======= =======
Diluted earnings per share:
Reported net income $ 0.34 $ 0.07
Goodwill amortization - 0.03
------- -------
Adjusted net income $ 0.34 $ 0.10
======= =======
Note 3: Acquisitions and Dispositions.
On October 15, 2001, the Company purchased certain assets from
BBD Business Consultants, LTD. and its affiliates. BBD Business
Consultants, LTD. operated 42 Burger King restaurants in the
Grand Rapids, Michigan metropolitan area. The Company also
purchased leasehold improvements and entered into lease
agreements with the landlords of 41 of the 42 Burger King
restaurants. One restaurant was closed on November 26, 2001 due
to the inability to secure a long-term lease with the landlord.
In conjunction with this transaction the Company obtained
franchise agreements for the acquired restaurants from Burger
King Corporation. The purchase price for the restaurants
aggregated $6,067,000 and consisted of $4,212,000 in cash and
$1,855,000 in assumed liabilities. The acquisition was accounted
for as a purchase. Goodwill of approximately $1,096,000 was
recorded in connection with the acquisition, and subsequently
adjusted to $988,000 for the finalization of various liabilities.
On May 16, 2002, the Company sold nine of its Grady's American
Grill restaurants for $10.5 million. The Company recorded a
$74,000 gain related to this transaction in the third quarter of
fiscal 2002.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
Note 4: Commitments.
As of August 4, 2002, the Company had commitments aggregating
approximately $1,262,000 for restaurant construction and the
purchase of new equipment.
Note 5: Debt Instruments.
As of August 4, 2002, the Company had a financing package
totaling $109,066,000, consisting of a $60,000,000 revolving
credit agreement and a $49,066,000 mortgage facility (the
"Mortgage Facility"), as described below.
The Mortgage Facility currently includes 34 separate mortgage
notes, with terms of 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 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 (nine of which the Company
mortgaged its leasehold interest) and 15 of the Company's Burger
King restaurants (three of which the Company mortgaged its
leasehold interest). The mortgage notes contain, among other
provisions, certain restrictive covenants including maintenance
of a consolidated fixed charge coverage ratio for the financed
properties.
On June 10, 2002, the Company refinanced its prior $76,000,000
credit facility with a $60,000,000 revolving credit agreement
with JP Morgan Chase Bank, as agent, and four other banks (the
"Bank Facility"). The weighted average borrowing rate under the
Bank Facility on August 4, 2002 was 5.01%. The Company had
$7,629,000 available under the Bank Facility as of August 4,
2002. The Bank Facility is collateralized by the stock of certain
subsidiaries of the Company, certain interests in the Company's
franchise agreements with Brinker and Burger King Corporation and
substantially all of the Company's real and personal property not
pledged in the Mortgage Facility.
The Bank Facility contains 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, cross-default
provisions with other material agreements, 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 Bank Facility provides for borrowings at the adjusted LIBOR
rate plus a contractual spread which is as follows:
RATIO OF FUNDED DEBT
TO CASH FLOW LIBOR
MARGIN
- -------------------- ---------
Greater than or equal to 3.50 3.00%
Less than 3.5x but greater than or equal to 3.0x 2.75%
Less than 3.0x but greater than or equal to 2.5x 2.25%
Less than 2.5x 1.75%
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
The Bank Facility also contains covenants requiring maintenance
of funded debt to cash flow and fixed charge coverage ratios
which are as follows:
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO COVENANT
- ------------------- ---------
Fiscal 2002
Q2 4.00
Q3 4.00
Q4 4.00
Fiscal 2003
Q1 through Q3 4.00
Q4 3.75
Fiscal 2004
Q1 through Q3 3.75
Q4 3.50
Fiscal 2005
Q1 through Q2 3.50
Thereafter 3.00
FIXED CHARGE COVERAGE RATIO 1.50
Note 6: Earnings Per Share.
The Company had outstanding common shares of 11,489,099, which
includes 178,256 shares of restricted stock, as of August 4,
2002. The Company has granted options to purchase common shares
to its employees and outside directors. The Company has also
granted restricted stock to its employees. These options and
restricted stock 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.
Twelve weeks ended Forty weeks ended
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
------- ------- ------- -------
(In thousands, except per share amounts)
Basic net income per share:
Net income available to
common shareholders (numerator) $ 1,718 $ 213 $ 3,883 $ 778
Weighted average common shares ======= ======= ======= =======
outstanding (denominator) 11,270 11,590 11,227 11,654
======= ======= ======= =======
Basic net income per share $ 0.15 $ 0.02 $ 0.35 $ 0.07
======= ======= ======= =======
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
Twelve weeks ended Forty weeks ended
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
------- ------- ------- -------
(In thousands, except per share amounts)
Diluted net income per share:
Net income available to
common shareholders (numerator) $ 1,718 $ 213 $ 3,883 $ 778
======= ======= ======= =======
Weighted average common shares
outstanding 11,270 11,590 11,227 11,654
Effect of dilutive securities:
Options on common stock 347 20 249 17
Total common shares and dilutive ------- ------- ------- -------
securities(denominator) 11,617 11,610 11,476 11,671
======= ======= ======= =======
Diluted net income per share $ 0.15 $ 0.02 $ 0.34 $ 0.07
======= ======= ======= =======
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 restaurants 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
---------------------- ------- ------- ------- -------
Third quarter fiscal 2002
- ---------------------------
Revenues $ 29,693 $ 29,816 $ - $ 59,509
Income from restaurant
operations 3,346 4,786 2 8,134
Operating income 1,753 2,059 (96) $ 3,716
Interest expense 1,881
Other income 207
Income before income taxes ------
$ 2,042
========
Depreciation and
amortization 1,368 1,104 328 2,800
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
Full Quick
(Dollars in thousands) Service Service Other Total
---------------------- ------- ------- ------- -------
Third quarter fiscal 2001
- --------------------------
Revenues $ 33,037 $ 19,098 $ - $ 52,135
Income from restaurant
operations 3,034 3,083 31 6,148
Operating income 1,415 1,682 (359) $ 2,738
Interest expense (2,286)
Other income 8
--------
Income before income taxes $ 460
=======
Depreciation and
amortization 2,086 748 303 3,137
First forty weeks of fiscal 2002
- ---------------------------------------
Revenues $ 108,559 $ 93,623 $ - $202,182
Income from restaurant
operations 12,783 12,785 2 25,570
Operating income 6,876 4,256 (677) $ 10,455
Interest expense (6,596)
Other income 1,104
-------
Income before income taxes $ 4,963
=======
Depreciation and
amortization 4,737 3,511 938 9,186
First forty weeks of fiscal 2001
- ----------------------------------------
Revenues $ 113,563 $ 59,057 $ - $172,620
Income from restaurant
operations 12,867 8,703 108 21,678
Operating income 7,077 3,657 (1,402) $ 9,332
Interest expense (8,150)
Other income 700
-------
Income before income taxes $ 1,882
=======
Depreciation and
amortization 6,895 2,433 1,037 10,365
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
Note 8: Contingencies.
The Company is a party to one legal proceeding relating to the
Company's previously owned bagel-related businesses.
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
to 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 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 counterclaims 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
("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 Counterclaims and the Third
Party Complaint. Reilly and the Intervenors are seeking damages
in an amount no less than $10 million, an unspecified amount of
punitive damages, attorney's fees, costs and interest. Based upon
the currently available information, the Company does not believe
that the ultimate resolution of this matter will have a material
adverse effect on the Company's financial position or results of
operations, however, there can be no assurance
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
thereof. Neither can there be any assurance that the Company
will be able to realize sufficient value from Reilly or the
Principal Guarantors to satisfy the amount of the Loan.
In the foregoing case, one or more present or former officers and
directors of the Company were named as party defendants, but were
subsequently dismissed by the Court. The Company advanced
defense costs on their behalf until they were dismissed by the
Court.
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 February 28, 2001, the parties reached a
settlement of this matter pursuant to which the Company made an
initial payment of $125,000 and an additional payment of $175,000
in December 2001. As part of the settlement, the Company also
purchased 96,064 shares of its common stock owned by the
plaintiffs, in December 2001, for approximately $264,000 or $2.75
per share. The Company had reclassified $264,000 from
stockholders' equity to common stock subject to redemption on its
consolidated balance sheet related to its agreement to purchase
such shares from the plaintiff in December 2001. The Company had
previously accrued for the full amount of the settlement,
including the expense portion of the share repurchase.
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 was 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 was originally obligated to pay the first $3 million of
its share of Franchise Damages in cash. The Company has
satisfied this obligation. The remaining $4 million of the
Company's share of Franchise Damages was originally payable by
crediting amounts owed to the Company pursuant to the $10 million
Subordinated Note ("Subordinated Note") issued to the Company by
Bruegger's Corporation. However, as a result of the Bruegger's
Resolution (described below), the remainder of the Company's
share of Franchise Damages is payable in cash.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
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 arose 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. 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.
On February 28, 2001, the Company and Bruegger's Corporation
reached a settlement (the "Bruegger's Resolution") of their
various disputes that includes, among other things, the following
provisions: (a) the principal amount of the Subordinated Note
was restated to $10.7 million; (b) the Company and Bruegger's
Corporation each released their claim against the other to
receive a net working capital adjustment; (c) the Subordinated
Note was modified to, among other things, provide for an
extension of the period through which interest is to be accrued
and added to the principal amount of the Subordinated Note from
October, 2000 through January, 2002. From January, 2002 through
June, 2002, one-half of the interest is to be accrued and added
to the principal amount of the Subordinated Note and one-half of
the interest is to be paid in cash. Commencing in January, 2003,
interest is to be paid in cash through the maturity of the
Subordinated Note in October 2004; (d) the Company and Bruegger's
Corporation are each responsible for 50% of the Franchise Damages
with respect to the claims asserted by BFBC Ltd., et al., (e)
Bruegger's Corporation is entitled to 25% of any net recovery
made by the Company on the BFBC, Ltd., Loan; provided, however,
that any such entitlement is required to be applied to the
outstanding balance of the Subordinated Note; (f) Bruegger's
Corporation and its affiliates released their claims for breach
of representations and warranties under the Share Exchange
Agreement; and (g) Bruegger's Corporation is entitled to a credit
of two dollars against the Subordinated Note for every one dollar
that Bruegger's Corporation prepays against the Subordinated Note
prior to October, 2003 up to a maximum credit of $4 million. As
of the fourth quarter of fiscal 2001, Bruegger's Corporation
advised the Company that it is unable to continue to pay its 50%
share of Franchise Damages. Accordingly, it is likely that the
Company will have to incur the full expense of the BFBC
litigation and that Bruegger's Corporation will not have the
ability to perform its indemnity obligations, if any. The ongoing
expense of the BFBC litigation may be significant to the
Company's results of operations. Such expense is not presently
estimable as it depends upon a number of variables including the
extent to which the Company obtains favorable rulings on motions
it has filed, the length and outcome of any trial, whether or not
any appeal is taken and, if so, whether the Company is bringing
or responding to the appeal.
It is also likely that the Company may never receive any
principal or interest payments in respect of the Subordinated
Note. The Company has never recognized any interest income from
the Subordinated Note and has previously reserved for the full
amount of the Subordinated Note. Bruegger's Corporation failed
to make the interest payment that was due on June 1, 2002.
Additionally, the Company is a guarantor of the occupancy leases
for certain bagel restaurants currently operated by affiliates of
Bruegger's Corporation.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
As a result of the Company's current assessment of Bruegger's
Corporation's financial position, in the fourth quarter of fiscal
2001, the Company recorded a charge of $455,000 to reserve for
the estimated liability for the obligations as a guarantor.
During the third quarter of fiscal 2002 the Company determined
that it would not be liable for certain of the lease guarantees
and therefore reversed $155,000 of the original charge.
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 annual results of operations but there can
be no assurance thereof.
Note 9: Franchisee Commitment.
On January 27, 2000 the Company executed a "Franchisee
Commitment" pursuant to which it agreed to undertake certain
"Transformational Initiatives" including capital improvements and
other routine maintenance in all of 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 Burger King system extended
the initial deadline for completing these capital improvements to
December 31, 2002, although the Company met the initial deadline
with respect to 66 of the 70 Burger King restaurants subject to
the Franchisee Commitment. 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 completed this maintenance
prior to September 30, 2000, as required. In consideration for
executing the Franchisee Commitment, the Company received
"Transformational Payments" totaling approximately $3.9 million
during fiscal 2000. In addition, the Company received
supplemental Transformational Payments of $135,000 in October,
2001 and an additional $180,000 in the first quarter of fiscal
2002. The portion of the Transformational Payments that
corresponds to the amount required for the capital improvements
will be recognized as an offset to depreciation expense over the
useful life of the capital improvements. The portion of the
Transformational Payments that corresponds to the required
routine maintenance was recognized as a reduction in maintenance
expense over the period during which maintenance was performed.
The remaining balance of the Transformational Payments was
recognized as other income ratably through December 31, 2001, the
term of the initial Franchisee Commitment, except that the
supplemental Transformational Payments were recognized as other
income when earned and payable by Burger King Corporation. In the
second quarter of fiscal 2002, the Company recognized as other
income the $281,000 difference between the previously estimated
cost of the required capital improvements and the actual cost
thereof.
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 consists
of fifty-two weeks and ends October 27, 2002. The first quarter
of the Company's fiscal year consists of sixteen weeks with all
subsequent quarters being twelve 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.
Twelve Weeks Ended Forty Weeks Ended
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
------ ------- ------- ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 27.8 28.2 28.4 28.2
Payroll and benefits 29.3 29.2 29.8 29.2
Depreciation and
amortization 4.1 5.2 4.0 5.2
Other operating expenses 25.1 25.6 25.1 24.8
----- ----- ----- -----
Total restaurant operating
expenses 86.3 88.2 87.3 87.4
----- ----- ----- -----
Income from operations 13.7 11.8 12.7 12.6
General and administrative 7.6 6.1 7.3 6.6
Facility closing costs (0.4) - - 0.1
Amortization of intangibles 0.2 0.4 0.2 0.4
----- ----- ----- -----
Operating income 6.3 5.3 5.2 5.5
----- ----- ----- -----
Other income (expense):
Interest expense (3.2) (4.4) (3.3) (4.7)
Other income (expense), net 0.3 - 0.5 0.3
----- ----- ----- -----
Total other expense, net (2.9) (4.4) (2.8) (4.4)
----- ----- ----- -----
Income before income taxes 3.4 0.9 2.4 1.1
Income tax provision 0.5 0.5 0.5 0.6
----- ----- ----- -----
Net income 2.9% 0.4% 1.9% 0.5%
===== ===== ===== =====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Restaurant sales for the Company were $59,509,000 for the third
quarter of fiscal 2002 versus $52,135,000 for the comparable
period in fiscal 2001, an increase of $7,374,000. Restaurant
sales for the first forty weeks of fiscal 2002 were $202,182,000
versus $172,620,000 for the comparable period in fiscal 2001, an
increase of $29,562,000.
The Company's Burger King restaurant sales were $29,816,000 in
the third quarter of fiscal 2002 compared to sales of $19,098,000
in the same period of fiscal 2001, an increase of $10,718,000.
The Company had increased revenues of $9,930,000 from 41 Burger
King restaurants in the Grand Rapids, Michigan metropolitan area
which were purchased on October 15, 2001. The Company also had
increased revenue of $574,000 due to additional sales weeks from
one restaurant opened in fiscal 2002 and two restaurants opened
in fiscal 2001 which were open for their first full year in
fiscal 2002. The Company's Burger King restaurants had average
weekly sales of $21,497 in the third quarter of fiscal 2002
versus $22,094 in the same period in fiscal 2001. The
restaurants in the Grand Rapids acquisition have significantly
lower sales than the Company's other Burger King restaurants and
therefore adversely affected the average weekly sales for both
the quarter and the forty weeks ended August 4, 2002. Sales at
restaurants open for more than one year increased 0.9% in the
third quarter of fiscal 2002 when compared to the same period in
fiscal 2001. Sales increased $34,566,000 to $93,623,000 for the
first forty weeks of fiscal 2002 compared to $59,057,000 for the
comparable period in fiscal 2001. The Company had increased
revenues of $31,134,000 from the 41 Burger King restaurants it
acquired in the Grand Rapids, Michigan metropolitan area. The
Company had increased revenue of $2,310,000 due to additional
sales weeks from one restaurant opened in fiscal 2002 and three
restaurants opened in fiscal 2001 that were open for their first
full year in fiscal 2002. Average weekly sales were $20,209 in
the first forty weeks of fiscal 2002 versus $20,698 in the same
period in fiscal 2001. Sales at restaurants open for more than
one year increased 1.2% in the first forty weeks of fiscal 2002
when compared to the same period in fiscal 2001.
The Company's Chili's Grill & Bar restaurant sales increased
$1,532,000 to $17,527,000 in the third quarter of fiscal 2002
compared to $15,995,000 in the same period in fiscal 2001. The
Company had increased revenue of $940,000 due to additional sales
weeks from two new restaurants opened during fiscal 2001. Average
weekly sales increased to $44,259 in the third quarter of fiscal
2002 versus $42,767 in the same period of fiscal 2001. Sales at
restaurants open for more than one year increased 3.7% in the
third quarter of fiscal 2002 when compared to the same period in
fiscal 2001. Sales for the first forty weeks of fiscal 2002
increased $5,301,000 to $57,776,000 compared to $52,475,000 for
the same period in fiscal 2001. The Company had increased revenue
of $3,626,000 due to additional sales weeks from two new
restaurants opened during fiscal 2001. The average weekly sales
were $43,770 in the first forty weeks of fiscal 2002 versus
$42,250 in the same period in fiscal 2001. Sales at restaurants
open for more than one year increased 3.7% in the first forty
weeks of fiscal 2002 when compared to the same period in fiscal
2001. The Company believes that the increase in average weekly
sales was mainly due to successful operational and marketing
initiatives both by the Company and the franchisor.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Sales in the Company's Grady's American Grill restaurant division
were $8,490,000 in the third quarter of fiscal 2002 compared to
sales of $13,182,000 in the same period in fiscal 2001, a
decrease of $4,692,000. The Company has closed 12 units through
the third quarter of fiscal 2002. The absence of these units
accounted for $3,338,000 of the sales decrease during the third
quarter of fiscal 2002. The Company's Grady's American Grill
restaurants had average weekly sales of $31,115 in the third
quarter of fiscal 2002 versus $32,309 in the same period in
fiscal 2001. Sales at restaurants open for more than one year
decreased 14.5% in the third quarter of fiscal 2002 when compared
to the same period in fiscal 2001. Sales for the first forty
weeks of fiscal 2002 were $37,970,000 compared to $47,970,000 for
the same period in fiscal 2001, a decrease of $10,000,000. The
absence of the closed restaurants contributed approximately
$4,330,000 to the sales decrease. Average weekly sales were
$32,031 in the first forty weeks of fiscal 2002 versus $34,964 in
the same period in fiscal 2001. Sales at restaurants open for
more than one year decreased 12.1% in the first forty weeks of
fiscal 2002 when compared to the same period in fiscal 2001.
The Company continues to experience a significant decrease in
sales and cash flow at its Grady's American Grill division. The
Company continues to pursue various management actions in
response to this declining trend, including evaluating strategic
business alternatives for the division both as a whole and at
each of its restaurant locations.
The Company sold nine of its Grady's American Grill restaurants
for approximately $10.5 million on May 16, 2002. The Company
recorded an impairment charge of $4.1 million related to these
nine restaurants during the fourth quarter of fiscal 2001. As a
consequence of this loss and in connection with the
aforementioned evaluation, the Company estimated the future cash
flows expected to result from the continued operation and the
residual value of the remaining restaurant locations in the
division and concluded in the fourth quarter of fiscal 2001 that,
in 12 locations, the undiscounted estimated future cash flows
were less than the carrying amount of the related assets.
Accordingly, the Company concluded that these assets had been
impaired and recorded an impairment charge related to these
assets aggregating $10.4 million during the fourth quarter of
fiscal 2001.
While the Company believes that the Grady's American Grill assets
are reported at their estimated fair values as of August 4, 2002,
there can be no assurances thereof.
The Company's Italian Dining Division restaurant sales decreased
$184,000 to $3,676,000 in the third quarter of fiscal 2002
compared to $3,860,000 in the same period in fiscal 2001. The
average weekly sales were $38,292 in the third quarter of fiscal
2002 versus $40,205 in the same period of fiscal 2001. Sales at
restaurants open for more than one year decreased 4.7% in the
third quarter of fiscal 2002 when compared to the same period in
fiscal 2001. Sales for the first forty weeks of fiscal 2002
decreased $305,000 to $12,813,000 compared to $13,118,000 for the
same period in fiscal 2001. The average weekly sales were $40,041
in the first forty weeks of fiscal 2002 versus $40,994 in the
same period in fiscal 2001. Sales at restaurants open for more
than one year decreased 2.3% in the first forty weeks of fiscal
2002 when compared to the same period in fiscal 2001.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Total restaurant operating expenses, as a percentage of
restaurant sales, decreased to 86.3% for the third quarter of
fiscal 2002 versus 88.2% in the third quarter of fiscal 2001 and
to 87.3% in the first forty weeks of fiscal 2002 versus 87.4% in
the same period of fiscal 2001. The following factors influenced
the operating margins.
On October 15, 2001, the Company purchased 42 Burger King
restaurants in the Grand Rapids, Michigan metropolitan area (one
of which was subsequently closed). The acquired Burger King
restaurants have significantly lower operating margins than the
Company's other Burger King restaurants. The new Burger King
restaurants therefore had a negative effect on operating margins.
The Company believes that over time these operating margins will
improve and be similar to the Company's historical operating
margins.
On May 16, 2002, the Company sold nine Grady's American Grill
Restaurants. The restaurants disposed of had significantly lower
operating margins than the Company's other restaurants. The sale
of the restaurants therefore had a positive effect on operating
margins during the third quarter of fiscal 2002.
Food and beverage costs decreased to 27.8% of total revenues in
the third quarter of fiscal 2002 compared to 28.2% of total
revenues in the same period in fiscal 2001. Food and beverage
costs in dollars and as a percentage of sales increased in the
quick service segment due to the purchase of Burger King
restaurants in Grand Rapids, Michigan. The Company had an
increase in food and beverage costs of $2,944,000 in the third
quarter of fiscal 2002 due to the addition of 41 Burger King
restaurants in Grand Rapids, Michigan. The full service segment's
food and beverage costs, as a percentage of sales, were lower in
the third quarter of fiscal 2001. The decrease was mainly due to
the reduced number of Grady's American Grill restaurants, which
historically have had higher food and beverage costs than the
Company's other full service concepts. Food and beverage costs
increased to 28.4% in the first forty weeks of fiscal 2002
compared to 28.2% in the same period of fiscal 2001. Food and
beverage costs in dollars and as a percentage of sales increased
in the quick service segment due to the purchase of Burger King
restaurants in Grand Rapids, Michigan. The Company had an
increase in food and beverage costs of $9,366,000 in the first
forty weeks of fiscal 2002 due to the addition of 41 Burger King
restaurants in Grand Rapids, Michigan. Food and beverage costs
as a percentage of sales were consistent in the full service
segment for the first forty weeks of fiscal 2002 compared to
fiscal 2001.
Payroll and benefits were 29.3% of total revenues in the third
quarter of fiscal 2002 compared to 29.2% in the same period of
fiscal 2001. The increase as a percent of sales and in total
dollars in the quick service segment was mainly due to the
purchase of the Burger King restaurants in Grand Rapids,
Michigan. The Company experienced an increase in payroll of
$2,974,000 in the third quarter of fiscal 2002 due to the
addition of the Burger King restaurants in Grand Rapids,
Michigan. Payroll and benefits as a percentage of sales
decreased slightly in the full service segment due to the reduced
number of Grady's American Grill restaurants. Payroll and
benefits were 29.8% of total revenues in the first forty weeks of
fiscal 2002 compared to 29.2% in the same period of fiscal 2001.
The Company experienced an increase in payroll, as a percentage
of sales, in both the full service and the quick service
segments. The increase as a percentage of sales in the full
service segment was mainly due to the decreased average weekly
sales in the Company's Grady's American Grill restaurants. The
increase as a percent of sales and in total dollars in the quick
service segment was due to the purchase of the Burger King
restaurants in Grand Rapids, Michigan. The Company experienced an
increase in payroll of $9,731,000 in the first forty weeks of
fiscal 2002 due to the addition of the Burger King restaurants in
Grand Rapids, Michigan.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Depreciation and amortization, as a percentage of total revenues,
decreased to 4.1% for the third quarter of fiscal 2002 compared
to 5.2% in the same period in fiscal 2001. The decrease was
mainly due to a $486,000 decrease at the Company's Grady's
division, which was a direct result of the fiscal 2001 asset
impairment charge discussed above. This decrease was partially
offset by a $240,000 increase in depreciation and amortization in
the quick service segment due to the addition of 41 Burger King
restaurants in Grand Rapids, Michigan. Depreciation and
amortization, as a percentage of total revenues, decreased to
4.0% in the first forty weeks of fiscal 2002 compared to 5.2% in
the same period in fiscal 2001. The fiscal 2001 impairment charge
reduced the depreciation and amortization expense at the
Company's Grady's division by $1,423,000 in the first forty weeks
of fiscal 2001. This decrease was partially offset by a $755,000
increase in depreciation and amortization in the quick service
segment due to the addition of 41 Burger King restaurants in
Grand Rapids, Michigan.
Other restaurant operating expenses include rent and utilities,
royalties, promotional expense, repairs and maintenance, property
taxes and insurance. Other restaurant operating expenses as a
percentage of total revenues decreased in the third quarter of
fiscal 2002 to 25.1% compared to 25.6% in the same period of
fiscal 2001 and increased to 25.1% in the first forty weeks of
fiscal 2002 compared to 24.8% in the same period of fiscal 2001.
The decrease in other restaurant operating expenses as a
percentage of sales in the third quarter was mainly due to the
sale of under performing Grady's American Grill restaurants and a
reduction in promotional discounts in the Burger King
restaurants. The increase in other restaurant operating expenses
for the first forty weeks of fiscal 2002 was mainly due to the
lower average weekly sales at the Company's Grady's division.
Income from restaurant operations increased $1,986,000 to
$8,134,000, or 13.7% of revenues, in the third quarter of fiscal
2002 compared to $6,148,000, or 11.8% of revenues, in the
comparable period of fiscal 2001. Income from restaurant
operations in the Company's Quick Service segment increased
$1,703,000 while the Company's Full Service segment increased
$312,000 from the prior year. Income from restaurant operations
increased $3,892,000 to $25,570,000, or 12.7% of revenues, in the
first forty weeks of fiscal 2002 compared to $21,678,000, or
12.6% of revenues, in the comparable period of fiscal 2001.
Income from restaurant operations in the Company's Quick Service
segment increased $4,082,000 while the Company's Full Service
segment decreased $84,000 when compared to the first forty weeks
of the prior year.
General and administrative expenses were $4,531,000 in the third
quarter of fiscal 2002 compared to $3,199,000 in the third
quarter of fiscal 2001 and $14,796,000 in the first forty weeks
of fiscal 2002 compared to $11,449,000 in the same period of
fiscal 2001. As a percentage of total restaurant sales, general
and administrative expenses were 7.6% in the third quarter of
fiscal 2002 versus 6.1% in the third quarter of fiscal 2001 and
7.3% in the first forty weeks of fiscal 2002 compared to 6.6% in
the same period of fiscal 2001. In the third quarter of fiscal
2002 the Company recorded approximately $483,000 in expenses
related to the Company's litigation with BFBC, LTD. and in the
first forty weeks of fiscal 2002 the Company recorded
approximately $1,364,000 for the BFBC, LTD litigation (See Note
8). The Company did not incur similar expenses during fiscal
2001. The Company also incurred additional general and
administrative expenses related to the addition of 41 Burger King
restaurants in Grand Rapids, Michigan. The increase in the third
quarter of fiscal 2002 was $314,000 and the increase in the first
forty weeks of fiscal 2002 was $1,076,000.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company incurred $34,000 in facility closing costs and
reversed $245,000 in facility closing costs in the third quarter
of fiscal 2002 because actual facility closing costs for certain
restaurants were lower than the Company's original estimates.
Amortization of intangibles, as a percentage of total revenues,
decreased to 0.2% for the third quarter of fiscal 2002 compared
to 0.4% in the same period in fiscal 2001, and to 0.2% in the
first forty weeks of fiscal 2002 compared to 0.4% for the same
period in fiscal 2001. The Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" at the beginning of fiscal
2002. Under SFAS 142, amortization of goodwill was discontinued.
Total other expenses, as a percentage of revenues, decreased to
2.9% for the third quarter of fiscal 2002 from 4.4% during the
comparable period in fiscal 2001, and to 2.8% in the first forty
weeks of fiscal 2002 compared to 4.4% in the same period of
fiscal 2001. The decrease was mainly due to lower interest rates
and lower debt levels that reduced the Company's interest expense
in the third quarter and first forty weeks of fiscal 2002 versus
the same periods in fiscal 2001.
The provision for income taxes was $324,000 for the third quarter
of fiscal 2002 versus $247,000 in the comparable period in fiscal
2001. The provision for income taxes was $1,080,000 for the first
forty weeks of fiscal 2002 versus $1,104,000 in the comparable
period in fiscal 2001. The Company's federal tax expense was
completely offset by a reduction in the Company's deferred tax
valuation allowance for both the third quarter and the first
forty weeks of fiscal 2002. The Company has a large portion of
state taxes that are based on criteria other than income. The
Company expects to incur approximately $1,400,000 in state income
taxes during fiscal 2002.
For the third quarter of fiscal 2002, the Company reported net
income of $1,718,000 compared to net income of $213,000 for the
same period of fiscal 2001 and $3,883,000 in the first forty
weeks of fiscal 2002 compared to $778,000 in the same period of
fiscal 2001.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for building or
acquiring new restaurants, replacing equipment and remodeling
existing restaurants. The Company has historically financed these
activities using principally cash flows from operations and its
credit facilities. The Company's restaurants generate cash
immediately through sales. As is customary in the restaurant
industry, the Company does not have significant assets in the
form of trade receivables or inventory, and customary payment
terms generally result in several weeks of trade credit from its
vendors. Therefore, the Company's current liabilities have
historically exceeded its current assets.
In the first forty weeks of fiscal 2002, cash provided by
operating activities was $13,614,000 compared to $10,201,000 in
fiscal 2001. The increase in fiscal 2002 compared to fiscal 2001
was mainly due to increased profitability of the Company.
During the first forty weeks of fiscal 2002, the Company had
$10,036,000 in capital expenditures in connection with the
construction of new restaurants and the refurbishing of existing
restaurants.
During the first forty weeks of fiscal 2002, the Company had
$11,457,000 in proceeds from the sale of property and equipment,
principally from the sale of Grady's American Grill restaurants.
The Company had a net repayment of $13,549,000 under its
revolving credit agreement during the first forty weeks of fiscal
2002. As of August 4, 2002, the Company's revolving credit
agreement had an additional $7,629,000 available for future
borrowings. The Company's average borrowing rate on August 4,
2002, was 5.01%. The revolving credit agreement is subject to
certain restrictive covenants that require the Company, among
other things, to achieve agreed upon levels of cash flow. Under
the revolving credit agreement the Company's funded debt to
consolidated cash flow ratio and fixed charge coverage ratio
requirements were 4.00 and 1.50, respectively, on August 4, 2002.
The Company was in compliance with these requirements with a
funded debt to consolidated cash flow ratio of 3.82 and a fixed
charge coverage ratio of 1.71.
The Company did not repurchase any shares of stock during the
first forty weeks of fiscal 2002. The Company repurchased 736,073
shares of its common stock in the open market in the first forty
weeks of fiscal 2001 for $1,925,000. The Company does not
presently intend to repurchase shares due to the Company's
significant capital expenditure budget for fiscal 2002.
The Company's primary cash requirements in fiscal 2002 will be
capital expenditures in connection with the opening of new
restaurants, remodeling of existing restaurants, maintenance
expenditures, and the reduction of debt under the Company's debt
agreements. Through the first forty weeks of fiscal 2002, the
Company has opened one new Burger King restaurant. During the
fourth quarter of fiscal 2002, the Company anticipates opening
one new Burger King restaurant, one Chili's restaurant and one
Papa Vino's restaurant. The Company also plans to replace two
existing Burger King buildings with new buildings at the same
locations during the fourth quarter of fiscal 2002. 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. While the Company's capital expenditures for fiscal 2002
are expected to range from $16,000,000 to $18,000,000, if the
Company has alternative uses or needs for its cash, the Company
believes it could delay such planned expenditures. A significant
delay in opening restaurants could cause a default in the
Company's development agreements if the Company were not able to
obtain waivers from Brinker and Burger King. In such event, the
Company could lose its right to open additional Chili's and
Burger King restaurants and, in the case of Chili's, its right to
exclusivity in its markets.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company has debt service requirements of approximately
$1,337,000 in fiscal 2002, consisting primarily of the principal
payments required under the mortgage facility described below.
As of August 4, 2002, the Company had a financing package
totaling $109,066,000, consisting of a $60,000,000 revolving
credit agreement (the "Bank Facility") and a $49,066,000 mortgage
facility (the "Mortgage Facility"), as described below.
The Mortgage Facility currently includes 34 separate mortgage
notes, with terms of 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 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 (nine of which the Company
mortgaged its leasehold interest) and 15 of the Company's Burger
King restaurants (three of which the Company mortgaged its
leasehold interest). The mortgage notes contain, among other
provisions, certain restrictive covenants including maintenance
of a consolidated fixed charge coverage ratio for the financed
properties.
On June 10, 2002, the Company refinanced its Bank Facility with a
$60,000,000 revolving credit agreement with JP Morgan Chase Bank,
as agent, and four other banks. The Bank Facility is
collateralized by the stock of certain subsidiaries of the
Company, 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
Facility.
The Bank Facility contains 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, cross-default
provisions with other material agreements, 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 Bank Facility, provides for borrowings at the adjusted LIBOR
rate plus a contractual spread which is as follows:
RATIO OF FUNDED DEBT
TO CASH FLOW LIBOR
MARGIN
- -------------------- ----------
Greater than or equal to 3.50 3.00%
Less than 3.5x but greater than or equal to 3.0x 2.75%
Less than 3.0x but greater than or equal to 2.5x 2.25%
Less than 2.5x 1.75%
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 4, 2002
(Unaudited)
The Bank Facility also contains covenants requiring maintenance
of funded debt to cash flow and fixed charge coverage ratios
which are as follows:
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO COVENANT
- ------------------- ---------
Fiscal 2002
Q2 4.00
Q3 4.00
Q4 4.00
Fiscal 2003
Q1 through Q3 4.00
Q4 3.75
Fiscal 2004
Q1 through Q3 3.75
Q4 3.50
Fiscal 2005
Q1 through Q2 3.50
Thereafter 3.00
FIXED CHARGE COVERAGE RATIO 1.50
The Company does not believe that its current business plans will
be impeded by its leverage. Should the Company's leverage impede
its business plan, the Company believes it could reduce its
capital spending. Its principal opportunities to reduce capital
spending would be to scale back its new unit development and/or
its planned remodel budget.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER MATTERS
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and
Results of Operations are based upon the consolidated financial
statements, which were prepared in accordance with accounting
principles generally accepted in the United States of America.
These principles require management to make estimates and
assumptions that affect the reported amounts in the consolidated
financial statements and notes thereto. Actual results may differ
from these estimates, and such differences may be material to the
consolidated financial statements. Management believes that the
following significant accounting policies involve a higher degree
of judgment or complexity.
Property and equipment
Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets. The useful lives
of the assets are based upon management's expectations for the
period of time that the asset will be used for the generation of
revenue. Management periodically reviews the assets for changes
in circumstances that may impact their useful lives.
Impairment of long-lived assets
Management periodically reviews property and equipment for
impairment using historical cash flows as well as current
estimates of future cash flows. This assessment process requires
the use of estimates and assumptions that are subject to a high
degree of judgment. In addition, management periodically assesses
the recoverability of goodwill and other intangible assets which
requires assumptions regarding the future cash flows and other
factors to determine the fair value of the assets. If these
assumptions change in the future, management may be required to
record impairment charges for these assets.
Income taxes
The Company has recorded a valuation allowance to reduce its
deferred tax assets since it is more likely than not that some
portion of the deferred assets will not be realized. Management
has considered all available evidence both positive and negative,
including its historical operating results, estimates of future
taxable income and ongoing feasible tax strategies in assessing
the need for the valuation allowance; if these estimates and
assumptions change in the future, the Company may be required to
adjust its valuation allowance. This could result in a charge to,
or an increase in, income in the period such determination is
made.
Other estimates
Management is required to make judgments and or estimates in the
determination of several of the accruals that are reflected in
the consolidated financial statements. Management believes that
the following accruals are subject to a higher degree of
judgment.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Management uses estimates in the determination of the required
accruals for general liability, workers' compensation and health
insurance. These estimates are based upon a detailed examination
of historical and industry claims experience. The claim
experience may change in the future and may require management to
revise these accruals.
The Company is periodically involved in various legal actions
arising in the normal course of business. Management is required
to assess the probability of any adverse judgments as well as the
potential ranges of any losses. Management determines the
required accruals after a careful review of the facts of each
legal action. The accruals may change in the future due to new
developments in these matters.
Management continually reassesses its assumptions and judgments
and makes adjustments when significant facts and circumstances
dictate. Historically, actual results have not been materially
different than the estimates that are described above.
This report contains and incorporates forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995, including statements about the Company's development
plans and trends in the Company's operations and financial
results. Forward-looking statements can be identified by the use
of words such as "anticipates," "believes," "plans," "estimates,"
"expects," "intends," "may," and other similar expressions.
Forward-looking statements are made based upon management's
current expectations and beliefs concerning future developments
and their potential effects on the Company. There can be no
assurance that the Company will actually achieve the plans,
intentions and expectations discussed in these forward-looking
statements. Actual results may differ materially. Among the
risks and uncertainties that could cause actual results to differ
materially are the following: the availability and cost of
suitable locations for new restaurants; the availability and cost
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; changes in governmental
regulations, including increases in the minimum wage; the results
of pending litigation; and weather and other acts of God. The
Company undertakes no obligation to update or revise any forward-
looking information, whether as a result of new information,
future developments or otherwise.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The Company is exposed to interest rate risk in connection with
its $60.0 million revolving credit facility which provides for
interest payable at the LIBOR rate plus a contractual spread.
The Company's variable rate borrowings under this revolving
credit facility totaled $50.7 million at August 4, 2002. The
impact on the Company's annual results of operations of a one-
point interest rate change would be approximately $507,000.
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
None
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: September 17, 2002 By: /s/Jeanne M. Yoder
--------------------------
Vice President and Controller
(Principal accounting officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel B. Fitzpatrick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Quality Dining, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report.
Date: September 17, 2002
/s/ Daniel B. Fitzpatrick
--------------------------
Daniel B. Fitzpatrick
President and Chief Executive
Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John C. Firth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Quality Dining, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report.
Date: September 17, 2002
/s/ John C. Firth
---------------------------
John C. Firth
Executive Vice President and
General Counsel (Principal
Financial Officer)
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- ---------------------------------
10-S * Amendment, dated September 9, 2002, to
Employment Agreement between the Company
and John C. Firth
10-AE Aircraft Hourly Rental Agreement by and between
BMSB, Inc. and Quality Dining, Inc., dated as of
August 22, 2002
99.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Executive Vice
President and General Counsel
(Principal Financial Officer) Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 10-S
- --------------------
September 9, 2002
John C. Firth
Executive Vice President,
General Counsel and Secretary
Quality Dining, Inc.
4220 Edison Lakes Parkway
Mishawaka, IN 46545
Dear John:
This letter constitutes a supplement of, and amendment to, the
Employment Agreement dated August 24, 1999, between you and
Quality Dining, Inc. (the "Company"). Except as herein
supplemented or amended, the Employment Agreement shall remain in
full force and effect. Capitalized terms used herein and not
defined herein shall have the meanings ascribed to them in the
Employment Agreement.
1.Base Salary. Your annualized Base Salary for the period
commencing June 24, 2002 through the end of fiscal year 2003
shall be $285,000.00. Your Base Salary for fiscal year 2004
shall be $300,000.00. Your Base Salary for fiscal year 2005,
shall be $315,000.00.
2.Extraordinary Bonus. In addition to any annual bonus you are
eligible to receive pursuant to Section 4(b)(ii) of the
Employment Agreement, the Company has awarded you an
extraordinary bonus of $100,000.00 which will be paid to you on
the regular payroll date closest to October 15, 2002 provided you
are then still in the Company's employ.
3.Extraordinary Restricted Stock and Stock Option Grant. In
addition to any regular grants of restricted stock and/or stock
options which you are eligible to receive as an executive officer
of the Company, the Company shall grant to you as of the date of
this letter 120,000 shares of restricted stock which would vest
10 years from the date of grant, subject to accelerated vesting
in one-third increments at each of $1.00, $2.00 and $4.00
increases in the market price of the Company's common stock over
the closing market price of the Company's common stock on the
date of grant. If the closing price of the Company's common
stock equals or exceeds any above specified incremental increase
for a period of 10 out of 20 consecutive trading days, then one-
third of the shares granted would vest for each specified
increase. In addition, the Company shall grant to you as of the
date of this letter options for an aggregate of 60,000 shares of
the Company's common stock, which options would vest over three
years at a rate of 50% of such shares vesting one year from the
date of grant, 25% two years from the date of grant and the
remaining 25% three years from the date of grant. The exercise
price of such options shall be the closing price of the Company's
common stock on the date of grant. The restricted stock and
options shall be granted pursuant to the Company's 1997 Stock
Option and Incentive Plan.
If you agree to the terms of this letter, please execute and
return to me the copy of this letter enclosed herewith.
Yours very truly,
QUALITY DINING, INC.
By: /s/ Daniel B. Fitzpatrick
Daniel B. Fitzpatrick
Chairman, President & CEO
Accepted and Agreed to this 9th day of September, 2002.
/s/ John C. Firth
John C. Firth
EXHIBIT 10-AE
- --------------------
AIRCRAFT HOURLY RENTAL AGREEMENT
THIS AGREEMENT made as of the 22nd day of August 2002,
("Agreement") by and between BMSB, Inc., a Florida corporation
("Owner"), and Quality Dining, Inc., an Indiana corporation
("Operator").
1. Rental of the Aircraft
Owner hereby rents to Operator the non-exclusive right to
use and operate a certain aircraft, as outlined on Exhibit A,
(the "Aircraft"), which is owned and titled in the name of Owner.
Operator is renting Aircraft for the purpose of transporting
Operator or its members, directors, officers, employees and
guests in furtherance of its primary, non-transportation
business.
2. Delivery of Aircraft
The Aircraft shall be delivered to Operator at the location
outlined on Exhibit A, or such other location upon which the
parties may agree. Each date on which Owner delivers possession
of the Aircraft to Operator is referred to in this Agreement as a
"Delivery Date." Each rental period shall commence with delivery
and conclude with return of the Aircraft. If requested by Owner,
Operator shall execute a Delivery and Acceptance Certificate in
the form attached to this Agreement each time Operator accepts
delivery of the Aircraft.
3. Rental Period
The "Rental Period" shall consist of flight time during the
term of this Agreement, as well as any other period after Owner
has delivered possession of the Aircraft to Operator until
Operator returns the Aircraft to Owner. Operator shall schedule
its desired flight time (and Aircraft return time) in advance
with Owner. The Aircraft shall be available to Operator when not
previously scheduled by Owner or any other Operator or is
otherwise unavailable, such as due to maintenance.
4. Rent
Operator shall pay Owner base rent as outlined on Exhibit A
for use of the Aircraft. The sum of the base rent and all other
charges, payments, and indemnities due by Operator hereunder are
hereinafter referred to as "Aggregate Rentals." The hourly
charges shall be calculated on the time from takeoff to landing
at destination of each leg of the trip based on readings from the
Hobbs meter.
5. Term
This Agreement shall be for a one year term and shall
automatically renew for an additional year unless either Party
provides written notice prior to its anniversary date.
6. Certain Covenants of Operator. Operator agrees as follows:
a. Furnishing of Information
Operator shall furnish from time to time to Owner such
information regarding Operator's use, operation, or maintenance
of the Aircraft as Owner may reasonably request.
b. Lawful Use
The Aircraft shall not be maintained, used, operated, or
stored by Operator in violation of any law or any rule,
regulation, or order of any government or governmental authority
having jurisdiction (domestic or foreign), or in violation of any
airworthiness certificate, license, or registration relating to
the Aircraft or its use, or in violation or breach of any
representation or warranty made with respect to obtaining
insurance on the Aircraft or any term or condition of such
insurance policy. Aircraft operations shall be limited to
operations allowed under Part 91 of Title 14 of the Code of
Federal Regulations.
c. Aircraft Location
The Aircraft shall not be operated or located by Operator
in (i) any area excluded from coverage by the terms of insurance,
or (ii) any recognized or threatened area of hostilities, unless
fully covered to Owner's satisfaction by war risk insurance. The
predominant use of the Aircraft will be within the United States,
and in particular Operator shall during the term hereof comply
with Section 47.9(a)(3) and (b) of Title 14 of the Code of
Federal Regulations.
d. Base of the Aircraft
The Aircraft shall be principally based as outlined on
Exhibit A unless otherwise approved by Owner.
e. Transportation Code Filings
Operator shall not take any action that would endanger
the U.S. Registration of the Aircraft under Title 49 of the U.S.
Code, and the rules and regulations promulgated thereunder.
f. Non-Offset Expenses
Operator will incur certain expenses that will benefit
only the Operator. These payments include catering, fines and
fees on penalties arising out of Operator's use, and sales or use
taxes due to Operator's use. Operator agrees to pay these
expenses when due.
g. Offset Expense Payments
Operator will incur certain expenses that will benefit
Owner and Joint Renters of the Aircraft. These payments include
scheduled and non-scheduled maintenance pursuant to Paragraph 7,
hangar and storage charges while at home base, insurance premiums
for insurance coverage pursuant to Paragraph 10, fuel, crew
expenses, landing fees, handling fees away from home base, custom
fees and property and ad valorem taxes. Operator agrees to pay
these expenses when due.
h. Log Books
Operator shall maintain current and complete logs, books,
and records pertaining to the Aircraft during each Rental Period
in accordance with Federal Aviation Administration ("FAA") rules
and regulations and Operator shall deliver such records in
legible form to Owner.
i. Pilots
The Aircraft shall, at all times during each Rental
Period, be operated by duly qualified, current, and rated
(appropriate to the Aircraft) pilots employed, paid, and
contracted for by Operator, whose licenses are in good standing,
who meet the requirements established and specified by the
insurance policies required hereunder, and by the FAA, and any
other reasonable requirements established by Owner from time to
time.
j. Liens
Operator will not directly or indirectly create, incur,
or permit to be created as a result of Operator's acts or
omissions, any liens on or with respect to (i) the Aircraft or
any part thereof, (ii) Owner's title thereto or any interest of
Owner in or to the Aircraft, or (iii) Operator's interest under
this Agreement. Operator shall promptly, at its own expense, take
such action as may be necessary to promptly discharge any such
lien.
k. Taxes
Operator shall pay to and indemnify the Owner for, and
hold the Owner harmless from and against, all franchise, gross
receipts, rental, sales, use, excise, personal property, ad
valorem, value added, leasing, leasing use, stamp, landing,
airport use or other taxes, levies, imposts, duties, charges,
fees or withholdings of any nature, together with any penalties,
fines, or interest thereon ("Taxes") arising out of the
transactions contemplated by this Agreement and imposed against
Owner, Operator, or the Aircraft or any part thereof by any
federal or foreign government, any state, municipal or local
subdivision, any agency or instrumentality thereof or other
taxing authority, or upon the ownership, delivery, leasing,
possession, use, operation, return, transfer or release thereof,
or upon the rentals, receipts or earnings arising therefrom, or
upon or with respect to this Agreement; provided, however, that
Operator shall not have any obligation or liability with respect
to any state or federal income taxes imposed upon Owner. If a
claim is made against Owner for any Tax that is subject to
indemnification hereunder, Owner shall notify Operator promptly
of such claim in writing. In case any report or return is
required to be made with respect to any taxes, Operator will
either (after notice to Owner) make such report or return in such
manner as will show the ownership of the Aircraft in Owner and
send a copy of such report or return to Owner or will notify
Owner of such requirement and make such report or return in such
manner as shall be satisfactory to Owner. Owner agrees to
cooperate fully with Operator in the preparation of any such
report or return.
7. Aircraft Maintenance
During the Lease Term and until such time as the Aircraft is
returned to Owner, Operator agrees, at its own cost and expense,
to keep the Aircraft at all times in (a) fully operational, duly
certified, and airworthy condition and (b) condition adequate to
comply with all regulations of the FAA or any other governmental
agency having jurisdiction over the maintenance, use or operation
of the Aircraft. Without limiting the foregoing, Operator, at
its own cost and expense, shall maintain, inspect, service, and
test the Aircraft and perform all repairs on the Aircraft in
accordance with all maintenance manuals for the Aircraft from
time to time issued by the airframe manufacturer, the engine
manufacturer, or any other manufacturer. All work required by
this Paragraph 7 shall be undertaken and completed only by
properly trained, licensed, and certified maintenance personnel.
All replacement parts shall be of the type approved by the
airframe manufacturer, be of the same quality as the replaced
part, and become the property of Owner (free and clear of all
liens and encumbrances) upon installation.
8. Inspection
Owner or its designee shall have the right, but not the
duty, to inspect the Aircraft at any reasonable time and upon
reasonable notice. Upon Owner's request, Operator shall advise
Owner of the Aircraft's location and, within a reasonable time
and, provided there is no undue inconvenience and delay to
Operator, shall permit Owner to examine all information, logs,
documents, and Operator's records regarding or with respect to
the Aircraft and its use or condition.
9. Loss or Damage
a. Risk of Loss
Operator agrees to provide insurance for the benefit of
Owner and Operator for coverage including loss, theft,
confiscation, damage to or destruction of the Aircraft from any
cause whatsoever. Operator will provide Owner a copy of said
insurance on request. Owner agrees to hold Operator harmless for
any loss in excess of insurance coverage provided by Operator.
b. Insurance Proceeds Received by Operator
In the event Operator receives any insurance proceeds,
Operator shall be obligated to immediately pay to Owner the full
amount of said proceeds.
10. Insurance
Operator shall secure and maintain in effect at its own
expense throughout the term hereof such insurance policies
covering the Aircraft against a Casualty Occurrence as Owner
shall deem appropriate. All insurance policies shall name Owner
(or its designee in Owner's sole discretion) as owner of the
Aircraft and as loss payee. In the event of a Casualty
Occurrence, any insurance proceeds (other than for liability
insurance) received by the Operator with respect to the Casualty
Occurrence involving the Aircraft shall be paid to Owner.
11. Return
a. Location
Upon the termination or expiration of each Rental Period,
Operator shall return the Aircraft to the location designated on
the delivery and acceptance certificate (or such other mutually
agreeable location). All expenses for delivery and return of the
Aircraft shall be borne by Operator. In the event that Operator
fails for any reason whatsoever to return the Aircraft on or
before the last day of each Rental Period, Owner's damages shall
include, but shall not be limited to, lost rentals at the rate of
5 hours base rental charge for each day that such return is
delayed.
b. Return Condition
Upon return and at Operator's expense, the Aircraft must
satisfy all of the following conditions:
i. The Aircraft must be in substantially the same
condition as upon the commencement of each Rental Period, with
all equipment, parts, components, passenger service items, and
other accessories that were on or in the Aircraft when delivered
to Operator in a serviceable condition or with an equivalent or
better replacement thereof;
ii. All exterior paint and interior components (including
without limitation, paint, carpet, fabric, and wood paneling)
must be in the same good appearance as when the Aircraft was
delivered to Operator (reasonable wear and tear excepted);
iii.The Aircraft must be returned with all and complete
originals of the logs maintained by Operator (or if originals are
not available, then any consequences of (or conditions to) use of
new logs and new maintenance records under FAA rules and
regulations shall be observed or complied with, including without
limitation any engine and/or airframe rebuild under FAA rules and
regulations, including any engine rebuild under 14 CFR 91.175),
manuals, certificates, data, inspection, modification and
overhaul records, and all entries therein must be complete,
correct, and current, and in the case of any modifications made
to, or supplemental type certificates incorporated in, the
Aircraft, all engineering documents and drawings therefor must
also be returned;
iv. The Aircraft shall not have suffered any major damage
nor any damage of the kind requiring the use of an FAA Form 337
during each Rental Period;
v. The Aircraft shall be free of any hazardous or
otherwise unacceptable materials, contaminants, or substances
except as required for flight; and
vi. The Aircraft shall undergo an inspection or
inspections or a flight test or tests, as required in Owner's
discretion, resulting in the Owner's determination that the
Aircraft and all parts, components, systems, and records comply
with FAA standards at that date and meet all of the above
conditions.
If Operator does not return the Aircraft in accordance with
the above condition, (i) Owner may make (or cause to be made) any
repairs reasonably necessary to restore the Aircraft to the
required condition, (ii) Operator shall reimburse Owner, upon
demand, for any costs, expenses and fees, fees and expenses for
repairs, and lost rentals at the per diem rate related to such
restoration, and/or (iii) Operator shall compensate Owner for the
diminished value of the Aircraft resulting from Operator's
failure to return the Aircraft in such condition to Owner's
satisfaction.
If the parties hereto cannot agree on the diminished value
of the Aircraft mentioned in the preceding clause (iii) above,
said value shall be established by using the average of the
diminished value determined by two appraisals (each party
appointing on appraiser) if these are within five percent (5%) of
the highest; if not, a third appraisal shall be done (the
appraiser being appointed by the two preceding appraisers) and
the average of the two closest appraisals shall be used.
12. Owner's Disclaimer
NEITHER OWNER (NOR ITS AFFILIATES) MAKES, HAS MADE, OR SHALL
BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION,
EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE
AIRCRAFT RENTED HEREUNDER OR ANY ENGINE OR COMPONENT THEREOF,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN,
COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR
WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR
OPERATION, AIRWORTHINESS, SAFETY, PATENT, TRADEMARK OR COPYRIGHT
INFRINGEMENT, OR TITLE. All such risks, as between Owner (and
its affiliates) and Operator, are to be borne by Operator.
Without limiting the foregoing, Owner and its affiliates shall
have no responsibility or liability to Operator or any other
person with respect to any of the following, regardless of any
negligence of Owner or its affiliates: (i) any liability, loss,
or damage caused or alleged to be caused directly or indirectly
by the Aircraft, any inadequacy thereof, any deficiency or defect
(latent or otherwise) therein, or any other circumstance in
connection therewith; (ii) the use, operation, or performance of
the Aircraft or any risks relating thereto, (iii) any
interruption of service, loss of business or anticipated profits
or consequential damages, or (iv) the delivery, operation,
servicing, maintenance, repair, improvement, or replacement of
the Aircraft.
13. Indemnification
a. General Indemnity
Operator shall indemnify and save harmless Owner, its
affiliates, its successors and assigns, their directors, officers
and employees, from and against any and all losses, claims
(including without limitation, claims involving strict or
absolute liability in tort, damage, injury, death, liability, and
third party claims), suits, demands, costs, and expenses of every
nature (including, without limitation, reasonable attorneys'
fees) arising directly or indirectly from or in connection with
the possession, maintenance, condition, storage, use, operation,
or return operation of the Aircraft and Operator shall, upon
request, defend any actions based on or arising out of any of the
foregoing.
b. Survival
Operator's obligations under this Paragraph 13 shall
survive termination of this Agreement and shall remain in effect
until all required indemnity payments have been made by Operator
to Owner. All references to Owner in this Paragraph 13 include
Owner and any consolidated taxpayer group of which Owner is a
member.
14. Operator's Default
Each of the following events shall constitute an "Event of
Default" hereunder (whatever the reason for such event of default
and whether it shall be voluntary or involuntary, or come about
or be effected by operation of law, or be pursuant to or in
compliance with any judgment, degree, or order of any court of
any order, rule, or regulation of any administrative or
governmental body):
a. Operator shall fail to make payment of any Aggregate
Rental within ten (10) days after the same shall become due and
such failure shall continue for five (5) days after written
notice thereof from Owner to Operator; or
b. Operator shall fail to perform or observe any covenant,
condition, or agreement to be performed or observed by it under
this Agreement or any agreement, document, or certificate
delivered by Operator in connection herewith. Owner shall
endeavor to provide Operator with written notice and three (3)
days to cure such breach, except in the case of emergency or a
continuing breach which cannot be cured; or
c. Any representation or warranty made by Operator in this
Agreement or any agreement, document, or certificate delivered by
the Operator in connection herewith is or shall become incorrect
in any material respect, and, if such a default is susceptible of
being corrected, Operator fails to correct such default within
three (3) days of a written notice of Owner requesting correction
of same; or
d. Operator shall become insolvent; or
e. Operator makes an assignment for the benefit of
creditors, or if a petition is file by or against Operator under
any bankruptcy or insolvency law; or
f. If a receiver is appointed for Operator or any of
Operator's property.
15. Owner's Remedies
a. Remedies
Upon the occurrence of any Event of Default Owner may, at
its option, exercise any of all remedies available at law or in
equity, including, without limitation, any or all of the
following remedies, as Owner in its sole discretion shall elect:
i. By notice in writing terminate this Agreement,
whereupon all rights of the Operator to the use of the Aircraft
or any part thereof shall absolutely cease and terminate but
Operator shall remain liable as hereinafter provided; and
thereupon Operator, if so requested by the Owner, shall at its
expense promptly return the Aircraft as required by Paragraph 11
hereof or Owner, at its option, may, with or without legal
process, enter upon the premises where the Aircraft may be
located and take immediate possession of and remove the same.
Operator specifically authorizes Owner's entry upon any premises
where the Aircraft maybe located for the purpose of, and waives
any cause of action it may have arising from, a peaceful retaking
of the Aircraft. Operator shall, without further demand,
forthwith pay to Owner as liquidated damages for loss of a
bargain and not as a penalty, an amount equal to the total
accrued and unpaid Aggregate Expenses, plus all other accrued and
unpaid amounts due hereunder, plus the Stipulated Loss Value in
the event that the Aircraft has not been returned. Upon payment
in full of the Stipulated Loss Value (if applicable), the
Aggregate Expenses for the Aircraft shall cease to accrue as to
the date of such payment, each Rental Period shall terminate, and
(except in the case of the loss, theft, confiscation, or complete
destruction of the Aircraft and subject to the rights of the
insurer following payment of a settlement to request transfer of
title and possession of the Aircraft) Operator shall be entitled
to recover possession of the Aircraft and obtain title thereto;
and
ii. Perform or cause to be performed any obligation,
covenant, or agreement of Operator hereunder. Operator agrees to
pay all reasonable costs and expenses incurred by Owner for such
performance as additional Aggregate Rental hereunder and
acknowledges that such performance by Owner shall not be deemed
to cure said Event of Default.
b. Costs and Attorneys' Fees
Operator shall be liable for all costs, charges, and
expenses, including reasonable legal fees and disbursements,
incurred by Owner by reason of the occurrence of any Event of
Default or the exercise of Owner's remedies with respect thereto.
c. Nonexclusive
No remedy referred to herein is intended to be exclusive,
but each shall be cumulative and in addition to any other remedy
referred to above or otherwise available to Owner at law or in
equity. Owner shall not be deemed to have waived any breach,
Event of Default or right hereunder unless the same is
acknowledged in writing by a duly authorized representative of
Owner. No waiver by Owner of any default or Event of Default
hereunder shall in any way be, or be construed to be, a waiver of
any future or subsequent default or Event of Default. The
failure or delay of Owner in exercising any rights granted it
hereunder upon any occurrence of any of the contingencies set
forth herein shall not constitute a waiver of any such right upon
the continuation or recurrence of any such contingencies or
similar contingencies and any single or partial exercise of any
particular right by Owner shall not exhaust the same or
constitute a waiver of any other right provided herein.
16. Owner's Assignment
It is understood that Owner may assign or pledge any or all
of its rights in this Agreement or the Aircraft without notice to
or the consent of Operator.
17. Notices
Unless specifically provided to the contrary herein all
notices permitted or required by this Agreement shall be in
writing and shall be deemed given with sent by commercial
courier, registered or certified mail, return receipt requested,
postage prepaid, to the address set forth hereinbelow, or such
other address as may hereafter be designated by the addressee in
a written notice to the other party.
Owner:BMSB, Inc.
4220 Edison Lakes Parkway
Mishawaka, IN 46545
Operator:Quality Dining, Inc.
4220 Edison Lakes Parkway
Mishawaka, IN 46545
18. Entire Agreement
The terms and conditions of this Agreement constitute the entire
agreement between the parties as to the subject matter hereof and
supersede all prior written and oral negotiations,
representations, and agreements, if any, between the parties on
such matters and shall be binding upon the parties, their
successors, assigns, and legal representatives.
19. Modification of Agreement
No change or modification hereof or waiver of any term or
condition hereof shall be effective unless the change or
modification is in writing and signed by both parties.
20. Time of the Essence
Time is of the essence in this Agreement.
21. Headings
The headings of Sections and subsections of this Agreement
are included for convenience only and shall not be used in its
construction or interpretation.
22. Governing Law
THE PARTIES HERETO ACKNOWLEDGE THAT THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ALL RESPECT IN ACCORDANCE WITH THE
SUBSTANTIVE LAWS OF THE STATE OF INDIANA (WITHOUT REGARD TO ITS
CHOICE OF LAWS RULES).
23. Truth-in-Leasing
a. OPERATOR HAS REVIEWED THE AIRCRAFT'S MAINTENANCE AND
OPERATING LOGS SINCE ITS DATE OF MANUFACTURE AND HAS FOUND THAT
THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 91 OF
THE FEDERAL AVIATION REGULATIONS. OWNER CERTIFIES THAT, ON THE
DELIVERY DATE, THE AIRCRAFT WILL COMPLY WITH THE APPLICABLE
MAINTENANCE AND INSPECTION REQUIREMENTS OF PART 91 OF THE FEDERAL
AVIATION REGULATIONS.
b. OPERATOR CERTIFIES THAT OPERATOR, AND NOT OWNER, IS
RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS
AGREEMENT DURING EACH RENTAL PERIOD. OPERATOR FURTHER CERTIFIES
THAT OPERATOR UNDERSTANDS ITS RESPONSIBILITY FOR COMPLIANCE WITH
APPLICABLE FEDERAL AVIATION REGULATIONS.
c. OPERATOR CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED
AND INSPECTED DURING EACH RENTAL PERIOD UNDER PART 91 OF THE
FEDERAL AVIATION REGULATIONS OF OPERATIONS TO BE CONDUCTED UNDER
THIS AGREEMENT. OPERATOR UNDERSTANDS THAT AN EXPLANATION OF
FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FEDERAL
AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT
STANDARDS DISTRICT OFFICE, GENERAL AVIATION DISTRICT OFFICE, OR
AIR CARRIER DISTRICT OFFICE.
IN WITNESS WHEREOF, the parties hereto have each caused this
Agreement to be duly executed as of the year and day first above
written. THIS AGREEMENT SHALL NOT BE EFFECTIVE UNTIL EXECUTED ON
BEHALF OF EACH PARTY.
OWNER: OPERATOR:
BMSB, Inc. Quality Dining, Inc.
By: /s/ Daniel B. Fitzpatrick By: /s/ John C. Firth
- ------------------------------ --------------------------
Title: President Title: Executive Vice President
DELIVERY AND ACCEPTANCE CERTIFICATE
This Certificate is delivered by the undersigned Operator
("Operator") pursuant to the Aircraft Agreement dated as of the
___ day of ____________, 2002, ("Agreement"), and in connection
with the following aircraft ("Aircraft") rented thereunder:
Aircraft: 1993 Beech 400A, Serial Number RK-72, N428WE
Operator hereby certifies that the Aircraft (including all
pertinent operational equipment and logs and maintenance manuals)
has been delivered to Operator, that Operator has caused its duly
qualified expert to inspect the Aircraft (and all pertinent
operational equipment and logs and maintenance manuals), and
that, based upon such inspection (which is entirely to Operator's
satisfaction), Operator hereby accepts the Aircraft as of the
Delivery Date specified below for all purposes of the Agreement
(including, without limitation, "operational control" thereof as
such term is used and defined under the Federal Aviation
Regulations). Operator will have operational control commencing
at the beginning of each Rental Period and ending upon the return
of the Aircraft to Owner at the end of each Rental Period
throughout the term of this Agreement. Operator hereby further
certifies that the following information is true and correct:
Delivery Date: The date of Operator's execution of this
Certificate.
Delivery Location: Greenville-Spartanburg International, South
Carolina (GSP)
OWNER: WITNESS:
BMSB, Inc. By: _________________________
By: Date: ________________________
Date:
OPERATOR:
Quality Dining, Inc.
By: _________________________
Date: _________________________
EXHIBIT A
Aircraft Identification
Aircraft: 1993 Beech 400A, Serial Number RK-72, N428WE
Hourly Rental Charges
Total hourly rent shall be the sum of the hourly rent amount of
$1,275 per hour, multiplied by Flight Time defined in paragraph
4, reduced by offset expense payments pursuant to paragraph 6g.
Base Airport
South Bend Regional (SBN)
Exhibit 99.1
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Quality Dining, Inc.
(the "Company") on Form 10-Q for the period ending August 4, 2002
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Daniel B. Fitzpatrick, Chairman of the
Board, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to
906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Daniel B. Fitzpatrick
- -------------------------------
Daniel B. Fitzpatrick
Chairman of the Board, President and
Chief Executive Officer
September 17, 2002
Exhibit 99.2
- ----------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Quality Dining, Inc.
(the "Company") on Form 10-Q for the period ending August 4, 2002
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, John C. Firth, Executive Vice President
and General Counsel (Principal Financial Officer) of the Company,
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to
906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ John C. Firth
- ------------------
John C. Firth,
Executive Vice President and
General Counsel (Principal Financial Officer)
September 17, 2002