Page 1 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 May 9, 2004 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 incorporation or organization) Identification No.) 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 ________ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No x The number of shares of the registrant's common stock outstanding as of June 18, 2004 was 11,596,781. QUALITY DINING, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 9, 2004 INDEX Page PART I - Financial Information Item 1. Consolidated Financial Statements (Unaudited): 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 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 30 Part II - Other Information Item 1. Legal Proceedings 31 Item 2. Changes in Securities 31 Item 3. Defaults upon Senior Securities 31 Item 4. Submission of Matters to Vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits and Reports on Form 8-K 31 Signatures 32 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 Twenty-Eight Weeks Ended May 9, May 11, May 9, May 11, 2004 2003 2004 2003 ------- ------- ------- ------- Revenues: Burger King $ 26,578 $ 25,452 $ 58,885 $ 59,393 Chili's Grill & Bar 20,346 18,616 45,153 42,132 Italian Dining Division 3,865 4,163 8,892 9,808 Grady's American Grill 1,437 1,459 3,360 3,501 ------- ------- ------- ------- Total revenues 52,226 49,690 116,290 114,834 ------- ------- ------- ------- Operating expenses: Restaurant operating expenses: Food and beverage 14,270 13,450 31,856 30,850 Payroll and benefits 15,114 14,293 33,894 33,630 Depreciation and amortization 2,101 2,288 4,968 5,362 Other operating expenses 13,605 12,685 30,421 30,077 ------- ------- ------- ------- Total restaurant operating expenses 45,090 42,716 101,139 99,919 ------- ------- ------- ------- Income from restaurant operations 7,136 6,974 15,151 14,915 General and administrative 3,663 4,041 8,678 8,980 Amortization of intangibles 37 87 119 203 ------- ------- ------- ------- Operating income 3,436 2,846 6,354 5,732 ------- ------- ------- ------- Other income (expense): Recovery of note receivable - 3,459 - 3,459 Interest expense (1,464) (1,690) (3,523) (3,994) Loss on sale of property and equipment (28) (1) (75) (10) Minority interest in earnings (573) (587) (1,054) (1,370) Other income, net 70 257 154 750 ------- ------- ------- ------- Total other income (expense), net (1,995) 1,438 (4,498) (1,165) ------- ------- ------- ------- Income from continuing operations before income taxes 1,441 4,284 1,856 4,567 Income tax provision 287 256 559 597 ------- ------- ------- ------- Income from continuing operations 1,154 4,028 1,297 3,970 Loss from discontinued operations (900) (4,308) (765) (4,071) ------- ------- ------- ------- Net income (loss) $ 254 $ (280) $ 532 $ (101) ======= ======= ======= ======= Basic net income (loss) per share: Continuing operations 0.10 0.36 0.11 0.35 Discontinued operations (0.08) (0.38) (.07) (0.36) ------- ------- ------- ------- Basic net income (loss) per share $ 0.02 $ (0.02) $0.04 $ (0.01) ======= ======= ======= ======= Diluted net income (loss) per share: Continuing operations 0.10 0.36 0.11 0.35 Discontinued operations (0.08) (0.38) (0.07) (0.36) ------- ------- ------- ------- Diluted net income (loss) per share $ 0.02 $ (0.02) $0.04 $ (0.01) ======= ======= ======= ======= Weighted average shares outstanding: Basic 11,311 11,311 11,311 11,311 ======= ======= ======= ======= Diluted 11,337 11,316 11,341 11,327 ======= ======= ======= ======= See Notes to Consolidated Financial Statements. QUALITY DINING, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) May 9, October 26, 2004 2003 ASSETS --------- --------- Current assets: Cash and cash equivalents $ 1,265 $ 1,724 Accounts receivable 1,706 1,723 Inventories 1,823 1,670 Deferred income taxes 2,710 2,251 Assets held for sale 12 5,821 Other current assets 1,769 2,192 ------- ------- Total current assets 9,285 15,381 ------- ------- Property and equipment, net 109,593 112,826 ------- ------- Other assets: Deferred income taxes 6,207 6,749 Trademarks, net 495 1,285 Franchise fees and development fees, net 8,440 8,801 Goodwill 7,960 7,960 Liquor licenses, net 2,884 2,820 Other 3,567 3,454 ------- ------- Total other assets 29,553 31,069 ------- ------- Total assets $148,431 $159,276 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 9,151 $ 10,055 Accounts payable 6,717 6,182 Accrued liabilities 21,761 19,520 ------- ------- Total current liabilities 37,629 35,757 Long-term debt 72,638 85,335 ------- ------- Total liabilities 110,267 121,092 ------- ------- Minority interest 13,662 14,272 Stockholders' equity: Preferred stock, without par value: 5,000,000 shares authorized; none issued - - Common stock, without par value: 50,000,000 shares authorized; 12,955,781 and 12,955,781 shares issued, respectively 28 28 Additional paid-in capital 237,402 237,402 Accumulated deficit (205,982) (206,514) Unearned compensation (517) (575) ------- ------- 30,931 30,341 Treasury stock, at cost, 2,508,587 and 2,508,587 shares, respectively (6,429) (6,429) ------- ------- Total stockholders' equity 24,502 23,912 ------- ------- Total liabilities and stockholders' equity $148,431 $159,276 ======= ======= See Notes to Consolidated Financial Statements. QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Twenty-Eight Weeks Ended May 9, May 11, 2004 2003 --------- --------- Cash flows from operating activities: Net income (loss) $ 532 $ (101) Loss from discontinued operations 765 4,071 Minority interest in earnings 1,054 1,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 4,739 5,111 Amortization of other assets 775 865 Loss on sale of property and equipment 75 10 Deferred income taxes 83 - Amortization of unearned compensation 58 47 Changes in current assets and current liabilities: Net decrease (increase) in current assets 287 (169) Net increase (decrease) in current liabilities 2,136 (3,539) --------- --------- Net cash provided by operating activities 10,504 7,665 --------- --------- Cash flows from investing activities: Purchase of property and equipment (3,929) (2,698) Proceeds from the sales of property and equipment 8,635 581 Purchase of other assets (472) (199) Other - 300 --------- --------- Net cash provided by (used) for investing activities 4,234 (2,016) --------- --------- Cash flows from financing activities: Borrowings of long-term debt 28,271 31,043 Repayment of long-term debt (41,872) (33,705) Cash distributions to minority interest in consolidated partnerships (1,664) (3,683) --------- --------- Net cash used by financing activities (15,265) (6,345) --------- --------- Cash provided by discontinued operations 68 824 --------- --------- Net increase in cash and cash equivalents (459) 128 Cash and cash equivalents, beginning of period 1,724 1,174 --------- --------- Cash and cash equivalents, end of period $ 1,265 $ 1,302 ========= ========= See Notes to Consolidated Financial Statements. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (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 (TM) Italian Kitchen ("Papa Vino's"). The Company operates one of its Grady's American Grill restaurants under the tradename Porterhouse Steaks and Seafood (TM) and one under the tradename Regas Grill (R). As of May 9, 2004, the Company operated 174 restaurants, including 118 Burger Kings, 38 Chili's Grill & Bar restaurants, 7 Grady's American Grill restaurants, six Papa Vino's, three Spageddies, one Regas Grill and one Porterhouse Steak and Seafood restaurant. Note 2: Summary of Significant Accounting Policies. Basis of Presentation During the first quarter of 2004, the Company adopted FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", as revised by the FASB in December 2003 (FIN 46R). As a result of the adoption of this Interpretation, the Company changed its consolidation policy whereby the accompanying consolidated financial statements now include the accounts of Quality Dining, Inc., its wholly owned subsidiaries, and certain related party affiliates that are variable interest entities. Previously, the consolidated financial statements included only the accounts of Quality Dining, Inc., and its wholly owned subsidiaries. Prior periods have been restated to reflect this change. The Company determined that certain affiliated real estate partnerships from which the Company leases 42 of its Burger King restaurants and that are substantially owned by certain directors, officers, and stockholders of the Company meet the definition of variable interest entities as defined in FIN 46R ("VIE's"). Furthermore, the Company has determined that it is the primary beneficiary of these VIE's, based on the criteria in FIN 46R. The Company holds no direct ownership or voting interest in the VIE's. Additionally, the creditors and beneficial interest holders of the VIE's have no recourse to the general credit of the Company. The assets of the VIE's, which consist primarily of property and equipment, totaled $17,873,000 and $18,599,000 at May 9, 2004 and October 26, 2003, respectively. The liabilities of the VIE's, which consist primarily of bank debt, totaled $7,263,000 and $7,493,000 at May 9, 2004 and October 26, 2003, respectively. Certain of the assets of the VIE's serve as collateral for the debt obligations. Because certain of these assets were previously recorded as capital leases by the Company, with a resulting lease obligation, the consolidation of the VIE's served to increase total assets as reported by the Company by $13,291,000 and $13,869,000 and total liabilities by $3,729,000 and $3,697,000 at May 9, 2004 and October 26, 2003, respectively. Additionally, the consolidation of the VIE's increased treasury stock by $2,806,000 at May 9, 2004 and October 26, 2003, as one of the VIE's owns common stock of the Company. The change had no impact on reported net income or earnings per share for the twenty-eight weeks ended May 9, 2004 and May 11, 2003. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) The following table presents the effect of the consolidation of the VIE's on depreciation and amortization expense, other operating expenses, general and administrative expense, interest expense and other income (expense) for the twelve weeks and twenty-eight weeks ended May 9, 2004 and May 11, 2003: (In thousands) 12-Weeks Ended 28-Weeks Ended -------------- -------------- May 9, May 11, May 11, May 9, 2004 2003 2004 2003 ------- ------- ------- ------- Depreciation and amortization expense $ 2,070 $ 2,255 $ 4,903 $ 5,285 Change in consolidation policy 31 33 65 77 ------ ------ ------ ------ Consolidated depreciation and amortization $ 2,101 $ 2,288 $ 4,968 $ 5,362 ====== ====== ====== ====== Other operating expenses $14,172 $13,223 $31,706 $31,314 Change in consolidation policy (567) (538) (1,285) (1,237) ------ ------ ------ ------ Consolidated other operating expenses $13,605 $12,685 $30,421 $30,077 ====== ====== ====== ====== General and administrative expenses $ 3,647 $ 4,031 $ 8,660 $ 8,937 Change in consolidation policy 16 10 18 43 ------ ------ ------ ------ Consolidated general and administrative Expenses $ 3,663 $ 4,041 $ 8,678 $ 8,980 ====== ====== ====== ====== Interest expense $ 1,517 $ 1,782 $ 3,646 $ 4,207 Change in consolidation policy (53) (92) (123) (213) ------ ------ ------ ------ Consolidated interest expense $ 1,464 $ 1,690 $ 3,523 $ 3,994 ====== ====== ====== ====== Other income (expense) $ 70 $ 257 $ 425 $ 710 Change in consolidation policy - - (271) 40 ------ ------ ------ ------ Consolidated other income (expense) $ 70 $ 257 $ 154 $ 750 ====== ====== ====== ====== 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 28-week period ended May 9, 2004 are not necessarily indicative of the results that may be expected for the 53- week year ending October 31, 2004. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) These financial statements should be read in conjunction with the Company's audited financial statements for the fiscal year ended October 26, 2003 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. As a result of the adoption of Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company has classified the revenues, expenses and related assets and liabilities of four Grady's American Grill restaurants that were sold in 2003, one Grady's American Grill restaurant that was sold and one that was closed in fiscal 2004, six Grady's American Grill restaurants that the Company sold and leased back in fiscal 2004 and one Grady's American Grill restaurant that was held for sale at the end of the second quarter of fiscal 2004, as discontinued operations in the accompanying consolidated financial statements. Intangible Assets Franchise Fees and Development Fees - The Company's Burger King and Chili's franchise agreements require the payment of a franchise fee for each restaurant opened. Franchise fees are deferred and amortized on the straight-line method over the lives of the respective franchise agreements. Development fees paid to Brinker were deferred and expensed in the period the related restaurants were opened. Franchise fees are being amortized on a straight-line basis, generally over 20 years. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) Trademarks - The Company owns the trademarks for its Grady's American Grill, Spageddies Italian Kitchen, Papa Vino's Italian Kitchen, Regas Grill and Porterhouse Steaks and Seafood. During the second quarter of fiscal 2003 the Company recorded an impairment charge of $4,411,000, consisting of a reduction in the net book value of the Grady's American Grill trademark of $2,882,000 and in the net book value of certain fixed assets of $1,529,000. The net book value of the Grady's American Grill trademark was $416,000 as of May 9, 2004. During the second quarter of fiscal 2003 the Company reviewed the useful life of the Grady's American Grill trademark and determined that the remaining useful life should be reduced from 15 years to five years. In determining the fair value of the impaired assets, the Company relied primarily on the discounted cash flow analyses that incorporated an investment horizon of five years and utilized a risk adjusted discount factor. Below are the gross carrying amount and accumulated amortization of the trademarks, franchise fees and development fees as of May 9, 2004. Amortized Intangible Assets - --------------------------- (Dollars in thousands) As of May 9, 2004 ------------------------------------ Gross Carrying Accumulated Net Amount Amortization Book Value Amortized intangible assets: -------- -------- -------- Trademarks $ 2,050 $ (1,555) $ 495 Franchise fees and development fees 14,824 (6,384) 8,440 ------- ------- ------ Total $ 16,874 $ (7,939) $ 8,935 ======= ======= ======= As of October 26, 2003 --------------------------------- Gross Carrying Accumulated Net Amount Amortization Book Value Amortized intangible assets: -------- -------- -------- Trademarks $ 2,961 $ (1,676) $ 1,285 Franchise fees and development fees 14,782 (5,981) 8,801 ------- ------- ------- Total $ 17,743 $ (7,657) $ 10,086 ======= ======= ======= The Company's intangible asset amortization expense for the twenty-eight week period ending May 9, 2004 was $522,000 compared to $600,000 for the comparable period in fiscal 2003. The estimated annual intangible amortization expense for each of the next five years is as follows: Year one $ 851,000 Year two $ 851,000 Year three $ 851,000 Year four $ 851,000 Year five $ 760,000 QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) 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 May 9, 2004 and October 26, 2003. 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. Stock Options The Company accounts for all of its stock-based compensation awards in accordance with APB Opinion No. 25 which requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. Under this method, no compensation cost has been recognized for stock option awards. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value method as prescribed by SFAS 123, the Company's net earnings (loss) and net earnings (loss) per share would have been the pro forma amounts indicated below: Twelve Twenty-Eight Weeks Ended Weeks Ended May 9, May 11, May 9, May 11, 2004 2003 2004 2003 ------- ------- ------ ------- (In thousands, except per share amounts) - --------------------------------------- Net income (loss), as reported $ 254 $ (280) $ 532 $ (101) Deduct: Total stock option based employee compensation expense determined by using the Black-Scholes option pricing model, net of related tax effects (7) (8) (16) (19) ----- ----- ----- ----- Net income (loss), pro forma $ 247 $ (288) $ 516 $ (120) ===== ===== ===== ===== Basic and diluted net income (loss) per common share, as reported $ 0.02 $(0.02) $ 0.04 $(0.01) ===== ===== ===== ===== Basic and diluted net income (loss) per common share, pro forma $ 0.02 $ (0.03) $ 0.04 $(0.01) ===== ===== ===== ===== QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) Note 3: Acquisitions and Dispositions. During the first twenty-eight weeks of fiscal 2004, the Company received net proceeds of $7,571,000 from a sale of seven Grady's American Grill restaurants. The Company recorded a loss in discontinued operations of $886,000 related to these sales in fiscal 2004. Six of the restaurants sold were sale-leaseback transactions. In each of the six sale- leaseback transactions, the Company's lease obligations extend for less than one year. The Company purchased five existing Burger King restaurants from a Burger King franchisee in the third quarter of fiscal 2004 for $1,150,000 During fiscal 2003, the Company sold four Grady's American Grill restaurants for net proceeds of $4,779,000. The Company recorded a $1,160,000 gain in discontinued operations related to these sales in fiscal 2003. As discussed in Note 2, discontinued operations includes the revenues and expenses of the four Grady's American Grill restaurants that were sold in fiscal 2003, the seven restaurants sold and one restaurant closed in the first twenty-eight weeks of fiscal 2004 and the one restaurant that was being held for sale as of May 9, 2004. The decision to dispose of the locations reflects the Company's ongoing process of evaluating the performance of the Grady's American Grill restaurants and using the proceeds from dispositions to reduce debt. Assets held for sale includes restaurant equipment totaling $12,000 as of May 9, 2004. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) Net loss from discontinued operations for the periods ended May 9, 2004, and May 11, 2003 were made up of the following components: Twelve Twenty-Eight Weeks Ended Weeks Ended May 9, May 11, May 9, May 11, 2004 2004 2004 2003 ----- ----- ----- ----- (In thousands, except per share amounts) - ---------------------------------------- Revenue discontinued operations $ 2,140 $ 2,272 $ 5,779 $10,487 Income discontinued restaurant operations 13 273 140 529 Asset impairment and facility closing expense (905) (4,572) (886) (4,578) ----- ----- ----- ----- Loss before taxes (892) (4,299) (746) (4,049) Income tax provision (8) (9) (19) (22) ----- ----- ----- ----- Loss from discontinued operations $ (900) $(4,308) $ (765) $(4,071) ===== ===== ===== ===== Basic and diluted net income per share from discontinued operations $(0.08) $ (0.38) $ (0.07) $ (0.36) ===== ===== ===== ===== Note 4: Commitments. The Company is self-insured for a portion of its employee health care costs. The Company is liable for medical claims up to $125,000 per eligible employee annually, and aggregate annual claims up to approximately $3,160,000. The aggregate annual deductible is determined by the number of eligible covered employees during the year and the coverage they elect. The Company is self-insured with respect to any worker's compensation claims not covered by insurance. The Company maintains a $250,000 per occurrence deductible and is liable for aggregate claims up to $2,400,000 for the twelve-month period beginning September 1, 2003 and ending August 31, 2004. The Company is self-insured with respect to any general liability claims below the Company's self-insured retention of $150,000 per occurrence for the twelve-month period beginning September 1, 2003 and ending August 31, 2004. As of May 9, 2004, the Company has accrued $4,065,000 for the estimated expense for its self-insured insurance plans. These accruals require management to make significant estimates and assumptions. Actual results could differ from management's estimates. At May 9, 2004, the Company had commitments aggregating $798,000 for the construction of restaurants. The Company is involved in various legal proceedings incidental to the conduct of its business, including employment discrimination claims. Based upon currently available information, the Company does not expect that any such proceedings will have a material adverse effect on the Company's financial position or results of operations but there can be no assurance thereof. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) Note 5: Debt Instruments. As of May 9, 2004, 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 initial 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, financial covenants that require the Company to maintain a consolidated fixed charge coverage ratio of at least 1.30 for each of six subsets of the financed properties. The Company was not in compliance with the required consolidated fixed charge coverage ratio for two of the subsets of the financed properties as of October 26, 2003. Both of these subsets are comprised solely of Burger King restaurants and had fixed charge coverage ratios of 1.11 and 1.26 as of October 26, 2003. The Company sought and obtained waivers of these covenant defaults from the mortgage lenders through November 28, 2004. If the Company is not in compliance with these covenants as of November 28, 2004, the Company will most likely seek additional waivers. The Company believes it would be able to obtain such waivers but there can be no assurance thereof. If the Company is unable to obtain such waivers it is contractually entitled to pre-pay the outstanding balances under one or more of the separate mortgage notes such that the remaining properties in the subsets would meet the required ratio. However, any such prepayments would be subject to prepayment premiums and to the Company's ability to maintain its compliance with the financial covenants in its Bank Facility. Alternatively, the Company is contractually entitled to substitute one or more better performing restaurants for under-performing restaurants such that the reconstituted subsets of properties would meet the required ratio. However, any such substitutions would require the consent of the lenders in the Bank Facility. For these reasons, the Company believes that its rights to prepay mortgage notes or substitute properties may be impractical depending on the circumstances existing at the time. 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. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) 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 3.00 2.75% Less than 3.0x but greater than or equal to 2.5x 2.25% Less than 2.5x 1.75% The Bank Facility also contains covenants requiring maintenance of funded debt to cash flow and fixed charge coverage ratios as follows: MAXIMUM FUNDED DEBT TO CASH FLOW RATIO COVENANT - -------------------- ---------- 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's funded debt to consolidated cash flow ratio may not exceed 3.75 through the third quarter of fiscal 2004 and 3.50 by the end of fiscal 2004. The Company's funded debt to consolidated cash flow ratio on May 9, 2004 was 3.33. If the Company does not maintain the required funded debt to consolidated cash flow ratio, that would constitute an event of default under the Bank Facility. The Company would then need to seek waivers from its lenders or amendments to the covenants. If the Company was unable to obtain waivers from its lenders or amendments to the covenants the Company would be in default under the Bank Facility. During continuance of an event of default, the Company would be subject to a post-default interest rate under the Bank Facility that increases the otherwise effective interest rate by 1.50%. In addition to the right to declare all obligations immediately due and payable, the Bank Facility also has additional rights including, among other things, the right to sell any of the collateral securing the Company's obligations under the Bank Facility. In the event the Company's obligations under the Bank Facility become immediately due and payable the Company does not have sufficient liquidity to satisfy these obligations and it is likely that the Company would be forced to seek protection from its creditors. Such events would also constitute a default under the Company's franchise agreements with Brinker and Burger King Corporation. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) Note 6: Net Income Per Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding plus all potential dilutive common shares outstanding. For all years presented, the difference between basic and dilutive shares represents options on common stock. For the twelve and twenty-eight week periods ended May 9, 2004, 544,143 options were excluded from the diluted earnings per share calculations because to include them would have been anti-dilutive. For the twelve and twenty- eight week periods ended May 11, 2003, 597,733 and 582,7333 options respectively were excluded from the diluted earnings per share calculations because to include them would have been anti-dilutive. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) Note 7: Segment Reporting. The Company operates four distinct restaurant concepts in the food- service industry. It owns the Grady's American Grill and two Italian Dining concepts and operates Burger King restaurants and Chili's Grill & Bar as a franchisee of Burger King Corporation and Brinker International, Inc., respectively. The Company has identified each restaurant concept as an operating segment based on management structure and internal reporting. For purposes of applying SFAS 131, the Company considers the Grady's American Grill, the two Italian concepts and Chili's Grill & Bar to be similar and has 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 "all other" column is the VIE activity, see Note 2. The "other reconciling items" column includes corporate related items, intercompany eliminations and income and expense not allocated to reportable segments. Other Full Quick All Reconciling (Dollars in thousands) Service Service Other Items Total - --------------------------------------------------------------------------- - ------- Second quarter fiscal 2004 - --------------------------- Revenues $25,648 $26,578 $ 840 $ (840) $ 52,226 Income from restaurant operations 3,442 3,133 688 (127) 7,136 Operating income (loss) 2,112 909 672 (257) 3,436 Interest expense (1,464) Other expense (531) Income from continuing operations before income ------ taxes $ 1,441 ====== Total Assets 71,947 46,849 17,873 11,762 $ 148,431 Depreciation and amortization 1,052 983 115 56 $ 2,206 Second quarter fiscal 2003 - --------------------------- Revenues $24,238 $25,452 $ 800 $ (800) $ 49,690 Income from restaurant operations 3,561 2,888 658 (133) 6,974 Operating income (loss) 2,128 466 648 (396) $ 2,846 Interest expense (1,690) Other income 3,128 Income from continuing operations before income ------ taxes $ 4,284 ====== Total Assets 82,904 48,932 15,972 11,465 $ 159,273 Depreciation and amortization 1,109 1,162 117 275 $ 2,663 QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 9, 2004 (Unaudited) Other Full Quick All Reconciling (Dollars in thousands) Service Service Other Items Total - ------------------------------------------------------------------------------- First twenty-eight weeks of fiscal 2004 - --------------------------------------- Revenues $57,405 $58,885 $1,939 $(1,939) $ 116,290 Income from restaurant operations 7,565 6,309 1,576 (299) 15,151 Operating income (loss) 4,493 1,028 1,558 (725) 6,354 Interest expense (3,523) Other income (975) Income from continuing operations before income ------- taxes $ 1,856 ======= Total Assets 71,947 46,849 17,873 11,762 $ 148,431 Depreciation and amortization 2,513 2,343 261 397 $ 5,514 First twenty-eight weeks of fiscal 2003 - --------------------------------------- Revenues $55,441 $59,393 $1,854 (1,854) $ 114,834 Income from restaurant operations 7,852 5,856 1,516 (309) 14,915 Operating income (loss) 4,644 536 1,473 (921) 5,732 Interest expense (3,994) Other income 2,829 Income from continuing ------- operations before income taxes $ 4,567 ======= Total Assets 82,904 48,932 15,972 11,465 $ 159,273 Depreciation and amortization 2,603 2,712 273 718 $ 6,306 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 53 weeks and ends October 31, 2004. The first quarter of the Company's fiscal year consists of 16 weeks. The second and third quarter of fiscal 2004 each consist of 12 weeks. The fiscal 2004 fourth quarter consists of 13 weeks. 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 Twenty-Eight Weeks Ended May 9, May 11, May 9, May 11, 2004 2003 2004 2003 ----- ----- ----- ----- Total revenues 100.0% 100.0% 100.0% 100.0% Operating expenses: Restaurant operating expenses Food and beverage 27.3 27.1 27.4 26.9 Payroll and benefits 28.9 28.8 29.1 29.3 Depreciation and amortization 4.0 4.6 4.3 4.7 Other operating expenses 26.1 25.5 26.2 26.2 ----- ----- ----- ----- Total restaurant operating expenses 86.3 86.0 87.0 87.1 ----- ----- ----- ----- Income from operations 13.7 14.0 13.0 12.9 ----- ----- ----- ----- General and administrative 7.0 8.1 7.4 7.8 Amortization of intangibles 0.1 0.2 0.1 0.2 ----- ----- ----- ----- Operating income (loss) 6.6 5.7 5.5 4.9 ----- ----- ----- ----- Other income (expense): Recovery of note receivable - 7.0 - 3.0 Interest expense (2.8) (3.4) (3.0) (3.5) Minority interest in earnings (1.1) (1.2) (0.9) (1.2) Other income (expense), net - 0.5 - 0.7 ----- ----- ----- ----- Total other income (expense), net (3.9) 2.9 (3.9) (1.0) ----- ----- ----- ----- Income from continuing operations before income taxes 2.7 8.6 1.6 3.9 Income tax provision 0.5 0.5 0.5 0.5 ----- ----- ----- ----- Income (loss) from continuing operations 2.2 8.1 1.1 3.4 Income (loss) from discontinued operations, net of tax (1.7) (8.7) (0.7) (3.5) ----- ----- ----- ----- Net Income (loss) 0.5% (0.6)% 0.4% (0.1)% ===== ===== ===== ===== Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN RESULTS OF OPERATIONS (continued) Restaurant sales for the Company were $52,226,000 for the second quarter of fiscal 2004 versus $49,690,000 for the comparable period in fiscal 2003, an increase of $2,536,000. Restaurant sales for the first twenty- eight weeks of fiscal 2004 were $116,290,000 versus $114,834,000 for the comparable period in fiscal 2003, an increase of $1,456,000. The Company's Burger King restaurant sales were $26,578,000 in the second quarter of fiscal 2004 compared to sales of $25,452,000 in the same period of fiscal 2003, an increase of $1,126,000. The Company had increased revenue of $532,000 due to additional sales weeks from two new restaurants opened in fiscal 2003. The Company's Burger King restaurants had average weekly sales of $18,770 in the second quarter of fiscal 2004 versus $18,285 in the same period in fiscal 2003. Sales at restaurants open for more than one year increased 2.4% in the second quarter of fiscal 2004 when compared to the same period in fiscal 2003. Sales decreased $507,000 to $58,886,000 for the first twenty-eight weeks of fiscal 2004 compared to $59,393,000 for the comparable period in fiscal 2003. The Company had increased revenue of $1,211,000 due to additional sales weeks from three restaurants opened in fiscal 2003. Average weekly sales were $17,822 in the first twenty-eight weeks of fiscal 2004 versus $18,357 in the same period in fiscal 2003. Sales at restaurants open for more than one year decreased 3.2% in the first twenty-eight weeks of fiscal 2004 when compared to the same period in fiscal 2003. During the second quarter of fiscal 2004 Burger King introduced some appealing new products and had improved promotional campaigns. The Company believes these changes were responsible for the positive same store sales results. The Company's Chili's Grill & Bar restaurant sales increased $1,730,000 to $20,346,000 in the second quarter of fiscal 2004 compared to $18,616,000 in the same period in fiscal 2003. The Company had increased revenue of $1,821,000 due to additional sales weeks from one restaurant opened during fiscal 2004 and three restaurants opened in fiscal 2003. Average weekly sales decreased to $45,314 in the second quarter of fiscal 2004 versus $45,627 in the same period of fiscal 2003. Sales at restaurants open for more than one year decreased .5% in the second quarter of fiscal 2004 when compared to the same period in fiscal 2003. Sales for the first twenty-eight weeks of fiscal 2004 increased $3,021,000 to $45,153,000 compared to $42,132,000 for the same period in fiscal 2003. The Company had increased revenue of $3,683,000 due to additional sales weeks from one new restaurant opened during fiscal 2004 and three new restaurants opened in fiscal 2003. The average weekly sales were $43,374 in the first twenty-eight weeks of fiscal 2004 versus $44,257 in the same period in fiscal 2003. Sales at restaurants open for more than one year decreased 1.7% in the first twenty-eight weeks of fiscal 2004 when compared to the same period in fiscal 2003. Sales in the Company's Grady's American Grill restaurant division were $1,437,000 in the second quarter of fiscal 2004 compared to sales of $1,459,000 in the same period in fiscal 2003, a decrease of $22,000. The Company sold four units in fiscal 2003, closed one unit in fiscal 2004, sold and leased back six restaurants in fiscal 2004 and had one restaurant classified as held for sale as of May 9, 2004. As required by SFAS 144, the results of operations for these restaurants have been classified as discontinued operations for all periods reported. The remaining three Grady's American Grill restaurants had average weekly sales of $39,921 in the second quarter of fiscal 2004 versus $40,528 in the first quarter of fiscal 2003, a decrease of 1.5%. Sales in the Company's Grady's American Grill restaurant division were $3,360,000 in the first twenty-eight weeks of fiscal 2004 compared to sales of $3,501,000 in the same period in fiscal 2003, a decrease of $141,000. The remaining three Grady's American Grill restaurants had average weekly sales of $39,995 in the first twenty-eight weeks of fiscal 2004 versus $41,679 in the same period of fiscal 2003, a decrease of 4.0%. The Company believes sales declines in its Grady's American Grill division resulted from competitive intrusion and the Company's inability to efficiently market this concept. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company's Italian Dining Division restaurant sales decreased $298,000 to $3,865,000 in the second quarter of fiscal 2004 compared to $4,163,000 in the same period in fiscal 2003. The average weekly sales were $35,785 in the second quarter of fiscal 2004 versus $38,549 in the same period of fiscal 2003. Sales at restaurants open for more than one year decreased 7.2% in the second quarter of fiscal 2004 when compared to the same period in fiscal 2003. Sales for the first twenty-eight weeks of fiscal 2004 decreased $916,000 to $8,892,000 compared to $9,808,000 for the same period in fiscal 2003. The average weekly sales were $35,287 in the first twenty-eight weeks of fiscal 2004 versus $38,920 in the same period in fiscal 2003. Sales at restaurants open for more than one year decreased 9.6% in the first twenty-eight weeks of fiscal 2004 when compared to the same period in fiscal 2003. The Company has experienced significant competitive intrusion in the markets where it has Italian Dining restaurants. Total restaurant operating expenses, as a percentage of restaurant sales, increased to 86.3% for the second quarter of fiscal 2004 versus 86.0% in the second quarter of fiscal 2003, and decreased to 87.0% in the first twenty-eight weeks of fiscal 2004 versus 87.1% in the same period of fiscal 2003. The following factors influenced the operating margins. Food and beverage costs increased to 27.3% of total revenues in the second quarter of fiscal 2004 compared to 27.1% of total revenues in the same period in fiscal 2003, and 27.4% in the first twenty-eight weeks of fiscal 2004 compared to 26.9% in the same period of fiscal 2003. Food and beverage costs have increased in both the full service and quick service segment. The increases are mainly due to higher dairy and beef costs. The Company expects the cost pressures to persist for the rest of fiscal 2004. Payroll and benefits were 28.9% of total revenues in the second quarter of fiscal 2004 compared to 28.8% in the same period of fiscal 2003. Payroll and benefits were 29.1% of total revenues in the first twenty- eight weeks of fiscal 2004 compared to 29.3% in the same period of fiscal 2003. The Company had lower payroll and benefits expense, as a percentage of sales, in the quick service segment for both the quarter and twenty-eight weeks ended May 9, 2004. The improvement was mainly due to the Company's increased focus on payroll costs in light of declining sales. The Company does not believe that it can continue to decrease payroll expense in the quick service segment without diminishing customer satisfaction; therefore, if the negative sales trends do not abate, payroll costs as a percentage of sales are likely to increase in the remaining quarters of fiscal 2004. The Company had higher payroll and benefits expense, as a percentage of sales, in the full service segment for both the quarter and twenty-eight weeks ended May 9, 2004. The increase was mainly due to lower average weekly sales in each of the full service concepts. Depreciation and amortization, as a percentage of total revenues, decreased to 4.0% for the second quarter of fiscal 2004 compared to 4.6% in the same period in fiscal 2003. The decrease was mainly due to a $179,000 decrease in depreciation expense in the quick service segment. The decrease was mainly due to certain assets becoming fully depreciated. Depreciation and amortization, as a percentage of total revenues, decreased to 4.3% in the first twenty-eight weeks of fiscal 2004 compared to 4.7% in the same period in fiscal 2003. The decrease was mainly due to a $369,000 decrease in depreciation expense in the quick service segment. The decrease was mainly due to certain assets becoming fully depreciated. 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 increased in the second quarter of fiscal 2004 to 26.1% compared to 25.5% in the same period of fiscal 2003. They were consistent at 26.2% in the first twenty-eight weeks of fiscal 2004 and fiscal 2003. The Company's other operating expenses, as a percentage of sales, increased in the second quarter of fiscal 2004, mainly due to lower average weekly sales at the Company's full service restaurants. The Company participated in the Burger King 2000 and 2001 Early Renewal programs that included a royalty reduction as an incentive to franchisees to renew franchise agreements early. The Company included 39 restaurants in the Early Renewal programs. In the first twenty-eight weeks of fiscal 2004 and fiscal 2003 the Company's participation in the Early Renewal program reduced the Company's royalty expense by $196,000 and $132,000, respectively. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Income from restaurant operations increased $162,000 to $7,136,000, or 13.7% of revenues, in the second quarter of fiscal 2004 compared to $6,974,000, or 14.0% of revenues, in the comparable period of fiscal 2003. Income from restaurant operations in the Company's Quick Service segment decreased $119,000 while the Company's Full Service segment increased $236,000 from the prior year. Income from restaurant operations increased $236,000 to $15,151,000, or 13.0% of revenues, in the first twenty-eight weeks of fiscal 2004 compared to $14,915,000, or 12.9% of revenues, in the comparable period of fiscal 2003. Income from restaurant operations in the Company's Quick Service segment decreased $287,000 while the Company's Full Service segment increased $453,000 when compared to the first twenty-eight weeks of the prior year. General and administrative expenses were $3,663,000 in the second quarter of fiscal 2004 compared to $4,041,000 in the second quarter of fiscal 2003 and $8,678,000 in the first twenty-eight weeks of fiscal 2004 compared to $8,980,000 in the same period of fiscal 2003. As a percentage of total restaurant sales, general and administrative expenses were 7.0% in the second quarter of fiscal 2004 versus 8.1% in the second quarter of fiscal 2003, and 7.4% in the first twenty-eight weeks of fiscal 2004 compared to 7.8% in the same period of fiscal 2003. In the second quarter of fiscal 2003 the Company recorded approximately $118,000 in expenses related to the Company's litigation with BFBC, LTD and in the first twenty-eight weeks of fiscal 2003 the Company recorded approximately $284,000 for the BFBC, LTD litigation. The Company did not have similar expense in fiscal 2004. Total interest expense for the second quarter of fiscal 2004 was $1,464,000 compared to $1,690,000 during the same period in fiscal 2003. Total interest expense was $3,523,000 in the first twenty-eight weeks of fiscal 2004 compared to interest expense of $3,994,000 in the same period of fiscal 2003. The decreases were due to lower interest rates and lower debt levels. During the second quarter of fiscal 2003 the Company recorded a $3,459,000 gain on the collection of a note receivable that had previously been written off. The Company did not have any similar activity in fiscal 2004. Minority interest in earnings relates to certain related party affiliates that are variable interest entities. The Company holds no direct ownership or voting interest in the VIE's. Minority interest in earnings was $573,000 for the second quarter of fiscal 2004 versus $587,000 in the comparable period in fiscal 2003. Minority interest in earnings was $1,054,000 for the first twenty-eight weeks of fiscal 2004 versus $1,370,000 in the comparable period in fiscal 2003. See Note 2 in the Company's consolidated financial statements for the impact of the variable interest entities on specific income statement categories. The provision for income taxes was $287,000 for the second quarter of fiscal 2004 versus $256,000 in the comparable period in fiscal 2003. The provision for income taxes was $559,000 for the first twenty-eight weeks of fiscal 2004 versus $597,000 in the comparable period in fiscal 2003. The Company's provision for income taxes includes a significant amount of state tax expense that is based on criteria other than income. At the end of the second quarter of fiscal 2004 the Company had a valuation reserve against its deferred tax asset resulting in a net deferred tax asset of $8.9 million. Absent a significant and unforeseen change in facts or circumstances, management re-evaluates the realizability of its tax assets in connection with its annual budgeting cycle. Management does not believe there were any significant changes in facts or circumstances through the end of the second quarter of fiscal 2004. 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Discontinued operations includes all disposed of restaurants and the six current Grady's American Grill restaurants, which at the end of the second quarter the Company expected to sell or close before the end of fiscal 2004. The decision to dispose of these locations reflects the Company's ongoing process of evaluating the performance and cash flows of its various restaurant locations and using the proceeds from the sale of closed restaurants to reduce outstanding debt. The net loss from discontinued operations for the second quarter of fiscal 2004 was $900,000 versus a loss of $4,308,000 in the same period of fiscal 2003. The net loss from discontinued operations for the first twenty-eight weeks of fiscal 2004 was $765,000 versus a loss of $4,071,000 in the same period in fiscal 2003. The fiscal 2004 results include impairment and facility closing expenses of $886,000 versus $4,578,000 in fiscal 2003. The total restaurant sales from discontinued operations for the second quarter of fiscal 2004 were $2,140,000 versus $4,214,000 in fiscal 2003. The total restaurant sales from discontinued operations for the first twenty-eight weeks of fiscal 2004 were $5,779,000 versus $10,487,000 in the same period in fiscal 2003. For the second quarter of fiscal 2004, the Company reported net income of $254,000 compared to a net loss of $280,000 for the second quarter of fiscal 2003. For the first twenty-eight weeks of fiscal 2004, the Company reported net income of $532,000 compared to a net loss of $101,000 for the same period in fiscal 2003. Management Outlook The following section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about trends in and the impact of certain initiatives upon 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. Quick Service The quick service segment of the restaurant industry is a very mature and competitive segment, which is dominated by several national chains. Market share is gained through national media campaigns promoting specific sandwiches, usually at a discounted price. The national chains extend marketing efforts to include nationwide premiums and movie tie- ins. To date in fiscal 2004, other chains in the quick-service restaurant industry, including McDonald's and Wendy's, promotional campaigns and new products have been successful in taking away market share from Burger King. During the second quarter of fiscal 2004 Burger King introduced some appealing new products and had improved promotional campaigns. The Company believes these changes were responsible for the positive same store sales results. Full Service The full service segment of the restaurant industry is also mature and competitive. This segment has a few national companies that utilize national media efficiently. This segment also has numerous regional and local chains that provide service and products comparable to the national chains but which cannot support significant marketing campaigns. The Company operates three restaurant concepts that compete in the full service segment. 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) During fiscal 2004, the Company has continued to emphasize the operational and marketing initiatives that contributed to the success of its Chili's division in fiscal 2003. While the average weekly sales trends were not as good as the Company had expected, the Company expects steady financial results for the remainder of fiscal 2004. During the first twenty-eight weeks of fiscal 2004, the Company continues to experience a deterioration in its Italian Dining division's profitability. The Company has experienced significant competitive intrusion in the markets where it has Italian Dining restaurants. The Company expects the competitive pressures to continue for the remainder of fiscal 2004. During the first twenty-eight weeks of fiscal 2004, the Grady's American Grill concept was negatively affected by competitive intrusion in the Company's markets and limitations in the Company's ability to efficiently market its restaurants. The Company will continue to consider opportunities to divest under-performing or non-strategic restaurants during fiscal 2004. The Company expects the Grady's American Grill division's operating performance to continue to decline during fiscal 2004. 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 the Company's historical operating results, estimates of future taxable income and ongoing feasible tax strategies in assessing the need for the valuation allowance. The Company believes the positive evidence includes the historically consistent profitability of its Chili's, Italian Dining and Burger King divisions, and the resolution of substantially all of its bagel-related contingent liabilities. The Company believes the negative evidence includes the persistent negative trends in its Grady's American Grill division and the recent sales declines in its Burger King division. During the first twenty-eight weeks of fiscal 2004, the Company continued to experience unusual uncertainty concerning whether, when and to what extent the recent sales declines in its Burger King division will be reversed. In estimating its deferred tax asset, management used its 2004 operating plan as the basis for a forecast of future taxable earnings. Management did not incorporate growth assumptions and limited the forecast to five years, the period that management believes it can project results that are more likely than not achievable. Absent a significant and unforeseen change in facts or circumstances, management re-evaluates the realizability of its tax assets in connection with its annual budgeting cycle. 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'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. During the first twenty-eight weeks of 2004, net cash provided by operating activities was $11,144,000 compared to $7,665,000 in fiscal 2003. The increase was mainly due to changes in working capital that provided cash in fiscal 2004 versus changes in working capital that used cash in fiscal 2003. During the first twenty-eight weeks of fiscal 2004, the Company had $3,929,000 in capital expenditures in connection with the building of one new full service restaurant that opened in the second quarter of fiscal 2004 and the refurbishing of existing restaurants. During the first twenty-eight weeks of fiscal 2004, the Company had $8,635,000 in proceeds from the sales of property and equipment. The Company had a net repayment of $12,450,000 under its revolving credit agreement during the first twenty-eight weeks of fiscal 2004. As of May 9, 2004, the Company's revolving credit agreement had an additional $26,504,000 of capacity though not all of that capacity is available for future borrowings due to the applicable financial covenants. The Company's average borrowing rate on May 9, 2004, was 4.22%. The Company's primary cash requirements in fiscal 2004 will be capital expenditures in connection with the building or acquiring of new restaurants, remodeling of existing restaurants, maintenance expenditures, and the reduction of debt under the Company's debt agreements. During the remainder of fiscal 2004, the Company anticipates opening two full service restaurants. The Company does not plan to build any new quick service restaurants in fiscal 2004. The Company did purchase five existing Burger King restaurants from a franchisee during the third quarter of fiscal 2004 for $1,150,000. 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 2004 are expected to range from $10,000,000 to $12,000,000, if the Company has alternative uses or needs for its cash, the Company believes it could reduce such planned expenditures without affecting its current operations. The Company has debt service requirements of approximately $1,474,000 in fiscal 2004, consisting primarily of the principal payments required under its mortgage facility. The Company expects to reduce its borrowings under its revolving credit agreement by $2,000,000 within the next year and therefore has classified $2,000,000 of revolving credit debt as current. The Company had $4,813,000 of current debt related to the consolidation of its variable interest entities, see Note 2. The Company anticipates that its cash flow from operations, together with the available capacity under its revolving credit agreement as of May 9, 2004, will provide sufficient funds for its operating, capital expenditure, debt service and other requirements through the end of fiscal 2004. As of May 9, 2004, 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. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Mortgage Facility currently includes 34 separate mortgage notes, with initial 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, financial covenants that require the Company to maintain a consolidated fixed charge coverage ratio of at least 1.30 for each of six subsets of the financed properties. The Company was not in compliance with the required consolidated fixed charge coverage ratio for two of the subsets of the financed properties as of October 26, 2003. Both of these subsets are comprised solely of Burger King restaurants and had fixed charge coverage ratios of 1.11 and 1.26. The Company sought and obtained waivers of these covenant defaults from the mortgage lenders through November 28, 2004. If the Company is not in compliance with these covenants as of November 28, 2004, the Company will most likely seek additional waivers. The Company believes it would be able to obtain such waivers but there can be no assurance thereof. If the Company is unable to obtain such waivers it is contractually entitled to pre-pay the outstanding balances under one or more of the separate mortgage notes such that the remaining properties in the subsets would meet the required ratio. However, any such prepayments would be subject to prepayment premiums and to the Company's ability to maintain its compliance with the financial covenants in its Bank Facility. Alternatively, the Company is contractually entitled to substitute one or more better performing restaurants for under- performing restaurants such that the reconstituted subsets of properties would meet the required ratio. However, any such substitutions would require the consent of the lenders in the Bank Facility. For these reasons, the Company believes that its rights to prepay mortgage notes or substitute properties may be impractical depending on the circumstances existing at the time. 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 3.00 2.75% Less than 3.0x but greater than or equal to 2.5x 2.25% Less than 2.5x 1.75% Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Bank Facility also contains covenants requiring maintenance of funded debt to cash flow and fixed charge coverage ratios for fiscal 2004 and 2005 as follows: MAXIMUM FUNDED DEBT TO CASH FLOW RATIO COVENANT - -------------------- ------- 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's funded debt to consolidated cash flow ratio may not exceed 3.75 through the third quarter of fiscal 2004 and 3.50 by the end of fiscal 2004. The Company's funded debt to consolidated cash flow ratio on May 9, 2004 was 3.33. If the Company does not maintain the required funded debt to consolidated cash flow ratio that would constitute an event of default under the Bank Facility. The Company would then need to seek waivers from its lenders or amendments to the covenants. If the Company was unable to obtain waivers from its lenders or amendments to the covenants the Company would be in default under the Bank Facility. During continuance of an event of default, the Company would be subject to a post-default interest rate under the Bank Facility that increases the otherwise effective interest rate by 1.50%. In addition to the right to declare all obligations immediately due and payable, the Bank Facility also has additional rights including, among other things, the right to sell any of the collateral securing the Company's obligations under the Bank Facility. In the event the Company's obligations under the Bank Facility become immediately due and payable the Company does not have sufficient liquidity to satisfy these obligations and it is likely that the Company would be forced to seek protection from its creditors. Such events would also constitute a default under the Company's franchise agreements with Brinker and Burger King Corporation. Critical Accounting Policies - ---------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company's 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. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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, at least annually, or as circumstances dictate, management 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. In determining fair value, the Company relies primarily on discounted cash flow analyses that incorporates an investment horizon of five years and utilizes a risk adjusted discount factor. If these assumptions change in the future, management may be required to record impairment charges for these assets. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 the Company's historical operating results, estimates of future taxable income and ongoing feasible tax strategies in assessing the need for the valuation allowance. In estimating its deferred tax asset, management used its 2004 operating plan as the basis for a forecast of future taxable earnings. Management did not incorporate growth assumptions and limited the forecast to five years, the period that management believes it can project results that are more likely than not achievable. Absent a significant and unforeseen change in facts or circumstances, management re-evaluates the realizability of its tax assets in connection with its annual budgeting cycle. The Company operates in a very competitive industry that can be significantly affected by changes in local, regional or national economic conditions, changes in consumer tastes, weather conditions and various other consumer concerns. Accordingly, the amount of the deferred tax asset considered by management to be realizable, more likely than not, could change in the near term if estimates of future taxable income change. This could result in a charge to, or 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. 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 claims 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 and assistance from outside legal counsel. 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. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 that provides for interest payable at the LIBOR rate plus a contractual spread. The Company's variable rate borrowings under this revolving credit facility totaled $31.1 million at May 9, 2004. The impact on the Company's annual results of operations of a one-point interest rate change would be approximately $311,000. Item 4. CONTROLS AND PROCEDURES. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of its disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings Note 4 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 Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders None Item 5. Other Information On June 15, 2004 a group of seven shareholders led by Company CEO Daniel B. Fitzpatrick presented the Board with a proposal to purchase all outstanding shares of common stock owned by the public shareholders. Under the terms of the proposed transaction, the public holders of the outstanding shares of the Company would each receive $2.75 per share in cash in exchange for their shares. The purchase would take the form of a merger in which the Company would survive as a privately held corporation. The group advised the Board that it is not interested in selling its shares to a third party, whether in connection with a sale of the company or otherwise. In response to the proposal, the Board appointed a special committee of independent directors to evaluate the transaction and make a recommendation to shareholders. It is expected that the committee will retain independent advisors. The proposed transaction is subject to certain conditions, including the negotiation of definitive agreements, the obtaining of the necessary financing for the merger and the refinancing of the Company's outstanding bank debt, the approval of the Company's franchisors and the approval of the Board of Directors and the shareholders of the Company. 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 On March 31, 2004, the Company filed a current report on Form 8-K furnishing under Item 12 a copy of the Company's press release dated March 31, 2004. 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: June 18, 2004 By: /s/John C. Firth ---------------------------- Executive Vice President General Counsel and Secretary (Principal Financial Officer) INDEX TO EXHIBITS Exhibit Number Description - -------------- --------------------------------- 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Executive Vice President and General Counsel (Principal Financial Officer) EXHIBIT 31.1 RULE 13a-14(a)/15d-14(a) CERTIFICATION 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 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 report; 3.Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-15(e) and 15d-15(e)) for the registrant and have: a.Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control of financial reporting; and; 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a.All significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control or financial reporting; and Date:June 18, 2004 /s/ Daniel B. Fitzpatrick ---------------------------- Daniel B. Fitzpatrick President and Chief Executive Officer EXHIBIT 31.2 RULE 13a-14(a)/15d-14(a) CERTIFICATION 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 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 report; 3.Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-15(e) and 15d-15(e)) for the registrant and have: a.Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control of financial reporting; and; 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a.All significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control or financial reporting; and Date: June 18, 2004 /s/ John C. Firth ----------------------------------- John C. Firth Executive Vice President and General Counsel (Principal Financial Officer) EXHIBIT 32.1 QUALITY DINING, INC. 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 May 9, 2004 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 June 18, 2004 EXHIBIT 32.2 QUALITY DINING, INC. 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 May 9, 2004 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) June 18, 2004