SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended February 15, 1998
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from ______________ to ____________________
Commission file number 0-23420
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QUALITY DINING, INC.
(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
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(Address of principal executive offices and zip code)
(219) 271-4600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X____ No ________
The number of shares of the registrant's common stock outstanding as of
March 18, 1998 was 12,599,444.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 15, 1998
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...........11
Part II - Other Information
Item 1. Legal Proceedings.......................................15
Item 2. Changes in Securities...................................15
Item 5. Other Information.......................................15
Item 6. Exhibits and Reports on Form 8-K........................15
Signatures........................................................15
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Sixteen Weeks Ended
February 15, February 16,
1998 1997
----------- -----------
Revenues:
Restaurant sales:
Grady's American Grill $ 25,481 $ 27,555
Burger King 22,329 20,819
Chili's Grill & Bar 16,848 15,587
Bruegger's Bagel Bakery - 15,516
Italian Dining Division 4,489 2,960
------- -------
Total restaurant sales 69,147 82,437
Franchise related revenue - 4,083
------- -------
Total revenues 69,147 86,520
Operating expenses:
Restaurant operating expenses:
Food and beverage 20,459 25,398
Payroll and benefits 19,853 24,672
Depreciation and amortization 3,668 4,947
Other operating expenses 16,065 18,926
------- -------
Total restaurant operating expenses 60,045 73,943
General and administrative 4,709 5,830
Amortization of intangibles 328 1,464
------- -------
Total operating expenses 65,082 81,237
------- -------
Operating income 4,065 5,283
------- -------
Other income (expense):
Interest expense (3,816) (2,371)
Gain on sale of property and equipment 19 -
Interest income 68 61
Other income, net 13 131
------- -------
Total other expense, net (3,716) (2,179)
------- -------
Income before income taxes 349 3,104
Income tax provision 227 1,474
------- -------
Net income $ 122 $ 1,630
======= =======
Basic net income per share $ 0.01 $ 0.10
======= =======
Diluted net income per share $ 0.01 $ 0.10
======= =======
Weighted average shares:
Basic 12,599 16,909
======= =======
Diluted 12,663 16,939
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
February 15, October 26,
1998 1997
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,352 $ 7,500
Accounts receivable 3,340 3,265
Inventories 1,815 1,912
Deferred income taxes 5,125 5,191
Other current assets 6,282 5,942
------- -------
Total current assets 18,914 23,810
------- -------
Property and equipment, net 140,913 144,363
------- -------
Other assets:
Deferred income taxes 4,809 4,809
Trademarks, net 12,549 12,651
Franchise fees and development costs, net 9,589 9,732
Goodwill, net 8,968 9,135
Notes receivable, less allowance 6,000 6,000
Pre-opening costs and
non-competition agreements, net 484 888
Liquor licenses, net 3,161 3,217
Other 1,235 1,368
------- -------
Total other assets 46,795 47,800
------- -------
Total assets $ 206,622 $ 215,973
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease and
non-competition obligations $ 476 $ 464
Accounts payable 6,569 8,648
Accrued liabilities 19,223 22,937
------- -------
Total current liabilities 26,268 32,049
Long-term debt 123,506 127,106
Capitalized lease and non-competition
obligations, principally to related parties,
less current portion 5,913 6,005
------- -------
Total liabilities 155,687 165,160
------- -------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued
Common stock, without par value: 50,000,000
shares authorized; 12,619,444 and 12,619,059
shares issued, respectively 28 28
Additional paid-in capital 236,420 236,420
Accumulated deficit (185,263) (185,385)
------- -------
51,185 51,063
Less treasury stock, at cost, 20,000 shares 250 250
------- -------
Total stockholders' equity 50,935 50,813
------- -------
Total liabilities and stockholders' equity $ 206,622 $ 215,973
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Sixteen Weeks Ended
February 15, February 16,
1998 1997
Cash flows from operating activities:
Net income $ 122 $ 1,630
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization of
property and equipment 3,458 4,464
Amortization of other assets 1,058 2,631
Gain on sale of property and equipment (19) -
Net decrease in current assets (252) (1,850)
Net decrease in current liabilities (5,569) (3,106)
Other 8 -
Net cash provided (used) by ------- -------
operating activities (1,194) 3,769
------- -------
Cash flows from investing activities:
Increase in notes receivable - (18,967)
Proceeds from sales of property and equipment 764 -
Purchase of property and equipment (977) (18,647)
Payment of other assets (56) (1,758)
------- -------
Net cash used in investing activities (269) (39,372)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options - 1
Borrowings of long-term debt - 40,000
Repayment of long-term debt (3,600) -
Repayment of capitalized lease obligations
and non-competition obligations (85) (60)
------- -------
Net cash provided (used) by financing activities (3,685) 39,941
------- -------
Net increase (decrease) in cash and cash equivalents (5,148) 4,338
Cash and cash equivalents, beginning of period 7,500 444
------- -------
Cash and cash equivalents, end of period $ 2,352 $ 4,782
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 15, 1998
(Unaudited)
Note 1: Description of Business.
Nature of Business - Quality Dining, Inc. and its subsidiaries (the "Company")
develop and operate 143 quick service and full service restaurants in 20
states. The Company owns and operates 40 Grady's American Grill(R) restaurants,
five restaurants under the tradename of Spageddies Italian Kitchen (R) and three
restaurants under the tradename of Papa Vino's Italian Kitchen (TM). The Company
also operates, as a franchisee, 67 Burger King(R) restaurants and 28 Chili's
Grill & Bar(TM) restaurants.
Note 2: Basis of Presentation.
The accompanying consolidated financial statements include the accounts of
Quality Dining, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statement reporting purposes. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, considered necessary
for a fair presentation have been included. Operating results for the sixteen-
week period ended February 15, 1998 are not necessarily indicative of the
results that may be expected for the 52-week year ending October 25, 1998.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 26, 1997
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Note 3: Disposition of Bagel-Related Businesses
On October 20, 1997, the Company sold its bagel-related businesses to Mr.
Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and
their affiliates. The sale included the stock of Bruegger's Corporation and
the stock of all of the other bagel-related businesses. The total proceeds
from the sale were $45,164,000. The consideration included the issuance by
Bruegger's Corporation of a junior subordinated note in the amount of
$10,000,000, which was recorded as $6,000,000 due to a $4,000,000 reserve for
legal indemnification, the transfer of 4,310,740 shares of the Company's
common stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which
were retired, a receivable for purchase price adjustment of $500,000, and
$16,841,000 in cash.
The subordinated note has an annual interest rate of 12% and will mature in
October of 2004. Interest will be accrued and added to the principal amount
of the note for the first three years and will be paid in cash for the
remaining life of the note. The Company did not recognize any interest income
from this note in the first quarter of fiscal 1998.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 15, 1998
(Unaudited)
The cash component of the proceeds included an adjustment for the calculation
of the net working capital deficit. The calculation used was subject to final
adjustment and is being disputed by Messrs. Brue and Dressel. The Company does
not expect the ultimate resolution of this dispute to have a material adverse
effect on the Company's financial position or results of operations.
Note 4: Commitments.
As of February 15, 1998, the Company had commitments aggregating approximately
$53,279 for the construction of new restaurants.
Note 5: Long-Term Debt.
On October 9, 1997, the Company amended its revolving credit agreement with
Chase Bank of Texas, as agent for a group of seven banks, providing for
borrowings of up to $145,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread (8.625% at February 15, 1998). The revolving
credit agreement is supported by the pledge of the stock of certain
subsidiaries of the Company and expires on April 26, 1999, at which time all
amounts are due. The revolving credit agreement expires on April 26, 1999 and
therefore all amounts under the revolving credit agreement will become a
current liability on April 26, 1998.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, minimum levels of tangible net worth,
limitations on the incurrence of additional indebtedness, limitations on
consolidated capital expenditures and restrictions on the payment of dividends
(other than stock dividends) on, or the purchase or redemption of, any shares
of the Company's capital stock. In addition, the revolving credit agreement
contains a mandatory reduction in borrowing availability to $140,000,000 by
December 31, 1998. At February 15, 1998, the fair value of the amount
outstanding under the Revolving Credit Agreement approximated the carrying
amount.
Note 6: Earnings Per Share
The Company has outstanding at February 15, 1998 common shares totaling
approximately 12,599,000. The Company has also granted options to purchase
common shares to its employees and outside directors. These options have a
dilutive effect on the calculation of earnings per share. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation as required by SFAS 128.
Quarter ended
February 15, February 16,
Basic earnings per share: 1998 1997
---------- ----------
Income available to common
shareholders (numerator) $ 122,000 $ 1,630,000
Weighted average common shares ========== ==========
outstanding (denominator) 12,599,000 16,909,000
========== ==========
Basic earnings per share $ 0.01 $ 0.10
========== ==========
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 15, 1998
(Unaudited)
Note 6: Earnings Per Share (continued)
Quarter ended
February 15, February 16,
Diluted earnings per share: 1998 1997
----------- -----------
Income available to common
shareholders (numerator) $ 122,000 $ 1,630,000
Weighted average common shares ========== ==========
outstanding 12,599,000 16,909,000
Effect of dilutive securities:
Options on common stock 64,000 30,000
Total common shares and dilutive ---------- ----------
securities(denominator) 12,663,000 16,939,000
========== ==========
Diluted earnings per share $ 0.01 $ 0.10
========== ==========
Note 7: Contingencies.
On November 10, 1994, the Company acquired all of the outstanding stock of
Grayling Corporation, Grayling Management Corporation ("Grayling Management"),
Chili's of Mt. Laurel, Inc. ("Mt. Laurel") and Chili's of Christiana, Inc.
("Christiana"). Prior to entering into negotiations with the Company,
Grayling Corporation and its principal shareholder, T. Garrick Steele
("Steele"), had entered into an agreement (the "Asset Agreement") to sell
substantially all of Grayling Corporation's assets to a third party, KK&G
Enterprises, Inc. ("KK&G"). The Asset Agreement was terminated by Grayling
Corporation and was not consummated. On September 27, 1994, KK&G filed suit
in the Court of Common Pleas, Philadelphia County, Pennsylvania, against
Grayling Corporation, Mt. Laurel, Christiana and Steele seeking damages and
specific performance of the Asset Agreement. Steele is obligated to continue
to defend the lawsuit and indemnify the Company and Grayling Corporation
against any loss or damages resulting from the lawsuit. Steele has recently
advised the Company that he has reached a settlement with KK&G pursuant to
which Grayling Corporation and its affiliates will receive a general release
from KK&G and there will not be any liability to the Company. The Company has
been advised that the settlement will be finalized by the end of the Company's
second quarter. Accordingly, the Company does not expect that the lawsuit
will have a material adverse effect on the Company's financial position or
results of operations. In making such assessment, management has considered
the financial ability of Steele to defend the lawsuit and indemnify the
Company against any loss or damages resulting from the lawsuit.
BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation (a former
indirect subsidiary of the Company), and Timothy Johnson, Gregory LeMond,
Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest")
commenced an action on January 30, 1997 filed in the United States District
Court, District of Minnesota, against Bruegger's Franchise Corporation,
Quality Dining, Inc., Daniel B. Fitzpatrick (the "Bruegger's Defendants") and
an investment banking firm retained by BruWest, alleging inter alia that the
Bruegger's Defendants breached commitments to provide financing to BruWest,
interfered with the plaintiffs' efforts to obtain financing from third
parties, violated existing franchise and development agreements between
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 15, 1998
(Unaudited)
Note 7: Contingencies (continued).
BruWest and Bruegger's Franchise Corporation, violated certain provisions of
the Minnesota Franchise Act and breached duties and implied covenants of good
faith and fair dealing. The Bruegger's Defendants denied all allegations in
the complaint. Without admitting any liability or obligation to do so, on
March 11, 1997, Bruegger's Corporation loaned $1.2 million to the plaintiffs.
The loan is secured by certain assets of the plaintiffs and personal
guarantees of Messrs. LeMond and Snow. The loan provides for monthly interest
payments commencing April 11, 1997 at the rate of nine percent (9%) per annum
and matured on September 11, 1997. On March 14, 1997, the complaint was
dismissed, without prejudice. On May 22, 1997, BruWest refiled the complaint
with additional allegations challenging the enforceability of the loan
documents and personal guarantees. BruWest has ceased payment of royalties as
required under its franchise agreements and did not repay the loan at
maturity.
Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and
Mark Ratterman, Chris Galloway and Peter Shipman, principals of Quality
Baking, LLC, commenced an action on July 9, 1997 filed in the United States
District Court, for the Eastern District of Missouri, Eastern Division,
against Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl
Brue, Michael Dressell, Daniel B. Fitzpatrick and John Firth, alleging that
the plaintiffs purchased their franchises based upon financial representations
that have not materialized, that they purchased preferred stock in Bruegger's
Corporation based upon false representations, that the defendants falsely
represented their intentions with respect to repurchasing bakeries from the
plaintiffs, and that the defendants violated implied covenants of good faith
and fair dealing. Quality Baking, LLC has ceased operating its four bakeries.
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 filed 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 have not
materialized, 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. Since the filing of
the lawsuit, PLB Enterprises, Inc. has ceased operating its two bakeries and
D&K Foods, Inc. and Pacific Capital Ventures, Inc. have converted their
bakeries from Bruegger's Bagel Bakeries to another concept.
All of the above pending franchise related litigation is in preliminary stages
and only limited discovery has occurred. In each of these cases, one or more
present or former officers and directors of the Company have been named as
party defendants and the Company is advancing defense costs on their behalf.
Pursuant to the Share Exchange Agreement by and among Quality Dining, Inc.,
Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell, the Agreement
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
February 15, 1998
(Unaudited)
Note 7: Contingencies (continued).
and Plan of Merger by and among Quality Dining, Inc., Bagel Disposition
Corporation and Lethe, LLC, and certain other related agreements entered into
as part of the disposition of the Company's bagel-related businesses, the
Company is responsible for 50% of the first $14 million of franchise related
litigation expenses, inclusive of attorney's fees, costs, expenses,
settlements and judgments (collectively "Franchise Damages"). Bruegger's
Corporation and certain of its affiliates are obligated to indemnify the
Company from all other Franchise Damages. The Company is obligated to pay the
first $3 million of its share of Franchise Damages in cash. The remaining $4
million of the Company's share of Franchise Damages is payable by crediting
amounts owed to the Company pursuant to the $10 million junior subordinated
note issued to the Company by Bruegger's Corporation. Based upon the
currently available information, the Company does not believe that these cases
individually or in the aggregate will have a material adverse effect on the
Company's financial position and results of operations. Such assessment is
based upon the Company's belief that Bruegger's Corporation has and will
continue to have the ability to perform its indemnity obligations.
Rigel Corporation, a franchisee of Bruegger's Franchise Corporation commenced
an action on July 16, 1997 filed in the United States District Court for the
District of Nebraska, against Quality Dining, Inc. and Bruegger's Corporation,
alleging that the defendants have breached franchise and development
agreements and violated the Sherman Act. This action was settled in December
of 1997 for an amount that was not material.
James T. Bies filed a shareholder derivative action in United States District
Court for the Southern District of Michigan on October 14, 1997. The
complaint names as defendants 12 individuals who are current or former
directors or officers of the Company. The complaint alleges that the
individual defendants as directors breached fiduciary duties to the Company by
approving certain transactions in 1997 involving loans to Bagel Acquisition
Corporation that allegedly benefited Daniel Fitzpatrick, the Company's
Chairman, President and Chief Executive Officer. The plaintiff also alleges
that individual defendants participated in a "conspiracy to waste, dissipate,
and improperly use funds, property and assets of Quality" for the benefit of
Bagel Acquisition Corporation and Mr. Fitzpatrick. The plaintiff alleges that
the Company and its shareholders have been damaged in an amount in excess of
$28,000,000. The relief sought also includes the appointment of a receiver,
and accounting and attorney's fees. On December 10, 1997, the defendants
filed a motion to dismiss the complaint based on plaintiff's failure before
filing suit to make a "demand" upon the Company's board of directors to
address and respond to the allegations presented by the complaint. As a
shareholder derivative action, the claims purport to be brought on behalf of
the Company against the individual defendants and for the benefit of the
Company. However, in accordance with its articles of incorporation, the
Company has certain obligations to indemnify the individual defendants and the
Company is advancing defense costs on their behalf. The Company does not
expect that this lawsuit will have a material adverse effect on the Company's
financial position or results of operations.
The Company is involved in various other legal proceedings incidental to the
conduct of its business. Management does not expect that any such proceedings
will have a material adverse effect on the Company's financial position or
results of operations.
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 first quarter of the Company's fiscal year consists of 16
weeks with all subsequent quarters being 12 weeks in duration. The current
fiscal year ends October 25, 1998.
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, except where
otherwise noted.
Sixteen weeks Ended
February 15, February 16,
1998 1997
--------- ---------
Revenues:
Restaurant sales 100.0% 95.3%
Franchise related revenue - 4.7
------ ------
Total revenues 100.0 100.0
------ ------
Operating expenses:
Restaurant operating
expenses (as % of restaurant sales)
Food and beverage 29.6 30.8
Payroll and benefits 28.7 29.9
Depreciation and amortization 5.3 6.0
Other operating expenses 23.2 23.0
------ ------
Total restaurant operating expenses 86.8 89.7
General and administrative expenses 6.8 6.7
Amortization of intangibles 0.5 1.7
------ ------
Total operating expenses 94.1 93.9
------ ------
Operating income 5.9 6.1
------ ------
Other income (expense):
Interest expense (5.5) (2.7)
Interest income .1 .1
Other income, net - .1
------ ------
Total other expense, net (5.4) (2.5)
------ ------
Income before income taxes 0.5 3.6
Income taxes 0.3 1.7
------ ------
Net income 0.2% 1.9%
====== ======
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Restaurant sales for the first quarter of fiscal 1998 were $69,147,000, a
decrease of $13,290,000 from the $82,437,000 for the comparable period in
fiscal 1997. The decrease was primarily attributable to the disposition of
the Company's bagel-related businesses on October 20, 1997.
Total revenues for the Company were $69,147,000 for the first quarter of
fiscal 1998, a decrease of $17,373,000 from the $86,520,000 for the comparable
period in fiscal 1997. Total revenues in fiscal 1997 included $4,083,000 in
franchise related revenues from Bruegger's Corporation. Due to the sale of the
bagel-related businesses, the Company no longer has any bagel-related revenue.
As a percentage of restaurant sales, total restaurant operating expenses
decreased to 86.8% in the first quarter of fiscal 1998 from 89.7% in the first
quarter of fiscal 1997. Contributing to this decrease were lower food and
beverage expense, lower payroll and benefits expense and lower depreciation
expense. This was primarily the result of the Company's divestiture of the
bagel-related businesses and improved margin performance in the Company's full
service dining concepts.
General and administrative expenses, as a percentage of total revenues, were
6.8% in the first quarter of fiscal 1998 versus 6.7% in the comparable period
of fiscal 1997. General and administrative expenses decreased from $5,830,000
in fiscal 1997 to $4,709,000 in fiscal 1998. The reduction was due to the
Company's staff reduction plan that was implemented during the second quarter
of fiscal 1997, in conjunction with the decision to divest of the bagel-
related businesses and the ultimate sale of these businesses.
Amortization of intangibles, as a percentage of total revenues, decreased to
0.5% for the first quarter of fiscal 1998 compared to 1.7% for the same period
in fiscal 1997. The decrease for the quarter was primarily due to the write-
off of the bagel-related goodwill in the second quarter of fiscal 1997.
Total other expenses, as a percentage of total revenues, increased to 5.4% for
the first quarter of fiscal 1998 from 2.5% during the comparable period in
fiscal 1997. The increase was primarily due to an increase in interest expense
resulting from increased borrowings and higher interest rates under the
Company's revolving credit agreement.
The provision for income taxes includes federal and state income taxes using
the Company's estimated effective income tax rate for the respective fiscal
year. The Company's effective income tax rate was 65.0% for the sixteen weeks
ended February 15, 1998 compared to 47.5% for the sixteen weeks ended February
18, 1997. The increase in the effective income tax rate is mainly due to a
large portion of state taxes being based on criteria other than income.
For the first quarter of fiscal 1998, the Company reported net income of
$122,000 compared to net income of $1,630,000 for the first quarter of fiscal
1997.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $2,352,000 at February 15, 1998,
a decrease of $5,148,000 from the $7,500,000 at October 26, 1997. Principal
uses of funds consisted of: (i) those used in operations ($1,194,000), (ii)
expenditures associated with new restaurant development and restaurant
remodeling ($977,000) and (iii) repayment of long-term debt ($3,600,000).
The Company's primary cash requirements for the remainder of fiscal 1998 will
be to finance (i) the reduction of debt under the Company's revolving credit
agreement, (ii) the opening of new restaurants, (iii) remodeling and
maintenance expenditures at existing restaurants and (iv) corporate capital
expenditures. The Company's capital expenditures budget is expected to range
from $5,000,000 to $6,000,000 for fiscal 1998. During fiscal 1998, the Company
anticipates opening three Burger King restaurants. One Burger King restaurant
was opened during the first quarter of fiscal 1998 and the remaining two are
planned to open during the third quarter of fiscal 1998. The actual amount of
the Company's cash requirements for capital expenditures depends in part on
the number of new restaurants opened and the actual expense related to
remodeling and maintenance of existing units.
On October 9, 1997, the Company amended its revolving credit agreement with
Chase Bank of Texas, as agent for a group of seven banks, providing for
borrowings of up to $145,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread (8.625% at February 15, 1998). The revolving
credit agreement expires on April 26, 1999 and is supported by the pledge of
the stock of certain subsidiaries of the Company. As of February 15, 1998,
there was $123,506,000 outstanding under this revolving credit agreement. The
revolving credit agreement expires on April 26, 1999 and therefore all amounts
under the revolving credit agreement will become a current liability on April
26, 1998. The Company anticipates that the amounts outstanding under the
facility will be refinanced prior to maturity.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, minimum levels of tangible net worth,
limitations on the incurrence of additional indebtedness, limitations on
consolidated capital expenditures and restrictions on the payment of dividends
(other than stock dividends) on, or the purchase or redemption of, any shares
of the Company's capital stock. In addition, the revolving credit agreement
contains a mandatory reduction in borrowing availability to $140,000,000 by
December 31, 1998. The Company has a significant amount of debt subject to
floating interest rates. Therefore, any increase in interest rates would have
an adverse effect on the Company.
The Company anticipates that its cash flow from operations, together with
amounts available under its revolving credit agreement, will be sufficient to
fund its planned expansion and other operating cash requirements through the
end of fiscal 1998.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
IMPACT OF YEAR 2000
The Company relies to a large extent on computer technology to carry out its
day-to-day operations. Many software products in the marketplace are only
able to recognize a two digit year date and therefore will recognize a date
using "00" as the year 1900 instead of the year 2000. This problem could
result in significant transactional inaccuracies and could even cause the
system to stop operating. As the year 2000 approaches, the Company has begun
to evaluate its current computer systems in order to determine what
modifications, if any, are necessary to make its information systems and
software capable of recognizing and processing the year 2000. The Company
anticipates that it will substantially complete its evaluation during fiscal
1998 and then begin to make the necessary upgrades or replacements to its
computer systems. Until its assessment is complete, the Company is unable to
estimate whether the costs associated with year 2000 issue will have a
material effect on the Company's business, financial position or results of
operations.
This report contains certain forward-looking statements, including statements
about the Company's development plans, that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: the availability and cost of suitable locations
for new restaurants; the availability of capital to the Company; the ability
of the Company to develop and operate its restaurants; the hiring, training
and retention of skilled corporate and restaurant management and other
restaurant personnel; the integration and assimilation of acquired concepts;
the overall success of the Company's franchisors; the ability to obtain the
necessary government approvals and third-party consents; the ability of the
Company to modify or redesign its computer systems to work properly in the
year 2000 and the cost thereof; and changes in governmental regulations,
including increases in the minimum wage.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 6 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
On November 4, 1997, the Company filed a Current Report on Form 8-K
announcing under Item 2 an agreement to sell all of its bagel-related
businesses. The Company also disclosed under Item 7 pro forma financial
information relating to the sale of its bagel-related businesses.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining, Inc.
(Registrant)
Date: March 31, 1998 By: /s/Martin Miranda
Vice President & Controller
(Principal accounting officer)
INDEX TO EXHIBITS
Exhibit
No. Description
_______ ------------------------------------------
27 Financial Data Schedule
27A Financial Data Schedule - Fiscal 1997
(Restated due to SFAS 128)
27B Financial Data Schedule - Fiscal 1996
(Restated due to SFAS 128)