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 10, 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
----------------------------------------------------
(Address of principal executive offices and zip code)
(219) 271-4600
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X____ No ________
The number of shares of the registrant's common stock outstanding as of
June 15, 1998 was 12,599,444.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 10, 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...........12
Part II - Other Information
Item 1. Legal Proceedings.......................................17
Item 2. Changes in Securities...................................17
Item 3. Defaults upon Senior Securities.........................17
Item 4. Submission of Matters to a Vote of Security Holders.....17
Item 5. Other Information.......................................17
Item 6. Exhibits and Reports on Form 8-K........................18
Signatures........................................................18
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 10, May 11, May 10, May 11,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Restaurant sales:
Grady's American Grill $ 20,827 $ 20,813 $ 46,308 $ 48,368
Burger King 18,685 17,492 41,014 38,310
Bruegger's Bagel Bakery - 13,740 - 29,256
Chili's Grill & Bar 12,902 12,500 29,750 28,087
Italian Dining Division 3,424 3,157 7,913 6,117
------- ------- ------- -------
Total restaurant sales 55,838 67,702 124,985 150,138
Franchise related revenue - 3,396 - 7,479
------- ------- ------- -------
Total revenues 55,838 71,098 124,985 157,617
------- ------- ------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 16,597 20,780 37,057 46,178
Payroll and benefits 15,793 20,677 35,646 45,349
Depreciation and amortization 2,665 3,948 6,333 8,895
Other operating expenses 13,693 19,193 29,758 38,119
------- ------- ------- -------
Total restaurant
operating expenses 48,748 64,598 108,794 138,541
General and administrative 3,726 9,666 8,435 15,496
Amortization of intangibles 246 1,097 573 2,561
Impairment of assets - 185,000 - 185,000
Store closing costs - 15,513 - 15,513
Franchise operating
partner expense - 2,066 - 2,066
------- ------- ------- -------
Total operating expenses 52,720 277,940 117,802 359,177
------- ------- ------- -------
Operating income (loss) 3,118 (206,842) 7,183 (201,560)
Other income (expense):
Interest expense (2,841) (2,164) (6,656) (4,535)
Gain (loss) on sale of property
and equipment (10) - 9 -
Interest income 43 60 110 122
Other income (expense), net 76 (12) 90 118
------- ------- ------- -------
Total other expense, net (2,732) (2,116) (6,447) (4,295)
------- ------- ------- -------
Income (loss) before
income taxes (benefit) 386 (208,958) 736 (205,855)
Income taxes (benefit) 232 (7,217) 459 (5,743)
------- ------- ------- -------
Net income (loss) $ 154 $(201,741) $ 277 $(200,112)
======= ======= ======= =======
Basic net income
(loss) per share $ .01 $ (11.93) $ 0.02 $ (11.83)
======= ======= ======= =======
Diluted net income
(loss) per share $ .01 $ (11.93) $ 0.02 $ (11.83)
======= ======= ======= =======
Weighted average shares outstanding:
Basic 12,599 16,910 12,599 16,910
====== ====== ====== ======
Diluted 12,749 16,910 12,706 16,910
====== ====== ====== ======
See Accompanying Notes to Consolidated Financial Statements
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
May 10, October 26,
1998 1997
-------- ---------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,383 $ 7,500
Accounts receivable 3,092 3,265
Inventories 1,916 1,912
Deferred income taxes 3,322 5,191
Other current assets 2,251 5,942
------- -------
Total current assets 12,964 23,810
------- -------
Property and equipment, net 139,673 144,363
------- -------
Other assets:
Deferred income taxes 6,340 4,809
Trademarks, net 12,473 12,651
Franchise fees and development costs, net 9,484 9,732
Goodwill, net 8,844 9,135
Notes receivable, less allowance 6,000 6,000
Pre-opening costs and
non-competition agreements, net 294 888
Liquor licenses, net 3,119 3,217
Other 1,199 1,368
------- -------
Total other assets 47,753 47,800
------- -------
Total assets $ 200,390 $ 215,973
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current Portion of long-term debt $ 117,006 $ -
Current portion of capitalized lease and
non-competition obligations 492 464
Accounts payable 6,992 8,648
Accrued liabilities 18,973 22,937
------- -------
Total current liabilities 143,463 32,049
Long-term debt - 127,106
Capitalized lease and non-competition
obligations, principally to related parties,
less current portion 5,837 6,005
------- -------
Total liabilities 149,300 165,160
------- -------
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 (185,108) (185,385)
------- -------
51,340 51,063
Less treasury stock, at cost, 20,000 shares 250 250
------- -------
Total stockholders' equity 51,090 50,813
------- -------
Total liabilities and stockholders' equity $ 200,390 $ 215,973
======= =======
See Notes to Consolidated Financial Statements
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Twenty-Eight Weeks Ended
May 10, May 11,
1998 1997
---------- ---------
Cash flows from operating activities:
Net income (loss) $ 277 $ (200,112)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of
property and equipment 6,027 8,180
Amortization of other assets 1,707 4,647
Impairment of assets - 185,000
Store closing accrual - 15,513
Deferred income taxes 338 (4,216)
Gain on sale of property and equipment (9) -
Changes in assets and liabilities, net of
consolidation of controlled affiliate:
Net increase(decrease) in current assets 3,860 (4,896)
Net increase (decrease) in
current liabilities (5,137) (2,058)
Other 1 (19)
Net cash provided by ------- -------
operating activities 7,064 2,039
------- -------
Cash flows from investing activities
Increase in notes receivable - (23,927)
Proceeds from sale of property and equipment 783 -
Purchase of property and equipment (2,594) (28,441)
Payment of other assets (88) (2,949)
Other (42) -
------- -------
Net cash used in investing activities (1,941) (55,317)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options - 1
Borrowings of long-term debt - 55,000
Repayment of long-term debt (10,100) -
Repayment of capitalized lease
and non-competition obligations (140) (106)
Net cash provided (used) ------- -------
by financing activities (10,240) 54,895
------- -------
Net increase (decrease) in cash and cash equivalents (5,117) 1,617
Cash and cash equivalents, beginning of period 7,500 444
------- -------
Cash and cash equivalents, end of period $ 2,383 $ 2,061
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 10, 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. As of May 10, 1998, the Company owned and operated 40 Grady's
American Grill restaurants, five restaurants under the tradename of
Spageddies Italian Kitchen and three restaurants under the tradename of
Papa Vino's Italian Kitchen. The Company also operated, as a franchisee,
67 Burger King restaurants and 28 Chili's Grill & Bar 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 twelve-
week and twenty-eight week periods ended May 10, 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 twenty-eight weeks of fiscal 1998.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 10, 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 Dressell. 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: Impairment of Long-Lived Assets
On May 10, 1997, the Company's Board of Directors committed the Company to a
plan of action to divest the Bruegger's bagel-related businesses. During the
second quarter of fiscal 1997 the Company recorded a non-cash impairment
charge of $185,000,000 and a store closing charge of $15,513,000 as a result
of this decision. The non-cash impairment charge represented a reduction of
the carrying amounts of bagel-related assets to their estimated fair values.
The impairment charge included non-cash charges for the write-off of goodwill
and the write-down of notes receivable and property and equipment. During the
second quarter of fiscal 1997 the Company received non-binding offers to
purchase its bagel-related assets and used these offers, less estimated costs
to sell, to determine the current fair value of the bagel-related assets. On
October 20, 1997 the Company sold all its bagel-related assets and no further
charges were incurred.
The store closing charge represented the estimated costs associated with
closing under-performing Bruegger's units and other Bruegger's units which
were at various stages of development when the decision was made to divest the
Bruegger's bagel-related businesses. The charge included amounts for
terminating leases, the write-off of fixed assets and pre-opening costs,
restaurant management severance costs and other store closing costs. As of May
10, 1998, $12,536,000 in costs related to these activities had been incurred,
of which $1,743,000 were cash payments and $10,793,000 were non-cash charges,
primarily for the write-down of fixed assets. The remaining costs are
primarily associated with terminating occupancy leases which the Company
expects to be substantially complete by the end of fiscal 1998. The Company
believes that the remaining reserve is adequate to cover all future expenses
relating to the closed stores.
Note 5: Franchise Operating Partner Program
During the second quarter of fiscal 1997 the Company recorded a $2,066,000
charge for expenses relating to the Franchise Operating Partner Program. These
costs were primarily related to the professional services of financial
advisors involved in negotiating with potential equity investors for the
Franchise Operating Partner Program. The Franchise Operating Partner Program
was canceled when the Company decided to divest Bruegger's Corporation.
Note 6: Commitments.
As of May 10, 1998, the Company had commitments aggregating approximately
$1,209,000 for the construction of new restaurants.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 10, 1998
(Unaudited)
Note 7: 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 (8.6875% at May 10, 1998). The revolving credit
agreement is supported by the pledge of the stock of certain subsidiaries of
the Company. The revolving credit expires on April 26, 1999, at which time all
amounts are due and therefore the revolving credit agreement has been
classified as a current liability at May 10, 1998. The Company anticipates
that the revolving credit agreement will be refinanced by the expiration date.
However, there can be no assurance that the Company will complete this
refinancing.
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 May 10, 1998, the fair value of the amount outstanding
under the Revolving Credit Agreement approximated the carrying amount.
Note 8: Earnings Per Share
The Company had outstanding at May 10, 1998 common shares totaling
approximately 12,599,000. The Company had 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 for the twelve and
twenty-eight week periods ended May 10, 1998. These options were anti-dilutive
for the twelve and twenty-eight week periods ended May 11, 1997. The following
is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation as required by SFAS 128.
Twelve weeks ended Twenty-eight weeks ended
May 10, May 11, May 10, May 11,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands, except per share amounts)
Basic net income (loss) per share:
Net income (loss) available to
common shareholders (numerator) $ 154 $(201,741) $ 277 $(200,112)
======= ========= ======== =========
Weighted average common shares
outstanding (denominator) 12,599 16,910 12,599 16,910
======= ========= ======== =========
Basic net income (loss) per share $ 0.01 $ (11.93) $ 0.02 $ (11.83)
======= ========= ======== =========
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 10, 1998
(Unaudited)
Note 8: Earnings Per Share (continued)
Twelve weeks ended Twenty-eight weeks ended
May 10, May 11, May 10, May 11,
1998 1997 1998 1997
------- ------- ------- --------
(In thousands, except per share amounts)
Diluted net income (loss) per share:
Net income (loss) available to
common shareholders (numerator) $ 154 $(201,741) $ 277 $(200,112)
======= ========= ======== =========
Weighted average common shares
outstanding 12,599 16,910 12,599 16,910
Effect of dilutive securities:
Options on common stock 150 - 107 -
Total common shares and dilutive ------ ------ ------ ------
securities(denominator) 12,749 16,910 12,706 16,910
====== ====== ====== ======
Diluted net income(loss)per share $ 0.01 $ (11.93) $ 0.02 (11.83)
====== ====== ====== ======
Note 9: Contingencies.
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
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. On April 22,
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 10, 1998
(Unaudited)
1998, the Court granted the defendants' Motion to Transfer this matter to the
United States District Court for the Northern District of Indiana. The
complaint alleges 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 payment of royalties as required under its franchise agreements for 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. PLB Enterprises,
Inc. has ceased payment of royalties as required under its franchise
agreements for its two bakeries.
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
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.
James T. Bies filed a shareholder derivative action in the United States
District Court for the Southern District of Michigan on October 14, 1997. The
complaint named as defendants 12 individuals who are current or former
directors or officers of the Company. The complaint alleged that the
individual defendants as directors breached fiduciary duties to the Company by
approving certain transactions in 1997 involving loans to Bagel Acquisition
Corporation that allegedly benefited Daniel B. Fitzpatrick, the Company's
Chairman, President and Chief Executive Officer. The plaintiff also alleged
that individual defendants participated in a "conspiracy to waste, dissipate,
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 10, 1998
(Unaudited)
and improperly use funds, property and assets of Quality" for the benefit of
Bagel Acquisition Corporation and Mr. Fitzpatrick. The plaintiff alleged that
the Company and its shareholders had been damaged in an amount in excess of
$28,000,000. The relief sought also included the appointment of a receiver,
an accounting and attorney's fees. On April 27, 1998, the Court dismissed the
complaint without prejudice, for failure to make a "demand" upon the Company's
board of directors. By letter dated May 12, 1998, Mr. Bies has demanded that
the Company pursue these claims against the defendants. In accordance with
the Indiana Business Corporation Law, the board of directors has appointed a
special committee to investigate the allegations and determine whether it is
in the best interests of the Company to pursue this matter.
The Company and certain of its executive officers are defendants in two class
action lawsuits filed in the United States District Court for the Northern
District of Indiana. The complaints allege, among other things, that the
defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 thereunder. The plaintiffs are seeking,
among other things, an award of unspecified compensatory damages, interest,
costs and attorney's fees. The Company believes the complaints are without
merit and intends to vigorously defend against the allegations made in the
complaints. However, there can be no assurance that the ultimate outcome of
these actions will not 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.
Twelve Weeks Ended Twenty-Eight Weeks Ended
May 10, May 11, May 10, May 11,
1998 1997 1998 1997
------- ------- ------- -------
Revenues:
Restaurant sales 100.0% 95.2% 100.0% 95.3%
Franchise related revenue - 4.8 - 4.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Restaurant operating expenses (as % of restaurant sales)
Food and beverage 29.7 30.7 29.7 30.8
Payroll and benefits 28.3 30.5 28.5 30.2
Depreciation and amortization 4.8 5.8 5.1 5.9
Other operating expenses 24.5 28.3 23.8 25.4
Total restaurant ----- ----- ----- -----
operating expenses 87.3 95.3 87.1 92.3
General and administrative 6.7 13.6 6.7 9.8
Amortization of intangibles 0.4 1.5 0.5 1.6
Impairment of assets - 260.2 - 117.4
Store closing costs - 21.8 - 9.8
Franchise operating
partner expense - 2.9 - 1.3
----- ----- ----- -----
Total operating expenses 94.4 390.9 94.3 227.9
----- ----- ----- -----
Operating income (loss) 5.6 (290.9) 5.7 (127.9)
----- ----- ----- -----
Other income (expense):
Interest expense (5.1) (3.1) (5.3) (2.8)
Interest income .1 .1 .1 .1
Other income (expense), net .1 - .1 -
----- ----- ----- -----
Total other expense, net (4.9) (3.0) (5.1) (2.7)
----- ----- ----- -----
Income (loss) before
income taxes (benefit) 0.7 (293.9) 0.6 (130.6)
Income taxes (benefit) 0.4 (10.1) 0.4 (3.6)
----- ----- ----- -----
Net income (loss) 0.3% (283.8)% 0.2% (127.0)%
===== ===== ===== =====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Restaurant sales for the second quarter of fiscal 1998 were $55,838,000, a
decrease of 17.5% over restaurant sales of $67,702,000 for the comparable
period in fiscal 1997. Restaurant sales for the first twenty-eight weeks of
fiscal 1998 were $124,985,000, a decrease of 16.8% over restaurant sales of
$150,138,000 for the comparable period in fiscal 1997. The decrease for the
quarter and the first twenty-eight weeks was attributable to the disposition
of the Company's bagel-related businesses on October 20, 1997. Total revenues
in fiscal 1997 included 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 87.3% for the second quarter of fiscal 1998 from 95.3% in the
second quarter of fiscal 1997 and to 87.1% in the first twenty-eight weeks of
fiscal 1998 from 92.3% in the same period of fiscal 1997. Contributing to the
decreases were lower food and beverage expense, lower payroll and benefits
expense, lower depreciation expense and lower other operating expenses. 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
6.7% in the second quarter of fiscal 1998 versus 13.6% in the comparable
period in fiscal 1997. General and administrative expenses, as a percentage of
total revenues, were 6.7% for the first twenty-eight weeks of fiscal 1998
versus 9.8% in the comparable period in fiscal 1997. The reduction for the
quarter and the first twenty-eight weeks was due to the sale of the
bagel-related businesses.
During the second quarter of fiscal 1997, the Company recorded a non-cash
impairment charge of $185,000,000 as a result of the decision to divest its
bagel-related businesses. The non-cash impairment charge represented a
reduction of the carrying amounts of bagel-related assets to their estimated
fair value. The impairment charge included non-cash charges for the write-off
of goodwill and the write-down of notes receivable and property and equipment.
On October 20, 1997 the Company sold the bagel-related businesses and no
further charges were recorded.
In the second quarter of fiscal 1997, the Company recorded a $15,513,000
charge for closing under-performing Bruegger's units and other Bruegger's
units which were at various stages of development when the decision was made
to divest the bagel-related businesses. The charge included amounts for
terminating leases, write-offs of fixed assets and pre-opening costs,
restaurant management severance costs and other store closing costs.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
During the second quarter of fiscal 1997, the Company recorded a $2,066,000
charge for expenses related to the Franchise Operating Partner Program. These
costs were primarily related to the professional services of financial
advisors involved in negotiating with potential equity investors for the
Franchise Operating Partner Program. The Franchise Operating Partner Program
was canceled due to the Company's decision to divest Bruegger's Corporation.
Amortization of intangibles, as a percentage of total revenues, decreased to
0.4% for the second quarter of fiscal 1998 compared to 1.5% for the same
period in fiscal 1997. For the first twenty-eight weeks of fiscal 1998
amortization of intangibles, as a percentage of total revenues, decreased to
0.5% compared to 1.6% for the same period in fiscal 1997. The decrease for the
second quarter and the first twenty-eight weeks of fiscal 1998 were 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 4.9% for
the second quarter of fiscal 1998 from 3.0% during the comparable period in
fiscal 1997. Total other expenses, as a percentage of total revenues,
increased to 5.1% from 2.7% for the first twenty-eight weeks of fiscal 1998
compared to 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 effective income tax rates for the twelve and twenty-eight weeks ended May
10, 1998 were 60.1% and 62.4%, respectively, compared to 3.5% (benefit)
and 2.8% (benefit) for the twelve and twenty-eight weeks ended May 11, 1997.
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 high effective income tax rate for fiscal 1998 is mainly due to a
large portion of state taxes being based on criteria other than income. The
low income tax benefit rate in fiscal 1997 is a result of a significant
portion of the $185.0 million non-cash charge for asset impairment being non-
deductible for tax purposes.
For the second quarter of fiscal 1998, the Company reported net income of
$154,000 compared to net loss of $201,741,000 for the second quarter of fiscal
1997. For the first twenty-eight weeks of fiscal 1998, the Company reported
net income of $277,000 compared to net loss of $200,112,000 for the same
period in fiscal 1997. The net loss for the quarter and the first twenty-eight
weeks ended May 11, 1997 was primarily due to the $185,000,000 non-cash asset
impairment charge and the $15,513,000 store closing charge, relating to the
decision to divest the Bruegger's bagel-related businesses.
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 $2,383,000 at May 10, 1998, a
decrease of $5,117,000 from the $7,500,000 at October 27, 1996. The principal
source of funds was provided by operations ($7,064,000). The primary uses of
funds consisted of: (i) expenditures associated with new restaurant
development and restaurant remodeling ($2,594,000) and (ii) repayment of long-
term debt ($10,100,000).
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 $7,000,000 for fiscal 1998. During fiscal 1998, the Company
anticipates opening four Burger King restaurants. One Burger King restaurant
was opened during the first quarter of fiscal 1998, two are planned to open
during the third quarter and one in the fourth quarter. 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 (8.6875% at May 10, 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 May 10, 1998, there
was $117,006,000 outstanding under this revolving credit agreement. The
revolving credit agreement expires on April 26, 1999 and therefore all amounts
under the revolving credit agreement have been classified as a current
liability as of May 10, 1998. The Company anticipates that the revolving
credit agreement will be refinanced by the expiration date. However, there
can be no assurance that the Company will complete this refinancing.
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 and other sources,
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 and cost of capital to the Company; the
the ability of the Company to refinance its credit facility; 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 9 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 a Vote of Security Holders
On March 10, 1998, the Company held its annual meeting of shareholders. At
the meeting, the shareholders elected the following directors by the vote
indicated to serve until the year 2001 annual meeting of shareholders.
Broker
For Withheld Non-votes
---------- --------- ---------
James K. Fitzpatrick 10,955,488 437,962 0
Ezra H. Friedlander 10,995,633 397,817 0
Steven M. Lewis 11,011,497 381,953 0
In addition, the following directors continue in office until the annual
meeting of shareholders in the year indicated:
Term Expires
------------
Christopher J. Murphy, III 1999
William R. Schonsheck 1999
Daniel B. Fitzpatrick 2000
Arthur J. Decio 2000
Coopers & Lybrand, L.L.P. was approved as auditors for the Company for 1998 by
the following vote:
11,286,958 For; 69,942 Against; 36,550 Abstentions and Broker non-votes
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such exhibits,
and is incorporated herein by reference.
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining, Inc.
(Registrant)
Date: June 23, 1998 By: /s/Martin Miranda
Vice President & Controller
(Principal accounting officer)
INDEX TO EXHIBITS
Exhibit
No. Description
27 Financial Data Schedule
3
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