SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended August 1, 1999
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from ______________ to ____________________
Commission file number 0-23420
QUALITY DINING, INC.
- ------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1804902
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4220 Edison Lakes Parkway, Mishawaka, Indiana 46545
----------------------------------------------------
(Address of principal executive offices and zip code)
(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
September 14, 1999 was 12,754,996.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 1, 1999
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...........14
Part II - Other Information
Item 1. Legal Proceedings.......................................22
Item 2. Changes in Securities...................................22
Item 3. Defaults upon Senior Securities.........................22
Item 4. Submission of Matters to a Vote of Security Holders.....22
Item 5. Other Information.......................................22
Item 6. Exhibits and Reports on Form 8-K........................22
Signatures........................................................23
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Twelve Weeks Ended Forty Weeks Ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
Revenues: -------- -------- -------- --------
Burger King $ 20,599 $ 20,262 $ 61,993 $ 61,276
Grady's American Grill 16,167 17,553 58,645 63,861
Chili's Grill & Bar 13,026 13,244 42,593 42,994
Italian Dining Division 3,673 3,558 12,002 11,471
------- ------- ------- -------
Total revenues 53,465 54,617 175,233 179,602
------- ------- ------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 15,540 16,134 51,490 53,191
Payroll and benefits 15,617 15,711 50,829 51,357
Depreciation and
amortization 2,568 2,586 8,499 8,919
Other operating expenses 13,300 13,324 42,646 43,083
Total restaurant ------- ------- ------- -------
operating expenses 47,025 47,755 153,464 156,550
General and administrative 3,565 3,642 11,953 12,077
Amortization of intangibles 251 251 824 824
Impairment of assets and
facility closing costs 2,501 - 2,501 -
------- ------- ------- -------
Total operating expenses 53,342 51,648 168,742 169,451
------- ------- ------- -------
Operating income 123 2,969 6,491 10,151
Other income (expense):
Interest expense (2,280) (2,596) (7,983) (9,252)
Gain (loss) on sale of
property and equipment 1 (8) (163) 1
Interest income 17 45 91 155
Other income (expense), net 3 164 13 253
------- ------- ------- -------
Total other expense, net (2,259) (2,395) (8,042) (8,843)
------- ------- ------- -------
Income (loss) before
income taxes (2,136) 574 (1,551) 1,308
Income tax provision 219 344 570 803
------- ------- ------- -------
Net income (loss) $ (2,355) $ 230 $ (2,121) $ 505
======= ======= ======= =======
Basic net income(loss)
per share $ (0.19) $ 0.02 $ (0.17) $ 0.04
======= ======= ======= =======
Diluted net income (loss)
per share $ (0.19) $ 0.02 $ (0.17) $ 0.04
======= ======= ======= =======
Weighted average shares outstanding:
Basic 12,712 12,599 12,637 12,599
======= ======= ======= =======
Diluted 12,712 12,601 12,637 12,671
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
August 1, October 25,
1999 1998
ASSETS --------- ---------
Current assets:
Cash and cash equivalents $ 67 $ 3,351
Accounts receivable 2,076 2,358
Inventories 1,870 1,872
Deferred income taxes 2,618 2,848
Other current assets 1,791 1,568
------- -------
Total current assets 8,422 11,997
------- -------
Property and equipment, net 127,127 136,764
------- -------
Other assets:
Deferred income taxes 7,382 7,152
Trademarks, net 12,065 12,320
Franchise fees and development costs, net 8,888 9,259
Goodwill, net 8,178 8,594
Notes receivable, less allowance 10,294 6,000
Liquor licenses, net 2,718 2,859
Other 1,173 1,330
------- -------
Total other assets 50,698 47,514
------- -------
Total assets $ 186,247 $ 196,275
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease and
long-term debt $ 1,361 $ 370
Accounts payable 5,762 7,086
Accrued liabilities 17,272 19,288
------- -------
Total current liabilities 24,395 26,744
Long-term debt 107,502 112,756
Capitalized lease and non-competition
obligations, principally to related parties,
less current portion 5,529 5,849
------- -------
Total liabilities 137,426 145,349
------- -------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued
Common stock, without par value: 50,000,000
shares authorized; 12,754,996 and 12,619,444
shares issued, respectively 28 28
Additional paid-in capital 236,887 236,420
Accumulated deficit (187,393) (185,272)
Unearned compensation (451) -
------- -------
49,071 50,926
Less treasury stock, at cost, 20,000 shares 250 250
------- -------
Total stockholders' equity 48,821 50,926
------- -------
Total liabilities and stockholders' equity $ 186,247 $ 196,275
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Forty Weeks Ended
August 1, August 2,
1999 1998
Cash flows from operating activities: -------- -------
Net income (loss) $ (2,121) $ 505
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 8,765 8,643
Amortization of other assets 1,778 2,304
Asset impairment charge and facility
closing costs 2,501 -
Loss(gain)on sale of property and equipment 163 (1)
Deferred income taxes - 575
Changes in assets and liabilities:
Net decrease (increase)in current assets 61 3,619
Net decrease in current liabilities (3,340) (5,034)
Other 16 -
Net cash provided by ------- -------
operating activities 7,823 10,611
------- -------
Cash flows from investing activities:
Purchase of note receivable (4,294) -
Proceeds from sales of property and equipment 2,704 839
Purchase of property and equipment (4,496) (5,067)
Other (288) (145)
------- -------
Net cash used in investing activities (6,374) (4,373)
------- -------
Cash flows from financing activities:
Borrowings of long-term debt 5,800 -
Repayment of long-term debt (10,100) (11,600)
Repayment of capitalized lease obligations
and non-competition obligations (283) (200)
Loan financing fees (150) -
------- -------
Net cash used by financing activities (4,733) (11,800)
------- -------
Net decrease in cash and cash equivalents (3,284) (5,562)
Cash and cash equivalents, beginning of period 3,351 7,500
------- -------
Cash and cash equivalents, end of period $ 67 $ 1,938
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 1999
(Unaudited)
Note 1: Description of Business.
Nature of Business Quality Dining, Inc. (the "Company") operates four distinct
restaurant concepts. It owns the Grady's American Grill(R) and two Italian
Dining concepts and operates Burger King(R) restaurants and Chili's Grill &
Bar(TM) ("Chili's"(R)) as a franchisee of Burger King Corporation and Brinker
International, Inc. ("Brinker"), respectively. The Company operates its
Italian Dining restaurants under the tradenames of Papa Vino's Italian Kitchenr
("Papa Vino's"(R)) and Spageddies Italian Kitchen(R) ("Spageddies"). As of
August 1, 1999, the Company operated 144 restaurants, including 71 Burger King
restaurants, 28 Chili's, 37 Grady's American Grill restaurants, four Spageddies
and four Papa Vino's.
Note 2: Basis of Presentation.
The accompanying consolidated financial statements include the accounts of
Quality Dining, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statement reporting purposes. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, considered necessary
for a fair presentation have been included. Operating results for the forty
week period ended August 1, 1999 are not necessarily indicative of the results
that may be expected for the 53-week year ending October 31, 1999.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 25, 1998
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Note 3: Disposition of Bagel-Related Businesses
On October 20, 1997, the Company sold its bagel-related businesses to Mr.
Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and
their affiliates. The Company's board of directors determined to sell the
bagel-related businesses after a careful evaluation of the future prospects for
the bagel business, the competitive environment that then existed in the bagel
segment, and the historical performance of the Company's bagel-related
businesses. The sale included the stock of Bruegger's Corporation and the
stock of all of the other bagel-related businesses. The total proceeds from
the sale were $45,164,000. The consideration included the issuance by
Bruegger's Corporation of a junior subordinated note in the amount of
$10,000,000, which was recorded as $6,000,000 due to a $4,000,000 reserve for
legal indemnification, the transfer of 4,310,740 shares of the Company's common
stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which were
retired, a receivable for purchase price adjustment of $500,000, and
$16,841,000 in cash. The subordinated note has an annual interest rate of 12%
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1999
(Unaudited)
and matures in October 2004. The note provides for interest to be accrued and
added to the principal amount of the note through October 2000 and to be paid
in cash for the remaining life of the note. The Company has not recognized any
interest income from this note. The cash component of the proceeds included an
adjustment for the calculation of the net working capital deficit. The
calculation used was subject to final adjustment and is being disputed by
Messrs. Brue and Dressell. In addition, on or about September 13, 1999,
Messrs. Brue and Dressell asserted a claim for $10 million for breach of
representations and warranties under the Share Exchange Agreement.
The Company does not expect the ultimate resolution of these disputes to
have a material adverse effect on the Company's financial position or
results of operations but there can be no assurance thereof.
Note 4: Impairment of Long-Lived Assets and Facility Closure Expense
The Company recorded non-cash charges totaling $2,501,000 during the third
quarter of fiscal 1999 consisting primarily of $650,000 for the disposal of
obsolete point of sale equipment in its full service dining restaurants that
the Company identified as a result of installing its new point of sale system,
$1,047,000 for the estimated costs associated with the anticipated closing of
two regional offices and three restaurant locations and $804,000 primarily for
a non-cash asset impairment write down for two under-performing restaurants.
This non-cash asset impairment charge resulted from the Company's determination
that an impairment write down should be considered for certain locations when
there is a sustained trend of negative operating performance as measured by
restaurant level cash flow. The non-cash facility closure charges include
amounts for the write off of fixed assets and other costs related to the
closing of these facilities. Each of these non-cash charges represents a
reduction of the carrying amount of the assets to their estimated fair market
values. The Company anticipates that the point of sale equipment disposal and
the facilities closures will occur prior to the end of fiscal 1999.
Note 5: Commitments.
As of August 1, 1999, the Company had commitments aggregating approximately
$2,580,000 for restaurant construction and the purchase of new equipment.
Note 6: Long-Term Debt.
On August 3, 1999 the Company completed the refinancing of its existing debt
with a financing package totaling $125,066,000, consisting of a $76,000,000
revolving credit agreement and a $49,066,000 mortgage facility, as described
below. The revolving credit agreement was executed with Chase Bank of Texas, as
agent for a group of six banks, providing for borrowings of up to $76,000,000
with interest payable at the adjusted LIBOR rate plus a contractual spread. The
revolving credit agreement is collateralized by the stock of certain
subsidiaries of the Company, the $10 million junior subordinated note issued by
Bruegger's Corporation, certain interests in the Company's franchise agreements
with Brinker and Burger King Corporation and substantially all of the Company's
personal property not pledged in the mortgage financing. The revolving credit
agreement will mature on October 31, 2002, at which time all amounts
outstanding thereunder are due.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1999
(Unaudited)
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, limitations on the incurrence of additional
indebtedness, limitations on consolidated capital expenditures, restrictions on
the payment of dividends (other than stock dividends) and limitations on the
purchase or redemption of shares of the Company's capital stock.
The $49,066,000 mortgage facility has 34 separate mortgage notes and the term
of each mortgage note is either 15 or 20 years. The notes have fixed rates of
interest of either 9.79% or 9.94%. The notes require equal monthly interest
and principal payments. The Company used the proceeds of the mortgage facility
to repay indebtedness under its existing revolving credit agreement. The
mortgage notes are collateralized by a first mortgage/deed of trust and
security agreement on the real estate, improvements and equipment on 19 of the
Company's Chili's restaurants and 15 of the Company's Burger King restaurants.
The mortgage notes contain, among other provisions, certain restrictive
covenants including maintenance of a consolidated fixed charge coverage ratio
for the financed properties.
As a result of the August 3, 1999 refinancing, the Company has classified its
outstanding borrowings as of August 1, 1999 as long-term debt.
Note 7: Earnings (Loss) Per Share
The Company had outstanding at August 1, 1999 common shares totaling
12,754,996. 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.
Twelve weeks ended Forty weeks ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per share amounts)
Basic net income (loss) per share:
Net income (loss) available to
common shareholders (numerator) $(2,355) $ 230 $(2,121) $ 505
======= ======= ======= =======
Weighted average common shares
outstanding (denominator) 12,712 12,599 12,637 12,599
======= ======= ======= =======
Basic net income (loss) per share $ (0.19) $ 0.02 $ (0.17) $ 0.04
======= ======= ======= =======
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1999
(Unaudited)
Twelve weeks ended Forty weeks ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per share amounts)
Diluted net income (loss) per share:
Net income (loss) available to
common shareholders (numerator) $(2,355) $ 230 $(2,121) $ 505
======= ======= ======= =======
Weighted average common shares
outstanding 12,712 12,599 12,637 12,599
Effect of dilutive securities:
Options on common stock - 2 - 72
------- ------- ------ ------
Total common shares and dilutive
securities(denominator) 12,712 12,601 12,637 12,671
======= ======= ======= =======
Diluted net income per share $ (0.19) $ 0.02 $ (0.17) $ 0.04
======= ======= ======= =======
Note 8: Contingencies.
The Company and certain of its officers and directors are parties to various
legal proceedings relating to the Company's purchase, operation and financing
of the Company's bagel-related businesses.
Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and Mark
Ratterman, Chris Galloway and Peter Shipman, principals of Quality Baking, LLC,
commenced an action on July 9, 1997 filed in the United States District Court,
for the Eastern District of Missouri, Eastern Division, against the Company,
Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael
Dressell, Daniel B. Fitzpatrick and John Firth.
On April 22, 1998, the Court granted the defendants' Motion to Transfer this
matter to the United States District Court for the Northern District of
Indiana. The complaint 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. On July 28, 1999,
the court dismissed all counts against all of the individual defendants,
dismissed the count alleging violations of implied covenants of good faith and
fair dealing and dismissed all fraud claims against the Company. The case
continues to proceed against the Company on allegations that the Company
breached an agreement to repurchase bakeries from the plaintiffs and against
the Bruegger's entities on allegations that the plaintiffs purchased their
franchises and preferred stock of Bruegger's Corporation based upon false
representations and on allegations that Bruegger's Franchise Corporation
breached the plaintiffs' franchise and development agreements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1999
(Unaudited)
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.
On or about April 15, 1997, Texas Commerce Bank National Association ("Texas
Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd., a Florida
limited partnership ("BFBC"). At the time of the Loan BFBC was a franchisee
under franchise agreements with Bruegger's Franchise Corporation (the
"Franchisor"). The Company at that time was an affiliate of the Franchisor. In
connection with the Loan and as an accommodation of BFBC, the Company executed
to Texas Commerce a "Guaranty". By the terms of the Guaranty the Company
agreed that upon maturity of the Loan by default or otherwise that it would
either (1) pay the Loan obligations or (2) buy the Loan and all of the related
loan documents (the "Loan Documents") from Texas Commerce or its successors.
In addition several principals of BFBC (the "Principal Guarantors") guaranteed
repayment of the Loan by each executing a "Principal Guaranty". On November
10, 1998, Texas Commerce (1) declared that the Loan was in default, (2)
notified BFBC, the Principal Guarantors and the Company that all of the Loan
obligations were due and payable, and (3) demanded payment.
The Company elected to satisfy its obligations under the Guaranty by purchasing
the Loan from Texas Commerce. On November 24, 1998, the Company bought the
Loan for $4,294,000. Thereafter, the Company sold the Loan to its Texas
affiliate Grady's American Grill, L.P. ("Grady's"). On November 30, 1998
Grady's commenced an action seeking to recover the amount of the Loan from one
of the Principal Guarantors, Michael K. Reilly ("Reilly"). As part of this
action Grady's also seeks to enforce a Subordination Agreement that was one of
the Loan Documents against MKR Investments, L.P., a partnership ("MKR"). Reilly
is the general partner of MKR. This action is pending in the United States
District Court for the Southern District of Texas Houston Division as Case No.
H-98-4015. Reilly has denied liability and filed a counterclaim against Grady's
alleging that Grady's engaged in unfair trade practices, violated Florida's
"Rico" statute, engaged in a civil conspiracy and violated state and federal
securities laws in connection with the Principal Guaranty (the
"Counterclaims"). Reilly also filed a third party complaint against Quality
Dining, Inc., Grady's American Grill Restaurant Corporation, David M. Findlay,
Daniel Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise Corporation,
Champlain Management Services, Inc., Nordahl Brue, Michael Dressell and Ed
Davis alleging that Reilly invested in BFBC based upon false representations,
that the third party defendants violated Florida and Illinois franchise
statutes, committed unfair trade practices, violated covenants of good faith
and fair dealing, violated the Florida "Rico" statute and violated state and
federal securities laws in connection with the Principal Guaranty. Based upon
the currently available information, the Company does not believe
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1999
(Unaudited)
that these matters will have a materially adverse effect on the Company's
financial position or results of operations. However, there can be no
assurance that the Company will be able to realize sufficient value from Reilly
to satisfy the amount of the Loan or that the Company will not incur any
liability as a result of the Counterclaims or third party complaint filed by
Reilly.
In each of the above cases, one or more present or former officers and
directors of the Company have been named as party defendants and the Company
has and/or is advancing defense costs on their behalf. Pursuant to the Share
Exchange Agreement by and among Quality Dining, Inc., Bruegger's Corporation,
Nordahl L. Brue and Michael J. Dressell, 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. Through August 1, 1999, the Company had paid approximately
$1.8 million in cash and assigned its $1.2 million note from BruWest to
Bruegger's Corporation which together have satisfied the Company's remaining
obligation to pay cash in respect of Franchise Damages. 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. Through August 1, 1999,
the outstanding balance due under the junior subordinated note has been reduced
by $600,000 in respect of Franchise Damages. Based upon the currently
available information, the Company does not believe that these cases
individually or in the aggregate will have a material adverse effect on the
Company's financial position and results of operations but there can be no
assurance thereof. Such assessment is based in part upon the Company's belief
that Bruegger's Corporation has and will continue to have the ability to
perform its indemnity obligations.
On or about September 13, 1999, Messrs. Brue and Dressell have asserted a claim
of breach of representations and warranties under the Share Exchange Agreement.
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 but there can be no assurance thereof.
James T. Bies filed a shareholder derivative action in the United States
District Court for the Southern District of Michigan on October 14, 1997. A
derivative action is an action on behalf of the Company in which any recovery
against the defendants would be payable to the Company. The complaint named as
defendants 12 individuals who are current or former directors or officers of
the Company. The complaint alleged that the individual defendants as directors
breached fiduciary duties to the Company by approving certain transactions in
1997 involving loans to Bagel Acquisition Corporation that allegedly benefited
Daniel B. Fitzpatrick, the Company's Chairman, President and Chief Executive
Officer. The plaintiff also alleged that individual defendants participated in
a "conspiracy to waste, dissipate, and improperly use funds, property and
assets" of the Company for the benefit of Bagel Acquisition Corporation and Mr.
Fitzpatrick. The plaintiff alleged that the Company and its shareholders had
been damaged in an amount in excess of $28,000,000. The relief sought also
included the appointment of a receiver, an accounting and attorney's fees. On
April 27, 1998, the Court dismissed the complaint without prejudice, for
failure to make a "demand" upon the Company's board of directors that the
Company institute the action. By letter dated May 12, 1998, Mr. Bies demanded
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1999
(Unaudited)
that the Company pursue these claims against the defendants. In accordance
with the Indiana Business Corporation Law ("IBCL"), the board of directors
appointed a special committee of three disinterested outside directors and one
other disinterested person to investigate the allegations. The three
disinterested outside directors are Messrs. Decio, Lewis and Murphy (named
defendants in the action) and the disinterested person is David T. Link, Dean
of the University of Notre Dame Law School. As required by the IBCL, the
special committee was charged with evaluating the claim and determining whether
it is in the best interests of the Company to pursue this matter. Subsequent
to the establishment of the special committee, Mr. Bies refiled his action on
July 30, 1998. As a result of its investigation of Mr. Bies' demand, the
special committee has determined that the claims identified by Mr. Bies are
without merit and therefore it would not be in the Company's best interests to
pursue them. As a result, on January 6, 1999, the special committee filed a
motion to dismiss or alternatively for summary judgment, which was denied on
April 20, 1999 essentially because the Court was unable to determine, on the
record before it, whether the special committee was disinterested. The Court
has denied the Company's subsequent request to schedule an evidentiary hearing
to assist in this determination. The Company does not believe this matter will
have a material adverse effect on the Company's financial position or results
of operations.
The Company and certain of its executive officers are defendants in a class
action lawsuit filed in the United States District Court for the Northern
District of Indiana. The complaint alleges, 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 by failing to disclose various
matters in connection with the Company's acquisition, development, financing
and disposition of its bagel-related businesses. The putative class period in
such actions is from June 7, 1996 to May 13, 1997 on which dates the price of
the Company's common stock closed at $34.25 and $6.56, respectively. The
plaintiffs are seeking, among other things, an award of unspecified
compensatory damages, interest, costs and attorney's fees. The Company has
filed a motion to dismiss the complaint which is presently pending before the
Court and it intends to vigorously defend against the allegations made in the
complaints. However, there can be no assurance that the ultimate outcome of
this or other actions (including other actions under federal or state
securities laws) arising out of the Company's acquisition, development,
financing and disposition of its bagel-related businesses 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.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1999
(Unaudited)
Note 10: Restricted Stock Awards.
On June 1, 1999, the Company repurchased 298,340 options that had previously
been issued under its 1993 Stock Option and Incentive Plan, at strike prices
ranging from $13.60 to $34.50, for their fair value of $44,751, or $0.15 per
option. These options are not available to be reissued.
On June 1, 1999, the Company also implemented a Long Term Incentive
Compensation Plan (the "Long Term Plan") for seven of its executive officers and
certain other senior executives (the "Participants"). The Long Term Plan is
designed to incent and retain those individuals who are critical to achieving
the Company's long term business objectives. The Long Term Plan consists of
(a) options granted with an exercise price equal to the closing price of the
Company's stock on June 1, 1999, which vest over three years; (b) restricted
stock awards of 155,552 shares which vest on June 1, 2006, subject to
accelerated vesting in the event the price of the Company's common stock
achieves certain targets; and, for certain Participants, (c) a cash bonus
payable at the conclusion of fiscal year 2000. The Company also entered into
agreements with five of its executive officers and two other senior executives
pursuant to which the employees have agreed not to compete with the Company
for a period of time after the termination of their employment and are
entitled to receive certain payments in the event of a change of control of
the Company.
As a result of these grants, the Company recorded a capital contribution and
offsetting deferred charge of approximately $467,000 for unearned
compensation. The deferred charge is equal to the number of shares granted
multiplied by a share price of $3.00, which was the Company's closing share
price on the day of the grant. The deferred charge is classified in the
equity section of the Company's consolidated balance sheet as unearned
compensation and is being amortized on a straight-line basis over the vesting
period.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has a 52/53-week fiscal year ending on the last Sunday in October
of each year. The current fiscal year is 53 weeks long and ends October 31,
1999. The first quarter of the Company's current fiscal year consists of 16
weeks, the second and third quarters consist of 12 weeks and the fourth quarter
is 13 weeks in duration.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
which certain items of revenue and expense bear to total revenues.
Twelve Weeks Ended Forty Weeks Ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
-------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 29.1 29.5 29.4 29.6
Payroll and benefits 29.2 28.8 29.0 28.6
Depreciation and amortization 4.8 4.7 4.9 5.0
Other operating expenses 24.9 24.4 24.3 24.0
----- ----- ----- -----
Total restaurant operating
expenses 88.0 87.4 87.6 87.2
General and administrative 6.7 6.7 6.8 6.7
Amortization of intangibles 0.5 0.5 0.5 0.5
Impairment of assets and
facility closing costs 4.7 - 1.4 -
----- ----- ----- -----
Total operating expenses 99.9 94.6 96.3 94.4
----- ----- ----- -----
Operating income 0.1 5.4 3.7 5.6
----- ----- ----- -----
Other income (expense):
Interest expense (4.2) (4.8) (4.6) (5.2)
Interest incom - .1 .1 .1
Other income (expense), net - .3 (.1) .1
----- ----- ----- -----
Total other expense, net (4.2) (4.4) (4.6) (5.0)
----- ----- ----- -----
Income (loss) before income taxes (4.1) 1.0 (0.9) 0.6
Income tax provision 0.4 0.6 0.3 0.4
----- ----- ----- -----
Net income (loss) (4.5)% 0.4% (1.2)% 0.2%
===== ===== ===== =====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Revenues for the Company were $53,465,000 for the third quarter of fiscal 1999
versus $54,617,000 for the comparable period in fiscal 1998, a decrease of
$1,152,000. Restaurant sales for the first forty weeks of fiscal 1999 were
$175,233,000 versus $179,602,000 for the comparable period in fiscal 1998, a
decrease of $4,369,000.
The Company's Burger King restaurant sales increased $337,000 to $20,599,000
in the third quarter of fiscal 1999 when compared to restaurant sales of
$20,262,000 in the same period in fiscal 1998. The Company's Burger King
restaurants had average weekly sales of $24,324 in the third quarter of fiscal
1999 versus $24,728 in the same period in fiscal 1998. The decrease in average
weekly sales was offset by revenues of $614,000 from three units open in
fiscal 1999 that were not open or not open for the full quarter in fiscal
1998. The Company's Burger King restaurant sales increased $717,000 to
$61,993,000 for the first forty weeks of fiscal 1999 compared to $61,276,000
for the comparable period in fiscal 1998. Average weekly sales were $22,086 in
the first forty weeks of fiscal 1999 versus $22,816 in the same period in
fiscal 1998. The decline in average weekly sales for the first forty weeks of
fiscal 1999 resulted primarily from inclement weather during the first quarter
of fiscal 1999. The decrease in average weekly sales was offset by revenues of
$2,247,000 from four units open in fiscal 1999 that were not open or not open
for the full forty weeks in fiscal 1998.
Sales in the Company's Grady's American Grill restaurant division decreased
$1,386,000 to $16,167,000 in the third quarter of fiscal 1999 compared to
sales of $17,553,000 in the same period in fiscal 1998. The decrease was
partly attributable to the sale of one unit in fiscal 1998 and two units in
fiscal 1999. The absence of these units contributed approximately $675,000 to
the sales decrease. The Company's Grady's American Grill restaurants had
average weekly sales of $35,688 in the third quarter of fiscal 1999 versus
$36,569 in the same period in fiscal 1998. The Company's promotional activity
was not as expansive as it was in the third quarter of fiscal 1998, thereby
reducing promotional related sales. Sales in the Company's Grady's American
Grill restaurant division for the first forty weeks of fiscal 1999 decreased
$5,216,000 to $58,645,000 compared to $63,861,000 for the same period in
fiscal 1998. The absence of the three units which were sold contributed
approximately $2,115,000 to the sales decrease. Average weekly sales were
$38,608 in the first forty weeks of fiscal 1999 versus $39,913 in the same
period in fiscal 1998. The decrease resulted primarily from inclement weather
in several key markets during the first quarter of fiscal 1999 and reduced
promotional activity, thereby reducing promotional related sales.
The Company's Chili's Grill & Bar restaurant sales decreased $218,000 to
$13,026,000 in the third quarter of fiscal 1999 compared to $13,244,000 in the
same period in fiscal 1998. Average weekly sales were $38,767 in the third
quarter of fiscal 1999 versus $39,417 in the same period of fiscal 1998. The
Company's Chili's Grill & Bar restaurant sales for the first forty weeks of
fiscal 1999 decreased $401,000 to $42,593,000 compared to $42,994,000 for the
same period in fiscal 1998. Average weekly sales were $38,029 in the first
forty weeks of fiscal 1999 versus $38,388 in the same period in fiscal 1998.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company's Italian Dining division restaurant sales increased $115,000 to
$3,673,000 in the third quarter of fiscal 1999 compared to $3,558,000 in the
same period in fiscal 1998. Average weekly sales were $38,270 in the third
quarter of fiscal 1999 versus $37,065 in the same period of fiscal 1998. The
Company's Italian Dining division restaurant sales for the first forty weeks
of fiscal 1999 increased $531,000 to $12,002,000 compared to $11,471,000 for
the same period in fiscal 1998. Average weekly sales were $37,506 in the first
forty weeks of fiscal 1999 versus $35,848 in the same period in fiscal 1998.
Total restaurant operating expenses, as a percentage of restaurant sales, were
88.0% for the third quarter of fiscal 1999 versus 87.4% in the third quarter
of fiscal 1998 and 87.6% in the first forty weeks of fiscal 1999 versus 87.2%
in the same period of fiscal 1998. The following factors influenced the
operating margins.
Food and beverage costs were 29.1% of total revenues in the third quarter of
fiscal 1999 compared to 29.5% of total revenues in the same period in fiscal
1998 and 29.4% in the first forty weeks of fiscal 1999 compared to 29.6% in
the same period of fiscal 1998. The decrease as a percentage of total revenue
was mainly due to increased efficiencies and favorable commodity prices that
resulted in decreased food costs at the Company's Burger King, Chili's and
Italian Dining restaurants.
Payroll and benefits were 29.2% of total revenues in the third quarter of
fiscal 1999 versus 28.8% in the same period of fiscal 1998 and 29.0% in the
first forty weeks of fiscal 1999 compared to 28.6% in the same period of
fiscal 1998. Payroll and benefits increased as a percentage of total revenues
in the Company's Burger King, Grady's American Grill and Chili's divisions.
Overall, the Company has increased hourly wages at each of its restaurant
concepts due to the high level of competition to attract qualified employees.
Depreciation and amortization, as a percentage of total revenues, remained
relatively consistent at 4.8% in the third quarter of fiscal 1999 when
compared to 4.7% in the third quarter of fiscal 1998 and 4.9% in the first
forty weeks of fiscal 1999 compared to 5.0% in the same period of fiscal 1998.
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 third quarter of fiscal 1999 to 24.9% when compared to 24.4%
in third quarter of fiscal 1998 and increased to 24.3% in the first forty
weeks of fiscal 1999 compared to 24.0% in the same period of fiscal 1998. The
increase was primarily due to an increase in advertising expenses at the
Company's full service restaurant concepts.
General and administrative expenses decreased to $3,565,000 in the third
quarter of fiscal 1999 compared to $3,642,000 in the third quarter of fiscal
1998 and to $11,953,000 in the first forty weeks of fiscal 1999 compared to
$12,077,000 in the same period of fiscal 1998. As a percentage of total
restaurant sales, general and administrative expenses remained consistent at
6.7% in the third quarter of fiscal 1999 versus the third quarter of fiscal
1998 and increased to 6.8% in the first forty weeks of fiscal 1999 compared to
6.7% in the same period of fiscal 1998. The increase in the first forty weeks
was primarily due to lower than expected sales in the first quarter due to
inclement weather.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company recorded non-cash charges totaling $2,501,000 during the third
quarter of fiscal 1999 consisting primarily of $650,000 for the disposal of
obsolete point of sale equipment in its full service dining restaurants that
the Company identified as a result of installing its new point of sale system,
$1,047,000 for the estimated costs associated with the anticipated closing of
two regional offices and three restaurant locations and $804,000 primarily for
a non-cash asset impairment write down for two under-performing restaurants.
This non-cash asset impairment charge resulted from the Company's determination
that an impairment write down should be considered for certain locations when
there is a sustained trend of negative operating performance as measured by
restaurant level cash flow. The non-cash facility closure charges include
amounts for the write off of fixed assets and other costs related to the
closing of these facilities. Each of these non-cash charges represents a
reduction of the carrying amount of the assets to their estimated fair market
values. The Company anticipates that the point of sale equipment disposal and
the facilities closures will occur prior to the end of fiscal 1999.
Amortization of intangibles, as a percentage of total revenues, remained
consistent at 0.5% for the third quarter of fiscal 1999 and the first forty
weeks of fiscal 1999, when compared to the same periods in fiscal 1998.
Total other expenses, as a percentage of revenues, decreased to 4.2% for the
third quarter of fiscal 1999 from 4.4% during the comparable period in fiscal
1998 and to 4.6% in the first forty weeks of fiscal 1999 compared to 5.0% in
the same period of fiscal 1998. The decrease for the quarter and the first
forty weeks was primarily due to a decrease in interest expense resulting from
decreased borrowings and lower interest rates.
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 had an income tax provision for the third quarter of fiscal
1999 of $219,000 compared to $344,000 for the same period of fiscal 1998 and
an income tax provision for the first forty weeks of fiscal 1999 of $570,000
compared to a net income tax provision of $803,000 in the same period of
fiscal 1998. The decrease in the income tax provision for the third quarter
and the first forty weeks of fiscal 1999 was mainly due to implementation of
state tax strategies to reduce state income tax expense.
For the third quarter of fiscal 1999, the Company reported net loss of
$2,355,000 compared to net income of $230,000 for the same period of fiscal
1998 and a net loss of $2,121,000 in the first forty weeks of fiscal 1999
compared to net income of $505,000 in the same period of fiscal 1998.
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 $67,000 at August 1, 1999, a
decrease of $3,284,000 from the $3,351,000 at October 25, 1998. Principal uses
of funds consisted of: (i) expenditures for property and equipment
($4,496,000), (ii) net reduction in long-term debt ($4,300,000) and (iii)
purchase of the BFBC note receivable ($4,294,000). Principal sources of funds
consisted of (i) those provided by operations ($7,823,000) and (ii) proceeds
from sales of property and equipment ($2,704,000).
The Company's primary cash uses in fiscal 1999 will be as follows: finance
capital expenditures in connection with the opening of new restaurants,
remodeling and maintenance expenditures of existing restaurants and point of
sale upgrades. The Company's capital expenditures for fiscal 1999 are
expected to be approximately $9,000,000. The Company currently plans to use
any remaining cash flow to reduce debt under the Company's revolving credit
agreement. During the first quarter of fiscal 1999 the Company purchased a
note for $4,294,350 from Texas Commerce in satisfaction of its obligations
under a loan guaranty. The purchase of the note was financed through
borrowings under the Company's revolving credit agreement. During fiscal 1999,
the Company has opened one Burger King restaurant and does not anticipate
opening any additional restaurants during fiscal 1999. 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 August 3, 1999 the Company completed the refinancing of its existing debt
with a financing package totaling $125,066,000, consisting of a $76,000,000
revolving credit agreement and a $49,066,000 mortgage facility, as described
below. The revolving credit agreement was executed with Chase Bank of Texas, as
agent for a group of six banks, providing for borrowings of up to $76,000,000
with interest payable at the adjusted LIBOR rate plus a contractual spread. The
revolving credit agreement is collateralized by the stock of certain
subsidiaries of the Company, the $10 million junior subordinated note issued by
Bruegger's Corporation, certain interests in the Company's franchise agreements
with Brinker and Burger King Corporation and substantially all of the Company's
personal property not pledged in the mortgage financing. The revolving credit
agreement will mature on October 31, 2002, at which time all amounts
outstanding thereunder are due.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, limitations on the incurrence of additional
indebtedness, limitations on consolidated capital expenditures, restrictions on
the payment of dividends (other than stock dividends) and limitations on the
purchase or redemption of shares of the Company's capital stock.
The $49,066,000 mortgage facility has 34 separate mortgage notes and the term
of each mortgage note is either 15 or 20 years. The notes have fixed rates of
interest of either 9.79% or 9.94%. The notes require equal monthly interest
and principal payments. The Company used the proceeds of the mortgage facility
to repay indebtedness under its existing revolving credit agreement.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The mortgage notes are collateralized by a first mortgage/deed of trust and
security agreement on the real estate, improvements and equipment on 19 of the
Company's Chili's restaurants and 15 of the Company's Burger King restaurants.
The mortgage notes contain, among other provisions, certain restrictive
covenants including maintenance of a consolidated fixed charge coverage ratio
for the financed properties.
As a result of the August 3, 1999 refinancing, the Company has classified its
outstanding borrowings as of August 1, 1999 as long-term debt.
IMPACT OF YEAR 2000
The term "Year 2000" is a general term used to describe the various problems
that may result from the improper processing of dates and date-sensitive
calculations by computers and other machinery and equipment as the year 2000
is approached and thereafter. These problems generally arise from the fact
that most of the world's computer hardware and software has historically used
only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the "2000's" from dates in the
"1900's."
The Company's State of Readiness. The Company has established a formal plan
("Year 2000 Plan") to (i) test its information technology systems to evaluate
Year 2000 compliance, (ii) assess the Year 2000 compliance of its information
technology vendors, (iii) assess its non-information technology systems that
utilize embedded technology such as micro-controllers and (iv) determine the
readiness of third parties such as government agencies, utility companies,
telecommunication companies, suppliers and other "non-technology" third party
vendors. The Company has completed the testing and assessment of its
information technology systems including non-information technology systems
that utilize embedded technology. The Company has determined that 50 of its
critical systems were Year 2000 compliant as of September 9, 1999, and
anticipates that the remaining sixteen critical systems will be Year 2000
compliant by October, 1999.
Independent of the Company's Year 2000 Plan, the Company had previously
determined it would replace its point of sale equipment in as many as 75 of
its full service dining restaurants. This determination was part of the
Company's ongoing efforts to enhance financial controls through a centralized,
computerized, accounting system to enhance the tracking of data to enable the
Company to better manage its operations. The Company is currently in the
process of replacing the point of sale equipment in its full service
restaurants and expects to complete this process by October, 1999. The Company
has determined that the replacement systems are Year 2000 compliant. The
Company expects the replacement of the point of sale equipment in its full
service restaurants to cost approximately $3 million. During the third
quarter of fiscal 1999, the Company recorded a non-cash charge of $650,000 in
connection with the disposition of certain of its obsolete point of sale
equipment that the Company identified as a result of installing its new point
of sale system. The Company has determined that the point of sale equipment in
its 70 Burger King restaurants is Year 2000 compliant.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Costs to Address the Company's Year 2000 Issues. The Company expenses costs
associated with its Year 2000 Plan as the costs are incurred except for costs
that the Company would otherwise capitalize. The Company does not expect the
costs associated with its Year 2000 Plan to have a material adverse effect on
its financial position or results of operations. The Company is unable to
estimate the costs it may incur as a result of Year 2000 problems suffered by
third parties with which it deals. The Company has surveyed its critical
vendors, other than utilities and government agencies, and believes that
either each vendor was Year 2000 compliant by June, 1999 or, if not, suitable
alternative suppliers that are Year 2000 compliant will be available.
Risks Presented by Year 2000 Problems. To operate its businesses, the Company
relies upon government agencies, utility companies, telecommunications
companies, suppliers and other third party service providers over which it can
assert little control. The Company's ability to conduct its business is
dependent upon the ability of these third parties to avoid Year 2000 related
disruption. If they do not adequately address their Year 2000 issues, the
company's business may be materially affected which could result in a
materially adverse effect on the Company's results of operations and financial
condition. If the Company is not able to integrate replacement point of sale
systems at its full service restaurants, its ability to effectively operate
those restaurants could be substantially impaired. As a result of the
Company's ongoing assessment, the Company may identify additional areas of its
business that are at risk of Year 2000 disruption. The absence of any such
determination at this point represents only the current status of the
assessment phase of the Company's Year 2000 Plan and should not be construed
to mean that there are no other areas of the Company's business which are at
risk of a Year 2000 related disruption.
The Company's Contingency Plans. The Company's Year 2000 Plan calls for the
development of contingency plans for areas of its business that are
susceptible to a substantial risk of a Year 2000 related disruption where the
Company determines that such disruption could be mitigated through reasonable,
cost effective contingency plans. The Company has not yet developed detailed
contingency plans specific to Year 2000 events for any specific area of
business. Consistent with its Year 2000 Plan, the Company will develop
specific Year 2000 contingency plans for such areas of business as and if such
determinations are made
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131,"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is
to be presented. This statement need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim periods in the initial year of application is to be reported in
financial statements for interim periods in the second year of application.
The Company will adopt SFAS No.131 for its fiscal 1999 Financial Statements.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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
ability of the Company to develop and operate its restaurants; the hiring,
training and retention of skilled corporate and restaurant management and
other restaurant personnel; the integration and assimilation of acquired
concepts; the overall success of the Company's franchisors; the ability to
obtain the necessary government approvals and third-party consents; the
ability of the Company to modify or redesign its computer systems to work
properly in the year 2000 and the cost thereof; and changes in governmental
regulations, including increases in the minimum wage.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 8 to the unaudited consolidated financial statements of the Company
included in Part I of this report is incorporated herein by reference.
Item 2. Changes in Securities
None
Items 3. Defaults upon Senior Securities
None
Item 4 Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
On June 1, 1999, the Company repurchased 298,340 options that had previously
been issued under its 1993 Stock Option and Incentive Plan, at strike prices
ranging from $13.60 to $34.50, for their fair value of $44,751, or $0.15 per
option. These options are not available to be reissued.
On June 1, 1999, the Company also implemented a Long Term Incentive
Compensation Plan (the "Long Term Plan") for seven of its executive officers
and certain other senior executives (the "Participants"). The Long Term Plan
is designed to incent and retain those individuals who are critical to achieving
the Company's long term business objectives. The Long Term Plan consists of
(a) options granted with an exercise price equal to the closing price of the
Company's stock on June 1, 1999, which vest over three years; (b) restricted
stock awards of 155,552 shares which vest on June 1, 2006, subject to
accelerated vesting in the event the price of the Company's common stock
achieves certain targets; and, for certain Participants, (c) a cash bonus
payable at the conclusion of fiscal year 2000. The Company also entered into
agreements with five of its executive officers and two other senior executives
pursuant to which the employees have agreed not to compete with the Company
for a period of time after the termination of their employment and are
entitled to receive certain payments in the event of a change of control 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
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining, Inc.
(Registrant)
______________________
Date: September 13, 1999 By: /s/Martin Miranda
Vice President & Controller
(Principal accounting officer
and duly authorized officer)
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------------------------------------------------
4-A Form of Mortgage, Assignment of Rents, Fixture Filing
and Security Agreement
4-B Form of Lease
4-C Form of Promissory Note
4-D Intercreditor Agreement by and among Burger King
Corporation, the Company and Chase Bank of Texas,
National Association, NBD Bank, N.A. and NationsBank,
N.A. effective as of May 11, 1999
4-E Intercreditor Agreement by and among Captec Financial
Group, Inc., CNL Financial Services, Inc., Chase Bank
of Texas, National Association and the Company dated
August 3, 1999
4-F Collateral Assignment of Lessee's Interest in Leases
by and between Southwest Dining, Inc. and Chase Bank
of Texas, National Association dated July 26, 1999
4-G Collateral Assignment of Lessee's Interest in Leases
by and between Grayling Corporation and Chase Bank of
Texas, National Association dated July 26, 1999
4-H Collateral Assignment of Lessee's Interest in Leases
by and between Bravokilo, Inc. and Chase Bank of
Texas, National Association dated July 26, 1999
4-I Third Amended and Restated Revolving Credit Agreement
dated as of May 11, 1999 by and between Quality
Dining, Inc. and GAGHC, Inc., as Borrowers, Chase Bank
of Texas, National Association, as Administrative
Agent, NBD Bank, N.A., as Documentation Agent,
NationsBank, N.A. (South) as Co-Agent, and LaSalle
Bank, N.A., The Northern Trust Company, KeyBank
National Association (successor in interest to Society
National Bank), SunTrust Bank, Central Florida, N.A.
(collectively the "Banks")
4-J First Amendment to Third Amended and Restated Revolving
Credit Agreement dated as of July 26, 1999 by and
between Quality Dining, Inc., and GAGHC, Inc., as
Borrowers and the Banks
4-K Second Amendment to Third Amended and Restated
Revolving Credit Agreement dated as of September 9,
1999 by and between Quality Dining, Inc. and GAGHC,
Inc., Banks which are Party thereto and Chase Bank of
Texas, National Association.
INDEX TO EXHIBITS (continued)
Exhibit No. Description
- ----------- ------------------------------------------------
10-D Second Amendment to Development Agreement by and
between Southwest Dining, Inc. and Brinker
International, Inc. dated July 26, 1999
10-G Employment Agreement between the Company and John C.
Firth dated August 24, 1999.
10-Q Non Compete Agreement between the Company and James K.
Fitzpatrick dated June 1, 1999
10-R Non Compete Agreement between the Company and Gerald
O. Fitzpatrick dated June 1, 1999
10-S Non Compete Agreement between the Company and David M.
Findlay dated June 1, 1999
10-U Non Compete Agreement between the Company and Robert
C. Hudson dated June 1, 1999
10-AH Agreement for Purchase of Options between the Company
and Daniel B. Fitzpatrick dated June 1, 1999
10-AI Agreement for Purchase of Options between the Company
and John C. Firth dated June 1, 1999
10-AJ Agreement for Purchase of Options between the Company
and James K. Fitzpatrick dated June 1, 1999
10-AK Agreement for Purchase of Options between the Company
and Gerald O. Fitzpatrick dated June 1, 1999
10-AL Agreement for Purchase of Options between the Company
and David M. Findlay dated June 1, 1999
10-AM Agreement for Purchase of Options between the Company
and Robert C. Hudson dated June 1, 1999
10-AN Agreement for Purchase of Options between the Company
and Patrick J. Barry dated June 1, 1999
10-AO Agreement for Purchase of Options between the Company
and Marti'n Miranda dated June 1, 1999
10-AP Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and Daniel B. Fitzpatrick dated
June 1, 1999
10-AQ Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and John C. Firth dated June 1,
1999
INDEX TO EXHIBITS (continued)
Exhibit No. Description
- ---------- -----------------------------------------------------
10-AR Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and James K. Fitzpatrick dated
June 1, 1999
10-AS Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and Gerald O. Fitzpatrick dated
June 1, 1999
10-AT Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and David M. Findlay dated June 1,
1999
10-AU Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and Robert C. Hudson dated June 1,
1999
10-AV Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and Patrick J. Barry dated June 1,
1999
10-AW Agreement for Restricted Shares Granted Under Quality
Dining, Inc. 1997 Stock Option and Incentive Plan
between the Company and Marti'n Miranda dated June 1,
1999
10-AX Consulting agreement between the Registrant and
William R. Schonsheck dated August 13, 1999
27 Financial Data Schedule