1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14D-9
(RULE 14D-101)
SOLICITATION/RECOMMENDATION STATEMENT UNDER
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
QUALITY DINING, INC.
- --------------------------------------------------------------------------------
Name of Subject Company
QUALITY DINING, INC.
- --------------------------------------------------------------------------------
(Name of Persons Filing Statement)
COMMON STOCK, WITHOUT PAR VALUE
- --------------------------------------------------------------------------------
(Title of Class of Securities)
747456P 10 5
- --------------------------------------------------------------------------------
(CUSIP Number of Class of Securities)
John C. Firth, Esq.
Executive Vice President, General Counsel and Secretary
Quality Dining, Inc.
4220 Edison Lakes Parkway
Mishawaka, Indiana 46545
Telephone: (219) 271-4600
Facsimile: (219) 243-4393
- --------------------------------------------------------------------------------
(Name, address, and telephone numbers of person authorized to receive notices
and communications on behalf of the persons filing statement)
Copies to:
Lawrence Lederman, Esq. and
Robert S. Reder, Esq.
Milbank, Tweed, Hadley & McCloy LLP
1 Chase Manhattan Plaza
New York, New York 10005
Telephone: (212) 530-5000
Facsimile: (212) 530-5219
2
ITEM 1. SUBJECT COMPANY INFORMATION
The name of the subject company is Quality Dining, Inc., an Indiana
corporation (the "Company"). The principal executive offices of the Company are
located at 4220 Edison Lakes Parkway, Mishawaka, Indiana 46545 and its phone
number is (219) 271-4600.
The class of equity securities to which this statement relates is the
common stock, no par value, of the Company (the "Common Stock"). As of May 19,
2000, 12,287,103 shares of Common Stock were outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON
The name and business address of the Company, which is the person filing
this statement, are set forth in Item 1 above.
This statement relates to the tender offer statement filed with the
Securities and Exchange Commission (the "SEC"), Schedule TO, on May 9, 2000
("Schedule TO"), by QDI Acquisition LLC, a Delaware limited liability company
("QDI Acquisition") and wholly-owned subsidiary of NBO, LLC, a Michigan limited
liability company ("NBO", and together with "QDI Acquisition", the "Bidder"), to
purchase all of the Common Stock outstanding, and the related rights to purchase
shares of the Series B Participating Cumulative Preferred Stock of the Company
(the "Rights" and, together with the Common Stock, the "Shares"), issued
pursuant to the Rights Agreement, dated as of March 27, 1997 (the "Rights
Agreement"), by and between the Company and ChaseMellon Shareholder Services,
L.L.C., as successor to KeyCorp Shareholder Services, Inc., as Rights Agent, at
a price of $5.00 per Share, net to the seller in cash, without interest thereon,
upon the terms and subject to the conditions set forth in the Bidder's Offer to
Purchase, dated May 9, 2000 (the "Offer to Purchase") and in the related Letter
of Transmittal (which, together with the Offer to Purchase and any supplements
or amendments thereto, collectively constitute the "Offer"). The Offer to
Purchase states that the principal executive offices and phone number of the
Bidder are: 25800 Northwestern Highway, Suite 750, Southfield, Michigan 48075;
(248) 262-1000.
According to the Offer to Purchase, the purpose of the Offer is for the
Bidder to acquire control of, and ultimately the entire equity interest in, the
Company. The Offer, as the first step in the acquisition of the Company, is
intended to facilitate the acquisition of all outstanding Shares. According to
the Offer to Purchase, NBO currently intends, promptly following consummation of
the Offer, to seek to have the Company consummate a merger or similar business
combination with QDI Acquisition or another direct or indirect wholly-owned
subsidiary of NBO (the "Merger"), pursuant to which each then outstanding Share
(other than Shares held by QDI Acquisition, NBO or any of their respective
wholly-owned subsidiaries, treasury shares and Shares held by the Company's
shareholders who properly exercise dissenter's rights available to them under
Chapter 44 of the Indiana Business Corporation Law (the "IBCL")) would be
converted into the right to receive in cash the price per Share paid by QDI
Acquisition pursuant to the Offer, without interest. If QDI Acquisition and NBO
collectively own at least 90% of the outstanding Shares following the
consummation of the Offer or otherwise, the Offer to Purchase states that NBO
intends to attempt to effect the proposed Merger pursuant to the "short-form
merger" provisions of Section 23-1-40-4 of the IBCL immediately following the
purchase of Shares in the Offer.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
Certain agreements, arrangements or understandings between the Company and
its executive officers, directors or affiliates are described in the Company's
Proxy Statement for the 2000 Annual Meeting of shareholders, dated February 4,
2000 (the "Proxy Statement") under the following headings: "Summary Compensation
Table," "Employment Agreements," "Compensation of Directors," "Stock Options,"
"401(k) and Deferred Compensation Savings Plan," "Long Term Incentive Plans,"
"Leases of Headquarters Building and Restaurant Facilities," "Transportation
Services" and "Administrative Services," A copy of the pertinent portions of the
Proxy Statement is attached as Annex I hereto, and such portions are
incorporated herein by reference.
1
3
Except as discussed herein or incorporated herein by reference, to the best
knowledge of the Company, as of the date hereof there exists no other material
agreement, arrangement or understanding and no actual or potential conflict of
interests between the Company or its affiliates and (i) the Company's executive
officers, directors or affiliates, or (ii) the Bidder or its executive officers,
directors or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
At a meeting of the Company's Board of Directors (the "Board") held on May
19, 2000, the Board, by a unanimous vote, determined that the Offer is
inadequate and not in the best interests of the Company and the Company's
shareholders. ACCORDINGLY, THE BOARD RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS
REJECT THE OFFER AND NOT TENDER ANY SHARES TO THE BIDDER.
The letter to the Company's shareholders communicating the Board's
recommendation and form of press release announcing such recommendation are
filed as Exhibits 1 and 2 hereto, respectively, and are incorporated herein by
reference.
Background
On March 22, 1999, David W. Schostak and Mark S. Schostak, who together
with Jerome L. Schostak and Robert I. Schostak are members of NBO (the
"Schostaks"), met with Daniel B. Fitzpatrick, Chairman, President and Chief
Executive Officer of the Company, and John C. Firth, Executive Vice President,
General Counsel and Secretary of the Company, purportedly to discuss the
Company's businesses and operations. During the meeting, the Schostaks requested
sensitive, confidential information about the Company. The Company determined it
was not appropriate to provide such information to the Schostaks, who operate
businesses which are direct competitors with the Company. Following that meeting
on March 26, 1999, NBO and the Schostaks filed a Schedule 13D indicating that
they owned 9.5% of the outstanding shares of Common Stock and voicing their
concern as to whether the Company was taking all possible steps to enhance
shareholder value.
On August 22, 1999, David Schostak met with Daniel B. Fitzpatrick and
proposed that Mr. Fitzpatrick join with NBO to structure a going private
transaction for the Company. Mr. Fitzpatrick declined this suggestion, advising
Mr. Schostak that he did not believe such a transaction would be in the best
interests of all of the Company's shareholders at that time.
Subsequent to these meetings, representatives of NBO made several requests
of executives of the Company for a meeting with the Board to discuss the future
of the Company and possible strategic alternatives. However, given the fact
that, during the previous meetings, NBO did not make a proposal for a business
combination but only requested confidential information and suggested that
management cooperate with NBO to structure a going private transaction, the
Board was reluctant to continue any further discussions with NBO.
On October 1, 1999, David W. Schostak, on behalf of NBO, sent a letter
formally requesting a meeting with the Board to discuss a possible acquisition
of the Company by NBO or its affiliates.
In a letter dated October 13, 1999 from John C. Firth to David W. Schostak,
the Company stated that the meeting requested by NBO was not necessary and would
not be productive. The letter informed NBO that the Board believed that the
Company's strategic plan, with its focus on optimizing cash flow, reducing debt
and disposing of underperforming assets, coupled with measured growth and a
moderate share repurchase program, represented the best opportunity to maximize
long-term shareholder value.
On January 13, 2000, NBO filed a preliminary proxy statement with the SEC
expressing its intention to (i) nominate two individuals for election to the
Board and (ii) seek approval of a non-binding shareholder proposal relating to
the termination of the Company's Rights Agreement at the 2000 Annual Meeting of
Shareholders to be held on March 7, 2000 (the "Annual Meeting"). Thereafter, NBO
commenced a proxy solicitation of the Company's shareholders seeking support for
its proposals.
2
4
On February 22, 2000, David W. Schostak, on behalf of NBO, sent a letter to
the Board proposing a "friendly" cash merger transaction with an entity to be
formed by NBO in which a cash price of $5.00 per Share would be paid to the
Company's shareholders (other than NBO) for all of their Shares. In response, on
February 23, 2000, John C. Firth sent a letter to NBO on behalf of the Company
stating that, among other things, the Board to be elected at the Annual Meeting
would, in accordance with its fiduciary duties, evaluate the fairness of NBO's
offer in the context of the Company's long-term strategy, as well as NBO's
ability to finance and complete the transaction. The letter also requested
evidence of NBO's ability to finance the proposed acquisition and asked that NBO
withdraw its solicitation of proxies for NBO's nominees as directors in view of
the conflicts inherent in NBO's status as a bidder for the Company.
By letter dated February 28, 2000, David W. Schostak, on behalf of NBO,
informed the Board that its $5.00 per share cash merger proposal would no longer
be subject to a financing condition and that NBO had the financial wherewithal
to consummate the proposed merger. On February 28, 2000, the Company issued a
press release in which Daniel B. Fitzpatrick stated, among other things, that
the Company believed that because NBO's offer remained subject to a full due
diligence review, this condition had exactly the same effect as a financing
condition. Mr. Fitzpatrick also stated that NBO still had not provided any
assurances that it could obtain the necessary financing for its acquisition
proposal, despite the Company's request for such evidence.
On March 7, 2000, at the Annual Meeting, NBO' s nominees and non-binding
shareholder proposal relating to the Company's Rights Agreement were defeated.
In the final report of the independent inspectors, the Board's nominees for
director received approximately 67% of the total votes cast and NBO's
shareholder proposal was defeated by a margin of approximately 2 to 1. In
addition, at the Annual Meeting David W. Schostak publicly advocated that the
Board sell the Company to Daniel B. Fitzpatrick who, Mr. Schostak said, was in
the best position to the buy the Company.
On March 13, 2000, the Board publicly announced that it had advised NBO
that there was no basis for further discussions of NBO's previous $5.00 per
Share offer in light of the highly conditional nature of the proposal. The Board
noted that NBO had not provided evidence satisfactory to the Company of its
ability to finance the transaction and that the transaction was subject to NBO's
due diligence review of the Company, which effectively made the offer subject to
a financing condition.
On April 4, 2000, in a press release, the Company announced that in
accordance with the provisions of the Rights Agreement, the Board had authorized
Daniel B. Fitzpatrick and any of his affiliates or associates to purchase up to
1,000,000 additional shares of Common Stock. The Company further announced that
Mr. Fitzpatrick and other members of management may purchase shares of Common
Stock from time to time in the open market or in privately negotiated
transactions depending on market conditions and other considerations.
On April 6, 2000, David W. Schostak sent a letter to the Board, criticizing
the Board's actions in authorizing the purchases of Common Stock discussed above
and requesting that the Board waive the purchase restrictions found in the
Rights Agreement for all shareholders. NBO also repeated its past request that
the Company be sold.
On April 14, 2000, the Company issued a press release stating that NBO had
misinterpreted the Company's April 4, 2000 announcement and indicating that,
among other things, an independent committee of the Board had been appointed and
that such committee had reconfirmed the Board's actions, the Board has always
believed that purchases of the Company's Common Stock by its employees,
including Mr. Fitzpatrick, is beneficial to and in the best interest of the
Company and its other shareholders, the Board did not view additional share
ownership by Daniel B. Fitzpatrick (which is limited to 1 million additional
shares) as a threat to the Company or a precursor to a change of control, Daniel
B. Fitzpatrick would only purchase the Shares in the market when the Company
advises him that it is not in the market to repurchase Shares and that neither
Daniel B. Fitzpatrick nor the Company would coordinate their purchases with any
other person.
On April 18, 2000, NBO announced its intention to commence the Offer. The
announcement indicated that, following completion of the Offer, NBO intended to
effect a merger in which all remaining shareholders
3
5
of the Company would receive the same consideration paid in the Offer in
exchange for their Shares. Also, on April 18, 2000, Mr. David W. Schostak, on
behalf of NBO, sent a letter to the Board asking the Board to give the Company's
shareholders the right to decide whether to accept Parent's $5.00 per Share
offer. NBO formally commenced the Offer on May 9, 2000.
On April 19, 2000, NBO filed a Verified Complaint for Injunctive And
Declaratory Relief in the United States District Court for the Northern District
of Indiana, South Bend Division, naming as defendants the Company, the CEO,
certain other directors of the Company, certain unidentified associates and
affiliates of the CEO and certain other unidentified members of management. See
"-- Item 8. Addition Information -- Litigation" below.
Reasons
In reaching the determination and recommendation set forth above, the Board
considered numerous factors, including, without limitation, the following:
(1) The Board's belief that the Offer price does not reflect the
inherent value of the Company. In this regard, the Board considered the
business, financial condition, results of operations, current business
strategy and future prospects of the Company and whether the Offer was
reflective thereof, including the opinion of the Company's management that
the financial terms of the Offer are inadequate. The opinion of management
was based on a variety of factors, including its knowledge of the Company's
business and operations and of its strategic objectives and corporate
policies and its views as to the prospects of the Company.
(2) The opinion of McDonald Investments Inc. ("McDonald") that the
Offer price is inadequate from a financial point of view as of May 19,
2000. McDonald, who acted as financial advisor to the Company in relation
to the Offer, delivered (i) a presentation at the May 19th Board meeting
and (ii) a written opinion (the "McDonald Opinion") to the Board stating
therein that the consideration of $5.00 per Share being offered to the
holders of the Shares pursuant to the Offer is inadequate from a financial
point of view to the Company's shareholders (other than the Bidder and its
affiliates).
A copy of the McDonald Opinion is attached as Annex II hereto. THE
COMPANY'S SHAREHOLDERS ARE URGED TO READ CAREFULLY THE MCDONALD OPINION IN
ITS ENTIRETY.
(3) The Board's belief that the current stock price of the Common
Stock does not reflect the actual value of the Company. As a result of the
problems with the Company's bagel franchise business and following the
disposition of that business in 1997, the market price of the Common Stock
was quite low. In view of the Company's significant debt obligations and
the difficult times experienced by restaurant companies in general, the
Company's stock price has not recovered. Thus, the Board concluded that the
apparent premium associated with the Offer is misleading inasmuch as it
does not give full credit to the turnaround in the Company's operations and
financial position since the disposition of the bagel franchise business or
to the Company's prospects for future growth.
(4) The Board's belief that, in view of the fact that the Company's
stock price does not reflect the progress that the Company has made in
recent months or the Company's prospects for future growth, the Offer is an
attempt by NBO to capture for itself the future growth in revenues, net
income and cash flow that will be realized from the implementation of the
Board's long-term strategy. In this regard, the Board reviewed the
Company's long-term strategy to rebuild the Company and maximize
shareholder value by optimizing cash flow, aggressively reducing debt,
improving the Company's restaurant operations and disposing of
underperforming assets, coupled with measured growth and a moderate stock
repurchase program. In its analysis, the Board considered the progress that
the Company has made since the Company disposed of its bagel business in
October 1997: (A) the reduction of debt from approximately $141 million to
$109 million and the replacement of short-term floating rate bank debt with
a fixed rate mortgage facility and a bank credit facility, (B) the
reengineering of the Company's support structure by reducing the number of
home office employees from approximately 220 to 70, (C) the installation of
state of the art point of sale and information management systems in all of
the Company's full service
4
6
restaurants, allowing management to analyze customer purchasing habits,
operating trends and promotional results, (D) the retention of ownership of
the Company's valuable real estate, enhancing the Company's ability to
participate in cost-saving incentive programs offered by the Company's
franchisors, rather than engaging in sale leaseback transactions that might
improve the Company's balance sheet in the near term but will not provide
long-term benefits, (E) the improvement in the consolidated cash flow
margins (as a percentage of its sales) of the Company's Burger King and
Chili's restaurants to a level to which the Board believes is significantly
better than those of the Company's peers, (F) the bolstering of the
development pipeline for future expansion, (G) the repurchase of 562,500
shares of the Company's Common Stock at an aggregate purchase price of
approximately $1.3 million and (H) the progress made towards satisfactorily
resolving the costly and distracting litigation arising out of the
operation and sale of the Company's bagel business.
(5) The Board's belief that, based on the factors discussed in items
(1) through (4) above, this is not the right time to sell the Company.
(6) The Board's belief, based on the outcome of the recent proxy fight
initiated by NBO as described above, that the Company's shareholders do not
support the Offer. The Board concluded that this view was supported by the
fact that NBO first announced its proposal to acquire all the outstanding
Shares at a price of $5.00 per Share during the proxy contest and before
the final votes were cast.
(7) The Board's view that, based on the Offer to Purchase, the Bidder
will not have available adequate financing to complete the Offer. In this
regard, the Board considered the fact that according to the Bidder, the
total amount of funds necessary to consummate the Offer, including fees and
expenses, will be approximately $57.5 million. The only financing disclosed
in the Offer to Purchase, however, is a conditional $55 million commitment
from Comerica Bank that has not been finalized by the parties. While the
Offer to Purchase states that members of NBO would contribute the remainder
of the funds necessary to complete the Offer and the Merger, including in
the event that the conditions to funding under the bank commitment are not
satisfied, the bank otherwise fails to fund under its commitment or the
amount funded under the bank commitment is insufficient to pay for all
Shares tendered pursuant to the Offer, the Offer to Purchase contains no
information on the financial condition of the members of NBO so as to
provide evidence to the Board that such individuals would have sufficient
equity to provide such financing.
The Board also recognized that the Company has approximately $60
million outstanding under its bank revolving credit agreement (the
"Revolving Credit Agreement"), and that the change in control of the
Company that will result from the consummation of the Offer will trigger a
default, giving the banks the right to accelerate and demand payment of all
outstanding indebtedness. Given that the Board had no reason to believe
that the banks would waive this default and the absence of any plan or
proposal on the part of the Bidder to obtain the additional financing
necessary to refinance the revolving credit indebtedness, the Board
concluded that to fully finance this transaction and effectively consummate
the Offer, NBO and its members may have to obtain upwards of approximately
$117.5 million. Furthermore, because the only financing arrangement
disclosed by the Bidder is the $55 million commitment discussed above,
which by the Bidder's own admission may have to be supplemented and/or
replaced by capital contributions from NBO's members whose financial
condition is unknown to the Board, the Board concluded that the Offer is
effectively conditioned on financing which is not readily available and
therefore is, in effect, illusory.
(8) The Board's belief that, based on certain conditions associated
with the Offer, the Offer will not succeed. According to the Offer to
Purchase, there are significant uncertainties and contingencies associated
with the Offer, including conditions which (i) are in the sole discretion
of the Bidder, (ii) are subject to external events not directly related to
the Company or (iii) are not within the control of the Company or the
Bidder. Included among these contingencies is the condition that the Offer
not cause the Company to be in default under any instrument evidencing its
existing indebtedness. As discussed above, the Company has approximately
$59 million outstanding under the Revolving Credit Agreement which may be
accelerated and become payable if the Offer is consummated. Given that the
Board has no reason
5
7
to believe that the banks would waive this default and there is no
indication of any plan or proposal to obtain or to refinance such
indebtedness in the Offer to Purchase, the Board concluded that it is
likely that this condition will not be satisfied.
The Board also noted that if the Offer is consummated, the Company
will be in breach of its franchise agreements with its principal
franchisors. Currently, the Company generates over 60% of its revenues from
operating as a franchisee of both the Burger King and Chili's restaurant
concepts. The franchise agreements governing these arrangements require the
approval of the franchisor in order to consummate a transaction such as the
one proposed by NBO. The Offer to Purchase fails to describe the need to
obtain these consents, even though the Board believes that the Schostaks,
who are also Burger King franchisees, are aware of these requirements.
Given that the Offer to Purchase is silent on this issue and the Board has
no reason to believe that the franchisors would give these consents to NBO,
the Board concluded that the Bidder will not consummate the Offer in light
of this contingency.
The Board concluded that the failure to obtain the foregoing bank and
franchisor consents and the potential breaches and losses that would result
from such a failure would have a material adverse impact on NBO's ability
to obtain funding under the Comerica Bank commitment. In fact, the Board
determined that no third party lender, or for that matter the Schostaks
themselves, would be willing to finance the Offer and the Merger under
circumstances in which the Company's banks and franchisors had not approved
the change of control. This determination further supported the Board's
view that the Offer will not be consummated and is illusory.
(9) The destabilizing effect that the Board believed an unsuccessful
Offer would have on the Company's employees, franchisors and other
constituents.
In light of the above factors, the Board determined that the Offer is not
in the best interests of the Company and the Company's shareholders.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS
REJECT THE OFFER AND NOT TENDER THEIR SHARES PURSUANT TO THE OFFER.
The foregoing discussion of the information and factors considered by the
Board is not intended to be exhaustive but addresses all of the material
information and factors considered by the Board in its consideration of the
Offer. In view of the variety of factors and the amount of information
considered, the Board did not find it practicable to provide specific
assessments of, quantify or otherwise assign any relative weights to the
specific factors considered in determining to recommend that the Company's
shareholders reject the Offer. Such determination was made after consideration
of all the factors taken as a whole. In addition, individual members of the
Board may have given differing weights to different factors.
To the Company's knowledge after reasonable inquiry, none of the Company's
executive officers, directors or affiliates currently intends to tender any of
the Shares held of record or beneficially owned by them pursuant to the Offer.
ITEM 5. PERSON/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
McDonald Investments Inc.
Pursuant to a letter agreement, dated May 9, 2000 (the "Letter Agreement"),
the Company has retained McDonald in connection with the Offer. Pursuant to the
Letter Agreement, the Company (i) paid McDonald a retainer fee of $100,000 upon
the execution of the Letter Agreement and (ii) agreed to pay McDonald a fee of
$250,000 for McDonald's services in rendering the McDonald Opinion, promptly
upon delivery of an oral McDonald Opinion, with such opinion to be confirmed in
writing and updated as needed.
The Company also agreed that if a transaction takes place involving (i) a
merger, consolidation, reorganization pursuant to which the Company is acquired
by or is combined with any person or entity ("Acquiring Entity") or (ii) the
acquisition by an Acquiring Entity of (X) all or a substantial portion of the
assets of the Company or (Y) securities representing 50% or more of the total
voting power of the Company (a "Transaction"), the Company will pay McDonald a
transaction fee equal to 1% ("Transaction Fee") of the
6
8
transaction value upon the consummation of any Transaction. Under the Letter
Agreement, the transaction value means the sum of (i) the total amount of cash
paid, (ii) the fair market value of any assets, securities or other property or
rights transferred in payment (including, payments to be made under
non-competition or similar arrangements and any deferred or contingent
payments), (iii) the principal amount of any indebtedness for borrowed money
appearing on the most recent balance sheet of the Company prior to the
consummation of any Transaction and (iv) the aggregate amount of any dividends
or other distributions declared by the Company with respect to its stock after
the date of the Letter Agreement, other than normal recurring cash dividends in
amounts not materially greater than currently paid.
The Company has also agreed to reimburse McDonald for all reasonable
out-of-pocket expenses incurred in connection with the performance of its duties
under the Letter Agreement. These expenses, however, do not include legal fees
and expenses relating to legal due diligence, if any, undertaken on behalf of
McDonald on the Company. In addition the Company has agreed to indemnify
McDonald against certain liabilities in connection with their engagement.
The Company also has agreed that, for a period of 18 months subsequent to
the date of the Letter Agreement, McDonald has the option ("Right of First
Refusal") to serve as (i) the Company's exclusive financial advisor in
connection with any proposed Transaction and in connection with any proposed
acquisition by the Company or any of its subsidiaries of any other person,
business or entity; and (ii) a managing underwriter or exclusive placement agent
in connection with any proposed primary or secondary offerings of debt or equity
securities by the Company or any of its subsidiaries. The terms of such
retention will be set forth in a separate agreement.
The Letter Agreement may be terminated by either party at any time upon
receipt of 60 days prior written notice without liability or continuing
obligation except that (i) the provisions relating to the indemnification of
McDonald and the Right of First Refusal will survive any such termination; (ii)
the Company will remain liable for McDonald's reasonable out-of-pocket expenses
incurred and fees earned up to the time of the termination; and (iii) if a
Transaction involving the Company is consummated within 18 months subsequent to
the date of the Letter Agreement or if a definitive agreement with respect to
such sale which is subsequently consummated is entered into during such period,
the Company will remain obligated to pay McDonald the Transaction Fee.
McDonald is an investment banking firm engaged on a regular basis to
provide a range of investment banking and financial advisory services, including
the valuation of businesses and their securities in connection with mergers and
acquisitions.
Georgeson Shareholder Communications, Inc.
The Company has also retained Georgeson Shareholder Communications, Inc.
("Georgeson") to assist the Company with its communications with the Company's
shareholders with respect to, and to provide other services to the Company in
connection with, the Offer. The Company will pay Georgeson reasonable and
customary compensation for its services and will reimburse Georgeson for its
reasonable out-of-pocket expenses incurred in connection therewith. In addition,
the Company has agreed to indemnify Georgeson against certain liabilities in
connection with their engagement.
Except as set forth above, neither the Company nor any person acting on its
behalf has employed, retained or compensated any person to make solicitations or
recommendations to the Company's shareholders with respect to the Offer.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY
On April 6, 2000, April 10, 2000, April 12, 2000 and April 14, 2000, Daniel
B. Fitzpatrick, Chairman of the Board, President and CEO of the Company,
purchased 10,000, 20,000, 20,000 and 15,000 Shares, respectively, in the open
market. Mr. Fitzpatrick paid $2.28 per share for the first three purchases and
$2.21 per share for the last purchase.
7
9
On April 4, 2000, Philip J. Faccenda, Inc., a holding company of which
Philip J. Faccenda, a director of the Company, is the majority shareholder and
has investment control of, purchased 10,000 Shares in the open market at a price
of $2.25 per share. In addition, on May 1, 2000, the Company awarded Mr.
Faccenda options to purchase 2,000 Shares at $2.875 per share pursuant to the
Company's 1999 Outside Directors Stock Option Plan (the "Outside Directors
Plan"); such options will be exercisable six months after the date of the grant.
On April 7, 2000, Bruce M. Jacobson, a director of the Company, purchased
7,500 Shares in the open market at a price of $2.37 per share. In addition, on
May 1, 2000, the Company awarded Mr. Jacobson options to purchase 2,000 Shares
at $2.875 per share pursuant to the Outside Directors Plan; such options will be
exercisable six months after the date of the grant.
On May 1, 2000, the Company awarded each of the following options to
purchase 4,000 Shares at $2.875 per share pursuant to the Outside Directors
Plan: Ezra H. Friedlander, Steven M. Lewis and Christopher J. Murphy III; such
options will be exercisable six months after the date of the grant.
Except as described above, to the best knowledge of the Company, no
transactions in the Shares have been effected during the past 60 days by the
Company or by any executive officer, director, affiliate or subsidiary of the
Company.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS
Except as described above under "Background," no negotiations are being
undertaken or are underway by the Company in response to the Offer which relate
to a tender offer or other acquisition of the Company's securities by the
Company, any subsidiary of the Company or any other person.
No negotiations are being undertaken or are underway by the Company in
response to the Offer which relate to, or would result in, (i) an extraordinary
transaction, such as a merger, reorganization or liquidation, involving the
Company or any subsidiary of the Company, (ii) a purchase, sale or transfer of a
material amount of assets by the Company or any subsidiary of the Company, or
(iii) any material change in the present dividend rate or policy, or
indebtedness or capitalization of the Company.
There are no transactions, board resolutions, agreements in principle or
signed contracts in response to the Offer that relate to or would result in one
or more of the matters referred to in this Item 7.
ITEM 8. ADDITIONAL INFORMATION
According to the Bidder's Offer to Purchase, the purpose of the Offer is to
enable the Bidder to acquire control of, and ultimately the entire equity
interest in, the Company. The Bidder currently intends, following completion of
the Offer, to seek to consummate the proposed Merger. In general, pursuant to
the IBCL, the approval of both the shareholders and the board of directors of a
corporation is required to effect a proposed merger of that corporation with or
into another corporation except that no shareholder approval is required in the
case of a corporation merging with a parent that owns 90% or more of the
corporation pursuant to the provisions of Section 23-1-40-4 of the IBCL. A
merger effected pursuant to such provision is referred to herein as a
"short-form merger." If the Offer is consummated and Bidder acquires 90% or more
of the outstanding Shares pursuant to the Offer (and subsequent purchases, if
any), according to the Offer to Purchase it will seek to effect the proposed
Merger as a short-form merger promptly thereafter. If the Offer is consummated
and the Bidder acquires less than 90% of the outstanding shares pursuant to the
Offer (and subsequent purchases, if any), the Merger can only be effected with
the approval of the Board and the Company's shareholders.
Certain terms of the Company's Restated Articles of Incorporation (the
"Articles"), the Company's By-laws (the "By-laws"), certain of the Company's
contractual obligations (including the Rights Agreement)
8
10
and Chapters 42 and 43 of the IBCL may affect the ability of the Bidders to
obtain control of the Company and to cause the consummation of the proposed
Merger.
(a) Classified Board
Unless the proposed Merger is consummated pursuant to a short-form merger,
approval by the Board will be required under the IBCL to effect the proposed
Merger. If the Board in office at the time of the consummation of the Offer were
to refuse to approve the proposed Merger (or any transaction or corporate action
proposed by the Bidder that required the approval of the Board), the Bidder, in
order to consummate such transaction or cause the Company to take such action,
would have to replace at least a majority of the Board with its own designees.
Certain provisions of the Articles and By-laws could prevent the Bidder from
replacing or electing a majority of the Board for up to two years. Pursuant to
Section 2.1 of the By-laws, the Board is divided into three classes with each
class elected for a term of three years and one class elected at the Company's
annual meeting of shareholders each year. Pursuant to Section 6.6 of the
Articles, directors can be removed from the Board only for cause and only by the
affirmative vote of holders representing two-thirds or more of all the Shares
entitled to vote for the election of directors (the "Director Removal
Provision"). As a result of these provisions, at least two annual meetings of
the Company's shareholders, absent the directors' removal in accordance with the
Director Removal Provision or their resignations, would be required to elect new
directors comprising a majority of the Board who could approve the proposed
Merger (or any similar transaction requiring the approval of the Board). Under
the IBCL, a company's by-laws may be amended only by the board of directors,
unless such company's articles of incorporation provide otherwise. The Articles
do not provide that the Company's shareholders may amend the By-laws.
(b) Shareholder Meetings
In the event that a special meeting of shareholders is necessary to effect
the proposed Merger, certain By-law provisions relating thereto could further
impede the Bidders' ability to call such a meeting. Section 1.3 of the By-laws
provides that special meetings of the Company's shareholders can be called only
by the Chairman of the Board, by vote of the Board, or at the request of 80% of
all the votes entitled to be cast on any issue proposed to be considered at the
proposed special meeting. The Bidder, according to the Offer to Purchase will
seek to have either the Chairman of the Board or the Company Board call a
special meeting if it becomes necessary to effect the proposed Merger.
(c) Supermajority and "Fair Price" Clauses
Article VIII of the Articles requires the approval of the holders of
two-thirds of the outstanding voting stock of the Company and not less than a
majority of the outstanding voting stock held by the Company's shareholders
other than a "Related Person" (as defined below) to a approve a "Business
Combination" (as defined below) with a Related Person (together, the
"Supermajority Voting Requirement"), unless: (i) the "Continuing Directors" (as
defined below) of the Company, by at least a two-thirds vote of such Continuing
Directors, have expressly approved such Business Combination prior to such
Related Person's having become a Related Person or have otherwise approved the
Business Combination or (ii) certain fair price and other provisions of the
Articles are met. Amending the Supermajority Voting Requirement requires the
affirmative vote of two-thirds of all outstanding shares of voting stock and
approval by the holders of a majority of the outstanding voting shares held by
the Company's shareholders other than any Related Person.
The Supermajority Voting Requirement contained in Article VIII of the
Articles would not be applicable to a Business Combination where all of the
following "fair price" and other conditions are satisfied: (a) the consideration
per share to be paid to the Company's shareholders in the Business Combination
is not less than the higher of: (1) the highest price paid by the Related Person
(including commissions and solicitation fees) within the two years preceding the
announcement of the Business Combination, plus interest calculated from the time
such person became a Related Person, less dividends paid (up to the amount of
interest accrued) and (2) the fair market value of the Shares during the 30 days
preceding such announcement; (b) the consideration is in the same form as paid
by the Related Person in acquiring a majority of its Shares; (c) the Related
Person, after becoming such but before consummation of the Business Combination
(1) takes steps to ensure that the Board shall be comprised of Continuing
Directors at least in proportion to the fraction of
9
11
voting stock owned by persons other than Related Persons; (2) does not acquire
any shares from the Company; (3) does not acquire any voting stock or
equivalents; and (4) except as approved by a majority of Continuing Directors,
does not receive financial assistance from the Company or make any major changes
in the Company's business or equity capital structure or enter into any contract
or understanding with the Company; and (d) mails a proxy or information
statement satisfying the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations promulgated thereunder to all
holders of voting stock.
The term "Affiliate" has the same meaning as in Rule 12b-2 under the
Exchange Act.
The term "Associate" with respect to any person means (1) any corporation
or organization (other than the Company or a majority-owned subsidiary of the
Company) of which such person is an officer or partner or is, directly or
indirectly, the Beneficial Owner of five percent (5%) or more of any class of
equity securities, (2) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, (3) any relative or spouse of such person, or
any relative of such spouse, who has the same home as such person, or (4) any
investment company registered under the Investment Company Act of 1940, as
amended, for which such person or any Affiliate of such person serves as
investment advisor.
The term "Beneficial Owner" means any person, or any of such person's
Affiliates and Associates, who beneficially owns, directly or indirectly, any
voting stock of the Company, who has the right to acquire (whether or not such
right is exercisable immediately) or vote any such beneficial ownership pursuant
to any agreement, contract, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise or who has
an agreement, arrangement or understanding with any other person for the purpose
of acquiring, holding, voting or disposing of any voting shares of the Company.
The term "Business Combination" means (1) the sale, exchange, lease,
transfer, or other disposition to or with a Related Person or any Affiliate or
Associate of such Related Person by the Company or any of its subsidiaries of
all or substantially all, or any Substantial Part, of its or their assets or
businesses (including, without limitation, securities issued by a subsidiary, if
any); (2) the purchase, exchange, lease, or other acquisition by the Company or
any of its subsidiaries of all or substantially all, or any Substantial Part, of
the assets or business of a Related Person or any Affiliate or Associate of such
Related Person; (3) any merger or consolidation of the Company or any subsidiary
thereof into or with a Related Person or any Affiliate or Associate of such
Related Person or into or with another Person which, after such merger or
consolidation, would be an Affiliate or an Associate of a Related Person, in
each case irrespective of which Person is the surviving entity in such merger or
consolidation; (4) any reclassification of securities, recapitalization, or
other transaction (other than a redemption in accordance with the terms of the
security redeemed) which has the effect, directly or indirectly, of increasing
the proportionate amount of shares of voting stock of the Company or any
subsidiary thereof which are Beneficially Owned by a Related Person, or any
partial or complete liquidation, spinoff, splitoff, or splitup of the Company or
any subsidiary thereof, unless approved by a majority of the Continuing
Directors; or (5) the acquisition upon the issuance thereof of Beneficial
Ownership by a Related Person of shares of voting stock or securities
convertible into shares of voting stock or any voting securities or securities
convertible into voting securities of any subsidiary of the Company, or the
acquisition upon the issuance thereof of Beneficial Ownership by a Related
Person of any rights, warrants, or options to acquire any of the foregoing or
any combination of the foregoing shares of voting stock or voting securities of
a subsidiary, if any.
The term "Continuing Director" means any member of the Board who is not
associated with the Related Person and was a member of the Board prior to the
time that the Related Person became a Related Person, and any successor of a
Continuing Director who is not associated with the Related Person and is
recommended to succeed a Continuing Director by not less than two-thirds of the
Continuing Directors then on the Board.
The term "fair market value" means, with respect to any period of time,
means (i) the highest closing sale price during such period if such stock is
listed on a securities exchange registered under the Exchange Act or, (ii) if
such stock is not listed on any such exchange, the highest closing bid quotation
with respect to such
10
12
stock during such period on the National Association of Securities Dealers, Inc.
Automated Quotation System or any similar system then in use or, (iii) if no
such quotations are available, the fair market value of such stock on the last
day of the period as determined by the Continuing Directors in good faith.
The term "Related Person" means any person (other than the Company or any
subsidiary of the Company or the Continuing Directors, singly or as a group) who
or that: (1) is the Beneficial Owner, directly or indirectly, of more than ten
percent (10%) of the voting power of the outstanding shares of voting stock and
who has not been the Beneficial Owner, directly or indirectly, of more than ten
percent (10%) of the voting power of the outstanding shares of voting stock for
a continuous period of two years prior to the date in question; (2) is an
Affiliate of the Company and at any time within the two-year period immediately
prior to the date in question (but not continuously during such two-year period)
was the Beneficial Owner, directly or indirectly, of ten percent (10%) or more
of the voting power of the then outstanding shares of voting stock; or (3) is an
assignee of or has otherwise succeeded to any shares of the voting stock which
were at any time within the two-year period immediately prior to the date in
question beneficially owned by any Related Person, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act of 1933, as amended.
A Related Person shall be deemed to have acquired a share of the Company at
the time when such Related Person became the Beneficial Owner thereof. For the
purposes of determining whether a person is the Beneficial Owner of ten percent
(10%) or more of the voting power of the then outstanding voting stock, the
outstanding voting stock shall be deemed to include any voting stock that may be
issuable to such person pursuant to a right to acquire such voting stock and
that is therefore deemed to be Beneficially Owned by such person. A person who
is a Related Person at (1) the time any definitive agreement relating to a
Business Combination is entered into, (2) the record date for the determination
of the shareholders entitled to notice of and to vote on a Business Combination,
or (3) the time immediately prior to the consummation of a Business Combination
shall be deemed a Related Person.
A Related Person shall not include the Board acting as a group. In
addition, a Related Person shall not include any person who possesses more than
ten percent (10%) of the voting power of the outstanding shares of voting stock
of the Company at the time of filing the Articles.
The term "Substantial Part" means properties and assets having an aggregate
fair market value, as determined by at least a majority of the Continuing
Directors, of more than 10% of the total consolidated assets of the Company and
its subsidiaries as determined immediately prior to the transaction in question.
According to the Offer to Purchase, the Bidder believes that it will be
deemed to be a Related Person for purposes of Article VIII of the Articles upon
consummation of the Offer.
The foregoing summary of certain provisions of the Articles and the By-laws
are qualified in their entirety by reference to the text thereof as filed by the
Company with the SEC.
(d) Business Combination Statute
Chapter 43 of the IBCL establishes a five-year period beginning with the
date that a person becomes a beneficial owner of 10% of the voting power of the
outstanding voting shares of a "resident domestic corporation" (which definition
includes the Company) during which certain business transactions involving the
acquiring shareholder are prohibited unless, prior to the acquisition of such
interest, the board of directors of the resident domestic corporation approves
the acquisition of such interest or the proposed business combination. After the
five-year period expires, a business combination involving the acquiring
shareholder may take place only upon approval by a majority of the disinterested
shares, or if the offer meets specified fair price criteria. The minimum price
for shares other than common shares is to be determined under criteria similar
to that for common shares, except the minimum price as defined cannot be less
than the highest preferential amount to which the shares are entitled in the
event of any liquidation, dissolution or winding up of the corporation.
A resident domestic corporation may elect not to be covered by Chapter 43
by the adoption of an amendment to its articles of incorporation. The amendment
must be approved by a majority vote of the
11
13
holders of all of the outstanding shares other than those shares held by the
acquiring shareholder, and the acquiring shareholder is not entitled to vote.
The amendment, once adopted, is not effective until 18 months following the
shareholder vote, and does not apply to any business combination with an
acquiring shareholder who acquired his shares before the effective date of the
amendment.
The Company's Articles do not exclude the Company from Chapter 43 of the
IBCL.
The foregoing summary of the Business Combination Statute does not purport
to be complete and is qualified in its entirety by reference to the provisions
of Chapter 43 of the IBCL.
(e) Control Share Statute
Under Chapter 42 of the IBCL, with certain exceptions, a person proposing
to acquire or acquiring voting shares of an "issuing public corporation" (which
definition includes only corporations having at least 100 shareholders,
principal place of business, principal office or substantial assets within
Indiana, and in which more than 10% of its shareholders are Indiana residents,
more than 10% of its shares are owned by Indiana residents, or which have 10,000
or more shareholders who are Indiana residents, which definition includes the
Company) sufficient to entitle that person to exercise voting power within any
of the ranges of one-fifth or more but less than one-third of all voting power,
one-third or more but less than a majority of all voting power, or a majority or
more of all voting power (a "Control Share Acquisition") may give a notice of
such fact to the corporation containing certain specified data. The acquiring
person may request that the directors call a special meeting of shareholders for
the purpose of considering the voting rights to be accorded the shares so
acquired ("Control Shares"), and the Control Shares have voting rights only to
the extent granted by a resolution approved by the shareholders. The resolution
must be approved by a majority of the votes entitled to be cast by each voting
group entitled to vote separately on the proposal, excluding shares held by the
acquiring person and shares held by management. Control Shares as to which the
required notice has not been filed and any Control Shares not accorded full
voting rights by the shareholders may be redeemed at fair value by the
corporation if it is authorized to do so by its articles of incorporation or
bylaws before a Control Share Acquisition has occurred (the Company is
authorized to make such a redemption). The Company's shareholders are entitled
to dissenter's rights with respect to the Control Share Acquisition in the event
that the Control Shares are accorded full voting rights and the acquiring person
has acquired Control Shares with a majority of all voting power.
The Control Share statute does not apply if, before a Control Share
Acquisition is made, the company's articles of incorporation or by-laws,
including a board adopted by-law, provide that they do not apply. The Articles
and By-laws do not exclude the Company from the Control Share statute.
The foregoing summary of the Control Share statute does not purport to be
complete and is qualified in its entirety by reference to the provisions of
Chapter 42 of the IBCL.
(f) State Takeover Statutes
Many states (including Indiana, where the Company is incorporated) have
adopted takeover laws and regulations that purport, in varying degrees, to be
applicable to attempts to acquire securities of corporations that are
incorporated in those states or that have substantial assets, stockholders,
principal executive offices or principal places of business in those states. In
1982, the Supreme Court of the United States, in Edgar v. MITE Corp.,
invalidated on constitutional grounds the Illinois Business Takeover Act, which,
as a matter of state securities law, made takeovers of corporations meeting
certain requirements more difficult. In 1987, however, in CTS Corp. v. Dynamics
Corp. of America, the Supreme Court of the United States held that the State of
Indiana could as a matter of corporate law and, in particular, with respect to
those aspects of corporate law concerning corporate governance, constitutionally
disqualify a potential acquirer from voting on the affairs of a target
corporation without the prior approval of the remaining stockholders, as long as
those laws were applicable only under certain conditions. Subsequently, in TLX
Acquisition Corp. v. Telex Corp., a federal district court in Oklahoma ruled
that the Oklahoma statutes were unconstitutional insofar as they apply to
corporations incorporated outside Oklahoma, because they would subject those
corporations to inconsistent regulations. Similarly in Tyson Foods, Inc. v.
McReynolds, a federal district court in Tennessee ruled that four Tennessee
takeover statutes were unconstitutional as applied to corporations incorporated
12
14
outside Tennessee. This decision was affirmed by the United States Court of
Appeals for the Sixth Circuit. In December 1988, a federal district court in
Florida held, in Grand Metropolitan PLC v. Butterworth, that the provisions of
the Florida Affiliated Transactions Act and Florida Control Share Acquisition
Act were unconstitutional as applied to corporations incorporated outside of
Florida.
Indiana has a takeover offers statute that by its terms would be applicable
to the Offer. This statute requires the Bidders to file a takeover offer
statement with the Indiana Securities Commissioner (the "Commissioner"). The
Commissioner will hold a hearing within 20 business days thereafter to determine
whether the takeover offer statement provides full and fair disclosure and,
according to the statute, the Commissioner has the power to prohibit purchases
under the Offer unless the takeover offer statement is deemed adequate by the
Commissioner.
(g) The Rights Agreement
On March 27, 1997, the Company adopted the Rights Agreement. Under the
Rights Agreement, holders of outstanding shares of Common Stock on April 11,
1997 received one Right for each share of Common Stock that they held.
Initially, each Right represented the right to purchase one one-hundreth
( 1/100th) of a share of the Company's Series B Participating Cumulative
Preferred Stock ("Series B Preferred Stock") at an exercise price of $75.00. The
Rights are not exercisable or separately transferable until the earlier of the
time: (i) that the Company learns that a person has acquired beneficial
ownership of more than 15% of the Company's outstanding Common Stock; or (ii)
such date, if any, as the Board of Directors may designate after a person
commences or discloses an intent to commence a tender or exchange offer for
outstanding Common Stock which could result in such person becoming the
beneficial owner of more than 15% of such shares.
Any person or group that beneficially owned more than 15% of the
outstanding Common Stock on the date of the Rights Agreement is not be deemed an
"acquirer" as to shares of Common Stock held as of the date of the Rights
Agreement; however, any additional acquisition of shares (other than from the
Company or pursuant to any employee benefit or compensation plan of the Company)
without the prior approval of the Board will make the person or group an
acquirer.
If an acquirer becomes the beneficial owner of more than 15% of the
Company's Common Stock, or a 15% beneficial owner acquires additional shares
without approval, each holder of a Right, other than such person or related
parties, will be entitled to purchase, for the Right's then-current exercise
price, that number of 1/100ths of a share of Series B Preferred Stock equal to
the number of shares of Common Stock that at the time of such event would have a
market value of twice the Right's exercise price. Similarly, if after the Rights
become exercisable, an acquirer consummates one of a variety of business
combinations with the Company, each Right will entitle its holder to purchase,
at the Right's then-current exercise price, shares of the company surviving the
business combination that have a book or market value of twice the Right's
exercise price.
The Company may redeem the Rights for $0.01 in cash or securities at any
time prior to the Rights becoming exercisable or the expiration of the Rights on
March 27, 2007.
The Series B Preferred Stock will be entitled to all the rights and
privileges set forth in the Articles of the Company and, in addition, will have
the following features:
1. Dividends. The holders of Series B Preferred Stock will be entitled to
receive (a) quarterly cumulative dividends payable in cash in an amount per
share equal to $0.01 per share less the amount of cash dividends received
pursuant to the following clause (b) (but not less than zero) and (b) cash and
in-kind dividends on each payment date for similar dividends on the Common Stock
in an amount per whole share of Series B Preferred Stock equal to 100 (which
number is subject to adjustment to reflect stock dividends, subdivisions or
combinations of the outstanding Common Stock) times the per share amount of all
cash dividends then to be paid on each share of Common Stock.
2. Voting Rights. The holders of Series B Preferred Stock will be entitled
to vote on each matter on which holders of Common Stock are entitled to vote and
will have 100 votes (subject to adjustment as described above) for each whole
share of Series B Preferred Stock held. Holders of any fraction of a share of
13
15
Series B Preferred Stock that is not smaller than 1/100th of a share will be
entitled to vote such fraction. Holders of Series B Preferred Stock have certain
special voting rights in the election of directors when the equivalent of six
quarterly dividends are in default.
3. Certain Restrictions. Whenever quarterly dividends or distributions on
the Series B Preferred Stock are in arrears, the Company's right to declare or
pay dividends or other distributions on, redeem, or purchase, any shares of
stock ranging junior to, or on parity with, the Series B Preferred Stock will be
subject to certain restrictions.
4. Liquidation Rights. Upon any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of any shares of
Series B Preferred Stock will be entitled to receive, before any distribution is
made to holders of shares of stock ranking junior to the Series B Preferred
Stock or any distribution (other than a ratable distribution) is made to the
holders of stock ranking on parity with the Series B Preferred Stock, an amount
equal to the accrued dividends thereon plus the greater of (a) $0.01 per share
or (b) an amount per share equal to 100 (subject to adjustment as described
above) times the amount per share to be distributed to holders of Common Stock;
provided that in no event will the amount or amounts, if any, exceed $100 per
share plus accrued dividends in the case of involuntary liquidation, dissolution
or winding up of the surviving company.
5. Redemption. The shares of Series B Preferred Stock will not be
redeemable. The Company may, however, purchase shares of Series B Preferred
Stock in the open market or pursuant to an offer to a particular holder or
holders.
6. Consolidation, Merger and Other Transactions. In the event of a
consolidation, merger or other transaction in which the shares of Common Stock
are exchanged for, or converted into, other securities, cash or any other
property, the shares of Series B Preferred Stock will be similarly exchanged or
converted.
7. Fractional Shares. Shares of Series B Preferred Stock will be issuable
in whole shares or in any fraction that is not smaller than 1/100th of a share
or any integral multiple of such fraction, subject to certain adjustments. In
lieu of issuing fractional shares, the Company may issue certificates or
depository receipts evidencing such authorized fraction of shares or, in the
case of fraction other than 1/100th and integral multiples thereof, pay
registered holders cash equal to the same fraction of the current market value
of a share of Series B Preferred Stock (if any are outstanding) or the
equivalent number of shares of Common Stock.
The foregoing summary of certain provisions of the Rights Agreement is
qualified in their entirety by reference to the text of the Rights Agreement as
filed by the Company with the SEC.
(h) Litigation
On April 19, 2000, NBO filed a Verified Complaint For Injunctive And
Declaratory Relief in the United States District Court for the Northern District
of Indiana, South Bend Division (the "Court"), naming as defendants the Company,
Daniel B. Fitzpatrick, certain other directors of the Company, certain
unidentified associates and affiliates of Daniel B. Fitzpatrick and certain
other unidentified members of management. The Complaint alleges, among other
things, that the director defendants' decision to authorize Daniel B.
Fitzpatrick and/or his associates and affiliates and/or other members of
management to acquire up to 1,000,000 additional shares of the Company's Common
Stock without triggering the Company's Rights Agreement would give management
effective control of the Company without the payment of a control premium and
would thwart NBO's tender offer. The Complaint alleges that this decision was
not made in good faith after a reasonable investigation of the consequences, and
was in breach of the director defendants' fiduciary duties. The Complaint also
alleges violations of the federal securities laws. The Complaint seeks
injunctive and declaratory relief.
On April 24, 2000, the Company and Daniel B. Fitzpatrick entered into an
agreement with NBO pursuant to which (a) Daniel B. Fitzpatrick agreed that he
will not, and will cause his affiliates and associates not to, purchase or
otherwise acquire any additional shares of Common Stock until June 15, 2000, (b)
the Company agreed that it will not, and will cause each of its executive
officers and directors not to, purchase or otherwise acquire any shares of
Common Stock until June 15, 2000, and (c) NBO agreed not to seek a
14
16
temporary restraining order or preliminary injunction in the above noted lawsuit
against such purchases that would take effect prior to June 15, 2000.
Notwithstanding the foregoing, the agreement did not restrain NBO from
requesting, and NBO has requested, that the court in the above noted lawsuit
schedule a preliminary injunction hearing prior to June 15, 2000, and order
expedited discovery.
On May 9, 2000, the Company, Daniel B. Fitzpatrick and other defendants
moved to dismiss NBO's complaints for failure to state a claim and comply with
pleading requirements imposed by federal securities law. The Court has indicated
that it will attempt to rule on the motion to dismiss by May 30, 2000 and has
stayed discovery until such ruling. The Court has scheduled a hearing on NBO's
motion for preliminary injunction on June 12, 2000 and provided for expedited
discovery if the defendant's motion to dismiss is not granted.
ITEM 9. EXHIBITS
EXHIBIT
NO. EXHIBIT
------- -------
Exhibit 1 -- Letter to the Company's shareholders, dated May 22,
2000.*
Exhibit 2 -- Form of Press Release issued by the Company on May 22,
2000.
- ---------------
* Included in copies mailed to the Company's shareholders.
15
17
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
QUALITY DINING, INC.
By: /s/ DANIEL B. FITZPATRICK
----------------------------------------------------------------------------
Name: Daniel B. Fitzpatrick
Title: Executive Vice
President
and Chief Financial
Officer
16
18
ANNEX I
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid or accrued during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers, based on salary and bonus earned during
fiscal 1999 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
-----------------------
ALL OTHER COMPENSATION SECURITIES RESTRICTED
FISCAL ----------------------- UNDERLYING STOCK ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) AWARDS(3) COMPENSATION
- --------------------------- ------ --------- --------- ---------- ---------- ------------
Daniel B. Fitzpatrick.......................... 1999 $346,538(4) $ 0 0 $ 60,000 $ 5,000(5)
Chairman, President and Chief 1998 340,000 0 0 0 4,773(6)
Executive Officer 1997 340,750 0 40,440 0 1,413(7)
John C. Firth.................................. 1999 $234,635(4) $97,486(8) 19,302 $ 66,004(9) $ 5,425(10)
Executive Vice President, General 1998 230,328 91,800 20,000 0 4,905(11)
Counsel and Secretary 1997 184,038 50,000 15,000 0 0
James K. Fitzpatrick........................... 1999 $198,750(4) $49,687 16,728 $ 43,956 $ 5,000(5)
Senior Vice President and Chief 1998 185,288 92,500 20,000 0 7,440(12)
Development Officer 1997 170,942 75,000 4,670 0 1,524(7)
Gerald O. Fitzpatrick.......................... 1999 $194,231(4) $58,270 16,299 $ 43,098 $ 1,638(5)
Senior Vice President, 1998 181,346 96,250 20,000 0 6,056(13)
Burger King Division 1997 155,000 75,000 3,980 0 1,298(7)
Patrick J. Barry............................... 1999 $188,558(4) $47,712 15,871 $ 42,240 $ 6,420(14)
Senior Vice President, Administration 1998 165,288 78,525 20,000 0 4,910(15)
and Information Technology 1997 150,000 75,000 0 0 76,420(16)
- ---------------
(1) Represents awards under the Company's bonus plan. To the extent the Company
meets certain financial targets and performance targets established for the
areas of the Company's operations under the supervision of the Named
Executive Officer, the officer may receive a discretionary bonus. For
fiscal 1999, fiscal 1998 and fiscal 1997, targeted performance levels and
potential bonus awards were approved by the Compensation Committee. Bonus
awards are accrued in the fiscal year earned, but typically paid in the
following fiscal year.
(2) Options to acquire shares of Common Stock. The Company has never granted
SAR's.
(3) Represents the market value of restricted shares awarded on June 1, 1999
under the Company's 1997 Stock Option Plan based on the closing market
price of the Company's Common Stock ($3.00) on that date. The total number
of shares of restricted stock awarded to the Named Executive Officers
pursuant to the Company's 1997 Stock Option Plan in fiscal 1999 were:
Daniel B. Fitzpatrick--20,000 shares; John C. Firth--18,668 shares; James
K. Fitzpatrick--14,652 shares; Gerald O. Fitzpatrick--14,366 shares; and
Patrick J. Barry--14,080 shares. The restricted shares awarded under the
1997 Stock Option Plan vest on June 1, 2006, subject to accelerated vesting
in one-third increments when the Company's share price closes at or above
$4.00, $5.00 and $7.00, respectively, for at least 10 out of 20 consecutive
trading days. Holders of restricted stock are eligible to vote the shares
and to receive dividends, if any. As of October 31, 1999, the total number
and value (based on the closing market price of the Company's Common Stock
on October 31, 1999) of the unvested restricted stock awards held by the
Named Executive Officers were as follows: Daniel B. Fitzpatrick--20,000
shares ($52,500); John C. Firth--22,668 shares ($59,504); James K.
Fitzpatrick--14,652 shares ($38,462); Gerald O. Fitzpatrick--14,366 shares
($37,711); and Patrick J. Barry--14,080 shares ($36,960).
19
(4) Represents compensation paid over the Company's 53 week fiscal year.
(5) Represents Company allocations to its discretionary, non-qualified deferred
compensation plan. The Company's allocations to this plan on behalf of
participants are determined at the discretion of the Board of Directors.
(6) Includes Company allocations to its discretionary, non-qualified deferred
compensation plan of $2,158 and Company contributions to its discretionary,
noncontributory profit sharing plan of $2,615. The Company's allocations
and contributions to these plans on behalf of participants are determined
at the discretion of the Board of Directors.
(7) Represents Company contributions under its discretionary, noncontributory
profit sharing plan.
(8) Includes a one-time bonus which Mr. Firth received in connection with his
employment agreement.
(9) Of this amount, (i) $56,004 represents the market value of restricted
shares awarded on June 1, 1999 under the Company's 1997 Stock Option Plan
based on the closing market price of the Company's Common Stock ($3.00) on
that date and (ii) $10,000 represents the market value of 4,000 restricted
shares awarded pursuant to Mr. Firth's Employment Agreement with the
Company based on the closing market price of the Company's Common Stock on
the date of the award. The restricted shares awarded pursuant to Mr.
Firth's Employment Agreement vest on February 24, 2000. As of October 31,
1999, the market value of these 4,000 restricted shares (based on the
closing market price of the Company's Common Stock on that date) was
$10,500.
(10) Includes Company allocations to its discretionary, non-qualified deferred
compensation plan of $5,000 and life insurance premiums of $425.
(11) Includes Company allocations to its discretionary, non-qualified deferred
compensation plan of $4,480 and life insurance premiums of $425.
(12) Includes Company allocations to its discretionary, non-qualified deferred
compensation plan of $4,269 and Company contributions to its discretionary,
noncontributory profit sharing plan of $3,171.
(13) Includes Company allocations to its discretionary, non-qualified deferred
compensation plan of $2,554 and Company contributions to its discretionary,
noncontributory profit sharing plan of $3,502.
(14) Includes Company allocations to its discretionary non-qualified deferred
compensation plan of $5,000 and life insurance premiums of $1,420.
(15) Includes Company allocations to its discretionary non-qualified deferred
compensation plan of $3,490 and life insurance premiums of $1,420.
(16) Includes a $75,000 payment to Mr. Barry pursuant to his letter agreement
with the Company (See "Employment Agreements") and life insurance premiums
of $1,420.
EMPLOYMENT AGREEMENTS
In August 1996, Patrick J. Barry entered into a letter agreement with the
Company in connection with his appointment as Vice President of the Company,
pursuant to which the Company agreed to pay Mr. Barry an annual base salary of
$150,000 for fiscal year 1997 and $165,000 for fiscal year 1998. In addition,
the Company granted Mr. Barry options to purchase 15,000 shares of the Company's
Common Stock at an exercise price of $21.25 which was equal to the fair market
value of the Company's stock on the date of grant. The Company also agreed to
pay Mr. Barry a bonus of $75,000 which was paid to him in fiscal 1997. The
Company further agreed that in the event Mr. Barry is terminated by the Company,
other than for cause, it would pay him severance benefits equal to one year's
base salary if the termination occurs in his first three years of employment and
75% of one year's base salary if the termination occurs in his fourth year of
employment. As part of his employment arrangement, the Company also agreed to
pay Mr. Barry $75,000 to compensate him for financial losses incurred by him in
connection with his resignation from his former employer, which amount was
determined and paid to him in fiscal 1997.
In August 1999, the Company entered into an Employment Agreement with John
C. Firth, its Executive Vice President and General Counsel. Mr. Firth's previous
Employment Agreement expired in June 1999. The agreement is for a period of
three years and extends automatically for one year on each anniversary date.
2
20
Mr. Firth's agreement provides for a $240,000 base salary which shall be
reviewed at least annually for increase and cash bonus payments of up to 50% of
his base salary determined in a manner similar to other senior executives of the
Company. In connection with entering into the agreement, Mr. Firth received a
one-time cash bonus of $40,000 and was awarded 4,000 restricted shares of
Company Common Stock, valued at $10,000 based upon the closing market price of
the Company's Common Stock on the date of grant. The restricted shares vest on
February 24, 2000. The Company also agreed to maintain a life insurance policy
on Mr. Firth's life during his employment in the amount of $500,000 for the
benefit of Mr. Firth or his designee. Pursuant to the agreement, Mr. Firth is
prohibited from competing with the Company or soliciting Company employees for a
period of one year after the termination of his employment. If the agreement is
terminated by the Company, other than for cause or by Mr. Firth with good reason
(which includes the termination of Mr. Firth's employment for any reason within
one year following a change in control of the Company), Mr. Firth is entitled to
two times his base salary and maximum bonus, additional and accelerated vesting
and exercisability as to the portion of any outstanding option scheduled to vest
on the next following vesting date and the Company will continue to provide
health and welfare benefits for one year.
In June 1999, the Company entered into non-compete agreements with certain
of its officers, including James K. Fitzpatrick and Gerald O. Fitzpatrick. The
agreements prohibit such officers from competing with the Company or soliciting
employees of the Company for a period of one year following the termination of
their employment. The agreements also provide that in the event of a change of
control of the Company, such officers will receive two times (in the case of
James K. Fitzpatrick) or one and one-half times (in the case of Gerald O.
Fitzpatrick) their base salary and maximum bonus potential at the time of the
change of control. The Board of Directors believed that these agreements,
together with awards under the Long Term Incentive Plans described below, would
encourage these key employees to remain with the Company at a critical stage in
the implementation of the Board's long-term strategy. In the case of the change
of control payments, the Board believed that these officers would be better able
to act in the interests of all shareholders in the face of a hostile takeover
attempt or in the event that the Board of Directors determined that the Company
should be sold if they were assured of receiving sizable payments following a
change of control. The Board was advised that such arrangements were prevalent
among publicly-traded companies and concluded that such arrangements would
foster, rather than impair, the ability of the Company to be sold. The Board of
Directors believed that these considerations were as applicable to James and
Gerald Fitzpatrick as they were to the other key officers of the Company who
were provided with comparable arrangements.
COMPENSATION OF DIRECTORS
During fiscal 1999, the Company paid Directors who are not employees of the
Company an annual retainer of $8,000, plus $500 for each regular Board of
Director's meeting attended and $750 for each special Board of Director's
meeting attended and each committee meeting attended if the committee met on a
day other than a Board of Director's meeting. All Directors receive
reimbursement of reasonable out-of-pocket expenses incurred in connection with
meetings of the Board. No Director who is an officer or employee of the Company
receives compensation for services rendered as a Director.
In addition, under the Company's 1993 Outside Directors Plan and the
Company's 1999 Outside Directors Stock Option Plan ("1999 Outside Directors
Plan"), generally on May 1 of each year, each then non-employee Director of the
Company automatically receives an option to purchase 2,000 shares of Common
Stock with an exercise price equal to the fair market value of the Common Stock
on the date of grant. Each option will have a term of 10 years and will be
exercisable six months after the date of grant. No options were granted on May
1, 1999 to non-employee Directors; however, under the 1999 Outside Directors
Plan, on May 1, 2000 each then non-employee Director will automatically receive
an option to purchase 4,000 shares of Common Stock. See "-- Stock Options".
STOCK OPTIONS
On December 17, 1993, the Directors and shareholders of the Company adopted
the 1993 Stock Option Plan. The 1993 Stock Option Plan provides for awards of
incentive and non-qualified stock options and shares of restricted stock to the
officers and key employees of the Company. An aggregate of 1,000,000 shares of
3
21
Common Stock were originally subject to the 1993 Stock Option Plan (subject to
adjustment in certain events). In fiscal 1999, the Company repurchased 298,340
options previously issued under the 1993 Stock Option Plan. See "-- Long Term
Incentive Plans." These options were permanently retired and are not available
to be reissued. As of October 31, 1999, options to purchase 197,990 shares of
Common Stock were outstanding under the 1993 Stock Option Plan. No awards for
additional shares of Common Stock will be made under the 1993 Stock Option Plan,
although the terms of options granted pursuant to the 1993 Stock Option Plan may
be modified.
On February 14, 1997, the Board of Directors adopted, subject to
shareholder approval, the 1997 Stock Option Plan. On March 26, 1997, the
shareholders of the Company approved the adoption of the 1997 Stock Option Plan
at the 1997 annual meeting of shareholders. The 1997 Stock Option Plan provides
for awards of incentive and non-qualified stock options, shares of restricted
stock, SAR's and performance stock to the officers and key employees of the
Company. An aggregate of 1,100,000 shares of Common Stock are subject to the
1997 Stock Option Plan (subject to adjustment in certain events). As of October
31, 1999, options to purchase 536,000 shares of Common Stock were outstanding
under the 1997 Stock Option Plan and 155,552 restricted shares had been issued
and were outstanding under the 1997 Stock Option Plan.
The Company's Board of Directors and shareholders approved the 1993 Outside
Directors Plan effective December 17, 1993. The Company's 1993 Outside Directors
Plan reserved for issuance 40,000 shares of the Company's Common Stock (subject
to adjustment for subsequent stock splits, stock dividends and certain other
changes in the Common Stock) pursuant to non-qualified stock options to be
granted to non-employee Directors of the Company. As of October 31, 1999,
options to purchase 38,000 shares of Common Stock were outstanding under the
1993 Outside Directors Plan. See "-- Compensation of Directors."
On December 15, 1999, the Board of Directors adopted the 1999 Outside
Directors Plan. The 1999 Outside Directors Plan reserves for issuance 80,000
shares of the Company's Common Stock (subject to adjustment for subsequent stock
splits, stock dividends and certain other changes in the Common Stock) pursuant
to non-qualified stock options to be granted to non-employee Directors of the
Company. The 1999 Outside Directors Plan provides that on May 1, 2000, each
non-employee Director will automatically receive an option to purchase 4,000
shares of Common Stock and on May 1 of each year thereafter, each non-employee
Director will automatically receive an option to purchase 2,000 shares of Common
Stock. Each option will have an exercise price equal to the fair market value of
the Common Stock on the date of grant.
No option granted under the 1993 Outside Directors Plan or the 1999 Outside
Directors Plan may be exercised less than six months or more than 10 years from
the date it is granted. In addition, no option may be exercised unless the
grantee has served continuously on the Board of Directors at all times beginning
on the date of grant and ending on the date of exercise of the option.
Nevertheless, all options held by a grantee who ceases to be a non-employee
Director due to death, permanent disability or retirement with the consent of
the Board of Directors may be exercised, to the extent they were exercisable at
the date of cessation, at any time within one year after the date of cessation.
Options held by a deceased grantee may be exercised by the grantee's estate or
heirs. If a grantee ceases to be a non-employee Director for any other reason,
such grantee's options will expire three months after cessation.
4
22
The following table sets forth information with respect to options granted
by the Company under the 1997 Stock Option Plan to the Named Executive Officers
during fiscal 1999.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR BASE PRICE DATE 5% 10%
- ---- ---------- ------------ ----------- ---------- ---------- ----------
Daniel B. Fitzpatrick........ 0 0% -- -- -- --
John C. Firth................ 19,302 12.0% $3.00 5/31/09 $36,417 $92,287
James K. Fitzpatrick......... 16,728 10.4% $3.00 5/31/09 $31,560 $79,980
Gerald O. Fitzpatrick........ 16,299 10.1% $3.00 5/31/09 $30,751 $77,929
Patrick J. Barry............. 15,871 9.8% $3.00 5/31/09 $29,944 $75,883
- ---------------
(1) Consists of incentive stock options all of which were granted at 100% of the
fair market value of the stock on the date of grant. The options are
exercisable 25% on June 1, 2000, 25% on June 1, 2001 and 50% on June 1,
2002.
(2) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, of the Company's stock price. The Company did not use an alternative
formula for a grant date valuation, as the Company is not aware of any
formula which will determine with reasonable accuracy a present value based
on future unknown or volatile factors.
The following table sets forth information with respect to the exercise of
options by the Named Executive Officers during fiscal 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
SHARES ACQUIRED NUMBER OF SECURITIES UNEXERCISED
ON EXERCISE VALUE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY
--------------------------- --------------------------- OPTIONS AT FISCAL OPTIONS AT FISCAL
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE YEAR-END YEAR-END(1)
- ---- ----------- ------------- ----------- ------------- ---------------------- -----------------
Daniel B. Fitzpatrick..... 0 0 23,200 0 -- --
John C. Firth............. 0 0 5,000 34,302 -- --
James K. Fitzpatrick...... 0 0 23,600 31,728 -- --
Gerald O. Fitzpatrick..... 0 0 23,430 31,299 -- --
Patrick J. Barry.......... 0 0 5,000 30,871 -- --
- ---------------
(1) The closing price for the Company's Common Stock as reported by the Nasdaq
National Market System on October 31, 1999 was $2.625. The exercise prices
of the options in the table exceeded $2.625 and therefore were not "In the
Money."
401(K) AND DEFERRED COMPENSATION SAVINGS PLAN
On October 27, 1986, the Company implemented the Quality Dining, Inc.
Retirement Plan and Trust ("Plan I"). Plan I is designed to provide all of the
Company's employees with a tax-deferred long-term savings vehicle. The Company
provides a matching cash contribution equal to 50% of a participant's
contribution, up to a maximum of 5% of such participant's compensation. Plan I
is a qualified 401(k) plan. Participants in Plan I elect the percentage of pay
they wish to contribute as well as the investment alternatives in which their
contributions are to be invested. Participant's contributions vest immediately
while Company contributions vest 25% annually beginning in the participant's
second year of eligibility since Plan I inception.
5
23
On May 18, 1998, the Company implemented the Quality Dining, Inc.
Supplemental Deferred Compensation Plan ("Plan II"). Plan II is a non-qualified
deferred compensation plan. Plan II participants are considered a select group
of management and highly compensated employees according to Department of Labor
guidelines. Since the implementation of Plan II, Plan II participants are no
longer eligible to contribute to Plan I. Plan II participants elect the
percentage of their pay they wish to defer into their Plan II account. They also
elect the percentage of their account to be allocated among various investment
options. The Company makes matching allocations to the Plan II participants'
deferral accounts equal to 50% of a participant's contribution, up to a maximum
of 5% of such participant's compensation. Company allocations vest 25% annually,
beginning in the participant's second year of eligibility since Plan I
inception.
LONG TERM INCENTIVE PLANS
On June 1, 1999 the Company implemented two plans for its senior officers,
a Strategic Executive Long Term Incentive Compensation Plan (the "Strategic Long
Term Plan") and a Senior Executive Long Term Incentive Compensation Plan (the
"Senior Long Term Plan" and, together with the Strategic Long Term Plan, the
"Long Term Plans"). The participants in the Strategic Long Term Plan are seven
of the Company's executive officers (including each of the Named Executive
Officers other than Daniel Fitzpatrick, the Chief Executive Officer) and one
other senior officer, and the participants in the Senior Long Term Plan are
eight other senior officers of the Company.
The Strategic Long Term Plan consists of three components: (i) restricted
stock awards which vest on June 1, 2006, subject to accelerated vesting in
one-third increments when the Company's share price closes at or above $4.00,
$5.00 and $7.00, respectively, for at least 10 out of 20 consecutive trading
days; (ii) options granted with an exercise price equal to the closing price of
the Common Stock on June 1, 1999, of which 25% will vest on June 1, 2000, 25%
will vest on June 1, 2001 and 50% will vest on June 1, 2002; and (iii) a cash
bonus equal to the product of (A) 10% and (B) the sum of the actual base salary
paid to a participant in fiscal years 1998, 1999 and 2000, payable at the
conclusion of the fiscal year 2000 so long as the participant is still employed
by the Company at that time. In the event of death or disability prior to the
payment date, a participant (or their legal representative) in the Strategic
Long Term Plan will receive the amount of the cash bonus that had accrued up to
the date of the participant's death or disability.
The Senior Long Term Plan consists of restricted stock awards and options
that are identical to the restricted stock awards and options contained in the
Strategic Long Term Plan, but does not contain a cash bonus component. The
restricted stock and options issued to the participants of the Long Term Plans
were issued under the Company's 1997 Stock Option Plan.
The Company also repurchased 298,340 options previously issued, at strike
prices ranging from $13.60 to $34.50, to certain executives and non-executive
officers of the Company under the Company's 1993 Stock Option Plan for their
fair value of $44,751, or $0.15 per option. The purchase price was determined
using the Black-Scholes methodology. These options were permanently retired and
are not available to be reissued. As part of this purchase, Daniel B.
Fitzpatrick, John C. Firth, James K. Fitzpatrick, Gerald O. Fitzpatrick and
Patrick J. Barry sold to the Company 157,990, 35,000, 21,170, 17,290 and 15,000
options, respectively, and were paid $23,699, $5,250, $3,175, $2,593 and $2,250,
respectively.
CERTAIN TRANSACTIONS
Related party transactions are subject to the review and approval of the
Company's Audit Committee, which is composed exclusively of the Company's
disinterested Directors.
LEASES OF HEADQUARTERS BUILDING AND RESTAURANT FACILITIES
In February 1997, the Company moved into a new headquarters facility, which
is leased from a limited liability company in which the Company has a 50%
interest. The Company leased its former headquarters facility from B.K. Main
Street Properties, a partnership owned by Messrs. Daniel B. Fitzpatrick, Ezra H.
Friedlander and James K. Fitzpatrick. This lease was a triple net lease with
monthly rental payments
6
24
calculated on the basis of $12.00 per square foot annually. The lease provided
for renewals of up to five years at then prevailing market rates. The Company
believes that this lease was on terms at least as favorable as could be obtained
from an unrelated third party. In May 1997, the Company subleased its former
headquarters facility to a local financial institution for a term extending
through the expiration of the Company's lease. On May 5, 1999, the financial
institution exercised its option to purchase the Company's former headquarters
facility from B.K. Main Street Properties which resulted in the termination of
the Company's lease. During fiscal 1999, the Company paid $64,234 under this
lease and received $40,781 from the sublessee.
Of the Burger King restaurants operated by the Company as of October 31,
1999, 41 were leased from a series of entities owned, in various percentages, by
Messrs. Daniel B. Fitzpatrick, Ezra H. Friedlander and James K. Fitzpatrick (the
"Real Estate Partnerships"). The Company believes that these leases are on terms
at least as favorable as leases that could be obtained from unrelated third
parties. Each of the leases between the Company and a Real Estate Partnership
are triple net leases which provide for an annual base rent equal to 13 1/2% of
the total cost (land and building) of the leased restaurant, together with
additional rent of 7% of restaurant sales, to the extent that amount exceeds the
base rental. These terms are substantially identical to those which were offered
by Burger King Corporation to its franchisees at the time the leases were
entered into except that Burger King Corporation was generally charging
additional rent of 8 1/2% of restaurant sales. During fiscal 1999, the Company
paid $3,872,378 under these leases.
During fiscal 1999, the Company paid an aggregate of $3,936,612 under these
related party leases. The Company does not presently intend to enter into
additional leases with related parties.
TRANSPORTATION SERVICES
Burger Management South Bend No. 3, Inc., an Indiana corporation ("SB No.
3"), owned by Messrs. Daniel B. Fitzpatrick, Ezra H. Friedlander and James K.
Fitzpatrick, has provided the service of its King Air turbo-prop aircraft to the
Company. In fiscal 1999, SB No. 3 billed the Company $260,000. The Company
believes that the amounts paid for air services were no greater than amounts
which would have been paid to unrelated third parties for similar services.
Consequently, the Company intends to continue to utilize SB No. 3 to provide air
transportation services. Since January 1, 1996, SB No. 3 has leased two or three
employees from the Company to act as a pilot and co-pilot of the aircraft. SB
No. 3 reimburses the Company for the Company's full cost of such employees.
ADMINISTRATIVE SERVICES
The Company provides certain accounting, tax and other administrative
services to the Real Estate Partnerships and SB No. 3 on a fee for services
basis. The aggregate amount of fees paid to the Company for administrative
services by these entities during fiscal 1999 was $14,000. The Company believes
that these fees are no lesser than amounts which would have been charged to
unaffiliated third parties for comparable services.
7
25
ANNEX II
McDonald Investments Logo
May 19, 2000
Board of Directors
Quality Dining, Inc.
P.O. Box 416
South Bend, IN 46624
Members of the Board:
We understand that on May 9, 2000, QDI Acquisition LLC, a Delaware limited
liability company (the "Purchaser") and a wholly owned subsidiary of NBO, LLC, a
Michigan limited liability company (the "Parent"), disclosed in a Tender Offer
Statement on Schedule TO (the "Schedule TO"), dated May 9, 2000 and filed with
the Securities and Exchange Commission, that it has commenced a tender offer to
purchase all outstanding shares of Common Stock, without par value (the "Common
Stock"), including associated rights to purchase Preferred Stock, of Quality
Dining Inc. (the "Company") not already beneficially owned by Parent, at a price
of $5.00 per share, net to the seller in cash, without interest thereon, upon
the terms and subject to the conditions set forth in the Offer to Purchase,
dated May 9, 2000 (the "Offer to Purchase") and the related Letter of
Transmittal (which, together with the Offer to Purchase and any amendments or
supplements thereto, collectively constitute the "Offer") included in the
Schedule TO.
You have asked for our opinion as to whether the consideration to be
received pursuant to the Offer is adequate from a financial point of view to the
holders of Common Stock other than the Parent and its affiliates.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of the Company;
(iii) reviewed certain financial projections prepared by the management of
the Company;
(iv) discussed the past and current operations and financial condition and
the prospects and business strategy of the Company with senior executives of the
Company;
(v) reviewed the reported prices and trading activity for the Common Stock;
26
Board of Directors
May 19, 2000
Page 2
(vi) compared the financial performance of the Company and the prices and
trading activity of the Common Stock with that of certain other comparable
publicly-traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(viii) reviewed the Offer to Purchase, the Schedule TO and certain related
documents; and
(ix) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the Company's financial projections, we have
assumed that they have been reasonably prepared on bases reflecting management's
best currently available estimates and judgements of the future financial
performance of the Company, and we have assumed that such projections are
capable of being achieved. We have not made any independent valuation or
appraisal of the assets or liabilities of the Company, nor have we been
furnished with any such appraisals. We were not requested to solicit, and did
not solicit, interest from other parties with respect to an acquisition of or
other business combination with the Company. Our opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the Offer, or otherwise
required, with the Securities and Exchange Commission. This opinion is not
intended to be and shall not constitute a recommendation to any holder of Common
Stock as to whether to tender shares of Common Stock pursuant to the Offer.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Offer is inadequate from a financial point of view to the
holders of Common Stock other than the Parent and its affiliates.
Very truly yours,
McDONALD INVESTMENTS INC.
2