SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended February 17, 2002
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______________ to ____________________
Commission file number 0-23420
---------------------
QUALITY DINING, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1804902
----------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4220 Edison Lakes Parkway, Mishawaka, Indiana 46545
---------------------------------------------------
(Address of principal executive offices and zip code)
(219) 271-4600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the registrant's common stock outstanding as of
March 20, 2002 was 11,484,099.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 17, 2002
INDEX
Page
----
PART I. - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations...............................3
Consolidated Balance Sheets.........................................4
Consolidated Statements of Cash Flows...............................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................17
Part II - Other Information
Item 1. Legal Proceedings..................................................25
Item 2. Changes in Securities..............................................25
Item 3. Defaults upon Senior Securities....................................25
Item 4. Submission of Matters to a Vote of Security Holders................25
Item 5. Other Information..................................................25
Item 6. Exhibits and Reports on Form 8-K...................................25
Signatures...................................................................26
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Sixteen Weeks Ended
February 17, February 18,
2002 2001
------------ ------------
Revenues:
Burger King $ 35,544 $ 22,506
Chili's Grill & Bar 22,554 20,664
Grady's American Grill 17,187 19,912
Italian Dining Division 5,219 5,188
-------- --------
Total revenues 80,504 68,270
-------- --------
Operating expenses:
Restaurant operating expenses:
Food and beverage 22,982 19,258
Payroll and benefits 24,661 20,017
Depreciation and amortization 3,232 3,540
Other operating expenses 20,151 16,827
-------- --------
Total restaurant operating expenses 71,026 59,642
-------- --------
Income from restaurant operations 9,478 8,628
-------- --------
General and administrative expense 5,558 4,573
Facility closing costs -- 216
Amortization of intangibles 130 268
-------- --------
Operating income 3,790 3,571
-------- --------
Other income (expense):
Interest expense (2,770) (3,435)
Loss on sale of
property and equipment (75) (8)
Interest income 3 7
Other income (expense), net 425 357
-------- --------
Total other expense, net (2,417) (3,079)
-------- --------
Income before income taxes 1,373 492
Income tax provision 432 367
-------- --------
Net income $ 941 $ 125
======== ========
Basic net income per share $ 0.08 $ 0.01
======== ========
Diluted net income per share $ 0.08 $ 0.01
======== ========
Weighted average shares outstanding:
Basic 11,206 11,782
======== ========
Diluted 11,298 11,791
======== ========
See Notes to Consolidated Financial Statements.
Page 3
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
February 17, October 28,
2002 2001
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,530 $ 2,070
Accounts receivable 2,190 1,842
Inventories 1,964 2,042
Deferred income taxes 2,432 1,999
Other current assets 2,696 2,042
--------- ---------
Total current assets 10,812 9,995
--------- ---------
Property and equipment, net 118,036 119,433
--------- ---------
Other assets:
Deferred income taxes 7,568 8,001
Trademarks, net 6,274 6,405
Franchise fees and development fees, net 9,729 10,029
Goodwill 8,176 8,068
Liquor licenses, net 2,718 2,757
Other 3,151 2,550
Total other assets 37,616 37,810
--------- ---------
Total assets $ 166,464 $ 167,238
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized leases
and long-term debt $ 61,984 $ 1,808
Accounts payable 12,633 10,735
Accrued liabilities 21,078 20,857
Total current liabilities 95,695 33,400
Long-term debt 45,340 108,964
Capitalized leases principally to related
parties, less current portion 4,075 4,230
--------- ---------
Total liabilities 145,110 146,594
--------- ---------
Common stock subject to redemption -- 264
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued -- --
Common stock, without par value: 50,000,000
shares authorized; 12,949,151 and 12,855,594
shares issued, respectively 28 28
Additional paid-in capital 237,002 237,002
Accumulated deficit (211,529) (212,470)
Unearned compensation (524) (557)
--------- ---------
24,977 24,003
Treasury stock, at cost, 1,360,573
and 1,360,573 shares, respectively (3,623) (3,623)
Total stockholders' equity 21,354 20,380
--------- ---------
Total liabilities and stockholders' equity $ 166,464 $ 167,238
========= =========
See Notes to Consolidated Financial Statement
Page 4
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Sixteen Weeks Ended
February 17, February 18,
2002 2001
----------- ------------
Cash flows from operating activities:
Net income $ 941 $ 125
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 3,113 3,558
Amortization of other assets 509 574
Loss on sale of property and equipment 75 8
Amortization of unearned compensation 33 29
Changes in current assets and current liabilities:
Net increase in current assets (924) (430)
Net increase (decrease) current liabilities 2,119 (906)
-------- --------
Net cash provided by operating activities 5,866 2,958
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,597) (810)
Purchase of other assets (834) (154)
Other (108) --
Net cash used for investing activities (2,539) (964)
-------- --------
Cash flows from financing activities:
Borrowings of long-term debt 33,959 19,350
Repayment of long-term debt (37,407) (19,222)
Purchase of treasury stock -- (1,925)
Payment for stock subject to redemption (264) --
Repayment of capitalized lease obligations (155) (158)
-------- --------
Net cash used by financing activities (3,867) (1,955)
-------- --------
Net increase in cash and cash equivalents (540) 39
Cash and cash equivalents, beginning of period 2,070 2,912
-------- --------
Cash and cash equivalents, end of period $ 1,530 $ 2,951
======== ========
See Notes to Consolidated Financial Statements.
Page 5
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 17, 2002
(UNAUDITED)
NOTE 1: DESCRIPTION OF BUSINESS.
NATURE OF BUSINESS Quality Dining, Inc. (the "Company") operates four distinct
restaurant concepts. It owns the Grady's American Grill(R) and two Italian
Dining concepts and operates Burger King(R) restaurants and Chili's Grill &
Bar(TM) ("Chili's"(R)) as a franchisee of Burger King Corporation and Brinker
International, Inc. ("Brinker"), respectively. The Company operates its Italian
Dining restaurants under the tradenames of Spageddies Italian Kitchen(R)
("Spageddies"(R)) and Papa Vino's Italian Kitchen(R) ("Papa Vino's"(R)). As of
February 17, 2002, the Company operated 190 restaurants, including 116 Burger
King restaurants, 33 Chili's, 32 Grady's American Grill restaurants, three
Spageddies and five Papa Vino's.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Quality Dining, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statement reporting purposes. In the opinion of management,
all adjustments, consisting only of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
16-week period ended February 17, 2002 are not necessarily indicative of the
results that may be expected for the 52-week year ending October 27, 2002.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 28, 2001 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 141 AND NO. 142
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the
purchase method of accounting be used for business combinations initiated after
June 30, 2001. SFAS 141 also establishes criteria that must be used to determine
whether acquired intangible assets should be recognized separately from goodwill
in the Company's financial statements. Under SFAS 142, amortization of goodwill,
including goodwill recorded in past business combinations, will discontinue upon
adoption of this standard. In addition, goodwill and indefinite-lived intangible
assets will be tested for impairment in accordance with the provisions of SFAS
142. SFAS 142 is effective for fiscal years beginning after December 15, 2001.
The Company has early adopted the provisions of SFAS 142, in the first quarter
of fiscal 2002. SFAS 142 allows up to six months from the date of adoption to
complete the transitional goodwill impairment test which requires the comparison
of the fair value of a reporting unit to its carrying
Page 6
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 17, 2002
(UNAUDITED)
value (using amounts measured as of the beginning of the year of adoption) to
determine whether there is an indicated transitional goodwill impairment. If a
reporting unit's fair value is below its carrying value, the Company will need
to quantify a goodwill impairment by the end of fiscal 2002. The quantification
of an impairment requires the calculation of an "implied" fair value for a
reporting unit's goodwill. If the implied fair value of the reporting unit's
goodwill is less than its recorded goodwill, a transitional goodwill impairment
charge is recognized and reported as a cumulative effect of a change in
accounting principle. The Company will complete the impairment testing of
goodwill during the second quarter of fiscal 2002. Disclosures required by SFAS
are as follows:
INTANGIBLE ASSETS
As of February 17, 2002
----------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
($000s) ($000s)
Amortized intangible assets
Trademark $ 8,343 $ (2,069)
Franchise fees and development fees 14,463 (4,734)
-------- --------
Total $ 22,806 $ (6,803)
======== ========
The Company's intangible asset amortization expense for the quarter ended
February 17, 2002 was $389,000. The estimated intangible amortization expense
for each of the next five years is $1,264,000.
In the fourth quarter of fiscal 2001, the Company recorded an impairment charge
related to certain Grady's American Grill restaurants that resulted in a
reduction of the net book value of the Grady's American Grill trademark by
$4,920,000. In conjunction with the Company's impairment assessment, the Company
revised its estimate of the remaining useful life of the trademark to 15 years.
The original estimated life of the trademark had been 40 years. As a result of
these changes, net income as of February 17, 2002, was decreased by
$28,000,which is less than $0.01 per diluted share.
GOODWILL
The Company has two reporting units with goodwill - full service and quick
service restaurants. Full service and quick service restaurants are also the
Company's reportable segments. The Company had a total of $8,176,000 in goodwill
as of February 17, 2002. The full service segment had $6,904,000 of goodwill and
the quick service segment had $1,272,000 as of February 17, 2002.
Page 7
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 17, 2002
(UNAUDITED)
ADOPTION OF STATEMENT 142
The following table reports the comparative impact the adoption of Statement 142
has on the reported results of operations.
SIXTEEN WEEKS ENDED
---------------------------
FEBRUARY 17, FEBRUARY 18,
2002 2001
------------ ------------
($000s except for earnings-per-share amounts)
REPORTED NET INCOME $ 941 $ 125
Add back: Goodwill amortization -- 166
-------- --------
Adjusted net income $ 941 $ 291
======== ========
BASIC EARNINGS PER SHARE:
Reported net income $ 0.08 $ 0.01
Goodwill amortization -- 0.01
-------- --------
Adjusted net income $ 0.08 $ 0.02
======== ========
DILUTED EARNINGS PER SHARE:
Reported net income $ 0.08 $ 0.01
Goodwill amortization -- 0.01
-------- --------
Adjusted net income $ 0.08 $ 0.02
======== ========
NOTE 3: ACQUISITIONS.
On October 15, 2001, the Company purchased certain assets from BBD Business
Consultants, LTD. and its affiliates. BBD Business Consultants, LTD. operated 42
Burger King restaurants in the Grand Rapids, Michigan metropolitan area. The
Company also purchased leasehold improvements and entered into lease agreements
with the landlords of 41 of the 42 Burger King restaurants. One restaurant was
closed on November 26, 2001 due to the inability to secure a long-term lease
with the landlord. In conjunction with this transaction the Company obtained
franchise agreements for the acquired restaurants from Burger King Corporation.
The purchase price for the restaurants aggregated $6,067,000 and consisted of
$4,212,000 in cash and $1,855,000 in assumed liabilities. The acquisition was
accounted for as a purchase. Goodwill of approximately $1,096,000 was recorded
in connection with the acquisition, and subsequently adjusted by approximately
$108,000 in the first quarter for the finalization of various liabilities.
Page 8
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
NOTE 4: COMMITMENTS.
As of February 17, 2002, the Company had commitments aggregating approximately
$1,426,000 for restaurant construction and the purchase of new equipment.
NOTE 5: DEBT INSTRUMENTS.
The Company has a financing package totaling $125,066,000, consisting of a
$76,000,000 revolving credit agreement (the "Existing Facility") and a
$49,066,000 mortgage facility (the "Mortgage Facility"), as described below.
The Mortgage Facility currently includes 34 separate mortgage notes, with terms
of either 15 or 20 years. The notes have fixed rates of interest of either 9.79%
or 9.94%. The notes require equal monthly interest and principal payments. The
mortgage notes are collateralized by a first mortgage/deed of trust and security
agreement on the real estate, improvements and equipment on 19 of the Company's
Chili's restaurants (nine of which the Company mortgaged its leasehold interest)
and 15 of the Company's Burger King restaurants (three of which the Company
mortgaged its leasehold interest). The mortgage notes contain, among other
provisions, certain restrictive covenants including maintenance of a
consolidated fixed charge coverage ratio for the financed properties.
The Existing Facility executed with JP Morgan Chase Bank, as agent for a group
of six banks, provides for borrowings of up to $76,000,000 with interest payable
at the adjusted LIBOR rate plus a contractual spread. The weighted average
borrowing rate on February 17, 2002 was 5.54%. The Company had $14,475,000
available under its Existing Facility as of February 17, 2002. The Existing
Facility is collateralized by the stock of certain subsidiaries of the Company,
certain interests in the Company's franchise agreements with Brinker and Burger
King Corporation and substantially all of the Company's personal property not
pledged in the Mortgage Facility.
The Existing Facility contains restrictive covenants including maintenance of
certain prescribed debt and fixed charge coverage ratios, limitations on the
incurrence of additional indebtedness, limitations on consolidated capital
expenditures, cross-default provisions with other material agreements,
restrictions on the payment of dividends (other than stock dividends) and
limitations on the purchase or redemption of shares of the Company's capital
stock. These restrictions do not presently prohibit the Company from
repurchasing its capital stock.
The Existing Facility matures on October 31, 2002, at which time all amounts
outstanding thereunder are due. Accordingly, $60,135,000 has been classified as
a current liability as of February 17, 2002. As of April 3, 2002, the Company
had received commitments from JP Morgan Chase Bank, as agent, and five other
banks to refinance the Existing Facility with a $60,000,000 revolving credit
agreement (the "Replacement Facility").
Page 9
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
The Replacement Facility, if consummated, will provide for borrowings at the
adjusted LIBOR rate plus a contractual spread which compares to the Existing
Facility as follows:
Ratio of Funded Debt
to Cash Flow LIBOR Margin
- ------------ ------------
Existing Facility Replacement Facility
----------------- --------------------
4.50 <= X 3.00% 3.00%
4.00 <= X 2.75% 3.00%
3.50 <= X 2.50% 3.00%
3.00 <= X 2.25% 2.75%
2.50 <= X 1.75% 2.25%
X < 2.50 1.25% 1.75%
The Replacement Facility will also contain covenants requiring maintenance of
funded debt to cash flow and fixed charge coverage ratios which compare to the
Existing Facility as follows:
COVENANT EXISTING FACILITY REPLACEMENT FACILITY
- -------- ----------------- --------------------
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO
Fiscal 2002
Q1 4.25 N/A
Q2 4.25 4.00
Q3 3.75 4.00
Q4 3.75 4.00
Fiscal 2003
Q1 through Q3 N/A 4.00
Q4 N/A 3.75
Fiscal 2004
Q1 through Q3 N/A 3.75
Q4 N/A 3.50
Fiscal 2005 N/A 3.50
Q1 through Q2
Thereafter N/A 3.00
FIXED CHARGE COVERAGE RATIO 1.55 1.50
The Replacement Facility will also contain certain other restrictive covenants,
Page 10
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
terms and conditions that will be substantially the same as those that are
presently contained in the Existing Facility. The Replacement Facility
contemplates the completion of definitive documentation, perfection of security
interests and the closing of the sale of nine of the Company's Grady's American
Grill restaurants prior to its effectiveness. (See Part I, Item 2).
The Company expects the Replacement Facility to be effective in the third
quarter of fiscal 2002 but there can be no assurance thereof. If the Company is
not able to implement the Replacement Facility, the Company will have to
consider financing alternatives which might include, among others, negotiating
an extension of the Existing Facility or a new facility with its existing bank
group, either of which may be on less favorable terms, finding a new commercial
lender or attempting to identify alternative sources of debt or equity capital.
The inability of the Company to replace the Existing Facility would have a
material adverse effect on the Company.
NOTE 6: EARNINGS PER SHARE.
The Company had outstanding at February 17, 2002 common shares totaling
11,484,099. The Company has also granted options to purchase common shares to
its employees and outside directors. These options have a dilutive effect on the
calculation of earnings per share. The following is a reconciliation of the
numerators and denominators of the basic and diluted earnings per share
computation as required by SFAS 128.
QUARTER ENDED
FEBRUARY 17, FEBRUARY 18,
BASIC EARNINGS PER SHARE: 2002 2001
----------- -----------
Income available to common
shareholders (numerator) $ 941,000 $ 125,000
=========== ===========
Weighted average common shares
outstanding (denominator) 11,206,000 11,782,000
=========== ===========
Basic earnings per share $ 0.08 $ 0.01
=========== ===========
QUARTER ENDED
FEBRUARY 17, FEBRUARY 18,
DILUTED EARNINGS PER SHARE: 2002 2001
----------- ------------
Income available to common
shareholders (numerator) $ 941,000 $ 125,000
=========== ===========
Weighted average common shares
outstanding 11,206,000 11,782,000
Effect of dilutive securities:
Restricted Stock and
options on common stock 92,000 9,000
----------- -----------
Total common shares and dilutive
securities(denominator) 11,298,000 11,791,000
=========== ===========
Diluted earnings per share $ 0.08 $ 0.01
=========== ===========
Page 11
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
NOTE 7: SEGMENT REPORTING.
The Company operates four distinct restaurant concepts in the food-service
industry. It owns the Grady's American Grill and two Italian Dining concepts and
operates Burger King restaurants and Chili's Grill & Bar as a franchisee of
Burger King Corporation and Brinker International, Inc., respectively. The
Company has identified each restaurant concept as an operating segment based on
management structure and internal reporting. For purposes of applying SFAS 131,
the Company considers the Grady's American Grill, the two Italian concepts and
Chili's Grill & Bar to be similar and has aggregated them into a single
reportable operating segment (Full Service). The Company considers the Burger
King restaurants as a separate reportable segment (Quick Service). Summarized
financial information concerning the Company's reportable segments is shown in
the following table. The "other" column includes corporate related items and
income and expense not allocated to reportable segments.
FULL QUICK
(DOLLARS IN THOUSANDS) SERVICE SERVICE OTHER TOTAL
- --------------------------------------------------------------------------------
FIRST QUARTER FISCAL 2002
- -------------------------
Revenues $ 44,960 $ 35,544 $ -- $ 80,504
Income from restaurant
operations 5,288 4,117 73 9,478
Operating income 3,039 1,005 (254) $ 3,790
Interest expense (2,770)
Other income 353
--------
Income before income
taxes $ 1,373
========
Depreciation and
amortization 1,922 1,338 362 3,622
FIRST QUARTER FISCAL 2001
- -------------------------
Revenues $ 45,764 $ 22,506 $ -- $ 68,270
Income from restaurant
operations 5,568 3,018 42 8,628
Operating income 3,285 982 (696) $ 3,571
Interest expense (3,435)
Other income 356
--------
Income before income
taxes $ 492
========
Depreciation and
amortization 2,744 961 427 4,132
Page 12
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
NOTE 8: CONTINGENCIES.
The Company is a party to one legal proceeding relating to the Company's
previously owned bagel-related businesses.
D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises, Inc.,
franchisees of Bruegger's Franchise Corporation, and Ken Wagnon, Dan Carney, Jay
Wagnon and Patrick Beatty, principals of the foregoing franchisees, commenced an
action on July 16, 1997 in the United States District Court for the District of
Maryland, against Bruegger's Corporation, Bruegger's Franchise Corporation,
Quality Dining, Inc., Daniel B. Fitzpatrick, Michael J. Dressell and Nordahl L.
Brue, alleging that the plaintiffs purchased their franchises based upon
financial representations that did not materialize, that they purchased
preferred stock in Bruegger's Corporation based upon false representations, that
Bruegger's Corporation falsely represented its intentions with respect to
purchasing bakeries from the plaintiffs or providing financing to the
plaintiffs, and that the defendants violated implied covenants of good faith and
fair dealing. On February 28, 2001, the parties reached a settlement of this
matter pursuant to which the Company made an initial payment of $125,000 and an
additional payment of $175,000 in December 2001. As part of the settlement, the
Company also purchased 96,064 shares of its common stock owned by the
plaintiffs, in December 2001, for approximately $264,000 or $2.75 per share. The
Company had reclassified $264,000 from stockholders' equity to common stock
subject to redemption on its consolidated balance sheet related to its agreement
to purchase such shares from the plaintiff in December 2001. The Company had
previously accrued for the full amount of the settlement, including the expense
portion of the share repurchase.
On or about April 15, 1997, Texas Commerce Bank National Association ("Texas
Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd., a Florida
limited partnership ("BFBC"). At the time of the Loan, BFBC was a franchisee
under franchise agreements with Bruegger's Franchise Corporation (the
"Franchisor"). The Company at that time was an affiliate of the Franchisor. In
connection with the Loan and as an accommodation of BFBC, the Company executed
to Texas Commerce a "Guaranty". By the terms of the Guaranty the Company agreed
that upon maturity of the Loan by default or otherwise that it would either (1)
pay the Loan obligations or (2) buy the Loan and all of the related loan
documents (the "Loan Documents") from Texas Commerce or its successors. In
addition several principals of BFBC (the "Principal Guarantors") guaranteed
repayment of the Loan by each executing a "Principal Guaranty". On November 10,
1998, Texas Commerce (1) declared that the Loan was in default, (2) notified
BFBC, the Principal Guarantors and the Company that all of the Loan obligations
were due and payable, and (3) demanded payment.
The Company elected to satisfy its obligations under the Guaranty by purchasing
the Loan from Texas Commerce. On November 24, 1998, the Company bought the Loan
for $4,294,000. Thereafter, the Company sold the Loan to its Texas affiliate
Grady's American Grill, L.P. ("Grady's"). On November 30, 1998 Grady's commenced
an action seeking to recover the amount of the Loan from one of the Principal
Guarantors, Michael K. Reilly ("Reilly"). As part of this action Grady's also
seeks to enforce a Subordination Agreement that was one of the Loan Documents
against MKR Investments, L.P., a partnership ("MKR"). Reilly is the general
partner of MKR. This action is pending in the United States District Court for
the Southern District of Texas Houston Division as Case No.
Page 13
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
H-98-4015. Reilly has denied liability and filed counterclaims against Grady's
alleging that Grady's engaged in unfair trade practices, violated Florida's
"Rico" statute, engaged in a civil conspiracy and violated state and federal
securities laws in connection with the Principal Guaranty (the "Counterclaims").
Reilly also filed a third party complaint ("Third Party Complaint") against
Quality Dining, Inc., Grady's American Grill Restaurant Corporation, David M.
Findlay, Daniel B. Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise
Corporation, Champlain Management Services, Inc., Nordahl L. Brue, Michael J.
Dressell and Ed Davis ("Third Party Defendants") alleging that Reilly invested
in BFBC based upon false representations, that the Third Party Defendants
violated state franchise statutes, committed unfair trade practices, violated
covenants of good faith and fair dealing, violated the state "Rico" statute and
violated state and federal securities laws in connection with the Principal
Guaranty.
In addition, BFBC and certain of its affiliates, including the Principal
Guarantors ("Intervenors") have intervened and asserted claims against Grady's
and the Third Party Defendants that are similar to those asserted in the
Counterclaims and the Third Party Complaint. Reilly and the Intervenors are
seeking damages in an amount no less than $10 million, an unspecified amount of
punitive damages, attorney's fees, costs and interest. Based upon the currently
available information, the Company does not believe that the ultimate resolution
of this matter will have a material adverse effect on the Company's financial
position or results of operations, however, there can be no assurance thereof.
Neither can there be any assurance that the Company will be able to realize
sufficient value from Reilly or the Principal Guarantors to satisfy the amount
of the Loan.
In the foregoing case, one or more present or former officers and directors of
the Company were named as party defendants, but where subsequently dismissed by
the Court. The Company advanced defense costs on their behalf until they were
dismissed by the Court.
Pursuant to the Share Exchange Agreement by and among Quality Dining, Inc.,
Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell ("Share Exchange
Agreement"), the Agreement and Plan of Merger by and among Quality Dining, Inc.,
Bagel Disposition Corporation and Lethe, LLC, and certain other related
agreements entered into as part of the disposition of the Company's
bagel-related businesses, the Company was responsible for 50% of the first $14
million of franchise-related litigation expenses, inclusive of attorney's fees,
costs, expenses, settlements and judgments (collectively "Franchise Damages").
Bruegger's Corporation and certain of its affiliates are obligated to indemnify
the Company from all other Franchise Damages. The Company was originally
obligated to pay the first $3 million of its share of Franchise Damages in cash.
The Company has satisfied this obligation. The remaining $4 million of the
Company's share of Franchise Damages was originally payable by crediting amounts
owed to the Company pursuant to the $10 million Subordinated Note ("Subordinated
Note") issued to the Company by Bruegger's Corporation. However, as a result of
the Bruegger's Resolution (described below), the remainder of the Company's
share of Franchise Damages is payable in cash.
On or about September 10, 1999, Bruegger's Corporation, Lethe LLC, Nordahl L.
Brue, and Michael J. Dressel commenced an action against the Company in the
United States District Court for the District of Vermont alleging that the
Page 14
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
Company breached various provisions of the Share Exchange Agreement which
arose out of the ongoing dispute concerning the net working capital adjustment
contemplated by the Share Exchange Agreement. On February 1, 2000, the Company
filed counter-claims against Bruegger's Corporation for the working capital
adjustment to which it believes it is entitled. Additionally, on or about
September 13, 1999, Messrs. Brue and Dressell asserted a claim for breach of
representations and warranties under the Share Exchange Agreement.
On February 28, 2001, the Company and Bruegger's Corporation reached a
settlement (the "Bruegger's Resolution") of their various disputes that
includes, among other things, the following provisions: (a) the principal amount
of the Subordinated Note was restated to $10.7 million; (b) the Company and
Bruegger's Corporation each released their claim against the other to receive a
net working capital adjustment; (c) the Subordinated Note was modified to, among
other things, provide for an extension of the period through which interest is
to be accrued and added to the principal amount of the Subordinated Note from
October, 2000 through January, 2002. From January, 2002 through June, 2002,
one-half of the interest is to be accrued and added to the principal amount of
the Subordinated Note and one-half of the interest is to be paid in cash.
Commencing in January, 2003, interest is to be paid in cash through the maturity
of the Subordinated Note in October 2004; (d) the Company and Bruegger's
Corporation are each responsible for 50% of the Franchise Damages with respect
to the claims asserted by BFBC Ltd., et al., (e) Bruegger's Corporation is
entitled to 25% of any net recovery made by the Company on the BFBC, Ltd., Loan;
provided, however, that any such entitlement is required to be applied to the
outstanding balance of the Subordinated Note; (f) Bruegger's Corporation and its
affiliates released their claims for breach of representations and warranties
under the Share Exchange Agreement; and (g) Bruegger's Corporation is entitled
to a credit of two dollars against the Subordinated Note for every one dollar
that Bruegger's Corporation prepays against the Subordinated Note prior to
October, 2003 up to a maximum credit of $4 million. As of the fourth quarter of
fiscal 2001, Bruegger's Corporation advised the Company that it is unable to
continue to pay its 50% share of Franchise Damages. Accordingly, it is likely
that the Company will have to incur the full expense of the BFBC litigation and
that Bruegger's Corporation will not have the ability to perform its indemnity
obligations, if any. The ongoing expense of the BFBC litigation may be
significant to the Company's results of operations. Such expense is not
presently estimable as it depends upon a number of variables including the
extent to which the Company obtains favorable rulings on motions it expects to
file, the length and outcome of any trial, whether or not any appeal is taken
and, if so, whether the Company is bringing or responding to the appeal.
It is also likely that the Company may never receive any principal or interest
payments in respect of the Subordinated Note. The Company has never recognized
any interest income from the Subordinated Note and has previously reserved for
the full amount of the Subordinated Note. Additionally, the Company is a
guarantor of the occupancy leases for certain bagel restaurants currently
operated by affiliates of Bruegger's Corporation. As a result of the Company's
current assessment of Bruegger's Corporation's financial position, in the fourth
quarter of fiscal 2001, the Company recorded a charge of $455,000 to reserve for
the estimated liability for the obligations as a guarantor.
The Company is involved in various other legal proceedings incidental
to the conduct of its business, including employment discrimination claims.
Based
Page 15
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEBRUARY 17, 2002
(UNAUDITED)
upon currently available information, the Company does not expect that any
such proceedings will have a material adverse effect on the Company's financial
position or annual results of operations but there can be no assurance thereof.
NOTE 9: FRANCHISEE COMMITMENT.
On January 27, 2000 the Company executed a "Franchisee Commitment" pursuant to
which it agreed to undertake certain "Transformational Initiatives" including
capital improvements and other routine maintenance in all of its Burger King
restaurants. The capital improvements include the installation of signage
bearing the new Burger King logo and the installation of a new drive-through
ordering system. The initial deadline for completing these capital improvements
- - December 31, 2001 - has been extended to December 31, 2002, although the
Company met the initial deadline with respect to 66 of the 70 Burger King
restaurants subject to the Franchisee Commitment. In addition, the Company
agreed to perform, as necessary, certain routine maintenance such as exterior
painting, sealing and striping of parking lots and upgraded landscaping. The
Company completed this maintenance prior to September 30, 2000, as required. In
consideration for executing the Franchisee Commitment, the Company received
"Transformational Payments" totaling approximately $3.9 million during fiscal
2000. In addition, the Company received supplemental Transformational Payments
of $135,000 in October, 2001 and an additional $180,000 in the first quarter of
fiscal 2002. The portion of the Transformational Payments that corresponds to
the amount required for the capital improvements will be recognized as an offset
to depreciation expense over the useful life of the capital improvements. The
portion of the Transformational Payments that corresponds to the required
routine maintenance was recognized as a reduction in maintenance expense over
the period during which maintenance was performed. The remaining balance of the
Transformational Payments was recognized as other income ratably through
December 31, 2001, the term of the initial Franchisee Commitment except that the
supplemental Transformational Payments were recognized as other income when
earned and payable by Burger King Corporation.
Page 16
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has a 52/53-week fiscal year ending on the last Sunday in October of
each year. The current fiscal year consists of 52 weeks and ends October 27,
2002. The first quarter of the Company's fiscal year consists of 16 weeks with
all subsequent quarters being 12 weeks in duration.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages which
certain items of revenue and expense bear to total revenues.
Sixteen weeks Ended
February 17, February 18,
2002 2001
------------ ------------
Total revenues 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 28.5 28.2
Payroll and benefits 30.6 29.3
Depreciation and amortization 4.0 5.2
Other operating expenses 25.0 24.7
------ ------
Total restaurant operating expenses 88.1 87.4
------ ------
Income from restaurant operations 11.9 12.6
General and administrative expenses 6.9 6.7
Amortization of intangibles 0.2 0.4
Facility closing costs 0.0 0.3
------ ------
Operating income 4.8 5.2
------ ------
Other income (expense):
Interest expense (3.4) (5.0)
Interest income -- --
Other income, net 0.4 0.5
------ ------
Total other expense, net (3.0) (4.5)
------ ------
Income before income taxes 1.8 0.7
Income tax provision 0.5 0.5
------ ------
Net income 1.3% 0.2%
====== ======
Page 17
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Restaurant sales in the first quarter of fiscal 2002 were $80,504,000, an
increase of $12,234,000, compared to restaurant sales of $68,270,000 in the
first quarter of fiscal 2001. The following factors influenced first quarter
revenues:
The Company's Burger King restaurant sales increased $13,038,000 to $35,544,000
in the first quarter of fiscal 2002 when compared to restaurant sales of
$22,506,000 in the same period of fiscal 2001. The Company had increased
revenues of $11,935,000 from 41 Burger King restaurants in the Grand Rapids,
Michigan metropolitan area which were purchased on October 15, 2001. The Company
had increased revenue of $983,000 due to additional sales weeks from one
restaurant opened in fiscal 2002 and three restaurants opened in fiscal 2001
which were open for their first full year in fiscal 2002. The Company's Burger
King restaurants had average weekly sales of $19,174 in the first quarter of
fiscal 2002 versus $19,812 in the same period in fiscal 2001. The decrease is
due to the addition of the Grand Rapids, Michigan market because that market's
average weekly sales are below the Company's other markets. Sales at restaurants
owned for more than one year increased 0.5% in fiscal 2002 when compared to the
same period in fiscal 2001. The Company believes that the increase in comparable
store sales was mainly due to milder winter weather in fiscal 2002 compared to
fiscal 2001.
The Company's Chili's Grill & Bar restaurant sales increased $1,890,000 to
$22,554,000 in the first quarter of fiscal 2002 compared to restaurant sales of
$20,664,000 in the same period in fiscal 2001. The Company had increased revenue
of $1,587,000 due to additional sales weeks from two new restaurants opened
during fiscal 2001 which were open for their first full year in fiscal 2002.
Average weekly sales were $42,716 in the first quarter of fiscal 2002 versus
$41,661 in the same period in fiscal 2001. Sales at restaurants open for more
than one year increased 1.5% in fiscal 2002 when compared to the same period in
fiscal 2001. The Company believes that the increase in comparable store sales
was mainly due to milder winter weather in fiscal 2002 compared to fiscal 2001.
Sales in the Company's Grady's American Grill restaurant division decreased
$2,725,000 to $17,187,000 in the first quarter of fiscal 2002 compared to sales
of $19,912,000 in the same period in fiscal 2001. The Company closed two units
during the first quarter of fiscal 2002. The absence of these units contributed
approximately $449,000 to the sales decrease during the first quarter of fiscal
2002. The Company's Grady's American Grill restaurants had average weekly sales
of $32,515 in the first quarter of fiscal 2002 versus $35,813 in the same period
in fiscal 2001. Sales at restaurants open for more than one year decreased 11.0%
in fiscal 2002 when compared to the same period in fiscal 2001.
The Company continues to experience a significant decrease in sales and cash
flow at its Grady's American Grill division. The Company continues to pursue
various management actions in response to this declining trend, including
evaluating strategic business alternatives for the division both as a whole and
at each of its 32 restaurant locations. The Company has entered into an
agreement to sell nine of its Grady's American Grill restaurants for
approximately $10.4 million. The Company expects the sale to close during the
second quarter of its fiscal 2002, but there can be no assurance thereof. The
Company recorded an impairment charge of $4.1 million related to these nine
restaurants during the fourth quarter of fiscal 2001. As a consequence of this
loss and in connection with the aforementioned evaluation, the Company estimated
the future cash flows expected to result from the continued operation and the
residual value of the remaining restaurant locations in the division and
concluded in the fourth quarter of fiscal 2001 that, in 12 locations, the
undiscounted estimated future cash flows were less than the carrying amount of
the related assets. Accordingly, the Company concluded that these assets had
been impaired and recorded an impairment charge related
Page 18
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
to these assets aggregating $10.4 million during the fourth quarter of fiscal
2001.
While the Company believes that the Grady's assets are reported at their
estimated fair values as of February 17, 2002, there can be no assurances that
future asset impairments may not occur.
The Company's Italian Dining Division restaurant sales increased $31,000 to
$5,219,000 in the first quarter of fiscal 2002 when compared to restaurant sales
of $5,188,000 in the same period in fiscal 2001. Average weekly sales were
$40,778 in the first quarter of fiscal 2002 versus $40,532 in fiscal 2001. Sales
at restaurants open for more than one year increased 0.6% in fiscal 2002 when
compared to the same period in fiscal 2001. The Company believes that the
increase in comparable store sales was mainly due to milder winter weather in
fiscal 2002 compared to fiscal 2001.
Total restaurant operating expenses were 88.1% of revenues in the first quarter
of fiscal 2002 versus 87.4% in the first quarter of fiscal 2001. The following
factors influenced the operating margins:
On October 15, 2001, the Company purchased certain assets from BBD Business
Consultants, LTD. and its affiliates. BBD Business Consultants, LTD. operated 42
Burger King restaurants in the Grand Rapids, Michigan metropolitan area. The
acquired Burger King restaurants have significantly lower operating margins than
the Company's other Burger King restaurants. The new Burger King restaurants
therefore had a negative effect on operating margins. The Company believes that
over time these operating margins will improve and be similar to the Company's
historical operating margins.
Food and beverage costs were $22,982,000, or 28.5% of total revenues, in the
first quarter of fiscal 2002, compared to $19,258,000, or 28.2% of total
revenues, in the same period in fiscal 2001. Food and beverage costs in dollars
and as a percentage of sales increased in the quick service segment due to the
purchase of Burger King restaurants in Grand Rapids, Michigan. The Company had a
$3,592,000 increase in food and beverage costs due to the addition of 41 Burger
King restaurants in Grand Rapids, Michigan. The full service segment's food and
beverage costs, as a percentage of sales, were consistent with the prior year.
Payroll and benefits were $24,661,000 in the first quarter of fiscal 2002,
compared to $20,017,000 in the same period in fiscal 2001. As a percentage of
total revenues, payroll and benefits increased to 30.6% in the first quarter of
fiscal 2002 from 29.3% in the same period of fiscal 2001. The Company
experienced an increase in payroll, as a percentage of sales, in both the full
service and the quick service segment. The increase as a percentage of sales in
the full service segment was mainly due to the decreased average weekly sales in
the Company's Grady's American Grill restaurants. The increase as a percent of
sales and in total dollars in the quick service segment was due to the purchase
of the Burger King restaurants in Grand Rapids, Michigan. The Company
experienced a $3,972,000 increase in payroll due to the addition of 41 Burger
King restaurants in Grand Rapids, Michigan.
Depreciation and amortization expense was $3,232,000 in the first quarter of
fiscal 2002 compared to $3,540,000 in the first quarter of fiscal 2001. As a
percentage of total restaurant sales, depreciation and amortization decreased to
4.0% for the first quarter of fiscal 2002 compared to 5.2% in the same period in
fiscal 2001. The decrease was mainly due to a $534,000 decrease at the Company's
Grady's division. The decrease was a direct result of the fiscal 2001 asset
impairment charge discussed above. This decrease was partially offset by
$289,000 increase in depreciation and amortization in the quick service segment
due to the addition of 41 Burger King restaurants in Grand Rapids, Michigan.
Page 19
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $20,151,000 in the first quarter of
fiscal 2002 compared to $16,827,000 in the same period of fiscal 2001. As a
percentage of total revenues, other restaurant operating expenses were 25.0% in
the first quarter of fiscal 2002 compared to 24.7% in the same period of fiscal
2001. The increase in other restaurant operating expenses as a percentage of
sales and in total dollars was due to the quick service segment incurring
$3,555,000 more in restaurant operating expenses related to the addition of 41
Burger King restaurants in Grand Rapids, Michigan.
Income from restaurant operations increased $819,000 to $9,478,000, or 11.9% of
revenues, in the first quarter of fiscal 2002 compared to $8,628,0000, or 12.6%
of revenues, in the comparable period of fiscal 2001. Income from restaurant
operations in the Company's quick service segment increased by $1,099,000 mainly
due to the addition of 41 Burger King restaurants in Grand Rapids, Michigan.
Income from restaurant operations in the full service segment decreased by
$280,000. The decrease was mainly due to decreased revenues at the Company's
Grady's American Grill restaurants.
General and administrative expenses increased $985,000 to $5,558,000, or 6.9% of
revenues, in the first quarter of fiscal 2002 compared to $4,573,0000, or 6.7%
of revenues, in the comparable period of fiscal 2001. The increase was mainly
because the Company incurred $459,000 in general and administrative expenses
related to the addition of 41 Burger King restaurants in Grand Rapids, Michigan.
The Company also incurred $285,000 of expense directly related to the BFBC Ltd.
Litigation. (See note 8)
The Company recorded expenses of $216,000 for facility closing costs in the
first quarter of fiscal 2001 versus none in the same period of fiscal 2002.
During the first quarter of fiscal 2001 the Company closed one Grady's American
Grill restaurant because the unit was not meeting the Company's performance
targets.
Amortization of intangibles, as a percentage of revenues, decreased to 0.2% for
the first quarter of fiscal 2002 compared to 0.4% for the same period in fiscal
2001. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
at the beginning of fiscal 2002. Under SFAS 142, amortization of goodwill was
discontinued. The Company had incurred $166,000 in goodwill amortization in the
first quarter of fiscal 2001. This decrease was partially offset by a $28,000
increase in trademark amortization due to the revision in the estimated useful
life.
Total other expenses, as a percentage of revenues, were 3.0% for the first
quarter of fiscal 2002 versus 4.5% during the comparable period in fiscal 2001.
The decrease was due to lower interest rates which reduced the Company's
interest expense in the first quarter of fiscal 2002 versus the same period in
fiscal 2001.
The provision for income taxes was $432,000 for the first quarter of fiscal 2002
versus $367,000 in the comparable period in fiscal 2001. The Company's effective
income tax rate was 31.5% in the first quarter of fiscal 2002 versus 74.6% in
the comparable period in fiscal 2001. The provision for income taxes in fiscal
2001 and fiscal 2002 consisted of the Company's estimated state tax expense.
Since the Company believes that the net operating loss carryforwards will be
available to offset any federal taxable income incurred, no federal provision
has been recorded in the first quarter of fiscal 2002.
For the first quarter of fiscal 2002, the Company reported net income of
$941,000 compared to net income of $125,000 for the first quarter of fiscal
2001.
Page 20
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for building or acquiring new
restaurants, replacing equipment and remodeling existing restaurants. The
Company has historically financed these activities using principally cash flows
from operations and its credit facilities. The Company's restaurants generate
cash immediately through sales. As is customary in the restaurant industry, the
Company does not have significant assets in the form of trade receivables or
inventory, and customary payment terms generally result in several weeks of
trade credit from its vendors. Therefore, the Company's current liabilities have
historically exceeded its current assets.
In the first quarter of fiscal 2002, cash provided by operating activities was
$5,866,000 compared to $2,958,000 in fiscal 2001. The increase in fiscal 2002
compared to fiscal 2001 was mainly due to the timing of cash disbursements,
which resulted in an increase in accounts payable and accrued liabilities of
$2,119,000 in fiscal 2002 versus a decrease in accounts payable and accrued
liabilities of $906,000 in fiscal 2001.
The Company had a net repayment of $3,000,000 under its revolving credit
agreement. As of February 17, 2002, the Company's revolving credit agreement has
an additional $14,475,000 available for future borrowings. The Company's average
borrowing rate on February 17, 2002, was 5.54%. The revolving credit agreement
is subject to certain restrictive covenants which require the Company, among
other things, to achieve agreed upon levels of cash flow. Under the revolving
credit agreement the Company's funded debt to consolidated cash flow ratio and
fixed charge coverage ratio requirements were 4.25 and 1.55, respectively, on
February 17, 2002. The Company was in compliance with these requirements with a
funded debt to consolidated cash flow ratio of 3.93 and a fixed charge coverage
ratio of 1.61. Should the Company experience an event of default, the Company
would need to seek the forbearance of its lenders by requesting waivers or
amendments to the covenants.
The Company did not repurchase any shares of stock during the first quarter of
fiscal 2002. The Company repurchased 736,073 shares of its common stock in the
open market in the first quarter of fiscal 2001 for $1,925,000. The Company does
not presently intend to repurchase shares due to the Company's significant
capital expenditure budget for fiscal 2002.
During the first quarter of fiscal 2002, the Company had $1,597,000 in capital
expenditures in connection with the opening of new restaurants and the
refurbishing of existing restaurants.
The Company's primary cash requirements in fiscal 2002 will be capital
expenditures in connection with the opening of new restaurants, remodeling of
existing restaurants, maintenance expenditures, and the reduction of debt under
the Company's debt agreements. During fiscal 2002, the Company anticipates
opening two new Burger King restaurants and two full service restaurants. The
Company also plans to replace three existing Burger King buildings with new
buildings at the same locations. The actual amount of the Company's cash
requirements for capital expenditures depends in part on the number of new
restaurants opened, whether the Company owns or leases new units and the actual
expense related to remodeling and maintenance of existing units. While the
Company's capital expenditures for fiscal 2002 are expected to range from
$16,000,000 to $18,000,000, if the Company has alternative uses or needs for its
cash, the Company believes it could delay such planned expenditures. A
significant delay in opening restaurants could cause a default in the Company's
development agreements if the Company were not able to obtain waivers from
Brinker and Burger King. In such event, the Company could lose its right to open
additional Chili's and Burger King restaurants and, in the case of Chili's, its
right to exclusivity in its markets. A default in either the Brinker or the
Burger King development agreements would have no impact on restaurants the
Company currently operates.
Page 21
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company has debt service requirements of approximately $1,337,000 in fiscal
2002, consisting primarily of the principal payments required under the mortgage
facility.
The Company has a $76,000,000 revolving credit agreement (the "Existing
Facility"). The Existing Facility executed with JP Morgan Chase Bank, as agent
for a group of six banks, provides for borrowings of up to $76,000,000 with
interest payable at the adjusted LIBOR rate plus a contractual spread. The
Existing Facility is collateralized by the stock of certain subsidiaries of the
Company, certain interests in the Company's franchise agreements with Brinker
and Burger King Corporation and substantially all of the Company's personal
property not pledged in the Mortgage Facility.
The Existing Facility contains restrictive covenants including maintenance of
certain prescribed debt and fixed charge coverage ratios, limitations on the
incurrence of additional indebtedness, limitations on consolidated capital
expenditures, cross-default provisions with other material agreements,
restrictions on the payment of dividends (other than stock dividends) and
limitations on the purchase or redemption of shares of the Company's capital
stock. These restrictions do not presently prohibit the Company from
repurchasing its capital stock.
The Existing Facility matures on October 31, 2002, at which time all amounts
outstanding thereunder are due. Accordingly, $60,135,000 has been classified as
a current liability as of February 17, 2002. As of April 3, 2002, the Company
had received commitments from JP Morgan Chase Bank, as agent, and five other
banks to refinance the Existing Facility with a $60,000,000 revolving credit
agreement (the "Replacement Facility"). The Replacement Facility, if
consummated, will provide for borrowings at the adjusted LIBOR rate plus a
contractual spread which compares to the Existing Facility as follows:
Ratio of Funded Debt
to Cash Flow LIBOR Margin
- ------------ ------------
Existing Facility New Facility
----------------- ------------
4.50 <= X 3.00% 3.00%
4.00 <= X 2.75% 3.00%
3.50 <= X 2.50% 3.00%
3.00 <= X 2.25% 2.75%
2.50 <= X 1.75% 2.25%
X < 2.50 1.25% 1.75%
Page 22
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Replacement Facility will also contain covenants requiring maintenance of
funded debt to cash flow and fixed charge coverage ratios which compare to the
Existing Facility as follows:
COVENANT EXISTING FACILITY NEW FACILITY
- -------- ----------------- ------------
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO
- ------------------
Fiscal 2002
Q1 4.25 N/A
Q2 4.25 4.00
Q3 3.75 4.00
Q4 3.75 4.00
Fiscal 2003
Q1 through Q3 N/A 4.00
Q4 N/A 3.75
Fiscal 2004
Q1 through Q3 N/A 3.75
Q4 N/A 3.50
Fiscal 2005 N/A 3.50
Q1 through Q2
Thereafter N/A 3.00
FIXED CHARGE COVERAGE RATIO 1.55 1.50
The Replacement Facility will also contain certain other restrictive covenants,
terms and conditions that will be substantially the same as those that are
presently contained in the Existing Facility. The Replacement Facility
contemplates the completion of definitive documentation, perfection of security
interests and the closing of the sale of nine of the Company's Grady's American
Grill restaurants prior to its effectiveness. (See Part I, Item 2).
The Company expects the Replacement Facility to be effective in the third
quarter of fiscal 2002 but there can be no assurance thereof. If the Company is
not able to implement the Replacement Facility, the Company will have to
consider financing alternatives which might include, among others, negotiating
an extension of the Existing Facility or a new facility with its existing bank
group, either of which may be on less favorable terms, finding a new commercial
lender or attempting to identify alternative sources of debt or equity capital.
The inability of the Company to replace the Existing Facility agreement would
have a material adverse effect on the Company.
Page 23
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company does not believe that its current business plans will be impeded by
its leverage. Should the Company's leverage impede its business plan, the
Company believes it could reduce its capital spending and/or recapitalize its
balance sheet. Its principal opportunities to reduce capital spending would be
to scale back its new unit development and/or its planned remodel budget. The
Company believes its principal opportunity to recapitalize its balance sheet
would be to enter into a sale-leaseback transaction involving certain of
its restaurant properties. Although the Company prefers to own its real estate,
in addition to the properties in the Mortgage Facility, the Company currently
owns 26 restaurants and has ground leases for 12 others that might be suitable
for such a transaction.
This report contains certain forward-looking statements, including statements
about the Company's development plans, that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: the availability and cost of suitable locations
for new restaurants; the availability and cost of capital to the Company; the
ability of the Company to consummate the agreement for the purchase of NBO's
shares; the ability of Bruegger's Corporation to make any payments to the
Company pursuant to the Subordinated Note; the ability of the Company to develop
and operate its restaurants; the hiring, training and retention of skilled
corporate and restaurant management and other restaurant personnel; the
integration and assimilation of acquired concepts; the overall success of the
Company's franchisors; the ability to obtain the necessary government approvals
and third-party consents; and changes in governmental regulations, including
increases in the minimum wage.
Page 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 8 to the unaudited consolidated financial statements of the Company
included in Part I of this report is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEMS 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On March 12, 2002, the Company held its annual meeting of shareholders. At the
meeting, the shareholders elected the following directors by the vote indicated
to serve until the year 2004 annual meeting of shareholders.
For Withheld
---------- --------
Bruce M. Jacobson 10,712,610 145,428
Christopher J. Murphy, III 10,708,380 149,658
In addition, the following directors continue in office until the annual meeting
of shareholders in the year indicated:
Term Expires
- ------------
Daniel B. Fitzpatrick 2003
Philip J. Faccenda 2003
James K. Fitzpatrick 2004
Ezra H. Friedlander 2004
Steven M. Lewis 2004
PricewaterhouseCoopers LLP was approved as auditors for the Company for 2002 by
the following vote:
For 10,729,298; Against 106,655; Abstentions 22,085
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining, Inc.
(Registrant)
Date: April 3, 2002 By: /s/ Christopher L. Collier
--------------------------------
Vice President of Finance
(Principal financial officer)
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