SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended May 9, 2004
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)
(574) 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 ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ( ) No (X)
The number of shares of the registrant's common stock outstanding as of June 18,
2004 was 11,596,781.
Page 1
Explanatory Note
This Quarterly Report on Form 10-Q/A is being filed to revise the financial
statements for the twelve and twenty-eight weeks ended May 9, 2004 and May 11,
2003 contained in Part I, Item 1 hereof to correct an error in the allocation of
tax expense (benefit) between continuing operations and discontinued operations.
This change did not affect the Company's reported financial position or net
income but did affect the Company's income tax provision, net income (loss) from
continuing operations and net income (loss) from discontinued operations for the
twelve and twenty-eight weeks ended May 9, 2004 and May 11, 2003. The change
also affected the previously reported allocation of basic and diluted net income
per share between continuing operations and discontinued operations for the
twelve and twenty-eight weeks ended May 9, 2004 and May 11, 2003.
Accordingly, the Company has revised its financial statements for the twelve and
twenty-eight weeks ended May 9, 2004 and May 11, 2003 and is filing this
Amendment No. 2 to Form 10-Q to reflect the proper income tax provision, income
(loss) from continuing operations, income (loss) from discontinued operations,
basic and diluted net income per share from continuing operations and basic and
diluted net income per share from discontinued operations. This Quarterly Report
on Form 10-Q/A amends and restates Item 1 of Part I, Item 2 of Part I and Item 4
of Part I of the original Quarterly Report on Form 10-Q. All other Items in Part
I and Part II are included in their entirety. Other than the changes to reflect
the adjustments and changes made in the Amendment No. 1 to this Form 10-Q, the
Company has not updated the information contained herein to reflect events and
transactions occurring subsequent to the date of the Form 10-Q filing on June
18, 2004. All information contained in this amended report is subject to
updating and supplementing as provided in the Company's reports filed with the
Securities and Exchange Commission subsequent to the date of the original Form
10-Q filing date.
Page 2
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 9, 2004
INDEX
Page
----
PART I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 34
Item 4. Controls and Procedures 34
Part II- Other Information
Item 1. Legal Proceedings 35
Item 2. Changes in Securities 35
Item 3. Defaults upon Senior Securities 35
Item 4. Submission of Matters to Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 36
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Twelve Weeks Ended Twenty-Eight Weeks Ended
May 9, May 11, May 9, May 11,
2004 2003 2004 2003
----------- ----------- ----------- -----------
As Restated As Restated As Restated As Restated
(See Notes 1A and 1B) (See Notes 1A and 1B)
Revenues:
Burger King $ 26,578 $ 25,452 $ 58,885 $ 59,393
Chili's Grill & Bar 20,346 18,616 45,153 42,132
Italian Dining Division 3,865 4,163 8,892 9,808
Grady's American Grill 1,437 1,459 3,360 3,501
----------- ----------- ----------- -----------
Total revenues 52,226 49,690 116,290 114,834
----------- ----------- ----------- -----------
Operating expenses:
Restaurant operating expenses:
Food and beverage 14,270 13,450 31,856 30,850
Payroll and benefits 15,114 14,293 33,894 33,630
Depreciation and amortization 2,101 2,288 4,968 5,362
Other operating expenses 13,605 12,685 30,421 30,077
----------- ----------- ----------- -----------
Total restaurant operating expenses 45,090 42,716 101,139 99,919
----------- ----------- ----------- -----------
Income from restaurant operations 7,136 6,974 15,151 14,915
General and administrative 3,663 4,041 8,678 8,980
Amortization of intangibles 37 87 119 203
----------- ----------- ----------- -----------
Operating income 3,436 2,846 6,354 5,732
----------- ----------- ----------- -----------
Other income (expense):
Recovery of note receivable - 3,459 - 3,459
Interest expense (1,464) (1,690) (3,523) (3,994)
Loss on sale of property
and equipment (28) (1) (75) (10)
Minority interest in earnings (573) (587) (1,054) (1,370)
Other income, net 70 257 154 750
----------- ----------- ----------- -----------
Total other income (expense), net (1,995) 1,438 (4,498) (1,165)
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes 1,441 4,284 1,856 4,567
Income tax provision 570 1,483 859 1,793
----------- ----------- ----------- -----------
Income from continuing operations 871 2,801 997 2,774
Loss from discontinued operations (617) (3,081) (465) (2,875)
----------- ----------- ----------- -----------
Net income (loss) $ 254 $ (280) $ 532 $ (101)
=========== =========== =========== ===========
Basic net income (loss) per share:
Continuing operations 0.08 0.25 0.10 0.24
Discontinued operations (0.06) (0.27) (.05) (0.25)
----------- ----------- ----------- -----------
Basic net income (loss) per share $ 0.02 $ (0.02) $ 0.05 $ (0.01)
=========== =========== =========== ===========
Diluted net income (loss) per share:
Continuing operations 0.08 0.25 0.10 0.24
Discontinued operations (0.06) (0.27) (0.05) (0.25)
----------- ----------- ----------- -----------
Diluted net income (loss) per share $ 0.02 $ (0.02) $ 0.05 $ (0.01)
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 10,163 11,311 10,163 11,311
=========== =========== =========== ===========
Diluted 10,189 11,316 10,193 11,327
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
Page 4
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
May 9, October 26,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,265 $ 1,724
Accounts receivable 1,706 1,723
Inventories 1,823 1,670
Deferred income taxes 2,710 2,251
Assets held for sale 12 10,737
Other current assets 1,769 2,192
----------- -----------
Total current assets 9,285 20,297
----------- -----------
Property and equipment, net 109,593 107,910
----------- -----------
Other assets:
Deferred income taxes 6,207 6,749
Trademarks, net 495 1,285
Franchise fees and development fees, net 8,440 8,801
Goodwill 7,960 7,960
Liquor licenses, net 2,884 2,820
Other 3,567 3,454
----------- -----------
Total other assets 29,553 31,069
----------- -----------
Total assets $ 148,431 $ 159,276
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,151 $ 10,055
Accounts payable 6,717 6,182
Accrued liabilities 21,761 19,520
----------- -----------
Total current liabilities 37,629 35,757
Long-term debt 72,638 85,335
----------- -----------
Total liabilities 110,267 121,092
----------- -----------
Minority interest 13,662 14,272
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued - -
Common stock, without par value: 50,000,000
shares authorized; 12,955,781 and 12,955,781
shares issued, respectively 28 28
Additional paid-in capital 237,402 237,402
Accumulated deficit (205,982) (206,514)
Unearned compensation (517) (575)
----------- -----------
30,931 30,341
Treasury stock, at cost, 2,508,587
and 2,508,587 shares, respectively (6,429) (6,429)
----------- -----------
Total stockholders' equity 24,502 23,912
----------- -----------
Total liabilities and stockholders' equity $ 148,431 $ 159,276
=========== ===========
See Notes to Consolidated Financial Statements.
Page 5
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Twenty-Eight Weeks Ended
May 9, May 11,
2004 2003
As Restated As Restated
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 532 $ (101)
Loss from discontinued operations 465 2,875
Minority interest in earnings 1,054 1,370
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 4,739 5,111
Amortization of other assets 775 865
Loss on sale of property and equipment 75 10
Deferred income taxes 83 -
Amortization of unearned compensation 58 47
Changes in current assets and current liabilities:
Net decrease (increase) in current assets 287 (169)
Net increase (decrease) in current liabilities 2,136 (3,539)
------------ ------------
Net cash provided by operating activities 10,204 6,469
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (3,929) (2,698)
Proceeds from the sales of property and equipment 8,635 581
Purchase of other assets (472) (199)
Other - 300
------------ ------------
Net cash provided by (used) for investing activities 4,234 (2,016)
------------ ------------
Cash flows from financing activities:
Borrowings of long-term debt 28,271 31,043
Repayment of long-term debt (41,872) (33,705)
Cash distributions to minority interest
in consolidated partnerships (1,664) (3,683)
------------ ------------
Net cash used by financing activities (15,265) (6,345)
------------ ------------
Cash provided by discontinued operations 368 2,020
------------ ------------
Net increase in cash and cash equivalents (459) 128
Cash and cash equivalents, beginning of period 1,724 1,174
------------ ------------
Cash and cash equivalents, end of period $ 1,265 $ 1,302
============ ============
See Notes to Consolidated Financial Statements.
Page 6
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Note 1: Description 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(R) ("Chili's") 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(TM) Italian Kitchen ("Papa Vino's"). The Company operates one of its
Grady's American Grill(R) restaurants under the tradename Porterhouse Steaks and
Seafood(TM) and one under the tradename Regas Grill(R). As of May 9, 2004, the
Company operated 174 restaurants, including 118 Burger Kings, 38 Chili's Grill &
Bar restaurants, 7 Grady's American Grill restaurants, six Papa Vino's, three
Spageddies, one Regas Grill(R) and one Porterhouse Steak and Seafood
restaurant(TM).
Note 1A: Restatement of Earnings Per Share
The Company has restated its financial statements for the twelve and
twenty-eight weeks ended May 9, 2004 to correct an error in the calculation of
weighted average shares outstanding. This error did not affect the Company's
reported financial position or results of operations including net income but
did affect the calculation of basic and diluted net income (loss) per share for
each reporting period.
Specifically, the shares of the Company's common stock held by an affiliated
real estate entity should have been excluded from the calculation of weighted
average shares outstanding in the Company's financial statements for the twelve
and the twenty-eight weeks ended May 9, 2004. The affiliated real estate entity
leases certain Burger King restaurants to the Company and isowned by the
Company's Chairman and Chief Executive Officer. Effective October 27, 2003, the
Company has retroactively consolidated the affiliated real estate entity
pursuant to the guidance in FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities", as amended (FIN 46R). The Company appropriately
reflected the common stock held by the affiliated real estate entity as treasury
stock on its consolidated balance sheets at October 26, 2003 and May 9, 2004.
The Company has adjusted the amounts previously reported for the twenty-eight
weeks ended May 9, 2004 in Note 2 with respect to the effect of the change in
the consolidation policy for adoption of FIN 46 on basic and diluted net income
(loss) per share, and the pro forma basic and diluted net income(loss) per share
had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value method as prescribed by SFAS 123. There were
no changes in basic or diluted net income (loss)for these items for the twelve
weeks ended May 9, 2004.
The changes are as follows:
Page 7
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Twelve Weeks Ended May 9, 2004
As Previously
As Restated Reported
-------------- --------------
Basic net income (loss) per share:
Continuing operations $ 0.11 $ 0.10
Discontinued operations (0.09) (0.08)
-------------- --------------
Basic net income (loss) per share $ 0.02 $ 0.02
============== ==============
Diluted net income (loss) per share:
Continuing operations $ 0.11 $ 0.10
Discontinued operations (0.09) (0.08)
-------------- --------------
Diluted net income (loss) per share $ 0.02 $ 0.02
============== ==============
Weighted average shares outstanding:
Basic 10,163,000 11,311,000
Diluted 10,189,000 11,337,000
Basic and diluted net income per
share from discontinued
operations (See Note 3) $ (0.09) $ (0.08)
Twenty-Eight Weeks Ended May 9, 2004
As Previously
As Restated Reported
-------------- --------------
Basic net income (loss) per share:
Continuing operations $ 0.13 $ 0.11
Discontinued operations (0.08) (0.07)
-------------- --------------
Basic net income (loss) per share $ 0.05 $ 0.04
============== ==============
Diluted net income (loss) per share:
Continuing operations $ 0.13 $ 0.11
Discontinued operations (0.08) (0.07)
-------------- --------------
Diluted net income (loss) per share $ 0.05 $ 0.04
============== ==============
Weighted average shares outstanding:
Basic 10,163,000 11,311,000
Diluted 10,193,000 11,341,000
Basic and diluted net income (loss)
per share-Change in consolidation
policy (See Note 2) $ 0.01 $ 0.00
Basic and diluted net income (loss)
Per common share, SFAS 123 pro forma
(see Note 2) $ 0.05 $ 0.04
Page 8
Note 1B: Restatement of Tax Expense (Benefit)
This Quarterly Report on Form 10-Q/A is being filed to revise the financial
statements for the twelve and twenty-eight weeks ended May 9, 2004 and May 11,
2003 contained in Part I, Item 1 hereof to correct an error in the allocation of
tax expense (benefit) between continuing operations and discontinued operations
related to the closure or sale of certain Grady's American Grill restaurants in
fiscal 2004 as discussed in Note 3. This change did not affect the Company's
reported financial position or net income but did affect the Company's income
tax provision, net income (loss) from continuing operations and net income
(loss) from discontinued operations for the twelve and twenty-eight weeks ended
May 9, 2004. The change also affected the allocation of basic and diluted net
income per share between continuing operations and discontinued operations and
basic and diluted net income per share from continuing operations and basic and
diluted net income per share from discontinued operations for the twelve and
twenty-eight weeks ended May 9, 2004 and May 11, 2003.
Accordingly, the Company has revised its financial statements for the twelve and
twenty-eight weeks ended May 9, 2004 and May 11, 2003 and is filing this
Amendment No. 2 to Form 10-Q to reflect the proper income tax provision, income
(loss) from continuing operations, income (loss) from discontinued operations,
basic and diluted net income per share from continuing operations and basic and
diluted net income per share from discontinued operations. This Quarterly Report
on Form 10-Q/A amends and restates Item 1 of Part I, Item 2 of Part I and Item 4
of Part I of the original Quarterly Report on Form 10-Q. All other Items in Part
I and Part II are included in their entirety. Other than the changes to reflect
the adjustments and changes made in the Amendment No. 1 to this Form 10-Q, the
Company has not updated the information contained herein to reflect events and
transactions occurring subsequent to the date of the Form 10-Q filing on June
18, 2004. All information contained in this amended report is subject to
updating and supplementing as provided in the Company's reports filed with the
Securities and Exchange Commission subsequent to the date of the original Form
10-Q filing date.
The changes are as follows:
The twelve and twenty-eight weeks ended May 9, 2004
Twelve Weeks Ended Twenty-Eight Weeks Ended
As Previously As Previously
As restated Restated As restated Restated
-------------- -------------- -------------- --------------
Income from continuing operations
before income taxes 1,441 1,441 1,856 1,856
Income tax provision 570 287 859 559
-------------- -------------- -------------- --------------
Income from continuing operations 871 1,154 997 1,297
Loss from discontinued operations (617) (900) (465) (765)
-------------- -------------- -------------- --------------
Net income (loss) $ 254 $ 254 $ 532 $ 532
============== ============== ============== ==============
Basic net income (loss) per share:
Continuing operations 0.08 0.11 0.10 0.13
Discontinued operations (0.06) (0.09) (0.05) (0.08)
-------------- -------------- -------------- --------------
Basic net income (loss) per share $ 0.02 $ 0.02 $ 0.05 $ 0.05
============== ============== ============== ==============
Diluted net income (loss) per share:
Continuing operations 0.08 0.11 0.10 0.13
Discontinued operations (0.06) (0.09) (0.05) (0.08)
-------------- -------------- -------------- --------------
Diluted net income (loss) per share $ 0.02 $ 0.02 $ 0.05 $ 0.05
============== ============== ============== ==============
Page 9
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
The twelve and twenty-eight weeks ended May 11, 2003
Twelve Weeks Ended Twenty-Eight Weeks Ended
As Previously As Previously
As restated Restated As restated Restated
------------- ------------- ------------- -------------
Income from continuing operations
before income taxes 4,284 4,284 4,567 4,567
Income tax provision 1,483 256 1,793 597
------------- ------------- ------------- -------------
Income from continuing operations 2,801 4,028 2,774 3,970
Loss from discontinued operations (3,081) (4,308) (2,875) (4,071)
------------- ------------- ------------- -------------
Net income (loss) $ (280) $ (280) $ (101) $ (101)
============= ============= ============= =============
Basic net income (loss) per share:
Continuing operations 0.25 0.36 0.24 0.35
Discontinued operations (0.27) (0.38) (.25) (0.36)
------------- ------------- ------------- -------------
Basic net income (loss) per share $ (0.02) $ (0.02) $ (0.01) $ (0.01)
============= ============= ============= =============
Diluted net income (loss) per share:
Continuing operations 0.25 0.36 0.24 0.35
Discontinued operations (0.27) (0.38) (0.25) (0.36)
------------- ------------- ------------- -------------
Diluted net income (loss) per share $ (0.02) $ (0.02) $ (0.01) $ (0.01)
============= ============= ============= =============
Note 2: Summary of Significant Accounting Policies.
Basis of Presentation
During the first quarter of 2004, the Company adopted FASB Interpretation No.
46, "Consolidation of Variable Interest Entities", as revised by the FASB in
December 2003 (FIN 46R). As a result of the adoption of this Interpretation, the
Company changed its consolidation policy whereby the accompanying consolidated
financial statements now include the accounts of Quality Dining, Inc., its
wholly owned subsidiaries, and certain related party affiliates that are
variable interest entities. Previously, the consolidated financial statements
included only the accounts of Quality Dining, Inc., and its wholly owned
subsidiaries. Prior periods have been restated to reflect this change.
The Company determined that certain affiliated real estate partnerships from
which the Company leases 42 of its Burger King restaurants and that are
substantially owned by certain directors, officers, and stockholders of the
Company meet the definition of variable interest entities as defined in FIN 46R
("VIE's"). Furthermore, the Company has determined that it is the primary
beneficiary of these VIE's, based on the criteria in FIN 46R. The Company holds
no direct ownership or voting interest in the VIE's. Additionally, the creditors
and beneficial interest holders of the VIE's have no recourse to the general
credit of the Company.
The assets of the VIE's, which consist primarily of property and equipment,
totaled $17,873,000 and $18,599,000 at May 9, 2004 and October 26, 2003,
respectively. The liabilities of the VIE's, which consist primarily of bank
debt, totaled $7,263,000 and $7,493,000 at May 9, 2004 and October 26, 2003,
respectively. Certain of the assets of the VIE's serve as collateral for the
debt obligations. Because certain of these assets were previously recorded as
capital leases by the Company, with a resulting lease obligation, the
consolidation of the VIE's served to increase total assets as reported
Page 10
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
by the Company by $13,291,000 and $13,869,000 and total liabilities by
$3,729,000 and $3,697,000 at May 9, 2004 and October 26, 2003, respectively.
Additionally, the consolidation of the VIE's increased treasury stock by
$2,806,000 at May 9, 2004 and October 26, 2003, as one of the VIE's owns common
stock of the Company. The change had no impact on reported net income or
earnings per share for the twenty-eight weeks ended May 9, 2004 and May 11,
2003.
The following table presents the effect of the consolidation of the VIE's on
depreciation and amortization expense, other operating expenses, general and
administrative expense, interest expense and other income (expense) for the
twelve weeks and twenty-eight weeks ended May 9, 2004 and May 11, 2003:
12-Weeks Ended 28-Weeks Ended
--------------------- ---------------------
May 9, May 11, May 9, May 11,
(In thousands) 2004 2003 2004 2003
-------- -------- -------- --------
Depreciation and amortization expense $ 2,070 $ 2,255 $ 4,903 $ 5,285
Change in consolidation policy 31 33 65 77
-------- -------- -------- --------
Consolidated depreciation and
amortization $ 2,101 $ 2,288 $ 4,968 $ 5,362
======== ======== ======== ========
Other operating expenses $ 14,172 $ 13,223 $ 31,706 $ 31,314
Change in consolidation policy (567) (538) (1,285) (1,237)
-------- -------- -------- --------
Consolidated other operating expenses $ 13,605 $ 12,685 $ 30,421 $ 30,077
======== ======== ======== ========
General and administrative expenses $ 3,647 $ 4,031 $ 8,660 $ 8,937
Change in consolidation policy 16 10 18 43
-------- -------- -------- --------
Consolidated general and administrative
Expenses $ 3,663 $ 4,041 $ 8,678 $ 8,980
======== ======== ======== ========
Interest expense $ 1,517 $ 1,782 $ 3,646 $ 4,207
Change in consolidation policy (53) (92) (123) (213)
-------- -------- -------- --------
Consolidated interest expense $ 1,464 $ 1,690 $ 3,523 $ 3,994
======== ======== ======== ========
Other income (expense) $ 70 $ 257 $ 425 $ 710
Change in consolidation policy - - (271) 40
-------- -------- -------- --------
Consolidated other income (expense) $ 70 $ 257 $ 154 $ 750
======== ======== ======== ========
All significant intercompany balances and transactions have been eliminated.
Page 11
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
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
28-week period ended May 9, 2004 are not necessarily indicative of the results
that may be expected for the 53-week year ending October 31, 2004.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 26, 2003 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
As a result of the adoption of Statement of Financial Accounting Standard
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company has classified the revenues, expenses and related assets
and liabilities of four Grady's American Grill restaurants that were sold in
2003, one Grady's American Grill restaurant that was sold and one that was
closed in fiscal 2004, six Grady's American Grill restaurants that the Company
sold and leased back in fiscal 2004 and one Grady's American Grill restaurant
that was held for sale at the end of the second quarter of fiscal 2004, as
discontinued operations in the accompanying consolidated financial statements.
Intangible Assets
Franchise Fees and Development Fees - The Company's Burger King and Chili's
franchise agreements require the payment of a franchise fee for each restaurant
opened. Franchise fees are deferred and amortized on the straight-line method
over the lives of the respective franchise agreements. Development fees paid to
Brinker were deferred and expensed in the period the related restaurants were
opened. Franchise fees are being amortized on a straight-line basis, generally
over 20 years.
Page 12
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Trademarks - The Company owns the trademarks for its Grady's American Grill,
Spageddies Italian Kitchen, Papa Vino's Italian Kitchen, Regas Grill and
Porterhouse Steaks and Seafood. During the second quarter of fiscal 2003 the
Company recorded an impairment charge of $4,411,000, consisting of a reduction
in the net book value of the Grady's American Grill trademark of $2,882,000 and
in the net book value of certain fixed assets of $1,529,000. The net book value
of the Grady's American Grill trademark was $416,000 as of May 9, 2004. During
the second quarter of fiscal 2003 the Company reviewed the useful life of the
Grady's American Grill trademark and determined that the remaining useful life
should be reduced from 15 years to five years. In determining the fair value of
the impaired assets, the Company relied primarily on the discounted cash flow
analyses that incorporated an investment horizon of five years and utilized a
risk adjusted discount factor.
Below are the gross carrying amount and accumulated amortization of the
trademarks, franchise fees and development fees as of May 9, 2004.
As of May 9, 2004
--------------------------------------
Amortized Intangible Assets Net
- --------------------------- Gross Carrying Accumulated Book
(Dollars in thousands) Amount Amortization Value
-------------- ------------ -------
Amortized intangible assets:
Trademarks $ 2,050 $ (1,555) $ 495
Franchise fees and development fees 14,824 (6,384) 8,440
-------- -------- -------
Total $ 16,874 $ (7,939) $ 8,935
======== ======== =======
As of October 26, 2003
--------------------------------------
Net
Gross Carrying Accumulated Book
Amount Amortization Value
-------------- ------------ -------
Amortized intangible assets:
Trademarks $ 2,961 $ (1,676) $ 1,285
Franchise fees and development fees 14,782 (5,981) 8,801
-------- -------- -------
Total $ 17,743 $ (7,657) $10,086
======== ======== =======
The Company's intangible asset amortization expense for the twenty-eight week
period ending May 9, 2004 was $522,000 compared to $600,000 for the comparable
period in fiscal 2003. The estimated annual intangible amortization expense for
each of the next five years is as follows:
Year one $ 851,000
Year two $ 851,000
Year three $ 851,000
Year four $ 851,000
Year five $ 760,000
Page 13
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Goodwill - 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
restaurants 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. The Company has two operating segments with goodwill - Chili's Grill
& Bar and Burger King. The Company had a total of $7,960,000 in goodwill as of
May 9, 2004 and October 26, 2003. The Chili's Grill and Bar operating segment
had $6,902,000 of goodwill and the Burger King operating segment had $1,058,000
of goodwill.
Stock Options
The Company accounts for all of its stock-based compensation awards in
accordance with APB Opinion No. 25 which requires compensation cost to be
recognized based on the excess, if any, between the quoted market price of the
stock at the date of grant and the amount an employee must pay to acquire the
stock. Under this method, no compensation cost has been recognized for stock
option awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value method as prescribed by SFAS 123, the
Company's net earnings (loss) and net earnings (loss) per share would have been
the pro forma amounts indicated below:
Twelve Twenty-Eight
Weeks Ended Weeks Ended
May 9, May 11, May 9, May 11,
2004 2003 2004 2003
------- ------- ------- -------
As
Restated
(See Note 1A)
(In thousands, except per share amounts)
- ---------------------------------------
Net income (loss), as reported $ 254 $ (280) $ 532 $ (101)
Deduct: Total stock option based employee
compensation expense determined by using
the Black-Scholes option pricing model,
net of related tax effects (7) (8) (16) (19)
------- ------- ------- -------
Net income (loss), pro forma $ 247 $ (288) $ 516 $ (120)
======= ======= ======= =======
Basic and diluted net income (loss)
per common share, as reported $ 0.02 $ (0.02) $ 0.05 $ (0.01)
======= ======= ======= =======
Basic and diluted net income (loss)
per common share, pro forma $ 0.02 $ (0.03) $ 0.05 $ (0.01)
======= ======= ======= =======
Page 14
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Note 3: Acquisitions and Dispositions.
During the first twenty-eight weeks of fiscal 2004, the Company received net
proceeds of $7,571,000 from a sale of seven Grady's American Grill restaurants.
The Company recorded a loss in discontinued operations of $886,000 related to
these sales in fiscal 2004. Six of the restaurants sold were sale-leaseback
transactions. In each of the six sale-leaseback transactions, the Company's
lease obligations extend for less than one year.
The Company purchased five existing Burger King restaurants from a Burger King
franchisee in the third quarter of fiscal 2004 for $1,150,000
During fiscal 2003, the Company sold four Grady's American Grill restaurants for
net proceeds of $4,779,000. The Company recorded a $1,160,000 gain in
discontinued operations related to these sales in fiscal 2003.
As discussed in Note 2, discontinued operations includes the revenues and
expenses of the four Grady's American Grill restaurants that were sold in fiscal
2003, the seven restaurants sold and one restaurant closed in the first
twenty-eight weeks of fiscal 2004 and the one restaurant that was being held for
sale as of May 9, 2004. The decision to dispose of the locations reflects the
Company's ongoing process of evaluating the performance of the Grady's American
Grill restaurants and using the proceeds from dispositions to reduce debt.
Assets held for sale includes restaurant equipment totaling $12,000 as of May 9,
2004.
Page 15
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Net loss from discontinued operations for the periods ended May 9, 2004, and May
11, 2003 were made up of the following components:
Twelve Twenty-Eight
Weeks Ended Weeks Ended
May 9, May 11, May 9, May 11,
2004 2003 2004 2003
----------- ----------- ----------- -----------
As Restated As Restated As Restated As Restated
(In thousands, except per share amounts) (See Note 1B) (See Note 1B)
- ----------------------------------------
Revenue discontinued operations $ 2,140 $ 2,272 $ 5,779 $ 10,487
Income discontinued restaurant operations 13 273 140 529
Asset impairment and facility closing
expense (905) (4,572) (886) (4,578)
----------- ----------- ----------- -----------
Loss before taxes (892) (4,299) (746) (4,049)
Income tax provision 275 1,218 281 1,174
----------- ----------- ----------- -----------
Loss from discontinued operations $ (617) $ (3,081) $ (465) $ (2,875)
=========== =========== =========== ===========
Basic and diluted net income per
share from discontinued operations $ (0.06) $ (0.27) $ (0.05) $ (0.25)
=========== =========== =========== ===========
Note 4: Commitments.
The Company is self-insured for a portion of its employee health care costs. The
Company is liable for medical claims up to $125,000 per eligible employee
annually, and aggregate annual claims up to approximately $3,160,000. The
aggregate annual deductible is determined by the number of eligible covered
employees during the year and the coverage they elect.
The Company is self-insured with respect to any worker's compensation claims not
covered by insurance. The Company maintains a $250,000 per occurrence deductible
and is liable for aggregate claims up to $2,400,000 for the twelve-month period
beginning September 1, 2003 and ending August 31, 2004.
The Company is self-insured with respect to any general liability claims below
the Company's self-insured retention of $150,000 per occurrence for the
twelve-month period beginning September 1, 2003 and ending August 31, 2004.
As of May 9, 2004, the Company has accrued $4,065,000 for the estimated expense
for its self-insured insurance plans. These accruals require management to make
significant estimates and assumptions. Actual results could differ from
management's estimates.
At May 9, 2004, the Company had commitments aggregating $798,000 for the
construction of restaurants.
The Company is involved in various legal proceedings incidental to the conduct
of its business, including employment discrimination claims. Based 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 results of operations but there can be no assurance thereof.
Page 16
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Note 5: Debt Instruments.
As of May 9, 2004, the Company had a financing package totaling $109,066,000,
consisting of a $60,000,000 revolving credit agreement (the "Bank Facility") and
a $49,066,000 mortgage facility (the "Mortgage Facility"), as described below.
The Mortgage Facility currently includes 34 separate mortgage notes, with
initial 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, financial covenants that require the Company to maintain
a consolidated fixed charge coverage ratio of at least 1.30 for each of six
subsets of the financed properties.
The Company was not in compliance with the required consolidated fixed charge
coverage ratio for two of the subsets of the financed properties as of October
26, 2003. Both of these subsets are comprised solely of Burger King restaurants
and had fixed charge coverage ratios of 1.11 and 1.26 as of October 26, 2003.
The Company sought and obtained waivers of these covenant defaults from the
mortgage lenders through November 28, 2004. If the Company is not in compliance
with these covenants as of November 28, 2004, the Company will most likely seek
additional waivers. The Company believes it would be able to obtain such waivers
but there can be no assurance thereof. If the Company is unable to obtain such
waivers it is contractually entitled to pre-pay the outstanding balances under
one or more of the separate mortgage notes such that the remaining properties in
the subsets would meet the required ratio. However, any such prepayments would
be subject to prepayment premiums and to the Company's ability to maintain its
compliance with the financial covenants in its Bank Facility. Alternatively, the
Company is contractually entitled to substitute one or more better performing
restaurants for under-performing restaurants such that the reconstituted subsets
of properties would meet the required ratio. However, any such substitutions
would require the consent of the lenders in the Bank Facility. For these
reasons, the Company believes that its rights to prepay mortgage notes or
substitute properties may be impractical depending on the circumstances existing
at the time.
On June 10, 2002, the Company refinanced its Bank Facility with a $60,000,000
revolving credit agreement with JP Morgan Chase Bank, as agent, and four other
banks. The Bank 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 Bank 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.
Page 17
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
The Bank Facility provides for borrowings at the adjusted LIBOR rate plus a
contractual spread which is as follows:
RATIO OF FUNDED DEBT
TO CASH FLOW LIBOR MARGIN
- ------------------------------------------------ ------------
Greater than or equal to 3.50 3.00%
Less than 3.5x but greater than or equal to 3.00 2.75%
Less than 3.0x but greater than or equal to 2.5x 2.25%
Less than 2.5x 1.75%
The Bank Facility also contains covenants requiring maintenance of funded debt
to cash flow and fixed charge coverage ratios as follows:
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO COVENANT
-------------------- ----------
Fiscal 2003
Q1 through Q3 4.00
Q4 3.75
Fiscal 2004
Q1 through Q3 3.75
Q4 3.50
Fiscal 2005
Q1 through Q2 3.50
Thereafter 3.00
FIXED CHARGE COVERAGE RATIO 1.50
The Company's funded debt to consolidated cash flow ratio may not exceed 3.75
through the third quarter of fiscal 2004 and 3.50 by the end of fiscal 2004. The
Company's funded debt to consolidated cash flow ratio on May 9, 2004 was 3.33.
If the Company does not maintain the required funded debt to consolidated cash
flow ratio, that would constitute an event of default under the Bank Facility.
The Company would then need to seek waivers from its lenders or amendments to
the covenants. If the Company was unable to obtain waivers from its lenders or
amendments to the covenants the Company would be in default under the Bank
Facility. During continuance of an event of default, the Company would be
subject to a post-default interest rate under the Bank Facility that increases
the otherwise effective interest rate by 1.50%. In addition to the right to
declare all obligations immediately due and payable, the Bank Facility also has
additional rights including, among other things, the right to sell any of the
collateral securing the Company's obligations under the Bank Facility. In the
event the Company's obligations under the Bank Facility become immediately due
and payable the Company does not have sufficient liquidity to satisfy these
obligations and it is likely that the Company would be forced to seek protection
from its creditors. Such events would also constitute a default under the
Company's franchise agreements with Brinker and Burger King Corporation.
Page 18
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Note 6: Net Income Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share is based on the weighted average number of common shares outstanding plus
all potential dilutive common shares outstanding. For all years presented, the
difference between basic and dilutive shares represents options on common stock.
For the twelve and twenty-eight week periods ended May 9, 2004, 544,143 options
were excluded from the diluted earnings per share calculations because to
include them would have been anti-dilutive. For the twelve and twenty-eight week
periods ended May 11, 2003, 597,733 and 582,7333 options respectively were
excluded from the diluted earnings per share calculations because to include
them would have been anti-dilutive.
Page 19
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(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 "all other" column is the VIE activity, see Note 2. The
"other reconciling items" column includes corporate related items, intercompany
eliminations and income and expense not allocated to reportable segments.
Other
Full Quick All Reconciling
(Dollars in thousands) Service Service Other Items Total
---------------------- -------- -------- -------- ------------ --------
Second quarter fiscal 2004
Revenues $ 25,648 $ 26,578 $ 840 $ (840) $ 52,226
Income from restaurant
operations 3,442 3,133 688 (127) 7,136
Operating income (loss) 2,112 909 672 (257) 3,436
Interest expense (1,464)
Other expense (531)
Income from continuing
operations before income --------
taxes $ 1,441
========
Total Assets 71,947 46,849 17,873 11,762 $148,431
Depreciation and
amortization 1,052 983 115 56 $ 2,206
Second quarter fiscal 2003
Revenues $ 24,238 $ 25,452 $ 800 $ (800) $ 49,690
Income from restaurant
operations 3,561 2,888 658 (133) 6,974
Operating income (loss) 2,128 466 648 (396) $ 2,846
Interest expense (1,690)
Other income 3,128
Income from continuing
operations before income --------
taxes $ 4,284
========
Total Assets 82,904 48,932 15,972 11,465 $159,273
Depreciation and
amortization 1,109 1,162 117 275 $ 2,663
Page 20
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 9, 2004
(UNAUDITED)
Other
Full Quick All Reconciling
(Dollars in thousands) Service Service Other Items Total
---------------------- -------- -------- -------- ------------ --------
First twenty-eight weeks of fiscal 2004
Revenues $ 57,405 $ 58,885 $ 1,939 $ (1,939) $116,290
Income from restaurant
operations 7,565 6,309 1,576 (299) 15,151
Operating income (loss) 4,493 1,028 1,558 (725) 6,354
Interest expense (3,523)
Other income (975)
Income from continuing
operations before income --------
taxes $ 1,856
========
Total Assets 71,947 46,849 17,873 11,762 $148,431
Depreciation and
amortization 2,513 2,343 261 397 $ 5,514
First twenty-eight weeks of fiscal 2003
Revenues $ 55,441 $ 59,393 $ 1,854 (1,854) $114,834
Income from restaurant
operations 7,852 5,856 1,516 (309) 14,915
Operating income (loss) 4,644 536 1,473 (921) 5,732
Interest expense (3,994)
Other income 2,829
Income from continuing --------
operations before income taxes $ 4,567
========
Total Assets 82,904 48,932 15,972 11,465 $159,273
Depreciation and
amortization 2,603 2,712 273 718 $ 6,306
Page 21
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 53 weeks and ends October 31,
2004. The first quarter of the Company's fiscal year consists of 16 weeks. The
second and third quarter of fiscal 2004 each consist of 12 weeks. The fiscal
2004 fourth quarter consists of 13 weeks.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages which
certain items of revenue and expense bear to total revenues.
Twelve Weeks Ended Twenty-Eight Weeks Ended
May 9, May 11, May 9, May 11,
2004 2003 2004 2003
--------- --------- --------- ---------
As Restated As Restated
(See Note 1B to the unaudited financial statements)
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 27.3 27.1 27.4 26.8
Payroll and benefits 28.9 28.8 29.1 29.3
Depreciation and amortization 4.0 4.6 4.3 4.7
Other operating expenses 26.1 25.5 26.2 26.2
--------- --------- --------- ---------
Total restaurant operating expenses 86.3 86.0 87.0 87.0
--------- --------- --------- ---------
Income from operations 13.7 14.0 13.0 13.0
--------- --------- --------- ---------
General and administrative 7.0 8.1 7.4 7.8
Amortization of intangibles 0.1 0.2 0.1 0.2
--------- --------- --------- ---------
Operating income (loss) 6.6 5.7 5.5 5.0
--------- --------- --------- ---------
Other income (expense):
Recovery of note receivable - 7.0 - 3.0
Interest expense (2.8) (3.4) (3.0) (3.5)
Minority interest in earnings (1.1) (1.2) (0.9) (1.2)
Other income (expense), net 0.1 0.5 - 0.7
--------- --------- --------- ---------
Total other income (expense), net (3.8) 2.9 (3.9) (1.0)
--------- --------- --------- ---------
Income from continuing operations before
income taxes 2.8 8.6 1.6 4.0
Income tax provision 1.1 3.0 0.7 1.6
--------- --------- --------- ---------
Income (loss) from continuing operations 1.7 5.6 0.9 2.4
Income (loss) from discontinued operations,
net of tax (1.2) (6.2) (0.4) (2.5)
--------- --------- --------- ---------
Net Income (loss) 0.5% (0.6)% 0.5% (0.1)%
========= ========= ========= =========
Page 22
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Restaurant sales for the Company were $52,226,000 for the second quarter of
fiscal 2004 versus $49,690,000 for the comparable period in fiscal 2003, an
increase of $2,536,000. Restaurant sales for the first twenty-eight weeks of
fiscal 2004 were $116,290,000 versus $114,834,000 for the comparable period in
fiscal 2003, an increase of $1,456,000.
The Company's Burger King restaurant sales were $26,578,000 in the second
quarter of fiscal 2004 compared to sales of $25,452,000 in the same period of
fiscal 2003, an increase of $1,126,000. The Company had increased revenue of
$532,000 due to additional sales weeks from two new restaurants opened in fiscal
2003. The Company's Burger King restaurants had average weekly sales of $18,770
in the second quarter of fiscal 2004 versus $18,285 in the same period in fiscal
2003. Sales at restaurants open for more than one year increased 2.4% in the
second quarter of fiscal 2004 when compared to the same period in fiscal 2003.
Sales decreased $508,000 to $58,885,000 for the first twenty-eight weeks of
fiscal 2004 compared to $59,393,000 for the comparable period in fiscal 2003.
The Company had increased revenue of $1,211,000 due to additional sales weeks
from three restaurants opened in fiscal 2003. Average weekly sales were $17,822
in the first twenty-eight weeks of fiscal 2004 versus $18,357 in the same period
in fiscal 2003. Sales at restaurants open for more than one year decreased 3.2%
in the first twenty-eight weeks of fiscal 2004 when compared to the same period
in fiscal 2003. During the second quarter of fiscal 2004 Burger King introduced
some appealing new products and had improved promotional campaigns. The Company
believes these changes were responsible for the positive same store sales
results.
The Company's Chili's Grill & Bar restaurant sales increased $1,730,000 to
$20,346,000 in the second quarter of fiscal 2004 compared to $18,616,000 in the
same period in fiscal 2003. The Company had increased revenue of $1,821,000 due
to additional sales weeks from one restaurant opened during fiscal 2004 and
three restaurants opened in fiscal 2003. Average weekly sales decreased to
$45,314 in the second quarter of fiscal 2004 versus $45,627 in the same period
of fiscal 2003. Sales at restaurants open for more than one year decreased .5%
in the second quarter of fiscal 2004 when compared to the same period in fiscal
2003. Sales for the first twenty-eight weeks of fiscal 2004 increased $3,021,000
to $45,153,000 compared to $42,132,000 for the same period in fiscal 2003. The
Company had increased revenue of $3,683,000 due to additional sales weeks from
one new restaurant opened during fiscal 2004 and three new restaurants opened in
fiscal 2003. The average weekly sales were $43,374 in the first twenty-eight
weeks of fiscal 2004 versus $44,257 in the same period in fiscal 2003. Sales at
restaurants open for more than one year decreased 1.7% in the first twenty-eight
weeks of fiscal 2004 when compared to the same period in fiscal 2003.
Sales in the Company's Grady's American Grill restaurant division were
$1,437,000 in the second quarter of fiscal 2004 compared to sales of $1,459,000
in the same period in fiscal 2003, a decrease of $22,000. The Company sold four
units in fiscal 2003, closed one unit in fiscal 2004, sold and leased back six
restaurants in fiscal 2004 and had one restaurant classified as held for sale as
of May 9, 2004. As required by SFAS 144, the results of operations for these
restaurants have been classified as discontinued operations for all periods
reported. The remaining three Grady's American Grill restaurants had average
weekly sales of $39,921 in the second quarter of fiscal 2004 versus $40,528 in
the second quarter of fiscal 2003, a decrease of 1.5%. Sales in the Company's
Grady's American Grill restaurant division were $3,360,000 in the first
twenty-eight weeks of fiscal 2004 compared to sales of $3,501,000 in the same
period in fiscal 2003, a decrease of $141,000. The remaining three Grady's
American Grill restaurants had average weekly sales of $39,995 in the first
twenty-eight weeks of fiscal 2004 versus $41,679 in the same period of fiscal
2003, a decrease of 4.0%. The Company believes sales declines in its Grady's
American Grill division resulted from competitive intrusion and the Company's
inability to efficiently market this concept.
Page 23
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's Italian Dining Division restaurant sales decreased $298,000 to
$3,865,000 in the second quarter of fiscal 2004 compared to $4,163,000 in the
same period in fiscal 2003. The average weekly sales were $35,785 in the second
quarter of fiscal 2004 versus $38,549 in the same period of fiscal 2003. Sales
at restaurants open for more than one year decreased 7.2% in the second quarter
of fiscal 2004 when compared to the same period in fiscal 2003. Sales for the
first twenty-eight weeks of fiscal 2004 decreased $916,000 to $8,892,000
compared to $9,808,000 for the same period in fiscal 2003. The average weekly
sales were $35,287 in the first twenty-eight weeks of fiscal 2004 versus $38,920
in the same period in fiscal 2003. Sales at restaurants open for more than one
year decreased 9.6% in the first twenty-eight weeks of fiscal 2004 when compared
to the same period in fiscal 2003. The Company has experienced significant
competitive intrusion in the markets where it has Italian Dining restaurants.
Total restaurant operating expenses, as a percentage of restaurant sales,
increased to 86.3% for the second quarter of fiscal 2004 versus 86.0% in the
second quarter of fiscal 2003, and was consistent at 87.0% in the first
twenty-eight weeks of fiscal 2004 versus fiscal 2003. The following factors
influenced the operating margins.
Food and beverage costs increased to 27.3% of total revenues in the second
quarter of fiscal 2004 compared to 27.1% of total revenues in the same period in
fiscal 2003, and 27.4% in the first twenty-eight weeks of fiscal 2004 compared
to 26.8% in the same period of fiscal 2003. Food and beverage costs have
increased in both the full service and quick service segment. The increases are
mainly due to higher dairy and beef costs. The Company expects the cost
pressures to persist for the rest of fiscal 2004.
Payroll and benefits were 28.9% of total revenues in the second quarter of
fiscal 2004 compared to 28.8% in the same period of fiscal 2003. Payroll and
benefits were 29.1% of total revenues in the first twenty-eight weeks of fiscal
2004 compared to 29.3% in the same period of fiscal 2003. The Company had lower
payroll and benefits expense, as a percentage of sales, in the quick service
segment for both the quarter and twenty-eight weeks ended May 9, 2004. The
improvement was mainly due to the Company's increased focus on payroll costs in
light of declining sales. The Company does not believe that it can continue to
decrease payroll expense in the quick service segment without diminishing
customer satisfaction; therefore, if the negative sales trends do not abate,
payroll costs as a percentage of sales are likely to increase in the remaining
quarters of fiscal 2004. The Company had higher payroll and benefits expense, as
a percentage of sales, in the full service segment for both the quarter and
twenty-eight weeks ended May 9, 2004. The increase was mainly due to lower
average weekly sales in each of the full service concepts.
Depreciation and amortization, as a percentage of total revenues, decreased to
4.0% for the second quarter of fiscal 2004 compared to 4.6% in the same period
in fiscal 2003. The decrease was mainly due to a $179,000 decrease in
depreciation expense in the quick service segment. The decrease was mainly due
to certain assets becoming fully depreciated. Depreciation and amortization, as
a percentage of total revenues, decreased to 4.3% in the first twenty-eight
weeks of fiscal 2004 compared to 4.7% in the same period in fiscal 2003. The
decrease was mainly due to a $369,000 decrease in depreciation expense in the
quick service segment. The decrease was mainly due to certain assets becoming
fully depreciated.
Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses as a percentage of total revenues increased
in the second quarter of fiscal 2004 to 26.1% compared to 25.5% in the same
period of fiscal 2003. They were consistent at 26.2% in the first twenty-eight
weeks of fiscal 2004 and fiscal 2003. The Company's other operating expenses, as
a percentage of sales, increased in the second quarter of fiscal 2004, mainly
due to lower average weekly sales at the Company's full service restaurants. The
Company participated in the Burger King 2000 and 2001 Early Renewal programs
that included a royalty reduction as an incentive to franchisees to renew
franchise agreements early. The Company included 39 restaurants in the Early
Renewal programs. In the first twenty-eight weeks of fiscal 2004 and fiscal 2003
the Company's participation in the Early Renewal program reduced the Company's
royalty expense by $196,000 and $132,000, respectively.
Page 24
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Income from restaurant operations increased $162,000 to $7,136,000, or 13.7% of
revenues, in the second quarter of fiscal 2004 compared to $6,974,000, or 14.0%
of revenues, in the comparable period of fiscal 2003. Income from restaurant
operations in the Company's Quick Service segment decreased $119,000 while the
Company's Full Service segment increased $236,000 from the prior year. Income
from restaurant operations increased $236,000 to $15,151,000, or 13.0% of
revenues, in the first twenty-eight weeks of fiscal 2004 compared to
$14,915,000, or 13.0% of revenues, in the comparable period of fiscal 2003.
Income from restaurant operations in the Company's Quick Service segment
decreased $287,000 while the Company's Full Service segment increased $453,000
when compared to the first twenty-eight weeks of the prior year.
General and administrative expenses were $3,663,000 in the second quarter of
fiscal 2004 compared to $4,041,000 in the second quarter of fiscal 2003 and
$8,678,000 in the first twenty-eight weeks of fiscal 2004 compared to $8,980,000
in the same period of fiscal 2003. As a percentage of total restaurant sales,
general and administrative expenses were 7.0% in the second quarter of fiscal
2004 versus 8.1% in the second quarter of fiscal 2003, and 7.4% in the first
twenty-eight weeks of fiscal 2004 compared to 7.8% in the same period of fiscal
2003. In the second quarter of fiscal 2003 the Company recorded approximately
$118,000 in expenses related to the Company's litigation with BFBC, LTD and in
the first twenty-eight weeks of fiscal 2003 the Company recorded approximately
$284,000 for the BFBC, LTD litigation. The Company did not have similar expense
in fiscal 2004.
Total interest expense for the second quarter of fiscal 2004 was $1,464,000
compared to $1,690,000 during the same period in fiscal 2003. Total interest
expense was $3,523,000 in the first twenty-eight weeks of fiscal 2004 compared
to interest expense of $3,994,000 in the same period of fiscal 2003. The
decreases were due to lower interest rates and lower debt levels.
During the second quarter of fiscal 2003 the Company recorded a $3,459,000 gain
on the collection of a note receivable that had previously been written off. The
Company did not have any similar activity in fiscal 2004.
Minority interest in earnings relates to certain related party affiliates that
are variable interest entities. The Company holds no direct ownership or voting
interest in the VIE's. Minority interest in earnings was $573,000 for the second
quarter of fiscal 2004 versus $587,000 in the comparable period in fiscal 2003.
Minority interest in earnings was $1,054,000 for the first twenty-eight weeks of
fiscal 2004 versus $1,370,000 in the comparable period in fiscal 2003. See Note
2 in the Company's consolidated financial statements for the impact of the
variable interest entities on specific income statement categories.
The provision for income taxes, as restated, was $570,000 for the second quarter
of fiscal 2004 versus $1,483,000 in the comparable period in fiscal 2003. The
provision for income taxes, as restated, was $859,000 for the first twenty-eight
weeks of fiscal 2004 versus $1,793,000 in the comparable period in fiscal 2003.
The decrease is mainly due to lower income from continuing operations.
At the end of the second quarter of fiscal 2004 the Company had a valuation
reserve against its deferred tax asset resulting in a net deferred tax asset of
$8.9 million. Absent a significant and unforeseen change in facts or
circumstances, management re-evaluates the realizability of its tax assets in
connection with its annual budgeting cycle. Management does not believe there
were any significant changes in facts or circumstances through the end of the
second quarter of fiscal 2004.
Page 25
2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Discontinued operations includes all disposed of restaurants and the six current
Grady's American Grill restaurants, which at the end of the second quarter the
Company expected to sell or close before the end of fiscal 2004. The decision to
dispose of these locations reflects the Company's ongoing process of evaluating
the performance and cash flows of its various restaurant locations and using the
proceeds from the sale of closed restaurants to reduce outstanding debt. The net
loss from discontinued operations, as restated, for the second quarter of fiscal
2004 was $617,000 versus a loss of $3,081,000 in the same period of fiscal 2003.
The net loss from discontinued operations, as restated, for the first
twenty-eight weeks of fiscal 2004 was $465,000 versus a loss of $2,875,000 in
the same period in fiscal 2003. The fiscal 2004 results include impairment and
facility closing expenses of $886,000 versus $4,578,000 in fiscal 2003.
The total restaurant sales from discontinued operations for the second quarter
of fiscal 2004 were $2,140,000 versus $4,214,000 in fiscal 2003. The total
restaurant sales from discontinued operations for the first twenty-eight weeks
of fiscal 2004 were $5,779,000 versus $10,487,000 in the same period in fiscal
2003.
For the second quarter of fiscal 2004, the Company reported net income of
$254,000 compared to a net loss of $280,000 for the second quarter of fiscal
2003. For the first twenty-eight weeks of fiscal 2004, the Company reported net
income of $532,000 compared to a net loss of $101,000 for the same period in
fiscal 2003.
Management Outlook
The following section contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including statements about
trends in and the impact of certain initiatives upon the Company's operations
and financial results. Forward-looking statements can be identified by the use
of words such as "anticipates," "believes," "plans," "estimates," "expects,"
"intends," "may," and other similar expressions. Forward-looking statements are
made based upon management's current expectations and beliefs concerning future
developments and their potential effects on the Company. There can be no
assurance that the Company will actually achieve the plans, intentions and
expectations discussed in these forward-looking statements. Actual results may
differ materially.
Quick Service
The quick service segment of the restaurant industry is a very mature and
competitive segment, which is dominated by several national chains. Market share
is gained through national media campaigns promoting specific sandwiches,
usually at a discounted price. The national chains extend marketing efforts to
include nationwide premiums and movie tie-ins. To date in fiscal 2004, other
chains in the quick-service restaurant industry, including McDonald's and
Wendy's, promotional campaigns and new products have been successful in taking
away market share from Burger King. During the second quarter of fiscal 2004
Burger King introduced some appealing new products and had improved promotional
campaigns. The Company believes these changes were responsible for the positive
same store sales results.
Full Service
The full service segment of the restaurant industry is also mature and
competitive. This segment has a few national companies that utilize national
media efficiently. This segment also has numerous regional and local chains that
provide service and products comparable to the national chains but which cannot
support significant marketing campaigns. The Company operates three restaurant
concepts that compete in the full service segment.
Page 26
2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
During fiscal 2004, the Company has continued to emphasize the operational and
marketing initiatives that contributed to the success of its Chili's division in
fiscal 2003. While the average weekly sales trends were not as good as the
Company had expected, the Company expects steady financial results for the
remainder of fiscal 2004.
During the first twenty-eight weeks of fiscal 2004, the Company continues to
experience a deterioration in its Italian Dining division's profitability. The
Company has experienced significant competitive intrusion in the markets where
it has Italian Dining restaurants. The Company expects the competitive pressures
to continue for the remainder of fiscal 2004.
During the first twenty-eight weeks of fiscal 2004, the Grady's American Grill
concept was negatively affected by competitive intrusion in the Company's
markets and limitations in the Company's ability to efficiently market its
restaurants. The Company will continue to consider opportunities to divest
under-performing or non-strategic restaurants during fiscal 2004. The Company
expects the Grady's American Grill division's operating performance to continue
to decline during fiscal 2004.
Income taxes
The Company has recorded a valuation allowance to reduce its deferred tax assets
since it is more likely than not that some portion of the deferred assets will
not be realized. Management has considered all available evidence both positive
and negative, including the Company's historical operating results, estimates of
future taxable income and ongoing feasible tax strategies in assessing the need
for the valuation allowance. The Company believes the positive evidence includes
the historically consistent profitability of its Chili's, Italian Dining and
Burger King divisions, and the resolution of substantially all of its
bagel-related contingent liabilities. The Company believes the negative evidence
includes the persistent negative trends in its Grady's American Grill division
and the recent sales declines in its Burger King division. During the first
twenty-eight weeks of fiscal 2004, the Company continued to experience unusual
uncertainty concerning whether, when and to what extent the recent sales
declines in its Burger King division will be reversed. In estimating its
deferred tax asset, management used its 2004 operating plan as the basis for a
forecast of future taxable earnings. Management did not incorporate growth
assumptions and limited the forecast to five years, the period that management
believes it can project results that are more likely than not achievable. Absent
a significant and unforeseen change in facts or circumstances, management
re-evaluates the realizability of its tax assets in connection with its annual
budgeting cycle.
Page 27
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'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.
During the first twenty-eight weeks of 2004, net cash provided by operating
activities was $10,204,000 compared to $6,469,000 in fiscal 2003. The increase
was mainly due to changes in working capital that provided cash in fiscal 2004
versus changes in working capital that used cash in fiscal 2003.
During the first twenty-eight weeks of fiscal 2004, the Company had $3,929,000
in capital expenditures in connection with the building of one new full service
restaurant that opened in the second quarter of fiscal 2004 and the refurbishing
of existing restaurants.
During the first twenty-eight weeks of fiscal 2004, the Company had $8,635,000
in proceeds from the sales of property and equipment.
The Company had a net repayment of $12,450,000 under its revolving credit
agreement during the first twenty-eight weeks of fiscal 2004. As of May 9, 2004,
the Company's revolving credit agreement had an additional $26,504,000 of
capacity though not all of that capacity is available for future borrowings due
to the applicable financial covenants. The Company's average borrowing rate on
May 9, 2004, was 4.22%.
The Company's primary cash requirements in fiscal 2004 will be capital
expenditures in connection with the building or acquiring of new restaurants,
remodeling of existing restaurants, maintenance expenditures, and the reduction
of debt under the Company's debt agreements. During the remainder of fiscal
2004, the Company anticipates opening two full service restaurants. The Company
does not plan to build any new quick service restaurants in fiscal 2004. The
Company did purchase five existing Burger King restaurants from a franchisee
during the third quarter of fiscal 2004 for $1,150,000. 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 2004 are expected to range
from $10,000,000 to $12,000,000, if the Company has alternative uses or needs
for its cash, the Company believes it could reduce such planned expenditures
without affecting its current operations. The Company has debt service
requirements of approximately $1,474,000 in fiscal 2004, consisting primarily of
the principal payments required under its mortgage facility. The Company expects
to reduce its borrowings under its revolving credit agreement by $2,000,000
within the next year and therefore has classified $2,000,000 of revolving credit
debt as current. The Company had $4,813,000 of current debt related to the
consolidation of its variable interest entities, see Note 2.
The Company anticipates that its cash flow from operations, together with the
available capacity under its revolving credit agreement as of May 9, 2004, will
provide sufficient funds for its operating, capital expenditure, debt service
and other requirements through the end of fiscal 2004.
As of May 9, 2004, the Company had a financing package totaling $109,066,000,
consisting of a $60,000,000 revolving credit agreement (the "Bank Facility") and
a $49,066,000 mortgage facility (the "Mortgage Facility"), as described below.
Page 28
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Mortgage Facility currently includes 34 separate mortgage notes, with
initial 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, financial covenants that require the Company to maintain
a consolidated fixed charge coverage ratio of at least 1.30 for each of six
subsets of the financed properties.
The Company was not in compliance with the required consolidated fixed charge
coverage ratio for two of the subsets of the financed properties as of October
26, 2003. Both of these subsets are comprised solely of Burger King restaurants
and had fixed charge coverage ratios of 1.11 and 1.26. The Company sought and
obtained waivers of these covenant defaults from the mortgage lenders through
November 28, 2004. If the Company is not in compliance with these covenants as
of November 28, 2004, the Company will most likely seek additional waivers. The
Company believes it would be able to obtain such waivers but there can be no
assurance thereof. If the Company is unable to obtain such waivers it is
contractually entitled to pre-pay the outstanding balances under one or more of
the separate mortgage notes such that the remaining properties in the subsets
would meet the required ratio. However, any such prepayments would be subject to
prepayment premiums and to the Company's ability to maintain its compliance with
the financial covenants in its Bank Facility. Alternatively, the Company is
contractually entitled to substitute one or more better performing restaurants
for under-performing restaurants such that the reconstituted subsets of
properties would meet the required ratio. However, any such substitutions would
require the consent of the lenders in the Bank Facility. For these reasons, the
Company believes that its rights to prepay mortgage notes or substitute
properties may be impractical depending on the circumstances existing at the
time.
On June 10, 2002, the Company refinanced its Bank Facility with a $60,000,000
revolving credit agreement with JP Morgan Chase Bank, as agent, and four other
banks. The Bank 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 Bank 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.
The Bank Facility provides for borrowings at the adjusted LIBOR rate plus a
contractual spread which is as follows:
RATIO OF FUNDED DEBT
TO CASH FLOW LIBOR MARGIN
- ------------------------------------------------ -------------
Greater than or equal to 3.50 3.00%
Less than 3.5x but greater than or equal to 3.00 2.75%
Less than 3.0x but greater than or equal to 2.5x 2.25%
Less than 2.5x 1.75%
Page 29
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Bank Facility also contains covenants requiring maintenance of funded debt
to cash flow and fixed charge coverage ratios for fiscal 2004 and 2005 as
follows:
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO COVENANT
- -------------------- -------
Fiscal 2003
Q1 through Q3 4.00
Q4 3.75
Fiscal 2004
Q1 through Q3 3.75
Q4 3.50
Fiscal 2005
Q1 through Q2 3.50
Thereafter 3.00
FIXED CHARGE COVERAGE RATIO 1.50
The Company's funded debt to consolidated cash flow ratio may not exceed 3.75
through the third quarter of fiscal 2004 and 3.50 by the end of fiscal 2004. The
Company's funded debt to consolidated cash flow ratio on May 9, 2004 was 3.33.
If the Company does not maintain the required funded debt to consolidated cash
flow ratio that would constitute an event of default under the Bank Facility.
The Company would then need to seek waivers from its lenders or amendments to
the covenants. If the Company was unable to obtain waivers from its lenders or
amendments to the covenants the Company would be in default under the Bank
Facility. During continuance of an event of default, the Company would be
subject to a post-default interest rate under the Bank Facility that increases
the otherwise effective interest rate by 1.50%. In addition to the right to
declare all obligations immediately due and payable, the Bank Facility also has
additional rights including, among other things, the right to sell any of the
collateral securing the Company's obligations under the Bank Facility. In the
event the Company's obligations under the Bank Facility become immediately due
and payable the Company does not have sufficient liquidity to satisfy these
obligations and it is likely that the Company would be forced to seek protection
from its creditors. Such events would also constitute a default under the
Company's franchise agreements with Brinker and Burger King Corporation.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's consolidated financial statements, which
were prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and notes thereto. Actual results may differ from these estimates,
and such differences may be material to the consolidated financial statements.
Management believes that the following significant accounting policies involve a
higher degree of judgment or complexity.
Page 30
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Property and Equipment
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets. The useful lives of the assets are based
upon management's expectations for the period of time that the asset will be
used for the generation of revenue. Management periodically reviews the assets
for changes in circumstances that may impact their useful lives.
Impairment of Long-Lived Assets
Management periodically reviews property and equipment for impairment using
historical cash flows as well as current estimates of future cash flows. This
assessment process requires the use of estimates and assumptions that are
subject to a high degree of judgment. In addition, at least annually, or as
circumstances dictate, management assesses the recoverability of goodwill and
other intangible assets which requires assumptions regarding the future cash
flows and other factors to determine the fair value of the assets. In
determining fair value, the Company relies primarily on discounted cash flow
analyses that incorporates an investment horizon of five years and utilizes a
risk adjusted discount factor. If these assumptions change in the future,
management may be required to record impairment charges for these assets.
Page 31
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Income taxes
The Company has recorded a valuation allowance to reduce its deferred tax assets
since it is more likely than not that some portion of the deferred assets will
not be realized. Management has considered all available evidence both positive
and negative, including the Company's historical operating results, estimates of
future taxable income and ongoing feasible tax strategies in assessing the need
for the valuation allowance. In estimating its deferred tax asset, management
used its 2004 operating plan as the basis for a forecast of future taxable
earnings. Management did not incorporate growth assumptions and limited the
forecast to five years, the period that management believes it can project
results that are more likely than not achievable. Absent a significant and
unforeseen change in facts or circumstances, management re-evaluates the
realizability of its tax assets in connection with its annual budgeting cycle.
The Company operates in a very competitive industry that can be significantly
affected by changes in local, regional or national economic conditions, changes
in consumer tastes, weather conditions and various other consumer concerns.
Accordingly, the amount of the deferred tax asset considered by management to be
realizable, more likely than not, could change in the near term if estimates of
future taxable income change. This could result in a charge to, or increase in,
income in the period such determination is made.
Other estimates
Management is required to make judgments and or estimates in the determination
of several of the accruals that are reflected in the consolidated financial
statements. Management believes that the following accruals are subject to a
higher degree of judgment.
Management uses estimates in the determination of the required accruals for
general liability, workers' compensation and health insurance. These estimates
are based upon a detailed examination of historical and industry claims
experience. The claims experience may change in the future and may require
management to revise these accruals.
The Company is periodically involved in various legal actions arising in the
normal course of business. Management is required to assess the probability of
any adverse judgments as well as the potential ranges of any losses. Management
determines the required accruals after a careful review of the facts of each
legal action and assistance from outside legal counsel. The accruals may change
in the future due to new developments in these matters.
Management continually reassesses its assumptions and judgments and makes
adjustments when significant facts and circumstances dictate. Historically,
actual results have not been materially different than the estimates that are
described above.
Page 32
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
This report contains and incorporates forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements about the Company's development plans and trends in the Company's
operations and financial results. Forward-looking statements can be identified
by the use of words such as "anticipates," "believes," "plans," "estimates,"
"expects," "intends," "may," and other similar expressions. Forward-looking
statements are made based upon management's current expectations and beliefs
concerning future developments and their potential effects on the Company. There
can be no assurance that the Company will actually achieve the plans, intentions
and expectations discussed in these forward-looking statements. Actual results
may differ materially. Among the risks and uncertainties that could cause actual
results to differ materially are the following: the availability and cost of
suitable locations for new restaurants; the availability and cost of capital to
the Company; the ability of the Company to develop and operate its restaurants;
the hiring, training and retention of skilled corporate and restaurant
management and other restaurant personnel; the integration and assimilation of
acquired concepts; the overall success of the Company's franchisors; the ability
to obtain the necessary government approvals and third-party consents; changes
in governmental regulations, including increases in the minimum wage; the
results of pending litigation; and weather and other acts of God. The Company
undertakes no obligation to update or revise any forward-looking information,
whether as a result of new information, future developments or otherwise.
Page 33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk in connection with its $60.0
million revolving credit facility that provides for interest payable at the
LIBOR rate plus a contractual spread. The Company's variable rate borrowings
under this revolving credit facility totaled $31.1 million at May 9, 2004. The
impact on the Company's annual results of operations of a one-point interest
rate change would be approximately $311,000.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our President and Chief Executive Officer ("CEO") and Principal Financial
Officer ("PFO"), we have evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by
this quarterly report, and, based on their evaluation, our CEO and PFO have
concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
In the course of the process of closing its accounts for fiscal year 2004, the
Company determined that it had not been properly allocating certain federal tax
attributes between continuing operations and discontinued operations in the
first three fiscal quarters of 2004. After consultation with the Independent
Registered Public Accounting Firm of the Company, the accounting for the
allocation of federal tax attributes has been corrected on this Form 10-Q/A and
the Company has amended its Form 10-Q for the sixteen weeks ended February 15,
2004, and its Form 10-Q for the twelve and forty weeks ended August 1, 2004. The
Company's previously reported net income and income per share are not affected
by this reclassification.
The Company has instituted enhanced internal controls designed to ensure the
intraperiod allocation of tax expense (benefit) between continuing operations
and discontinued operations conforms to US Generally Accepted Accounting
Principles . Such enhancements will generally conform quarterly procedures to
those utilized by the Company in its year end closing process.
Except as set forth above, there have not been any changes in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Page 34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 to the unaudited consolidated financial statements of the Company
included in Part I of this report is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On June 15, 2004 a group of five shareholders led by Company CEO Daniel B.
Fitzpatrick ("Fitzpatrick Group") presented the Board with a proposal to
purchase all outstanding shares of common stock owned by the public
shareholders. Under the terms of the proposed transaction, the public holders of
the outstanding shares of the Company would each receive $2.75 in cash in
exchange for each of their shares. The purchase would take the form of a merger
in which the Company would survive as a privately held corporation. The
Fitzpatrick Group advised the Board that it was not interested in selling its
shares to a third party, whether in connection with a sale of the company or
otherwise.
On October 13, 2004, the special committee of independent directors established
by the Company's Board approved in principle, by a vote of three to one, a
transaction by which the Fitzpatrick Group would purchase all outstanding shares
of common stock owned by the public shareholders. Under the terms of the
proposed transaction, the public holders of the outstanding shares of Quality
Dining would receive $3.20 in cash in exchange for each of their shares.
On November 9, 2004, the Company entered into a definitive merger agreement with
a newly-formed entity owned by the Fitzpatrick Group. Under the terms of the
agreement, the public shareholders will receive $3.20 in cash in exchange for
each of their shares. Following the merger, the Company's common stock will no
longer be traded on NASDAQ or registered with the Securities and Exchange
Commission. The Fitzpatrick Group has agreed to vote their shares for and
against approval of the transaction in the same proportion as the votes cast by
all other shareholders voting at the special meeting to be held to vote on the
transaction. The agreement provides that if the shareholders do not approve the
transaction, the Company will reimburse the Fitzpatrick Group for its reasonable
out-of-pocket expenses not to exceed $750,000. The agreement is subject to
customary conditions, including, financing and the approval of the Company's
shareholders and Franchisors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is
set forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
On March 31, 2004, the Company filed a current report on Form 8-K
furnishing under Item 12 a copy of the Company's press release
dated March 31, 2004.
Page 35
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: December 23, 2004 By: /s/John C. Firth
------------------------------
Executive Vice President
General Counsel and Secretary
(Principal Financial Officer)
Page 36
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Executive Vice President and
General Counsel (Principal Financial Officer)
Page 37