SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended February 20, 2005
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 March
19, 2005 was 11,596,781.
Page 1
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 20, 2005
INDEX
Page
----
PART I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 35
Signatures 35
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sixteen Weeks Ended
February 20, February 15,
2005 2004
------------ ------------
(As restated
See Note 1A)
------------
Revenues:
Burger King $ 37,440 $ 32,307
Chili's Grill & Bar 27,332 24,807
Italian Dining Division 4,963 5,027
Grady's American Grill 1,731 1,922
-------- --------
Total revenues 71,466 64,063
-------- --------
Operating expenses:
Restaurant operating expenses:
Food and beverage 19,727 17,586
Payroll and benefits 20,825 18,780
Depreciation and amortization 2,857 2,967
Other operating expenses 19,351 16,904
-------- --------
Total restaurant operating expenses 62,760 56,237
-------- --------
Income from restaurant operations 8,706 7,826
-------- --------
General and administrative expense 4,881 5,014
Amortization of trademarks 33 82
Facility closing expense 26 -
-------- --------
Operating income 3,766 2,730
-------- --------
Other income (expense):
Interest expense (1,978) (2,059)
Loss on sale of property and equipment (71) (47)
Minority interest in earnings (732) (480)
Other income (expense), net 65 86
-------- --------
Total other expense, net (2,716) (2,500)
-------- --------
Income from continuing operations
before income tax 1,050 230
Income tax provision 480 289
-------- --------
Income (loss) from continuing operations 570 (59)
Income (loss) from discontinued operations,
net of tax (22) 151
-------- --------
Net income $ 548 $ 92
======== ========
Basic net income per share:
Continuing operations 0.05 -
Discontinued operations - 0.01
-------- --------
Basic net income per share $ 0.05 $ 0.01
======== ========
Diluted net income per share:
Continuing operations 0.05 -
Discontinued operations - 0.01
-------- --------
Diluted net income per share $ 0.05 $ 0.01
======== ========
Weighted average shares outstanding:
Basic 10,183 10,163
======== ========
Diluted 10,343 10,163
======== ========
See Notes to Consolidated Financial Statements.
Page 3
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
February 20, October 31,
2005 2004
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,931 $ 1,570
Accounts receivable 2,741 1,520
Inventories 1,801 1,770
Deferred income taxes 3,073 2,785
Other current assets 2,786 3,321
--------- ---------
Total current assets 12,332 10,966
--------- ---------
Property and equipment, net 106,451 108,898
--------- ---------
Other assets:
Deferred income taxes 5,142 5,563
Trademarks, net 426 446
Franchise fees and development fees, net 8,063 8,250
Goodwill 7,960 7,960
Liquor licenses, net 2,788 2,846
Other 3,422 3,613
--------- ---------
Total other assets 27,801 28,678
--------- ---------
Total assets $ 146,584 $ 148,542
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 45,930 $ 10,721
Accounts payable 5,643 7,077
Accrued liabilities 19,711 20,769
--------- ---------
Total current liabilities 71,284 38,567
Deferred rent 3,234 3,071
Long-term debt 34,825 69,838
--------- ---------
Total liabilities 109,343 111,476
Minority interest 13,030 13,434
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
shares issued 28 28
Additional paid-in capital 237,411 237,411
Accumulated deficit (206,378) (206,926)
Unearned compensation (421) (452)
--------- ---------
30,640 30,061
Treasury stock, at cost, 2,508,587 shares (6,429) (6,429)
--------- ---------
Total stockholders' equity 24,211 23,632
--------- ---------
Total liabilities and stockholders' equity $ 146,584 $ 148,542
========= =========
See Notes to Consolidated Financial Statements.
Page 4
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Sixteen Weeks Ended
February 20, February 15,
2005 2004
------------ ------------
(As restated
See Note 1A)
------------
Cash flows from operating activities:
Net income $ 548 $ 92
Loss (income) from discontinued operations 22 (151)
Minority interest in earnings 732 480
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 2,671 2,877
Amortization of other assets 425 468
Deferred rent 163 156
Deferred income tax 145 -
Loss on sale of property and equipment 71 47
Amortization of unearned compensation 31 33
Changes in current assets and current liabilities:
Net increase in current assets (717) (143)
Net increase (decrease) in current liabilities (2,492) 2,279
Other 44 -
-------- --------
Net cash provided by operating activities 1,643 6,138
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (301) (1,633)
Proceeds from the sales of property and equipment 4 1,303
Purchase of other assets (71) (197)
Other 60 -
-------- --------
Net cash used for investing activities (308) (527)
-------- --------
Cash flows from financing activities:
Borrowings of long-term debt 13,908 14,875
Repayment of long-term debt (13,712) (20,236)
Cash distributions to minority interest
in consolidated partnerships (1,136) (884)
-------- --------
Net cash used for financing activities (940) (6,245)
-------- --------
Cash (used for) provided by discontinued operations (34) 154
-------- --------
Net increase (decrease) in cash and cash equivalents 361 (480)
Cash and cash equivalents, beginning of period 1,570 1,724
-------- --------
Cash and cash equivalents, end of period $ 1,931 $ 1,244
======== ========
See Notes to Consolidated Financial Statements.
Page 5
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
Note 1: Description of Business.
Quality Dining, Inc. (the "Company") operates five distinct restaurant concepts.
It owns the Grady's American Grill(R), Porterhouse Steaks and Seafood, 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"). As of
February 20, 2005, the Company operated 174 restaurants, including 123 Burger
Kings, 39 Chili's Grill & Bar restaurants, 2 Grady's American Grill restaurants,
six Papa Vino's, three Spageddies and one Porterhouse Steak and Seafood
restaurant(TM).
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, Inc. 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, other than members of the Fitzpatrick Group,
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.
The Company's shareholders will vote upon the proposal at a special shareholder
meeting scheduled for April 12, 2005.
Page 6
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
Note 1A Restatement:
The Company has determined that it had incorrectly calculated its straight-line
rent expense and related deferred rent liability. As a result, on February 4,
2005, the Company concluded that its previously filed financial statements for
fiscal years through 2003 and the first three interim periods in 2004 should be
restated. Historically, when accounting for leases with renewal options, the
Company recorded rent expense on a straight-line basis over the initial
non-cancelable lease term without regard for renewal options. In addition, the
Company depreciated its buildings, leasehold improvements and other long-lived
assets on those properties over a period that included both the initial
non-cancelable term of the lease and all option periods provided for in the
lease (or the useful life of the assets if shorter). The Company has restated
its financial statements to (i) recognize rent expense on a straight-line basis
over the lease term, including cancelable option periods where failure to
exercise such options would result in an economic penalty such that at lease
inception the renewal option is reasonably assured of exercise, and (ii) to
recognize depreciation on its buildings, leasehold improvements and other
long-lived assets over the expected lease term, where the lease term is shorter
than the useful life of the assets.
The restatement did not have any impact on the Company's previously reported
total cash flows, revenues or compliance with any covenant under its credit
facility or other debt instruments.
As a result of the changes, the Company's Consolidated Results of Operations for
the sixteen weeks ended February 15, 2004 have been adjusted as follows:
February 15, 2004
----------------------
As
As previously
(In thousands, except per share data) restated reported
- ----------------------------------------------------- --------- ----------
Depreciation and Amortization $ 2,967 $ 2,866
Other operating expenses 16,904 16,818
Total restaurant operating expenses 56,237 56,050
Income from restaurant operations 7,826 8,013
Operating income 2,730 2,917
Income before income taxes from continuing operations 230 417
Income (loss) from continuing operations (59) 128
Net income $ 92 $ 279
Basic net income (loss) per share:
Continuing operations $ - $ 0.01
Net income $ 0.01 $ 0.03
Diluted net income (loss) per share
Continuing operations $ - $ 0.01
Net Income $ 0.01 $ 0.03
Page 7
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
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.
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 $17,869,000 and $17,816,000 at February 20, 2005 and October 31, 2004,
respectively. The liabilities of the VIE's, which consist primarily of debt,
totaled $7,535,000 and $7,338,000 at February 20, 2005 and October 31, 2004,
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 by the
Company by $13,474,000 and $13,494,000 and total liabilities by $4,544,000 and
$4,160,000 at February 20, 2005 and October 31, 2004, respectively.
Additionally, the consolidation of the VIE's increased treasury stock by
$2,806,000 at February 20, 2005 and October 31, 2004, 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 sixteen weeks ended February 20, 2005 and February
15, 2004.
Page 8
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
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
sixteen weeks ended February 20, 2005 and February 15, 2004:
16-Weeks ended 16-Weeks ended
February 20, 2005 February 15, 2004
(As restated
See Note 1A)
----------------- -----------------
(In thousands)
Depreciation and amortization expense $ 2,810 $ 2,934
Change in consolidation policy 47 33
-------- --------
Consolidated depreciation and amortization $ 2,857 $ 2,967
======== ========
Other operating expenses $ 20,143 $ 17,619
Change in consolidation policy (792) (715)
-------- --------
Consolidated other operating expenses $ 19,351 $ 16,904
======== ========
General and administrative expenses $ 4,845 $ 5,013
Change in consolidation policy 36 1
-------- --------
Consolidated general and administrative
Expenses $ 4,881 $ 5,014
======== ========
Interest expense $ 1,994 $ 2,129
Change in consolidation policy (16) (70)
-------- --------
Consolidated interest expense $ 1,978 $ 2,059
======== ========
Other income (expense) $ 50 $ 357
Change in consolidation policy 15 (271)
-------- --------
Consolidated other income (expense) $ 65 $ 86
======== ========
All significant intercompany balances and transactions have been eliminated.
Page 9
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(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
16-week period ended February 20, 2005 are not necessarily indicative of the
results that may be expected for the 52-week year ending October 30, 2005.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 31, 2004 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
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 10
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
Trademarks - The Company owns the trademarks for its Grady's American Grill,
Spageddies Italian Kitchen, Papa Vino's Italian Kitchen and Porterhouse Steaks
and Seafood. The net book value of the Grady's American Grill trademark was
$349,000 as of February 20, 2005. The net book value of the Spageddies Italian
Kitchen trademark was $77,000 as of February 20, 2005.
Below are the gross carrying amount and accumulated amortization of the
trademarks, franchise fees and development fees as of February 20, 2005.
As of February 20, 2005
-----------------------------------------
Net
Gross Carrying Accumulated Book
Amortized Intangible Assets Amount Amortization Value
- ------------------------------------- -------------- ------------ ---------
(Dollars in thousands)
Amortized intangible assets:
Trademarks $ 842 $ (416) $ 426
Franchise fees and development fees 15,025 (6,962) 8,063
-------- -------- ---------
Total $ 15,867 $ (7,378) 8,489
======== ======== =========
As of October 31, 2004
----------------------------------------
Net
Gross Carrying Accumulated Book
Amount Amortization Value
-------------- ------------ --------
Amortized intangible assets:
Trademarks $ 842 $ (396) $ 446
Franchise fees and development fees 14,985 (6,735) 8,250
-------- -------- --------
Total $ 15,827 $ (7,131) $ 8,696
======== ======== ========
The Company's intangible asset amortization expense for the sixteen-week period
ending February 20, 2005 was $268,000 compared to $314,000 for the comparable
period in fiscal 2004. The estimated intangible amortization expense for each of
the next five years is as follows:
Year one $870,000
Year two $870,000
Year three $870,000
Year four $870,000
Year five $763,000
Page 11
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
Goodwill - The Company operates five distinct restaurant concepts in the
food-service industry. It owns the Grady's American Grill concept, Porterhouse
Steaks and Seafood concept, an Italian Dining concept and it 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, with the exception of Porterhouse Steaks and
Seafood, which is included with the Grady's American Grill 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 October 31, 2004. 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:
Sixteen Weeks Ended
February 15,
2004
February 20, (As restated
(In thousands, except per share amounts) 2005 See Note 1A)
- --------------------------------------- ------------ ------------
Net income, as reported $ 548 $ 92
Add: Stock-based compensation expense
included in reported net earnings,
net of related tax effects 20 22
Deduct: Total stock based employee
compensation expense determined by
using the fair value based method,
net of related tax effects (27) (31)
------- -------
Net income, pro forma $ 541 $ 83
======= =======
Diluted net income per common share, as reported $ 0.05 $ 0.01
======= =======
Diluted net income per common share, pro forma $ 0.05 $ 0.01
======= =======
Page 12
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment". This Statement is a revision of FASB Statement No. 123, "Accounting
for Stock-Based Compensation". This Statement supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements. This
Statement establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a
fair-value-based measurement method in accounting for share-based payment
transactions with employees. This Statement is effective for public entities
that file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005, and for nonpublic
entities as of the beginning of the first annual reporting period that begins
after December 15, 2005. The Company is still assessing the impact, if any, the
Statement will have on the Company's financial statements.
In December 2004, the FASB issued FASB Statement No. 153 (SFAS 153), "Exchanges
of Nonmonetary Assets an amendment of APB Opinion No. 29 (APB 29). This
Statement addresses the measurement of exchanges of nonmonetary assets. It
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB 29 and replaces it with
an exception for exchanges that do not have commercial substance. This Statement
is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not believe the adoption of this
Statement will have any material impact on the Company's financial statements.
Note 3: Acquisitions and Dispositions.
In accordance with 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 the Grady's American Grill restaurants that
met the criteria for `held for sale' treatment as discontinued operations in the
accompanying consolidated financial statements.
Page 13
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
Net income from discontinued operations for the periods ended February 20, 2005,
and February 15, 2004 were made up of the following components:
Sixteen Weeks Ended
February 20, February 15,
(In thousands, except per share amounts) 2005 2004
- ---------------------------------------- ---------- -----------
Revenue discontinued operations $ 17 $ 3,639
Income (loss) discontinued
restaurant operations (9) 132
Gain (loss) on sale of assets and facility
closing costs (25) 63
---------- -----------
Income (loss) before taxes (34) 195
Income tax benefit (provision) 12 (44)
Income (loss) from ---------- -----------
discontinued operations $ (22) $ 151
========== ===========
Basic and diluted net income (loss) per
share from discontinued operations $ - $ 0.01
========== ===========
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 $3,953,000. 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, 2004 and ending August 31, 2005.
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, 2004 and ending August 31, 2005.
The Company has accrued $4,621,000 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 February 20 2005, the Company had commitments aggregating $1,550,000 for the
construction of restaurants.
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. In addition to Mr. Fitzpatrick, the other members of the
Fitzpatrick Group are James K. Fitzpatrick, Senior Vice President and Chief
Development Officer; Ezra H. Friedlander, Director; Gerald O. Fitzpatrick,
Senior Vice President, Burger King Division; and John C. Firth, Executive Vice
President and General Counsel. Under the terms of the transaction as originally
Page 14
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
proposed, 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 June 22, 2004, a purported class action lawsuit was filed on behalf of the
public shareholders of the Company by Milberg, Weiss, Bershad & Schulman LLP
against the Company, its directors and two of its officers alleging that the
individual defendants breached fiduciary duties by acting to cause or facilitate
the acquisition of the Company's publicly-held shares for unfair and inadequate
consideration, and colluding in the Fitzpatrick group's going private proposal.
The action, Bruce Alan Crown Grantors Trust v. Daniel B. Fitzpatrick, et al.,
Cause No. 71-D04-0406-PL00299, was filed in the St. Joseph Superior Court in
South Bend, Indiana. The action sought to enjoin the transaction or if
consummated, to rescind the transaction or award rescisssory damages, and for
defendants to account to the putative class for unspecified damages.
On August 19, 2004, the Company and the individual defendants filed motions to
dismiss the action. The defendants argued that the claims were not ripe because
the transaction proposed by the Fitzpatrick group required approval by the
Company's board of directors and its shareholders, neither of which had
occurred, and that in any event, as a matter of Indiana corporate law,
shareholders who dissent from such a transaction that receives the approval of a
majority of the shares entitled to vote are not permitted to enjoin or otherwise
challenge the transaction. On September 24, 2004, the plaintiff filed a response
to defendants' motions to dismiss arguing that the claim was timely because the
proposed transaction allegedly was a fait accompli and that Indiana law permits
minority shareholders to challenge such a transaction.
On October 12, 2004, three days before the hearing on the defendants' motions to
dismiss, the plaintiff amended its complaint. The amended complaint continues to
challenge the adequacy of the Fitzpatrick group's proposal and to allege that
the individual defendants have breached fiduciary duties. In addition, citing
the Company's September 15, 2004, announcements of (a) third quarter earnings
and (b) a correction in the calculation of weighted average shares outstanding
which increased earnings per share in the first two quarters of 2004 by a
fraction of a penny, the plaintiff alleges that from March 31, 2004, until
September 15, 2004, the defendants violated the antifraud provisions of Indiana
Securities Act by disseminating misleading information to "artificially deflate"
the price of Quality Dining shares, and thereby induce investors to hold Quality
Dining shares. Finally, the plaintiff alleges that the failure of the Company's
directors to pursue a forfeiture action under Section 304 of the Sarbanes-Oxley
Act of 2002, which requires the chief executive officer and chief financial
officer under certain circumstances to reimburse the Company for certain types
of compensation if the Company is required to issue a restatement, would
constitute a breach of fiduciary duties.
On October 13, 2004, the Company announced that the special committee of the
board of directors had approved in principle, by a vote of three to one, a
transaction by which the Fitzpatrick group would purchase the outstanding shares
held by Company's public shareholders for $3.20 per share. The agreement was
subject to several contingencies. With respect to shareholder approval, the
Fitzpatrick group agreed to vote its shares in the same proportion as the
Company's public shareholders vote their shares.
Page 15
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
On November 3, 2004, Quality Dining and the individual defendants filed motions
to dismiss the amended complaint. Defendants argued as before that as a matter
of Indiana corporate law, the plaintiff cannot enjoin or otherwise challenge the
proposed transaction. Defendants contended that plaintiff's claims challenging
the proposed transaction should be dismissed for the additional reason that the
merger is subject to approval by a majority of the putative class that the
plaintiff seeks to represent. Defendants also argued that there is no cause of
action under the Indiana Securities Act for persons who "hold" their securities
purportedly because of misleading information, and no basis for a claim that
reports filed by the Company with the SEC violate a section of the Indiana Act
prohibiting the filing of misleading reports with the Indiana Securities
Division. Finally, defendants contended that the plaintiff has no private right
of action under Section 304 of the Sarbanes-Oxley Act and cannot maintain a
direct action as a shareholder of the Company to pursue a forfeiture of certain
executive compensation.
A hearing on the defendants' motion to dismiss was held on December 17, 2004. On
February 3, 2005, the Court granted the defendants' motion and dismissed the
plaintiff's amended complaint. On February 22, 2005, the plaintiff filed a
motion to correct errors or for reconsideration, and on March 11, 2005, the
defendants filed a response requesting the Court to deny the plaintiff's motion.
In addition, on February 18, 2005, lawyers representing the plaintiff delivered
to the Company's Board of Directors a demand letter relating to the merger and
related matters. The board appointed a special committee to investigate the
demands. By letter dated March 15, 2005, the special committee informed the
shareholder that, after due consideration, the special committee has determined
that the Company has no legal or equitable right or remedy in respect of the
demands and that it is not in the best interests of the Company to pursue any
right or remedy in the name of the Company with respect to such demands. Based
upon currently available information the Company does not expect the ultimate
resolution of this matter to have a materially adverse effect on the Company's
financial position or results of operations, but there can be no assurance
thereof.
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
FEBRUARY 20, 2005
(UNAUDITED)
Note 5: Debt Instruments.
The Company has a financing package totaling $89,066,000, consisting of a
$40,000,000 revolving credit agreement and a $49,066,000 mortgage facility, as
described below. The revolving credit agreement executed with JP Morgan Chase
Bank, as agent for a group of five banks, provides for borrowings of up to
$40,000,000 with interest payable at the adjusted LIBOR rate plus a contractual
spread. The weighted average borrowing rate under the revolving credit agreement
on February 20, 2004 was 5.31%. The revolving credit agreement will mature on
November 1, 2005, at which time all amounts outstanding are due. Since the
revolving credit agreement matures within the next year the $31,150,000
outstanding under the agreement has been classified as current debt. The Company
plans to refinance its revolver as part of its go private transaction, see note
1. If the Company does not go private, the Company believes it would be able to
refinance the revolver with the current bank group but there can be no assurance
thereof. The Company had $6,870,000 available under its revolving credit
agreement as of February 20, 2005. The revolving credit agreement 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 real and personal property
not pledged in the mortgage financing.
The revolving credit agreement contains, among other provisions, 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. Under the revolving credit agreement, the Company's
funded debt to consolidated cash flow ratio could not exceed 3.50 and its fixed
charge coverage ratio could not be less than 1.50 on February 20, 2005. The
Company was in compliance with these requirements with a funded debt to
consolidated cash flow ratio of 3.10 and a fixed charge coverage ratio of 1.71.
Letters of credit reduce the Company's borrowing capacity under its revolving
credit facility and represent purchased guarantees that ensure the Company's
performance or payment to third parties in accordance with specified terms and
conditions which amounted to $1,980,000 as of February 20, 2005.
The $49,066,000 mortgage facility currently includes 34 separate mortgage notes,
with terms of either 15 or 20 years. The notes have fixed rates of interest of
either 9.79% or 9.94%. The notes require equal monthly interest and principal
payments. The mortgage notes are collateralized by a first mortgage/deed of
trust and security agreement on the real estate, improvements and equipment on
19 of the Company's Chili's restaurants and 15 of the Company's Burger King
restaurants. These restaurants have a net book value of $32,571,000 at February
20, 2005. 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.
Page 17
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
The Company was not in compliance with the required consolidated fixed charge
coverage ratio for one of the subsets of the financed properties as of October
31, 2004. This subset is comprised solely of Burger King restaurants and had a
fixed charge coverage ratio of 1.13. Outstanding obligations under this subset
totaled $8,588,000 at February 20, 2005. The Company sought and obtained a
waiver for this covenant default from the mortgage lender through November 27,
2005. If the Company is not in compliance with the covenant as of November 27,
2005, the Company will most likely seek an additional waiver. The Company
believes it would be able to obtain such waiver but there can be no assurance
thereof. If the Company is unable to obtain such waiver 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 subset 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 revolving credit agreement. 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 revolving credit agreement. For
these reasons, the Company believes that its rights to prepay mortgage notes or
substitute properties, while reasonably possible, may be impractical depending
on the circumstances existing at the time.
The Company has 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 (VIE).
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 VIE's bank debt totaled
$7,468,000 at February 20, 2005 and $5,928,000 of that debt was classified as
current debt.
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 3.50x 3.00%
Less than 3.5x but greater than or equal to 3.00x 2.75%
Less than 3.0x but greater than or equal to 2.5x 2.25%
Less than 2.5x 1.75%
Page 18
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
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 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 3.50
through the second quarter of fiscal 2004 and 3.00 by the end of the third
quarter of fiscal 2005. The Company's funded debt to consolidated cash flow
ratio on February 20, 2005 was 3.10. To meet the required ratios throughout
fiscal 2005, the Company plans to continue to use cash from operations to reduce
funded debt.
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 which 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 19
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(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 period ended February 20, 2005, 367,185 options were excluded from the
diluted earnings per share calculations because to do so would have been
anti-dilutive. For the period ended February 15, 2004, 648,993 options were
excluded from the diluted earnings per share calculations because to do so would
have been anti-dilutive.
Note 7: Segment Reporting.
The Company operates five distinct restaurant concepts in the food-service
industry. It owns the Grady's American Grill and two Italian Dining concepts and
operates Burger King 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, with the exception of Porterhouse
Steaks and Seafood which is included with the Grady's American Grill 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 Dining concepts and Chili's Grill & Bar to be similar and has aggregated
them into a single reportable 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
and income and expense not allocated to reportable segments.
Other
Full Quick All Reconciling
(Dollars in thousands) Service Service Other Items Total
- -------------------------- -------- ------- ------ ----------- ---------
First quarter fiscal 2005
Revenues $ 34,026 $37,440 $1,143 (1,143) $71,466
Income from restaurant
operations 4,291 3,764 940 (289) 8,706
Operating income (loss) 2,720 662 904 (520) $ 3,766
Interest expense (2,045)
Other income (738)
Income from continuing -------
operations before income
taxes $ 983
=======
Depreciation and
amortization 1,324 1,422 159 191 $ 3,096
Page 20
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 20, 2005
(UNAUDITED)
First quarter fiscal 2004
(As restated - See Note 1A)
Revenues $ 31,756 $32,307 $1,100 $(1,100) $64,063
Income from restaurant
operations 4,053 3,142 214 417 7,826
Operating income (loss) 2,313 87 885 (555) $ 2,730
Interest expense (2,059)
Other income (441)
Income from continuing
operations before income -------
taxes $ 230
=======
Depreciation and
amortization 1,528 1,393 145 343 $ 3,409
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 52 weeks and ends October 30,
2005. The first quarter of the Company's fiscal year consists of 16 weeks. The
second, third and fourth quarters of fiscal 2005 will each consist of 12 weeks.
RESTATEMENT
The Company has determined that it had incorrectly calculated its straight-line
rent expense and related deferred rent liability. As a result, on February 4,
2005, the Company concluded that its previously filed financial statements for
fiscal years through 2003 and the first three interim periods in 2004 should be
restated. Historically, when accounting for leases with renewal options, the
Company recorded rent expense on a straight-line basis over the initial
non-cancelable lease term without regard for renewal options. In addition, the
Company depreciated its buildings, leasehold improvements and other long-lived
assets on those properties over a period that included both the initial
non-cancelable term of the lease and all option periods provided for in the
lease (or the useful life of the assets if shorter). The Company has restated
its financial statements to (i) recognize rent expense on a straight-line basis
over the lease term, including cancelable option periods where failure to
exercise such options would result in an economic penalty such that at lease
inception the renewal option is reasonably assured of exercise, and (ii) to
recognize depreciation on its buildings, leasehold improvements and other
long-lived assets over the expected lease term, where the lease term is shorter
than the useful life of the assets.
The restatement did not have any impact on the Company's previously reported
total cash flows, revenues or compliance with any covenant under its credit
facility or other debt instruments.
See Note 1A to the Consolidated Financial Statements.
Page 22
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages which
certain items of revenue and expense bear to total revenues.
Sixteen weeks Ended
February 20, February 15,
2005 2004
------------ ------------
Total revenues 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 27.6 27.5
Payroll and benefits 29.1 29.3
Depreciation and amortization 4.0 4.6
Other operating expenses 27.1 26.4
---- ----
Total restaurant operating expenses 87.8 87.8
---- ----
Income from restaurant operations 12.2 12.2
General and administrative expenses 6.8 7.8
Amortization of intangibles 0.1 0.1
---- ----
Operating income 5.3 4.3
---- ----
Other income (expense):
Interest expense (2.8) (3.2)
Loss on sale of property and equipment (0.1) (0.1)
Minority interest in earnings (1.0) (0.7)
Other income, net 0.1 0.1
---- ----
Total other expense, net (3.8) (3.9)
---- ----
Income from continuing operation before income
taxes 1.5 0.4
Income tax provision 0.7 0.5
---- ----
Income from continuing operations 0.8 (.01)
Income from discontinued operations, net of tax - 0.2
---- ----
Net income 0.8% 0.1%
==== ====
Page 23
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Restaurant sales in the first quarter of fiscal 2005 were $71,466,000, an
increase of $7,403,000, compared to restaurant sales of $64,063,000 in the first
quarter of fiscal 2004. The following factors influenced first quarter revenues:
The Company's Burger King restaurant sales increased $5,133,000 to $37,440,000
in the first quarter of fiscal 2005 when compared to restaurant sales of
$32,307,000 in the same period of fiscal 2004. The Company had increased revenue
of $1,846,000 due to additional sales weeks from six restaurants opened in
fiscal 2004. The Company closed one restaurant in fiscal 2005 which decreased
sales by $101,000. The Company's Burger King restaurants had average weekly
sales of $19,069 in the first quarter of fiscal 2005 versus $17,112 in the same
period in fiscal 2004. Sales at restaurants owned for more than one year
increased 10.7% in the first quarter of fiscal 2005 when compared to the same
period in fiscal 2004. The Company believes that the sales increase in fiscal
2005 resulted primarily from effective marketing and successful new product
introductions by Burger King Corporation.
The Company's Chili's Grill & Bar restaurant sales increased $2,525,000 to
$27,332,000 in the first quarter of fiscal 2005 compared to restaurant sales of
$24,807,000 in the same period in fiscal 2004. The Company had increased revenue
of $1,844,000 due to additional sales weeks from two restaurants opened during
fiscal 2004. Average weekly sales were $43,801 in the first quarter of fiscal
2005 versus $41,903 in the same period in fiscal 2004. Sales at restaurants open
for more than one year increased 1.9% in the first quarter of fiscal 2005 when
compared to the same period in fiscal 2004.
The Company's Italian Dining Division restaurant sales decreased $64,000 to
$4,963,000 in the first quarter of fiscal 2005 when compared to restaurant sales
of $5,027,000 in the same period in fiscal 2004. Average weekly sales were
$34,467 in the first quarter of fiscal 2005 versus $34,913 in fiscal 2004. Sales
at restaurants open for more than one year decreased 1.3% in the first quarter
of fiscal 2005 when compared to the same period in fiscal 2004. The Company
believes that the sales declines it experienced in its Italian Dining division
resulted primarily from competitive intrusion.
Sales in the Company's Grady's American Grill restaurant division decreased
$191,000 to $1,731,000 in the first quarter of fiscal 2005 compared to sales of
$1,922,000 in the same period in fiscal 2004. The three Grady's American Grill
restaurants had average weekly sales of $36,056 in the first quarter of fiscal
2005 versus $40,050 in the first quarter of fiscal 2004, a decrease of 10.0%.
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.
Total restaurant operating expenses were 87.8% of revenues in the first quarter
of fiscal 2005 and the first quarter of fiscal 2004. The following factors
influenced the operating margins:
Food and beverage costs were $19,727,000, or 27.6% of total revenues, in the
first quarter of fiscal 2005, compared to $17,586,000, or 27.5% of total
revenues, in the same period in fiscal 2004. Food and beverage costs as a
percentage of sales increased mainly due to higher commodity costs.
Page 24
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Payroll and benefits were $20,825,000 in the first quarter of fiscal 2005,
compared to $18,780,000 in the same period in fiscal 2004. As a percentage of
total revenues, payroll and benefits decreased to 29.1% in the first quarter of
fiscal 2005 from 29.3% in the same period of fiscal 2004. Payroll and benefits,
as a percentage of sales, improved in the quick service segment. The improvement
was mainly due to higher average unit volumes at the Company's Burger King
restaurants.
Depreciation and amortization expense was $2,857,000 in the first quarter of
fiscal 2005 compared to $2,967,000 in the first quarter of fiscal 2004. As a
percentage of total restaurant sales, depreciation and amortization decreased to
4.0% for the first quarter of fiscal 2005 compared to 4.6% in the same period in
fiscal 2004. The decrease, as a percentage of revenues, was mainly due to assets
becoming fully depreciated and higher average unit volumes at Chili's and Burger
King restaurants. As disclosed in Note 6 to the 2004 Annual Report on Form 10-K,
in fiscal 2000, the Company executed a "Franchisee Commitment" pursuant to which
it agreed to undertake certain initiatives including capital improvements and
other routine maintenance in all of its Burger King restaurants. The Capital
Portion of the Franchise Commitment ($1,966,000) was originally recorded as a
reduction in the cost of the assets acquired. Consequently, the Company has not
and will not incur depreciation expense over the useful life of these assets
(which range between five and ten years).
Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $19,351,000 in the first quarter of
fiscal 2005 compared to $16,904,000 in the same period of fiscal 2004. As a
percentage of total revenues, other restaurant operating expenses were 27.1% in
the first quarter of fiscal 2005 compared to 26.4% in the same period of fiscal
2004. The increase, as a percentage of sales, was mainly due to increased
promotional expenses in the quick service segment.
Income from restaurant operations increased $880,000 to $8,706,000, or 12.2% of
revenues, in the first quarter of fiscal 2005 compared to $7,826,000, or 12.2%
of revenues, in the comparable period of fiscal 2004. Income from restaurant
operations in the Company's quick service segment increased by $622,000,
primarily due to increased average weekly sales. Income from restaurant
operations in the full service segment increased by $238,000, mainly due to an
increase in sales weeks from new stores and an increase in average weekly sales
at the Company's Chili's restaurants.
General and administrative expenses decreased $133,000 to $4,881,000, or 6.8% of
revenues, in the first quarter of fiscal 2005 compared to $5,014,000, or 7.8% of
revenues, in the comparable period of fiscal 2004. The decrease, as a percentage
of sales, was mainly due to increased revenue.
Total other expenses were $2,716,000 for the first quarter of fiscal 2005 versus
$2,500,000 during the comparable period in fiscal 2004. The increase was mainly
due to a $252,000 increase in minority interest in earnings.
Income tax expense of $480,000 was recorded in the first quarter of fiscal 2005
compared to $289,000 in the same period of fiscal 2004. The increase is mainly
due to higher income before taxes.
Page 25
2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
At the end of the first quarter of fiscal 2005 the Company had a valuation
reserve against its deferred tax asset resulting in a net deferred tax asset of
$8.2 million. The Company's assessment of its ability to realize the net
deferred tax asset was based on the weight of both positive and negative
evidence, including the taxable income of its current operations. Based on this
assessment, the Company believes it is more likely than not that the net
deferred tax asset of $8.2 million will be realized. Such evidence is reviewed
periodically and could result in the recognition of additional tax benefit or
expense related to its net deferred tax asset position in the future.
Discontinued operations includes seven Grady's restaurants disposed of in fiscal
2004 and one disposed of in fiscal 2005. 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 for the first quarter of fiscal 2005 was $22,000 versus
income of $151,000 in fiscal 2004. The total restaurant sales from discontinued
operations for fiscal 2005 were $17,000 versus $3,639,000 in fiscal 2004.
For the first quarter of fiscal 2005, the Company reported net income of
$548,000 compared to net income of $92,000 for the first quarter of fiscal 2004.
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 2005, Burger
King Corporation's promotional campaigns and new products have been successful
at increasing Burger King average unit volumes.
Page 26
2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
During fiscal 2005, the Company has continued to emphasize the operational and
marketing initiatives that contributed to the success of its Chili's division in
the past. The Company expects average weekly sales to increase in the low single
digits for the remainder of fiscal 2005.
During the first quarter of fiscal 2005, 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 2005.
During the first quarter of fiscal 2005, 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 expects the Grady's American Grill division's operating performance to
continue to decline during fiscal 2005.
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 significant positive evidence considered by
management in making this judgment included the Company's profitability in 2002,
2003 and 2004, the consistent historical profitability of the Company's Burger
King and Chili's divisions, and the resolution during 2003 of substantially all
contingent liabilities related to its sold bagel businesses. The negative
evidence considered by management includes persistent negative operating trends
in its Grady's American Grill division, recent same store sales declines in the
Italian Dining division, and statutory limitations on available carryforward tax
benefits. In estimating its deferred tax asset, management used its 2005
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 sixteen weeks of 2005, net cash provided by operating
activities was $1,643,000 compared to $6,138,000 in fiscal 2004. The decrease
was mainly due to changes in working capital that used cash in fiscal 2005
versus providing cash in fiscal 2004. The large fluctuation in working capital
was mainly due to the timing of payments.
During the first sixteen weeks of fiscal 2005, the Company had $301,000 in
capital expenditures principally for the refurbishing of existing restaurants.
The Company had net borrowings of $525,000 under its revolving credit agreement
during the first sixteen weeks of fiscal 2005. As of February 20, 2005, the
Company's revolving credit agreement had an additional $6,870,000 available for
future borrowings. The Company's average borrowing rate on February 20, 2005,
was 5.31%.
The Company's primary cash requirements in fiscal 2005 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
2005, the Company anticipates opening one full service restaurant and major
remodels of four to six restaurants. The Company does not plan to open any new
quick service restaurants. 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 2005 are expected to range from $8,000,000 to
$10,000,000, 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
$1,792,000 in fiscal 2005, consisting primarily of the principal payments
required under its mortgage facility. The revolving credit agreement will mature
on November 1, 2005, at which time all amounts outstanding are due. Since the
agreement matures within the next year, the $31,150,000 outstanding under the
revolving credit agreement has been classified as current debt. The Company
plans to refinance its revolver as part of its go private transaction, see note
1. If the Company does not go private, the Company believes it would be able to
refinance the revolver with the current bank group but there can be no assurance
thereof. The Company had $5,928,000 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
$6,870,000 available under its revolving credit agreement as of February 20,
2005, will provide sufficient funds for its operating, capital expenditure, debt
service and other requirements through the end of fiscal 2005.
Page 28
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
As of February 20, 2005, the Company had a financing package totaling
$89,066,000, consisting of a $40,000,000 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 which 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 one of the subsets of the financed properties as of February
15, 2005. This subset is comprised solely of Burger King restaurants and had a
fixed charge coverage ratio of 1.13 as of February 15, 2005. Outstanding
obligations under this subset totaled $8,966,000 at October 31, 2004. The
Company sought and obtained a waiver for this covenant default from the mortgage
lender through November 27, 2005. If the Company is not in compliance with the
covenant as of November 27, 2005, the Company will most likely seek an
additional waiver. The Company believes it would be able to obtain such waiver
but there can be no assurance thereof. If the Company is unable to obtain such
waiver, 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 subset 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 revolving credit agreement.
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 revolving
credit agreement. For these reasons, the Company believes that its rights to
prepay mortgage notes or substitute properties, where reasonably possible, may
be impractical depending on the circumstances existing at the time.
The Company's Bank Facility is a $40,000,000 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 29
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 3.50x 3.00%
Less than 3.5x but greater than or equal to 3.00x 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 for fiscal 2004 and 2005 as
follows:
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO COVENANT
- --------------------------- -----------
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 3.50
through the second quarter of fiscal 2005 and 3.00 by the end of the third
quarter of fiscal 2005. The Company's funded debt to consolidated cash flow
ratio on February 20, 2005 was 3.10. To obtain the required ratios throughout
fiscal 2005, the Company plans to use cash generated by operations to reduce
debt.
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 which 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 30
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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.
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. 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 disposed Grady's American Grill restaurants as discontinued operations in the
accompanying consolidated financial statements.
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 2005 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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment". This Statement is a revision of FASB Statement No. 123, "Accounting
for Stock-Based Compensation". This Statement supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
Page 32
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
payment transactions. This Statement requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements. This
Statement establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a
fair-value-based measurement method in accounting for share-based payment
transactions with employees. This Statement is effective for public entities
that file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005, and for nonpublic
entities as of the beginning of the first annual reporting period that begins
after December 15, 2005. The Company is still assessing the impact, if any, the
Statement will have on the Company's financial statements.
In December 2004, the FASB issued FASB Statement No. 153 (SFAS 153), "Exchanges
of Nonmonetary Assets an amendment of APB Opinion No. 29 (APB 29). This
Statement addresses the measurement of exchanges of nonmonetary assets. It
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB 29 and replaces it with
an exception for exchanges that do not have commercial substance. This Statement
is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not believe the adoption of this
Statement will have any material impact on the Company's financial statements.
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 $40.0
million revolving credit facility which provides for interest payable at the
LIBOR rate plus a contractual spread. The Company's variable rate borrowings
under this revolving credit facility totaled $31.2 million at February 20, 2005.
The impact on the Company's annual results of operations of a one-point interest
rate change would be approximately $312,000.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of its disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the
principal executive officer and principal financial officer concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
In the course of the process of closing its accounts for fiscal year 2004, the
Company determined that (i) it had not been properly allocating certain federal
tax attributes between continuing operations and discontinued operations in the
first three quarters of 2004, and (ii) it had incorrectly calculated its
straight-line rent expense, related to deferred rent liability, and depreciation
expense on long-lived assets on certain leased properties. The accounting for
the allocation of federal tax attributes was corrected on Forms 10-Q/A filed on
December 23, 2004. The Company's previously reported net income and income per
share were not affected by this change in classification. The accounting for
straight-line rent expense, deferred rent liability and depreciation was
corrected on a Form 8-K filed on February 15, 2005.
The Company has instituted enhanced internal controls designed to ensure the
intra-period allocation of tax expense (benefit) between continuing operations
and discontinued operations conforms to the U.S. generally accepted accounting
principles. Such enhancements will generally conform quarterly procedures to
those utilized by the Company in its year-end closing process. Similarly, the
Company has instituted enhanced internal controls to ensure that straight-line
rent, deferred rent liability and depreciation are computed with reference to
correct lease terms.
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
NONE
ITEM 6. EXHIBITS
(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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining,Inc.
(Registrant)
Date: April 5, 2005 By: /s/ John C. Firth
------------------------------
Executive Vice President
General Counsel and Secretary
(Principal Financial Officer)
Page 35
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 36