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 May 11, 1997
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______________ to ____________________
Commission file number 0-23420
QUALITY DINING, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1804902
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4220 Edison Lakes Parkway, Mishawaka, Indiana 46545
(Address of principal executive offices and zip code)
(219) 271-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X____ No ________
The number of shares of the registrant's common stock outstanding as of
June 15, 1997 was 16,909,799.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 11, 1997
INDEX
Page
PART I. - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations....................3
Consolidated Balance Sheets..............................4
Consolidated Statements of Cash Flows....................5
Notes to Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........10
Part II - Other Information
Item 1. Legal Proceedings.......................................16
Item 2. Changes in Securities...................................16
Item 3. Defaults upon Senior Securities.........................16
Item 4. Submission of Matters to a Vote of Security Holders.....16
Item 5. Other Information.......................................17
Item 6. Exhibits and Reports on Form 8-K........................17
Signatures........................................................17
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 11, May 12, May 11, May 12,
1997 1996 1997 1996
------- ------- ------- -------
Revenues:
Restaurant sales:
Grady's American Grill $ 20,813 $ 24,571 $ 48,368 $ 41,679
Burger King 17,492 16,208 38,310 35,588
Bruegger's Bagel Bakery 13,740 3,228 29,256 6,321
Chili's Grill & Bar 12,500 9,506 28,087 21,086
Italian Dining 3,157 1,889 6,117 4,373
------- ------- ------- -------
Total restaurant sales 67,702 55,402 150,138 109,047
Franchise related revenue 3,396 - 7,479 -
------- ------- ------- -------
Total revenues 71,098 55,402 157,617 109,047
------- ------- ------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 20,780 17,406 46,178 34,256
Payroll and benefits 20,677 15,326 45,349 30,650
Depreciation and
amortization 3,948 2,351 8,895 4,813
Other operating expenses 19,193 12,620 38,119 24,390
------- ------- ------- -------
Total restaurant operating
expenses 64,598 47,703 138,541 94,109
General and administrative 9,666 2,518 15,496 5,088
Amortization of intangibles 1,097 270 2,561 569
Restructuring and
integration costs - - - 1,938
Impairment of assets 185,000 - 185,000 -
Store closing costs 15,513 - 15,513 -
Franchise operating
partner expense 2,066 - 2,066 -
------- ------- ------- -------
Total operating expenses 277,940 50,491 359,177 101,704
------- ------- ------- -------
Operating income (loss) (206,842) 4,911 (201,560) 7,343
------- ------- ------- -------
Other income (expense):
Interest expense (2,164) (1,701) (4,535) (3,125)
Gain on sale of property
and equipment - - - 3
Interest income 60 40 122 111
Other income (expense), net (12) 34 118 38
------- ------- ------- -------
Total other expense, net (2,116) (1,627) (4,295) (2,973)
------- ------- ------- -------
Income (loss) before
income taxes (credit) (208,958) 3,284 (205,855) 4,370
Income taxes (credit) (7,217) 1,198 (5,743) 1,595
------- ------- ------- -------
Net income (loss) $ (201,741) $ 2,086 $ (200,112) $ 2,775
======= ======= ======= =======
Net income (loss)
per share $ (11.93) $ 0.24 $ (11.83) $ 0.31
======= ======= ======= =======
Weighted average shares
outstanding 16,910 8,839 16,910 8,838
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
May 11, October 27,
1997 1996
--------- ---------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 2,061 $ 444
Accounts receivable 6,972 4,518
Accounts and note receivable, related parties - 11,651
Notes receivable 1,198 3,585
Refundable income taxes 2,671 -
Inventories 3,852 3,082
Deferred income taxes 7,579 1,996
Other current assets 2,896 3,438
------- -------
Total current assets 27,229 28,714
------- -------
Property and equipment, net 194,731 177,044
------- -------
Other assets:
Franchise fees and development costs, net 10,319 10,406
Goodwill, net 9,384 152,195
Trademarks, net 12,902 13,082
Pre-opening costs and
non-competition agreements, net 2,935 2,463
Liquor licenses, net 3,306 2,876
Other 1,156 1,234
------- -------
Total other assets 40,002 182,256
------- -------
Total assets $ 261,962 $ 388,014
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease and
non-competition obligations $ 479 $ 451
Accounts payable 17,474 8,531
Accrued restructuring and integration
costs - 8,984
Accrued store closing costs 15,513 -
Accrued liabilities 14,089 12,135
------- -------
Total current liabilities 47,555 30,101
Long-term debt 133,610 78,610
Capitalized lease and non-competition
obligations, principally to related parties,
less current portion 6,674 6,436
Deferred income taxes 5,111 3,744
------- -------
Total liabilities 192,950 118,891
------- -------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued
Common stock, without par value: 50,000,000
shares authorized; 16,929,799 and 16,929,035
shares issued, respectively 28 28
Additional paid-in capital 258,243 258,242
Retained earnings (deficit) (189,009) 11,103
------- -------
69,262 269,373
Less treasury stock, at cost, 20,000 shares 250 250
------- -------
Total stockholders' equity 69,012 269,123
------- -------
Total liabilities and stockholders' equity $ 261,962 $ 388,014
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Twenty-Eight Weeks Ended
May 11, May 12,
1997 1996
------- -------
Cash flows from operating activities:
Net income (loss) $(200,112) $ 2,775
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of
property and equipment 8,180 4,174
Amortization of other assets 4,647 1,658
Impairment of assets 185,000 -
Store closing accrual 15,513 -
Deferred income taxes (4,216) -
Refundable income taxes (2,671) -
Gain on sale of property and equipment - (3)
Changes in assets and liabilities, net of
consolidation of controlled affiliate:
Net increase in current assets (2,225) (2,759)
Net increase (decrease) in
current liabilities (2,058) 1,916
Other (19) 36
Net cash provided by ------- -------
operating activities 2,039 7,797
------- -------
Cash flows from investing activities:
Acquisition of business, net of cash acquired - (74,764)
Increase in notes receivable (23,927) -
Proceeds from sale of property and equipment - 3
Purchase of property and equipment (28,441) (14,636)
Payment of other assets (2,949) (1,812)
------- -------
Net cash (used in) investing activities (55,317) (91,209)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 1 55
Borrowings of long-term debt 55,000 81,491
Repayment of capitalized lease
and non-competition obligations (106) (114)
Payment of redeemable preferred stock
subscription payable - (250)
Other - (6)
------- -------
Net cash provided by financing activities 54,895 81,176
------- -------
Net increase (decrease) in cash and cash equivalents 1,617 (2,236)
Cash and cash equivalents, beginning of period 444 5,639
------- -------
Cash and cash equivalents, end of period $ 2,061 $ 3,403
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 11, 1997
(Unaudited)
Note 1: Description of Business.
Quality Dining, Inc. and its subsidiaries (the "Company") develop and operate
both quick service and full service restaurants throughout the United States.
The Company owns, operates and franchises Bruegger's Bagel Bakeries. As of May
11, 1997, there were 489 retail bagel bakeries, of which 310 were operated by
independent franchisees, 63 were operated by a controlled affiliate (Bagel
Acquisition Corporation) and 116 were Company-owned and operated. As of May 11,
1997 the Company owned and operated 41 Grady's American Grill restaurants, five
Spageddies Italian Kitchen restaurants and three Papa Vino's Italian Kitchen
restaurants. The Company also operated, as a franchisee, 66 Burger King
restaurants and 27 Chili's Grill & Bar restaurants.
Note 2: Basis of Presentation.
The accompanying condensed consolidated financial statements include the
accounts of Quality Dining, Inc. and its wholly-owned subsidiaries. As of May
11, 1997, the Company also consolidated its controlled affiliate, Bagel
Acquisition Corporation, into its consolidated balance sheet (see note 8).
All significant intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statement reporting purposes. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, considered necessary
for a fair presentation have been included. Operating results for the twelve-
week period and the twenty-eight week period ended May 11, 1997 are not
necessarily indicative of the results that may be expected for the 52-week year
ending October 26, 1997.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 27, 1996
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Note 3: Impairment of Long-Lived Assets
On May 10, 1997, the Company's Board of Directors committed the Company to a
plan of action to divest the Bruegger's bagel-related businesses. The Company
has recorded a non-cash impairment charge of $185.0 million and a store closing
charge of $15.5 million as a result of this decision. The non-cash impairment
charge represents a reduction of the carrying amounts of bagel-related assets
to their estimated fair values. The impairment charge includes non-cash
charges for the write-off of goodwill and the write-down of notes receivable
and property and equipment. The Company has received non-binding offers to
purchase its bagel-related assets and used these offers, less estimated costs
to sell, to determine the current fair value of the bagel-related assets.
Actual results, however, could vary significantly from the Company's current
estimates.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 11, 1997
(Unaudited)
The Company also recorded a store closing charge for the estimated costs
associated with closing under-performing Bruegger's units and other Bruegger's
units which were at various stages of development when the decision was made
to divest the Bruegger's bagel-related businesses. The charge includes amounts
for terminating leases, the write-off of fixed assets and pre-opening costs,
restaurant management severance costs and other store closing costs. As of
June 25, 1997, the Company has closed a total of 22 Bruegger's units in six
markets.
Note 4: Restructuring and Integration Costs.
In connection with the Company's acquisition of Bruegger's Corporation on June
7, 1996, the Company recorded a special pre-tax charge of $8.0 million during
the third quarter of fiscal 1996 for combining and integrating administrative
functions, recruiting and relocating new employees, franchise-related costs,
and legal and professional fees. This charge was in addition to the $6.0
million recorded as part of the cost of the acquisition for facility closures,
restaurant remodeling, and relocation and severance packages for Bruegger's
personnel. As of May 11, 1997, substantially all costs related to these
activities had been incurred (including $9.1 million incurred during the first
twenty-eight weeks of fiscal 1997), of which $11.8 million were cash payments
and $2.2 million were non-cash charges, primarily for the write-down of assets.
In conjunction with the acquisitions of the Grady's American Grill restaurants
on December 21, 1995 and the rights to the Spageddies restaurant concept in the
United States, which was finalized on October 28, 1995, the Company recorded a
special pre-tax charge of $1.9 million during the sixteen-week period ended
February 18, 1996. The charge reflected the estimated costs for integration of
computer systems, employee transition costs, recruitment and relocation costs,
and legal and professional fees. As of the end of fiscal 1996, substantially
all costs related to these activities had been incurred.
Note 5: Commitments.
As of May 11, 1997, the Company had commitments aggregating approximately $2.0
million for the construction of new restaurants.
Note 6: Long-Term Debt.
On January 22, 1997, the Company amended its revolving credit agreement with
Texas Commerce Bank, as agent for a group of seven banks, providing for
borrowings of up to $150 million with interest payable monthly at the adjusted
LIBOR rate plus a contractual spread. The revolving credit agreement expires
on April 26, 1999 and is unsecured. As of May 11, 1997, there was $133.6
million outstanding under this revolving credit facility.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, minimum levels of tangible net worth, as defined,
limitations on the incurrence of additional indebtedness and annual limitations
on the payment of dividends (other than stock dividends) on, or the purchase or
redemption of, any shares of the Company's capital stock in aggregate amounts
exceeding 40% of the Company's net income for the immediately preceding fiscal
year. At the conclusion of the second quarter of fiscal 1997, the Company
received a waiver from the bank group for non-compliance of the following
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 11, 1997
(Unaudited)
financial covenants contained in the revolving credit agreement: minimum
tangible net worth, ratio of funded debt to total capitalization, fixed charge
coverage ratio and ratio of funded debt to consolidated cash flow. In
addition, the bank group waived non-compliance with two non-financial
covenants. In order to avoid future non-compliance with the covenants
contained in the agreement, the Company will seek an amendment to the revolving
credit agreement to revise certain covenants and terms and conditions.
There can be no assurance that the Company will be able to amend
the existing agreement under terms acceptable to it and the bank group.
Note 7: Contingencies.
On November 10, 1994, the Company acquired all of the outstanding stock of
Grayling Corporation, Grayling Management Corporation, Chili's of Mt. Laurel,
Inc. ("Mt. Laurel"), and Chili's of Christiana, Inc. ("Christiana"). Prior to
entering into negotiations with the Company, Grayling Corporation and its
principal shareholder, T. Garrick Steele ("Steele"), had entered into an
agreement (the "Asset Agreement") to sell substantially all of Grayling
Corporation's assets to a third party, KK&G Enterprises, Inc. ("KK&G"). The
Asset Agreement was terminated by Grayling Corporation and was not
consummated. On September 27, 1994, KK&G filed suit in the Court of Common
Pleas, Philadelphia County, Pennsylvania, against Grayling Corporation, Mt.
Laurel, Christiana and Steele seeking damages and specific performance of the
Asset Agreement. Steele is obligated to continue to defend the lawsuit and
indemnify the Company and Grayling Corporation against any loss or damages
resulting from the lawsuit. Management does not expect that the lawsuit will
have a material adverse effect on the Company's financial position or results
of operations. In making such assessment, management considered the financial
ability of Steele to defend the lawsuit and indemnify the Company against any
loss or damages resulting from the lawsuit.
BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation, and Timothy
Johnson, Gregory LeMond, Michael Snow and Matthew Starr, principals of BruWest
(collectively "BruWest") commenced an action on January 30, 1997 against
Bruegger's Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick
(the "Bruegger's Defendants") and an investment banking firm retained by
BruWest alleging inter alia that the Bruegger's Defendants breached
commitments to provide financing to BruWest, interfered with the Plaintiffs'
efforts to obtain financing from third parties, violated existing franchise
and development agreements between BruWest and Bruegger's Franchise
Corporation, violated certain provisions of the Minnesota Franchise Act and
breached duties and implied covenants of good faith and fair dealing. The
Bruegger's Defendants denied all allegations in the Complaint. Without
admitting any liability or obligation to do so, on March 11, 1997, Bruegger's
Corporation loaned $1.2 million to the Plaintiffs. The loan is secured by
certain assets of the plaintiffs and personal guarantees of Mssrs. LeMond and
Snow. The loan provides for monthly interest payments commencing April 11,
1997 at the rate of nine (9%) percent per annum and matures on September 11,
1997. On March 14, 1997, the complaint was dismissed, without prejudice.
On May 22, 1997, BruWest refiled the complaint with additional allegations
challenging the enforceability of the loan documents and personal guarantees.
BruWest has ceased payment of royalties as required under its Franchise
agreements and Bruegger's Franchise Corporation has issued a written notice
of default to BruWest.
The Company is involved in various other legal proceedings incidental to the
conduct of its business. Management does not expect that any such proceedings
will have a material adverse effect on the Company's financial position or
results of operations.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Concluded
May 11, 1997
(Unaudited)
Note 8: Related Party Transactions
During the twenty-eight weeks ended May 11, 1997, the Company loaned $28.1
million to a related company ("Bagel Acquisition Corporation") owned by a
director and officer of the Company, which used the funds to acquire a number
of Bruegger's Bagel Bakeries from independent franchisees and for working
capital purposes. Bagel Acquisition Corporation was formed for the sole purpose
of facilitating the acquisition of bakeries and markets on behalf of the
Company for inclusion in the Company's proposed Franchise Operating Partner
Program. The Company had loaned Bagel Acquisition Corporation an aggregate of
$38.0 million as of May 11, 1997. The $38.0 million promissory note bears
interest at 11% and is collateralized by substantially all assets of Bagel
Acquisition Corporation. On May 10, 1997, the Company's Board of Directors
decided to divest the Bruegger's bagel-related businesses and therefore has
canceled the Franchise Operating Partner Program. In connection with this
decision, the Company has consolidated the assets and liabilities of Bagel
Acquisition Corporation into its consolidated balance sheet as of May 11, 1997.
The note receivable from Bagel Acquisition Corporation has been eliminated as
part of the consolidation. Bagel Acquisition Corporation was consolidated into
the Company's consolidated balance sheet as of May 11, 1997 and therefore its
results of operations have not been included in the Company's consolidated
financial results for the twenty-eight weeks ending May 11, 1997.
Note 9: Franchise Operating Partner Program
During the second quarter of fiscal 1997 the Company recorded a $2.1 million
charge for expenses relating to the Franchise Operating Partner Program.
These costs were primarily related to the professional services of financial
advisors involved in negotiating with potential equity investors for the
Franchise Operating Partner Program. The Franchise Operating Partner Program
has been canceled due to the Company's decision to divest Bruegger's
Corporation.
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 first quarter of the Company's fiscal year consists of 16
weeks with all subsequent quarters being 12 weeks in duration. The current
fiscal year ends October 26, 1997.
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, except where
otherwise noted.
Twelve Weeks Ended Twenty-Eight Weeks Ended
May 11, May 12, May 11, May 12,
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
Restaurant sales 95.2% 100.0% 95.3% 100.0%
Franchise related revenue 4.8 - 4.7 -
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Restaurant operating expenses (as % of restaurant sales)
Food and beverage 30.7 31.4 30.8 31.4
Payroll and benefits 30.5 27.7 30.2 28.1
Depreciation and amortization 5.8 4.2 5.9 4.4
Other operating expenses 28.3 22.8 25.4 22.4
----- ----- ----- -----
Total restaurant
operating expenses 95.3 86.1 92.3 86.3
General and administrative 13.6 4.5 9.8 4.7
Amortization of intangibles 1.5 .5 1.6 .5
Restructuring and
integration costs - - - 1.8
Impairment of assets 260.2 - 117.4 -
Store closing costs 21.8 - 9.8 -
Franchise operating
partner expense 2.9 - 1.3 -
----- ----- ----- -----
Total operating expenses 390.9 91.1 227.9 93.3
----- ----- ----- -----
Operating income (loss) (290.9) 8.9 (127.9) 6.7
----- ----- ----- -----
Other income (expense):
Interest expense (3.1) (3.1) (2.9) (2.8)
Interest income .1 .1 .1 .1
Other income (expense), net - .1 .1 -
----- ----- ----- -----
Total other expense, net (3.0) (2.9) (2.7) (2.7)
----- ----- ----- -----
Income (loss) before income
taxes (credit) (293.9) 6.0 (130.6) 4.0
Income taxes (credit) (10.1) 2.2 (3.6) 1.5
----- ----- ----- -----
Net income (loss) (283.8)% 3.8% (127.0)% 2.5%
===== ===== ===== =====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Restaurant sales for the second quarter of fiscal 1997 were $67.7 million, an
increase of 22.2% over restaurant sales of $55.4 million for the comparable
period in fiscal 1996. The increase was primarily attributable to the
acquisition of Bruegger's Corporation and sales generated by other Company
restaurants operating in the second quarter of fiscal 1997 that were not
operating during the second quarter of fiscal 1996. During the second quarter
of fiscal 1997 the Company opened eight Bruegger's units, one Grady's American
Grill restaurant, one Papa Vino's Italian Kitchen restaurant, one Burger King
restaurant and three Chili's Grill & Bar restaurants. Also during the second
quarter the Company closed two Grady's American Grill restaurants in
conjunction with an agreement to sell these units. The Company operated 258
restaurants at the end of the second quarter of fiscal 1997 compared to 150 at
the end of the second quarter of fiscal 1996. Sales from new restaurants and
the addition of Bruegger's Corporation were partially offset by a $3.8 million
decrease in sales at the Company's Grady's American Grill restaurants.
Total revenues for the Company were $71.1 million for the second quarter of
fiscal 1997, an increase of 28.3% over $55.4 million for the comparable period
in fiscal 1996. Total revenues for the Company includes restaurant sales and
franchise-related revenues from Bruegger's Corporation. Franchise-related
revenues include royalties on franchised restaurant sales, franchise and
development fees, interest income and other miscellaneous fees from franchised
operations.
Restaurant sales for the first twenty-eight weeks of fiscal 1997 were $150.1
million, an increase of 37.7% over restaurant sales of $109.0 million for the
comparable period in fiscal 1996. The increase was primarily attributable to
the acquisitions of Grady's American Grill restaurants and Bruegger's
Corporation and sales generated by other Company restaurants operating in the
first twenty-eight weeks of fiscal 1997 that were not operating during the
same period of fiscal 1996. For the twenty-eight weeks ending May 11, 1997,
the Company's Grady's American Grill and Bruegger's Bagel Bakery restaurants
contributed $29.6 million in increased sales, or 72.1% of the total sales
increase of $41.1 million.
Total revenues for the Company were $157.6 million for the first 28 weeks of
fiscal 1997, an increase of 44.6% over $109.0 million for the comparable
period in fiscal 1996.
As a percentage of restaurant sales, total restaurant operating expenses
increased to 95.3% for the second quarter of fiscal 1997 from 86.1% in the
second quarter of fiscal 1996. Contributing to this increase were higher
payroll and benefits expense, higher depreciation and amortization expense and
higher other operating expenses. These increases are primarily due to the
following three factors. First, sales at the Company's Bruegger's Bagel
Bakery and Grady's American Grill units have been lower than expected,
producing higher costs as a percentage of sales than at the Company's other
concepts. Second, payroll expenses increased as a percentage of sales as a
result of the minimum wage increase, the continued competition for qualified
restaurant employees and the labor inefficiencies typically associated with
new unit development as well as higher payroll levels at the Company's
Grady's American Grill and Bruegger's units. Third, other operating expenses
increased as a percentage of sales due to increased advertising and
promotional expenses, including increased local store marketing at the Company's
Bruegger's Bagel Bakery, Grady's American Grill, Chili's Grill & Bar and
Burger King restaurants. In addition, pre-opening expenses as a percentage of
sales were substantially higher due to significant new unit openings.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
As a percentage of restaurant sales, total restaurant operating expenses
increased to 92.3% in the first twenty-eight weeks of fiscal 1997 from 86.3%
in the same period of fiscal 1996. Contributing to this increase were higher
payroll and benefits expense, higher depreciation and amortization expense and
higher other operating expenses as discussed above.
General and administrative expenses, as a percentage of total revenues, were
13.6% in the second quarter of fiscal 1997 versus 4.5% in the comparable
period in fiscal 1996. The increase was primarily due to costs associated
with the development of a regional and corporate infrastructure designed to
support the now terminated Franchise Operating Partner Program and the
anticipated aggressive development of the Bruegger's brand.
In connection with the decision to discontinue Bruegger's development and
divest the Company's bagel-related businesses, a staff reduction plan was
implemented during the third quarter of fiscal 1997. A significant number of
positions were eliminated by this action. The Company does not expect to make
additional reductions prior to the divestiture of the bagel-related
businesses, but does anticipate significant further reductions following the
intended divestiture.
During the second quarter of fiscal 1997, the Company recorded a $15.5 million
charge for closing under-performing Bruegger's units and other Bruegger's
units which were at various stages of development when the decision was made
to divest the Bruegger's bagel-related businesses. The charge includes amounts
for terminating leases, write-offs of fixed assets and pre-opening costs,
restaurant management severance costs and other store closing costs. As of
June 25, 1997, the Company has closed a total of 22 Bruegger's restaurants in
six markets.
During the second quarter of fiscal 1997, the Company recorded a $2.1 million
charge for expenses related to the Franchise Operating Partner Program. These
costs were primarily related to the professional services of financial
advisors involved in negotiating with potential equity investors for the
Franchise Operating Partner Program. The Franchise Operating Partner Program
has been canceled due to the Company's decision to divest Bruegger's
Corporation.
Amortization of intangibles, as a percentage of total revenues, increased to
1.5% for the second quarter of fiscal 1997 compared to .5% for the same period
in fiscal 1996. The increase for the quarter was primarily due to the
amortization of intangible assets relating to the acquisition of Bruegger's
Corporation.
Amortization of intangibles, as a percentage of total revenues, increased to
1.6% for the first twenty-eight weeks of fiscal 1997 compared to .5% for the
same period in fiscal 1996. The increase was primarily due to the
amortization of intangible assets relating to the acquisitions of Bruegger's
Corporation and Grady's American Grill. The Company will record less
amortization of intangibles in the future due to elimination of Bruegger's-
related goodwill in connection with the Bruegger's asset impairment charge
taken during the second quarter of fiscal 1997.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company recorded a non-cash impairment charge of $185.0 million as a result
of the decision to divest its bagel-related businesses. The non-cash impairment
charge represents a reduction of the carrying amounts of bagel-related assets
to their estimated fair value. The impairment charge includes non-cash charges
for the write-off of goodwill and the write-down of notes receivable and
property and equipment. The Company has received non-binding offers to purchase
its bagel-related assets and used these offers, less estimated costs to sell,
to calculate the current fair value of the bagel-related assets. Actual
results, however, could vary significantly from the Company's current
estimates.
During the first quarter of fiscal 1996, the Company recorded a special pre-
tax charge of $1.9 million for restructuring and integration costs related to
the acquisitions of Grady's American Grill restaurants and Spageddies Italian
Kitchen.
Total other expenses, as a percentage of total revenues, increased to 3.0% for
the second quarter of fiscal 1997 from 2.9% during the comparable period in
fiscal 1996. Total other expenses, as a percentage of total revenues, remained
consistent at 2.7% for the first twenty-eight weeks of fiscal 1997 and fiscal
1996. Total other expenses remained consistent as a percent of sales for
these periods due to increases in interest expense being offset by similar
increases in revenue.
The effective income tax rates for the twelve and twenty-eight weeks ended May
11, 1997 were 3.5% and 2.8%, respectively, compared to 36.5% for the twelve
and twenty-eight weeks ended May 12, 1996. The low income tax benefit rate
for the fiscal 1997 period is a result of a significant portion of the $185.0
million non-cash charge for asset impairment being non-deductible for tax
purposes. A benefit for income taxes was recognized for the amount of the
charge giving rise to a net operating loss carryback and the amount of the
deferred income tax assets which can be justified by taxes paid in prior years.
A valuation allowance was established for the remaining deferred tax assets.
For the second quarter of fiscal 1997, the Company reported a net loss of
$201.7 million compared to net income of $2.1 million for the second quarter
of fiscal 1996. The net loss for the quarter ended May 11, 1997 was primarily
due to the $185.0 million non-cash asset impairment charge relating to the
decision to divest the Bruegger's bagel-related businesses.
For the first twenty-eight weeks of fiscal 1997, the Company reported a net
loss of $200.1 million compared to net income of $2.8 million for the same
period in fiscal 1996. The net loss for the twenty-eight weeks ended May 11,
1997 was primarily due to the $185.0 million non-cash asset impairment charge
relating to the Company's decision to divest the Bruegger's bagel-related
businesses.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") was issued by the Financial Accounting
Standards Board. The Company is required to initially adopt this
pronouncement during its fiscal 1998 first quarter ending February 15, 1998.
SFAS No. 128 will require the Company to make a dual presentation of basic and
fully diluted earnings per share on the face of its consolidated statements of
operations. The Company does not presently anticipate that SFAS No. 128 will
have a significant impact on the Company's historically reported earnings per
share.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $2.1 million at May 11, 1997, an
increase of $1.6 million from the $0.4 million at October 27, 1996. Principal
sources of funds consisted of: (i) those provided by operations ($2.0 million)
and (ii) net proceeds from the Company's revolving credit facility ($55.0
million). The primary uses of funds consisted of: (i) expenditures associated
with new restaurant development ($28.4 million), (ii) net increase in notes
receivable ($23.9 million) and (iii) franchise, liquor license and preopening
costs ($2.9 million).
The Company's primary cash requirements for the remainder of fiscal 1997 will
be to finance capital expenditures in connection with the opening of new
restaurants, to remodel existing restaurants and to provide for general
working capital purposes. The Company's growth plans for the remainder of
fiscal 1997 include one Bruegger's Bagel Bakery, which opened on
June 10, 1997, and one Chili's Grill & Bar restaurant. The Company expects
to incur capital expenditures of two to four million dollars for the
remaining twenty-four weeks of fiscal 1997.
On January 22, 1997, the Company amended its existing revolving credit
facility with Texas Commerce Bank, as agent for a group of seven banks. The
facility, as amended, provides for borrowings up to a maximum of $150 million,
with interest payable at the adjusted LIBOR rate plus a contractual spread.
The loan agreement expires on April 26, 1999 and is unsecured. As of May 11,
1997, there was $133.6 million outstanding under this revolving credit
facility.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, minimum levels of tangible net worth, as defined,
limitations on the incurrence of additional indebtedness and annual limitations
on the payment of dividends (other than stock dividends) on, or the purchase or
redemption of, any shares of the Company's capital stock in aggregate amounts
exceeding 40% of the Company's net income for the immediately preceding fiscal
year. At the conclusion of the second quarter of fiscal 1997, the Company
received a waiver from the bank group for non-compliance of the following
financial covenants contained in the revolving credit agreement: minimum
tangible net worth, ratio of funded debt to total capitalization, fixed charge
coverage ratio and ratio of funded debt to consolidated cash flow. In
addition, the bank group waived non-compliance with two non-financial
covenants. In order to avoid future non-compliance with the covenants
contained in the agreement, the Company will seek an amendment to the
revolving credit agreement to revise certain covenants and terms and
conditions. The Company also intends to request an increase in borrowing
capacity under the revolving credit agreement as part of the amendment. If
the Company does not receive additional borrowing capacity, it may not have
sufficient funds for its planned expansion and other internal operating cash
requirements through the end of fiscal 1997. In such event, the Company would
delay, to the extent feasible, any capital expenditures and would take other
appropriate actions to raise capital or reduce cash outlays. There can be no
assurance that the Company will be able to amend the existing agreement under
terms acceptable to it and the bank group.
Except for the historical information contained herein, the matters discussed
in this press release are forward looking statements that involve a number of
risks and uncertainties. Among the factors that could cause actual results to
differ materially are the following: the timing of and the amount realized from
the divestiture of the bagel-related businesses, the availability and cost of
the necessary capital to enable the Company to meet its obligations and to
develop additional units, the availability and cost of suitable locations for
new restaurants, the hiring, training and retention of skilled management and
other restaurant personnel, the ability to obtain the necessary government
approvals and third party consents, changes in governmental regulations,
including an increase in the minimum wage, and other risk factors listed from
time to time in the Company's filings with the Securities and Exchange
Commission.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 7 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 a Vote of Security Holders
On March 26, 1997, the Company held its annual meeting of shareholders. At
the meeting, the shareholders elected the following directors by the vote
indicated to serve until the year 2000 annual meeting of shareholders.
Broker
For Withheld Non-votes
Arthur J. Decio 15,543,272 60,577 3,809
Stephen A. Finn 11,020,725 4,583,124 3,809
Daniel B. Fitzpatrick 11,218,270 4,385,579 3,809
In addition, the following directors continue in office until the annual
meeting of shareholders in the year indicated:
Term Expires
James K. Fitzpatrick 1998
Steven M. Lewis 1998
Christopher J. Murphy, III 1999
William R. Schonsheck 1999
Ezra H. Friedlander 1998
Nordahl L. Brue 1999
Michael J. Dressell 1999
David T. Austin 1998
William W. Moreton 2000
Coopers & Lybrand, L.L.P. was approved as auditors for the Company for 1997 by
the following vote:
15,563,532 For; 36,111 Against; 8,015 Abstentions and Broker non-votes
The adoption of the Company's 1997 Stock Option and Incentive Plan was
approved by the following vote:
8,752,835 For; 345,765 Against; 4,331,154 Abstentions and 2,177,904 Broker
non-votes
Item 5. Other Information
On March 27, 1997, the Company amended its By-Laws to increase the size of the
Board of Directors to 12 members from 11. The Company also elected William W.
Moreton to the Board of Directors upon his employment as Executive Vice
President, Treasurer and Chief Financial Officer. Mr. Moreton's term expires at
the 2000 annual meeting of shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such exhibits,
and is incorporated herein by reference.
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining, Inc.
(Registrant)
Date: June 25, 1997 By: /s/ William W. Moreton
Executive Vice President,
Treasurer and Chief Financial
Officer
INDEX TO EXHIBITS
Exhibit
No. Description
10-AM Second amendment to revolving
credit loan agreement, Promissory note and
security agreement
27 Financial Data Schedule
Exhibit 10-AM
SECOND AMENDMENT TO REVOLVING
CREDIT LOAN AGREEMENT, PROMISSORY NOTE AND
SECURITY AGREEMENT
THIS SECOND AMENDMENT to Revolving Credit Loan Agreement, Promissory
Note and Security Agreement ("Amendment") is made and entered into as of this
19th day of February, 1997 by and between BAGEL ACQUISITION CORPORATION, an
Indiana Corporation ("Borrower") and QUALITY DINING, INC., an Indiana
Corporation ("Lender.").
R E C I T A L S
A. Borrower and Lender entered into a certain Revolving Credit Loan
Agreement, dated August 12, 1996 ("Loan Agreement").
B. Borrower signed, as maker, a certain Promissory Note related to
the Loan Agreement, dated August 12, 1996, in the face amount of Eleven
Million ($11,000,000) Dollars and in favor of Lender as named payee ("Note").
C. Borrower and Lender entered into a certain Security Agreement,
dated August 12, 1996 securing the repayment of the Note ("Security
Agreement").
D. Borrower and Lender entered into a certain First Amendment to
Revolving Credit Loan Agreement, Promissory Note and Security Agreement, dated
as of December 2, 1996 amending the Loan Agreement, Note and Security
Agreement.
E. Borrower and Lender wish to amend, once again, the Loan Agreement,
Note and Security Agreement.
NOW, THEREFORE, the parties hereto, each in consideration of the
other's promises and agreements hereinafter contained and for other good and
valuable consideration, agree that the Recitals above set forth are a part of
this Amendment for all purposes and further agree as follows:
1. The Loan Agreement is hereby amended, again, by deleting the words
and figures "Thirty Million Dollars ($30,000,000)" from the second line of
Recital A and replacing them with "Forty Million ($40,000,000) Dollars."
2. The Note is hereby amended, again, by:
(a) Deleting the figures "$30,000,000" from the third line and
replacing them with
"$40,000,000", and
(b) Deleting the words and figures "Thirty Million Dollars
($30,000,000)" from the
eighth and ninth lines and replacing them with "Forty Million
Dollars
($40,000,000);" and
(c) Deleting the date "April 15, 1997" from the tenth line and
replacing it with "June 15, 1997."
3. The Security Agreement is hereby amended, again, by deleting the
words and figures "Thirty Million Dollars and no cents ($30,000,000.00)" from
the eleventh line and replacing them with "Forty Million Dollars and no cents
($40,000,000)."
4. All of the terms, provisions and conditions of the Loan Agreement,
Note and Security Agreement, as amended heretofore, shall remain in full force
and effect to the extent they are not amended hereby; and the Loan Agreement,
Note and Security Agreement, as amended heretofore and as amended hereby,
shall continue in full force and effect in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
day and year first above written.
"BORROWER"
Bagel Acquisition Corporation
/s/ Daniel B. Fitzpatrick
By: Daniel B. Fitzpatrick,
Its: President
"LENDER"
Quality Dining, Inc.
/s/ John C. Firth
By: John C. Firth,
Its: Senior Vice President
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