<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended OCTOBER 27, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
3820 EDISON LAKES PARKWAY
MISHAWAKA, INDIANA 46545
(Address of principal executive offices) (Zip Code)
(219) 271-4600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
$167,877,236
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at December 9, 1996
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").
16,909,609
Number of shares of Common Stock, without par value, outstanding at
January 14, 1997
DOCUMENT INCORPORATED BY REFERENCE
Portions of the following document have been incorporated by reference into this
Annual Report on Form 10-K
IDENTITY OF DOCUMENT PART OF FORM 10-K INTO WHICH
DOCUMENT IS INCORPORATED
Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held
March 26, 1997 PART III
<PAGE>
The Registrant's Annual Report on Form 10-K for the year ended October 27,
1996 is being amended to correct Part II, Item 8 and Part IV, Item 14.
Specifically, Note 13 to the Consolidated Financial Statements is being amended
to correct the amounts of future minimum lease payments guaranteed by the
Registrant. No other parts of the Annual Report are being amended.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- ------------------------------------------------------------------------------
OCTOBER 27, October 29,
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 444 $ 5,639
Accounts receivable 4,518 599
Accounts and note receivable, related parties 11,651 -
Note receivable 3,585 -
Inventories 3,082 825
Deferred income taxes 1,996 23
Other current assets 3,438 1,352
- ------------------------------------------------------------------------------
Total current assets 28,714 8,438
- ------------------------------------------------------------------------------
Property and equipment, net 177,044 63,209
- ------------------------------------------------------------------------------
Other assets:
Franchise fees and development costs, net 10,406 10,698
Goodwill, net 152,195 10,216
Trademarks, net 13,082 -
Pre-opening costs and non-competition agreements,
net 2,463 1,709
Liquor licenses, net 2,876 2,131
Investment in redeemable preferred stock - 2,625
Other 1,234 221
- ------------------------------------------------------------------------------
Total other assets 182,256 27,600
- ------------------------------------------------------------------------------
Total assets $388,014 $ 99,247
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease and
non-competition obligations, principally
to related parties $ 451 $ 360
Current portion of redeemable preferred
stock subscription payable - 375
Accounts payable 8,231 4,111
Accounts payable, related parties 300 1,076
Accrued liabilities 21,119 3,631
Income taxes payable - 711
- ------------------------------------------------------------------------------
Total current liabilities 30,101 10,264
Long-term debt 78,610 7,413
Capitalized lease and non-competition
obligations, principally to related
parties, less current portion 6,436 6,885
Redeemable preferred stock subscription
payable, less current portion - 875
Deferred income taxes 3,744 2,409
- ------------------------------------------------------------------------------
Total liabilities 118,891 27,846
- ------------------------------------------------------------------------------
Commitments and contingencies
(Notes 11, 12 and 13)
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued
Common stock, without par value: 50,000,000
shares authorized; 16,929,035 and 8,856,520
shares issued, respectively 28 28
Additional paid-in capital 258,242 63,190
Retained earnings 11,103 8,433
- ------------------------------------------------------------------------------
269,373 71,651
Less treasury stock, at cost, 20,000 shares 250 250
- ------------------------------------------------------------------------------
Total stockholders' equity 269,123 71,401
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $388,014 $ 99,247
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-27-
<PAGE>
<TABLE>
<CAPTION>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------
Fiscal Year Ended
OCTOBER 27, October 29, October 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Restaurant sales:
Bruegger's Bagel Bakery $ 25,967 $ 5,270 $ 191
Grady's American Grill 85,101 - -
Italian Dining Division 8,388 4,741 174
Burger King 70,987 57,013 49,716
Chili's Grill & Bar 41,913 38,267 14,286
- --------------------------------------------------------------------------------------------------
Total restaurant sales 232,356 105,291 64,367
Franchise related revenue 5,274 - -
- --------------------------------------------------------------------------------------------------
Total revenues 237,630 105,291 64,367
- --------------------------------------------------------------------------------------------------
Operating expenses:
Restaurant operating expenses:
Food and beverage 72,201 31,176 18,576
Payroll and benefits 66,176 27,191 16,190
Depreciation and amortization 11,635 5,109 2,610
Other operating expenses 52,452 24,057 15,351
- --------------------------------------------------------------------------------------------------
Total restaurant operating expenses 202,464 87,533 52,727
General and administrative 12,047 5,706 4,065
Amortization of intangibles 2,537 682 83
Restructuring and integration costs 9,938 - -
- --------------------------------------------------------------------------------------------------
Total operating expenses 226,986 93,921 56,875
- --------------------------------------------------------------------------------------------------
Operating income 10,644 11,370 7,492
- --------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (6,340) (2,699) (1,314)
Gain (loss) on sale of property and equipment 4 343 (59)
Interest income 206 127 155
Other income (expense), net 154 (12) (14)
- --------------------------------------------------------------------------------------------------
Total other expense (5,976) (2,241) (1,232)
- --------------------------------------------------------------------------------------------------
Income before income taxes 4,668 9,129 6,260
Income taxes 1,998 3,240 2,332
- --------------------------------------------------------------------------------------------------
Net income $ 2,670 $ 5,889 $ 3,928
- --------------------------------------------------------------------------------------------------
Net income per share $0.23 $0.85
- -------------------------------------------------------------------------------
Weighted average shares outstanding 11,855 6,925
- -------------------------------------------------------------------------------
Pro forma income data (unaudited):
Net income as reported $ 3,928
Pro forma provision for income taxes 512
- --------------------------------------------------------------------------------------------------
Pro forma net income $ 3,416
- --------------------------------------------------------------------------------------------------
Pro forma net income per share $0.59
- --------------------------------------------------------------------------------------------------
Pro forma weighted average number of
common shares and common stock
equivalent shares outstanding 5,801
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-28-
<PAGE>
<TABLE>
<CAPTION>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------
Additional Total
Preferred Common Paid-in Retained Treasury Stockholders'
Stock Stock Capital Earnings Stock Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1993 $ - $26 $ 129 $ 3,606 $ - $ 3,761
Net income, fiscal 1994 - - - 3,928 - 3,928
S Corporation distributions - - - (6,567) - (6,567)
Issuance of common stock - 2 - - - 2
Proceeds from sale of common stock,
net of offering expenses - - 25,458 - - 25,458
Reclassification of S Corporation deficit - - (1,577) 1,577 - -
- -------------------------------------------------------------------------------------------------------------------
Balance, October 30, 1994 - 28 24,010 2,544 - 26,582
Net income, fiscal 1995 - - - 5,889 - 5,889
Issuance of common stock in acquisitions:
Grayling - - 3,350 - - 3,350
SHONCO - - 4,000 - - 4,000
Proceeds from sale of common stock,
net of offering expenses - - 31,688 - - 31,688
Exercise of stock options - - 129 - - 129
Tax benefit arising from the exercise
of stock options - - 13 - - 13
Treasury stock acquired - - - - (250) (250)
- -------------------------------------------------------------------------------------------------------------------
Balance, October 29, 1995 - 28 63,190 8,433 (250) 71,401
Net income, fiscal 1996 - - - 2,670 - 2,670
Bruegger's acquisition:
Issuance of common stock - - 123,051 - - 123,051
Issuance of preferred stock 11,780 - - - - 11,780
Exchange of preferred stock for common stock (10,115) - 10,115 - - -
Redemption of preferred stock (1,665) - - - - (1,665)
Proceeds from sale of common stock,
net of offering expenses - - 59,755 - - 59,755
Exercise of stock options - - 1,228 - - 1,228
Tax benefit arising from the exercise
of stock options - - 903 - - 903
- -------------------------------------------------------------------------------------------------------------------
Balance, October 27, 1996 $ - $28 $258,242 $11,103 $(250) $269,123
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-29-
<PAGE>
<TABLE>
<CAPTION>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
OCTOBER 27, October 29, October 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,670 $ 5,889 $ 3,928
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property and equipment 9,836 4,008 2,221
Amortization of other assets 5,192 1,991 549
(Gain) loss on sale of property and equipment (4) (343) 59
Deferred income taxes 42 413 623
Changes in operating assets and liabilities, excluding
effects of acquisitions and dispositions:
Accounts receivable (4,609) (243) (179)
Inventories (796) (182) (146)
Other current assets (1,319) (707) (149)
Accounts payable 603 1,012 897
Accrued liabilities 2,657 994 (215)
Income taxes payable 192 76 634
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,464 12,908 8,222
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (77,168) (23,472) -
Proceeds from sales of property and equipment 4 598 736
Purchase of property and equipment (41,135) (25,357) (14,574)
Purchase of redeemable preferred stock - (375) (750)
Repayment of stockholder notes receivable - - 623
Increase in notes receivable (10,025) - -
Payment of other assets (3,960) (1,799) (1,806)
Other, net (1,147) (101) 34
- ------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (133,431) (50,506) (15,737)
- ------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from sale of common stock, net 59,755 31,688 25,458
Proceeds from exercise of stock options 1,228 129 -
Borrowings of long-term debt 218,285 37,721 6,000
Repayment of long-term debt (163,223) (30,308) (14,200)
Repayment of capitalized lease and non-competition obligations (358) (196) (172)
Payment of redeemable preferred stock subscription payable (250) (250) -
Redemption of preferred stock (1,665) - -
Repayment of stockholder notes payable - - (3,158)
S Corporation distributions paid - - (4,138)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 113,772 38,784 9,790
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,195) 1,186 2,275
Cash and cash equivalents, beginning of year 5,639 4,453 2,178
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 444 $ 5,639 $ 4,453
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 6,131 $ 2,687 $ 1,376
Cash paid for income taxes 2,850 2,665 1,075
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of redeemable preferred stock - 500 1,000
Property and equipment purchased and
related liability included in accounts payable 2,075 1,288 1,592
Common stock issued in acquisitions 123,051 7,350 -
Preferred stock issued in acquisition 11,780 - -
Long-term debt assumed in acquisition 16,135 - -
Treasury stock acquired in disposition of restaurants - 250 -
Non-competition agreement - 510 -
Note receivable acquired in disposition of restaurants 3,500 - -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
<PAGE>
Quality Dining, Inc.
Notes to Consolidated Financial Statements
{1} NATURE OF BUSINESS, REORGANIZATION AND PUBLIC OFFERINGS
NATURE 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 October 27, 1996, there were 425 retail bagel bakeries, of
which 325 were operated by franchisees and 100 were Company-owned and operated.
The Company owns and operates 42 Grady's American Grill restaurants, five
restaurants under the trade name of Spageddies Italian Kitchen and one
restaurant under the trade name Papa Vino's Italian Kitchen. The Company also
operates, as a franchisee, 63 Burger King restaurants and 22 Chili's Grill & Bar
restaurants.
REORGANIZATION - On December 17, 1993, in connection with the initial public
offering of the Company's common stock described below, the Company's Board of
Directors and stockholders adopted Restated Articles of Incorporation and
authorized the reorganization of the Company. Under the Company's Restated
Articles of Incorporation, the Company's authorized capital stock consists of 50
million shares of common stock and five million shares of preferred stock, each
without par value. In addition, the Company's Board of Directors authorized a
7,869.1-for-one stock split of the common stock effected as a stock dividend on
December 17, 1993.
The Company's Board of Directors also adopted a share exchange and
reorganization agreement dated as of December 17, 1993 (the "Reorganization
Agreement") among the Company, certain of its affiliated companies and their
respective stockholders. Pursuant to the Reorganization Agreement, on March 1,
1994 the Company acquired all of the outstanding shares of capital stock of the
affiliated companies in a share exchange transaction under which additional
shares of the Company's common stock were issued to the stockholders of the
affiliated companies in exchange for all of their capital stock in the
affiliated companies.
The authorization of the common and preferred stock and effects of the
stock split and the reorganization have been reflected retroactively in the
accompanying consolidated financial statements as if the share exchange and
related mergers had been consummated at the beginning of the earliest period
presented.
PUBLIC OFFERINGS - On March 8, 1994, the Company completed an initial public
offering of 2,471,250 shares of its common stock at $11.50 per share. Net of
underwriting fees and offering expenses, proceeds to the Company amounted to
$25.5 million. On October 16, 1995, the Company completed a second public
offering consisting of 1,771,288 shares of its common stock at $19.25 per share.
Net of underwriting fees and offering expenses, proceeds to the Company
aggregated $31.7 million. On July 31, 1996, the Company completed a third public
offering consisting of 2,541,595 shares of its common stock at $25.00 per share.
Net of underwriting fees and offering expenses, proceeds to the Company
aggregated $59.8 million.
{2} SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR - The Company maintains its accounts on a 52/53 week fiscal year
ending the last Sunday in October. The fiscal years ended October 27, 1996
(fiscal 1996), October 29, 1995 (fiscal 1995) and October 30, 1994 (fiscal 1994)
each contained 52 weeks.
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of Quality Dining, Inc. and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated affiliates are accounted for using the equity
method.
-31-
<PAGE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INVENTORIES - Inventories consist primarily of restaurant food and supplies and
are stated at the lower of cost or market. Cost is determined using the first-
in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment, including capitalized leased
properties, are stated at cost. Depreciation and amortization are being recorded
on the straight-line method over the estimated useful lives of the related
assets, which range from three to 31 1/2 years, or the terms of the related
leases, if shorter. Upon the sale or disposition of property and equipment, the
asset cost and related accumulated depreciation is removed from the accounts and
any resulting gain or loss is included in income. Normal repairs and maintenance
costs are expensed as incurred.
GOODWILL AND TRADEMARKS - Goodwill arising from the excess of the purchase price
over the acquired tangible and intangible net assets acquired in acquisitions
and trademarks are being amortized on a straight-line basis, principally over 40
years. Accumulated amortization of goodwill as of October 27, 1996 and October
29, 1995 was $2,455,801 and $546,835, respectively. Accumulated amortization of
trademarks as of October 27, 1996 was $281,287 (none at October 29, 1995). The
Company reviews the carrying value of these recorded assets whenever events or
changes in circumstances warrant, and measures the potential impairment by
comparing the carrying value of the asset to the expected undiscounted net
future cash inflows resulting from the assets to which the intangible relates.
Management believes that no impairment of goodwill and trademarks has occurred
and that no reduction of the estimated useful life is warranted.
FRANCHISE FEES AND DEVELOPMENT COSTS - 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 costs paid to
the respective franchisors are deferred and expensed in the period the related
restaurants are opened. The excess of the purchase price over the acquired
tangible and intangible assets acquired in the SHONCO acquisition has been
allocated to franchise rights (see Note 14). The franchise agreements generally
provide for a term of 20 years with renewal options upon expiration. Accumulated
amortization of franchise fees and development costs as of October 27, 1996 and
October 29, 1995 was $1,702,510 and $1,050,572, respectively.
FRANCHISE RELATED REVENUE RECOGNITION - Franchise related revenue includes
royalties, franchise fees, development fees, net commissary revenue, interest
income and other miscellaneous fees related to the Company's bagel business.
Franchisees are required to pay monthly royalties, generally 4% to 5% of
restaurant sales, which the Company recognizes as earned. Each franchisee also
pays an initial franchise fee for each bakery opened. Development fees, which
result from area development agreements with franchisees, are deferred and
recognized as revenue when all material conditions have been substantially
completed by the Company, which generally occurs when the bakeries under the
related area development agreements are opened. Deferred development fees at
October 27, 1996 were $770,000. Net commissary revenue results from products
sold to franchisees from Company-owned commissaries. Interest income results
from the Company's notes receivable from franchisees.
ADVERTISING - The Company maintains an advertising fund for national and
regional advertising for the Bruegger's Bagel Bakery ("Bruegger's") concept. The
advertising fund collects fees paid by Company-owned
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<PAGE>
and franchised bakeries, and disburses funds relating to costs associated with
maintaining, administering and preparing advertising, marketing, public
relations and promotional programs for the Bruegger's concept. Contributions to
the fund are based on a specified percentage of sales, generally 2% to 4%. Such
contributions are recorded as earned and have been reflected as a reduction of
advertising expenses in the 1996 consolidated statement of income. The Company
incurs advertising expense related to its other concepts under franchise
agreements (see Note 5) or through local advertising. Advertising costs are
expensed at the time the related advertising first takes place. Advertising
costs for all concepts were $4.6 million, $2.9 million and $2.8 million for
fiscal years 1996, 1995 and 1994, respectively.
PRE-OPENING COSTS - Direct costs incurred in connection with opening new
restaurants are deferred and amortized on a straight-line basis over a 12-month
period following the opening of a restaurant. Amortization of pre-opening costs
aggregated $1,848,021, $1,007,320 and $248,264 for fiscal years 1996, 1995 and
1994, respectively.
LIQUOR LICENSES - Costs incurred in securing liquor licenses for the Company's
restaurants and the fair value of liquor licenses acquired in acquisitions are
capitalized and amortized on a straight-line basis, principally over 20 years.
Accumulated amortization of liquor licenses as of October 27, 1996 and October
29, 1995 was $269,752 and $146,157, respectively.
COMPUTER SOFTWARE COSTS - Costs of purchased and internally developed computer
software are capitalized and amortized over a five-year period using the
straight-line method. As of October 27, 1996 and October 29, 1995, capitalized
computer software costs, net of related accumulated amortization, aggregated
$1,707,512 and $406,957, respectively. Amortization of computer software costs
was $197,472 for fiscal year 1996. Amortization of computer software costs in
fiscal 1995 and 1994 was not significant.
CAPITALIZED INTEREST - Interest costs capitalized during the construction period
of new restaurants were $233,837 and $137,545 for fiscal years 1996 and 1995,
respectively. No interest was capitalized in fiscal 1994.
INCOME TAXES - In connection with the reorganization on March 1, 1994, the
Company terminated its S Corporation status and became taxable as a C
Corporation. On that date, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the years in which the differences are expected to reverse. Upon
termination of the Company's S Corporation status and adoption of SFAS No. 109,
the Company established a net deferred tax liability of $546,000 representing
the tax effect of cumulative temporary differences as of that date (see Note 7).
The consolidated statements of income for the fiscal years ended October
27, 1996 and October 29, 1995 include a provision for income taxes for the
entire period. Prior to March 1, 1994, the Company (or its predecessors) had
elected to be taxed under Subchapter S of the Internal Revenue Code. As a result
of the election, federal and state income taxes on the net income of the Company
were payable personally by the stockholders. The consolidated statement of
income for the fiscal year ended October 30, 1994 includes a provision for
federal and state income taxes only for the period March 1, 1994 through October
30, 1994. Accordingly, a pro forma provision for federal and state income taxes,
using a 37% effective rate, is presented for the period November 1, 1993 through
February 28, 1994 as if the Company were taxed as a C Corporation for the entire
fiscal year.
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<PAGE>
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject
the Company to credit risk, consist primarily of cash and cash equivalents and
notes receivable (see Notes 13 and 14). Substantially all of the Company's cash
and cash equivalents at October 27, 1996 are concentrated with a bank located in
Michigan City, Indiana.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PRO FORMA DATA (UNAUDITED) - Pro forma net income per share for the fiscal year
ended October 30, 1994 is based on 4,437,552 shares of common stock and common
stock equivalents outstanding from November 1, 1993 to March 1, 1994, which
includes 4,000,000 shares of common stock outstanding, including shares issued
in the exchange of shares discussed in Note 1, and 437,552 shares of common
stock and common stock equivalents assumed to be outstanding, and 6,471,250
shares of common stock outstanding from that date through October 30, 1994.
The 437,552 shares of common stock and common stock equivalents assumed to
be outstanding are equivalent to the number of shares of common stock at the
initial public offering price of $11.50 per share (after deducting underwriting
discounts) necessary to fund that portion of the $5.1 million S Corporation and
special distributions payable to stockholders in excess of fiscal 1993
undistributed earnings in the aggregate amount of $4.4 million at October 31,
1993 and 26,359 common stock equivalents assumed outstanding resulting from the
granting of nonqualified stock options to certain employees of the Company to
purchase an aggregate of 26,590 shares of the Company's common stock.
RECLASSIFICATIONS - Certain information in the consolidated financial statements
for fiscal 1995 and 1994 has been reclassified to conform with the current
reporting format. The reclassifications had no effect on total assets,
liabilities and stockholders' equity or net income as previously reported.
RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement
establishes financial accounting and reporting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. This statement is effective for
fiscal years beginning after December 15, 1995. The Company does not expect
that the adoption of SFAS No. 121 in fiscal 1997 will have a material effect on
its consolidated financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". This statement establishes a fair value based method of
accounting for employee stock options or similar equity instruments, but allows
companies to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees".
Companies electing to continue to apply the accounting requirements in APB
Opinion No. 25 must, however, make pro forma disclosures of net income and net
income per share as if the fair value based method of accounting defined in SFAS
No. 123 had been applied. These disclosure requirements are effective for
fiscal years beginning after December 15, 1995. The Company expects to adopt
SFAS No. 123 on a disclosure basis only, beginning in fiscal 1997.
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<PAGE>
{3} OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Other current assets and accrued liabilities consist of the following:
- ----------------------------------------------------------------------------
OCTOBER 27, October 29,
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Other current assets:
Deposits $ 1,499 $ 465
Refundable income taxes 1,300 -
Prepaid expenses and other 639 887
- ----------------------------------------------------------------------------
$ 3,438 $ 1,352
- ----------------------------------------------------------------------------
Accrued liabilities:
Accrued salaries and wages $ 3,489 $ 1,621
Accrued advertising and royalties 756 633
Accrued property taxes 1,505 421
Accrued sales taxes 1,225 521
Accrued restructuring and integration costs 8,984 -
Deferred development fees 770 -
Other accrued liabilities 4,390 435
- ----------------------------------------------------------------------------
$ 21,119 $ 3,631
- ----------------------------------------------------------------------------
</TABLE>
{4} PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
- ----------------------------------------------------------------------------
OCTOBER 27, October 29,
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Land $ 29,573 $10,217
Land improvements 7,406 3,411
Buildings 33,740 18,510
Capitalized leased property 7,644 7,644
Leasehold improvements 52,864 10,814
Restaurant equipment 60,885 26,510
Office furniture and equipment 4,288 1,289
Vehicles 979 552
Construction in progress 6,019 979
- ----------------------------------------------------------------------------
203,398 79,926
- ----------------------------------------------------------------------------
Less, accumulated depreciation and amortization:
Capitalized leased property 2,909 2,527
All other 23,445 14,190
- ----------------------------------------------------------------------------
26,354 16,717
- ----------------------------------------------------------------------------
Property and equipment, net $177,044 $63,209
- ----------------------------------------------------------------------------
</TABLE>
{5} FRANCHISE AND DEVELOPMENT RIGHTS
The Company has entered into franchise agreements with two franchisors for
the operation of two of its restaurant concepts, Burger King and Chili's. The
franchise agreements provide the franchisors with significant rights regarding
the business and operations of the Company's franchised restaurants. The
franchise agreements with Burger King Corporation require the Company to pay
royalty and advertising fees equal to 3.5% and 4.0% of Burger King restaurant
sales, respectively. The franchise agreements with Brinker International, Inc.
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<PAGE>
("Brinker") covering the Company's Chili's restaurant concept require the
Company to pay royalty and advertising fees equal to 4.0% and 0.5% of Chili's
restaurant sales, respectively.
The Company has entered into development agreements to develop additional
restaurants in each of the two concepts. Each of the development agreements
requires the Company to pay a development fee. In addition, the development
agreements contain certain requirements regarding the number of units to be
opened in the future. Each restaurant opened will be subject to a separate
franchise agreement, which requires the payment of an initial franchise fee
(currently $40,000) for each such restaurant. Should the Company fail to comply
with the required development schedules or with the requirements of the
agreements for restaurants within areas covered by the development agreements,
the franchisors have the right to terminate the Company's development agreements
and the exclusivity provided by the development agreements.
The Company's Bruegger's Bagel Bakeries and Spageddies restaurant concepts
were previously subject to franchise and development agreements with Bruegger's
Corporation and Brinker, respectively. These agreements required the payment of
royalty and advertising fees and an initial franchise fee upon opening a
restaurant. On June 7, 1996, the Company acquired all of the issued and
outstanding shares of common stock of Bruegger's Corporation and is no longer
subject to such fees. On October 28, 1995, the Company acquired all rights to
the Spageddies restaurant concept in the United States from Brinker for a cash
payment of $100,000 and is no longer subject to such fees.
{6} RETIREMENT PLANS
The Company maintains a discretionary, noncontributory profit sharing plan
for its eligible employees. Plan contributions are determined by the Company's
Board of Directors and are based upon 5.7% of annual participant compensation in
excess of the social security wage base. Contributions in excess of that
amount, if any, are allocated to all plan participants on a pro-rata basis.
All employees are also eligible to participate in a 401(k) plan after one
year of service in which the employee has worked a minimum of 1,000 hours. The
Company matches a portion of the employee's contribution to the plan and
provides investment choices for the employee.
The Company's contributions under both plans aggregated $100,000, $70,000
and $60,000 for fiscal years 1996, 1995 and 1994, respectively.
{7} INCOME TAXES
The provision for income taxes for the fiscal years ended October 27, 1996,
October 29, 1995 and for the period March 1, 1994 through October 30, 1994 (see
Note 2) is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Fiscal Year Ended March 1, 1994
OCTOBER 27, October 29, to
(Dollars in thousands) 1996 1995 October 30, 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,736 $2,320 $1,489
State 220 507 220
- ---------------------------------------------------------------------------------------------------
1,956 2,827 1,709
- ---------------------------------------------------------------------------------------------------
Deferred:
Establishment of net deferred
tax liability at date of termination
of S Corporation status (March 1, 1994) - - 546
Provision for the period 42 413 77
- ---------------------------------------------------------------------------------------------------
42 413 623
- ---------------------------------------------------------------------------------------------------
Total $1,998 $3,240 $2,332
- ---------------------------------------------------------------------------------------------------
</TABLE>
-36-
<PAGE>
The components of the deferred tax asset and liability are as follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 27, October 29,
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax asset:
FICA tip credit $ 215 $ -
Restructuring and integration costs 1,584 -
Stock appreciation rights 549 -
Accrued liabilities 700 -
Other 55 23
- ------------------------------------------------------------------------------
Current deferred tax asset 3,103 23
Less: Valuation allowance (1,107) -
- ------------------------------------------------------------------------------
$ 1,996 $ 23
- ------------------------------------------------------------------------------
Long-term deferred tax asset (liability):
Bruegger's net operating loss carryforwards $ 3,553 $ -
Property and equipment (2,617) (1,098)
Franchise fees (1,463) (1,481)
Pre-opening costs (698) (356)
Capitalized lease obligations 679 598
Other (228) (72)
- ------------------------------------------------------------------------------
Net long-term deferred tax liability (774) (2,409)
Less: Valuation allowance (2,970) -
- --------------------------------------------------------------------------
$(3,744) $(2,409)
- --------------------------------------------------------------------------
</TABLE>
Effective with the acquisition of Bruegger's Corporation on June 7, 1996, the
Company established a valuation allowance against Bruegger's Corporation's
deferred tax assets in the amount of $4.8 million. Subsequent to the acquisition
date, the Company reduced the valuation allowance by $680,000 with a
corresponding reduction of goodwill. Any future reductions in the valuation
allowance will also reduce goodwill. Net operating losses of Bruegger's
Corporation in the amount of $9.4 million expire through the year 2011 and are
subject to limitations as to their utilization.
Differences between the effective income tax rate and the U.S. statutory tax
rate were as follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
OCTOBER 27, October 29, October 30,
(Percent of pretax income) 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income
tax benefit 3.1 3.6 3.3
S Corporation income for which no
income taxes were provided - - (8.2)
Recognition of net deferred tax liability upon
termination of S Corporation status - - 8.7
FICA tax credit (5.9) (1.6) (.6)
Goodwill amortization 10.5 - -
Other, net 1.1 (.5) .1
- ------------------------------------------------------------------------------------------
Effective tax rate 42.8% 35.5% 37.3%
- ------------------------------------------------------------------------------------------
</TABLE>
{8} DISTRIBUTIONS
As an S Corporation, the Company (or its predecessors) made annual
S Corporation distributions to its stockholders. On February 28, 1994, the
Company distributed to its stockholders its S Corporation earnings from November
1, 1993 through that date in the aggregate amount of $1.4 million. On December
17, 1993, the Company and its predecessors declared distributions to their
respective stockholders aggregating $5.1 million
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<PAGE>
that were paid on January 4, 1994. Of the total distributions, an amount
representing undistributed S Corporation earnings through October 31, 1993 ($2.7
million) was paid in cash and a special distribution of $2.4 million was
represented by two-year promissory notes bearing interest at the rate of 6% per
annum. The promissory notes were repaid in full from the proceeds of the
Company's initial public offering.
{9} LONG-TERM DEBT AND CREDIT AGREEMENTS
On April 26, 1996, the Company amended its revolving credit agreement
providing for borrowings up to $150 million. The interest rate paid by the
Company is the adjusted LIBOR rate plus 1.5% (6.9375% at October 27, 1996).
Concurrently, the Company repaid the amount then outstanding under the previous
revolving loan agreement, which was terminated.
The revolving credit agreement expires on April 26, 1999 and is unsecured.
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. As of October 27, 1996, there was $78.6 million outstanding under this
revolving credit agreement.
In connection with the Grady's American Grill acquisition (see Note 14),
the Company entered into a revolving credit agreement providing for borrowings
of up to $85 million with interest payable monthly at the lower of the adjusted
LIBOR rate plus 2% or the bank's prime rate less 0.5%. On December 21, 1995, the
Company borrowed $82 million under this agreement to finance the Grady's
American Grill acquisition and to repay the amount then outstanding under the
previous revolving credit agreement, which was terminated.
On February 22, 1994, the Company entered into a revolving credit
agreement, which as amended through August 10, 1995, provided for borrowings up
to a maximum of $45 million with interest payable monthly at the lower of the
LIBOR rate plus 2% or the bank's prime rate less 0.5%. As of October 29, 1995,
there was $7.4 million outstanding under this revolving credit agreement.
{10} STOCK OPTION PLANS
The Company has two stock option plans: the 1993 Stock Option and
Incentive Plan (the "Employee Plan") and the Outside Directors Stock Option Plan
(the "Outside Directors Plan").
Under the Employee Plan, shares of restricted stock and options to purchase
shares of the Company's common stock may be granted to officers and other
employees. An aggregate of one million shares of common stock, including an
additional 500,000 shares reserved in fiscal 1996, have been reserved for
issuance under the Employee Plan. On December 17, 1993, the Company's Board of
Directors granted nonqualified stock options for 770 employees to purchase an
aggregate of 26,590 shares of common stock at an exercise price of $.10 per
share. The options have a term of 10 years and were exercisable beginning
February 1, 1995. Compensation expense of approximately $300,000 associated with
the granting of these nonqualified stock options was recognized at the date of
the Company's initial public offering (March 8, 1994). Since that date, certain
of these employees terminated their employment with the Company prior to
exercising the options. As a result, the amount of compensation expense was
reduced to $212,838 for fiscal year 1994 and was further reduced by $37,883 and
$6,739 during fiscal years 1995 and 1996, respectively. These amounts are
included in general and administrative expenses in the consolidated statements
of income.
Under the Outside Directors Plan, 40,000 shares of common stock have been
reserved for the issuance of nonqualified stock options to be granted to non-
employee directors of the Company. On May 1, 1994 and on each May 1 thereafter,
each then non-employee director of the Company will receive an option to
purchase
-38-
<PAGE>
2,000 shares of common stock at an exercise price equal to the fair
market value of the Company's common stock on the date of grant. Each option has
a term of 10 years and becomes exercisable six months after the date of grant.
Activity with respect to the Company's stock option plans for fiscal years
1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Number of Shares Price Range
- -------------------------------------------------------------------
<S> <C> <C>
Outstanding, November 1, 1993 - $-
Granted 112,590 .10 - 11.50
Canceled .10
- -------------------------------------------------------------------
Outstanding, October 30, 1994 102,670 .10 - 11.50
Granted 173,950 12.125 - 21.25
Canceled (6,640) .10 - 12.125
Exercised (11,070) .10 - 12.125
- -------------------------------------------------------------------
Outstanding, October 29, 1995 258,910 .10 - 21.25
Granted 598,184 10.45 - 31.375
Canceled (35,450) .10 - 24.50
Exercised (118,527) .10 - 12.125
- -------------------------------------------------------------------
Outstanding, October 27, 1996 703,117 .10 - 31.375
- -------------------------------------------------------------------
Exercisable, October 27, 1996 129,812
- -------------------------------------------------
Available for future grants at October
27, 1996 207,286
- -------------------------------------------------
</TABLE>
{11} LEASES
The Company leases its office facilities and a substantial portion of the
land and buildings used in the operation of its restaurants. The restaurant
leases generally provide for a noncancelable term of five to 20 years and
provide for additional renewal terms at the Company's option. Most restaurant
leases contain provisions for percentage rentals on sales above specified
minimums. Rental expense incurred under these percentage rental provisions
aggregated approximately $1,087,900, $686,500 and $514,000 for fiscal years
1996, 1995 and 1994, respectively.
As of October 27, 1996, future minimum lease payments related to these
leases were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
Fiscal Year Capital Leases Operating Leases Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 1,081 $ 12,048 $ 13,129
1998 1,081 12,127 13,208
1999 1,081 11,888 12,969
2000 1,081 10,971 12,052
2001 1,081 9,700 10,781
2002 and thereafter 7,813 52,855 60,668
- --------------------------------------------------------------------------------
13,218 $109,589 $122,807
--------------------
Less: Amount representing interest 6,697
- ---------------------------------------------------
Present value of future minimum
lease payments of which $242 is
included in current
liabilities at October 27, 1996 $ 6,521
- ---------------------------------------------------
</TABLE>
-39-
<PAGE>
Future minimum lease payments do not include amounts payable by the Company
for maintenance costs, real estate taxes, insurance, contingent rentals payable
based on a percentage of sales above specified minimum amounts for restaurant
facilities, amounts due under an operating lease for Bruegger's office space
located in Vermont (see Note 13) or amounts due under a lease for the new
corporate headquarters (see Note 12).
Rent expense, including percentage rentals based on sales, was $9.9
million, $5.1 million and $3.2 million for fiscal years 1996, 1995 and 1994,
respectively.
{12} COMMITMENTS AND CONTINGENCIES
The Company is party to several legal proceedings which are considered by
management to be customary and incidental to its business. In the opinion of
management, after consulting with legal counsel, the ultimate disposition of
these lawsuits should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company is self-insured for the portion of its employee health care
costs not covered by insurance. The Company is liable for medical claims up to
$100,000 per eligible employee annually, and aggregate annual claims up to
approximately $2.2 million. 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 annual
deductible per occurrence and is liable for aggregate annual claims up to
approximately $600,000.
During fiscal 1996, the Company invested $718,750 for a 50% ownership
interest in a limited liability company ("LLC") established to acquire and
develop a 53,000 square-foot facility, which the Company intends to occupy in
1997 as its corporate headquarters and lease from the LLC. The investment is
accounted for using the equity method. The related lease agreement provides for
a fifteen-year initial term, with four additional five-year renewal options.
Minimum annual rental payments are estimated to be approximately $600,000 and
have not been included in the future minimum lease payments summarized in Note
11. The Company is responsible for costs incurred on the headquarters facility
in excess of those originally planned. The Company and the other member of the
LLC have jointly and severally guaranteed the debt of the LLC, which amounted to
$4.0 million at October 27, 1996.
At October 27, 1996, the Company had commitments aggregating $1.3 million
for the construction of restaurants.
-40-
<PAGE>
{13} RELATED PARTY TRANSACTIONS
The Company leases its current headquarters facility, one Bruegger's Bagel
Bakery and a substantial number of its Burger King restaurants from entities
that are substantially owned by certain directors, officers and stockholders of
the Company. Amounts paid for leases with these related entities are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
OCTOBER 27, October 29, October 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Operating leases:
Base rentals $2,542 $2,451 $2,424
Percentage rentals 350 365 353
- --------------------------------------------------------------------------------
2,892 2,816 2,777
- --------------------------------------------------------------------------------
Capitalized leases:
Interest 821 913 969
Reduction of lease obligations 204 188 168
Percentage rentals 200 160 123
- --------------------------------------------------------------------------------
1,225 1,261 1,260
- --------------------------------------------------------------------------------
Total $4,117 $4,077 $4,037
- --------------------------------------------------------------------------------
</TABLE>
The Company guarantees future minimum lease payments of certain affiliated
franchisees of Bruegger's. As of October 27, 1996, future minimum lease payments
related to these leases were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------
Fiscal Year
- --------------------------------------
<S> <C>
1997 $1,668
1998 1,643
1999 1,489
2000 1,258
2001 899
2002 and thereafter 2,948
- --------------------------------------
Total minimum lease payments $9,905
- --------------------------------------
</TABLE>
In October 1996, the Company entered into an agreement with a related party
to terminate a lease for office space located in Vermont. The agreement requires
a payment of $900,000 to be made in the first quarter of fiscal 1997. The
estimated cost for the termination of this lease was accrued as part of the cost
of the purchase of Bruegger's Corporation at the time of the acquisition (see
Note 14).
Affiliated real estate partnerships and two other entities related through
common ownership pay management fees to the Company as reimbursement for
administrative services provided. Total management fees for fiscal 1996, 1995
and 1994 were $14,500, $15,750 and $16,000, respectively.
During the fiscal years 1996, 1995 and 1994, the Company made payments to
companies owned by certain directors, stockholders and officers of the Company
of $399,140, $324,500 and $204,398, respectively, for air transportation
services and $11.7 million and $6.1 million in fiscal 1995 and 1994,
respectively, to a related party construction company to construct and renovate
certain of the Company's restaurants. As of November 1, 1995, the Company
acquired all of the capital stock of this related-party construction company.
During fiscal 1996, the Company loaned $9.9 million to a company 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. The $9.9 million
promissory note bears interest at 11%, is due April 15, 1997 and is
collateralized by substantially all assets of the related company. Interest
income recognized by the Company on this note in fiscal 1996 amounted to
$119,000. Subsequent to October 27, 1996 and through January 10, 1997, the
-41-
<PAGE>
Company loaned this related company an additional $14.5 million to acquire
additional Bruegger's Bagel Bakeries from independent franchisees and for
working capital purposes. The Company anticipates that all of these bakeries
will be sold to other unrelated franchisees of Bruegger's in fiscal 1997.
The Company and its Bruegger's concept transact certain business activities
with the aforementioned related company and certain other entities whose
principal shareholders are directors and/or officers of the Company. A summary
of these transactions for the fiscal year ended October 27, 1996 included:
purchases of cream cheese ($2.0 million); sales of bagels and related products
($2.0 million); royalties earned ($1.7 million); marketing fees earned
($764,000); installation of point-of-sale registers ($410,000); management,
accounting, legal and computer support services ($534,000); and transaction fees
($210,000).
At October 27, 1996 and October 29, 1995, amounts owed by the Company to
related companies were $300,282 and $1.1 million, respectively. At October 27,
1996, amounts receivable from related parties aggregated $11.7 million (none at
October 29, 1995), which included the above note receivable of $9.9 million.
{14} ACQUISITIONS AND DISPOSITIONS
On July 15, 1996, the Company acquired all the assets, including
trademarks, of Moe's Broadway Bagel, Inc., operator of three Moe's Broadway
Bagel restaurants ("Moe's"), for $3.6 million in cash. In a concurrent
transaction, the Company sold the operating assets of Moe's to a third party in
exchange for a promissory note in the amount of $3.5 million and entered into
development and franchise agreements for which the Company collects franchise
related revenues. The promissory note bears interest at 11%, is due April 15,
1997 and is collateralized by substantially all assets of Moe's. The Company
retained the rights to all of Moe's trademarks and other intangible assets.
On June 7, 1996, the Company acquired all of the issued and outstanding
shares of common stock of Bruegger's Corporation. Pursuant to the terms of the
acquisition and related merger agreement, Bruegger's Corporation became a wholly
owned subsidiary of the Company. The purchase price consisted of the issuance of
5,127,121 shares of the Company's common stock, valued at $123.1 million, and
direct acquisition and estimated post-merger integration costs aggregating $6.9
million. The Company also issued 117,800 shares of its Series A Convertible
Cumulative Preferred Stock, without par value (the "Quality Dining Preferred
Stock") in exchange for a like number of issued and outstanding shares
(exclusive of those shares held by the Company, which were canceled) of
Bruegger's Corporation Class A Cumulative Convertible Preferred Stock, $100 par
value per share. Subsequent to the acquisition, 101,150 shares of the Quality
Dining Preferred Stock were converted into an aggregate of 285,531 shares of the
Company's common stock. The excess of the purchase price over the acquired
tangible and intangible net assets of $143.9 million has been allocated to
goodwill and is being amortized on a straight-line basis over 40 years.
In connection with the acquisition, the Company recorded a special pre-tax
charge of $8.0 million 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. Through fiscal
1996, approximately $4.9 million of these costs have been incurred, of which
$3.5 million were cash payments and $1.4 million were non-cash charges,
primarily for the write down of assets. The Company expects to complete these
actions in fiscal 1997.
On December 21, 1995, the Company acquired 42 Grady's American Grill
restaurants and all rights to the Grady's American Grill concept from Brinker
International, Inc. The purchase price aggregated $75.4 million consisting of
$74.4 million in cash and the incurrence of $1.0 million of liabilities and
direct acquisition costs. The cash portion of the purchase price was funded
through borrowings under the Company's revolving credit facility. The excess of
the purchase price over the acquired tangible and intangible net assets of $13.2
million has been allocated to trademarks and is being amortized on a straight-
line basis over 40 years.
-42-
<PAGE>
The acquisitions of Bruegger's Corporation and Grady's American Grill were
both accounted for using the purchase method and the operating results have been
included in the Company's consolidated financial statements since their
respective acquisition dates.
In connection with the acquisitions of Grady's American Grill 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 first quarter of fiscal 1996. The charge reflected the
estimated costs for integration of computer systems, employee transition costs,
recruitment and relocation costs, and legal and professional fees. At October
27, 1996, substantially all costs related to these activities had been incurred.
On August 14, 1995, the Company acquired all of the issued and outstanding
common stock of SHONCO, Inc. and three affiliated companies and certain
operating assets of three other affiliated companies. SHONCO, Inc. and its
affiliated companies (collectively, "SHONCO") owned and operated eight Burger
King restaurants in the Detroit, Michigan metropolitan area, and had the right
to develop four additional Burger King restaurants in that metropolitan area
under target reservation agreements acquired by the Company. The purchase price
of SHONCO aggregated $9.6 million and consisted of $5.1 million in cash
(including $450,000 paid in fiscal 1996), the issuance of 316,832 shares of the
Company's common stock, valued at $4.0 million, and the incurrence of a $510,000
liability under a non-competition agreement (discounted at 8.5%). The
acquisition was accounted for using the purchase method and the operating
results of SHONCO have been included in the Company's consolidated financial
statements since the date of the acquisition. A deferred tax liability of $1.4
million was established at the time of the acquisition for the income tax effect
of differences between the book and tax bases of certain of the assets acquired.
The excess of the purchase price over the acquired tangible and intangible net
assets of $7.7 million has been allocated to franchise rights and is being
amortized on a straight-line basis over 20 years.
On November 10, 1994, the Company acquired all of the outstanding capital
stock of Grayling Corporation and certain affiliated companies (collectively,
"Grayling"), and certain real estate and improvements from an affiliate of the
principal Grayling stockholder. Grayling operated eight Chili's restaurants in
the greater Philadelphia, Pennsylvania area. The purchase price for Grayling
aggregated $19.7 million consisting of $16.3 million in cash and the issuance of
286,080 shares of the Company's common stock valued at $3.4 million. The Company
also paid $2.6 million in cash for the real estate and improvements related to a
Chili's restaurant under construction held by an affiliate of the principal
Grayling stockholder. The cash portion of the purchase price was funded through
borrowings under the Company's revolving credit facility.
The acquisition was accounted for using the purchase method and the
operating results of Grayling have been included in the Company's consolidated
financial statements since the date of acquisition. The excess of the purchase
price over the acquired tangible and intangible net assets of $10.6 million has
been allocated to goodwill and is being amortized on a straight-line basis over
20 years.
-43-
<PAGE>
The following unaudited pro forma results for the fiscal years ended
October 27, 1996 and October 29, 1995 were developed assuming Bruegger's,
Grady's American Grill and SHONCO had been acquired as of the beginning of the
periods presented. Grayling has been included in the Company's historical
financial results since its acquisition date of November 10, 1994. For both
years, the unaudited pro forma results reflect certain adjustments, including
interest expense, depreciation of property and equipment and amortization of
intangible assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fiscal Year Ended
OCTOBER 27, October 29,
(Dollars in thousands, except per share data) 1996 1995
- ------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Total revenues $269,555 $229,586
Pro forma net income (loss) (5,776) 2,001
Pro forma net income (loss) per share $(.39) $.16
- ------------------------------------------------------------------------------
</TABLE>
The unaudited pro forma results shown above are not necessarily indicative
of the consolidated results that would have occurred had the acquisitions taken
place at the beginning of the respective periods, nor are they necessarily
indicative of results that may occur in the future.
Effective July 10, 1995, the Company sold two of its Burger King
restaurants located in the Detroit, Michigan metropolitan area to the former
senior vice president of the Company responsible for the Detroit market of the
Company's Burger King restaurant division. The sales price for the two Burger
King restaurants aggregated $850,000 consisting of $600,000 in cash and the
assignment to the Company of 20,000 shares of the Company's common stock, valued
at $250,000. The Company recognized a pre-tax gain of $350,000 in connection
with this sale during fiscal 1995.
-44-
<PAGE>
Quality Dining, Inc.
Report of Independent Accountants
To the Stockholders and Board of Directors
of Quality Dining, Inc.:
We have audited the accompanying consolidated balance sheets of Quality Dining,
Inc. and subsidiaries as of October 27, 1996 and October 29, 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for the fifty-two week periods ended October 27, 1996, October 29, 1995 and
October 30, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quality Dining,
Inc. and subsidiaries as of October 27, 1996 and October 29, 1995, and the
consolidated results of their operations and their cash flows for the fifty-two
week periods ended October 27, 1996, October 29, 1995 and October 30, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
South Bend, Indiana
January 10, 1997
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The following consolidated financial statements of the Company and its
subsidiaries are set forth in Part II, Item 8.
Consolidated Balance Sheets as of October 27, 1996 and October 29,
1995
Consolidated Statements of Income for the fiscal years ended October
27, 1996, October 29, 1995 and October 30, 1994
Consolidated Statements of Stockholders' Equity for the fiscal years
ended October 27, 1996, October 29, 1995 and October 30, 1994
Consolidated Statements of Cash Flows for the fiscal years ended
October 27, 1996, October 29, 1995 and October 30, 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedules:
None
3. 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.
-47-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Daniel B. Fitzpatrick
-------------------------
DANIEL B. FITZPATRICK
Date: February 12, 1997 President and Chief Executive Officer
S-1
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INDEX TO EXHIBITS
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EXHIBIT IN THIS
NO. DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------- ----------
<S> <C> <C>
2 (1) Share Exchange and Reorganization Agreement by and among the
Registrant and Burger Services, Inc., Bravokilo, Inc., Bendan
Restaurant, Inc., Burger Management of Muskegon, Inc., Burger
Management Fort Wayne, Inc., Best Bagels, Inc., Full Service Dining
Inc., Southwest Dining, Inc., Daniel B. Fitzpatrick, Gerald O. Fitzpatrick,
James K. Fitzpatrick, John D. Fitzpatrick, Ezra H. Friedlander, Benjamin
Schulman and Michael G. Sosinski dated as of December 17, 1993.................
2-B (2) Stock Purchase Agreement among the Registrant, Grayling Corporation,
T. Garrick Steele, Joseph E. Olin, Andrew P. Murphy, Anita L. Wood,
Thomas Miller and Steve Hunter dated as of September 27, 1994..................
2-C (3) Acquisition Agreement by and among the Registrant, Bravokilo, Inc.,
William R. Schonsheck, SHONCO, Inc., SHONCO II, Inc., SHONCO III,
Inc., SHONCO IV, Inc., SHONCO V, Inc., SHONCO VI, Inc., SHONCO Six,
Inc., SHONCO Seven Management, Inc., SHONCO X, Inc., SHONCO XI,
Inc. and SHONCO XII, Inc. dated as of July 13, 1995............................
2-D (6) Asset Purchase Agreement, as amended, dated as of October 30, 1995 by
and between the Registrant and Brinker International, Inc......................
2-E (7) Agreement and Plan of Merger, dated as of February 21, 1996, among the
Registrant, BAC, Inc., and Bruegger's Corporation..............................
3-A (9) Restated Articles of Incorporation of the Registrant...........................
3-B (10) By-Laws of the Registrant, as amended to date..................................
4 (8) Amended and Restated Revolving Credit Agreement, dated as of April 26,
1996, between the Registrant and GAGHC, Inc., as borrowers, and Texas
Commerce Bank National Association, as agent, NBD Bank, N.A., LaSalle
National Bank, NationsBank, N.A. (South), SunTrust Bank, Central Florida,
N.A., The Northern Trust Company and Key Bank..................................
4-A First Amendment, dated as of November 7, 1996, to Amended and Restated
Revolving Credit Agreement, dated as of April 26, 1996, between the
Registrant, GAGHC, Inc., and BF Holding, Inc., as borrowers, and Texas
Commerce Bank National Association, as agent, NBD Bank, N.A., LaSalle
National Bank, NationsBank, N.A. (South), SunTrust Bank, Central Florida,
N.A., The Northern Trust Company and Key Bank..................................
10-A (1) Form of Burger King Franchise Agreement........................................
10-B (1) Form of Chili's Franchise Agreement............................................
10-D (1) Form of Bruegger's Bakeries Franchise Agreement................................
</TABLE>
S-2
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EXHIBIT IN THIS
NO. DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------- ----------
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10-E (1) (i) Target Reservation Agreement between Burger King Corporation
and the Registrant dated December 24, 1993; (ii) Side Letter Agreement
to Target Reservation Agreement dated December 21, 1993........................
10-F (1) Development Agreement between Chili's, Inc. and the Registrant
dated June 27, 1990............................................................
10-H (11) Form of Bruegger's Development Agreement (Preferred Stock
Franchisees)...................................................................
10-I (9) *1993 Stock Option and Incentive Plan, as amended, of the Registrant...........
10-J (1) *Outside Directors Stock Option Plan of the Registrant.........................
10-K (1) Lease Agreement between B.K. Main Street Properties
and the Registrant dated January 1, 1994.......................................
10-L Schedule of Related Party Leases...............................................
10-M (1) Form of Related Party Lease....................................................
10-Q Form of Bruegger's Development Agreement and Form of
Bruegger's Franchise Agreement attached thereto (Standard
Franchisees)...................................................................
10-R Form of Bruegger's Development Agreement and Form of
Bruegger's Franchise Agreement attached thereto (Related
Party Franchisees).............................................................
10-S Form of Bruegger's Development Agreement and Form of
Bruegger's Franchise Agreement attached thereto (Future
Franchisees)...................................................................
10-T (4) First Amendment dated May 2, 1995 to Development Agreement between
Chili's, Inc. and the Registrant dated June 27, 1990...........................
10-U Schedule of Bruegger's Related Party Development Agreements....................
10-V (4) *Employment Agreement between the Registrant and William R.
Schonsheck dated August 14, 1995...............................................
10-W (4) Non-Competition Agreement between the Registrant and William R.
Schonsheck dated August 14, 1995...............................................
10-X (4) Lease Agreement for Farmington Hills #509 between the Registrant and
William R. Schonsheck dated August 14, 1995...................................
</TABLE>
S-3
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NO. DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------- ----------
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10-Y (4) Lease Agreement for Belleville #4814 between the Registrant and
William R. Schonsheck dated August 14, 1995...................................
10-Z (4) Purchase and Sale Agreement between the Registrant and John D.
Fitzpatrick dated July 10, 1995................................................
10-AA (4) Target Reservation Agreement between Burger King Corporation and the
Registrant dated September 15, 1995............................................
10-AB (5) Stock Purchase Agreement between Ezra H. Friedlander, Daniel B.
Fitzpatrick and James K. Fitzpatrick, as shareholders of Tri-State Construction
Co., Inc., and the Registrant dated as of November 1, 1995.....................
10-AC (9) Agreement between the Registrant and Nordahl L. Brue and Michael J.
Dressell, dated February 21, 1996..............................................
10-AD Priority Charter Agreement between the Registrant and Burger Management of
South Bend #3, Inc., dated September 1, 1994...................................
10-AE *Resignation Agreement between the Registrant and Michael G. Sosinski,
dated as of October 25, 1996...................................................
10-AF Lease Agreement between the Registrant and Six Edison Lakes, L.L.C., dated
September 19, 1996.............................................................
10-AG Stock Option Agreement between the Registrant, Daniel B. Fitzpatrick and
Bagel Acquisition Corporation, dated August 12, 1996...........................
10-AH Computer and Communications Systems Agreement between the Registrant and
Bagel Acquisition Corporation, dated as of August 12, 1996.....................
10-AI Accounting Services Agreement between the Registrant and Bagel Acquisition
Corporation, dated as of August 12, 1996.......................................
10-AJ Management Services Agreement between the Registrant and Bagel Acquisition
Corporation, dated as of August 12, 1996.......................................
10-AK Schedule of Related Party Franchise Agreements.................................
10-AL (i) Revolving Credit Loan Agreement between the Registrant and Bagel
Acquisition Corporation, dated August 12, 1996; (ii) Promissory Note between
the Registrant and Bagel Acquisition Corporation, dated August 12, 1996........
10-AM First Amendment to Revolving Credit Loan Agreement, Promissory Note and Security
Agreement between the Registrant and Bagel Acquisition Corporation, dated as of
December 2, 1996...............................................................
</TABLE>
S-4
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EXHIBIT IN THIS
NO. DESCRIPTION FILING
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10-AN (i) Termination and Modification Agreement between the Registrant
and Howard Opera House Associates, dated October 23, 1996;
(ii) Lease between the Registrant and Howard Opera House
Associates, dated as of January 28, 1991; (iii) Lease between
the Registrant and Howard Opera House Associates, dated as of
January 28, 1991...............................................................
21 Subsidiaries of the Registrant.................................................
23 Written consent of Coopers & Lybrand L.L.P.....................................
27 Financial Data Schedule........................................................
</TABLE>
__________________
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as the same exhibit number to the
Company's Registration Statement on Form S-1 (Registration No. 33-73826)
is incorporated herein by reference.
(2) The copy of this exhibit filed as the same exhibit number to the
Company's Report on Form 8-K dated November 23, 1994 is incorporated
herein by reference.
(3) The copy of this exhibit filed as Exhibit 2 to the Company's Report on
Form 8-K dated August 28, 1995 is incorporated herein by reference.
(4) The copy of this exhibit filed as the same exhibit number to the
Company's Registration Statement on Form S-1 (Registration No. 33-96806)
is incorporated herein by reference.
(5) The copy of this exhibit filed as the same exhibit number to the
Company's Report on Form 10-K for the year ended October 29, 1995 is
incorporated herein by reference.
(6) The copy of this exhibit filed as the same exhibit number to the
Company's Report on Form 8-K dated January 5, 1996 is incorporated herein
by reference.
(7) The copy of this exhibit filed as the same exhibit number to the
Company's Registration Statement on Form S-4 (Registration No. 333-2050)
is incorporated herein by reference.
(8) The copy of this exhibit filed as the same exhibit number to the
Company's Report on Form 8-K dated May 1, 1996 is incorporated herein by
reference.
(9) The copy of this exhibit filed as the same exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
May 12, 1996 is incorporated herein by reference.
(10) The copy of this exhibit filed as the same exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
August 4, 1996 is incorporated herein by reference.
(11) The copy of this exhibit filed as exhibit 10-H(i) "Development Agreement
between Bruegger's Franchise Corporation and Registrant dated November
15, 1993," to the Company's Registration Statement on Form S-1
(Registration No. 33-73826) is incorporated herein by reference.
All other exhibits listed in this Index to Exhibits are incorporated by
reference to the Company's Report on Form 10-K for the year ended October 27,
1996.
S-5
