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 9, 1999
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, 1999 was 12,599,444.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 9, 1999
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...........12
Part II - Other Information
Item 1. Legal Proceedings.......................................20
Item 2. Changes in Securities...................................20
Item 3. Defaults upon Senior Securities.........................20
Item 4. Submission of Matters to a Vote of Security Holders.....20
Item 5. Other Information.......................................20
Item 6. Exhibits and Reports on Form 8-K........................20
Signatures........................................................21
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Twelve Weeks Ended Twenty-Eight Weeks Ended
May 9, May 10, May 9, May 10,
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Grady's American Grill $ 18,803 $ 20,827 $ 42,478 $ 46,308
Burger King 18,040 18,685 41,394 41,014
Chili's Grill & Bar 13,185 12,902 29,567 29,750
Italian Dining Division 3,681 3,424 8,328 7,913
------- ------- ------- -------
Total revenues 53,709 55,838 121,767 124,985
------- ------- ------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 15,669 16,597 35,950 37,057
Payroll and benefits 15,516 15,793 35,212 35,646
Depreciation and amortization 2,554 2,665 5,932 6,333
Other operating expenses 13,145 13,693 29,346 29,758
Total restaurant ------- ------- ------- -------
operating expenses 46,884 48,748 106,440 108,794
General and administrative 3,625 3,726 8,388 8,435
Amortization of intangibles 246 246 573 573
------- ------- ------- -------
Total operating expenses 50,755 52,720 115,401 117,802
------- ------- ------- -------
Operating income 2,954 3,118 6,366 7,183
Other income (expense):
Interest expense (2,397) (2,841) (5,704) (6,656)
Gain (loss) on sale of property
and equipment (99) (10) (164) 9
Interest income 32 43 74 110
Other income (expense), net (124) 76 12 90
------- ------- ------- -------
Total other expense, net (2,588) (2,732) (5,782) (6,447)
------- ------- ------- -------
Income before income taxes 366 386 584 736
Income tax provision 220 232 350 459
------- ------- ------- -------
Net income $ 146 $ 154 $ 234 $ 277
======= ======= ======= =======
Basic net income per share $ 0.01 $ 0.01 $ 0.02 $ 0.02
======= ======= ======= =======
Diluted net income per share $ 0.01 $ 0.01 $ 0.02 $ 0.02
======= ======= ======= =======
Weighted average shares outstanding:
Basic 12,599 12,599 12,599 12,599
======= ======= ======= =======
Diluted 12,603 12,749 12,616 12,706
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
May 9, October 25,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 352 $ 3,351
Accounts receivable 2,587 2,358
Inventories 1,975 1,872
Deferred income taxes 3,157 2,848
Other current assets 2,529 1,568
-------- --------
Total current assets 10,600 11,997
-------- --------
Property and equipment, net 131,237 136,764
-------- --------
Other assets:
Deferred income taxes 6,843 7,152
Trademarks, net 12,141 12,320
Franchise fees and development costs, net 8,982 9,259
Goodwill, net 8,303 8,594
Notes receivable, less allowance 10,294 6,000
Liquor licenses, net 2,760 2,859
Other 1,191 1,330
-------- --------
Total other assets 50,514 47,514
-------- --------
Total assets $ 192,351 $ 196,275
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 110,756 $ -
Current portion of capitalized lease and
non-competition obligations 396 370
Accounts payable 6,197 7,086
Accrued liabilities 18,215 19,288
-------- --------
Total current liabilities 135,564 26,744
Long-term debt - 112,756
Capitalized lease and non-competition
obligations, principally to related parties,
less current portion 5,627 5,849
-------- --------
Total liabilities 141,191 145,349
-------- --------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued
Common stock, without par value: 50,000,000
shares authorized; 12,619,444 and 12,619,444
shares issued, respectively 28 28
Additional paid-in capital 236,420 236,420
Accumulated deficit (185,038) (185,272)
-------- --------
51,410 51,176
Less treasury stock, at cost, 20,000 shares 250 250
-------- --------
Total stockholders' equity 51,160 50,926
-------- --------
Total liabilities and stockholders' equity $ 192,351 $ 196,275
======== ========
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Twenty-Eight Weeks Ended
May 9, May 10,
1999 1998
Cash flows from operating activities: ------- -------
Net income $ 234 $ 277
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization of
property and equipment 6,109 6,027
Amortization of other assets 1,305 1,707
Loss(gain)on sale of property and equipment 164 (9)
Changes in assets and liabilities:
Net decrease (increase)in current assets (1,293) 3,860
Net decrease in current liabilities (1,962) (5,137)
Other - 339
Net cash provided by ------- -------
operating activities 4,557 7,064
------- -------
Cash flows from investing activities:
Purchase of note receivable (4,294) -
Proceeds from sales of property and equipment 1,449 783
Purchase of property and equipment (2,195) (2,594)
Other (319) (130)
------- -------
Net cash used in investing activities (5,359) (1,941)
------- -------
Cash flows from financing activities:
Borrowings of long-term debt 4,300 -
Repayment of long-term debt (6,300) (10,100)
Repayment of capitalized lease obligations
and non-competition obligations (197) (140)
------- -------
Net cash used by financing activities (2,197) (10,240)
------- -------
Net decrease in cash and cash equivalents (2,999) (5,117)
Cash and cash equivalents, beginning of period 3,351 7,500
------- -------
Cash and cash equivalents, end of period $ 352 $ 2,383
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 9, 1999
(Unaudited)
Note 1: Description of Business.
Nature of Business Quality Dining, Inc. (the "Company") operates four distinct
restaurant concepts. It owns the Grady's American Grill(R) and two Italian
Dining concepts and operates Burger King(R) restaurants and Chili's Grill & Bar
("Chili's"(R)) as a franchisee of Burger King Corporation and Brinker
International, Inc. ("Brinker"), respectively. The Company operates its
Italian Dining restaurants under the tradenames of Papa Vino's Italian Kitchenr
("Papa Vino's"(R)) and Spageddies Italian Kitchen (R) ("Spageddies"(R)). As of
May 9, 1999, the Company operated 144 restaurants, including 70 Burger King
restaurants, 28 Chili's, 38 Grady's American Grill restaurants, four Spageddies
and four Papa Vino's.
Note 2: Basis of Presentation.
The accompanying consolidated financial statements include the accounts of
Quality Dining, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with 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 twenty-
eight week period ended May 9, 1999 are not necessarily indicative of the
results that may be expected for the 53-week year ending October 31, 1999.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 25, 1998
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Note 3: Disposition of Bagel-Related Businesses
On October 20, 1997, the Company sold its bagel-related businesses to Mr.
Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and
their affiliates. The Company's board of directors determined to sell the
bagel-related businesses after a careful evaluation of the future prospects for
the bagel business, the competitive environment that then existed in the bagel
segment, and the historical performance of the Company's bagel-related
businesses. The sale included the stock of Bruegger's Corporation and the
stock of all of the other bagel-related businesses. The total proceeds from
the sale were $45,164,000. The consideration included the issuance by
Bruegger's Corporation of a junior subordinated note in the amount of
$10,000,000, which was recorded as $6,000,000 due to a $4,000,000 reserve for
legal indemnification, the transfer of 4,310,740 shares of the Company's common
stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which were
retired, a receivable for purchase price adjustment of $500,000, and
$16,841,000 in cash. The subordinated note has an annual interest rate of 12%
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 9, 1999
(Unaudited)
and matures in October 2004. The note provides for interest to be accrued and
added to the principal amount of the note through October 2000 and to be paid
in cash for the remaining life of the note. The Company has not recognized any
interest income from this note. The cash component of the proceeds included an
adjustment for the calculation of the net working capital deficit. The
calculation used was subject to final adjustment and is being disputed by
Messrs. Brue and Dressell. The Company does not expect the ultimate resolution
of this dispute to have a material adverse effect on the Company's financial
position or results of operations but there can be no assurance thereof.
Note 4: Commitments.
As of May 9, 1999, the Company had commitments aggregating approximately
$3,418,000 for restaurant construction and the purchase of new equipment.
Note 5: Long-Term Debt.
On September 11, 1998, the Company amended its revolving credit agreement with
Chase Bank of Texas, as agent for a group of seven banks, providing for
borrowings of up to $130,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread. The weighted average interest rate of all
borrowing as of May 9, 1999 was 7.75%. The revolving credit agreement is
collateralized by the stock of certain subsidiaries of the Company, the $10
million junior subordinated note issued by Bruegger's Corporation, certain
interests in its franchise agreements with Brinker and Burger King Corporation
and substantially all of the Company's personal property. The revolving credit
agreement matures on April 26, 2000, at which time all amounts are due and
therefore the revolving credit agreement has been classified as a current
liability at May 9, 1999. The Company is currently working on refinancing this
revolving credit facility. Although the Company believes it will be able to
refinance this facility before its maturity on terms acceptable to the
Company, there can be no assurance thereof.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, limitations on the incurrence of additional
indebtedness, limitations on consolidated capital expenditures, restrictions
on the payment of dividends (other than stock dividends) and limitations on
the purchase or redemption of shares of the Company's capital stock. The
revolving credit agreement also contains a mandatory reduction in borrowing
availability on December 31, 1999 to the lesser of $125,000,000 or an amount
based on a contractual formula. In addition, based on a contractual formula,
the borrowing availability may be reduced on June 30, 1999. At May 9, 1999,
the fair value of the amount outstanding under the revolving credit agreement
approximated the carrying amount.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 9, 1999
(Unaudited)
Note 6: Earnings Per Share
The Company had outstanding at May 9, 1999 common shares totaling 12,599,444.
The Company has also granted options to purchase common shares to its employees
and outside directors. These options have a dilutive effect on the calculation
of earnings per share. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computation as
required by SFAS 128.
Twelve weeks ended Twenty-eight weeks ended
May 9, May 10, May 9, May 10,
1999 1998 1999 1998
------ ------ ------ ------
(In thousands, except per share amounts)
Basic net income per share:
Net income available to
common shareholders (numerator) $ 146 $ 154 $ 234 $ 277
====== ====== ====== ======
Weighted average common shares
outstanding (denominator) 12,599 12,599 12,599 12,599
====== ====== ====== ======
Basic net income per share $ 0.01 $ 0.01 $ 0.02 $ 0.02
====== ====== ====== ======
Twelve weeks ended Twenty-eight weeks ended
May 9, May 10, May 9, May 10,
1999 1998 1999 1998
------ ------ ------ ------
(In thousands, except per share amounts)
Diluted net income per share:
Net income available to
common shareholders (numerator) $ 146 $ 154 $ 234 $ 277
====== ====== ====== ======
Weighted average common shares
outstanding 12,599 12,599 12,599 12,599
Effect of dilutive securities:
Options on common stock 4 150 17 107
------ ------ ------ ------
Total common shares and dilutive
securities(denominator) 12,603 12,749 12,616 12,706
====== ====== ====== ======
Diluted net income per share $ 0.01 $ 0.01 $ 0.02 $ 0.02
====== ====== ====== ======
Note 7: Contingencies.
The Company and certain of its officers and directors are parties to various
legal proceedings relating to the Company's purchase, operation and financing
of the Company's bagel-related businesses.
Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and Mark
Ratterman, Chris Galloway and Peter Shipman, principals of Quality Baking, LLC,
commenced an action on July 9, 1997 filed in the United States District Court,
for the Eastern District of Missouri, Eastern Division, against Bruegger's
Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael Dressell,
Daniel B. Fitzpatrick and John Firth.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 9, 1999
(Unaudited)
On April 22, 1998, the Court granted the defendants' Motion to Transfer this
matter to the United States District Court for the Northern District of
Indiana. The complaint alleges that the plaintiffs purchased their franchises
based upon financial representations that have not materialized, that they
purchased preferred stock in Bruegger's Corporation based upon false
representations, that the defendants falsely represented their intentions with
respect to repurchasing bakeries from the plaintiffs, and that the defendants
violated implied covenants of good faith and fair dealing.
D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises, Inc.,
franchisees of Bruegger's Franchise Corporation, and Ken Wagnon, Dan Carney,
Jay Wagnon and Patrick Beatty, principals of the foregoing franchisees,
commenced an action on July 16, 1997 filed in the United States District Court,
for the District of Maryland, against Bruegger's Corporation, Bruegger's
Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick, Michael J.
Dressell and Nordahl L. Brue, alleging that the plaintiffs purchased their
franchises based upon financial representations that have not materialized,
that they purchased preferred stock in Bruegger's Corporation based upon false
representations, that Bruegger's Corporation falsely represented its intentions
with respect to purchasing bakeries from the plaintiffs or providing financing
to the plaintiffs, and that the defendants violated implied covenants of good
faith and fair dealing.
On or about April 15, 1997, Texas Commerce Bank National Association ("Texas
Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd., a Florida
limited partnership ("BFBC"). At the time of the Loan BFBC was a franchisee
under franchise agreements with Bruegger's Franchise Corporation (the
"Franchisor"). The Company at that time was an affiliate of the Franchisor.
In connection with the Loan and as an accommodation of BFBC, the Company
executed to Texas Commerce a "Guaranty". By the terms of the Guaranty the
Company agreed that upon maturity of the Loan by default or otherwise that it
would either (1) pay the Loan obligations or (2) buy the Loan and all of the
related loan documents (the "Loan Documents") from Texas Commerce or its
successors. In addition several principals of BFBC (the "Principal
Guarantors") guaranteed repayment of the Loan by each executing a "Principal
Guaranty". On November 10, 1998, the bank (1) declared that the Loan was in
default, (2) notified BFBC, the Principal Guarantors and the Company that all
of the Loan obligations were due and payable, and (3) demanded payment.
The Company elected to satisfy its obligations under the Guaranty by purchasing
the Loan from the bank. On November 24, 1998, the Company bought the Loan for
$4,294,000. Thereafter, the Company sold the Loan to its Texas affiliate
Grady's American Grill, L.P. ("Grady's"). On November 30, 1998 Grady's
commenced an action seeking to recover the amount of the Loan from one of the
Principal Guarantors, Michael K. Reilly ("Reilly"). As part of this action
Grady's also seeks to enforce a Subordination Agreement that was one of the
Loan Documents against MKR Investments, L.P., a partnership ("MKR"). Reilly is
the general partner of MKR. This action is pending in the United States
District Court for the Southern District of Texas Houston Division as Case No.
H-98-4015. Reilly has denied liability and filed a counterclaim against Grady's
alleging that Grady's engaged in unfair trade practices, violated Florida's
"Rico" statute, engaged in a civil conspiracy and violated state and federal
securities laws in connection with the Principal Guaranty (the
"Counterclaims"). Reilly also filed a third party complaint against Quality
Dining, Inc., Grady's American Grill Restaurant Corporation, David M. Findlay,
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 9, 1999
(Unaudited)
Daniel Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise Corporation,
Champlain Management Services, Inc., Nordahl Brue, Michael Dressell and Ed
Davis alleging that Reilly invested in BFBC based upon false representations,
that the third party defendants violated Florida and Illinois franchise
statutes, committed unfair trade practices, violated covenants of good faith
and fair dealing, violated the Florida "Rico" statute and violated state and
federal securities laws in connection with the Principal Guaranty. Based upon
the currently available information, the Company does not believe that these
matters will have a materially adverse effect on the Company's financial
position or results of operations. However, there can be no assurance that the
Company will be able to realize sufficient value from Reilly to satisfy the
amount of the Loan or that the Company will not incur any liability as a result
of the Counterclaims or third party complaint filed by Reilly.
In each of the above cases, one or more present or former officers and
directors of the Company have been named as party defendants and the Company
has and is advancing defense costs on their behalf. Pursuant to the Share
Exchange Agreement by and among Quality Dining, Inc., Bruegger's Corporation,
Nordahl L. Brue and Michael J. Dressell, the Agreement and Plan of Merger by
and among Quality Dining, Inc., Bagel Disposition Corporation and Lethe, LLC,
and certain other related agreements entered into as part of the disposition of
the Company's bagel-related businesses, the Company is responsible for 50% of
the first $14 million of franchise related litigation expenses, inclusive of
attorney's fees, costs, expenses, settlements and judgments (collectively
"Franchise Damages"). Bruegger's Corporation and certain of its affiliates are
obligated to indemnify the Company from all other Franchise Damages. The
Company is obligated to pay the first $3 million of its share of Franchise
Damages in cash. Through May 9, 1999, the Company had paid approximately $1.4
million in cash and assigned its $1.2 million note from BruWest to Bruegger's
Corporation which together reduce the Company's remaining obligation to pay
cash in respect of Franchisee Damages to approximately $400,000. The remaining
$4 million of the Company's share of Franchise Damages is payable by crediting
amounts owed to the Company pursuant to the $10 million junior subordinated
note issued to the Company by Bruegger's Corporation. Through May 9, 1999, the
outstanding balance due under the junior subordinated note has been reduced by
$600,000 in respect of Franchisee Damages. Based upon the currently available
information, the Company does not believe that these cases individually or in
the aggregate will have a material adverse effect on the Company's financial
position and results of operations but there can be no assurance thereof. Such
assessment is based in part upon the Company's belief that Bruegger's
Corporation has and will continue to have the ability to perform its indemnity
obligations.
James T. Bies filed a shareholder derivative action in the United States
District Court for the Southern District of Michigan on October 14, 1997. A
derivative action is an action on behalf of the Company in which any recovery
against the defendants would be payable to the Company. The complaint named as
defendants 12 individuals who are current or former directors or officers of
the Company. The complaint alleged that the individual defendants as directors
breached fiduciary duties to the Company by approving certain transactions in
1997 involving loans to Bagel Acquisition Corporation that allegedly benefited
Daniel B. Fitzpatrick, the Company's Chairman, President and Chief Executive
Officer. The plaintiff also alleged that individual defendants participated in
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 9, 1999
(Unaudited)
a "conspiracy to waste, dissipate, and improperly use funds, property and
assets" of the Company for the benefit of Bagel Acquisition Corporation and Mr.
Fitzpatrick. The plaintiff alleged that the Company and its shareholders had
been damaged in an amount in excess of $28,000,000. The relief sought also
included the appointment of a receiver, an accounting and attorney's fees. On
April 27, 1998, the Court dismissed the complaint without prejudice, for
failure to make a "demand" upon the Company's board of directors that the
Company institute the action. By letter dated May 12, 1998, Mr. Bies demanded
that the Company pursue these claims against the defendants. In accordance
with the Indiana Business Corporation Law ("IBCL"), the board of directors
appointed a special committee of three disinterested outside directors and one
other disinterested person to investigate the allegations. The three
disinterested outside directors are Messrs. Decio, Lewis and Murphy (named
defendants in the action) and the disinterested person is David T. Link, Dean
of the University of Notre Dame Law School. As required by the IBCL, the
special committee was charged with evaluating the claim and determining whether
it is in the best interests of the Company to pursue this matter. Subsequent
to the establishment of the special committee, Mr. Bies refiled his action on
July 30, 1998. As a result of its investigation of Mr. Bies' demand, the
special committee has determined that the claims identified by Mr. Bies are
without merit and therefore it would not be in the Company's best interests to
pursue them. As a result, on January 6, 1999, the special committee filed a
motion to dismiss or alternatively for summary judgment, which was denied on
April 20, 1999 essentially because the Court was unable to determine, on the
record before it, whether the special committee was disinterested. The Company
has requested the Court to schedule an evidentiary hearing to assist in this
determination. The Company does not believe this matter will have a material
adverse effect on the Company's financial position or results of operations.
The Company and certain of its executive officers are defendants in a class
action lawsuit filed in the United States District Court for the Northern
District of Indiana. The complaint alleges, among other things, that the
defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 thereunder by failing to disclose various
matters in connection with the Company's acquisition, development, financing
and disposition of its bagel-related businesses. The putative class period in
such actions is from June 7, 1996 to May 13, 1997 on which dates the price of
the Company's common stock closed at $34.25 and $6.56, respectively. The
plaintiffs are seeking, among other things, an award of unspecified
compensatory damages, interest, costs and attorney's fees. The Company has
filed a motion to dismiss the complaint which is presently pending before the
Court and it intends to vigorously defend against the allegations made in the
complaints. However, there can be no assurance that the ultimate outcome of
this or other actions (including other actions under federal or state
securities laws) arising out of the Company's acquisition, development,
financing and disposition of its bagel-related businesses will not have a
material adverse effect on the Company's financial position or results of
operations.
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.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has a 52/53-week fiscal year ending on the last Sunday in October
of each year. The current fiscal year is 53 weeks long and ends October 31,
1999. The first quarter of the Company's current fiscal year consists of 16
weeks, the second and third quarters consist of 12 weeks and the fourth quarter
is 13 weeks in duration.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
which certain items of revenue and expense bear to total revenues.
Twelve Weeks Ended Twenty-Eight Weeks Ended
May 9, May 10, May 9, May 10,
1999 1998 1999 1998
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 29.2 29.7 29.5 29.7
Payroll and benefits 28.9 28.3 28.9 28.5
Depreciation and amortization 4.8 4.8 4.9 5.1
Other operating expenses 24.5 24.5 24.1 23.8
------ ------ ------ ------
Total restaurant
operating expenses 87.4 87.3 87.4 87.1
General and administrative 6.7 6.7 6.9 6.7
Amortization of intangibles 0.5 0.4 0.5 0.5
------ ------ ------ ------
Total operating expenses 94.6 94.4 94.8 94.3
------ ------ ------ ------
Operating income 5.4 5.6 5.2 5.7
------ ------ ------ ------
Other income (expense):
Interest expense (4.5) (5.1) (4.7) (5.3)
Interest income .1 .1 .1 .1
Other income (expense), net (.4) .1 (.1) .1
------ ------ ------ ------
Total other expense, net (4.8) (4.9) (4.7) (5.1)
------ ------ ------ ------
Income before income taxes 0.6 0.7 0.5 0.6
Income tax provision 0.4 0.4 0.3 0.4
------ ------ ------ ------
Net income 0.2% 0.3% 0.2% 0.2%
====== ====== ====== ======
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Revenues for the Company were $53,709,000 for the second quarter of fiscal
1999 versus $55,838,000 for the comparable period in fiscal 1998, a decrease
of $2,129,000. Restaurant sales for the first twenty-eight weeks of fiscal
1999 were $121,767,000 versus $124,985,000 for the comparable period in fiscal
1998, a decrease of $3,218,000.
Sales in the Company's Grady's American Grill restaurant division decreased
$2,024,000 to $18,803,000 in the second quarter of fiscal 1999 compared to
sales of $20,827,000 in the same period in fiscal 1998. The decrease was
partly attributable to the sale of one unit in fiscal 1998 and one unit early
in the first quarter of fiscal 1999. The absence of these units contributed
approximately $693,000 to the sales decrease. The Company's Grady's American
Grill restaurants had average weekly sales of $41,235 in the second quarter of
fiscal 1999 versus $43,389 in the same period in fiscal 1998. The Company's
promotional activity was not as expansive as it was in the second quarter of
fiscal 1998, thereby reducing promotional related sales. Sales for the first
twenty-eight weeks of fiscal 1999 decreased $3,830,000 to $42,478,000 compared
to $46,308,000 for the same period in fiscal 1998. The absence of the two
units which were sold contributed approximately $1,440,000 to the sales
decrease. Average weekly sales were $39,848 in the first twenty-eight weeks of
fiscal 1999 versus $41,346 in the same period in fiscal 1998. The decrease
resulted primarily from inclement weather in several key markets during the
first quarter of fiscal 1999 and reduced promotional activity, thereby
reducing promotional related sales.
The Company's Burger King restaurant sales decreased $645,000 to $18,040,000
in the second quarter of fiscal 1999 when compared to restaurant sales of
$18,685,000 in the same period of fiscal 1998. The Company's Burger King
restaurants had average weekly sales of $21,476 in the second quarter of
fiscal 1999 versus $23,357 in the same period in fiscal 1998. The decrease in
average weekly sales was partially offset by revenues of $618,000 from three
units open in fiscal 1999 that were not open in fiscal 1998. Sales increased
$380,000 to $41,394,000 for the first twenty-eight weeks of fiscal 1999
compared to $41,014,000 for the comparable period in fiscal 1999. Average
weekly sales were $21,120 in the first twenty-eight weeks of fiscal 1999
versus $22,020 in the same period in fiscal 1998. The decline in average
weekly sales for the first twenty-eight weeks of fiscal 1999 resulted
primarily from inclement weather during the first quarter of fiscal 1999. The
decrease in average weekly sales was offset by the revenues of $1,596,000 from
four units open in fiscal 1999 that were not open for the full twenty-eight
weeks in fiscal 1998.
The Company's Chili's Grill & Bar restaurant sales increased $283,000 to
$13,185,000 in the second quarter of fiscal 1999 compared to $12,902,000 in
the same period in fiscal 1998. The increase was due to average weekly sales
increasing to $39,241 in the second quarter of fiscal 1999 versus $38,399 in
the same period of fiscal 1998. Sales for the first twenty-eight weeks of
fiscal 1999 decreased $183,000 to $29,567,000 compared to $29,750,000 for the
same period in fiscal 1999. The decrease was due to average weekly sales
decreasing to $37,712 in the first twenty-eight weeks of fiscal 1999 versus
$37,947 in the same period in fiscal 1998. Severe winter weather during the
first quarter reduced average weekly sales for the first twenty-eight weeks of
fiscal 1999.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company's Italian Dining Division restaurant sales increased $257,000 to
$3,681,000 in the second quarter of fiscal 1999 compared to $3,424,000 in the
same period in fiscal 1998. The increase was due to average weekly sales
increasing to $38,349 in the second quarter of fiscal 1999 versus $35,664 in
the same period of fiscal 1998. Sales for the first twenty-eight weeks of
fiscal 1999 increased $415,000 to $8,328,000 compared to $7,913,000 for the
same period in fiscal 1999. The increase was due to average weekly sales
increasing to $37,179 in the first twenty-eight weeks of fiscal 1999 versus
$35,326 in the same period in fiscal 1998.
Total restaurant operating expenses, as a percentage of restaurant sales, were
87.4% for the second quarter of fiscal 1999 versus 87.3% in the second quarter
of fiscal 1998 and 87.4% in the first twenty-eight weeks of fiscal 1999 versus
87.1% in the same period of fiscal 1998. The following factors influenced the
operating margins.
Food and beverage costs were 29.2% of total revenues in the second quarter of
fiscal 1999 compared to 29.7% of total revenues in the same period in fiscal
1998 and 29.5% in the first twenty-eight weeks of fiscal 1999 compared to
29.7% in the same period of fiscal 1998. The decrease as a percentage of total
revenue was mainly due to increased efficiencies resulting in decreased food
costs at the Company's Burger King, Chili's and Italian Dining restaurants.
Payroll and benefits were 28.9% of total revenues in the second quarter of
fiscal 1999 versus 28.3% in the same period of fiscal 1998 and 28.9% in the
first twenty-eight weeks of fiscal 1999 compared to 28.5% in the same period
of fiscal 1998. The Company has increased hourly wages at each of its
restaurant concepts due to the high level of competition to attract qualified
employees.
Depreciation and amortization, as a percentage of total revenues, remained
consistent at 4.8% in the second quarter of fiscal 1999 when compared to the
second quarter of fiscal 1998 and decreased to 4.9% in the first twenty-eight
weeks of fiscal 1999 compared to 5.1% in the same period of fiscal 1998. The
decrease for the first twenty-eight weeks is mainly due to the reduction in
store openings.
Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses as a percentage of total revenues remained
consistent in the second quarter of fiscal 1999 at 24.5% when compared to the
second quarter of fiscal 1998 and increased to 24.1% in the first twenty-eight
weeks of fiscal 1999 compared to 23.8% in the same period of fiscal 1998. The
increase in the first twenty-eight weeks was primarily due to an increase in
advertising expenses at the Company's full service restaurant concepts and
lower than expected sales in the first quarter due to inclement weather.
General and administrative expenses decreased to $3,625,000 in the second
quarter of fiscal 1999 compared to $3,726,000 in the second quarter of fiscal
1998 and to $8,388,000 in the first twenty-eight weeks of fiscal 1999 compared
to $8,435,000 in the same period of fiscal 1998. As a percentage of total
restaurant sales, general and administrative expenses remained consistent at
6.7% in the second quarter of fiscal 1999 versus the second quarter of fiscal
1998 and increased to 6.9% in the first twenty-eight weeks of fiscal 1999
compared to 6.7% in the same period of fiscal 1998. The increase in the first
twenty-eight weeks was primarily due to lower than expected sales in the first
quarter due to inclement weather.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Amortization of intangibles, as a percentage of total revenues, increased to
0.5% for the second quarter of fiscal 1999 compared to 0.4% in the same period
in fiscal 1998 and remained consistent at 0.5% in the first twenty-eight weeks
of fiscal 1999 compared to the same period of fiscal 1998. The increase as a
percentage of total revenues in the second quarter of fiscal 1999 is due to
the decrease in total revenues.
Total other expenses, as a percentage of revenues, decreased to 4.8% for the
second quarter of fiscal 1999 from 4.9% during the comparable period in fiscal
1998 and to 4.7% in the first twenty-eight weeks of fiscal 1999 compared to
5.1% in the same period of fiscal 1998. The decrease for the quarter and the
first twenty-eight weeks was primarily due to a decrease in interest expense
resulting from decreased borrowings and lower interest rates.
The provision for income taxes includes federal and state income taxes using
the Company's estimated effective income tax rate for the respective fiscal
year. The Company's effective income tax rate was consistent at 60.1% for the
second quarter of fiscal 1999 compared to the same period in fiscal 1998 and
decreased to 59.9% for the first twenty-eight weeks of fiscal 1999 compared to
62.4% in the same period of fiscal 1998. The decrease in the effective income
tax rate for the first twenty-eight weeks is mainly due to implementation of
state tax strategies to reduce state income tax expense. The high effective
income tax rate for fiscal 1999 is mainly due to a large portion of state
taxes being based on criteria other than income.
For the second quarter of fiscal 1999, the Company reported net income of
$146,000 compared to net income of $154,000 for the same period of fiscal 1998
and $234,000 in the first twenty-eight weeks of fiscal 1999 compared to
$277,000 in the same period of fiscal 1998.
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 $352,000 at May 9, 1999, a
decrease of $2,999,000 from the $3,351,000 at October 25, 1998. Principal uses
of funds consisted of: (i) expenditures for property and equipment
($2,195,000), (ii) net reduction in long-term debt (2,000,000) and (iii)
purchase of the BFBC note receivable ($4,294,000). Principal sources of funds
consisted of (i) those provided by operations ($4,557,000) and (ii) proceeds
from sales of property and equipment ($1,449,000).
The Company's primary cash uses in fiscal 1999 will be as follows: finance
capital expenditures in connection with the opening of new restaurants,
remodeling and maintenance expenditures of existing restaurants and point of
sale upgrades. The Company's capital expenditures for fiscal 1999 are
expected to be between $9,000,000 and $11,000,000. The Company currently
plans to use any remaining cash flow to reduce debt under the Company's
revolving credit agreement. During the first quarter of fiscal 1999 the
Company purchased a note for $4,294,350 from Chase Bank of Texas in
satisfaction of its obligations under a loan guaranty. The purchase of the
loan was financed through borrowings under the Company's revolving credit
agreement. During fiscal 1999, the Company anticipates opening two to four
Burger King restaurants. The actual amount of the Company's cash requirements
for capital expenditures depends in part on the number of new restaurants
opened and the actual expense related to remodeling and maintenance of
existing units.
On September 11, 1998, the Company amended its revolving credit agreement with
Chase Bank of Texas, as agent for a group of seven banks, providing for
borrowings of up to $130,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread. The weighted average interest rate of all
borrowing as of May 9, 1999 was 7.75%. The revolving credit agreement is
collateralized by the stock of certain subsidiaries of the Company, the $10
million junior subordinated note issued by Bruegger's Corporation, certain
interests in its franchise agreements with Brinker and Burger King Corporation
and substantially all of the Company's personal property. The revolving credit
agreement matures on April 26, 2000, at which time all amounts are due and
therefore the revolving credit agreement has been classified as a current
liability at May 9, 1999. The Company is currently working on refinancing this
revolving credit facility. Although the Company believes it will be able to
refinance this facility before its maturity on terms acceptable to the
Company, there can be no assurance thereof.
The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and
fixed charge coverage ratios, limitations on the incurrence of additional
indebtedness, limitations on consolidated capital expenditures, restrictions
on the payment of dividends (other than stock dividends) and limitations on
the purchase or redemption of shares of the Company's capital stock. The
revolving credit agreement also contains a mandatory reduction in borrowing
availability on December 31, 1999 to the lesser of $125,000,000 or an amount
based on a contractual formula. In addition, based on a contractual formula,
the borrowing availability may be reduced on June 30, 1999. At February 14,
1999, the fair value of the amount outstanding under the revolving credit
agreement approximated the carrying amount.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company anticipates that its cash flows from operations, together with
amounts available under its revolving credit agreement, will be sufficient to
fund its planned internal expansion and other internal operating cash
requirements through the end of fiscal 1999.
IMPACT OF YEAR 2000
- -------------------
The term "Year 2000" is a general term used to describe the various problems
that may result from the improper processing of dates and date-sensitive
calculations by computers and other machinery and equipment as the year 2000
is approached and thereafter. These problems generally arise from the fact
that most of the world's computer hardware and software has historically used
only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the "2000's" from dates in the
"1900's."
The Company's State of Readiness. The Company has established a formal plan
("Year 2000 Plan") to (i) test its information technology systems to evaluate
Year 2000 compliance, (ii) assess the Year 2000 compliance of its information
technology vendors, (iii) assess its non-information technology systems that
utilize embedded technology such as micro-controllers and (iv) determine the
readiness of third parties such as government agencies, utility companies,
telecommunication companies, suppliers and other "non-technology" third party
vendors. The Company has completed the testing and assessment of its
information technology systems including non-information technology systems
that utilize embedded technology. The Company has determined that 48 of its
critical systems were Year 2000 compliant by June 8, 1999, 16 will be replaced
by its new point of sale equipment and anticipates that the remaining two
critical systems will be Year 2000 compliant by October, 1999.
Independent of the Company's Year 2000 Plan, the Company has previously
determined it would replace its point of sale equipment in as many as 75 of
its full service dining restaurants. This determination was part of the
Company's ongoing efforts to enhance financial controls through a centralized,
computerized, accounting system to enhance the tracking of data to enable the
Company to better manage its operations. The Company is currently in the
process of replacing the point of sale equipment in its full service
restaurants and expects to complete this process by October, 1999. The Company
has determined that the replacement systems are Year 2000 compliant. The
Company expects the replacement of the point of sale equipment in its 75 full
service restaurants to cost approximately $3 million. The Company anticipates
incurring non-cash charges of approximately $500,000 to $750,000 in connection
with the disposition of certain of its point of sale equipment. The Company
has determined that the point of sale equipment in its 70 Burger King
restaurants is Year 2000 compliant.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Costs to Address the Company's Year 2000 Issues. The Company expenses costs
associated with its Year 2000 Plan as the costs are incurred except for costs
that the Company would otherwise capitalize. The Company does not expect the
costs associated with its Year 2000 Plan to have a material adverse effect on
its financial position or results of operations. The Company is unable to
estimate the costs it may incur as a result of Year 2000 problems suffered by
third parties with which it deals. The Company has surveyed its critical
vendors, other than utilities and government agencies, and believes that each
vendor will either be Year 2000 compliant by June, 1999 or, if not, suitable
alternative suppliers that are Year 2000 compliant will be available.
Risks Presented by Year 2000 Problems. To operate its businesses, the Company
relies upon government agencies, utility companies, telecommunications
companies, suppliers and other third party service providers over which it can
assert little control. The Company's ability to conduct its business is
dependent upon the ability of these third parties to avoid Year 2000 related
disruption. If they do not adequately address their Year 2000 issues, the
company's business may be materially affected which could result in a
materially adverse effect on the Company's results of operations and financial
condition. If the Company is not able to integrate replacement point of sale
systems at its full service restaurants, its ability to effectively operate
those restaurants could be substantially impaired. As a result of the
Company's ongoing assessment, the Company may identify additional areas of its
business that are at risk of Year 2000 disruption. The absence of any such
determination at this point represents only the current status of the
assessment phase of the Company's Year 2000 Plan and should not be construed
to mean that there are no other areas of the Company's business which are at
risk of a Year 2000 related disruption.
The Company's Contingency Plans. The Company's Year 2000 Plan calls for the
development of contingency plans for areas of its business that are
susceptible to a substantial risk of a Year 2000 related disruption where the
Company determines that such disruption could be mitigated through reasonable,
cost effective contingency plans. The Company has not yet developed detailed
contingency plans specific to Year 2000 events for any specific area of
business. Consistent with its Year 2000 Plan, the Company will develop
specific Year 2000 contingency plans for such areas of business as and if such
determinations are made
Recently Issued Accounting Standards
- -------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131,"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is
to be presented. This statement need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim periods in the initial year of application is to be reported in
financial statements for interim periods in the second year of application.
The Company will adopt SFAS No.131 for its fiscal 1999 Financial Statements.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
This report contains certain forward-looking statements, including statements
about the Company's development plans, that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: the availability and cost of suitable locations
for new restaurants; the availability and cost of capital to the Company; the
ability of the Company to develop and operate its restaurants; the hiring,
training and retention of skilled corporate and restaurant management and
other restaurant personnel; the integration and assimilation of acquired
concepts; the overall success of the Company's franchisors; the ability to
obtain the necessary government approvals and third-party consents; the
ability of the Company to modify or redesign its computer systems to work
properly in the year 2000 and the cost thereof; and changes in governmental
regulations, including increases in the minimum wage.
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
Items 3. Defaults upon Senior Securities
None
Item 4 Submission of Matters to Vote of Security Holders
On March 9, 1999, the Company held its annual meeting of shareholders. At
the meeting, the shareholders elected the following director by the vote
indicated to serve until the year 2002 annual meeting of shareholders.
Broker
For Withheld Non-votes
---------- -------- ---------
Christopher J. Murphy, III 11,150,031 195,347 0
In addition, the following directors continue in office until the annual
meeting of shareholders in the year indicated:
Term Expires
------------
Daniel B. Fitzpatrick 2000
Arthur J. Decio 2000
James K. Fitzpatrick 2001
Ezra H. Friedlander 2001
Steven M. Lewis 2001
PricewaterhouseCoopers, LLP was approved as auditors for the Company for 1999
by the following vote:
11,245,138 For; 80,089 Against; 20,151 Abstentions and Broker non-votes
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such exhibits,
and is incorporated herein by reference.
(b) Reports on Form 8-K
None
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 21, 1999 By: /s/Martin Miranda
Vice President & Controller
(Principal accounting officer)
INDEX TO EXHIBITS
Exhibit
No. Description
- ---------- -----------
27 Financial Data Schedule
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<PERIOD-END> MAY-9-1999
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<RECEIVABLES> 12881
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<INVENTORY> 1975
<CURRENT-ASSETS> 10600
<PP&E> 182445
<DEPRECIATION> 51208
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<BONDS> 110756
0
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<COMMON> 28
<OTHER-SE> 51132
<TOTAL-LIABILITY-AND-EQUITY> 192351
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<CGS> 35950
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