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 August 6, 2000
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
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(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
September 20, 2000 was 12,245,103.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 6, 2000
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...........17
Part II - Other Information
Item 1. Legal Proceedings.......................................23
Item 2. Changes in Securities...................................23
Item 3. Defaults upon Senior Securities.........................23
Item 4. Submission of Matters to a Vote of Security Holders.....23
Item 5. Other Information.......................................23
Item 6. Exhibits and Reports on Form 8-K........................23
Signatures........................................................23
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 Forty Weeks Ended
August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-------- -------- -------- --------
Revenues:
Burger King $ 20,221 $ 20,599 $ 63,269 $ 61,993
Grady's American Grill 15,363 16,167 53,977 58,645
Chili's Grill & Bar 14,134 13,026 45,905 42,593
Italian Dining Division 3,868 3,673 12,792 12,002
------- ------- ------- -------
Total revenues 53,586 53,465 175,943 175,233
------- ------- ------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 15,094 15,540 49,845 51,490
Payroll and benefits 15,678 15,617 51,469 50,829
Depreciation and
amortization 2,626 2,568 8,638 8,499
Other operating expenses 13,186 13,300 42,107 42,646
Total restaurant operating ------- ------- ------- -------
expenses 46,584 47,025 152,059 153,464
------- ------- ------- -------
Income from restaurant
operations 7,002 6,440 23,884 21,769
General and administrative 4,351 3,565 13,544 11,953
Amortization of intangibles 201 251 688 824
Impairment of assets and
facility closing costs - 2,501 - 2,501
------- ------- ------- -------
Operating income 2,450 123 9,652 6,491
------- ------- ------- -------
Other income (expense):
Interest expense (2,581) (2,280) (8,625) (7,983)
Gain (loss) on sale
of property and equipment (722) 1 (873) (163)
Interest income 3 17 25 91
Other income (expense), net 239 3 679 13
------- ------- ------- -------
Total other expense, net (3,061) (2,259) (8,794) (8,042)
------- ------- ------- -------
Income (loss) before
income taxes (611) (2,136) 858 (1,551)
Income tax provision 122 219 898 570
------- ------- ------- -------
Net loss $ (733) $ (2,355) $ (40) $ (2,121)
======= ======= ======= =======
Basic net loss per share $ (0.06) $ (0.19) $ (0.01) $ (0.17)
======= ======= ======= =======
Diluted net loss per share $ (0.06) $ (0.19) $ (0.01) $ ( 0.17)
======= ======= ======= =======
Weighted average shares outstanding:
Basic 12,265 12,712 12,361 12,637
======= ======= ======= =======
Diluted 12,265 12,712 12,361 12,637
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
August 6, October 31,
2000 1999
ASSETS ------- --------
Current assets:
Cash and cash equivalents $ 824 $ 1,019
Accounts receivable 2,458 1,946
Inventories 1,927 1,876
Deferred income taxes 2,686 2,630
Other current assets 2,210 1,787
------- -------
Total current assets 10,105 9,258
------- -------
Property and equipment, net 126,672 128,349
------- -------
Other assets:
Deferred income taxes 7,314 7,370
Trademarks, net 11,733 11,988
Franchise fees and development costs, net 9,353 8,748
Goodwill, net 7,638 8,053
Notes receivable, less allowance 10,294 10,294
Liquor licenses, net 2,611 2,686
Other 2,365 2,291
------- -------
Total other assets 51,308 51,430
------- -------
Total assets $ 188,085 $ 189,037
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized leases
and long-term debt $ 1,643 $ 1,471
Accounts payable 9,923 8,673
Accrued liabilities 19,212 17,076
------- -------
Total current liabilities 30,778 27,220
Long-term debt 104,592 107,384
Capitalized leases principally to related
parties, less current portion 5,072 5,431
------- -------
Total liabilities 140,442 140,035
------- -------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued
Common stock, without par value: 50,000,000
shares authorized; 12,869,603 and 12,773,849
shares issued, respectively 28 28
Additional paid-in capital 237,069 236,881
Accumulated deficit (187,269) (187,229)
Unearned compensation (487) (428)
------- -------
49,341 49,252
Less treasury stock, at cost, 624,500
and 20,000 shares, respectively 1,698 250
------- -------
Total stockholders' equity 47,643 49,002
------- -------
Total liabilities and stockholders' equity $ 188,085 $ 189,037
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Forty Weeks Ended
August 6, August 1,
2000 1999
------- -------
Cash flows from operating activities:
Net loss $ (40) $ (2,121)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 8,853 8,765
Amortization of other assets 1,442 1,778
Impairment of assets and
facility closing costs - 2,501
Loss on sale of property and equipment 873 163
Amortization of unearned compensation 129 -
Changes in current assets and current liabilities:
Net (increase) decrease in current assets (986) 61
Net increase (decrease) current liabilities 3,386 (3,340)
Other - 16
------- -------
Net cash provided by operating activities 13,657 7,823
------- -------
Cash flows from investing activities:
Purchase of note receivable - (4,294)
Proceeds from sales of property and equipment 1,094 2,704
Purchase of property and equipment (9,143) (4,496)
Purchase of other assets (1,376) (288)
------- -------
Net cash used in investing activities (9,425) (6,374)
------- -------
Cash flows from financing activities:
Borrowings of long-term debt 38,677 5,800
Repayment of long-term debt (41,297) (10,100)
Purchase of treasury stock (1,448) -
Loan financing fees - (150)
Repayment of capitalized lease obligations (359) (283)
------- -------
Net cash used by financing activities (4,427) (4,733)
------- -------
Net decrease in cash and cash equivalents (195) (3,284)
Cash and cash equivalents, beginning of period 1,019 3,351
------- -------
Cash and cash equivalents, end of period $ 824 $ 67
======= =======
See Accompanying Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 6, 2000
(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 Grillr and two Italian
Dining concepts and operates Burger King (R) restaurants and Chili's Grill &
Bar (TM) ("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 (R) Italian
Kitchen ("Papa Vino's" (R)) and Spageddies Italian Kitchen(R) ("Spageddies"(R)).
As of August 6, 2000, the Company operated 143 restaurants, including 71 Burger
King restaurants, 29 Chili's, 35 Grady's, three Spageddies and five 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 forty
week period ended August 6, 2000 are not necessarily indicative of the results
that may be expected for the 52-week year ending October 29, 2000.
These financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended October 31, 1999
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 (the "Subordinated Note"), 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
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
annual interest rate of 12% and matures in October 2004. Interest is to be
accrued and added to the principal amount of the Subordinated Note through
October 2000 and is to be paid in cash for the remaining life of the
Subordinated Note. The Subordinated Note is guaranteed by certain affiliates of
Bruegger's Corporation (the "Affiliate Guarantors"). 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. See Note 8 - Contingencies. Bruegger's
Corporation previously advised the Company that the Affiliate Guarantors were
in default of their senior secured loan and that the Affiliate Guarantors have
now successfully restructured their senior secured loan. The Company is in
discussions with Bruegger's Corporation and the Affiliate Guarantors to
restructure the Subordinated Note and, in connection therewith, to settle the
Company's existing disputes with Bruegger's Corporation.
Specifically, the Company and Bruegger's Corporation are discussing a
resolution (the "Bruegger's Resolution") that may include, among other things,
one or more of the following provisions: (a) the principal and accrued
interest outstanding under the Subordinated Note would be reduced to $10
million; (b) the Company and Bruegger's Corporation each give up their claim
against the other to receive a net working capital adjustment; (c) the
Subordinated Note would be modified to, among other things, extend the period
through which interest would be accrued and added to the principal amount of
the Subordinated Note from October, 2000 through December, 2001. From December,
2001 through December, 2002, one-half of the interest would be accrued and
added to the principal amount of the Subordinated Note and one-half of the
interest would be paid in cash. Thereafter interest would be paid in cash
through the maturity of the Subordinated Note in October 2004; (d) the Company
and Bruegger's would each be responsible for 50% of the Franchise Damages with
respect to the claims asserted by D & K Foods, Inc., et al and BFBC Ltd., et al
(See Note 8-Contingencies). The Company would be entitled to 25% of any net
recovery made by Bruegger's Corporation on its counter-claim against D & K
foods, Inc., et al and Bruegger's Corporation would be entitled to 25% of any
net recovery made by the Company on the BFBC, Ltd., Loan. (See Note 8-
Contingencies); (e) Bruegger's Corporation and its affiliates would release
their claim for breach of representations and warranties under the Share
Exchange Agreement (See Note 8-Contingencies); and (f) the Company would give
Bruegger's Corporation a credit of two dollars against the Subordinated Note
for every one dollar that Bruegger's Corporation prepays against the
Subordinated note prior to October, 2003 up to a maximum credit of $4 million.
The Company does not expect the Bruegger's Resolution, if consummated on terms
substantially the same as those presently being discussed, to have a material
adverse effect on the Company's financial position or results of operations,
but there can be no assurance thereof. There also can be no assurance that the
Bruegger's Resolution will be consummated and whether or not consummated there
can be no assurance when, if ever, the Company might receive any principal or
interest payments in respect of the Subordinated Note. The Company will
continue to review the financial condition of the Affiliate Guarantors and
Bruegger's Corporation based upon available information to assess the
collectability of the Subordinated Note.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
Note 4: Commitments.
As of August 6, 2000, the Company had commitments aggregating approximately
$738,000 for restaurant construction and the purchase of new equipment.
Note 5: Long-Term Debt.
On August 3, 1999 the Company completed the refinancing of its existing debt
with a financing package totaling $125,066,000, consisting of a $76,000,000
revolving credit agreement and a $49,066,000 mortgage facility, as described
below. The revolving credit agreement was executed with Chase Bank of Texas,
as agent for a group of six banks, providing for borrowings of up to
$76,000,000 with interest payable at the adjusted LIBOR rate plus a
contractual spread. The Company had $18,700,000 available under its revolving
credit agreement as of August 6, 2000. The revolving credit agreement is
collateralized by the stock of certain subsidiaries of the Company, the
Subordinated Note issued by Bruegger's Corporation, certain interests in the
Company's franchise agreements with Brinker and Burger King Corporation and
substantially all of the Company's personal property not pledged in the
mortgage financing. The revolving credit agreement will mature on October 31,
2002, at which time all amounts outstanding thereunder are due.
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 $49,066,000 mortgage facility has 34 separate mortgage notes and the term
of each mortgage note is either 15 or 20 years. The notes have fixed rates of
interest of either 9.79% or 9.94%. The notes require equal monthly interest
and principal payments. The Company used the proceeds of the mortgage facility
to repay indebtedness under its existing revolving credit agreement. The
mortgage notes are collateralized by a first mortgage/deed of trust and
security agreement on the real estate, improvements and equipment on 19 of the
Company's Chili's restaurants and 15 of the Company's Burger King restaurants.
The mortgage notes contain, among other provisions, certain restrictive
covenants including maintenance of a consolidated fixed charge coverage ratio
for the financed properties.
Note 6: Earnings Per Share
During the first forty weeks of fiscal 2000 the Company acquired 604,500 shares
of common stock for $1,447,644. During the first forty weeks of fiscal 2000 the
Company issued 104,360 shares of restricted stock and accelerated the vesting
of 33,436 shares due to the price of the Company's stock achieving certain
price targets. The Company has recorded $62,547 of expense relating to the
accelerated vesting of the restricted stock during fiscal 2000.
The Company had outstanding at August 6, 2000 common shares totaling
12,245,103. 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 loss per share
computation as required by SFAS 128.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
Twelve weeks ended Forty weeks ended
August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-------- -------- -------- -------
(In thousands, except per share amounts)
Basic net loss per share:
Net loss available to
common shareholders (numerator) $ (733) $(2,355) $ (40) $(2,121)
Weighted average common shares ====== ====== ====== ======
outstanding (denominator) 12,265 12,712 12,361 12,637
====== ====== ====== ======
Basic net loss per share $ (0.06) $ (0.19) $ (0.01) $ (0.17)
====== ====== ====== ======
Twelve weeks ended Forty weeks ended
August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except per share amounts)
Diluted net loss per share:
Net loss available to
common shareholders (numerator) $ (733) $(2,355) $ (40) $(2,121)
Weighted average common shares ====== ====== ====== ======
outstanding 12,265 12,712 12,361 12,637
Effect of dilutive securities:
Options on common stock - - - -
Total common shares and dilutive ------ ------ ------ ------
securities(denominator) 12,265 12,712 12,361 12,637
====== ====== ====== ======
Diluted net loss per share $ (0.06) $ (0.19) $ (0.01) $ (0.17)
====== ====== ====== ======
Note 7 Segment Reporting:
The Company operates four distinct restaurant concepts in the food-service
industry. It owns the Grady's American Grill and two Italian Dining concepts
and operates Burger King restaurants and Chili's Grill & Bar restaurants as a
franchisee of Burger King Corporation and Brinker International, Inc.,
respectively. The Company has identified each restaurant concept as an
operating segment based on management structure and internal reporting. For
purposes of applying SFAS 131, the Company considers the Grady's American
Grill, the two Italian concepts and Chili's Grill & Bar to be similar and have
aggregated them into a single reportable operating segment (Full Service). The
Company considers the Burger King restaurants as a separate reportable segment
(Quick Service). Summarized financial information concerning the Company's
reportable segments is shown in the following table. The "other" column
includes corporate related items and income and expense not allocated to
reportable segments.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
Full Quick
(Dollars in thousands) Service Service Other Total
------- ------- ----- --------
Third quarter fiscal 2000
-------------------------
Revenues $ 33,365 $ 20,221 $ - $ 53,586
Income from restaurant
Operations 3,556 3,416 30 7,002
Operating income 1,430 1,422 (402) $ 2,450
Interest expense (2,581)
Other income (expense), net (480)
------
Income (loss) before income
Taxes $ (611)
======
Depreciation and
amortization 2,027 727 381 $3,135
Full Quick
(Dollars in thousands) Service Service Other Total
------- ------- ----- -----
Third quarter fiscal 1999
-------------------------
Revenues $ 32,866 $ 20,599 $ - $ 53,465
Income from restaurant
Operations 2,926 3,485 29 6,440
Operating income (1,025) 1,758 (610) $ 123
Interest expense (2,280)
Other income (expense), net 21
Income (Loss) before income --------
Taxes $ (2,136)
========
Depreciation and
amortization 1,986 717 426 $3,129
First forty weeks of fiscal 2000
---------------------------------
Revenues $ 112,674 $ 63,269 $ - $ 175,943
Income from restaurant
Operations 12,926 10,857 101 23,884
Operating income 6,340 4,674 (1,362) $ 9,652
Interest expense (8,625)
Other income (expense), net (169)
Income before income ------
Taxes $ 858
======
Depreciation and
amortization 6,725 2,358 1,212 $10,295
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
First forty weeks of fiscal 1999
--------------------------------
Revenues $ 113,240 $ 61,993 $ - $ 175,233
Income from restaurant
Operations 11,430 10,237 102 21,769
Operating income 3,279 4,947 (1,735) $ 6,491
Interest expense (7,983)
Other income (59)
Income before income -------
Taxes $ (1,551)
=======
Depreciation and
amortization 6,586 2,351 1,606 $10,543
Note 8: 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 the Company,
Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl L. Brue,
Michael J. Dressell, Daniel B. Fitzpatrick and John C. Firth.
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 alleged that the plaintiffs purchased their franchises
based upon financial representations that did not materialize, 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. On July 28, 1999,
the court dismissed all counts against all of the individual defendants,
dismissed the count alleging violations of implied covenants of good faith and
fair dealing and dismissed all fraud claims against the Company. On February
22, 2000, the Court granted the defendants' motions for summary judgment on all
remaining counts of the plaintiffs' complaint. On July 27, 2000, the court
dismissed this action in its entirety and the plaintiffs have agreed not to
pursue any appeal.
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 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 did not materialize, that they
purchased preferred stock in Bruegger's Corporation based upon false
representations, that Bruegger's Corporation falsely represented its intentions
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
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, Texas Commerce (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 Texas Commerce. 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,
Daniel B. Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise
Corporation, Champlain Management Services, Inc., Nordahl L. Brue, Michael J.
Dressell and Ed Davis ("Third Party Defendants") alleging that Reilly invested
in BFBC based upon false representations, that the Third Party Defendants
violated state franchise statutes, committed unfair trade practices, violated
covenants of good faith and fair dealing, violated the state "Rico" statute and
violated state and federal securities laws in connection with the Principal
Guaranty. In addition, BFBC and certain of its affiliates, including the
Principal Guarantors ("Intervenors") have intervened and asserted claims
against Grady's and the Third Party Defendants that are similar to those
asserted in the counter claims and the third party complaint. In addition, the
Company and Bruegger's Corporation are currently disputing the nature and
extent of their indemnity obligations, if any, to the other with respect to
this litigation (which dispute would be resolved if the Bruegger's Resolution
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
is consummated. See Note 3 - Disposition of Bagel-Related Businesses). 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 complaints filed by Reilly and the
Intervenors.
In each of the above cases, one or more present or former officers and
directors of the Company were named as party defendants and the Company has
and/or 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, ("Share Exchange Agreement") 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. As of August 6,
2000, the Company has satisfied this obligation. 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. However, the Company and Bruegger's
Corporation are currently disputing the nature and extent of their indemnity
obligations under the Share Exchange Agreement. If the Bruegger's Resolution is
consummated, the remaining $4 million of the Company's share of Franchise
Damages would be payable in cash. Through August 6, 2000 the outstanding
balance due under the Subordinated Note has been reduced by $600,000 in respect
of Franchise 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 an assumption that Bruegger's Corporation has and will continue to
have the ability to perform its indemnity obligations. However, for the reasons
described in Note 3 - Disposition of Bagel-Related Businesses, there can be no
assurance that Bruegger's Corporation has now or in the future will have the
ability to perform its indemnity obligations.
On or about September 10, 1999, Bruegger's Corporation, Lethe LLC, Nordahl L.
Brue, and Michael J. Dressel commenced an action against the Company in the
United States District Court for the District of Vermont alleging that the
Company breached various provisions of the Share Exchange Agreement which arise
out of the ongoing dispute concerning the net working capital adjustment
contemplated by the Share Exchange Agreement. On February 1, 2000, the Company
filed counter-claims against Bruegger's Corporation for the working capital
adjustment to which it believes it is entitled. See Note 3-Disposition of
Bagel-Related Businesses.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
Additionally, on or about September 13, 1999, Messrs. Brue and Dressell
asserted a claim for breach of representations and warranties under the Share
Exchange Agreement. If the Bruegger's Resolution is consummated, all of the
claims described in this paragraph would be settled as a part thereof. Whether
or not the Bruegger's Resolution is consummated, the Company does not expect
the ultimate resolution of these disputes to have a material adverse effect on
the Company's financial position or results of operations but there can be no
assurance thereof.
On April 19, 2000, NBO, LLC ("NBO") filed a Verified Complaint for Injunctive
and Declaratory Relief in the United States District Court for the Northern
District of Indiana, South Bend Division, naming as defendants the Company,
Daniel B. Fitzpatrick, certain other directors of the Company, certain
unidentified associates and affiliates of Daniel B. Fitzpatrick and certain
other unidentified members of management. The Complaint alleged among other
things, that the director defendants' decision to authorize Daniel B.
Fitzpatrick and/or his associates and affiliates and/or other members of
management to acquire up to 1,000,000 additional shares of the Company's common
stock without triggering the Company's Shareholder Rights Agreement would give
management effective control of the Company without the payment of a control
premium and would thwart NBO's tender offer. The Complaint alleged that this
decision was not made in good faith after a reasonable investigation of the
consequences, and was in breach of the director defendants' fiduciary duties.
On May 26, 2000 the Court dismissed these allegations for failure to state a
claim. The Complaint also alleged violations of the federal securities laws and
seeks injunctive and declaratory relief. On June 8, 2000, the Company renewed
its Motion to Dismiss the remaining allegations of NBO's complaint on grounds
that these allegations are moot. On June 9,2000 NBO voluntarily withdrew its
request for a preliminary injunction and on September 12, 2000 NBO voluntarily
dismissed its complaint, without prejudice.
The Company has reached an agreement in principle with NBO, L.L.C. for the
purchase by the Company and Daniel B. Fitzpatrick, the Company's President and
Chief Executive Officer, of all of NBO's shares of common stock of the Company.
NBO has agreed to deliver 800,000 shares of Company common stock and $9.8
million in cash to the Company in exchange for 18 Burger King stores currently
owned and operated by Quality Dining in the Detroit, Michigan area. In
addition, the Company has agreed in principle to grant NBO the right to sell an
additional 100,000 shares of Company common stock to the Company, at a price of
$6.00 per share, for a limited period of time beginning 18 months following the
closing of the initial transaction. As part of these transactions, Mr.
Fitzpatrick has agreed in principle to transfer the real estate underlying
three of the Detroit Burger King stores to NBO in exchange for 300,000 shares
of Company common stock. There can be no assurance that the agreement in
principle will be consummated, and if not consummated, there can be no
assurance that NBO, LLC will not again commence litigation.
The Company is involved in various other legal proceedings incidental to the
conduct of its business, including employment discrimination claims. Based
upon currently available information, the Company does not expect that any such
proceedings will have a material adverse effect on the Company's financial
position or results of operations but there can be no assurance thereof.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
Note 9: Franchisee Commitment
On January 27, 2000 the Company executed a "Franchisee Commitment" in which it
agreed to undertake certain "Transformational Initiatives" including capital
improvements and other routine maintenance in its Burger King restaurants. The
capital improvements include the installation of signage bearing the new Burger
King logo and the installation of a new drive-through ordering system. The
Company is required to complete these capital improvements by December 31,
2001. In addition, the Company agreed to perform, as necessary, certain
routine maintenance such as exterior painting, sealing and striping of parking
lots and upgraded landscaping. The Company is required to complete this
maintenance by September 30, 2000. In consideration for executing the
Franchisee Commitment, the Company received "Transformational Payments"
totaling approximately $3.9 million during fiscal 2000. The portion of the
Transformational Payments that corresponds to the amount required for the
capital improvements will be recognized as income over the useful life of the
capital improvements. The portion of the Transformational Payments that
corresponds to the required routine maintenance will be recognized as income
over the period during which maintenance is performed. The remaining balance of
the Transformational Payments will be recognized as income ratably over the
term of the Franchisee Commitment.
Note 10: Burger King Franchise Agreement
Beginning in July, 2000, Burger King Corporation will increase its royalty and
franchise fees for most new restaurants. At that time, the franchise fee for
new restaurants will increase from $40,000 to $50,000 for a 20 year agreement
and the royalty rate will increase from 3 1/2% of sales to 4 1/2% of sales,
after a transitional period. For franchise agreements entered into during the
transitional period, the royalty rate will be 4% of sales for the first 10
years and 4 1/2% of sales for the balance of the term.
For new restaurants, the transitional period will be from July 1, 2000 to June
30, 2003. As of July 1, 2003, the royalty rate will become 4 1/2% of sales for
the full term of new restaurant franchise agreements. For renewals of existing
franchise agreements, the transitional period will be from July 1, 2000 through
June 30, 2001. As of July 1, 2001, existing restaurants that renew their
franchise agreements will pay a royalty of 4 1/2% of sales for the full term of
the renewed agreement. The advertising contribution will remain 4% of sales.
Royalties payable under existing franchise agreements are not affected by these
changes until the time of renewal, at which time the then prevailing rate
structure will apply.
Burger King Corporation offered a voluntary program to incent franchisees to
renew their franchise agreements prior to the scheduled expiration date ("Early
Renewal Program"). Franchisees that elected to participate in the Early
Renewal Program will be required to make capital investments in their
restaurants by, among other things, bringing them up to Burger King
Corporation's current image, and to extend occupancy leases. Franchise
agreements entered into under the Early Renewal Program will have special
provisions regarding the royalty payable during the term, including a reduction
in the royalty to 2.75% over five years beginning April, 2002 and concluding in
April, 2007. The Company included 36 restaurants in the Early Renewal Program.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 6, 2000
(Unaudited)
The Company paid franchise fees of $877,000 in the third quarter of fiscal 2000
to extend the franchise agreements of the selected restaurants for sixteen to
twenty years. The Company expects to invest approximately $7,000,000 to
$8,000,000 to remodel the selected restaurants to bring them up to Burger King
Corporation's current image. The remodeling is required to be completed by
December 31, 2001.
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 52 weeks long and ends October 29,
2000. The first quarter of the Company's fiscal year consists of 16 weeks with
all subsequent quarters being 12 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 Forty Weeks Ended
August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 28.2 29.1 28.3 29.4
Payroll and benefits 29.3 29.2 29.3 29.0
Depreciation and amortization 4.9 4.8 4.9 4.9
Other operating expenses 24.6 24.9 23.9 24.3
Total restaurant operating ---- ---- ---- ----
expenses 87.0 88.0 86.4 87.6
Income from operations 13.0 12.0 13.6 12.4
General and administrative 8.1 6.7 7.7 6.8
Amortization of intangibles 0.4 0.5 0.4 0.5
Impairment of assets and
facility closing costs - 4.7 - 1.4
---- ---- ---- ----
Operating income 4.5 0.1 5.5 3.7
---- ---- ---- ----
Other income (expense):
Interest expense (4.8) (4.2) (4.9) (4.6)
Interest income - - - .1
Other income (expense), net (0.9) - (.2) (.1)
---- ---- ---- ----
Total other expense, net (5.7) (4.2) (5.1) (4.6)
---- ---- ---- ----
Income (loss) before income taxes (1.2) 4.1 0.4 (0.9)
Income tax provision 0.2 0.4 0.5 0.3
---- ---- ---- ----
Net income (loss) (1.4)% (4.5)% (0.1)% (1.2)%
==== ==== ==== ====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Restaurant sales for the Company were $53,586,000 for the third quarter of
fiscal 2000 versus $53,465,000 for the comparable period in fiscal 1999, a
decrease of $121,000. Restaurant sales for the first forty weeks of fiscal
2000 were $175,943,000 versus $175,233,000 for the comparable period in fiscal
1999, an increase of $710,000.
The Company's Burger King restaurant sales decreased $378,000 to $20,221,000
in the third quarter of fiscal 2000 when compared to restaurant sales of
$20,599,000 in the same period of fiscal 1999. The Company closed two
restaurants with expired leases: one in the fourth quarter of fiscal 1999 and
one in the first quarter of fiscal 2000, which contributed $162,000 to fiscal
1999 third quarter sales. The Company's Burger King restaurants had average
weekly sales of $24,073 in the third quarter of fiscal 2000 versus $24,324 in
the same period in fiscal 1999. The Company had increased revenue of $520,000
due to additional sales weeks from two new restaurants opened during fiscal
2000 and one restaurant opened in fiscal 1999 which was open for its first
full year in fiscal 2000. Sales increased $1,336,000 to $63,269,000 for the
first forty weeks of fiscal 2000 compared to $61,933,000 for the comparable
period in fiscal 1999. The Company had increased revenue of $1,811,000 due to
additional sales weeks from two new restaurants opened during fiscal 2000 and
one restaurant opened in fiscal 1999 which was open for its first full year in
fiscal 2000. The two closed restaurants contributed $488,000 in sales to the
first forty weeks of fiscal 1999. Average weekly sales were $22,468 in the
first forty weeks of fiscal 2000 versus $22,086 in the same period in fiscal
1999.
Sales in the Company's Grady's American Grill restaurant division were
$15,363,000 in the third quarter of fiscal 2000 compared to sales of
$16,167,000 in the same period in fiscal 1999, a decrease of $804,000. Two
units were disposed in fiscal 1999 and one was disposed in the third quarter
of fiscal 2000. The three disposed units contributed approximately $673,000
to the sales decrease. The Company's Grady's American Grill restaurants had
average weekly sales of $35,811 in the third quarter of fiscal 2000 versus
$35,688 in the same period in fiscal 1999. Sales for the first forty weeks of
fiscal 2000 decreased $4,668,000 to $53,977,000 compared to $58,645,000 for
the same period in fiscal 1999. The absence of the restaurants which were sold
contributed approximately $2,648,000 to the sales decrease. Average weekly
sales were $37,484 in the first forty weeks of fiscal 2000 versus $38,608 in
the same period in fiscal 1999.
The Company's Chili's Grill & Bar restaurant sales increased $1,108,000 to
$14,134,000 in the third quarter of fiscal 2000 compared to $13,026,000 in the
same period in fiscal 1999. The Company opened one Chili's restaurant during
the second quarter of fiscal 2000 which contributed $659,000 of the sales
increase. The average weekly sales increased to $40,614 in the third quarter
of fiscal 2000 versus $38,767 in the same period of fiscal 1999. Sales for the
first forty weeks of fiscal 2000 increased $3,312,000 to $45,905,000 compared
to $42,593,000 for the same period in fiscal 1999. The one new Chili's
restaurant contributed $1,168,000 of the sales increase. The average weekly
sales were $40,268 in the first forty weeks of fiscal 2000 versus $38,029 in
the same period in fiscal 1999.
The Company's Italian Dining Division restaurant sales increased $195,000 to
$3,868,000 in the third quarter of fiscal 2000 compared to $3,673,000 in the
same period in fiscal 1999. The average weekly sales were $40,292 in the third
quarter of fiscal 2000 versus $38,270 in the same period of fiscal 1999.
Sales for the first forty weeks of fiscal 2000 increased $790,000 to
$12,792,000 compared to $12,002,000 for the same period in fiscal 1999. The
average weekly sales were $39,976 in the first forty weeks of fiscal 2000
versus $37,506 in the same period in fiscal 1999.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Total restaurant operating expenses, as a percentage of restaurant sales,
decreased to 87.0% for the third quarter of fiscal 2000 versus 88.0% in the
third quarter of fiscal 1999 and were 86.4% in the first forty weeks of fiscal
2000 versus 87.6% in the same period of fiscal 1999. The following factors
influenced the operating margins.
Food and beverage costs improved to 28.2% of total revenues in the third
quarter of fiscal 2000 compared to 29.1% of total revenues in the same period
in fiscal 1999 and were 28.3% in the first forty weeks of fiscal 2000 compared
to 29.4% in the same period of fiscal 1999. Food and beverage costs improved
as a percentage of total revenues in both the Company's Full Service segment
and Quick Service segment during the third quarter and the first forty weeks
of fiscal 2000 compared to the same periods in fiscal 1999. The improvement in
food and beverage costs was mainly due to increased store level efficiencies
and favorable commodity prices.
Payroll and benefits were 29.3% of total revenues in the third quarter of
fiscal 2000 compared to 29.2% of total revenues in the same period of fiscal
1999. Payroll and benefits were 29.3% of total revenues in the first forty
weeks of fiscal 1999 compared to 29.0% in the same period of fiscal 1999. 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
relatively consistent at 4.9% for the third quarter of fiscal 2000 compared to
4.8% in the same period in fiscal 1999 and at 4.9% in the first forty weeks of
fiscal 2000 and the same period of fiscal 1999.
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 improved
in the third quarter of fiscal 2000 to 24.6% compared to 24.9% in the same
period of fiscal 1999 and improved to 23.9% in the first forty weeks of fiscal
2000 compared to 24.3% in the same period of fiscal 1999. The improvement for
the third quarter and the first forty weeks was primarily due to the improved
sales performance in the Company's Italian Dining and Chili's restaurants and
a decrease in promotional expenses relating to the Company's Grady's
restaurants.
Income from restaurant operations increased $562,000 to $7,002,000, or 13.0%
of revenues, in the third quarter of fiscal 2000 compared to $6,440,0000, or
12.0% of revenues, in the comparable period of fiscal 1999. Income from
restaurant operations in the Company's Quick Service segment decreased $69,000
while income from the Company's Full Service segment increased $630,000. The
decrease in the Quick Service segment was mainly due to decreased sales. The
increase in the Full Service segment was mainly due to increased sales and
lower food and beverage costs. Income from restaurant operations increased
$2,115,000 to $23,884,000, or 13.6% of revenues, in the first forty weeks of
fiscal 2000 compared to $21,769,0000, or 12.4% of revenues, in the comparable
period of fiscal 1999. Income from restaurant operations in the Company's
Quick Service segment accounted for $620,000 of the increase while the
Company's Full Service segment contributed $1,496,000. The increases were
mainly due to increased sales and lower food and beverage costs.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
General and administrative expenses were $4,351,000 in the third quarter of
fiscal 2000 compared to $3,565,000 in the third quarter of fiscal 1999 and
$13,544,000 in the first forty weeks of fiscal 2000 compared to $11,953,000 in
the same period of fiscal 1999. As a percentage of total restaurant sales,
general and administrative expenses were 8.1% in the third quarter of fiscal
2000 versus 6.7% in the third quarter of fiscal 1999 and increased to 7.7% in
the first forty weeks of fiscal 2000 compared to 6.8% in the same period of
fiscal 1999. The increase in general and administrative expenses is primarily
attributable to the unanticipated expenses related NBO, LLC's proxy contest
and tender offer. During the third quarter the Company incurred expenses
totaling approximately $842,000 related to this event and for the first forty
weeks of fiscal 2000 the Company incurred expenses totaling approximately
$1,447,000.
Amortization of intangibles, as a percentage of total revenues, remained
relatively consistent at 0.4% for the third quarter of fiscal 2000 compared to
0.5% in the same period in fiscal 1999 and at 0.4% in the first forty weeks of
fiscal 2000 compared to 0.5% the same period of fiscal 1999.
The Company recorded non-cash charges totaling $2,501,000 during the third
quarter of fiscal 1999 consisting primarily of $650,000 for the disposal of
obsolete point of sale equipment in its full service dining restaurants that
the Company identified as a result of installing its new point of sale system,
$1,047,000 for the estimated costs associated with the anticipated closing of
two regional offices and three restaurant locations and $804,000 primarily for
a non-cash asset impairment write down for two under-performing restaurants.
This non-cash asset impairment charge resulted from the Company's determination
that an impairment write down should be considered for certain locations when
there is a sustained trend of negative operating performance as measured by
restaurant level cash flow. The non-cash facility closure charges include
amounts for the write off of fixed assets and other costs related to the
closing of these facilities. Each of these non-cash charges represents a
reduction of the carrying amount of the assets to their estimated fair market
values.
Total other expenses, as a percentage of revenues, increased to 5.7% for the
third quarter of fiscal 2000 from 4.2% during the comparable period in fiscal
1999 and increased to 5.1% in the first forty weeks of fiscal 2000 compared to
4.6% for the same period of fiscal 1999. Increased interest expense and a loss
on the sale of property and equipment was partially offset by an increase in
other income relating to the Transformational Payments from Burger King
Corporation. See Note 9 Franchisee Commitment.
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 had a tax expense of $122,000 in the third quarter of fiscal
2000 compared to expense of $219,000 for the same period of fiscal 1999 and
tax expense of $898,000 in the first forty weeks of fiscal 2000 compared to
tax expense of $570,000 in the same period of fiscal 1999. The increased tax
expense for the first forty weeks of fiscal 2000 was mainly due to the
Company's increased income before income taxes.
For the third quarter of fiscal 2000, the Company reported net loss of
$733,000 compared to net loss of $2,355,000 for the same period of fiscal 1999
and net loss of $40,000 in the first forty weeks of fiscal 2000 compared to a
net loss of $2,121,000 in the same period of fiscal 1999.
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 $824,000 at August 6, 2000, a
decrease of $195,000 from the $1,019,000 at October 31, 2000. Principal uses
of funds consisted of: (i) expenditures for property and equipment
($9,143,000) (ii) net repayment of long-term debt ($2,620,000) (iii) purchase
of 562,500 shares of the Company's stock ($1,448,000) and the payment of
franchise fees ($1,098,000). Principal sources of funds consisted of those
provided by operations ($13,657,000).
The Company's primary cash requirements in fiscal 2000 will be capital
expenditures in connection with the opening of new restaurants, remodeling of
existing restaurants, maintenance expenditures, purchases of the Company's
stock, payment of franchise fees related to the Early Renewal Program and the
reduction of debt under the Company's debt agreements. The Company's capital
expenditures for fiscal 2000 are expected to range from $10,000,000 to
$13,000,000. The Company expects to incur the majority of the Burger King
Early Renewal Program expenses in fiscal 2001 - See Note 10. As of August 6,
2000 the Company has opened two Burger King restaurants and one Chili's
restaurant in fiscal 2000. The Company expects to open one to two more full
service restaurants before the end of fiscal 2000. The actual amount of the
Company's cash requirements for capital expenditures depends in part on the
number of new restaurants opened, whether the Company owns or leases new units
and the actual expense related to remodeling and maintenance of existing units
and the requirements and timing of the Burger King Early Successor Program.
On August 3, 1999 the Company completed the refinancing of its existing debt
with a financing package totaling $125,066,000, consisting of a $76,000,000
revolving credit agreement and a $49,066,000 mortgage facility, as described
below. The revolving credit agreement was executed with Chase Bank of Texas,
as agent for a group of six banks, providing for borrowings of up to
$76,000,000 with interest payable at the adjusted LIBOR rate plus a
contractual spread. The Company had $18,700,000 available under its revolving
credit agreement as of August 6, 2000. The revolving credit agreement is
collateralized by the stock of certain subsidiaries of the Company, the junior
subordinated note issued by Bruegger's Corporation, certain interests in the
Company's franchise agreements with Brinker and Burger King Corporation and
substantially all of the Company's personal property not pledged in the
mortgage financing. The revolving credit agreement will mature on October 31,
2002, at which time all amounts outstanding thereunder are due.
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 $49,066,000 mortgage facility has 34 separate mortgage notes and the term
of each mortgage note is either 15 or 20 years. The notes have fixed rates of
interest of either 9.79% or 9.94%. The notes require equal monthly interest
and principal payments. The Company used the proceeds of the mortgage facility
to repay indebtedness under its existing revolving credit agreement.
The mortgage notes are collateralized by a first mortgage/deed of trust and
security agreement on the real estate, improvements and equipment on 19 of the
Company's Chili's restaurants and 15 of the Company's Burger King restaurants.
The mortgage notes contain, among other provisions, certain restrictive
covenants including maintenance of a consolidated fixed charge coverage ratio
for the financed properties.
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 2000.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for the Company for periods beginning in fiscal year 2001. The
Company is currently not involved in derivative instruments or hedging
activities, and therefore, will measure the impact of this statement as
it becomes necessary.
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; and
changes in governmental regulations, including increases in the minimum wage.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 8 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
None
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: September 18, 2000 By: /s/Jeanne M. Yoder
Vice President & Controller
(Principal accounting officer)
INDEX TO EXHIBITS
Exhibit
No. Description
---- -------------
10-AV Severance Agreement and General Release between the Company
and David M. Findlay dated September 1, 2000.
Exhibit 10-AV
RESIGNATION AGREEMENT
This Resignation Agreement ("Agreement") is entered into this 1st day of
September, 2000 between David M. Findlay ("Employee") and Quality Dining, Inc.
and all of its subsidiaries, parent, affiliates, directors, officers, employee
and agents (collectively "Employer").
WHEREAS, Employee is currently employed by Employer;
WHEREAS, Employee has voluntarily resigned his employment as of the
Resignation Date (as defined below); and
WHEREAS, Employee and Employer desire to provide for an orderly transition of
Employee's responsibilities.
THEREFORE, Employee and Employer acknowledge and voluntarily agree as follows:
1. Employee's resignation of employment with Employer will be effective at the
time of Employer's normal close of business on September 1, 2000 (the
"Resignation Date").
2. Employee acknowledges that the Employer does not have severance benefits or
a severance program, plan or policy for employees separated from employment.
Employee agrees that he is not entitled to and shall not receive any
compensation for any sick days, vacation days, personal days, bonus or
otherwise, except in consideration of Employee's senior position with the
Employer and his commitment to provide the consulting services set forth in
Paragraph 3 below. Employer will continue to provide coverage to Employee
under its existing group health, vision and dental plans on the same terms as
existed on the Resignation Date through and including November 6, 2000.
3. Employee agrees to provide consulting services in an advisory capacity to
Employer in all areas which he had responsibility while he was employed by
Employer. Employee will perform his work for Employer (i) by telephone on an
as needed basis; and (ii) at Employers premises no more than 1/2 day per month.
The term of the consulting services shall commence on the Resignation Date and
shall expire on June 30, 2001.
Employer shall pay Employee $10,000 for such consulting services, payable at
the rate of $1,000 per month, in arrears, commencing on October 1, 2000.
Employee shall hold Employer harmless from any liability on the part of
Employer for Employer's failure to pay any taxes with respect Employee's
relationship to Employer.
Employee acknowledges that in order to perform the services called for in this
Paragraph 3, it will be necessary for Employer to disclose to Employee certain
confidential information of Employer. Employee shall treat such information
with the same degree of care and confidentiality as he was required to do
during the term of his employment by Employer.
The parties are and shall be independent contractors to one another, and
nothing herein shall be deemed to cause this Agreement to create an agency,
partnership, or joint venture between the parties. Nothing in this Agreement
shall be interpreted or construed as creating or establishing the relationship
of employer and employee between Employer and Employee. As an independent
contractor, Employee shall pay and report all federal and state income tax
withholding, social security taxes, and unemployment insurance applicable to
Employee. Employee shall not be entitled to participate in health or
disability insurance, retirement benefits, or other welfare or pension
benefits (if any) to which employees of Employer may be entitled except as
provided in paragraph 2 above.
4. Employee understands that he may revoke this Agreement for a period of
seven (7) days following the date of its execution. Any revocation within
this period should be submitted in writing and state, "I hereby revoke my
agreement to the Agreement." The revocation must be personally delivered, or
mailed and postmarked, within seven (7) days of execution of this Agreement.
This Agreement shall not become effective or enforceable until the revocation
period has expired.
5. Employee agrees not to disparage Employer or its subsidiaries, affiliates,
officers, directors, shareholders, employees, agents or services to any third
party, either orally or in writing.
6. In consideration of the mutual agreements and covenants set forth herein,
the receipt and sufficiency of which Employee hereby acknowledges, Employee
and his heirs, executors, administrators and assigns hereby voluntarily,
completely, unconditionally and irrevocably discharges and releases Employer,
its subsidiaries, parent, affiliates, officers, directors, employees, agents,
predecessors, employee benefit plans and their fiduciaries, and other
representatives of Employer, and their successors and assigns (the "Released
Parties"), from any and all claims, demands, causes of action, suits,
charges, violation and/or liability whatsoever, known or unknown (including
attorneys' fees, interest, expenses and costs actually incurred) involving any
matter arising out of or in any way related, directly or indirectly, to
Employee's employment with Employer or the termination thereof. The parties
agree and acknowledge that the claims and actions released herein include, but
are not limited to, any claim or action based upon any common law tort action,
wrongful discharge, breach of contract and/or employment discrimination on the
basis of race, color, sex, religion, national origin, age, disability, or any
other basis under Title VII of the Civil Rights Act, Americans With
Disabilities Act, Age Discrimination in Employment Act, the Older Workers
Benefits Protection Act, the Worker Adjustment Retraining and Notification
Act, the Employee Retirement Income Security Act, the Fair Labor Standards
Act, and Family and Medical Leave Act, all as amended, or their state or local
counterparts, or any claim or action under any other federal, state, or local
law, rule, or regulation. Nothing contained herein is intended or shall be
construed to alter, limit or in any way impair any of the Employer's existing
obligations to indemnify Employee arising out of or related to Employee's
former positions as an officer and director of the Employer, including the
Employer's obligations under its charter documents and any insurance available
from time to time.
7. Employee covenants and agrees that for a period of four (4) years from and
after the Resignation Date, Employee will not, directly or indirectly (a)
induce or influence or attempt to induce or influence, any person who is an
employee of the Employer (or who had been an employee of the Employer at any
time during the preceding 12 months) to terminate their employment with the
Employer or to accept employment with another Company, nor (b) aid, assist or
abet any other person, firm or corporation in any of the activities prohibited
in the immediately preceding clause (a).
8. On or before the Resignation Date, Employee agrees to return to Employer
all of Employer's property in Employee's possession or control, including, but
not limited to, Employer documents, materials, computer disks and other
records.
9. Employee warrants and agrees not to disclose any confidential or
proprietary information concerning Employer which was acquired during the
course of Employee's employment to any person, firm, corporation, association
or other entity.
10. Employee understands that this Agreement does not waive or release any
rights or claims that Employee may have under the Age Discrimination in
Employment Act of 1967 which arise and occur after the date Employee executes
this Agreement.
11. The parties agree and understand that if this Agreement is ever found to
be invalid or unenforceable (in whole or in part) as to any particular type of
claim or charge or as to any particular circumstances, it shall remain fully
valid and enforceable as to all other claims, charges and circumstances. As
to any actions, claims, or charges that would not be released because of the
revocation, invalidity, or unenforceability of this Agreement, Employee agrees
to return the severance payment described above, with legal interest, as a
prerequisite to asserting or bringing any such claims, charges or actions.
12. Employee agrees that nothing in this Agreement is or shall be construed as
an admission by Employer of any breach of any agreement or law or any
intentional or unintentional wrongdoing of any nature. Employee agrees and
acknowledges that Employee has not relied upon any representations of Employer
except as set forth in this Agreement.
13. The parties agree that this Agreement shall be governed by and enforced in
accordance with the laws of the State of Indiana and all disputes regarding
this Agreement shall be brought in the State of Indiana.
14. By signing this Agreement, Employee further acknowledges and agrees:
THAT EMPLOYEE HAS READ IT;
THAT THIS AGREEMENT IS BEING ENTERED INTO FREELY AND VOLUNTARILY;
THAT EMPLOYEE UNDERSTANDS THE AGREEMENT AND KNOWS THAT HE IS GIVING UP RIGHTS
INCLUDING BUT NOT LIMITED TO, RIGHTS UNDER THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, AS AMENDED, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964,
AS AMENDED, THE EQUAL PAY ACT OF 1963, AND THE AMERICANS WITH DISABILITIES ACT
OF 1990;
THAT EMPLOYEE CONSENTS TO EVERYTHING IN IT;
THAT EMPLOYEE HAS BEEN ADVISED AND HAS BEEN GIVEN THE OPPORTUNITY TO CONSULT
WITH AN ATTORNEY BEFORE EXECUTING IT;
THAT EMPLOYEE HAS BEEN GIVEN WHAT EMPLOYEE CONSIDERS TO BE A SUFFICIENT PERIOD
OF TIME TO REVIEW AND CONSIDER THIS AGREEMENT BEFORE SIGNING IT; AND
EMPLOYEE UNDERSTANDS THAT FOR A PERIOD OF SEVEN (7) DAYS AFTER SIGNING IT,
EMPLOYEE MAY REVOKE EMPLOYEE'S ACCEPTANCE OF IT. IF EMPLOYEE REVOKES THIS
AGREEMENT WITHIN THE SEVEN (7) DAY PERIOD, IT SHALL NOT BE EFFECTIVE OR
ENFORCEABLE.
THAT THE PROVISIONS OF THIS AGREEMENT MAY NOT BE AMENDED, WAIVED, CHANGED OR
MODIFIED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY AN AUTHORIZED
REPRESENTATIVE OF BOTH EMPLOYEE AND EMPLOYER.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
Employee: Employer:
Quality Dining, Inc.
/s/ David M. Findlay By:/s/ John C/ Firth
---------------- ----------------
David M. Findlay John C. Firth
Executive Vice President
and General Counsel
