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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 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 No. 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 46545
Mishawaka, Indiana (zip Code)
(Address of principal executive
offices)
(Registrant's telephone number, including area code) (219) 271-4600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
$24,095,790
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at November 25, 1999
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").
12,474,009
Number of shares of Common Stock, without par value, outstanding at January
14, 2000.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the following document have been incorporated by reference into
this Annual Report on Form 10-K
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IDENTITY OF DOCUMENT PART OF FORM 10-K INTO WHICH DOCUMENT IS INCORPORATED
Definitive Proxy Statement PART III
for the Annual Meeting of
Shareholders to be held
March 7, 2000.
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QUALITY DINING, INC.
Mishawaka, Indiana
Annual Report to Securities and Exchange Commission
October 31, 1999
PART I
ITEM 1. BUSINESS.
General
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(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 Spageddies Italian
Kitchen(R) ("Spageddies"(R)) and Papa Vino's Italian Kitchen(R) ("Papa
Vino's"(R)). As of October 31, 1999, the Company operated 142 restaurants,
including 70 Burger King restaurants, 28 Chili's, 36 Grady's American Grill
restaurants, four Spageddies and four Papa Vino's.
The Company was founded in 1981 and has grown from a two-unit Burger King
franchisee to a multi-concept restaurant operator. The Company has grown by
capitalizing on (i) its significant presence in targeted markets, (ii) the
stable operating performance of its Burger King restaurants, (iii) strategic
acquisitions of Burger King restaurants, Chili's restaurants and the Grady's
American Grill concept, and (iv) management's extensive experience.
The Company is an Indiana corporation, which is the indirect successor to a
corporation that commenced operations in 1981. Prior to the consummation of
the Company's initial public offering on March 8, 1994 (the "Offering"), the
business of the Company was transacted by the Company and eight affiliated
corporations. As a result of a reorganization effected prior to the Offering,
the Company became a management holding company. The Company, as used herein,
means Quality Dining, Inc. and all of its subsidiaries.
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%
and matures in October 2004. Interest will be accrued and added to the
principal amount of the note through October 2000 and will be paid in cash for
the remaining life of the note. The Company has not recognized any interest
income from this note. The Company will continue to review the financial
condition of Bruegger's Corporation based upon available information to assess
the collectability of the 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 ITEM 3--Legal Proceedings.
During the second quarter of fiscal 1997, the Company recorded a non-cash
impairment charge of $185,000,000 and a store closing charge of $15,513,000 as
a result of its decision to divest its bagel-related businesses. The
consummation of the sale of the bagel-related businesses in fiscal 1997 did
not result in any additional gain or loss.
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Business Strategy
The Company's fundamental business strategy is to optimize the cash flow of
its operations through proven operating management, reduce debt and
appropriately grow the Company's restaurant concepts in a manner focusing on
total customer satisfaction, while maximizing the long term value of the
Company for its shareholders. Management's operating philosophy, which is
shared by all of the Company's concepts, is comprised of the following key
elements:
Value-Based Concepts. Value-based restaurant concepts are important to the
Company's business strategy. Accordingly, in each of its restaurants, the
Company seeks to provide customers with value, which is a product of high-
quality menu selections, reasonably priced food, prompt, courteous service and
a pleasant dining atmosphere.
Focus on Customer Satisfaction. Through its comprehensive management
training programs and experienced management team, the Company seeks to ensure
that its employees provide customers with an enjoyable dining experience on a
consistent basis.
Hands-On Management Style. Members of the Company's senior management are
actively involved in the operations of each of the Company's restaurant
concepts. This active management approach is a key factor in the Company's
efforts to control costs and optimize operating income.
Quality Franchise Partners. The Company has historically sought franchisors
with established reputations for leadership in their various segments of the
restaurant industry who have proven integrity and share the Company's focus on
value, customer service and quality.
Use of Technology. The Company actively tracks the performance of its
business utilizing computer and point-of-sale technology. In addition, the
Company's voice and data communications systems provide timely and accurate
reporting.
Expansion
The Company currently plans to open three to five Burger King restaurants
and two to three full service restaurants in fiscal 2000. The Company's long
term expansion strategy is focused on the development of restaurants in
existing markets in order to achieve increased market penetration. In
addition, the Company may consider strategic acquisitions in the Burger King
system. During fiscal 1999, the Company added one new Burger King restaurant,
closed one Burger King restaurant, closed one Grady's American Grill
restaurant and sold two Grady's American Grill restaurants. At the end of
fiscal 1999, the Company operated 36 Grady's American Grill restaurants, four
Spageddies, four Papa Vino's, 70 Burger King restaurants and 28 Chili's
restaurants.
The amount of the Company's total investment to develop new restaurants
depends upon various factors, including prevailing real estate prices and
lease rates, raw material costs and construction labor costs in each market in
which a new restaurant is to be opened. The Company may own or lease the real
estate for future development.
The Company's ability to manage the diverse operations resulting from its
past growth will be essential to its ability to succeed. Prior to fiscal 1996,
the Company's business historically was focused primarily on the development
and operation of Burger King restaurants and Chili's restaurants. The Grady's
American Grill and Italian Dining concepts have varying degrees of name
recognition. Although the Company opened its first Spageddies in 1994, the
Company's Italian Dining concepts are not yet time proven. In addition, the
Company's acquisitions of Grady's American Grill and Spageddies have caused it
to assume many functions performed by the previous owners, requiring increased
staffing and expenditures in various areas including advertising and
marketing, purchasing, management information systems.
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Burger King Restaurants
General. Headquartered in Miami, Florida, Burger King Corporation is an
indirect wholly-owned subsidiary of Diageo, PLC. Burger King Corporation has
been franchising Burger King restaurants since 1954 and has since expanded to
locations throughout the world.
Menu. Each Burger King restaurant offers a diverse menu containing a
variety of traditional and innovative food items, featuring the Whopper(R)
sandwich and other flame-broiled hamburgers and sandwiches, which are prepared
to order with the customer's choice of condiments. The menu also typically
includes breakfast entrees, french fries, onion rings, desserts and soft
drinks. The Burger King system philosophy is characterized by its "Have It
Your Way"(R) service, generous portions and competitive prices, resulting in
high value to its customers. Management believes these characteristics
distinguish Burger King restaurants from their competitors and provide a
significant competitive advantage.
Advertising and Marketing. As required by its franchise agreements, the
Company contributes 4% of its restaurant sales to an advertising and marketing
fund controlled by Burger King Corporation. Burger King Corporation uses this
fund primarily to develop system-wide advertising, sales promotions and
marketing materials and concepts. In addition to its required contribution to
the advertising and marketing fund, the Company makes local advertising
expenditures intended specifically to benefit its own Burger King restaurants.
Typically, the Company spends its local advertising dollars on television and
radio.
Chili's Grill & Bar
General. The Chili's concept is owned by Brinker, a publicly-held
corporation headquartered in Dallas, Texas. The first Chili's Grill & Bar
restaurant opened in 1975.
Menu. Chili's restaurants are full service, casual dining restaurants
featuring quick, efficient and friendly table service designed to minimize
customer waiting and facilitate table turnover. Service personnel are dressed
casually to reinforce the casual, informal environment. Chili's restaurants
feature a diverse menu of broadly appealing food items, including a variety of
hamburgers, fajitas, chicken and seafood entrees and sandwiches, barbecued
ribs, salads, appetizers and desserts, all of which are prepared fresh daily
according to recipes specified by Chili's. Emphasis is placed on serving
substantial portions of quality food at modest prices. Each Chili's restaurant
has a full bar serving beer, wine and cocktails.
Advertising and Marketing. Pursuant to its franchise agreements with
Brinker, the Company contributes 0.5% of sales from each restaurant to Brinker
for advertising and marketing to benefit all restaurants. As part of a system-
wide promotional effort, the Company has agreed that for the period beginning
September 1, 1999 and ending August 30, 2000, it will pay an additional
advertising fee of 0.375% of sales. The Company is also required to spend 2%
of sales from each restaurant on local advertising. The Company's advertising
expenditures typically exceed the levels required under its agreements with
Brinker and the Company spends substantially all of its advertising dollars on
television and radio advertising. The Company also conducts promotional
marketing efforts targeted at its various local markets.
The Chili's franchise agreements provide that Brinker may establish
advertising cooperatives ("Cooperatives") for geographic areas where one or
more restaurants are located. Any restaurants located in areas subject to a
Cooperative are required to contribute 3% of sales to the Cooperative in lieu
of contributing 1/2% of sales to Brinker. Each such restaurant is also
required to directly spend 1/2% of sales on local advertising. To date, no
Cooperatives have been established in any of the Company's markets.
Grady's American Grill
General. Grady's American Grill restaurants feature high-quality food in a
classic American style, served in a warm and inviting setting. Prior to the
Company's acquisition of the concept from Brinker on December 21, 1995,
Brinker owned and operated 35 of the 36 Grady's American Grill restaurants now
owned and operated by
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the Company. The Company's Grady's American Grill concept is proprietary and
provides the Company with flexibility for expansion and development.
Menu. The Grady's American Grill menu features signature prime rib, high-
quality steaks, daily servings of seafood, inviting salads, sandwiches, soups
and high quality desserts. Entrees emphasize on-premise scratch preparation in
a classic American style.
Advertising and Marketing. As the owner of the Grady's American Grill
concept, the Company has full responsibility for marketing and advertising.
The Company expects to focus advertising and marketing efforts in local print
media, use of direct mail programs, television and radio, with total
expenditures estimated to range between 2% and 3% of the sales for its Grady's
American Grill restaurants.
Italian Dining Concepts
General. The Company's Italian Dining concept consists of Papa Vino's
Italian Kitchen and Spageddies Italian Kitchen. The first Papa Vino's
restaurant was opened in 1996 and the first Spageddies restaurant was opened
in 1994. The Company had been a franchisee of Spageddies since 1994, and
became the owner of the concept in October 1995. Papa Vino's and Spageddies
each offers a casual dining atmosphere with high-quality food, generous
portions and moderate prices, all enjoyed in a setting featuring the ambiance
of a traditional Italian trattoria with stone archways, large wines casks and
wine racks lining the walls and exhibition cooking in an inviting, comfortable
environment. The Company's Italian Dining concepts are proprietary and provide
the Company with flexibility for expansion and development.
Menu. A fundamental component of the Italian Dining concept is to provide
the customer with a wide variety of high-quality, value-priced Italian food.
The restaurant menu includes an array of entrees, including traditional
Italian pasta, grilled meats and freshly prepared selections of pizzas, soups,
salads and sandwiches. The menu also includes specialty appetizers, fresh
baked bread and desserts, together with a full-service bar serving beer, wine
and cocktails.
Advertising and Marketing. As the owner of these concepts, the Company has
full responsibility for marketing and advertising its Italian Dining
restaurants. The Company focuses its advertising and marketing efforts in
local print media, use of direct mail programs and radio, with total
expenditures estimated to range between 2% and 3% of the sales for these
restaurants.
Trademarks
The Company owns the following registered trademarks: Grady's American
Grill(R), Spageddies Italian Kitchen(R), Spageddies(R), Papa Vino's(R) and
Papa Vino's Italian Kitchen(R). The Company also owns a number of other
trademarks and service marks which are used in connection with its owned
concepts. The Company believes its marks are valuable and intends to maintain
its marks and any related registrations. Burger King(R) is a registered
trademark of Burger King Corporation. Chili's(R) and Chili's Grill & Bar(TM)
are a registered trademark and trademark, respectively, of Brinker.
Administrative Services
From its headquarters in Mishawaka, Indiana, the Company provides
accounting, cash management, information technology, purchasing and
procurement, human resources, finance, marketing, advertising, menu
development, budgeting and planning, legal, site selection and development
support services for each of its operating subsidiaries.
Management. The Company is managed by a team of senior managers who are
responsible for the establishment and implementation of a strategic plan. The
Company believes that its management team possesses the ability to manage its
diverse operations.
The Company has an experienced management team in place for each of its
concepts. Each concept's operations are managed by geographic region with a
senior manager responsible for each specific region of operations.
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During fiscal 1999, the Company decreased the span of control within each
of its concepts by adding additional multi-unit managers. This action lowered,
on average, the number of restaurants for which each multi-unit manager is
responsible.
Site Selection. Site selection for new restaurants is made by the Company's
senior management under the direction of the Company's Chief Development
Officer, subject in the case of the Company's franchised restaurants to the
approval of its franchisors. Within a potential market area, the Company
evaluates high-traffic locations to determine profitable trading areas. Site-
specific factors considered by the Company include traffic generators, points
of distinction, visibility, ease of ingress and egress, proximity to direct
competition, access to utilities, local zoning regulations and various other
factors. In addition, in evaluating potential full service dining sites, the
Company considers applicable laws regulating the sale of alcoholic beverages.
The Company regularly reviews potential sites for expansion. Once a potential
site is selected, the Company utilizes demographic and site selection data to
assist in final site selection.
Quality Control. The Company's senior management and restaurant management
staff are principally responsible for assuring compliance with the Company's
and its franchisors' operating procedures. The Company and its franchisors
have uniform operating standards and specifications relating to the quality,
preparation and selection of menu items, maintenance and cleanliness of the
premises and employee conduct. Compliance with these standards and
specifications is monitored by frequent on-site visits and inspections by the
Company's senior management. Additionally, the Company employs the use of toll
free customer feedback telephone services and outside "shopper services" to
visit restaurants periodically to ensure that the restaurants meet the
Company's operating standards. The Company's operational structure encourages
all employees to assume a proprietary role ensuring that such standards and
specifications are met.
Burger King. The Company's Burger King operations are focused on
achieving a high level of customer satisfaction with speed, accuracy and
quality of service closely monitored. The Company's senior management and
restaurant management staff are principally responsible for ensuring
compliance with the Company's and Burger King Corporation's operating
procedures. The Company and Burger King Corporation have uniform operating
standards and specifications relating to the quality, preparation and
selection of menu items, maintenance and cleanliness of the premises and
employee conduct. These standards include food preparation rules regarding,
among other things, minimum cooking times and temperatures, sanitation and
cleanliness.
Full Service Dining. The Company has uniform operating standards and
specifications relating to the quality, preparation and selection of menu
items, maintenance and cleanliness of the premises and employee conduct in
its full service dining concepts. At the Company's Chili's restaurants,
compliance with these standards and specifications is monitored by
representatives of Brinker. Each Full Service Dining restaurant typically
has a general manager and three to four assistant managers who together
train and supervise employees and are, in turn, overseen by a multi-unit
manager.
Information Technology Systems. Financial controls are maintained through a
centralized accounting system, which allows the Company to track the operating
performance of each restaurant. The Company has a point-of-sale system in each
of its restaurants which is linked directly to the Company's accounting
system, thereby making information available on a timely basis. This
information enables the Company to analyze customer purchasing habits,
operating trends and promotional results. During fiscal 1999 and early fiscal
2000, the Company replaced the point of sale equipment in all of its full
service restaurants.
Training. The Company maintains comprehensive training programs for all of
its restaurant management personnel. Special emphasis is placed on quality
food preparation, service standards and total customer satisfaction.
Burger King. The training program for the Company's Burger King
restaurant managers features an intensive hands-on training period followed
by classroom instruction and simulated restaurant management activities.
Upon certification, new managers work closely with experienced managers to
solidify their skills
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and expertise. The Company's existing restaurant managers regularly
participate in the Company's ongoing training efforts, including classroom
programs, off-site training and other training/development programs, which
the Company's senior concept management designs from time to time. The
Company generally seeks to promote from within to fill Burger King
restaurant management positions.
Full Service Dining. The Company requires all general and restaurant
managers of its full service dining concepts to participate in a system-
wide, comprehensive training program. These programs teach management
trainees detailed food preparation standards and procedures for each
concept. These programs are designed and implemented by the Company's
senior concept management teams.
Purchasing. Purchasing and procurement for the Company's Grady's American
Grill and Italian Dining concepts are managed by a dedicated purchasing
function and are generally contracted with full-service distributors. Unit-
level purchasing decisions from an approved list of suppliers are made by each
of the Company's restaurant managers based on their assessment of the
provisioning needs of the particular location. Purchase orders and invoices
are reviewed by restaurant general managers and by concept management.
The Company participates in system-wide purchasing and distribution
programs with respect to its Chili's and Burger King restaurants, which have
been effective in reducing store-level expenditures on food and paper
packaging commodities.
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 established and implemented 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 ("Third Party Vendors"). As of January 21, 2000, the
Company had not experienced any Year 2000 related disruptions to its own
internal systems nor have any Third Party Vendors experienced any Year 2000
disruptions that have materially affected their ability to do business with
the Company.
Costs to Address the Company's Year 2000 Issues. The Company expensed costs
associated with its Year 2000 Plan as the costs were incurred except for costs
that the Company would have otherwise capitalized.
Remaining Risks Presented by Year 2000 Problems. To operate its businesses,
the Company relies upon its Third Party Vendors. The Company's ability to
conduct its business is dependent upon the ability of its Third Party Vendors
to continue to avoid Year 2000 related disruption. Though the Company and its
Third Party Vendors do not appear to have suffered any significant Year 2000
related disruptions as a result of the roll over from 1999 to 2000, it is
possible that certain Year 2000 problems may exist but have not yet
materialized.
If the Company or its Third Party Vendors have not adequately addressed
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.
Independent of the Company's Year 2000 Plan, the Company had 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
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completed the process of replacing the point of sale equipment in its full
service restaurants in November of 1999. The Company has determined that the
replacement systems are Year 2000 compliant. The replacement of the point of
sale equipment in its full service restaurants cost approximately $3 million.
During the third quarter of fiscal 1999, the Company recorded a non-cash
charge of $650,000 in connection with the disposition of certain of its
obsolete point of sale equipment that the Company identified as a result of
installing its new point of sale system. The Company has determined that the
point of sale equipment in its 70 Burger King restaurants is Year 2000
compliant.
Franchise and Development Agreements
Burger King. The Company and Burger King Corporation entered into a
development agreement on December 24, 1993 (the "Burger King Agreement"). The
Burger King Agreement reserves for the Company 25 specifically defined limited
geographic areas ("Areas") and grants the Company the exclusive right to
select and develop one Burger King restaurant in each of up to 18 of those
Areas. The Company paid a $90,000 fee for the exclusivity provided by the
Burger King Agreement. The Company's exclusive right in an Area expires with
the opening by the Company of a Burger King restaurant in that Area.
As of October 31, 1999, the Company had developed 17 Burger King
restaurants under the Burger King Agreement. In January of 2000, the Company
developed its 18th and final restaurant under the Burger King Agreement. In
addition, the Company had opened one additional Burger King restaurant under a
separate agreement with Burger King in December of 1999.
The Company is responsible for all costs and expenses incurred in locating,
acquiring and developing restaurant sites. The Company must also satisfy
Burger King Corporation's development criteria, which include the specific
site, the related purchase contract or lease agreement and architectural and
engineering plans for each of the Company's new Burger King restaurants.
Burger King Corporation may refuse to grant a franchise for any proposed
Burger King restaurant if the Company is not conducting the operations of each
of its Burger King restaurants in compliance with Burger King Corporation's
franchise requirements. Burger King Corporation periodically monitors the
operations of its franchised restaurants and notifies its franchisees of
failures to comply with franchise or development agreements that come to its
attention.
Burger King Corporation's franchise agreements convey the right to use its
trade names, trademarks and service marks with respect to specific Burger King
restaurants. The franchise fee for a free-standing Burger King restaurant is
currently $40,000. In addition, each franchise agreement requires the Company
to pay a monthly royalty fee of 3 1/2% of sales and advertising fees of 4% of
sales.
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
the same at 4% of sales. Royalties payable under existing franchise agreements
are not affected by these changes until the time of renewal.
Burger King Corporation is also offering a voluntary program to incent
franchisees to renew their franchise agreements prior to the scheduled
expiration date ("Early Renewal Program"). Franchisees that elect 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
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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 for a period of time. The Company is
currently evaluating which, if any, of its restaurants would be suitable for
the Early Renewal Program. In conducting its evaluation, the Company will
consider, among other things, the applicable royalty reductions, the nature,
extent and resulting impact on sales from the required capital investment as
well as the Company's ability to extend its occupancy leases, where required.
The Company intends to decide which, if any, of its restaurants it will
include in the Early Renewal Program by March 15, 2000.
Burger King Corporation also provides general specifications for designs,
color schemes, signs and equipment, formulas for preparation of food and
beverage products, marketing concepts, inventory, operations and financial
control methods, management training, technical assistance and materials. Each
franchise agreement prohibits the Company from transferring a franchise
without the prior approval of Burger King Corporation.
Burger King Corporation's franchise agreements prohibit the Company, during
the term of the agreements, from owning or operating any other hamburger
restaurant. For a period of one year following the termination of a franchise
agreement, the Company remains subject to such restriction within a two mile
radius of the Burger King restaurant which was the subject of the franchise
agreement.
Chili's. The Company has a development agreement with Brinker (the "Chili's
Agreement") to develop 37 Chili's restaurants in two regions encompassing
counties in Indiana, Michigan, Ohio, Kentucky ("Midwest Region"), Delaware,
New Jersey and Pennsylvania ("Philadelphia Region"). The Company paid
development fees totaling $260,000 for the right to develop the restaurants in
the regions. Each franchise agreement requires the Company to pay an initial
franchise fee of $40,000, a monthly royalty fee of 4% of sales and advertising
fees of 0.5% of sales. As part of a system-wide promotional effort, the
Company has agreed that for the period beginning September 1, 1999 and ending
August 30, 2000, it will pay an additional advertising fee of 0.375% of sales.
As of October 31, 1999, the Company operated 28 Chili's.
The Company may develop up to 41 Chili's without specific approval of the
franchisor, but is obligated to satisfy the following development schedule:
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Minimum Cumulative Number
of Restaurants
------------------------------
Midwest Philadelphia Entire
Region Region Territory
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December 31, 1999.......................... 13 14 28(1)
December 31, 2000.......................... 14 15 31(1)
December 31, 2001.......................... 15 16 33(1)
December 31, 2002.......................... 15 16 35(1)
December 31, 2003.......................... 15 16 37(1)
</TABLE>
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(1) Two of the restaurants to be opened in this year may be located in either
region at the Company's discretion.
Failure to adhere to this schedule constitutes a default under the Chili's
Agreement and Brinker could terminate the Chili's Agreement. The Chili's
Agreement prohibits Brinker or any other Chili's franchisee from establishing
a Chili's restaurant within a specified geographic radius of the Company's
Chili's restaurants. The term of the Chili's Agreement expires when the
Company has completed the development schedule. The Chili's Agreement and the
franchise agreements prohibit the Company, for the term of the agreements,
from owning or operating other restaurants which are similar to a Chili's
restaurant. The Chili's Agreement extends this prohibition, but only within
the Company's development territories, for a period of two years following the
termination of such agreement. In addition, each franchise agreement prohibits
the Company, for the term of the franchise agreement and for a period of two
years following its termination, from owning or operating such other
restaurants within a 10-mile radius of the Chili's restaurant which was the
subject of such agreement.
9
<PAGE>
Under the Chili's Agreement, the Company is responsible for all costs and
expenses incurred in locating, acquiring and developing restaurant sites. Each
proposed restaurant site, the related purchase contract or lease agreement and
the architectural and engineering plans for each of the Company's new Chili's
restaurants are subject to Brinker's approval. Brinker may refuse to grant a
franchise for any proposed Chili's restaurant if the Company is not conducting
the operations of each of its Chili's restaurants in compliance with the
Chili's restaurant franchise requirements. Brinker may terminate the Chili's
Agreement if the Company defaults in its performance thereunder or under any
franchise agreement. Brinker periodically monitors the operations of its
franchised restaurants and notifies the franchisees of any failure to comply
with franchise or development agreements that comes to its attention.
The franchise agreements convey the right to use the franchisor's trade
names, trademarks and service marks with respect to specific restaurant units.
The franchisor also provides general specifications for designs, color
schemes, signs and equipment, formulas for preparation of food and beverage
products, marketing concepts, inventory, operations and financial control
methods, management training and technical assistance and materials. Each
franchise agreement prohibits the Company from transferring a franchise
without the prior approval of the franchisor.
Risks and Requirements of Franchisee Status. Due to the nature of
franchising and the Company's agreements with its franchisors, the success of
the Company's Burger King and Chili's concepts is, in large part, dependent
upon the overall success of its franchisors, including the financial
condition, management and marketing success of its franchisors and the
successful operation of restaurants opened by other franchisees. Certain
matters with respect to the Company's franchised concepts must be coordinated
with, and approved by, the Company's franchisors. In particular, certain
franchisors must approve the opening by the Company of any new franchised
restaurant, including franchises opened within the Company's existing
franchised territories, and the closing of any of the Company's existing
franchised restaurants. The Company's franchisors also maintain discretion
over the menu items that may be offered in the Company's franchised
restaurants.
Competition
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. The industry is mature and competition can
be expected to increase. There are many well-established competitors with
substantially greater financial and other resources than the Company, some of
which have been in existence for a substantially longer period than the
Company and may have substantially more units in the markets where the
Company's restaurants are, or may be, located. McDonald's and Wendy's
restaurants are the principal competitors to the Company's Burger King
restaurants. The competitors to the Company's Chili's and Italian Dining
restaurants are other casual dining concepts such as T.G.I. Friday's,
Applebee's, Bennigan's, Olive Garden and Red Lobster restaurants. The primary
competitors to Grady's American Grill are Houston's, J. Alexander's, Outback
Steakhouse, Houlihan's, Cooker Bar & Grille, and O'Charley's Restaurant &
Lounge, as well as a large number of locally-owned, independent restaurants.
The Company believes that competition is likely to become even more intense in
the future.
The Company and the restaurant industry in general are significantly
affected by factors such as changes in local, regional or national economic
conditions, changes in consumer tastes, weather conditions and various other
consumer concerns. In addition, factors such as increases in food, labor and
energy costs, the availability and cost of suitable restaurant sites,
fluctuating insurance rates, state and local regulations and the availability
of an adequate number of hourly-paid employees can also adversely affect the
restaurant industry.
Government Regulation
Each of the Company's restaurants is subject to licensing and regulation by
a number of governmental authorities, which include alcoholic beverage control
in the case of the Chili's, Italian Dining and Grady's American Grill
restaurants, and health, safety and fire agencies in the state or municipality
in which the restaurant is located. Difficulties or failures in obtaining the
required licenses or approvals could delay or prevent the opening of a new
restaurant in a particular area.
10
<PAGE>
Alcoholic beverage control regulations require each of the Company's
Chili's, Italian Dining and Grady's American Grill restaurants to apply to a
state authority and, in certain locations, county or municipal authorities for
a license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of the daily
operations of the Company's restaurants, including minimum age of patrons and
employees, hours of operation, advertising, wholesale purchasing, inventory
control and handling, storage and dispensing of alcoholic beverages. The loss
of a liquor license for a particular Grady's American Grill, Italian Dining or
Chili's restaurant would most likely result in the closing of the restaurant.
The Company may be subject in certain states to "dramshop" statutes, which
generally provide a person injured by an intoxicated patron the right to
recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance and
has never been named as a defendant in a lawsuit involving "dramshop"
liability.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and
tip credits. Significant numbers of the Company's food service and preparation
personnel are paid at rates related to the federal minimum wage and,
accordingly, increases in the minimum wage could increase the Company's labor
costs.
The Company is also subject to various local, state and federal laws
regulating the discharge of pollutants into the environment. The Company
believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations. In an effort to prevent and, if
necessary, to correct environmental problems, the Company conducts
environmental audits of a proposed restaurant site in order to determine
whether there is any evidence of contamination prior to purchasing or entering
into a lease with respect to such site. To date, the Company's operations have
not been materially adversely affected by the cost of compliance with
applicable environmental laws.
Employees
As of October 31, 1999, the Company employed approximately 9,000 persons.
Of those employees, approximately 96 held management or administrative
positions, approximately 510 were involved in restaurant management, and the
remainder were engaged in the operation of the Company's restaurants. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
11
<PAGE>
ITEM 2. PROPERTIES.
The following table sets forth, as of October 31, 1999, the 18 states in
which the Company operated restaurants and the number of restaurants in each
state. Of the 142 restaurants which the Company operated as of October 31,
1999, the Company owned 49 and leased 93. Many leases provide for base rent
plus an additional rent based upon sales to the extent the additional rent
exceeds the base rent, while other leases provide for only a base rent.
<TABLE>
<CAPTION>
Number of Company-Operated
Restaurants
-------------------------------------
Grady's
Burger American Italian
King Chili's Grill Dining Total
------ ------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Alabama............................. 1 1
Arkansas............................ 1 1
Colorado............................ 3 3
Delaware............................ 2 2
Florida............................. 6 6
Georgia............................. 5 5
Illinois............................ 1 1
Indiana............................. 39 5 2 46
Michigan............................ 31 6 1 4 42
Mississippi......................... 1 1
New Jersey.......................... 5 1 6
New Mexico.......................... 1 1
North Carolina...................... 2 2
Ohio................................ 3 1 2 6
Oklahoma............................ 1 1
Pennsylvania........................ 7 7
Tennessee........................... 5 5
Texas............................... 6 6
--- --- --- --- ---
Total............................. 70 28 36 8 142
=== === === === ===
</TABLE>
Burger King. As of October 31, 1999, 41 of the Company's Burger King
restaurants were leased from real estate partnerships owned by certain of the
Company's founding shareholders. In addition, the Company leased two of its
Burger King restaurants from William R. Schonsheck, a former director and
executive officer of the Company, or entities controlled by him. See ITEM 13,
"Certain Relationships and Related Transactions." The Company also leased
seven Burger King restaurants directly from Burger King Corporation and eight
restaurants from unrelated third parties. The seven leases with Burger King
Corporation are subject to the renewal of the franchise agreements for those
locations. The Company owned 12 of its Burger King restaurants as of October
31, 1999.
Chili's Grill & Bar. As of October 31, 1999, the Company owned 10 of its
Chili's restaurants and leased 18 other restaurants from unrelated parties.
Grady's American Grill. As of October 31, 1999, the Company owned 22 of its
Grady's American Grill restaurants. The Company leased one Grady's American
Grill restaurant from a limited partnership of which a subsidiary of the
Company is the general partner. The Company's other 13 Grady's American Grill
restaurants were leased from unrelated parties.
Italian Dining. As of October 31, 1999, the Company owned five of the
Italian Dining restaurants and leased the three other restaurants from
unrelated parties.
12
<PAGE>
Office Lease. The Company leases approximately 53,000 square feet for its
headquarters facility in an office building located in Mishawaka, Indiana that
was constructed in 1997 and is leased from a limited liability company in
which the Company owns a 50% interest. The remaining term of the lease
agreement is 12 years. Approximately 4,500 square feet, 12,400 square feet and
5,200 square feet of the Company's headquarters building have been subleased
to three tenants with remaining terms of five, six and eight years,
respectively.
ITEM 3. LEGAL PROCEEDINGS.
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 Brue, Michael Dressell, Daniel B. Fitzpatrick and John 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 alleges 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. The case
continues to proceed against the Company on allegations that the Company
breached an agreement to repurchase bakeries from the plaintiffs and against
the Bruegger's entities on allegations that the plaintiffs purchased their
franchises and preferred stock of Bruegger's Corporation based upon false
representations and on allegations that Bruegger's Franchise Corporation
breached the plaintiffs' franchise and development agreements.
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 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.
13
<PAGE>
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 Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise
Corporation, Champlain Management Services, Inc., Nordahl Brue, Michael
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. 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. Through October 31, 1999, the Company had paid approximately $1.8
million in cash and assigned its $1.2 million note from BruWest to Bruegger's
Corporation which together have satisfied the Company's remaining obligation
to pay cash in respect of Franchise Damages. 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 October 31, 1999, the outstanding
balance due under the junior 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 the Company's belief that Bruegger's Corporation has and
will continue to 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. See Item I BUSINESS--Disposition
of Bagel-Related Businesses. Additionally, on or about September 13, 1999,
Messrs. Brue and Dressell asserted a claim for breach of representations and
warranties under the Share
14
<PAGE>
Exchange Agreement. 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.
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
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 Court has denied the Company's subsequent request 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 were defendants in a
class action lawsuit filed in the United States District Court for the
Northern District of Indiana. The complaint alleged, 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 action was 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 were seeking, among other things, an award of unspecified
compensatory damages, interest, costs and attorney's fees. The Company filed a
motion to dismiss the complaint which was granted by the Court on September
28, 1999. The plaintiffs have not filed an appeal and the period for filing an
appeal has expired.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the 1999 fiscal year.
15
<PAGE>
Executive Officers of the Company
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Daniel B. Fitzpatrick... 42 Chairman of the Board, President and Chief Executive Officer
John C. Firth........... 42 Executive Vice President, General Counsel and Secretary
James K. Fitzpatrick.... 44 Senior Vice President, Chief Development Officer and Director
Patrick J. Barry........ 37 Senior Vice President--Administration and Information Technology
Lindley E. Burns........ 45 Senior Vice President--Full Service Dining
David M. Findlay........ 38 Chief Financial Officer and Treasurer
Gerald O. Fitzpatrick... 39 Senior Vice President--Burger King Division
Robert C. Hudson........ 43 Vice President--Grady's American Grill Division
Jeanne M. Yoder......... 33 Vice President, Controller
</TABLE>
Daniel B. Fitzpatrick has served as President and Chief Executive Officer
and a Director of the Company since 1982. Prior to founding the Company, Mr.
Fitzpatrick worked for a franchisee of Burger King Corporation, rising to the
level of regional director of operations. He has over 25 years of experience
in the restaurant business. Mr. Fitzpatrick also serves as a director of 1st
Source Corporation, a publicly held diversified bank holding company based in
South Bend, Indiana.
John C. Firth serves as Executive Vice President, General Counsel and
Secretary. Prior to joining the Company in June 1996, he was a partner with
the law firm of Sopko and Firth. Beginning in 1985, he represented the Company
as outside legal counsel with responsibility for the Company's legal affairs.
James K. Fitzpatrick has served as Senior Vice President and Chief
Development Officer of the Company since August 1995. Prior to that, Mr.
Fitzpatrick served as Vice President or Senior Vice President of the Company
in charge of the Company's Fort Wayne, Indiana Burger King restaurant
operations since 1984. Prior to joining the Company, he served as a director
of operations for a franchisee of Burger King Corporation. He has over 25
years of experience in the restaurant business.
Patrick J. Barry joined the Company in October 1996 and serves as the
Company's Senior Vice President--Administration and Information Technology.
Prior to joining the Company, Mr. Barry was a management consultant with The
Keystone Group and Andersen Consulting.
Lindley E. Burns joined the Company in June of 1995. Prior to joining the
Company he worked for Brinker as a multi-unit manager in its Chili's division
for two years and was a Chili's franchisee for eight years prior to joining
Brinker. He has over 20 years of experience in the restaurant business.
David M. Findlay has served as Chief Financial Officer and Treasurer since
January 2000. He joined the Company in May 1995 and has served in various
positions, most recently as Senior Vice President--Finance and Treasurer.
Prior to joining the Company, Mr. Findlay spent 10 years at The Northern Trust
Company of Chicago, Illinois, specializing in commercial lending to large
companies and financial institutions.
Gerald O. Fitzpatrick serves as a Senior Vice President in the Company's
Burger King Division. Mr. Fitzpatrick has served in various capacities in the
Company's Burger King operations since 1983. Prior to joining the Company, he
served as a district manager for a franchisee of Burger King Corporation. He
has over 20 years of experience in the restaurant business.
Robert C. Hudson joined the Company in December of 1995 when the Company
acquired Grady's American Grill. From 1992 until joining the Company, Mr.
Hudson held various operational positions at Brinker, most recently as an area
director in its Grady's American Grill division.
16
<PAGE>
Jeanne M. Yoder joined the Company in March of 1996. Since that time she
has served in various capacities in the Accounting Department, most recently
as Assistant Controller. Prior to joining the Company, she served as
Controller at a regional travel agency. Ms. Yoder is a certified public
accountant.
The above information includes business experience during the past five
years for each of the Company's executive officers. Executive officers of the
Company serve at the discretion of the Board of Directors. Messrs. Daniel B.
Fitzpatrick, James K. Fitzpatrick and Gerald O. Fitzpatrick are brothers.
There is no family relationship between any other Directors or executive
officers of the Company.
The success of the Company's business is dependent upon the services of
Daniel B. Fitzpatrick, President and Chief Executive Officer of the Company.
The Company maintains key man life insurance on the life of Mr. Fitzpatrick in
the principal amount of $1.0 million. The loss of the services of Mr.
Fitzpatrick would have a material adverse effect upon the Company.
(Pursuant to General Instruction G(3) of Form 10-K, the foregoing
information is included as an unnumbered Item in Part I of this Annual Report
in lieu of being included in the Company's Proxy Statement for its 2000 Annual
Meeting of Shareholders.)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ Stock Market's National
Market under the symbol QDIN. The prices set forth below reflect the high and
low sales quotations for the Company's Common Stock as reported by NASDAQ for
the calendar periods indicated. As of January 17, 2000, there were 414 holders
of record and approximately 4,450 beneficial owners.
<TABLE>
<CAPTION>
Calendar 1999 Calendar 1998
------------- -------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter................................. $4.219 $2.500 $6.094 $3.625
Second Quarter................................ 4.188 2.500 5.500 3.625
Third Quarter................................. 3.000 2.375 4.000 2.625
Fourth Quarter................................ 3.000 1.875 5.094 1.938
</TABLE>
The Company does not pay cash dividends on its Common Stock. The Company
does not anticipate paying cash dividends in the foreseeable future. The
Company's revolving credit agreement prohibits the payment of cash dividends
and restricts other distributions. The agreement expires October 31, 2002.
No unregistered equity securities were sold by the Company during fiscal
1999.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
QUALITY DINING, INC.
<TABLE>
<CAPTION>
Fiscal Year Ended(1)
----------------------------------------------------------
October 31, October 25, October 26, October 27, October 29,
1999 1998 1997 1996 1995
----------- ----------- ---------- ----------- -----------
(In thousands, except unit and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data(2):
Revenues:
Restaurant sales:
Burger King........... $82,650 $80,391 $ 74,616 $70,987 $57,013
Grady's American
Grill................ 75,198 81,241 85,403 85,101 --
Chili's Grill & Bar... 56,837 55,572 54,277 41,913 38,267
Italian Dining
Division............. 16,066 15,040 12,973 8,388 4,741
Bruegger's Bagel
Bakery............... -- -- 64,928 25,967 5,270
------- ------- --------- ------- -------
Total restaurant sales.. 230,751 232,244 292,197 232,356 105,291
------- ------- --------- ------- -------
Franchise related
revenue.............. -- -- 10,055 5,274 --
------- ------- --------- ------- -------
Total revenues.......... 230,751 232,244 302,252 237,630 105,291
------- ------- --------- ------- -------
Operating expenses
Restaurant operating
expenses
Food and beverage... 67,732 69,102 88,629 72,201 31,176
Payroll and
benefits........... 67,073 66,404 87,905 66,176 27,191
Depreciation and
amortization....... 11,002 11,475 17,691 11,635 5,109
Other operating
expenses........... 55,890 55,644 74,691 52,452 24,057
------- ------- --------- ------- -------
Total restaurant
operating expenses..... 201,697 202,625 268,916 202,464 87,533
General and
administrative....... 15,912 15,488 28,718 11,229 5,285
Amortization of
intangibles.......... 1,032 1,085 3,112 2,537 682
Impairment of assets
and facility closing
costs................ 2,501 250 200,813 -- --
Franchise operating
partner expense...... -- -- 2,066 -- --
Restructuring and
integration costs.... -- -- -- 9,938 --
------- ------- --------- ------- -------
Total operating
expenses............... 221,142 219,448 503,625 226,168 93,500
------- ------- --------- ------- -------
Operating income
(loss)(3)(4)........... 9,609 12,796 (201,373) 11,462 11,791
------- ------- --------- ------- -------
Other income (expense):
Interest expense...... (10,709) (11,962) (10,599) (6,340) (2,699)
Gain (loss) on sale of
property and
equipment............ (188) (345) 362 4 343
Interest income....... 103 190 221 206 127
Other income
(expense), net....... 43 541 32 154 (12)
------- ------- --------- ------- -------
Total other expense..... (10,751) (11,576) (9,984) (5,976) (2,241)
------- ------- --------- ------- -------
Income (loss) before
income taxes........... (1,142) 1,220 (211,357) 5,486 9,550
Income tax provision
(benefit).............. 815 1,107 (14,869) 2,816 3,661
------- ------- --------- ------- -------
Net income (loss)....... $(1,957) $ 113 $(196,488) $ 2,670 $ 5,889
------- ------- --------- ------- -------
Basic net income (loss)
per share.............. $ (0.15) $ 0.01 $ (11.68) $ 0.23 $ 0.85
------- ------- --------- ------- -------
Diluted net income
(loss) per share....... $ (0.15) $ 0.01 $ (11.68) $ 0.22 $ 0.84
------- ------- --------- ------- -------
Weighted average shares
outstanding
------- ------- --------- ------- -------
Basic................. 12,668 12,599 16,820 11,855 6,925
------- ------- --------- ------- -------
Diluted............... 12,668 12,654 16,820 11,947 6,987
------- ------- --------- ------- -------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended(1)
-----------------------------------------------------------
October 31, October 25, October 26, October 27, October 29,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(In thousands, except unit and per share data)
<S> <C> <C> <C> <C> <C>
Restaurant Data:
Units open at end of
period:
Grady's American
Grill................ 36 39 40 42 --
Italian Dining
Division............. 8 8 8 6 5
Burger King........... 70 70 66 63 59
Chili's Grill & Bar... 28 28 28 22 18
Bruegger's Bagel
Bakery Division:
Company-owned....... -- -- -- 100 12
Franchised.......... -- -- -- 325 --
-------- -------- -------- -------- -------
Totals............ 142 145 142 558 94
======== ======== ======== ======== =======
Balance Sheet Data:
Working capital
(deficiency)........... $(17,962) $(14,747) $ (8,239) $ (3,383) $(1,826)
Total assets............ 189,037 196,275 215,973 388,014 99,247
Long-term debt,
capitalized lease and
non-competition
obligations............ 112,815 118,605 133,111 85,046 14,298
Total stockholders'
equity................. 49,002 50,926 50,813 269,123 71,401
</TABLE>
- --------
(1) All fiscal years presented consisted of 52 weeks except fiscal 1999 which
had 53 weeks.
(2) The selected statement of operations data include the operations of
Bruegger's Corporation from June 7, 1996 until October 19, 1997; the
Grady's American Grill restaurants from December 21, 1995; SHONCO, Inc.
and certain affiliated companies from August 14, 1995; and Grayling
Corporation and certain affiliated companies from November 10, 1994.
(3) Operating loss for the fiscal year ended October 26, 1997 includes an
impairment of asset charge of $185.0 million, store closing costs of $15.5
million and franchise operating partner expense of $2.1 million which all
relate to the divestiture by the Company of its bagel-related companies.
Operating income for the fiscal year ended October 27, 1996 includes
restructuring and integration charges of $1.9 million associated with
costs related to the acquisitions of the Grady's American Grill concept
and restaurants and Spageddies Italian Kitchen concept and $8.0 million
associated with costs related to the acquisition of Bruegger's
Corporation.
(4) Operating income for the fiscal year ended October 31, 1999 includes non-
cash charges for the impairment of assets and facility closings totaling
$2,501,000. The non-cash charges consisted primarily of $650,000 for the
disposal of obsolete point of sale equipment that the Company identified
as a result of installing its new point of sale system in its full service
dining restaurants, $1,047,000 for the estimated costs and losses
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.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Quality Dining, Inc.
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
discussion should be read in conjunction with the consolidated financial
statements appearing elsewhere in this Annual Report.
Results of Operations
The following table reflects the percentages that certain items of revenue
and expense bear to total revenues, except restaurant operating expenses,
which are expressed as a percentage of total restaurant sales. The Company
sold Bruegger's Corporation on October 20, 1997. During fiscal 1997 the
Company had asset impairment charges, store closing costs and franchise
operating partner expenses all relating to its bagel businesses.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 31, October 25, October 26,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Restaurant sales:
Burger King.............................. 35.8% 34.6% 24.7%
Grady's American Grill................... 32.6 35.0 28.3
Chili's Grill & Bar...................... 24.6 23.9 18.0
Italian Dining Division.................. 7.0 6.5 4.2
Bruegger's Bagel Bakery.................. -- -- 21.5
----- ----- -----
Total restaurant sales..................... 100.0 100.0 96.7
----- ----- -----
Franchise related revenue................ -- -- 3.3
----- ----- -----
Total revenues............................. 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Restaurant operating expenses (as % of
restaurant sales):
Food and beverage...................... 29.4 29.8 30.3
Payroll and benefits................... 29.1 28.6 30.1
Depreciation and amortization.......... 4.8 4.9 6.1
Other operating expenses............... 24.2 24.0 25.6
----- ----- -----
Total restaurant operating expenses........ 87.5 87.3 92.1
General and administrative............... 6.9 6.7 9.5
Amortization of intangibles.............. 0.4 0.5 1.0
Impairment of assets and facility closing
costs................................... 1.1 0.1 66.4
Franchise operating partner expense...... -- -- 0.7
----- ----- -----
Total operating expenses................... 95.9 94.6 166.6
----- ----- -----
Operating income (loss).................... 4.1 5.4 (66.6)
----- ----- -----
Other income (expense):
Interest expense......................... (4.6) (5.2) (3.5)
Gain (loss) on sale of property and
equipment............................... -- (0.1) 0.1
Interest income.......................... -- 0.1 0.1
Other income (expense), net.............. -- 0.2 --
----- ----- -----
Total other expense, net................... (4.6) (5.0) (3.3)
----- ----- -----
Income (loss) before income taxes.......... (0.5) 0.4 (69.9)
Income tax provision (benefit)............. 0.4 0.4 (4.9)
----- ----- -----
Net income (loss).......................... (0.9)% -- % (65.0)%
----- ----- -----
</TABLE>
20
<PAGE>
Fiscal Year 1999 Compared to Fiscal Year 1998
Results for fiscal 1999 include 53 weeks compared to 52 weeks for fiscal
1998. Restaurant sales in fiscal 1999 were $230,751,000, a decrease of 0.6% or
$1,493,000, compared to restaurant sales of $232,244,000 in fiscal 1998.
The Company's Burger King restaurant sales increased $2,259,000 to
$82,650,000 in fiscal 1999 compared to restaurant sales of $80,391,000 in
fiscal 1998. The Company's Burger King restaurants had average weekly sales of
$22,164 in fiscal 1999 versus $22,806 in the same period in fiscal 1998. The
decrease in average weekly sales was offset by revenues of $2,543,000 due to
additional sales weeks from one new restaurant opened during fiscal 1999 and
four restaurants opened in fiscal 1998 which were open for their first full
year in fiscal 1999. The decline in average weekly sales for fiscal 1999
resulted primarily from inclement weather during the first quarter of fiscal
1999 and the intense competition in the quick service restaurant market.
The Company's Grady's American Grill restaurant sales were $75,198,000 in
fiscal 1999 compared to restaurant sales of $81,241,000 in fiscal 1998. The
decrease of $6,043,000 was attributable in part to the sale of one unit in
fiscal 1998 and two units in fiscal 1999 and the closing of one unit in fiscal
1999. The absence of these units contributed approximately $3,264,000 to the
sales decrease. The units that were disposed of did not fit the Company's long
term strategic plan as they were located in geographically remote markets and
were not meeting the Company's performance expectations. The Company's Grady's
American Grill restaurants had average weekly sales of $37,769 in fiscal 1999
versus $39,096 in the same period in fiscal 1998. The Company implemented
expanded marketing, operational and menu initiatives intended to stimulate
sales at its Grady's American Grill restaurants. The marketing initiatives
include the use of radio and television advertising in targeted markets,
direct mail promotional programs and enhanced local marketing programs within
each unit's specific market. Included in the menu initiatives were the review
of all menu items and the addition of new and seasonal items. Operational
initiatives included enhanced employee training programs, increased commitment
to the appearance and image of the Company's restaurants and heightened focus
on guest satisfaction. Due to the competitive nature of the restaurant
industry, these initiatives have not to date achieved the intended results and
there can be no assurances that these initiatives will achieve the intended
results.
The Company's Chili's Grill & Bar restaurant sales increased $1,265,000 to
$56,837,000 in fiscal 1999 when compared to restaurant sales of $55,572,000 in
fiscal 1998. The Company's marketing and operational initiatives implemented
during fiscal 1999 increased average weekly sales to $38,300 in fiscal 1999
versus $38,168 in fiscal 1998.
The Company's Italian Dining Division's restaurant sales increased
$1,026,000 to $16,066,000 in fiscal 1999 when compared to restaurant sales of
$15,040,000 in fiscal 1998. The increase was due to the success of operational
and marketing initiatives which increased average weekly sales to $37,893 in
fiscal 1999 from $36,153 in fiscal 1998.
Total restaurant operating expenses were $201,697,000 in fiscal 1999,
compared to $202,625,000 in fiscal 1998. As a percentage of restaurant sales,
total restaurant operating expenses increased slightly to 87.5% in fiscal 1999
from 87.3% in fiscal 1998. The following factors influenced the operating
margins:
Food and beverage costs were $67,732,000, or 29.4% of total restaurant
sales in fiscal 1999, compared to $69,102,000, or 29.8% of total restaurant
sales in fiscal 1998. The decrease as a percentage of total revenue was mainly
due to increased efficiencies and favorable commodity prices that resulted in
decreased food costs at the Company's Burger King, Chili's and Italian Dining
restaurants.
Payroll and benefits were $67,073,000 in fiscal 1999, compared to
$66,404,000 in fiscal 1998. As a percentage of total restaurant sales, payroll
and benefits increased 0.5% to 29.1% in fiscal 1999 from 28.6% in fiscal 1998.
Payroll and benefits increased as a percentage of total revenues in the
Company's Burger King, Grady's American Grill and Chili's divisions. Overall,
the Company has increased hourly wages at each of its restaurant concepts due
to the high level of competition to attract qualified employees.
21
<PAGE>
Depreciation and amortization decreased $473,000 to $11,002,000 in fiscal
1999 compared to $11,475,000 in fiscal 1998. As a percentage of total
restaurant sales, depreciation and amortization remained relatively consistent
at 4.8% in fiscal 1999 compared to 4.9% in fiscal 1998.
Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $55,890,000 in fiscal 1999 compared
to $55,644,000 in 1998. Other restaurant operating expenses as a percentage of
total restaurant sales increased in fiscal 1999 to 24.2% from 24.0% in fiscal
1998. The increase was primarily due to a $337,000 increase in workers
compensation expense and a $168,000 increase in advertising expense in fiscal
1999 versus fiscal 1998.
General and administrative expenses, which include corporate and district
management costs, were $15,912,000 in fiscal 1999, compared to $15,488,000 in
fiscal 1998. As a percentage of total revenues, general and administrative
expenses increased to 6.9% in fiscal 1999 compared to 6.7% in fiscal 1998. The
increase is mainly due to an increased number of multi-unit restaurant
managers and a decrease in sales performance.
Amortization of intangibles was $1,032,000 in fiscal 1999, compared to
$1,085,000 in fiscal 1998. As a percentage of total revenues, amortization of
intangibles remained relatively consistent at 0.4% in fiscal 1999 compared to
0.5% in fiscal 1998.
The Company recorded non-cash charges for the impairment of assets and
facility closings totaling $2,501,000 during the third quarter of fiscal 1999.
The non-cash charges consisted primarily of $650,000 for the disposal of
obsolete point of sale equipment that the Company identified as a result of
installing its new point of sale system in its full service dining
restaurants, $1,047,000 for the estimated costs and losses 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
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
value.
The Company had operating income of $9,609,000 in fiscal 1999 compared to
operating income of $12,796,000 in fiscal 1998. The decrease is mainly due to
the $2,501,000 in non-cash charges for the impairment of assets and facility
closings.
Total other expenses, as a percentage of total revenues, decreased to 4.7%
in fiscal 1999 compared to 5.0% in fiscal 1998. The decrease was primarily due
to a decrease in interest expense resulting from decreased borrowings under
the Company's revolving credit agreement. The decrease in interest expense
occurred despite a higher interest rate associated with the Company's fixed
rate mortgage facility.
Income tax expense of $815,000 was recorded in fiscal 1999 compared to
$1,107,000 in fiscal 1998. The decrease in the income tax provision for fiscal
1999 was mainly due to the implementation of state tax strategies to reduce
state income tax expense and to lower taxable income.
The Company has net operating loss carryforwards of approximately $51
million as well as FICA tip credits and alternative minimum tax credits of
$2.7 million. Net operating loss carryforwards of $48 million expire in 2012
and $3.0 million expire in 2018. FICA tip credits of $1.3 million expire in
2012, $477,000 expire in 2013 and $572,000 expire in 2014. The alternative
minimum tax credits of $300,000 carryforward indefinitely. During fiscal 1999,
the Company increased its valuation reserve against its net operating loss
carryforwards to $11.5 million leaving a net deferred tax asset of $10.0
million. The Company's assessment of its ability to realize the net deferred
tax asset was based on the weight of both positive and negative evidence,
including the taxable income of its current operations. Based on this
assessment, the Company's management believes it is more likely
22
<PAGE>
than not that the net deferred tax benefit recorded will be realized. Such
evidence will be reviewed prospectively and should the Company's operating
performance continue to improve, the Company may recognize additional tax
benefits related to its net deferred tax asset position in the future.
The net loss in fiscal 1999 was $1,957,000, or $0.15 per share, compared to
net income of $113,000, or $0.01 per share, in fiscal 1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Total revenues were $232,244,000 in fiscal 1998, a decrease of $70,008,000
or 23.2% when compared to the total revenues of $302,252,000 in fiscal 1997.
This decrease was primarily attributable to the divestiture of the Company's
bagel-related businesses on October 20, 1997. Total revenues in fiscal 1997
included $10,055,000 of franchise related revenues from the Company's bagel-
related operations.
Restaurant sales in fiscal 1998 decreased $59,953,000 or 20.5% to
$232,244,000, when compared to restaurant sales of $292,197,000 in fiscal
1997. This decrease was primarily attributable to the divestiture of the
Company's bagel-related businesses on October 20, 1997. Restaurant sales in
fiscal 1997 included $64,928,000 of revenue from the Company's bagel-related
operations. Due to the sale of the bagel-related businesses in fiscal 1997,
the Company no longer has any bagel related revenues.
The Company's Grady's American Grill restaurant sales decreased $4,162,000
to $81,241,000 in fiscal 1998 compared to restaurant sales of $85,403,000 in
fiscal 1997. The decrease was due to the sale of three units in fiscal 1997,
one unit during fiscal 1998 and a decrease in average weekly sales to $39,096
in fiscal 1998 from $39,741 in fiscal 1997. The units which were sold did not
fit the Company's long term strategic plan as they were located in
geographically remote markets and were not meeting the Company's performance
expectations. These divestitures did not have a material impact on revenues or
average weekly sales in fiscal 1998 versus fiscal 1997 for the Grady's
division. The Company has implemented marketing, operational and menu
initiatives intended to stimulate sales at its Grady's American Grill
restaurants.
The Company's Burger King restaurant sales increased $5,775,000 to
$80,391,000 in fiscal 1998 when compared to restaurant sales of $74,616,000 in
fiscal 1997. The sales increase was primarily due to an increase in average
weekly sales to $22,806 in fiscal 1998 from $21,972 in fiscal 1997. Sales also
increased due to additional sales weeks from four new restaurants opened
during fiscal 1998 and three restaurants opened in fiscal 1997 which were open
for their first full year in fiscal 1998.
The Company's Chili's Grill & Bar restaurant sales increased $1,295,000 to
$55,572,000 in fiscal 1998 when compared to restaurant sales of $54,277,000 in
fiscal 1997. The increase was due to six restaurants opened in fiscal 1997
being open for their first full year in fiscal 1998. Average weekly sales were
$38,168 in fiscal 1998 versus $40,596 in fiscal 1997. The Company has
implemented marketing and operational initiatives intended to stimulate sales
at its Chili's Grill & Bar restaurants. The marketing initiatives included the
use of direct mail promotional programs, targeted use of radio and television
advertising and enhanced marketing programs on a local basis within each
unit's specific market. The operational initiatives included enhanced employee
training programs, increased commitment to the appearance and image of the
Company's restaurants and heightened focus on guest satisfaction.
The Company's Italian Dining Division restaurant sales increased $2,067,000
to $15,040,000 in fiscal 1998 when compared to restaurant sales of $12,973,000
in fiscal 1997. The increase was due to an increase in average weekly sales to
$36,153 in fiscal 1998 from $34,321 in fiscal 1997 and additional sales weeks
from two restaurants opened in fiscal 1997 being open for their first full
year in fiscal 1998.
23
<PAGE>
Total restaurant operating expenses were $202,625,000 in fiscal 1998,
compared to $268,916,000 in fiscal 1997. As a percentage of restaurant sales,
total restaurant operating expenses decreased to 87.3% in fiscal 1998 from
92.1% in fiscal 1997. The following factors influenced the operating margins:
Food and beverage costs were $69,102,000, or 29.8% of total restaurant
sales in fiscal 1998, compared to $88,629,000, or 30.3%, of total restaurant
sales in fiscal 1997. The decrease was primarily due to the sale of the bagel-
related operations.
Payroll and benefits were $66,404,000 in fiscal 1998, compared to
$87,905,000 in fiscal 1997. As a percentage of total restaurant sales, payroll
and benefits decreased 1.5% to 28.6% in fiscal 1998 from 30.1% in fiscal 1997.
Of the 1.5% decrease 0.9% of the decrease was due to the sale of the bagel-
related businesses and 0.6% was due to operational improvements. The Company
expects to experience continued pressure to raise wages due to competition by
all retail businesses to attract qualified employees.
Depreciation and amortization decreased $6,216,000 to $11,475,000 in fiscal
1998 compared to $17,691,000 in fiscal 1997. As a percentage of total
restaurant sales, depreciation and amortization decreased to 4.9% in fiscal
1998 from 6.1% in fiscal 1997. The decrease was mainly due to the sale of the
bagel-related companies.
Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $55,644,000 in fiscal 1998 compared
to $74,691,000 in 1997. Other restaurant operating expenses as a percentage of
total restaurant sales decreased in fiscal 1998 to 24.0% from 25.6% in fiscal
1997. This decrease was primarily due to the Company's divestiture of its
bagel-related businesses and improvements in these expense categories at the
Company's Burger King, Chili's and Italian Dining concepts.
General and administrative expenses, which include corporate and district
management costs, were $15,488,000 in fiscal 1998, compared to $28,718,000 in
fiscal 1997. As a percentage of total revenues, general and administrative
expenses decreased to 6.7% in fiscal 1998 from 9.5% in fiscal 1997. This
decrease was primarily due to the Company's divestiture of its bagel-related
businesses.
Amortization of intangibles was $1,085,000 in fiscal 1998, compared to
$3,112,000 in fiscal 1997. The decrease was mainly due to the elimination of
Bruegger's related goodwill in connection with the Bruegger's asset impairment
charge taken during fiscal 1997.
The Company executed an agreement during the fourth quarter of fiscal 1998
to sell one Grady's American Grill restaurant. As a result of this agreement
the Company recorded a non-cash impairment charge of $250,000 to reduce the
carrying amounts of related assets to their estimated fair value. The sale was
completed during the first quarter of fiscal 1999.
During the second quarter of fiscal 1997, the Company recorded a non-cash
impairment charge of $185,000,000 as a result of the decision to divest its
bagel-related businesses. The non-cash impairment charge represented a
reduction of the carrying amounts of bagel-related assets to their estimated
fair value. The impairment charge included non-cash charges for the write-off
of goodwill and the write-down of notes receivable and property and equipment.
On October 20, 1997 the Company sold the bagel-related businesses and no
further charges were recorded.
In fiscal 1997, the Company elected not to build two Burger King
restaurants which it had acquired the development rights to as part of the
SHONCO acquisition. In conjunction with this decision the Company recorded a
non-cash impairment charge of $300,000 to write-off the capitalized
development rights associated with these two locations.
During the second quarter of fiscal 1997, the Company recorded a $2,066,000
charge for expenses related to the Franchise Operating Partner Program. These
costs were primarily related to the professional services of
24
<PAGE>
financial advisors involved in negotiating with potential equity investors for
the Franchise Operating Partner Program. The Franchise Operating Partner
Program was canceled due to the Company's decision to divest itself of its
bagel-related businesses.
In fiscal 1997, the Company recorded a $15,513,000 charge for closing
under-performing Bruegger's units and other Bruegger's units which were at
various stages of development when the decision was made to divest the bagel-
related businesses. The charge included amounts for terminating occupancy
leases, write-offs of fixed assets and pre-opening costs, restaurant
management severance costs and other store closing costs. Through fiscal 1998
the Company had incurred $12,916,000 of these costs, of which $2,123,000 were
cash payments and $10,793,000 were non-cash charges, primarily the write-down
of assets.
The Company had operating income of $12,796,000 in fiscal 1998 compared to
an operating loss of $201,373,000 in fiscal 1997. The increase in income was
mainly due to the special charges in fiscal 1997 relating to the divestiture
of the bagel-related businesses.
Total other expenses, as a percentage of total revenues, increased to 5.0%
in fiscal 1998 compared to 3.3% in fiscal 1997. The increase was primarily due
to an increase in interest expense resulting from increased borrowings and
higher borrowing rates under the Company's revolving credit agreement.
Income tax expense of $1,107,000 was recorded in fiscal 1998 compared to a
benefit of $14,869,000 in fiscal 1997. The fiscal 1997 benefit was due to the
pre-tax loss in fiscal 1997, resulting primarily from the special charges
noted above. The Company's effective income tax rate in fiscal 1998 was 90.7%
compared to an income tax rate of 7.0% (benefit) in fiscal 1997. The high
effective income tax rate for fiscal 1998 was mainly due to a large portion of
state taxes being based on criteria other than income. The fiscal 1997 benefit
was primarily due to the operating losses which resulted in a federal income
tax benefit and a nominal state income tax provision. The low income tax
benefit rate was a result of a significant portion of the $185,000,000 non-
cash charge for asset impairment being non-deductible for tax purposes.
The net income in fiscal 1998 was $113,000, or $0.01 per share, compared to
a net loss of $196,488,000, or $11.68 per share, in fiscal 1997. The increase
in net income was mainly due to the lack of special charges in fiscal 1998
relating to the divestiture of the bagel-related assets.
Liquidity and Capital Resources
The following table summarizes the Company's principal sources and uses of
cash:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 31, October 25, October 26,
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Net cash provided by operations......... $ 13,762 $ 14,899 $ 3,700
Nonoperating sources of cash:
Borrowings of long-term debt.......... 63,566 -- 62,500
Proceeds from the sale of assets...... 2,790 2,453 2,073
Disposition of businesses, net of cash
sold................................. -- -- 15,720
Nonoperating uses of cash:
Purchase of property and equipment.... (8,262) (6,205) (32,080)
Repayment of long-term debt........... (67,884) (14,350) (14,004)
Advances to affiliates................ -- -- (26,515)
Purchase of note receivable........... (4,294) -- --
Loan financing fees................... (1,327) (290) (387)
</TABLE>
In fiscal 1999 cash provided by operations was $13,762,000 compared to
$14,899,000 in fiscal 1998.
On November 24, 1998, the Company purchased a note receivable for
$4,294,000 from Texas Commerce Bank, to satisfy its obligations under its
Guaranty to Texas Commerce. See Note 10--Commitments and Contingencies.
25
<PAGE>
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 $16,544,000 available under its revolving
credit agreement as of October 31, 1999. 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 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.
During fiscal 1999 the Company paid fees and expenses totaling $1,327,000
related to the refinancing of its existing debt. These costs related primarily
to transaction and legal expenses for the mortgage facility and up-front fees
to the bank group and legal expenses for the revolving credit agreement.
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 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 $12,000,000. During fiscal 2000, the Company anticipates
opening three to five Burger King restaurants and two to three full service
restaurants. The actual amount of the Company's cash requirements for capital
expenditures depends in part on the number of new restaurants opened, if the
Company owns or leases new units and the actual expense related to remodeling
and maintenance of existing units.
The Company anticipates that its cash flow from operations, together with
the $16,544,000 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 No. 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.
26
<PAGE>
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 established and implemented 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 ("Third Party Vendors"). As of January 21, 2000, the
Company had not experienced any Year 2000 related disruptions to its own
internal systems nor have any Third Party Vendors experienced any Year 2000
disruptions that have materially affected their ability to do business with
the Company.
Costs to Address the Company's Year 2000 Issues. The Company expensed costs
associated with its Year 2000 Plan as the costs were incurred except for costs
that the Company would have otherwise capitalized.
Remaining Risks Presented by Year 2000 Problems. To operate its businesses,
the Company relies upon its Third Party Vendors. The Company's ability to
conduct its business is dependent upon the ability of its Third Party Vendors
to continue to avoid Year 2000 related disruption. Though the Company and its
Third Party Vendors do not appear to have suffered any significant Year 2000
related disruptions as a result of the roll over from 1999 to 2000, it is
possible that certain Year 2000 problems may exist but have not yet
materialized.
If the Company or its Third Party Vendors have not adequately addressed
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.
Independent of the Company's Year 2000 Plan, the Company had 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 completed the process of
replacing the point of sale equipment in its full service restaurants in
November of 1999. The Company has determined that the replacement systems are
Year 2000 compliant. The replacement of the point of sale equipment in its
full service restaurants cost approximately $3 million. During the third
quarter of fiscal 1999, the Company recorded a non-cash charge of $650,000 in
connection with the disposition of certain of its obsolete point of sale
equipment that the Company identified as a result of installing its new point
of sale system. The Company has determined that the point of sale equipment in
its 70 Burger King restaurants is Year 2000 compliant.
Burger King Franchise and Development Agreements
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
27
<PAGE>
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 the same at 4% of sales. Royalties
payable under existing franchise agreements are not effected by these changes.
Burger King Corporation is also offering a voluntary program to incent
franchisees to renew their franchise agreements prior to the scheduled
expiration date ("Early Renewal Program"). Franchisees that elect 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 for a period of time. The Company is currently
evaluating which, if any, of its restaurants would be suitable for the Early
Renewal Program. In conducting its evaluation, the Company will consider,
among other things, the applicable royalty reductions, the nature, extent and
resulting impact on sales from the required capital investment as well as the
Company's ability to extend its occupancy leases, where required. The Company
intends to decide which, if any, of its restaurants it will include in the
Early Renewal Program by March 15, 2000.
Impact of Inflation
Management does not believe that inflation has had a material effect on the
Company's operations during the past several years. Increases in labor, food,
and other operating costs could adversely affect the Company's operations. In
the past, however, the Company generally has been able to modify its operating
procedures or increase menu prices to substantially offset increases in its
operating costs.
Many of the Company's employees are paid hourly rates related to federal
and state minimum wage laws and various laws that allow for credits to that
wage. Although the Company has been able to and will continue to attempt to
pass along increases in costs through food and beverage price increases, there
can be no assurance that all such increases can be reflected in its prices or
that increased prices will be absorbed by customers without diminishing, to
some degree, customer spending at the Company's restaurants.
Forward-Looking Statements
This report contains and incorporates forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements about the Company's development plans and trends in the Company's
operations and financial results. Forward-looking statements can be identified
by the use of words such as "anticipates," "believes," "plans," "estimates,"
"expects," "intends," "may," and other similar expressions. Forward-looking
statements are made based upon management's current expectations and beliefs
concerning future developments and their potential effects on the Company.
There can be no assurance that the Company will actually achieve the plans,
intentions and expectations discussed in these forward-looking statements.
Actual results may differ materially. Among the risks and uncertainties that
could cause actual results to differ materially are the following: the
availability and cost of suitable locations for new restaurants; the
availability and cost of capital to the Company; the ability of the Company to
develop and operate its restaurants; the hiring, training and retention of
skilled corporate and restaurant management and other restaurant personnel;
the integration and assimilation of acquired concepts; the overall success of
the Company's franchisors; the ability to obtain the necessary government
approvals and third-party consents; changes in governmental regulations,
including increases in the minimum wage; the results of pending litigation;
and weather and other acts of God. The Company undertakes no obligation to
update or revise any forward-looking information, whether as a result of new
information, future developments or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, October 25,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 1,019 $ 3,351
Accounts receivable.................................. 1,946 2,358
Inventories.......................................... 1,876 1,872
Deferred income taxes................................ 2,630 2,848
Other current assets................................. 1,787 1,568
-------- --------
Total current assets................................... 9,258 11,997
-------- --------
Property and equipment, net............................ 128,349 136,764
-------- --------
Other assets:
Deferred income taxes................................ 7,370 7,152
Trademarks, net...................................... 11,988 12,320
Franchise fees and development fees, net............. 8,748 9,259
Goodwill, net........................................ 8,053 8,594
Notes receivable, less allowance..................... 10,294 6,000
Liquor licenses, net................................. 2,686 2,859
Other................................................ 2,291 1,330
-------- --------
Total other assets..................................... 51,430 47,514
-------- --------
Total assets........................................... $189,037 $196,275
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capitalized lease and long-term
debt................................................ $ 1,471 $ 370
Accounts payable..................................... 8,673 7,086
Accrued liabilities.................................. 17,076 19,288
-------- --------
Total current liabilities.............................. 27,220 26,744
Long-term debt......................................... 107,384 112,756
Capitalized leases principally to related parties, less
current portion....................................... 5,431 5,849
-------- --------
Total liabilities...................................... 140,035 145,349
-------- --------
Commitments and contingencies (Notes 9, 10 and 12)
Stockholders' equity:
Preferred stock, without par value: 5,000,000 shares
authorized; none issued............................. -- --
Common stock, without par value: 50,000,000 shares
authorized; 12,773,849 and 12,619,444 shares issued,
respectively........................................ 28 28
Additional paid-in capital........................... 236,881 236,420
Accumulated deficit.................................. (187,229) (185,272)
Unearned compensation................................ (428) --
-------- --------
49,252 51,176
Less treasury stock, at cost, 20,000 shares.......... 250 250
-------- --------
Total stockholders' equity............................. 49,002 50,926
-------- --------
Total liabilities and stockholders' equity............. $189,037 $196,275
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 31, October 25, October 26,
1999 1998 1997
----------- ----------- -----------
(In thousands, except per share
data)
<S> <C> <C> <C>
Revenues:
Restaurant sales:
Burger King............................ $ 82,650 $ 80,391 $ 74,616
Grady's American Grill................. 75,198 81,241 85,403
Chili's Grill & Bar.................... 56,837 55,572 54,277
Italian Dining Division................ 16,066 15,040 12,973
Bruegger's Bagel Bakery................ -- -- 64,928
-------- -------- ---------
Total restaurant sales..................... 230,751 232,244 292,197
-------- -------- ---------
Franchise related revenue................ -- -- 10,055
-------- -------- ---------
Total revenues............................. 230,751 232,244 302,252
-------- -------- ---------
Operating expenses:
Restaurant operating expenses:
Food and beverage...................... 67,732 69,102 88,629
Payroll and benefits................... 67,073 66,404 87,905
Depreciation and amortization.......... 11,002 11,475 17,691
Other operating expenses............... 55,890 55,644 74,691
-------- -------- ---------
Total restaurant operating expenses........ 201,697 202,625 268,916
General and administrative............... 15,912 15,488 28,718
Amortization of intangibles.............. 1,032 1,085 3,112
Impairment of assets and facility closing
costs................................... 2,501 250 200,813
Franchise operating partner expense...... -- -- 2,066
-------- -------- ---------
Total operating expenses................... 221,142 219,448 503,625
-------- -------- ---------
Operating income (loss).................... 9,609 12,796 (201,373)
-------- -------- ---------
Other income (expense):
Interest expense......................... (10,709) (11,962) (10,599)
Gain (loss) on sale of property and
equipment............................... (188) (345) 362
Interest income.......................... 103 190 221
Other income, net........................ 43 541 32
-------- -------- ---------
Total other expense........................ (10,751) (11,576) (9,984)
-------- -------- ---------
Income (loss) before income taxes.......... (1,142) 1,220 (211,357)
Income tax provision (benefit)............. 815 1,107 (14,869)
-------- -------- ---------
Net income (loss).......................... $ (1,957) $ 113 $(196,488)
-------- -------- ---------
Basic net income (loss) per share.......... $ (0.15) $ 0.01 $ (11.68)
-------- -------- ---------
Diluted net income (loss) per share........ $ (0.15) $ 0.01 $ (11.68)
-------- -------- ---------
Weighted average shares outstanding
Basic.................................... 12,668 12,599 16,820
-------- -------- ---------
Diluted.................................. 12,668 12,654 16,820
-------- -------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Additional Retained Stock-
Common Common Paid-in Earnings Unearned Treasury holders'
Stock Stock Capital (Deficit) Compensation Stock Equity
------ ------ ---------- --------- ------------ -------- ---------
(Dollars and shares in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 27,
1996................... 16,929 $ 28 $258,242 $ 11,103 $ -- $ (250) $ 269,123
Net loss, fiscal 1997. -- -- -- (196,488) -- -- (196,488)
Exercise of stock
options.............. 1 -- 1 -- -- -- 1
Bruegger's Disposition:
Redemption of shares.. (4,311) -- -- -- -- (21,823) (21,823)
Retirement of common
stock................ -- -- (21,823) -- -- 21,823 --
------ ---- -------- --------- ----- -------- ---------
Balance, October 26,
1997................... 12,619 28 236,420 (185,385) -- (250) 50,813
Net income, fiscal
1998................. -- -- -- 113 -- -- 113
------ ---- -------- --------- ----- -------- ---------
Balance, October 25,
1998................... 12,619 28 236,420 (185,272) -- (250) 50,926
Restricted stock
grants............... 155 -- 461 -- (461) -- --
Amortization of
unearned
compensation......... -- -- -- -- 33 -- 33
Net loss, fiscal 1999. -- -- -- (1,957) -- -- (1,957)
------ ---- -------- --------- ----- -------- ---------
Balance, October 31,
1999................... 12,774 $ 28 $236,881 $(187,229) $(428) $ (250) $ 49,002
------ ---- -------- --------- ----- -------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 31, October 25, October 26
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ (1,957) $ 113 $(196,488)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization of
property and equipment................. 11,353 11,381 16,094
Amortization of other assets............ 2,375 2,877 7,187
Impairment of assets and facility
closing costs.......................... 2,501 250 200,813
Loss (gain) on sale of property and
equipment.............................. 188 345 (362)
Amortization of unearned compensation... 33 -- --
Deferred income taxes................... -- -- (11,748)
Changes in operating assets and
liabilities, excluding effects of
acquisitions and dispositions:
Accounts receivable................... 412 279 65
Inventories........................... (4) 40 16
Other current assets.................. (219) 4,374 (4,024)
Accounts payable...................... 1,292 (2,174) (432)
Accrued liabilities................... (2,212) (2,586) (7,421)
-------- -------- ---------
Net cash provided by operating
activities......................... 13,762 14,899 3,700
-------- -------- ---------
Cash flows from investing activities:
Disposition of businesses, net of cash
sold..................................... -- -- 15,720
Increase in notes receivable.............. (4,294) -- --
Proceeds from sales of property and
equipment................................ 2,790 2,453 2,073
Purchase of property and equipment........ (8,262) (6,205) (32,080)
Advances to affiliates.................... -- -- (26,515)
Payment of other assets................... (112) (235) (3,319)
Other, net................................ (200) (88) (198)
-------- -------- ---------
Net cash used for investing
activities......................... (10,078) (4,075) (44,319)
-------- -------- ---------
Cash flow from financing activities:
Proceeds from exercise of stock options... -- -- 1
Borrowings of long-term debt.............. 63,566 -- 62,500
Repayment of long-term debt............... (67,884) (14,350) (14,004)
Repayment of capitalized lease and non-
competition obligations.................. (371) (333) (435)
Loan financing fees....................... (1,327) (290) (387)
-------- -------- ---------
Net cash (used for) provided by
financing activities............... (6,016) (14,973) 47,675
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (2,332) (4,149) 7,056
Cash and cash equivalents, beginning of
year....................................... 3,351 7,500 444
-------- -------- ---------
Cash and cash equivalents, end of year...... $ 1,019 $ 3,351 $ 7,500
======== ======== =========
Supplemental disclosures of cash flow
information:
Cash paid for interest, net of amounts
capitalized.............................. $ 11,277 $ 11,157 $ 8,367
Cash paid for income taxes................ 1,099 1,106 757
Noncash investing and financing activities:
Common stock received in disposition...... -- -- 21,823
Property and equipment purchased and
related liability included in accounts
payable.................................. 1,041 746 136
Note receivable acquired in disposition of
restaurants, net......................... -- -- 6,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, DISPOSITION OF BUSINESS AND PUBLIC OFFERINGS
Nature of Business--Quality Dining, Inc. and its subsidiaries (the
"Company") develop and operate both quick service and full service restaurants
in 18 states. The Company owns and operates 36 Grady's American Grill
restaurants, four restaurants under the tradename of Spageddies Italian
Kitchen and four restaurants under the tradename Papa Vino's Italian Kitchen.
The Company also operates, as a franchisee, 70 Burger King restaurants and 28
Chili's Grill & Bar restaurants.
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% and matures in October 2004. Interest will
be accrued and added to the principal amount of the note through October 2000
and will be paid in cash for the remaining life of the note. The Company has
not recognized any interest income from this note. The Company will continue
to review the financial condition of Bruegger's based upon available
information to assess the collectability of the 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 10)
During the second quarter of fiscal 1997, the Company recorded a non-cash
impairment charge of $185,000,000 and a store closing charge of $15,513,000 as
a result of its decision to divest the bagel related businesses (see Note 11).
The consummation of the sale of the bagel-related businesses did not result in
any additional gain or loss.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year--The Company maintains its accounts on a 52/53 week fiscal year
ending the last Sunday in October. The fiscal year ended October 31, 1999
(fiscal 1999) contained 53 weeks. The fiscal years ended October 25, 1998
(fiscal 1998) and October 26, 1997 (fiscal 1997) each contained 52 weeks.
Basis of Presentation--The accompanying consolidated financial statements
include the accounts of Quality Dining, Inc. and its wholly-owned
subsidiaries. As of May 11, 1997, the Company also consolidated its controlled
affiliate, Bagel Acquisition Corporation, into its consolidated financial
statements and recorded Bagel Acquisition Corporation's revenues and expenses
from May 11, 1997 to October 19, 1997. All significant intercompany balances
and transactions have been eliminated. Investments in unconsolidated
affiliates are accounted for using the equity method.
Use of Estimates in the Preparation of Financial Statements--The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories--Inventories consist primarily of restaurant food and supplies
and are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
33
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment--Property and equipment, including capitalized
leased properties, are stated at cost. Depreciation and amortization are being
recorded on the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease term of the related asset. The general
ranges of original depreciable lives are as follows:
<TABLE>
<CAPTION>
Years
------
<S> <C>
Capitalized Lease Property..... 17-20
Buildings and Leasehold
Improvements.................. 15-31 1/2
Furniture and Equipment........ 4-7
Computer Equipment and
Software...................... 5
</TABLE>
Upon the sale or disposition of property and equipment, the asset cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in income. Normal repairs and maintenance
costs are expensed as incurred.
Impairment of Long-Lived Assets and Facility Closure Expense--Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets," established accounting standards for the
impairment of long-lived assets, certain intangibles and goodwill related to
those assets. The Company reviews long-lived assets related to each restaurant
annually for impairment, or whenever events or changes in circumstances
indicate that the carrying amount of a restaurant may not be recoverable. An
impaired restaurant is written down to its estimated fair market value based
on the best information available to the Company. Considerable management
judgment is necessary to estimate the fair market value. Accordingly, actual
results could vary significantly from such estimates.
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 and losses 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.
The Company recorded a $250,000 non-cash impairment charge in fiscal 1998
in connection with its decision to sell a Grady's American Grill Restaurant.
In fiscal 1997, the Company recorded a $185,000,000 non-cash impairment
charge in connection with its decision to sell its bagel-related businesses
(see Note 11). In fiscal 1997, the Company decided not to build two Burger
King restaurants which it had acquired the development rights to as part of
the SHONCO acquisition. In conjunction with this decision the Company recorded
a non-cash impairment charge of $300,000 to write-off the capitalized
development rights associated with these two locations.
Goodwill and Trademarks--Goodwill arising from the excess of the purchase
price over the acquired tangible and intangible net assets acquired in
acquisitions and trademarks are being amortized on a straight-line basis,
principally over 40 years. Accumulated amortization of goodwill as of October
31, 1999 and October 25, 1998 was $2,710,000 and $2,169,000, respectively.
Accumulated amortization of trademarks as of October 31, 1999 and October 25,
1998 was $1,275,000 and $943,000, respectively. The Company wrote-off all of
the goodwill related to its bagel businesses as part of the $185,000,000 non-
cash impairment charge recorded during fiscal 1997 (See Note 11).
34
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Franchise Fees and Development Fees--The Company's Burger King and Chili's
franchise agreements require the payment of a franchise fee for each
restaurant opened. Franchise fees are deferred and amortized on the straight-
line method over the lives of the respective franchise agreements. Development
fees paid to the respective franchisors are deferred and expensed in the
period the related restaurants are opened. The excess of the purchase price
over the acquired tangible and intangible assets acquired in the SHONCO
acquisition has been allocated to franchise rights. The franchise agreements
generally provide for a term of 20 years with renewal options upon expiration.
Franchise fees are being amortized on a straight-line basis, principally over
20 years. Accumulated amortization of franchise fees and development costs as
of October 31, 1999 and October 25, 1998 was $3,312,000 and $2,704,000,
respectively.
Franchise Related Revenue Recognition--Franchise related revenue includes
royalties, franchise fees, development fees, net commissary revenue, interest
income and other miscellaneous fees related to the Company's bagel business,
which was divested on October 20, 1997. Franchisees were required to pay
monthly royalties, generally 4% to 5% of restaurant sales, which the Company
recognized as earned. Each franchisee also paid an initial franchise fee for
each bakery opened. Development fees, which resulted from area development
agreements with franchisees, were deferred and recognized as revenue when all
material conditions had been substantially completed by the Company, which
generally occurred when the bakeries under the related area development
agreements were opened.
Advertising--The Company incurs advertising expense related to its concepts
under franchise agreements (see Note 5) or through local advertising.
Advertising costs are expensed at the time the related advertising first takes
place. Advertising costs were $6,975,000, $6,807,000 and $7,381,000 for fiscal
years 1999, 1998 and 1997, respectively. The Company had maintained an
advertising fund for national and regional advertising for the Bruegger's
Bagel Bakery ("Bruegger's") concept. The advertising fund collected fees paid
by Company-owned and franchised bakeries, and disbursed funds relating to
costs associated with maintaining, administering and preparing advertising,
marketing, public relations and promotional programs for the Bruegger's
concept. Contributions to the fund were based on a specified percentage of
sales, generally 2%. Such contributions were recorded as earned and were
reflected as a reduction of advertising expenses.
Pre-Opening Costs--Effective with fiscal 1999, the Company expenses pre-
opening costs as incurred in accordance with SOP 98-5 "Reporting on the Costs
of Start-up Activities". Prior to fiscal 1999 direct costs incurred in
connection with opening new restaurants were deferred and amortized on a
straight-line basis over a 12-month period following the opening of a
restaurant. Amortization of pre-opening costs aggregated $577,000 and
$2,953,000 for fiscal years 1998 and 1997, respectively.
Liquor Licenses--Costs incurred in securing liquor licenses for the
Company's restaurants and the fair value of liquor licenses acquired in
acquisitions are capitalized and amortized on a straight-line basis,
principally over 20 years. Accumulated amortization of liquor licenses as of
October 31, 1999 and October 25, 1998 was $800,000 and $618,000, respectively.
Deferred Financing Costs--Deferred costs of debt financing included in
other non current assets are amortized over the life of the related loan
agreements, which range from three to 20 years.
Computer Software Costs--Costs of purchased and internally developed
computer software are capitalized and amortized over a five-year period using
the straight-line method. As of October 31, 1999 and October 25, 1998,
capitalized computer software costs, net of related accumulated amortization,
aggregated $655,000 and $1,276,000, respectively. Amortization of computer
software costs was $476,000, $445,000 and $411,000 for fiscal years 1999, 1998
and 1997 respectively.
35
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalized Interest--Interest costs capitalized during the construction
period of new restaurants and major capital projects were $24,000, $57,000 and
$125,000 for fiscal years 1999, 1998 and 1997 respectively.
Stock-Based Compensation--The Company has adopted the disclosure provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation." The Statement
encourages rather than requires companies to adopt a new method that accounts
for stock based compensation awards based on their estimated fair value at the
date they are granted. Companies are permitted, however, to continue
accounting for stock compensation awards under APB Opinion No. 25 which
requires compensation cost to be recognized based on the excess, if any,
between the quoted market price of the stock at the date of the grant and the
amount an employee must pay to acquire the stock. The Company has elected to
continue to apply APB Opinion No. 25 and has disclosed the pro forma net
income (loss) per share, determined as if the new method had been applied, in
Note 8.
Net Income (Loss) Per Share--Basic net income (loss) per share is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted net income per share assumes the exercise of stock
options using the treasury stock method, if dilutive.
Concentrations of Credit Risk--Financial instruments, which potentially
subject the Company to credit risk, consist primarily of cash and cash
equivalents and notes receivable. Substantially all of the Company's cash and
cash equivalents at October 31, 1999 were concentrated with a bank located in
Michigan City, Indiana.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Income Taxes--The Company utilizes SFAS No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the years in which the differences are expected to reverse. SFAS
109 requires the establishment of a valuation reserve against any deferred tax
assets if the realization of such assets is not deemed likely.
Segment Information--The Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") in fiscal
1999. SFAS 131 establishes standards for the reporting of information about
operating segments in annual and interim financial statements and requires
restatement of prior year information. Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker(s)
in deciding how to allocate resources and in assessing performance. SFAS 131
also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS 131 did not affect the Company's
consolidated financial position or results of operations but did change the
disclosure of segment information, as presented in Note 14.
Comprehensive Income--The Company adopted SFAS 130, "Reporting
Comprehensive Income" ("SFAS 130") in fiscal 1999. SFAS 130 requires that
other comprehensive income items be displayed in financial statements and that
the accumulated balance of other comprehensive income be displayed separately
from retained earnings and additional paid-in capital in the equity section of
a statement of financial position. The Company did not have any comprehensive
income items that were required to be reported under SFAS 130.
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
36
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Reclassifications--Certain information in the consolidated financial
statements for fiscal 1997 has been reclassified to conform with the current
reporting format. The reclassifications had no effect on stockholders' equity
or net loss as previously reported.
3. OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
Other current assets and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
October 31, October 25,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Other current assets:
Deposits........................................ $ 1,131 $ 1,222
Prepaid expenses and other...................... 656 346
------- -------
$ 1,787 $ 1,568
======= =======
Accrued liabilities:
Accrued salaries, wages and severance........... $ 3,587 $ 3,277
Accrued advertising and royalties............... 1,184 1,314
Accrued property taxes.......................... 1,345 1,030
Accrued sales taxes............................. 878 664
Accrued disposition costs....................... 1,521 2,059
Accrued store closing costs..................... 804 1,770
Accrued insurance costs......................... 1,857 1,809
Other accrued liabilities....................... 5,900 7,365
------- -------
$17,076 $19,288
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
October 31, October 25,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Land............................................. $ 37,116 $ 37,660
Capitalized lease property....................... 7,644 7,644
Buildings and leasehold improvements............. 77,471 77,646
Furniture and equipment.......................... 59,568 59,083
Construction in progress......................... 573 285
-------- --------
182,372 182,318
-------- --------
Less, accumulated depreciation and capitalized
lease amortization.............................. 54,023 45,554
-------- --------
Property and equipment, net...................... $128,349 $136,764
======== ========
</TABLE>
37
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. FRANCHISE AND DEVELOPMENT RIGHTS
The Company has entered into franchise agreements with two franchisors for
the operation of two of its restaurant concepts, Burger King and Chili's. The
franchise agreements provide the franchisors with significant rights regarding
the business and operations of the Company's franchised restaurants. The
franchise agreements with Burger King Corporation require the Company to pay
royalty and advertising fees equal to 3.5% and 4.0% of Burger King restaurant
sales, respectively. The franchise agreements with Brinker International, Inc.
("Brinker") covering the Company's Chili's restaurant concept require the
Company to pay royalty and advertising fees equal to 4.0% and 0.5% of Chili's
restaurant sales, respectively. In addition, the Company is required to spend
2% of sales from each of its Chili's restaurants on local advertising. As part
of a system-wide promotional effort, the Company has agreed that for the
period beginning September 1, 1999 and ending August 30, 2000, it will pay
Brinker an additional advertising fee of 0.375% of sales from each of its
Chili's restaurants.
The Company has entered into development agreements to develop additional
restaurants in each of the two concepts. Each of the development agreements
requires the Company to pay a development fee. In addition, the development
agreements contain certain requirements regarding the number of units to be
opened in the future. Each restaurant opened will be subject to a separate
franchise agreement, which requires the payment of an initial franchise fee
(currently $40,000) for each such restaurant. Should the Company fail to
comply with the required development schedules or with the requirements of the
agreements for restaurants within areas covered by the development agreements,
the franchisors have the right to terminate the Company's development
agreements and the exclusivity provided by the development agreements. As of
December 31, 1999, the Company developed its 18th and final restaurant under
its development agreement with Burger King Corporation.
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
the same at 4% of sales. Royalties payable under existing franchise agreements
are not effected by these changes.
Burger King Corporation is also offering a voluntary program to incent
franchisees to renew their franchise agreements prior to the scheduled
expiration date ("Early Renewal Program"). Franchisees that elect 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 for a period of time. The Company is currently
evaluating which, if any, of its restaurants would be suitable for the Early
Renewal Program. In conducting its evaluation, the Company will consider,
among other things, the applicable royalty reductions, the nature, extent and
resulting impact on sales from the required capital investment as well as the
Company's ability to extend its occupancy leases, where required. The Company
intends to decide which, if any, of its restaurants it will include in the
Early Renewal Program by March 15, 2000.
38
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended October
31, 1999, October 25, 1998 and October 26, 1997 is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 31, October 25, October 26,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................. $-- $ -- $ (4,243)
State................... 815 1,107 1,122
---- ------ --------
815 1,107 (3,121)
---- ------ --------
Deferred:
Provision (benefit) for
the period............. -- -- (11,748)
---- ------ --------
Total................... $815 $1,107 $(14,869)
==== ====== ========
</TABLE>
The components of the deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
October 31, October 25,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards................ $17,930 $18,682
Restructuring and integration costs............. 992 1,629
FICA tip credit and minimum tax credit.......... 2,661 2,164
Accrued liabilities............................. 2,971 1,557
Capitalized lease obligations................... 807 771
Other........................................... 320 153
------- -------
Deferred tax asset.............................. 25,681 24,956
Less: Valuation allowance....................... (11,510) (10,490)
------- -------
14,171 14,466
------- -------
Deferred tax liability:
Property and equipment.......................... (2,636) (3,109)
Franchise fees, trademarks and goodwill......... (1,488) (1,304)
Other........................................... (47) (53)
------- -------
Deferred tax liability.......................... (4,171) (4,466)
------- -------
Net deferred tax asset (liability).............. $10,000 $10,000
======= =======
</TABLE>
The Company has net operating loss carryforwards of approximately $51
million as well as FICA tip credits and alternative minimum tax credits of
$2.7 million. Net operating loss carryforwards of $48 million expire in 2012
and $3 million expire in 2018. FICA tip credits of $1.3 million expire in
2012, $477,000 expire in 2013 and $572,000 expire in 2014. The alternative
minimum tax credits of $300,000 carryforward indefinitely.
During fiscal 1999, the Company increased its valuation reserve against its
net operating loss carryforwards to $11.5 million leaving a net deferred tax
asset of $10.0 million. The Company's assessment of its ability to realize the
net deferred tax asset was based on the weight of both positive and negative
evidence, including the taxable income of its current operations. Based on
this assessment, the Company's management believes it is more likely than not
that the net deferred tax benefit recorded will be realized. Such evidence
will be reviewed
39
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
prospectively and should the Company's operating performance continue to
improve, the Company may recognize additional tax benefits related to its net
deferred tax asset position in the future.
Differences between the effective income tax rate and the U.S. statutory
tax rate were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 31, October 25, October 26,
(Percent of pretax income) 1999 1998 1997
-------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Statutory tax rate................... (34.0)% 34.0% (34.0)%
State income taxes, net of federal
income tax benefit.................. 47.1 59.0 .5
FICA tax credit...................... (50.1) (39.8) (0.2)
Write off and amortization of
goodwill............................ -- -- 22.3
Change in valuation allowance........ 89.3 20.5 4.8
Other, net........................... 19.1 17.0 (0.4)
----- ----- -----
Effective tax rate................... 71.4% 90.7% (7.0)%
===== ===== =====
</TABLE>
7. LONG-TERM DEBT AND CREDIT AGREEMENTS
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 $16,544,000 available under its revolving
credit agreement as of October 31, 1999. 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 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.
During fiscal 1999 the Company paid fees and expenses totaling $1,327,000
related to the refinancing of its existing debt. These costs related primarily
to transaction and legal expenses for the mortgage facility and up-front fees
to the bank group and legal expenses for the revolving credit agreement.
40
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate maturities of long-term debt subsequent to October 31, 1999
are as follows:
<TABLE>
<CAPTION>
Fiscal Year
----------- (Dollars in thousands)
<S> <C>
2000.............. $ 1,054
2001.............. 1,163
2002.............. 1,283
2003.............. 60,872
2004.............. 1,562
2005 and
thereafter....... 42,504
--------
Total........... $108,438
========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
Stock Options
The Company has three stock option plans: the 1993 Stock Option and
Incentive Plan, the 1997 Stock Option and Incentive Plan and the Outside
Directors Stock Option Plan.
On March 26, 1997 the Company's shareholders approved the 1997 Stock Option
and Incentive Plan and therefore no awards for additional shares of the
Company's common stock will be made under the 1993 Stock Option and Incentive
Plan. Under the 1997 Stock Option and Incentive Plan, shares of restricted
stock and options to purchase shares of the Company's common stock may be
granted to officers and other employees. An aggregate of 1,100,000 shares of
common stock has been reserved for issuance under the 1997 Stock Option and
Incentive Plan.
Under the Outside Directors Stock Option Plan, 40,000 shares of common
stock have been reserved for the issuance of nonqualified stock options to be
granted to non-employee directors of the Company. On May 1, 1994 and on each
May 1 thereafter, each then non-employee director of the Company will receive
an option to purchase 2,000 shares of common stock at an exercise price equal
to the fair market value of the Company's common stock on the date of grant.
Each option has a term of 10 years and becomes exercisable six months after
the date of grant. As of October 31, 1999 there were 38,000 options
outstanding under the Outside Directors Stock Option Plan.
On June 1, 1999, the Company repurchased 298,340 options, that had
previously been issued under its 1993 Stock Option and Incentive Plan at
strike prices ranging from $13.60 to $34.50, for their fair value of $44,751,
or $0.15 per option. These options are not available to be reissued. The
Company recorded $44,751 in compensation expense related to this repurchase.
On June 1, 1999, the Company also implemented a Long Term Incentive
Compensation Plan (the "Long Term Plan") for seven of its executive officers
and certain other senior executives (the "Participants"). The Long Term Plan
is designed to incent and retain those individuals who are critical to
achieving the Company's long term business objectives. The Long Term Plan
consists of (a) options granted with an exercise price equal to the closing
price of the Company's stock on June 1, 1999, which vest over three years; (b)
restricted stock awards of 155,552 shares which vest on June 1, 2006, subject
to accelerated vesting in the event the price of the Company's common stock
achieves certain targets; and, for certain Participants, (c) a cash bonus
payable at the conclusion of fiscal year 2000. The Company also entered into
Agreements with five of its executive officers and two other senior executives
pursuant to which the employees have agreed not to compete with the Company
for a period of time after the termination of their employment and are
entitled to receive certain payments in the event of a change of control of
the Company.
As a result of these grants, the Company recorded an increase to additional
paid in capital and an offsetting deferred charge of approximately $461,000
for unearned compensation. The deferred charge is equal to the number of
shares granted multiplied by a share price of $3.00, which was the Company's
closing share price on
41
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the day of the grant. The deferred charge is classified in the equity section
of the Company's consolidated balance sheet as unearned compensation and is
being amortized to compensation expense on a straight-line basis over the
vesting period.
The Company accounts for all of its plans in accordance with APB Opinion
No. 25 which requires compensation cost to be recognized based on the excess,
if any, between the quoted market price of the stock at the date of grant and
the amount an employee must pay to acquire the stock. Under this method, no
compensation cost has been recognized for stock option awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value method as prescribed by SFAS 123 (see Note
2), the Company's net earnings (loss) and net earnings (loss) per share would
have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
October 31, October 25, October 26,
1999 1998 1997
----------- ----------- -----------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Net income (loss), as reported........ $(1,957) $ 113 $(196,488)
Net income (loss), pro forma.......... $(2,190) $(826) $(197,410)
Basic net income (loss) per common
share, as reported................... $ (.15) $ .01 $ (11.68)
Basic net income (loss) per common
share, pro forma..................... $ (.17) $(.07) $ (11.74)
</TABLE>
The weighted average fair value at the date of grant for options granted
during fiscal 1999, 1998 and 1997 was $1.47, $1.67 and $6.80 per share,
respectively, which, for the purposes of this disclosure, is assumed to be
amortized over the respective vesting period of the grants. The fair value of
each option grant is estimated on the date of the grant using the Black-
Scholes option-pricing model with the following weighted average assumptions
used for grants in fiscal 1999, 1998 and 1997: dividend yield of 0% for all
years; expected volatility of 48.10%, 47.7% and 40.1%, respectively; risk-free
interest rate of 5.53%, 5.7% and 6.5%, respectively; and expected lives of
5.00, 4.98 and 4.39 years, respectively.
Activity with respect to the Company's stock option plans for fiscal years
1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding, October 27, 1996................ 703,117 $23.24
Granted.................................... 300,795 14.46
Canceled................................... (237,512) 22.33
Exercised.................................. (610) 2.66
--------- ------
Outstanding, October 26, 1997................ 765,790 20.12
Granted.................................... 526,600 3.41
Canceled................................... (187,005) 10.08
Exercised.................................. (385) .10
--------- ------
Outstanding, October 25, 1998................ 1,105,000 13.83
Granted.................................... 161,261 3.00
Canceled................................... (494,271) 20.19
Exercised.................................. -- --
--------- ------
Outstanding, October 31, 1999................ 771,990 $ 7.55
--------- ------
Exercisable, October 31, 1999................ 330,843
---------
Available for future grants at October 31,
1999........................................ 411,595
---------
</TABLE>
42
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information relating to fixed-priced stock
options outstanding for all plans as of October 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.10-
$10.00 533,905 8.57 years $ 3.38 108,565 $ 3.82
$10.01-
$20.00 173,800 5.43 years $12.55 157,993 $12.43
$20.01-
$32.875 64,285 6.41 years $28.64 64,285 $28.64
</TABLE>
Retirement Plans
The Company maintains a discretionary, noncontributory profit sharing plan
for its eligible employees. Plan contributions are determined by the Company's
Board of Directors.
Employees are also eligible to participate in either a 401(k) plan or a
deferred compensation program after one year of service in which the employee
has worked a minimum of 1,000 hours. The Company matches a portion of the
employee's contribution to the plans and provides investment choices for the
employee.
The Company's contributions under both plans aggregated $265,000, $173,000
and $99,000 for fiscal years 1999, 1998 and 1997, respectively.
9. LEASES
The Company leases its office facilities and a substantial portion of the
land and buildings used in the operation of its restaurants. The restaurant
leases generally provide for a noncancelable term of five to 20 years and
provide for additional renewal terms at the Company's option. Most restaurant
leases contain provisions for percentage rentals on sales above specified
minimums. Rental expense incurred under these percentage rental provisions
aggregated $970,000, $1,054,000 and $986,000 for fiscal years 1999, 1998 and
1997, respectively.
As of October 31, 1999, future minimum lease payments related to these
leases were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
------- --------- -------
Fiscal Year
----------- (Dollars in thousands)
<S> <C> <C> <C>
2000........................................... $ 1,152 $ 7,878 $ 9,030
2001........................................... 1,152 7,747 8,899
2002........................................... 1,110 7,607 8,717
2003........................................... 1,081 7,464 8,545
2004........................................... 1,081 6,898 7,979
2005 and thereafter............................ 4,569 26,936 31,505
------- ------- -------
10,145 $64,530 $74,675
------- -------
Less: Amount representing interest............. 4,297
-------
Present value of future minimum lease payments
of which $417 is included in current
liabilities at October 31, 1999............... $ 5,848
-------
</TABLE>
Rent expense, including percentage rentals based on sales, was $9,453,000,
$9,518,000 and $15,198,000 for fiscal years 1999, 1998 and 1997, respectively.
43
<PAGE>
QUALITY DINING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for the portion of its employee health care
costs not covered by insurance. The Company is liable for medical claims up to
$100,000 per eligible employee annually, and aggregate annual claims up to
approximately $2,500,000. The aggregate annual deductible is determined by the
number of eligible covered employees during the year and the coverage they
elect.
At October 31, 1999, the Company had commitments aggregating $921,000 for
the construction of restaurants.
The Company is self-insured with respect to any worker's compensation
claims not covered by insurance. The Company maintains a $250,000 annual
deductible per occurrence and is liable for aggregate claims up to $2,300,000
for the three year insurance plan period beginning March 1, 1998 and ending
April 30, 2001.
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 Brue, Michael Dressell, Daniel B. Fitzpatrick and John 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 alleges 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. The case
continues to proceed against the Company on allegations that the Company
breached an agreement to repurchase bakeries from the plaintiffs and against
the Bruegger's entities on allegations that the plaintiffs purchased their
franchises and preferred stock of Bruegger's Corporation based upon false
representations and on allegations that Bruegger's Franchise Corporation
breached the plaintiffs' franchise and development agreements.
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 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
44
<PAGE>
QUALITY DINING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise
Corporation, Champlain Management Services, Inc., Nordahl Brue, Michael
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. 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. Through October 31, 1999, the Company had paid approximately $1.8
million in cash and assigned its $1.2 million note from BruWest to Bruegger's
Corporation which together have satisfied the Company's remaining obligation
to pay cash in respect of Franchise Damages. 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 October 31, 1999, the outstanding
balance due under the junior subordinated note has been
45
<PAGE>
QUALITY DINING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 the Company's belief
that Bruegger's Corporation has and will continue to 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. 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. 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.
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
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 Court has denied the Company's subsequent request 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 were defendants in a
class action lawsuit filed in the United States District Court for the
Northern District of Indiana. The complaint alleged, 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 action was from June 7, 1996 to May 13, 1997 on which dates the price of
the Company's common stock closed at
46
<PAGE>
QUALITY DINING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
$34.25 and $6.56, respectively. The plaintiffs were seeking, among other
things, an award of unspecified compensatory damages, interest, costs and
attorney's fees. The Company filed a motion to dismiss the complaint which was
granted by the Court on September 28, 1999. The plaintiffs have not filed an
appeal and the period for filing an appeal has expired.
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.
11. IMPAIRMENT OF LONG-LIVED ASSETS
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 and losses 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. All facility closures were completed during the fourth quarter of
fiscal 1999 except for one restaurant which was closed early in fiscal 2000.
The Company recorded a $250,000 non-cash impairment charge in fiscal 1998
in connection with its decision to sell a Grady's American Grill Restaurant.
On May 10, 1997, the Company's Board of Directors committed the Company to
a plan of action to divest the Bruegger's bagel-related businesses. During the
second quarter of fiscal 1997 the Company recorded a non-cash impairment
charge of $185,000,000 and a store closing charge of $15,513,000 as a result
of this decision. The non-cash impairment charge represents a reduction of the
carrying amounts of bagel-related assets to their estimated fair values. The
impairment charge includes non-cash charges for the write-off of goodwill and
the write-down of notes receivable and property and equipment. During the
second quarter of fiscal 1997 the Company received non-binding offers to
purchase its bagel-related assets and used these offers, less estimated costs
to sell, to determine the current fair value of the bagel-related assets. On
October 20, 1997 the Company sold all its bagel-related assets and no further
charges were incurred.
The store closing charge represents the estimated costs associated with
closing under-performing Bruegger's units and other Bruegger's units which
were at various stages of development when the decision was made to divest the
Bruegger's bagel-related businesses. The charge includes amounts for
terminating leases, the write-off of fixed assets and pre-opening costs,
restaurant management severance costs and other store closing costs. During
the third quarter of fiscal 1997 the Company closed a total of 22 Bruegger's
units in eight markets. As of October 31, 1999, $14,709,000 in costs related
to these activities had been incurred, of which $3,916,000 were cash payments
and $10,793,000 were non-cash charges, primarily for the write-down of fixed
assets. The remaining costs are primarily associated with terminating
occupancy leases which the Company expects to be substantially complete by the
end of fiscal 2000. The Company believes that the remaining reserve is
adequate to cover all future expenses relating to the closed stores.
47
<PAGE>
QUALITY DINING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
12. RELATED PARTY TRANSACTIONS
The Company leases a substantial number of its Burger King restaurants from
entities that are substantially owned by certain directors, officers and
stockholders of the Company. Amounts paid for leases with these related
entities are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 31, October 25, October 26,
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Operating leases:
Base rentals........................ $2,456 $2,513 $2,502
Percentage rentals.................. 456 451 349
------ ------ ------
2,912 2,964 2,851
------ ------ ------
Capitalized leases:
Interest............................ 725 761 793
Reduction of lease obligations...... 300 264 233
Percentage rentals.................. 222 246 192
------ ------ ------
1,247 1,271 1,218
------ ------ ------
Total............................. $4,159 $4,235 $4,069
====== ====== ======
</TABLE>
Affiliated real estate partnerships and two other entities related through
common ownership pay management fees to the Company as reimbursement for
administrative services provided. Total management fees for fiscal 1999, 1998
and 1997 were $14,000, $14,000 and $14,000, respectively.
During the fiscal years 1999, 1998 and 1997, the Company made payments to
companies owned by certain directors, stockholders and officers of the Company
of $260,000, $185,000 and $327,000, respectively, for air transportation
services.
During fiscal 1997 and fiscal 1996, the Company loaned a total of
$38,000,000 to Bagel Acquisition Corporation, a company owned by a director
and officer of the Company, which used the funds to acquire a number of
Bruegger's Bagel Bakeries from independent franchisees. Interest income
recognized by the Company on this note in fiscal 1997 was $1,317,000. The
interest income from the note was included as part of franchise related
revenue on the Consolidated Statement of Operations. In connection with the
Company's decision to divest its bagel-related businesses, the Company began
consolidating the assets and liabilities of Bagel Acquisition Corporation as
of May 11, 1997 and Bagel Acquisition Corporation became a wholly owned
subsidiary on August 21, 1997, when the Company exercised its option to
acquire the stock of Bagel Acquisition Corporation for $1,000. The note
receivable from Bagel Acquisition Corporation was eliminated as part of the
consolidation. As of May 11, 1997, the Company consolidated Bagel Acquisition
Corporation into its consolidated financial statements and recorded Bagel
Acquisition Corporation's revenues and expenses from May 11, 1997 to October
19, 1997.
The Company and its Bruegger's concept transacted certain business
activities with Bagel Acquisition Corporation and certain other entities whose
principal shareholders were directors and/or officers of the Company. A
summary of these transactions for fiscal year 1997 included: purchases of
cream cheese $1,784,000; sales of bagels and related products $4,054,000;
royalties earned $4,485,000; marketing fees earned $2,016,000; installation of
point-of-sale registers $100,000; management, accounting, legal and computer
support services $677,000; and transaction fees $200,000.
48
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. ACQUISITIONS AND DISPOSITIONS
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 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%
and will mature in seven years. Interest will be accrued and added to the
principal amount of the note for the first three years and will be paid in
cash for the remaining life of the note. The Company will continue to review
the financial condition of Bruegger's based upon available information to
assess the collectability of the 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.
Prior to the transaction, Messrs. Brue and Dressell were directors of the
Company and owned approximately 25% of the Company's common stock. In
connection with the sale of the bagel-related businesses, Mr. Nordahl L. Brue,
Mr. Michael J. Dressell and Mr. David T. Austin resigned from the Company's
Board of Directors.
14. SEGMENT REPORTING
The Company adopted SFAS 131, "Disclosure about Segments of an Enterprise
and Related Information" (SFAS 131") in its fiscal year ending October 31,
1999.
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 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).
49
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The bagel-related companies, which were sold on October 27, 1997,
have been included in "other" for fiscal 1997.
<TABLE>
<CAPTION>
Full Quick
Service Service Other Total
-------- ------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues....................... $148,101 $82,650 $ -- $ 230,751
Income from restaurant
operations(1)................. 15,134 13,794 126 29,054
Operating income (loss)........ 5,038(2) 6,731(3) (2,160)(4) $ 9,609
Interest expense............... 10,709
Other expense.................. 42
---------
Loss before income taxes....... $ (1,142)
=========
Total assets................... 127,512 33,571 27,954 $ 189,037
Depreciation and amortization.. 8,572 3,202 1,954 13,728
Fiscal 1998
Revenues....................... $151,853 $80,391 $ -- $ 232,244
Income from restaurant
operations(1)................. 16,048 13,559 12 29,619
Operating income (loss)........ 8,014(5) 7,121 (2,339) $ 12,796
Interest expense............... 11,962
Other income................... 386
---------
Income before income taxes..... $ 1,220
=========
Total assets................... 134,973 33,572 27,730 $ 196,275
Depreciation and amortization.. 8,914 3,000 2,344 14,258
Fiscal 1997
Revenues....................... $152,653 $74,616 $ 74,983 $ 302,252
Income from restaurant
operations(1)................. 14,420 12,275 (3,414) 23,281
Operating income (loss)........ 6,569 5,752 (213,694)(6) $(201,373)
Interest expense............... 10,599
Other income................... 615
---------
Loss before income taxes....... $(211,357)
=========
Total assets................... 143,602 29,845 41,898 $ 215,345
Depreciation and amortization.. 6,952 2,817 13,512 23,281
</TABLE>
- --------
(1) Income from restaurant operations is restaurant sales minus total
restaurant operating expenses.
(2) Includes charges for the impairment of assets and facility closing costs
totaling $2,174,000.
(3) Includes charges for the impairment of assets and facility closing costs
totaling $159,000.
(4) Includes charges for the impairment of assets and facility closing costs
totaling $168,000.
(5) Includes charges for the impairment of assets totaling $250,000.
(6) Includes operating losses of the bagel-related companies and bagel-related
charges of $200,813,000 for the impairment of assets and facility closing
costs.
50
<PAGE>
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Year ended October 31, 1999
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter(1) Quarter
------- ------- ---------- -------
<S> <C> <C> <C> <C>
Total revenues.............................. $68,058 $53,709 $53,465 $55,519
Operating income ........................... 3,413 2,954 123 3,119
Income (loss) before income taxes........... 218 366 (2,136) 410
Net income (loss)........................... $ 87 $ 146 $(2,355) $ 165
======= ======= ======= =======
Basic net income (loss) per share........... $ .01 $ .01 $ (.19) $ 0.01
======= ======= ======= =======
Diluted net income (loss) per share......... $ .01 $ .01 $ (.19) $ 0.01
======= ======= ======= =======
Weighted average shares:
Basic..................................... 12,599 12,599 12,712 12,759
Diluted................................... 12,629 12,603 12,712 12,760
<CAPTION>
Year ended October 25, 1998
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ---------- -------
<S> <C> <C> <C> <C>
Total revenues.............................. $69,147 $55,838 $54,617 $52,642
Operating income ........................... 4,065 3,118 2,969 2,644
Income (loss) before income taxes........... 349 386 574 (89)
Net income (loss)........................... $ 122 $ 154 $ 230 $ (393)
======= ======= ======= =======
Basic net income (loss) per share........... $ .01 $ .01 $ .02 $ (0.03)
======= ======= ======= =======
Diluted net income (loss) per share......... $ .01 $ .01 $ .02 $ (0.03)
======= ======= ======= =======
Weighted average shares:
Basic..................................... 12,599 12,599 12,599 12,599
Diluted................................... 12,663 12,749 12,601 12,599
</TABLE>
- --------
(1) During the third quarter of fiscal 1999 the Company recorded asset
impairment charges and a facility closing charge totaling $2,501,000.
51
<PAGE>
QUALITY DINING, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Quality Dining, Inc.:
In our opinion, the consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Quality
Dining, Inc. and its subsidiaries at October 31, 1999 and October 25, 1998 and
the results of their operations and their cash flows for each of the three
years in the period ended October 31, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
December 15, 1999
52
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
independent accountants on accounting or financial disclosures.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Directors and nominees
for Director of the Company and concerning disclosure of delinquent filers is
incorporated herein by reference to the Company's definitive Proxy Statement
for its 2000 Annual Meeting of Shareholders, to be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of the Company's last
fiscal year. Information concerning the executive officers of the Company is
included under the caption "Executive Officers of the Company" at the end of
Part I of this Annual Report. Such information is incorporated herein by
reference, in accordance with General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item concerning remuneration of the
Company's officers and Directors and information concerning material
transactions involving such officers and Directors is incorporated herein by
reference to the Company's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference to the Company's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.
53
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
<TABLE>
<C> <S>
(a) 1. Financial Statements:
The following consolidated financial statements of the Company and its subsidiaries
are set forth in
Part II, Item 8.
Consolidated Balance Sheets as of October 31, 1999 and October 25, 1998.
Consolidated Statements of Operations for the fiscal years ended October 31, 1999,
October 25, 1998 and October 26, 1997.
Consolidated Statements of Stockholders' Equity for the fiscal years ended October
31, 1999, October 25, 1998 and October 26, 1997.
Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1999,
October 25, 1998 and October 26, 1997.
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedules:
None
3. Exhibits:
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
</TABLE>
None.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Quality Dining, Inc.
/s/ Daniel B. Fitzpatrick
By___________________________________
Daniel B. Fitzpatrick
President and Chief Executive
Officer
Date: January 25, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel B. Fitzpatrick Chairman of the Board, January 25, 2000
____________________________________ President, Chief Executive
Daniel B. Fitzpatrick Officer and Director
(Principal Executive
Officer)
/s/ David M. Findlay Chief Financial Officer and January 25, 2000
____________________________________ Treasurer (Principal
David M. Findlay Financial Officer)
/s/ Jeanne Yoder Vice President, Controller January 25, 2000
____________________________________ (Principal Accounting
Jeanne Yoder Officer)
/s/ James K. Fitzpatrick Senior Vice President, Chief January 25, 2000
____________________________________ Development Officer and
James K. Fitzpatrick Director
/s/ Arthur J. Decio Director January 25, 2000
____________________________________
Arthur J. Decio
/s/ Ezra H. Friedlander Director January 25, 2000
____________________________________
Ezra H. Friedlander
/s/ Steven M. Lewis Director January 25, 2000
____________________________________
Steven M. Lewis
/s/ Christopher J. Murphy III Director January 25, 2000
____________________________________
Christopher J. Murphy III
</TABLE>
55
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
No. In
Exhibit This
No. Description Filing
------- ----------- ------
<C> <S> <C>
2-F (1) Share Exchange Agreement, by and among Quality Dining,
Inc., Bruegger's Corporation, Nordahl L. Brue and
Michael J. Dressell, dated as of September 3, 1997.....
2-G (2) Agreement and Plan of Merger, by and among Quality
Dining, Inc., Bagel Disposition Corporation and Lethe,
LLC, dated as of September 3, 1997.....................
3-A (3) (i) Restated Articles of Incorporation of Registrant...
(3) (ii) Amendment to Registrant's Restated Articles of
Incorporation establishing the Series A Convertible
Cumulative Preferred Stock of the Registrant...........
(3) (iii) Amendment to Registrant's Restated Articles of
Incorporation establishing the Series B Participating
Cumulative Preferred Stock of the Registrant...........
3-B By-Laws of the Registrant, as amended to date..........
4-A (4) Form of Mortgage, Assignment of Rents, Fixture Filing
and Security Agreement.................................
4-B (4) Form of Lease..........................................
4-C (4) Form of Promissory Note................................
4-D (4) Intercreditor Agreement by and among Burger King
Corporation, the Company and Chase Bank of Texas,
National Association, NBD Bank, N.A. and NationsBank,
N.A. effective as of May 11, 1999......................
4-E (4) Intercreditor Agreement by and among Captec Financial
Group, Inc., CNL Financial Services, Inc., Chase Bank
of Texas, National Association and the Company dated
August 3, 1999.........................................
4-F (4) Collateral Assignment of Lessee's Interest in Leases by
and between Southwest Dining, Inc. and Chase Bank of
Texas, National Association dated July 26, 1999........
4-G (4) Collateral Assignment of Lessee's Interest in Leases by
and between Grayling Corporation and Chase Bank of
Texas, National Association dated July 26, 1999........
4-H (4) Collateral Assignment of Lessee's Interest in Leases by
and between Bravokilo, Inc. and Chase Bank of Texas,
National Association dated July 26, 1999...............
4-I (4) Third Amended and Restated Revolving Credit Agreement
dated as of May 11, 1999 by and between Quality Dining,
Inc. and GAGHC, Inc., as Borrowers, Chase Bank of
Texas, National Association, as Administrative Agent,
NBD Bank, N.A., as Documentation Agent, NationsBank,
N.A. (South) as Co-Agent, and LaSalle Bank, N.A., The
Northern Trust Company, KeyBank National Association
(successor in interest to Society National Bank),
SunTrust Bank, Central Florida, N.A. (collectively the
"Banks")...............................................
4-J (4) First Amendment to Third Amended and Restated Revolving
Credit Agreement dated as of July 26, 1999 by and
between Quality Dining, Inc., and GAGHC, Inc., as
Borrowers and the Banks................................
4-K (4) Second Amendment to Third Amended and Restated
Revolving Credit Agreement dated as of September 9,
1999 by and between Quality Dining, Inc. and GAGHC,
Inc., Banks which are Party thereto and Chase Bank of
Texas, National Association............................
4-L (5) Rights Agreement, dated as of March 27, 1997, by and
between Quality Dining, Inc. and KeyCorp Shareholder
Services, Inc., with exhibits..........................
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
No. In
Exhibit This
No. Description Filing
------- ----------- ------
<C> <S> <C>
10-A (6) Form of Burger King Franchise Agreement.................
10-B (6) Form of Chili's Franchise Agreement.....................
10-D (4) Second Amendment to Development Agreement by and between
Southwest Dining, Inc. and Brinker International, Inc.
dated July 26, 1999.....................................
10-E (6) (i) Target Reservation Agreement between Burger King
Corporation and the Registrant dated December 24, 1993;
(ii) Side Letter Agreement to Target Reservation
Agreement dated December 21, 1993.......................
10-F (6) Development Agreement between Chili's, Inc. and the
Registrant dated June 27, 1990..........................
10-G (4) Employment Agreement between the Company and John C.
Firth dated August 24, 1999.............................
10-H (7) *1997 Stock Option and Incentive Plan of the Registrant.
10-I (8) *1993 Stock Option and Incentive Plan, as amended of the
Registrant..............................................
10-J (6) *Outside Directors Stock Option Plan of the Registrant..
10-K (6) Lease Agreement between B.K. Main Street Properties and
the Registrant dated January 1, 1994....................
10-L (7) Schedule of Related Party Leases........................
10-M (6) Form of Related Party Lease.............................
10-O *1999 Outside Directors Stock Option Plan...............
10-P (7) *Letter Agreement between the Registrant and Patrick J.
Barry dated August 30, 1996.............................
10-Q (4) Non Compete Agreement between the Company and James K.
Fitzpatrick dated June 1, 1999..........................
10-R (4) Non Compete Agreement between the Company and Gerald O.
Fitzpatrick dated June 1, 1999..........................
10-S (4) Non Compete Agreement between the Company and David M.
Findlay dated June 1, 1999..............................
10-T (9) First Amendment dated May 2, 1995 to Development
Agreement between Chili's, Inc. and the Registrant dated
June 27, 1990...........................................
10-U (4) Non Compete Agreement between the Company and Robert C.
Hudson dated June 1, 1999...............................
10-V (9) *Employment Agreement between the Registrant and William
R. Schonsheck dated August 14, 1995.....................
10-W (9) Non-Competition Agreement between the Registrant and
William R. Schonsheck dated August 14, 1995.............
10-X (9) Lease Agreement for Farmington Hills #509 between the
Registrant and William R. Schonsheck dated August 14,
1995....................................................
10-Y (9) Lease Agreement for Belleville #4814 between the
Registrant and William R. Schonsheck dated August 14,
1995....................................................
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
No. In
Exhibit This
No. Description Filing
------- ----------- ------
<C> <S> <C>
10-Z (9) Purchase and Sale Agreement between the Registrant and
John D. Fitzpatrick dated July 10, 1995...............
10-AD (10) Priority Charter Agreement between the Registrant and
Burger Management of South Bend #3 Inc., dated
September 1, 1994.....................................
10-AF (10) Lease Agreement between the Registrant and Six Edison
Lakes, L.L.C. dated September 19, 1996................
10-AG (11) Amended and Restated Priority Charter Agreement
between the Registrant and Burger Management of South
Bend #3 Inc., dated October 21, 1998..................
10-AH (4) Agreement for Purchase of Options between the Company
and Daniel B. Fitzpatrick dated June 1, 1999..........
10-AI (4) Agreement for Purchase of Options between the Company
and John C. Firth dated June 1, 1999..................
10-AJ (4) Agreement for Purchase of Options between the Company
and James K. Fitzpatrick dated June 1, 1999...........
10-AK (4) Agreement for Purchase of Options between the Company
and Gerald O. Fitzpatrick dated June 1, 1999..........
10-AL (4) Agreement for Purchase of Options between the Company
and David M. Findlay dated June 1, 1999...............
10-AM (4) Agreement for Purchase of Options between the Company
and Robert C. Hudson dated June 1, 1999...............
10-AN (4) Agreement for Purchase of Options between the Company
and Patrick J. Barry dated June 1, 1999...............
10-AO (4) Agreement for Purchase of Options between the Company
and Marti'n Miranda dated June 1, 1999................
10-AP Form of Agreement for Restricted Shares Granted under
Quality Dining, Inc. 1997 Stock Option and Incentive
Plan dated June 1, 1999 between the Company and
certain executive officers identified on the schedule
attached thereto......................................
10-AQ Severance Agreement and General Release between the
Company and Marti'n Miranda dated January 14, 2000....
10-AW Severance Agreement and General Release between the
Company and Michael J. Wargo dated October 1, 1999....
10-AX (4) Consulting Agreement between the Company and William
R. Schonsheck dated August 13, 1999...................
10-AY Form of Agreement for Restricted Shares Granted under
Quality Dining, Inc. 1997 Stock Option and Incentive
Plan dated December 15, 1999 between the Company and
certain executive officers identified on the schedule
attached thereto......................................
10-AZ Consulting and Resignation Agreement between the
Company and Scott C. Smith dated November 1, 1999.....
21 Subsidiaries of the Registrant........................
23 Written consent of PricewaterhouseCoopers LLP.........
27 Financial Data Schedule...............................
</TABLE>
iii
<PAGE>
- --------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as exhibit number 1 to Amendment No. 5 of
Schedule 13D filed by Nordahl L. Brue, Michael J. Dressell, Steven P.
Schonberg and David T. Austin, dated September 4, 1997, is incorporated
herein by reference.
(2) The copy of this exhibit filed as exhibit number 2 to Amendment No. 5 of
Schedule 13D filed by Nordahl L. Brue, Michael J. Dressell, Steven P.
Schonberg and David T. Austin, dated September 4, 1997, is incorporated
herein by reference.
(3) The copy of this exhibit filed as the same exhibit number to the Company's
Registration Statement on Form 8-A filed on April 1, 1997 is incorporated
herein by reference.
(4) The copy of this exhibit filed as the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended August 1,
1999, is incorporated herein by reference.
(5) The copy of this exhibit filed as Exhibit 10-AO to the Company's
Registration Statement on Form 8-A filed on April 1, 1997 is incorporated
herein by reference.
(6) The copy of this exhibit filed as the same exhibit number to the Company's
Registration Statement on Form S-1 (Registration No. 33-73826) is
incorporated herein by reference.
(7) The copy of this exhibit filed as the same exhibit number to the Company's
Report on Form 10-K for the year ended October 26, 1997 is incorporated
herein by reference.
(8) The copy of this exhibit filed as the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended May 12, 1996
is incorporated herein by reference.
(9) The copy of this exhibit filed as the same exhibit number to the Company's
Registration Statement on Form S-1 (Registration No. 33-96806) is
incorporated herein by reference.
(10) The copy of this exhibit filed as the same exhibit number to the Company's
Report on Form 10-K for the year ended October 27, 1996 is incorporated
herein by reference.
(11) The copy of this exhibit filed is the same exhibit number to the Company's
Report on Form 10-K for the year ended October 25, 1998 is incorporated
herein by reference.
iv
<PAGE>
Exhibit 3-B
BY-LAWS
OF
QUALITY DINING, INC.
(As last amended effective October 20, 1999
to amend Sections 1.2 and 1.3 and January 24, 2000 to amend Section 2.1)
ARTICLE I
Meetings of Shareholders
------------------------
Section 1.1. Annual Meetings. Annual meetings of the shareholders of
the Corporation shall be held on the first Monday of March of each year
commencing in March, 1995, at such hour and at such place within or without the
State of Indiana as shall be designated by the Board of Directors. In the
absence of designation, the meeting shall be held at the principal office of the
Corporation at 11:00 a.m. (local time). The Board of Directors may, by
<PAGE>
resolution, change the date or time of such annual meeting. If the day fixed for
any annual meeting of shareholders shall fall on a legal holiday, then such
annual meeting shall be held on the first following day that is not a legal
holiday.
Section 1.2 Purposes of Annual Meetings
---------------------------
(a) At each annual meeting, the shareholders shall elect one group of
Directors. At any such annual meeting any business properly brought
before the meeting may also be transacted.
(b) To be properly brought before an annual meeting, business must be (i)
specified in the notice of the meeting (or any supplement thereto)
given by or at the direction of the Board of Directors (ii) otherwise
properly brought before the meeting by or at the direction of the
Board of Directors or (iii) otherwise properly brought before the
meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given
written notice thereof, either by personal delivery or by United
States mail, postage prepaid, to the Secretary, at the principal
executive offices of the Company, not less than 70 days nor more than
90 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the date of
the annual meeting is more than 30 days earlier or more than 60 days
later than such anniversary date, notice by the shareholder must be so
delivered or received not earlier than the 90th day prior to such
annual meeting and not later than the close of business on the later
of the 70th day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such
meeting is first made. Any such notice shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (i)
a brief description of the business desired to be brought before the
meeting and the reasons for conducting such business at the meeting
and in the event that such business includes a proposal to amend the
Restated Articles of Incorporation of the Company, the language of the
proposed amendment, (ii) the name and address of the shareholder
proposing such business, (iii) a representation that the shareholder
is a holder of record of shares of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the
meeting to propose such business, (iv) any material interest of the
shareholder to such business, and (v) if the shareholder intends to
solicit proxies in support of such shareholder's proposal, a
representation to that effect. The foregoing notice requirements shall
be deemed satisfied by a shareholder if the shareholder has notified
the Company of his or her intention to present a proposal at an annual
meeting and such shareholder's proposal has been included in a proxy
statement that has been prepared by management of the Company to
solicit proxies for such annual meeting; provided, however, that if
such shareholder does not appear or send a qualified representative to
present such proposal at such annual meeting, the Company need not
present such proposal for a vote at such meeting, notwithstanding that
the proxies in respect of such vote may have been received by the
Company. No business shall be conducted at an annual meeting of
shareholders except in accordance with this Section 1.2(b) and the
chairman of any annual meeting of shareholders may refuse to permit
any business to be brought
<PAGE>
before an annual meeting without compliance with the foregoing procedures
or if the shareholder solicits proxies in support of such shareholder's
proposal without such shareholder having made the representation required
by clause (v) of the preceding sentence.
Section 1.3. Special Meetings. Special meetings of the shareholders of
the Corporation may be called at any time by the Board of Directors or the
Chairman of the Board and shall be called by the Board of Directors if the
Secretary receives written, dated and signed demands for a special meeting,
describing in reasonable detail the purpose or purposes for which it is to be
held, from the holders of shares representing at least 80% of all the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting. If the Secretary receives one (1) or more proper written
demands for a special meeting of shareholders, the Board of Directors may set a
record date for determining shareholders entitled to make such demand. The Board
of Directors or the Chairman of the Board, as the case may be, calling a special
meeting of shareholders shall set the date, time and place of such meeting,
which may be held within or without the State of Indiana.
Section 1.4. Notices. A written notice, stating the date, time, and
place of any meeting of the shareholders, and, in the case of a special meeting,
the purpose or purposes for which such meeting is called, shall be delivered or
mailed by the Secretary of the Corporation, to each shareholder of record of the
Corporation entitled to notice of or to vote at such meeting no fewer than ten
(10) nor more than sixty (60) days before the date of the meeting. In the event
of a special meeting of shareholders required to be called as the result of a
demand therefor made by shareholders, such notice shall be given no later than
the sixtieth (60th) day after the Corporation's receipt of the demand requiring
the meeting to be called. Notice of shareholders' meetings, if mailed, shall be
mailed, postage prepaid, to each shareholder at his address shown in the
Corporation's current record of shareholders.
Notice of a meeting of shareholders shall be given to shareholders not
entitled to vote, but only if a purpose for the meeting is to vote on any
amendment to the Corporation's Restated Articles of Incorporation, merger, or
share exchange to which the Corporation would be a party, sale of the
Corporation's assets, dissolution of the Corporation, or consideration of voting
rights to be accorded to shares acquired or to be acquired in a "control share
acquisition" (as such term is defined in the Indiana Business Corporation Law).
Except as required by the foregoing sentence or as otherwise required by the
Indiana Business Corporation Law or the Corporation's Restated Articles of
Incorporation, notice of a meeting of shareholders is required to be given only
to shareholders entitled to vote at the meeting.
A shareholder or his proxy may at any time waive notice of a meeting
if the waiver is in writing and is delivered to the Corporation for inclusion in
the minutes or filing with the Corporation's records. A shareholder's attendance
at a meeting, whether in person or by proxy, (a) waives objection to lack of
notice or defective notice of the meeting, unless the shareholder or his proxy
at the beginning of the meeting objects to holding the meeting or transacting
business at the meeting, and (b) waives objection to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder or his proxy objects to
considering the matter when it is presented. Each
<PAGE>
shareholder who has, in the manner above provided, waived notice or objection to
notice of a shareholders' meeting shall be conclusively presumed to have been
given due notice of such meeting, including the purpose or purposes thereof.
If an annual or special shareholders' meeting is adjourned to a
different date, time, or place, notice need not be given of the new date, time,
or place if the new date, time, or place is announced at the meeting before
adjournment, unless a new record date is or must be established for the
adjourned meeting.
Section 1.5. Voting. Except as otherwise provided by the Indiana
Business Corporation Law or the Corporation's Restated Articles of
Incorporation, each share of the capital stock of any class of the Corporation
that is outstanding at the record date established for any annual or special
meeting of shareholders and is outstanding at the time of and represented in
person or by proxy at the annual or special meeting, shall entitle the record
holder thereof, or his proxy, to one (1) vote on each matter voted on at the
meeting.
Section 1.6. Quorum. Unless the Corporation's Restated Articles of
Incorporation or the Indiana Business Corporation Law provide otherwise, at all
meetings of shareholders, a majority of the votes entitled to be cast on a
matter, represented in person or by proxy, constitutes a quorum for action on
the matter. Action may be taken at a shareholders' meeting only on matters with
respect to which a quorum exists; provided, however, that any meeting of
shareholders, including annual and special meetings and any adjournments
thereof, may be adjourned to a later date although less than a quorum is
present. Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
Section 1.7. Vote Required To Take Action. If a quorum exists as to a
matter to be considered at a meeting of shareholders, action on such matter
(other than the election of Directors) is approved if the votes properly cast
favoring the action exceed the votes properly cast opposing the action, except
as the Corporation's Restated Articles of Incorporation or the Indiana Business
Corporation Law require a greater number of affirmative votes. Directors shall
be elected by a plurality of the votes properly cast.
Section 1.8. Record Date. Only such persons shall be entitled to
notice of or to vote, in person or by proxy, at any shareholders' meeting as
shall appear as shareholders upon the books of the Corporation as of such record
date as the Board of Directors shall determine, which date may not be earlier
than the date seventy (70) days immediately preceding the meeting. In the
absence of such determination, the record date shall be the fiftieth (50th) day
immediately preceding the date of such meeting. Unless otherwise provided by the
Board of Directors, shareholders shall be determined as of the close of business
on the record date.
<PAGE>
Section 1.9. Proxies. A shareholder may vote his shares either in
person or by proxy. A shareholder may appoint a proxy to vote or otherwise act
for the shareholder (including authorizing the proxy to receive, or to waive,
notice of any shareholders' meeting within the effective period of such proxy)
by signing an appointment form, either personally or by the shareholders'
attorney-in-fact. An appointment of a proxy is effective when received by the
Secretary or other officer or agent authorized to tabulate votes and is
effective for eleven (11) months unless a longer period is expressly provided in
the appointment form. The proxy's authority may be limited to a particular
meeting or may be general and authorize the proxy to represent the shareholder
at any meeting of shareholders held within the time provided in the appointment
form. Subject to the Indiana Business Corporation Law and to any express
limitation on the proxy's authority appearing on the face of the appointment
form, the Corporation is entitled to accept the proxy's vote or other action as
that of the shareholder making the appointment.
Section 1.10. Removal of Directors. Any or all of the members of the
Board of Directors may be removed, for good cause, only at a meeting of the
shareholders called expressly for that purpose, by a vote of the holders of
outstanding shares representing at least sixty-six and two-thirds percent (66-
2/3%) of the votes then entitled to be cast at an election of Directors.
Directors may not be removed in the absence of good cause.
Section 1.11. Written Consents. Any action required or permitted to be
taken at a shareholders' meeting may be taken without a meeting if the action is
taken by all the shareholders entitled to vote on the action. The action must be
evidenced by one (1) or more written consents describing the action taken,
signed by all the shareholders entitled to vote on the action, and delivered to
the Corporation for inclusion in the minutes or filing with the corporate
records. Action taken under this Section 1.10 is effective when the last
shareholder signs the consent, unless the consent specifies a different prior or
subsequent effective date, in which case the action is effective on or as of the
specified date. Such consent shall have the same effect as a unanimous vote of
all shareholders and may be described as such in any document.
Section 1.12. Participation by Conference Telephone. The Chairman of
the Board or the Board of Directors may permit any or all shareholders to
participate in an annual or special meeting of shareholders by, or through the
use of, any means of communication, such as conference telephone, by which all
shareholders participating may simultaneously hear each other during the
meeting. A shareholder participating in a meeting by such means shall be deemed
to be present in person at the meeting.
ARTICLE II
<PAGE>
Directors
---------
Section 2.1. Number and Terms. The business and affairs of the
Corporation shall be managed under the direction of a Board of Directors
consisting of seven (7) directors.
The Directors shall be divided into three (3) groups, with each group
consisting of one-third (1/3) of the total Directors, as near as may be, with
the term of office of the first group to expire at the annual meeting of
shareholders in 1995, the term of office of the second group to expire at the
annual meeting of shareholders in 1996, and the term of office of the third
group to expire at the annual meeting of shareholders in 1997; and at each
annual meeting of shareholders, the Directors chosen to succeed those whose
terms then expire shall be identified as being of the same group as the
Directors they succeed and shall be elected for a term expiring at the third
succeeding annual meeting of shareholders.
Despite the expiration of a Director's term, the Director shall
continue to serve until his successor is elected and qualified, or until the
earlier of his death, resignation, disqualification or removal, or until there
is a decrease in the number of Directors. Any vacancy occurring in the Board of
Directors, from whatever cause arising, shall be filled by selection of a
successor by a majority vote of the remaining members of the Board of Directors
(although less than a quorum). The term of a Director elected or selected to
fill a vacancy shall expire at the end of the term for which such Director's
predecessor was elected, or if the vacancy arises because of an increase in the
size of Board of Directors, at the end of the term specified at the time of
election or selection.
Nominations of persons for election as Directors may be made by the
Board or by any shareholder who is a shareholder of record at the time of giving
of the notice of nomination provided for in this Section 2.1 and who is entitled
to vote for the election of Directors. Any shareholder of record entitled to
vote for the election of Directors at a meeting may nominate a person or persons
for election as Directors only if written notice of such shareholder's intent to
make such nomination is given in accordance with the procedures for bringing
business before the meeting set forth in Section 1.2(b) of these By-Laws, either
by personal delivery or by United States mail, postage prepaid, to the Secretary
not later than (i) with respect to an election to be held at an annual meeting
of shareholders, not less than 70 nor more than 90 days in advance of the
anniversary date of the immediately preceding annual meeting; provided, however,
that in the event that the date of the annual meeting is more than 30 days
earlier or more than 60 days later than such anniversary date, notice by the
shareholder must be so delivered or received not earlier than the 90th day prior
to such annual meeting and not later than the close of business on the later
<PAGE>
of the 70th day prior to such annual meeting or the 10th day following the day
on which public announcement of the date of such meeting is first made, and (ii)
with respect to an election to be held at a special meeting of shareholders for
the election of Directors, not earlier than the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meting or the 10th day following the day on which public
announcement of the date of the special meeting is first made and of the
nominees to be elected at such meeting. Each such notice shall set forth: (a)
the name and address of the shareholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
shareholder is a holder of record of stock of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (d) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board; (e) the consent of each nominee to
serve as a Director if so elected; and (f) if the shareholder intends to solicit
proxies in support of such shareholder's nominee(s), a representation to that
effect. The chairman of any meeting of shareholders to elect Directors and the
Board may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure or if the shareholder solicits proxies
in support of such shareholder's nominee(s) without such shareholder having made
the representation required by clause (f) of the preceding sentence.
The Directors and each of them shall have no authority to bind the
Corporation except when acting as a Board.
Section 2.2. Quorum and Vote Required To Take Action. A majority of
the whole Board of Directors shall be necessary to constitute a quorum for the
transaction of any business, except the filling of vacancies. If a quorum is
present when a vote is taken, the affirmative vote of a majority of the
Directors present shall be the act of the Board of Directors, unless the act of
a greater number is required by the Indiana Business Corporation Law, the
Corporation's Restated Articles of Incorporation or these By-Laws.
Section 2.3. Annual and Regular Meetings. The Board of Directors shall
meet annually, without notice, immediately following the annual meeting of the
shareholders, for the purpose of transacting such business as properly may come
before the meeting. Other regular meetings of the Board of Directors, in
addition to said annual meeting, shall be held on such dates, at such times and
at such places as shall be fixed by resolution adopted by the Board of Directors
and specified in a notice of each such regular meeting, or otherwise
communicated to
<PAGE>
the Directors. The Board of Directors may at any time alter the date for the
next regular meeting of the Board of Directors.
Section 2.4. Special Meetings. Special meetings of the Board of
Directors may be called by any member of the Board of Directors upon not less
than twenty-four (24) hours' notice given to each Director of the date, time,
and place of the meeting, which notice need not specify the purpose or purposes
of the special meeting. Such notice may be communicated in person (either in
writing or orally), by telephone, telegraph, teletype, or other form of wire or
wireless communication, or by mail, and shall be effective at the earlier of the
time of its receipt or, if mailed, five (5) days after its mailing. Notice of
any meeting of the Board may be waived in writing at any time if the waiver is
signed by the Director entitled to the notice and is filed with the minutes or
corporate records. A Director's attendance at or participation in a meeting
waives any required notice to the Director of the meeting, unless the Director
at the beginning of the meeting (or promptly upon the Director's arrival)
objects to holding the meeting or transacting business at the meeting and does
not thereafter vote for or assent to action taken at the meeting.
Section 2.5. Written Consents. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
the action is taken by all members of the Board. The action must be evidenced by
one (1) or more written consents describing the action taken, signed by each
Director, and included in the minutes or filed with the corporate records
reflecting the action taken. Action taken under this Section 2.5 is effective
when the last Director signs the consent, unless the consent specifies a
different prior or subsequent effective date, in which cases the action is
effective on or as of the specified date. A consent signed under this Section
2.5 shall have the same effect as a unanimous vote of all members of the Board
and may be described as such in any document.
Section 2.6. Participation by Conference Telephone. The Board of
Directors may permit any or all Directors to participate in a regular or special
meeting by, or through the use of, any means of communication, such as
conference telephone, by which all Directors participating may simultaneously
hear each other during the meeting. A Director participating in a meeting by
such means shall be deemed to be present in person at the meeting.
Section 2.7. Executive Committee. The Board of Directors shall appoint
up to six (6) members to an Executive Committee. The Executive Committee shall,
subject to the restrictions of Section 2.9, be authorized to exercise the
authority of the full Board of Directors at any times other than during regular
or special meetings of the Board of Directors. All actions taken by the
Executive Committee shall be reported at the first regular meeting of the Board
of Directors following such actions. Members of the Executive Committee shall
serve at the pleasure of the Board of Directors.
<PAGE>
Section 2.8. Other Committees. (a) The Board of Directors may create
one (1) or more committees in addition to the Executive Committee and appoint
members of the Board of Directors to serve on them, by resolution of the Board
of Directors adopted by a majority of all the Directors in office when the
resolution is adopted. The committee may exercise the authority of the Board of
Directors to the extent specified in the resolution. Each committee may have one
(1) or more members, and all the members of such committee shall serve at the
pleasure of the Board of Directors.
Section 2.9. Limitations on Committees; Notice, Quorum and Voting.
----------- ----------------------------------------------------
(a) Neither the Executive Committee nor any other committee hereafter
established may:
(1) authorize dividends or other distributions, except a committee may
authorize or approve a reacquisition of shares if done according to a
formula or method prescribed by the Board of Directors;
(2) approve or propose to shareholders action that is required to be
approved by shareholders;
(3) fill vacancies on the Board of Directors or on any of its committees;
(4) except as permitted under Section 2.9(a)(7) below, amend the
Corporation's Restated Articles of Incorporation under IC 23-1-38-2;
(5) adopt, amend, repeal, or waive provisions of these By-Laws;
(6) approve a plan of merger not requiring shareholder approval; or
(7) authorize or approve the issuance or sale or a contract for sale of
shares, or determine the designation and relative rights, preferences,
and limitations of a class or series of shares, except the Board of
Directors may authorize a committee (or an executive officer of the
Corporation designated by the Board of Directors) to take the action
described in this Section 2.9(a)(7) within limits prescribed by the
Board of Directors.
(b) Except to the extent inconsistent with the resolutions creating a
committee, Sections 2.1 through 2.6 of these By-Laws, which govern meetings,
action without meetings, notice and waiver of notice, quorum and voting
requirements and telephone participation in meetings of the Board of Directors,
apply to each committee and its members as well.
<PAGE>
ARTICLE III
Officers
--------
Section 3.1. Designation, Selection and Terms. The officers of the
Corporation shall consist of the Chairman of the Board, the President, the Chief
Financial Officer, the Treasurer and the Secretary. The Board of Directors may
also elect Vice Presidents, Assistant Secretaries and Assistant Treasurers, and
such other officers or assistant officers as it may from time to time determine
by resolution creating the office and defining the duties thereof. In addition,
the Chairman of the Board or the President may, by a certificate of appointment
creating the office and defining the duties thereof delivered to the Secretary
for inclusion with the corporate records, from time to time create and appoint
such assistant officers as they deem desirable. The officers of the Corporation
shall be elected by the Board of Directors (or appointed by the Chairman of the
Board or the President as provided above) and need not be selected from among
the members of the Board of Directors, except for the Chairman of the Board and
the President who shall be members of the Board of Directors. Any two (2) or
more offices may be held by the same person. All officers shall serve at the
pleasure of the Board of Directors and, with respect to officers appointed by
the Chairman of the Board or the President, also at the pleasure of such
officers. The election or appointment of an officer does not itself create
contract rights.
Section 3.2. Removal. The Board of Directors may remove any officer at
any time with or without cause. An officer appointed by the Chairman of the
Board or the President may also be removed at any time, with or without cause,
by either of such officers. Vacancies in such offices, however occurring, may be
filled by the Board of Directors at any meeting of the Board of Directors (or by
appointment by the Chairman of the Board or the President, to the extent
provided in Section 3.1 of these By-Laws).
Section 3.3. Chairman of the Board. The Chairman of the Board shall be
the chief executive and principal policymaking officer of the Corporation.
Subject to the authority of the Board of Directors, he shall formulate the major
policies to be pursued in the administration of the Corporation's affairs. He
shall study and make reports and recommendations to the Board of Directors with
respect to major problems and activities of the Corporation and shall see that
the established policies are placed into effect and carried out under the
direction of the President. The Chairman of the Board shall, if present, preside
at all meetings of the shareholders and of the Board of Directors.
Section 3.4. Co-Chairman of the Board. The Co-Chairman of the Board
shall not be an officer of the Corporation, but shall have such power and
perform such duties as the Board of Directors or the Chairman of the Board may,
from time to time, prescribe. In the absence of
<PAGE>
the Chairman of the Board, or at the request of the Chairman of the Board, the
Co-Chairman of the Board shall preside at meetings of the shareholders and of
the Board of Directors.
Section 3.5. President. Subject to the provisions of Section 3.3, the
President shall be the chief operating officer of the Corporation, shall
exercise the powers and perform the duties which ordinarily appertain to that
office and shall manage and operate the business and affairs of the Corporation
in conformity with the policies established by the Board of Directors and by the
Chairman of the Board, or as may be provided for in these By-Laws. In connection
with the performance of his duties, he shall keep the Chairman of the Board
fully informed as to all phases of the Corporation's activities. In the absence
of the Chairman of the Board, the President shall preside at meetings of the
shareholders and of the Board of Directors.
Section 3.6. Chief Financial Officer. The Chief Financial Officer
shall be the chief financial officer of the Corporation and shall perform all of
the duties customary to that office. He shall be responsible for all of the
Corporation's financial affairs, subject to the supervision and direction of the
Chairman of the Board and the President, and shall have and perform such further
powers and duties as the Board of Directors may, from time to time, prescribe
and as the Chairman of the Board or the President may, from time to time,
delegate to him.
Section 3.7. Vice Presidents. Each Vice President shall have such
powers and perform such duties as the Board of Directors may, from time to time,
prescribe and as the Chairman of the Board or the President may, from time to
time, delegate to him.
Section 3.8. Treasurer. The Treasurer shall perform all of the duties
customary to that office, shall be the chief accounting officer of the
Corporation and shall be responsible for maintaining the Corporation's
accounting books and records and preparing its financial statements, subject to
the supervision and direction of the Chief Financial Officer and other superior
officers within the Corporation. He shall also be responsible for causing the
Corporation to furnish financial statements to its shareholders pursuant to IC
23-1-53-1.
Section 3.9. Assistant Treasurer. In the absence or inability of the
Treasurer, the Assistant Treasurer, if any, shall perform only such duties as
are specifically assigned to him, in writing, by the Board of Directors, the
Chairman of the Board, the President, the Chief Financial Officer, or the
Treasurer.
Section 3.10. Secretary. The Secretary shall be the custodian of the
books, papers, and records of the Corporation and of its corporate seal, if any,
and shall be responsible for seeing that the Corporation maintains the records
required by IC 23-1-52-1 (other than accounting records) and that the
Corporation files with the Indiana Secretary of State the annual report required
by IC 23-1-53-3. The Secretary shall be responsible for preparing minutes of the
<PAGE>
meetings of the shareholders and of the Board of Directors and for
authenticating records of the Corporation, and he shall perform all of the other
duties usual in the office of Secretary of a corporation.
Section 3.11. Assistant Secretary. In the absence or inability of the
Secretary, the Assistant Secretary, if any, shall perform only such duties as
are provided herein or specifically assigned to him, in writing, by the Board of
Directors, the Chairman of the Board, the President, or the Secretary.
Section 3.12. Salary. The Board of Directors may, at its discretion,
from time to time, fix the salary of any officer by resolution included in the
minute book of the Corporation.
ARTICLE IV
Checks
------
All checks, drafts, or other orders for payment of money shall be
signed in the name of the Corporation by such officers or persons as shall be
designated from time to time by resolution adopted by the Board of Directors and
included in the minute book of the Corporation; and in the absence of such
designation, such checks, drafts, or other orders for payment shall be signed by
the Chairman, the President, the Vice President-Finance or the Treasurer.
ARTICLE V
Loans
-----
Such of the officers of the Corporation as shall be designated from
time to time by resolution adopted by the Board of Directors and included in the
minute book of the Corporation shall have the power, with such limitations
thereon as may be fixed by the Board of Directors, to borrow money in the
Corporation's behalf, to establish credit, to discount bills and papers, to
pledge collateral, and to execute such notes, bonds, debentures, or other
evidences of indebtedness, and such mortgages, trust indentures, and other
instruments in connection therewith, as may be authorized from time to time by
such Board of Directors.
ARTICLE VI
Execution of Documents
----------------------
<PAGE>
The Chairman of the Board, the President or any other officer
authorized by the Board of Directors may, in the Corporation's name, sign all
deeds, leases, contracts, or similar documents unless otherwise directed by the
Board of Directors or otherwise provided herein or in the Corporation's Restated
Articles of Incorporation, or as otherwise required by law.
ARTICLE VII
Stock
-----
Section 7.1. Execution. Certificates for shares of the capital stock
of the Corporation shall be signed by the Chairman of the Board or the President
and by the Secretary and the seal of the Corporation (or a facsimile thereof),
if any, may be thereto affixed. Where any such certificate is also signed by a
transfer agent or a registrar, or both, the signatures of the officers of the
Corporation may be facsimiles. The Corporation may issue and deliver any such
certificate notwithstanding that any such officer who shall have signed, or
whose facsimile signature shall have been imprinted on, such certificate shall
have ceased to be such officer.
Section 7.2. Contents. Each certificate issued after the adoption of
these By-Laws shall state on its face the name of the Corporation and that it is
organized under the laws of the State of Indiana, the name of the person to whom
it is issued, and the number and class of shares and the designation of the
series, if any, the certificate represents, and shall state conspicuously on its
front or back that the Corporation will furnish the shareholder, upon his
written request and without charge, a summary of the designations, relative
rights, preferences, and limitations applicable to each class and the variations
in rights, preferences, and limitations determined for each series (and the
authority of the Board of Directors to determine variations for future series).
Section 7.3. Transfers. Except as otherwise provided by law or by
resolution of the Board of Directors, transfers of shares of the capital stock
of the Corporation shall be made only on the books of the Corporation by the
holder thereof, in person or by duly authorized attorney, on payment of all
taxes thereon and surrender for cancellation of the certificate or certificates
for such shares (except as hereinafter provided in the case of loss,
destruction, or mutilation of certificates) properly endorsed by the holder
thereof or accompanied by the proper evidence of succession, assignment, or
authority to transfer, and delivered to the Secretary or an Assistant Secretary.
Section 7.4. Stock Transfer Records. There shall be entered upon the
stock records of the Corporation the number of each certificate issued, the name
and address of the registered holder of such certificate, the number, kind, and
class of shares represented by such certificate, the date of issue, whether the
shares are originally issued or transferred, the registered
<PAGE>
holder from whom transferred, and such other information as is commonly required
to be shown by such records. The stock records of the Corporation shall be kept
at its principal office, unless the Corporation appoints a transfer agent or
registrar, in which case the Corporation shall keep at its principal office a
complete and accurate shareholders' list giving the names and addresses of all
shareholders and the number and class of shares held by each. If a transfer
agent is appointed by the Corporation, shareholders shall give written notice of
any changes in their addresses from time to time to the transfer agent.
Section 7.5. Transfer Agents and Registrars. The Board of Directors
may appoint one or more transfer agents and one or more registrars and may
require each stock certificate to bear the signature of either or both.
Section 7.6. Loss, Destruction, or Mutilation of Certificates. The
holder of any of the capital stock of the Corporation shall immediately notify
the Corporation of any loss, destruction, or mutilation of the certificate
therefor, and the Board of Directors may, in its discretion, cause to be issued
to him a new certificate or certificates of stock, upon the surrender of the
mutilated certificate, or, in the case of loss or destruction, upon satisfactory
proof of such loss or destruction. The Board of Directors may, in its
discretion, require the holder of the lost or destroyed certificate or his legal
representative to give the Corporation a bond in such sum and in such form, and
with such surety or sureties as it may direct, to indemnify the Corporation, its
transfer agents, and registrars, if any, against any claim that may be made
against them or any of them with respect to the capital stock represented by the
certificate or certificates alleged to have been lost or destroyed, but the
Board of Directors may, in its discretion, refuse to issue a new certificate or
certificates, save upon the order of a court having jurisdiction in such
matters.
Section 7.7. Form of Certificates. The form of the certificates for
shares of the capital stock of the Corporation shall conform to the requirements
of Section 7.2 of these By-Laws and be in such printed form as shall from time
to time be approved by resolution of the Board of Directors.
ARTICLE VIII
Seal
----
The corporate seal of the Corporation shall, if the Corporation elects
to have one, be in the form of a disc, with the name of the Corporation and
"INDIANA" on the periphery thereof and the word "SEAL" in the center.
<PAGE>
ARTICLE IX
Miscellaneous
-------------
Section 9.1. Indiana Business Corporation Law. The provisions of the
Indiana Business Corporation law, as amended, applicable to all matters relevant
to, but not specifically covered by, these By-Laws are hereby, by reference,
incorporated in and made a part of these By-Laws.
Section 9.2. Fiscal Year. The fiscal year of the Corporation shall
end on the last Sunday in October of each year.
Section 9.3. Election to be governed by Indiana Code (S) 23-1-43.
Effective upon the registration of the Corporation's common stock under Section
12 of the Securities Exchange Act of 1934, as amended, the Corporation shall be
governed by the provisions of IC 23-1-43 regarding business combinations.
Section 9.4. Control Share Acquisition Statute. The provisions of IC
23-1-42 shall apply to the acquisition of shares of the Corporation.
Section 9.5. Redemption of Shares Acquired in Control Share
Acquisitions. If and whenever the provisions of IC 23-1-42 apply to the
Corporation, any or all control shares acquired in a control share acquisition
shall be subject to redemption by the Corporation, if either:
(a) no acquiring person statement has been filed with the Corporation
with respect to such control share acquisition in accordance with
IC 23-1-42-6, or
(b) the control shares are not accorded full voting rights by the
Corporation's shareholders as provided in IC 23-1-42-9.
A redemption pursuant to Section 9.5(a) may be made at any time during the
period ending sixty (60) days after the last acquisition of control shares by
the acquiring person. A redemption pursuant to Section 9.5(b) may be made at any
time during the period ending two (2) years after the shareholder vote with
respect to the granting of voting rights to such control shares. Any redemption
pursuant to this Section 9.5 shall be made at the fair value of the control
shares and pursuant to such procedures for such redemption as may be set forth
in these By-Laws or adopted by resolution of the Board of Directors.
<PAGE>
As used in this Section 9.5, the terms "control shares," "control
share acquisition," "acquiring person statement," and "acquiring person" shall
have the meanings ascribed to such terms in IC 23-1-42.
Section 9.6. Amendments. These By-Laws may be rescinded, changed, or
amended, and provisions hereof may be waived, at any meeting of the Board of
Directors by the affirmative vote of a majority of the entire number of
Directors at the time, except as otherwise required by the Corporation's
Articles of Incorporation or by the Indiana Business Corporation Law.
Section 9.7. Definition of Articles of Incorporation. The term
"Articles of Incorporation" as used in these By-Laws means the Amended or
Restated Articles of Incorporation of the Corporation as from time to time are
in effect.
<PAGE>
Exhibit 10-O
QUALITY DINING, INC.
1999 OUTSIDE DIRECTORS STOCK OPTION PLAN
1. Purpose. The purpose of the Plan is to advance the interests of the
Company and its stockholders by encouraging increased Common Stock ownership by
members of the Board who are not employees of the Company or any of its
Subsidiaries, in order to promote long-term stockholder value through directors'
continuing ownership of the Common Stock.
2. Definitions. Unless the context clearly indicates otherwise, the
following terms, when used in the Plan, shall have the meanings set forth below.
"Board" shall mean the Board of Directors of the Company, as it may from
time to time be constituted.
"Common Stock" shall mean the Common Stock, without par value, of the
Company, and shall include the Common Stock as it may be changed from time
to time as described in Paragraph 7 of the Plan.
"Company" shall mean Quality Dining, Inc., and any successor by merger or
consolidation.
"Eligible Director" shall mean a member of the Board who is not at the time
of receipt of an Option an employee of the Company or any of its
Subsidiaries.
"Fair Market Value" of the Common Stock of the Company means the last sale
price on the applicable date (or if there is no reported sale on such date,
on the last preceding date on which any reported sale occurred) of one
share of Common Stock on the principal exchange on which such shares are
listed, or if not listed on any exchange, on the NASDAQ National Market
System or any similar system then in use, or if the shares of Common Stock
are not listed on the NASDAQ National Market System, the mean between the
closing high bid and low asked quotations of one such share on the date in
question as reported by NASDAQ or any similar system then in use, or, if no
such quotations are available, the Fair Market Value on such date of one
share of Common Stock as the Board shall determine.
<PAGE>
"Grantee" shall mean an Eligible Director who has been granted an Option.
"Option" shall mean a non-qualified option to purchase Common Stock held in
the treasury granted by the Company pursuant to the terms of the Plan.
"Plan" shall mean the Quality Dining, Inc. 1999 Outside Directors Stock
Option Plan, as set forth herein and as amended from time to time.
"Subsidiary" shall mean any corporation at least 50% of whose outstanding
voting stock is owned, directly or indirectly, by the Company.
3. Administration. The Plan shall be administered by the Board. The
Board shall have all the powers vested in it by the terms of the Plan, such
powers to include authority (within the limitations described herein) to
prescribe the form of the agreements embodying Options. The Board shall have
the power to construe the Plan, to determine all questions arising thereunder,
and to adopt and amend such rules and regulations for the administration of the
Plan as it may deem desirable. Any decision of the Board in the administration
of the Plan, as described herein, shall be final and conclusive. No member of
the Board shall be liable for anything done or omitted to be done by him or by
any other member of the Board in connection with the Plan, except for his own
willful misconduct or as expressly provided by statute.
4. Participation. Each Eligible Director shall be eligible to receive
Option grants in accordance with Paragraphs 5, 6, and 7 below.
5. Grants Under the Plan. (a) Options may be granted under the Plan,
subject to the terms, conditions and restrictions specified in Paragraphs 6 and
7 below. There may be issued under the Plan pursuant to the exercise of Options
an aggregate of not more than 80,000 shares of Common Stock, subject to
adjustment as provided in Paragraph 7 below. Shares of Common Stock that are
the subject of an Option but not purchased prior the expiration of the Option,
shall thereafter be considered unissued for purposes of the maximum number of
shares that may be issued under the Plan, and may again be the subject of Option
grants under the Plan. If at any time, the shares remaining available for
Option grants are not sufficient to make all Option grants then required to be
made under the Plan, no Option grants shall be made.
(b) An Eligible Director to whom an Option is provided to be granted or is
granted under the Plan (and any person succeeding to such an Eligible Director's
right pursuant to the Plan), shall have no rights as a stockholder with respect
to any shares of Common Stock issuable pursuant to any such Option until such
Option is exercised. Except as provided in Paragraph 7 below, no adjustment
shall be made for dividends, distributions, or other rights
<PAGE>
(whether ordinary or extraordinary, and whether in cash, securities, or other
property) for which the record date is prior to the date an Option is exercised.
Except as expressly provided for in the Plan, no Eligible Director or other
person shall have any claim or right to be granted an Option. Neither the Plan
nor any action taken hereunder shall be construed as giving any Eligible
Director any right to be retained in the service of the Company.
6. Option Grants. On May 1, 2000, each Eligible Director on such date
shall be automatically granted an option to purchase 4,000 shares of Common
Stock (subject to adjustment as provided in Paragraph 7). On May 1 of each
year, commencing May 1, 2001, each Eligible Director on such date shall be
automatically granted an Option to purchase 2,000 shares of Common Stock
(subject to adjustment as provided in Paragraph 7). Each Option shall be
evidenced by an agreement in such form as the Board shall prescribe from time to
time in accordance with the Plan and shall comply with the following terms and
conditions and such additional terms and conditions not inconsistent with the
Plan as may from time to time be prescribed by the Board.
(a) The Option exercise price per share shall be one hundred percent
(100%) of the Fair Market Value of a share of Common Stock on the date the
Option is granted.
(b) The Option shall not be transferable by the Grantee otherwise than by
will or the laws of descent and distribution, and shall be exercisable
during his lifetime only by him.
(c) The Option shall not be exercisable before the expiration of six
months from the date it is granted and after the expiration of ten years
from the date it is granted.
(d) Payment of the Option price shall be made at the time the Option is
exercised, and shall be made in United States dollars by cash or check.
(e) An Option shall not be exercisable unless the person exercising the
Option has been, at all times during the period beginning with the date of
grant of the Option and ending on the date of such exercise, in continuous
service on the Board, except that
(i) if any Grantee of an Option shall die or become
permanently disabled or shall retire with the consent of the Board,
holding an Option that has not expired and has not been fully
exercised, he or his executor, administrators, heirs, or distributees,
as the case may be, may, at any time within one year after the date
<PAGE>
of such event (but in no event after the Option has expired under the
provisions of subparagraph 6(c) above), exercise the Option with
respect to any shares as to which the Grantee could have exercised the
Option at the time of his death, disability, or retirement
<PAGE>
(ii) if a Grantee shall cease to serve as a director of the Company for any
reason other than those set forth in 6(e)(i) above, while holding an Option that
has not expired and has not been fully exercised, the Grantee, at any time
within three months of the date he ceased to be such an Eligible Director (but
in no event after the Option has expired under the provisions of subparagraph
6(c) above), may exercise the Option with respect to any shares of Common Stock
as to which he could have exercised the Option on the date he ceased to be such
an Eligible Director.
(f) Each Grantee of an Option shall pay to the Company, or make
arrangements satisfactory to the Board regarding the payment of, any
federal, state, or local taxes of any kind required by law to be withheld
with respect to the shares of Common Stock as to which an Option is being
exercised.
7. Dilution and Other Adjustments. In the event of any change in
the outstanding Common Stock by reason of any stock split, stock dividend,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares or other similar event, the number or kind of shares that may be
issued under the Plan pursuant to Paragraphs 5 and 6 above, the number or kind
of shares subject to any outstanding Option, and the Option price per share
under any outstanding Option, shall be automatically adjusted so that the
proportionate interest of the Eligible Directors or of the Grantee shall be
maintained as before the occurrence of such event. Any adjustment in
outstanding Options shall be made without change in the total Option exercise
price applicable to the unexercised portion of such Options and with a
corresponding adjustment in the Option exercise price per share. Any adjustment
permitted by this Paragraph shall be conclusive and binding for all purposes of
the Plan.
8. Miscellaneous Provisions. (a) An Eligible Director's rights and
interests under the Plan may not be assigned or transferred in whole or in part
either directly or by operation of law or otherwise (except in the event of a
participant's death, by will or the laws of descent and distribution),
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy, or in any other manner, and no such right or
interest of any Eligible Director in the Plan shall be subject to any obligation
or liability of such Eligible Director.
(b) If the shares of Common Stock that are the subject of an Option
are not registered under the Securities Act of 1933, as amended, pursuant to an
effective registration statement, the Grantee, if the Board shall deem it
advisable, may be required to represent and agree in writing (i) that any shares
of Common Stock acquired by such Grantee pursuant to the Plan will not be sold
except pursuant to an exemption from registration under said Act and (ii) that
such Grantee is acquiring such shares of Common Stock for his own account and
not with a view to the distribution thereof. No shares of Common Stock shall be
issued hereunder unless counsel for the Company shall be satisfied that such
issuance will be in compliance with applicable federal, state and other
securities laws.
<PAGE>
(c) By accepting any Options under the Plan, each Grantee and each
person claiming under or through him shall be conclusively deemed to have
indicated his acceptance and ratification of and consent to, the terms and
conditions of the Plan and any action taken under the Plan by the Company or the
Board.
9. Amendment. The Board may at any time and from time to time and
in any respect amend or modify this Plan.
10. Termination. This Plan shall terminate upon the earlier of the
following dates or events to occur:
(a) Upon the adoption of a resolution of the Board terminating the
Plan; or
(b) Upon the purchase upon exercise of Options of all the shares of
Common Stock the subject of Options under Paragraph 5 and 6, as adjusted
pursuant to Paragraph 7.
No termination of the Plan shall materially and adversely affect any of the
rights or obligations of any Grantee, without his consent, under any Option
theretofore granted under the Plan.
<PAGE>
Exhibit 10-AP
AGREEMENT FOR RESTRICTED SHARES
GRANTED UNDER QUALITY DINING, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
This Agreement has been entered into as of the 1st day of June, 1999
between Quality Dining, Inc., an Indiana corporation (the "Company") and [insert
name of Employee], an employee of the Company (the "Employee"), pursuant to the
Company's 1997 Stock Option and Incentive Plan (the "Plan") and evidences and
sets forth certain terms of the grant to the Employee pursuant to the Plan of an
aggregate of [insert total number of restricted shares] Restricted Shares as of
the date of this Agreement. Capitalized terms used herein and not defined herein
have the meanings set forth in the Plan.
Section 1. Receipt of Plan; Restricted Shares and this Agreement
Subject to Plan. The Employee acknowledges receipt of a copy of the Plan. This
Agreement and the Restricted Shares granted to Employee are subject to the terms
and conditions of the Plan, all of which are incorporated herein by reference.
Section 2. Restricted Period; Lapse of Restrictions and Vesting. The
Restricted Shares granted in this Agreement shall vest seven (7) years from the
date of this Agreement. Notwithstanding the foregoing, of the Restricted Shares
granted to the Employee, the restrictions on the specified portions shall lapse
and such portion of the shares shall become fully vested and not subject to
forfeiture to the Company as follows:
(a) [insert one-third of total grant] Restricted Shares shall vest
when the Market Value of the Company's Common Stock for ten out of 20
consecutive trading days is at least $4.00.
(b) [insert one-third of total grant] Restricted Shares shall vest
when the Market Value of the Company's Common Stock for ten out of 20
consecutive trading days is at least $5.00.
(c) [insert one-third of total grant] Restricted Shares shall vest
when the Market Value of the Company's Common Stock for ten out of 20
consecutive trading days is at least $7.00.
(d) All of the Restricted Shares granted to Employee under this
Agreement shall immediately vest upon a Change in Control, whether or not
the event constituting the Change in Control was approved in advance by the
Board.
Section 3. Certificates for Shares. Each certificate representing
the Restricted
<PAGE>
Shares granted to the Employee shall be registered in the name of the Employee
and deposited by the Employee, together with a stock power endorsed in blank,
with the Company and shall bear the following (or a similar) legend:
<PAGE>
"The transferability of this certificate and the shares of stock represented
hereby are subject to the terms and conditions (including forfeiture) contained
in the 1997 Stock Option and Incentive Plan of Quality Dining, Inc. and an
Agreement for Restricted Shares entered into between the registered owner and
Quality Dining, Inc. Copies of such Plan and Agreement are on file in the office
of the Secretary of Quality Dining, Inc."
Upon the lapse of restrictions on any portion of such Restricted
Shares, the Company shall promptly deliver a stock certificate for such portion
of shares to the Employee.
Section 4. Transferability. Until such time as the restrictions on
the Restricted Shares granted to Employee have lapsed and such shares are no
longer subject to forfeiture to the Company, the Employee shall not sell,
assign, transfer, pledge or otherwise encumber (a "Transfer") such Restricted
Shares. In addition, if any portion of the Restricted Shares vest pursuant to
the accelerated vesting provisions of Section 2 above, the Employee shall not
Transfer such portion of the shares for a period of one year from the date of
accelerated vesting; provided, however, that this lockup period shall
immediately terminate upon the death of employee or upon the occurrence of any
event constituting a Change in Control under the Plan, whether or not the Board
has approved such occurrence.
Section 5. Termination. If a participant ceases Continuous Service
for any reason, including death, before the Restricted Shares have vested, the
Participant's rights with respect to the unvested portion of the Restricted
Shares shall terminate and be returned to the Company.
Section 6. 83(b) Election. The Employee agrees not to make any
election under Section 83(b) of the Code with respect to any Restricted Shares
granted under this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by the
undersigned thereunto duly authorized as of the date first above written.
QUALITY DINING, INC.
__________________________________________________
By: John C. Firth
Its: Executive Vice President and General Counsel
__________________________________________________
[insert name of Employee]
<PAGE>
SCHEDULE
June 1, 1999
<TABLE>
<S> <C>
Daniel B. Fitzpatrick 20,000
John C. Firth 18,668
Patrick J. Barry 14,080
James K. Fitzpatrick 14,652
Gerald O. Fitzpatrick 14,366
David M. Findlay 9,505
Lindley E. Burns 8,434
Robert C. Hudson 7,290
Stephen Marquette 4,932
Joseph Olin 7,434
James Kochan 6,218
William Lee 6,718
Christopher Collier 4,188
Thomas D. Hanson 5,790
Marti'n Miranda 4,553
Jeanne Yoder 3,577
</TABLE>
<PAGE>
Exhibit 10-AQ
RESIGNATION AGREEMENT AND GENERAL RELEASE
This Resignation Agreement and General Release ("Agreement") is entered into
this 14 day of January, 2000 between Marti'n Miranda ("Employee") and Quality
Dining, Inc. ("Employer").
WHEREAS, Employee is currently employed by Employer;
WHEREAS, Employee and Employer have agreed that Employee shall resign his
employment with the Employer; and
WHEREAS, Employee and Employer desire to provide for an orderly transition of
Employee's responsibilities and to provide for certain termination benefits
to which Employee would not otherwise be entitled and resolve any differences
or disputes now existing or which may arise hereafter with respect to
Employee's employment and the termination thereof.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, Employee and Employer agree as follows:
1. Employee hereby tenders his resignation which resignation is hereby
accepted by Employer to be effective at the earlier of (a) the time of
Employer's normal close of business on March 31, 2000, or (b) such
earlier date selected by Employee and communicated to Employer by no less
than fourteen (14) days prior written notice (the "Severance Date").
2. Employee acknowledges that the Employer does not offer any severance or
termination benefits and Employee is not entitled to receive any
severance or termination benefits except as expressly provided herein
below:
a) Employer will continue to pay Employee at Employee's current salary
through and including the Severance Date in accordance with
Employer's normal payroll practices;
b) Employer will pay Employee for an additional ninety (90) days
commencing on the day after the Severance Date and concluding on the
ninetieth (90th) day thereafter (the "Benefit Period") in the form of
salary continuation at Employee's current salary, in accordance with
Employer's normal payroll practices; and
c) Employer will continue to provide coverage to Employee under its
existing health, vision and dental plans on the same terms as
currently exist through
<PAGE>
the earlier of the end of the Benefit Period or the date Employee
becomes (or could become) covered under any health plan of another
employer.
3. Employee will cease to participate in the Employer sponsored Non-
Qualified Deferred Compensation Plan as of the Severance Date and no
further contributions by the Employer or the Employee will be made to
said Plan with respect to any period after the Severance Date.
4. Employee acknowledges and agrees that he is not entitled to and shall not
receive any compensation for any accrued sick days, vacation days,
personal days, bonus or otherwise.
5. Employee acknowledges and agrees that any and all options issued to him
under the Employer's Stock Option and Incentive Plans shall expire as of
the Severance Date and any and all restricted shares that have been
issued to Employee which have not vested on or before the Severance Date
shall be forfeited by Employee as of the Severance Date.
6. From the date of this Agreement through the Severance Date, Employee
shall, among other things, assist in the transition of his
responsibilities to other employees of Employer and shall continue to
fulfill the responsibilities of the full service accounting manager until
a replacement is hired at which time he shall assist in the transition of
those responsibilities to the new employee.
7. Employee may revoke this Resignation Agreement and General Release 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 Resignation Agreement and General
Release." The revocation must be personally delivered, or mailed and
postmarked, within seven (7) days of execution of this Resignation
Agreement and General Release. This Resignation Agreement and General
Release shall not become effective or enforceable until the revocation
period has expired.
8. Employee shall not disparage Employer or its subsidiaries, affiliates,
officers, directors, shareholders, employees, agents or services to any
third party, either orally or in writing.
9. Employee individually and on behalf of his heirs, executors,
administrators and assigns hereby voluntarily, completely,
unconditionally and irrevocably discharges and releases Employer, its
subsidiaries, 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,
<PAGE>
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
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.
10. For a period of two (2) years from and after the Severance Date, Employee
shall not, directly or indirectly (a) induce or influence or attempt to
induce or influence, any person who is an employee of the Company (or who
had been an employee of the Company at any time during the preceding 12
months) to terminate their employment with the Company 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).
11. On or before the Severance Date, Employee shall 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.
12. Employee shall 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.
13. Employee covenants and agrees to keep the terms of this Agreement
confidential and shall not be disclosed by Employee to any persons other
than Employee's counsel, accountant and members of Employee's immediate
family.
14. Employee acknowledges and agrees 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 all consideration described
above, as a prerequisite to asserting or bringing any such claims,
charges or actions.
15. 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
<PAGE>
of any nature. Employee acknowledges and agrees that Employee has not
relied upon any representations of Employer except as set forth in this
Agreement.
16. 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.
17. Employee further acknowledges and agrees:
(a.) THAT EMPLOYEE HAS READ THIS AGREEMENT;
(b.) THAT THIS AGREEMENT IS BEING ENTERED INTO FREELY AND VOLUNTARILY;
(c.) THAT EMPLOYEE UNDERSTANDS THIS 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;
(d.) THAT EMPLOYEE CONSENTS TO EVERYTHING IN THIS AGREEMENT;
(e.) THAT EMPLOYEE HAS BEEN ADVISED AND HAS BEEN GIVEN THE OPPORTUNITY TO
CONSULT WITH AN ATTORNEY BEFORE EXECUTING THIS AGREEMENT;
(f.) THAT EMPLOYEE HAS BEEN GIVEN WHAT EMPLOYEE CONSIDERS TO BE A
SUFFICIENT PERIOD OF TIME TO REVIEW AND CONSIDER THIS RESIGNATION
AGREEMENT AND GENERAL RELEASE 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.
(g.) THAT THE PROVISIONS OF THIS RESIGNATION AGREEMENT AND GENERAL
RELEASE MAY NOT BE AMENDED, WAIVED, CHANGED OR MODIFIED EXCEPT BY AN
INSTRUMENT IN WRITING SIGNED BY AN AUTHORIZED REPRESENTATIVE OF BOTH
EMPLOYEE AND EMPLOYER.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
Employee: Employer:
Quality Dining, Inc.
/s/ Marti'n Miranda By: /s/ John C. Firth
- ------------------- -----------------
Marti'n Miranda John C. Firth
Executive Vice President and General
Dated: January 14, 2000 Counsel
Dated: January 14, 2000
<PAGE>
Exhibit 10-AW
SEVERANCE AGREEMENT AND GENERAL RELEASE
This Severance Agreement and General Release ("Agreement") is entered into
this 1st day of October,1999 between Michael J. Wargo ("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 and Employer have agreed to terminate the existing
employment relationship; and
WHEREAS, Employee and Employer desire to resolve any differences and disputes
now pending or which may arise in the future with respect to Employee's
employment and the termination thereof.
THEREFORE, Employee and Employer acknowledge and voluntarily agree as
follows:
1. Employee's termination of employment with Employer will be effective at
the time of Employer's normal close of business on October 1, 1999 (the
"Severance 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 understands and agrees that he will not receive
severance benefits unless he signs this Severance Agreement and General
Release. However, in consideration of Employee's promises set forth
below:
a) Employer will pay Employee severance pay in the total amount of
Thirty Thousand Two Hundred Eighty-eight and 52/100 Dollars
($30,288.52), payable in the form of salary continuation through
December 31, 1999 in accordance with Employer's normal payroll
practices; and
b) 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 Severance Date; and
c) Employee may continue to make deferrals into the Company's Non-
Qualified Deferred Compensation Plan through December 31, 1999 but
the Company will not make any "matches" in respect of any deferrals
subsequent to the Severance Date.
<PAGE>
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 as expressly provided in the preceding sub-paragraphs
(a), (b) and (c).
3. Employee understands that he may revoke this Severance Agreement and
General Release 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 Severance
Agreement and General Release." The revocation must be personally
delivered, or mailed and postmarked, within seven (7) days of execution
of this Severance Agreement and General Release. This Severance Agreement
and General Release shall not become effective or enforceable until the
revocation period has expired.
4. 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.
5. 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.
6. Employee covenants and agrees that for a period of five (5) years from
and after the Severance 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 Company (or who had been an employee of the Company
at any time during the preceding 12
<PAGE>
months) to terminate their employment with the Company 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).
7. On or before the Severance 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.
8. 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.
9. The parties agree that the terms of this Agreement will remain
confidential and will not be disclosed by Employee to any persons other
than Employee's counsel, accountant and members of Employee's immediate
family.
10. Employer will not contest Employee's application for unemployment
compensation benefits, provided Employee does not make application for
such unemployment compensation benefits before the end of the severance
period.
11. Employee understands that this Severance Agreement and General Release
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 Severance Agreement and
General Release.
12. Employee agrees and understands 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.
13. 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.
14. 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.
<PAGE>
15. By signing this Agreement, Employee further acknowledges and agrees:
(a.) THAT EMPLOYEE HAS READ IT;
(b.) THAT THIS AGREEMENT IS BEING ENTERED INTO FREELY AND VOLUNTARILY;
(c.) 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;
(d.) THAT EMPLOYEE CONSENTS TO EVERYTHING IN IT;
(e.) THAT EMPLOYEE HAS BEEN ADVISED AND HAS BEEN GIVEN THE OPPORTUNITY
TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT;
(f.) THAT EMPLOYEE HAS BEEN GIVEN WHAT EMPLOYEE CONSIDERS TO BE A
SUFFICIENT PERIOD OF TIME TO REVIEW AND CONSIDER THIS SEVERANCE
AGREEMENT AND GENERAL RELEASE 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.
(g.) THAT THE PROVISIONS OF THIS SEVERANCE AGREEMENT AND GENERAL RELEASE
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:
Michael J. Wargo Quality Dining, Inc.
/s/ Michael J. Wargo By: /s/ John C. Firth
- -------------------- -----------------
Employee Signature John C. Firth
Executive Vice President &
General Council
<PAGE>
Exhibit 10.AY
AGREEMENT FOR RESTRICTED SHARES
GRANTED UNDER QUALITY DINING, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
This Agreement has been entered into as of the 15th day of December,
1999 between Quality Dining, Inc., an Indiana corporation (the "Company") and
[insert name of Employee], an employee of the Company (the "Employee"), pursuant
to the Company's 1997 Stock Option and Incentive Plan (the "Plan") and evidences
and sets forth certain terms of the grant to the Employee pursuant to the Plan
of an aggregate of [insert total number of shares] Restricted Shares as of the
date of this Agreement. Capitalized terms used herein and not defined herein
have the meanings set forth in the Plan.
Section 1. Receipt of Plan; Restricted Shares and this Agreement
Subject to Plan. The Employee acknowledges receipt of a copy of the Plan. This
Agreement and the Restricted Shares granted to Employee are subject to the terms
and conditions of the Plan, all of which are incorporated herein by reference.
Section 2. Restricted Period; Lapse of Restrictions and Vesting. The
Restricted Shares granted in this Agreement shall vest seven (7) years from the
date of this Agreement. Notwithstanding the foregoing, of the Restricted Shares
granted to the Employee, the restrictions on the specified portions shall lapse
and such portion of the shares shall become fully vested and not subject to
forfeiture to the Company as follows:
(a) [insert one-third of total grant] Restricted Shares shall vest
when the Market Value of the Company's Common Stock for ten out of 20
consecutive trading days is at least $3.00.
(b) [insert one-third of total grant] Restricted Shares shall vest
when the Market Value of the Company's Common Stock for ten out of 20
consecutive trading days is at least $4.00.
(c) [insert one-third of total grant] Restricted Shares shall vest
when the Market Value of the Company's Common Stock for ten out of 20
consecutive trading days is at least $6.00.
(d) All of the Restricted Shares granted to Employee under this
Agreement shall immediately vest upon a Change in Control, whether or not
the event constituting the Change in Control was approved in advance by the
Board.
<PAGE>
Section 3. Certificates for Shares. Each certificate representing
the Restricted Shares granted to the Employee shall be registered in the name of
the Employee and deposited by the Employee, together with a stock power endorsed
in blank, with the Company and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the 1997 Stock Option and Incentive Plan of
Quality Dining, Inc. and an Agreement for Restricted Shares entered into
between the registered owner and Quality Dining, Inc. Copies of such Plan
and Agreement are on file in the office of the Secretary of Quality Dining,
Inc."
Upon the lapse of restrictions on any portion of such Restricted
Shares, the Company shall promptly deliver a stock certificate for such portion
of shares to the Employee.
Section 4. Transferability. Until such time as the restrictions on
the Restricted Shares granted to Employee have lapsed and such shares are no
longer subject to forfeiture to the Company, the Employee shall not sell,
assign, transfer, pledge or otherwise encumber (a "Transfer") such Restricted
Shares. In addition, if any portion of the Restricted Shares vest pursuant to
the accelerated vesting provisions of Section 2 above, the Employee shall not
Transfer such portion of the shares for a period of one year from the date of
accelerated vesting; provided, however, that this lockup period shall
immediately terminate upon the death of employee or upon the occurrence of any
event constituting a Change in Control under the Plan, whether or not the Board
has approved such occurrence.
Section 5. Termination. If a participant ceases Continuous Service
for any reason, including death, before the Restricted Shares have vested, the
Participant's rights with respect to the unvested portion of the Restricted
Shares shall terminate and be returned to the Company.
Section 6. 83(b) Election. The Employee agrees not to make any
election under Section 83(b) of the Code with respect to any Restricted Shares
granted under this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by the
undersigned thereunto duly authorized as of the date first above written.
QUALITY DINING, INC.
__________________________________________________
By: John C. Firth
Its: Executive Vice President and General Counsel
--------------------------------------------------
[insert name of Employee]
<PAGE>
SCHEDULE
December 15, 1999
<TABLE>
<S> <C>
John C. Firth 12,868
Patrick J. Barry 10,580
James K. Fitzpatrick 11,152
Gerald O. Fitzpatrick 10,866
David M. Findlay 6,756
Lindley E. Burns 6,434
Robert C. Hudson 5,791
Stephen Marquette 4,933
Joseph Olin 6,434
James Kochan 4,718
William Lee 4,718
Christopher Collier 3,689
Thomas D. Hanson 5,791
Marti'n Miranda 4,053
Jeanne Yoder 3,577
</TABLE>
<PAGE>
Exhibit 10-AZ
CONSULTING AND RESIGNATION AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made to be effective as
of the 1st day of November, 1999, by and between Scott C. Smith ("Consultant")
and Quality Dining, Inc., an Indiana corporation ("Company").
Recitals
--------
1. Consultant has been employed by the Company as an employee at
will.
2. Consultant desires to resign his employment with the Company as of
October 31, 1999 (the "Resignation Date").
3. Consultant is, and will continue to be, knowledgeable concerning
the Company's business and through years of experience has gained valuable
knowledge and expertise in the full service restaurant business.
4. The Company desires to retain Consultant as a consultant and
Consultant desires to be so retained, upon the terms and conditions set forth in
this Agreement.
Agreement
---------
NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained herein, the parties hereto agree as follows:
SECTION 1
---------
Term
----
Section 1.1. Term. The term ("Term") of this Agreement shall
commence on November 1, 1999, and shall continue through October 31, 2000.
SECTION 2
---------
Resignation
-----------
Section 2.1. Resignation. Consultant hereby resigns his employment
with the Company effective as of the Resignation Date.
Section 2.2 Stock Options. Consultant acknowledges that any and all
stock options to acquire shares of the Company's common stock are "underwater"
and hereby agrees that all such options shall be terminated as of the
Resignation Date.
<PAGE>
SECTION 3
---------
Consulting Services
-------------------
Section 3.1. Creation of the Relationship. Upon the terms of this
Agreement, and in recognition of Consultant's extensive experience and
expertise, the Company hereby agrees to retain Consultant, and Consultant hereby
agrees to be retained by the Company, during the Term of this Agreement and on
the terms and conditions set forth herein, in the capacity of a consultant to
the Company.
Section 3.2. Duties of Consultant. During the Term hereof,
Consultant agrees to render service to the Company as a consultant from time to
time as may be reasonably requested by the Company, including but not limited
to, advising the Company with respect to (i) the operations, marketing and
development of the Company's full service restaurant businesses, (ii) assisting
the Company in evaluating any potential full service restaurant acquisitions,
divestitures, joint ventures or the like, and (iii) such other matters as may
reasonably be requested by the Company. There shall not be a prescribed minimum
or maximum number of hours to be devoted by Consultant in fulfillment of
Consultant's duties hereunder. Consultant may provide services to the Company
under this Agreement from Consultant's home or business location by telephone or
in such other manner as is acceptable to Consultant and the Company. The
relationship of Consultant to the Company hereunder shall be that of independent
contractor and not as employee.
SECTION 4
---------
Compensation
------------
Section 4.1. Compensation. Consultant shall be entitled to a
consulting fee of $25,000 for the Term of this Agreement, payable in arrears in
equal monthly installments of $2,083.33 on the last day of each month commencing
November 30, 1999, with the last installment due on October 31, 2000. In the
event of Consultant's death during the Term of this Agreement, Consultant shall
be entitled only to the compensation provided for herein through the date of his
death.
SECTION 5
---------
Non-Competition Provisions
--------------------------
Section 5.1. Trade Secrets. For purposes of this Agreement, the term
"Trade Secret" includes not only that confidential or proprietary information
defined as a "Trade Secret" under the Indiana Trade Secrets Act, I.C. (S)24-2-3-
1 et seq. (the "Act"), but also that information which possesses independent
economic benefit to the Company (including without limitation customer lists)
and, from not being generally known by other persons who can obtain economic
benefit from its disclosure or use. Consultant covenants that Consultant will,
at all times, conform Consultant's conduct to the requirements of the Act and
will not misappropriate (e.g., use or disclose to any third party) any Trade
Secret of the Company. Consultant recognizes that the penalties for a Trade
Secret violation may include disgorgement of profits, payment of royalties,
compensatory damages, punitive damages, and attorney's fees. Consultant
understands that (a) Consultant may ask the Company to render an opinion as to
whether the Company considers certain knowledge to be a Trade Secret, if such a
question should arise, and (b) upon termination of this Agreement for any
reason, Consultant will continue to be prohibited from any time thereafter from
misappropriating any Trade Secret of the Company.
Section 5.2. Confidentiality. During the Term of this Agreement,
Consultant shall keep confidential all Trade Secrets of the Company; maintain in
trust, as the Company's property, all information concerning the Company's
business; and return to the Company, all documents that belong to the Company
and any and all copies thereof in Consultant's possession or under Consultant's
control when this Agreement terminates, or at any time upon request by the
Company.
<PAGE>
Section 5.4. Covenant Not to Raid Employees. Until October 31, 2001,
Consultant shall not, directly or indirectly, employ, engage for personal
service or favor (whether or not compensated), solicit for employment or advise
or recommend to any other person that such person employ, or solicit for
employment, any individual now or hereafter employed by the Company, or any
affiliate of the Company; nor induce or entice any such employee to leave his or
her employment; nor adversely interfere with past, present or prospective
relationships between the Company and any of their clients, customers,
suppliers, dealers, employees, agents or other persons or entities with which
any of such companies deals. Notwithstanding anything to the contrary in this
Agreement, the restrictions set forth in this Section 5.4 above will not apply
with regard to any individual who has not been employed by the Company for 12
months or more.
Section 5.4. Remedies. Consultant acknowledges and agrees that the
Company would suffer irreparable harm as a result of any breach of the covenants
contained herein and, therefore, agrees that, in the event of any actual or
threatened breach of any such covenant, in addition to any other right or remedy
which the Company may have (including monetary damages), the Company shall be
entitled to specific enforcement through injunctive or other equitable relief
obtained from a court with appropriate equity jurisdiction.
SECTION 6
---------
Miscellaneous
-------------
Section 6.1. Release. In consideration of the mutual agreements and
covenants set forth herein, the receipt and sufficiency of which Consultant
hereby acknowledges, Consultant and his heirs, executors, administrators and
assigns hereby voluntarily, completely, unconditionally and irrevocably
discharges and releases Company, its subsidiaries, parent, affiliates, officers,
directors, employees, agents, predecessors, employee benefit plans and their
fiduciaries, and other representatives of Company, 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 Consultant's employment with Company 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.
Section 6.2. Benefit and Burden. Consultant acknowledges that the
covenants of Consultant are unique and personal; accordingly, Consultant may not
assign any of Consultant's rights or delegate any of Consultant's duties or
obligations under this Agreement. The rights and obligations of the Company
under this Agreement shall inure to the benefit of, and be binding upon, the
successors and assigns of the Company. The rights and obligations of Consultant
under this Agreement shall inure to the benefit of and be binding upon the
heirs, legal representatives, successors and permitted assigns of Consultant.
Section 6.3. Nature of Relationship. The relationship of Consultant
to the Company hereunder shall be that of an independent contractor, and not as
an employee, a partner or joint venturer of the Company for any purpose.
Consultant shall not have any right to make contracts or commitments for or on
behalf of the Company, or to act in any manner as a representative of the
Company.
Section 6.4. Notices. Any notices to be given hereunder shall be
deemed sufficiently given when in writing and when (a) actually served on the
party to be notified, or (b) deposited in a receptacle of the United States
mail, certified or registered, postage prepaid, addressed appropriately as
follows:
<PAGE>
If to Company at: Daniel B. Fitzpatrick
Quality Dining, Inc.
4220 Edison Lakes Parkway
Mishawaka, IN 46545
If to Consultant at: Scott C. Smith
6601 W. Plano Parkway, #1626
Plano, TX 75093
Such addresses may be changed by any party by written advice given pursuant to
this Section.
Section 6.5. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana and all disputes
regarding this Agreement shall be brought in the State of Indiana.
Section 6.6. No Waiver. No failure on the part of any party at any
time to require the performance by any other party of any term of this Agreement
shall be taken or held to be a waiver of such term or in any way affect such
parties' right to enforce such term, and no waiver on the part of any party of
any term of this Agreement shall be deemed a continuing waiver or a waiver of
any other term hereof or the breach thereof.
Section 6.7. Modifications. This Agreement may not be amended,
modified, or supplemented without the written agreement of the parties at the
time of such amendment, modification, or supplement.
Section 6.8. Captions. The captions in this Agreement are for
convenience and identification purposes only, are not an integral part of this
Agreement, and are not to be considered in the interpretation of any part
hereof.
Section 6.9. Attorneys' Fees. In any action at law or in equity to
enforce any of the provisions or rights under this Agreement, the unsuccessful
party or parties to such litigation, as determined by the court in a final
judgment or decree, shall pay the successful party or parties all costs,
expenses, and reasonable attorneys' fees incurred by the successful party or
parties (including without limitation, costs, expenses, and fees on any
appeals), and if the successful party or parties recovers judgment in any such
action or proceeding, such costs, expenses, or attorneys' fees shall be included
as part of the judgment.
Section 6.10. Severability. The invalidity or unenforceability of
any particular provision, or part thereof, of this Agreement shall not affect
the other provisions, and this Agreement shall continue in all respects as if
such invalid or unenforceable provision had not been contained herein. If any
provision of this Agreement is in conflict with any applicable statute, rule, or
other law, it shall be deemed, if possible, to be modified or altered to conform
thereto or, if not possible, to be omitted herefrom.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
QUALITY DINING, INC.
By: /s/ John C. Firth
------------------------------------------
John C. Firth, Executive Vice President
/s/ Scott C. Smith
------------------------------------------
Scott C. Smith
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
STATE OF
SUBSIDIARY INCORPORATION DBA
OR ORGANIZATION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BKCAP Corporation Delaware Burger King restaurant
- -------------------------------------------------------------------------------------------------------------------------
BKCAP, LLC Delaware Burger King restaurant
- -------------------------------------------------------------------------------------------------------------------------
BKCN Corporation Delaware Burger King restaurant
- -------------------------------------------------------------------------------------------------------------------------
BKCN, LLC Delaware Burger King restaurant
- -------------------------------------------------------------------------------------------------------------------------
Bravokilo, Inc. Indiana Burger King restaurant
- -------------------------------------------------------------------------------------------------------------------------
Chili's Of Christiana, Inc. Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
Chili's Of Mount Laurel, Inc. New Jersey Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
Full Service Dining, Inc. Indiana Spageddie's restaurant
- -------------------------------------------------------------------------------------------------------------------------
GAGHC, Inc. Delaware Grady's American Grill restaurant
- -------------------------------------------------------------------------------------------------------------------------
GAGLC, Inc. Texas Grady's American Grill restaurant
- -------------------------------------------------------------------------------------------------------------------------
Grady's American Grill Restaurant Corporation Indiana Grady's American Grill restaurant
- -------------------------------------------------------------------------------------------------------------------------
Grady's American Grill, L.P. Texas Grady's American Grill restaurant
- -------------------------------------------------------------------------------------------------------------------------
Grady's, Inc. Tennessee Grady's American Grill restaurant
- -------------------------------------------------------------------------------------------------------------------------
GRAYCAP Corporation Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
GRAYCAP, LLC Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
GRAYCN Corporation Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
GRAYCN, LLC Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
Grayling Corporation Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
Grayling Management Corporation Virginia Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
Southwest Dining, Inc. Indiana Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
SWCAP Corporation Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
SWCAP, LLC Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
SWCN Corporation Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
SWCN, LLC Delaware Chili's restaurant
- -------------------------------------------------------------------------------------------------------------------------
Tri-State Construction Co. Inc. Indiana Tri-State Construction Co., Inc.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Quality Dining, Inc. on Form S-8 (File No. 33-84698 and File No. 333-38571) of
our report dated December 15, 1999, on our audits of the consolidated financial
statements of Quality Dining, Inc. as of October 31, 1999 and October 25, 1998,
and for the fifty-three week period ended October 31, 1999, and fifty-two week
periods ended October 25, 1998 and October 26, 1997, which report is included in
the Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> OCT-26-1998
<PERIOD-END> OCT-31-1999
<CASH> 1,019
<SECURITIES> 0
<RECEIVABLES> 12,240
<ALLOWANCES> 0
<INVENTORY> 1,876
<CURRENT-ASSETS> 9,258
<PP&E> 182,372
<DEPRECIATION> 54,023
<TOTAL-ASSETS> 189,037
<CURRENT-LIABILITIES> 27,220
<BONDS> 108,855
0
0
<COMMON> 28
<OTHER-SE> 48,974
<TOTAL-LIABILITY-AND-EQUITY> 189,037
<SALES> 230,751
<TOTAL-REVENUES> 230,751
<CGS> 67,732
<TOTAL-COSTS> 221,142
<OTHER-EXPENSES> 43
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,709
<INCOME-PRETAX> (1,142)
<INCOME-TAX> 815
<INCOME-CONTINUING> (1,957)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,957)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
