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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended August 3, 2003
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______________ to ____________________
Commission file number 0-23420
QUALITY DINING, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1804902
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4220 Edison Lakes Parkway, Mishawaka, Indiana 46545
(Address of principal executive offices and zip code)
(574) 271-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __X____ No ________
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes No x
The number of shares of the registrant's common stock outstanding as of
September 15, 2003 was 11,598,447.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 3, 2003
INDEX
Page
PART I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 24
Item 4. Controls and Procedures 24
Part II - Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 25
Part I. FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Twelve Weeks Ended Forty Weeks Ended
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
Revenues: -------- -------- -------- --------
Burger King $ 27,851 $ 30,327 $ 87,244 $ 95,404
Chili's Grill & Bar 19,028 17,527 61,160 57,776
Grady's American Grill 4,069 7,113 15,162 33,060
Italian Dining Division 3,864 3,676 13,672 12,813
-------- -------- -------- --------
Total revenues 54,812 58,643 177,238 199,053
Operating expenses: -------- -------- -------- --------
Restaurant operating expenses:
Food and beverage 14,807 16,103 48,172 55,791
Payroll and benefits 16,092 16,962 52,218 58,630
Depreciation and amortization 2,274 2,414 7,850 8,062
Other operating expenses 15,066 15,089 48,361 51,353
-------- -------- -------- --------
Total restaurant operating expenses 48,239 50,568 156,601 173,836
-------- -------- -------- --------
Income from restaurant operations 6,573 8,075 20,637 25,217
General and administrative 3,837 4,531 12,774 14,796
Impairment of assets and
facility closing costs - (211) 4,411 (7)
Amortization of intangibles 100 98 302 326
-------- -------- -------- --------
Operating income 2,636 3,657 3,150 10,102
-------- -------- -------- --------
Other income (expense):
Recovery of note receivable - - 3,459 -
Stock purchase expense (1,294) - (1,294) -
Interest expense (1,641) (1,881) (5,847) (6,596)
Gain (loss) on sale of property
and equipment (24) 269 (28) 439
Other income (expense), net 123 (62) 832 665
-------- -------- -------- --------
Total other income (expense), net (2,836) (1,674) (2,878) (5,492)
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (200) 1,983 272 4,610
Income tax provision 187 318 800 1,061
Income (loss) from continuing -------- -------- -------- --------
operations (387) 1,665 (528) 3,549
Income from discontinued
operations, net of tax 254 53 295 334
-------- -------- -------- --------
Net income (loss) $ (133) $ 1,718 $ (233) $ 3,883
======== ======== ======== ========
Basic net income (loss) per share:
Continuing operations (0.03) 0.15 (0.05) 0.32
Discontinued operations 0.02 - 0.03 0.03
-------- -------- -------- --------
Basic net income (loss) per share $ (0.01) $ 0.15 $ (0.02) $ 0.35
======== ======== ======== ========
Diluted net income (loss) per share:
Continuing operations (0.03) 0.15 (0.05) 0.31
Discontinued operations 0.02 - 0.03 0.03
-------- -------- -------- --------
Diluted net income (loss) per share $ (0.01) $ 0.15 $ (0.02) $ 0.34
======== ======== ======== ========
Weighted average shares outstanding:
Basic 11,311 11,270 11,311 11,227
======== ======== ======== ========
Diluted 11,311 11,617 11,311 11,476
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
August 3, October 27,
2003 2002
ASSETS ---------- -----------
Current assets:
Cash and cash equivalents $ 667 $ 1,021
Accounts receivable 1,471 1,615
Inventories 1,768 1,843
Deferred income taxes 2,487 2,356
Assets held for sale 880 3,673
Other current assets 1,935 2,222
-------- --------
Total current assets 9,208 12,730
-------- --------
Property and equipment, net 106,247 107,586
-------- --------
Other assets:
Deferred income taxes 7,513 7,644
Trademarks, net 1,508 5,317
Franchise fees and development fees, net 8,954 9,379
Goodwill 7,960 7,960
Liquor licenses, net 2,644 2,653
Other 3,366 3,672
-------- --------
Total other assets 31,945 36,625
-------- --------
Total assets $147,400 $156,941
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized leases
and long-term debt $ 2,158 $ 1,978
Accounts payable 6,031 9,884
Accrued liabilities 20,741 20,295
-------- --------
Total current liabilities 28,930 32,157
Long-term debt 88,301 95,305
Capitalized leases principally to related
parties, less current portion 3,284 3,726
-------- --------
Total liabilities 120,515 131,188
-------- --------
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued - -
Common stock, without par value: 50,000,000
shares authorized; 12,957,447 and 12,969,672
shares issued, respectively 28 28
Additional paid-in capital 238,700 237,434
Accumulated deficit (207,619) (207,386)
Unearned compensation (601) (700)
-------- --------
30,508 29,376
Treasury stock, at cost, 1,360,573
and 1,360,573 shares, respectively (3,623) (3,623)
-------- --------
Total stockholders' equity 26,885 25,753
-------- --------
Total liabilities and stockholders' equity $147,400 $156,941
======== ========
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Forty Weeks Ended
August 3, August 4,
2003 2002
Cash flows from operating activities: -------- --------
Net income (loss) $ (233) $ 3,883
Income from discontinued operations (295) (334)
Adjustments to reconcile net income to net
cash provided by operating activities of
continuing operations:
Depreciation and amortization of
property and equipment 7,596 7,805
Amortization of other assets 1,219 1,232
Impairment of assets 4,411 -
Stock purchase expense 1,294 -
Gain on sale of property and equipment (187) (439)
Amortization of unearned compensation 71 267
Changes in current assets and current liabilities:
Net increase in current assets 506 132
Net increase (decrease) in current liabilities (3,407) 620
------- -------
Net cash provided by operating
activities of continuing operations 10,975 13,166
------- -------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 3,665 11,457
Purchase of property and equipment (7,841) (10,036)
Purchase of other assets (501) (787)
Other 255 (16)
------- -------
Net cash provided by (used for) investing activities (4,422) 618
------- -------
Cash flows from financing activities:
Borrowings of long-term debt 36,689 77,590
Repayment of long-term debt (43,567) (91,139)
Payment for stock subject to redemption - (264)
Loan financing fees - (469)
Repayment of capitalized lease obligations (388) (369)
------- -------
Net cash used by financing activities (7,266) (14,651)
------- -------
Cash provided by discontinued operations 359 448
------- -------
Net decrease in cash and cash equivalents (354) (419)
Cash and cash equivalents, beginning of period 1,021 2,070
------- -------
Cash and cash equivalents, end of period $ 667 $ 1,651
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Note 1: Description of Business.
Quality Dining, Inc. (the "Company") operates four distinct restaurant
concepts. It owns the Grady's American Grill(r) and two Italian Dining
concepts and operates Burger King(r) restaurants and Chili's Grill & Bar(r)
("Chili's") 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 (TM) Italian Kitchen ("Papa
Vino's"). As of August 3, 2003, the Company operated 177 restaurants,
including 118 Burger King restaurants, 37 Chili's, 13 Grady's American
Grill restaurants, three Spageddies and six Papa Vino's.
Note 2: Summary of Significant Accounting Policies.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Quality Dining, Inc. and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for annual
financial statement reporting purposes. In the opinion of management,
all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation have been included.
Operating results for the 40-week period ended August 3, 2003 are not
necessarily indicative of the results that may be expected for the 52-
week year ending October 26, 2003.
These financial statements should be read in conjunction with the
Company's audited financial statements for the fiscal year ended October
27, 2002 included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
As a result of the adoption of Statement of Financial Accounting
Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company has classified the revenues, expenses
and related assets and liabilities of three Grady's American Grill
restaurants that were sold in 2003 and one Grady's American Grill that
is held for sale, as discontinued operations in the accompanying
consolidated financial statements.
Intangible Assets
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 Brinker were deferred and expensed
in the period the related restaurants were opened. Franchise fees are
being amortized on a straight-line basis, generally over 20 years.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Trademarks - The Company owns the trademarks for its Grady's American
Grill, Spageddies Italian Kitchen and Papa Vino's Italian Kitchen.
During the second quarter of fiscal 2003 the Company recorded an
impairment charge of $4,411,000, consisting of a reduction in the net
book value of the Grady's American Grill trademark of $2,882,000 and in
the net book value of certain fixed assets of $1,529,000. The net book
value of the Grady's American Grill trademark was $1,427,000 as of
August 3, 2003. During the second quarter of fiscal 2003 the Company
reviewed the useful life of the Grady's American Grill trademark and
determined that the remaining useful life should be reduced from 15
years to five years. In determining the fair value of the impaired
assets, the Company relied primarily on the discounted cash flow
analyses that incorporated an investment horizon of five years and
utilized a risk adjusted discount factor.
Below are the gross carrying amount and accumulated amortization of the
trademarks, franchise fees and development fees as of August 3, 2003.
Amortized Intangible Assets
- ---------------------------
As of August 3, 2003
--------------------------------
Gross Carrying Accumulated
Amount Amortization
($000s) ($000s)
Amortized intangible assets: ------- -------
Trademarks $ 2,015 $ (507)
Franchise fees and development fees 14,762 (5,808)
------- -------
Total $ 16,777 $ (6,315)
======= =======
The Company's intangible asset amortization expense for the twelve week
and the forty week periods ending August 3, 2003 was $241,000 and
$841,000, respectively, as compared to $266,000 and $887,000 for the
comparable periods in fiscal 2002. The estimated intangible amortization
expense for each of the next five years is $1,042,000.
Goodwill - The Company operates four distinct restaurant concepts in the
food-service industry. It owns the Grady's American Grill and two
Italian Dining concepts and operates Burger King restaurants and Chili's
Grill & Bar restaurants as a franchisee of Burger King Corporation and
Brinker International, Inc., respectively. The Company has identified
each restaurant concept as an operating segment based on management
structure and internal reporting. The Company has two operating
segments with goodwill - Chili's Grill & Bar and Burger King. The
Company had a total of $7,960,000 in goodwill as of August 3, 2003. The
Chili's Grill and Bar operating segment had $6,902,000 of goodwill and
the Burger King operating segment had $1,058,000 of goodwill.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Stock Options
The Company accounts for all of its stock-based compensation awards 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, the Company's net earnings (loss) and net earnings (loss) per share
would have been the pro forma amounts indicated below:
Twelve Weeks Ended Forty Weeks Ended
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except per share amounts)
- ---------------------------------------
Net income (loss), as reported $ (133) $ 1,718 $ (233) $ 3,883
Deduct: Total stock option based employee
compensation expense determined by using
the Black-Scholes option pricing model,
net of related tax effects $ (8) $ (11) $ (28) $ (37)
----- ----- ----- -----
Net income (loss), pro forma $ (141) $ 1,707 $ (261) $ 3,846
===== ===== ===== =====
Basic net income (loss) per common share,
as reported $(0.01) $ 0.15 $ (0.02) $ 0.35
===== ===== ===== =====
Basic net income (loss) per common share,
pro forma $(0.01) $ 0.10 $( 0.02) $ 0.35
===== ===== ===== =====
Stock Purchase Expense
During the third quarter of fiscal 2003, the Chairman and Chief
Executive Officer of the Company Daniel B. Fitzpatrick, purchased all
1,148,014 shares of the Company's common stock, owned by NBO, LLC
("NBO"), for approximately $4.1 million. The Company was required to
take a one-time non-cash charge of $1,294,000, which is equal to the
premium to the market price that Mr. Fitzpatrick paid for the shares.
There was also a corresponding increase in the Company's additional paid-
in capital of $1,294,000.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
New Pronouncements
Consolidation of Variable Interest Entities: In January 2003, the FASB
issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities. The objective of this interpretation is to provide
guidance on how to identify a variable interest entity (VIE) and
determine when the assets, liabilities, noncontrolling interests, and
results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate the entity if the
company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the
entity's expected residual returns, if they occur. FIN 46 also requires
additional disclosures by primary beneficiaries and other significant
variable interest holders. FIN 46 is effective for periods after June
15, 2003 for variable interest entities in which the Company holds a
variable interest it acquired before February 1, 2003. The Company is
still assessing the impact, if any, the interpretation will have on the
Company's financial statements.
Reclassifications
To enhance comparative data, management concluded during the third
quarter of fiscal 2003 that sales of promotional items, consisting
primarily of toys accompanying kids meals in the quick service segment,
should be reported as revenues. Previously, these items were immaterial
in amount and the value attributable to them was recorded as an offset
to other restaurant operating expense. Amounts reported in prior
periods have been reclassified to conform to the current quarter's
presentation. For all periods presented, the reclassifications result
in an increase of approximately 1% in consolidated revenue and
restaurant operating expenses as compared to amounts previously
reported. Such reclassifications had no impact on previously reported
income from restaurant operations, operating income, net income, or
stockholders' equity.
Note 3: Acquisitions and Dispositions.
During the first forty weeks of fiscal 2003, the Company sold three of
its Grady's American Grill restaurants. One restaurant was sold during
the second quarter of fiscal 2003 and two were sold in the third quarter
of fiscal 2003. Subsequent to August 3, 2003, the Company sold one
additional Grady's American Grill restaurant.
As discussed in Note 2, discontinued operations includes the revenues
and expenses of the four Grady's American Grill restaurants that either
had been sold or were being held for sale as of August 3, 2003. The
decision to dispose of the four locations reflects the Company's ongoing
process of evaluating the performance of the Grady's American Grill
restaurants and using the proceeds from dispositions to reduce debt.
Assets held for sale includes property, plant and equipment totaling
$880,000 as of August 3, 2003. As of August 3, 2003, the net book value
of Grady's American Grill's tangible long-lived and intangible assets
was $11,692,000 and $1,427,000, respectively.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Net income from discontinued operations for the periods ended August 3,
2003, and August 4, 2002 were made up of the following components:
Twelve Weeks Ended Forty Weeks Ended
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
-------- -------- --------- ---------
(In thousands, except per share amounts)
- ----------------------------------------
Revenue discontinued operations $ 303 $ 1,377 $ 3,197 $ 4,910
Income discontinued
Restaurant operations 32 59 252 353
Store closing expense (50) - (163) -
Gain on sale of assets 275 - 215 -
------- ------ ------ ------
Income before taxes 257 59 304 353
Income tax provision (3) (6) (9) (19)
Income from ------- ------ ------ ------
discontinued operations $ 254 $ 53 $ 295 $ 334
======= ====== ====== ======
Basic and diluted net income per
share from discontinued operations $ 0.02 $ - $ 0.03 $ 0.03
======= ====== ====== ======
Note 4: Commitments.
As of August 3, 2003, the Company had commitments aggregating
approximately $50,000 for restaurant construction and the purchase of
new equipment.
Note 5: Debt Instruments.
As of August 3, 2003, the Company had a financing package totaling
$109,066,000, consisting of a $60,000,000 revolving credit agreement and
a $49,066,000 mortgage facility (the "Mortgage Facility"), as described
below.
The Mortgage Facility currently includes 34 separate mortgage notes,
with terms of 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 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 (nine of which the Company mortgaged its leasehold interest)
and 15 of the Company's Burger King restaurants (three of which the
Company mortgaged its leasehold interest). The mortgage notes contain,
among other provisions, certain restrictive covenants including
maintenance of a consolidated fixed charge coverage ratio for the
financed properties.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
On June 10, 2002, the Company refinanced its prior $76,000,000 credit
facility with a $60,000,000 revolving credit agreement with JP Morgan
Chase Bank, as agent, and four other banks (the "Bank Facility"). The
weighted average borrowing rate under the Bank Facility on August 3,
2003 was 4.21%. The Company had $12,829,000 available under the Bank
Facility as of August 3, 2003. The Bank Facility is collateralized by
the stock of certain subsidiaries of the Company, certain interests in
the Company's franchise agreements with Brinker and Burger King
Corporation and substantially all of the Company's real and personal
property not pledged in the Mortgage Facility.
The Bank Facility contains 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, cross-default provisions with other
material agreements, 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 Bank Facility provides for borrowings at the adjusted LIBOR rate
plus a contractual spread which is as follows:
RATIO OF FUNDED DEBT
TO CASH FLOW LIBOR MARGIN
- -------------------- ---------------
Greater than or equal to 3.50 3.00%
Less than 3.5x but greater than or equal to 3.0x 2.75%
Less than 3.0x but greater than or equal to 2.5x 2.25%
Less than 2.5x 1.75%
The Bank Facility also contains covenants requiring maintenance of
funded debt to cash flow and fixed charge coverage ratios, which are as
follows:
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO COVENANT
- ------------------- ---------
Fiscal 2003
Q1 through Q3 4.00
Q4 3.75
Fiscal 2004
Q1 through Q3 3.75
Q4 3.50
Fiscal 2005
Q1 through Q2 3.50
Thereafter 3.00
FIXED CHARGE COVERAGE RATIO 1.50
On May 5, 2003, the Bank Facility was amended to exclude the expenses
which the Company incurred in the BFBC litigation (See Note 8) for
purposes of calculating its fixed charge coverage ratio and its funded
debt to cash flow ratio.
The Company was in compliance with all of its debt covenants as of
August 3, 2003.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Note 6: Earnings (Loss) Per Share.
The Company had outstanding at August 3, 2003 common shares totaling
11,598,447. The Company has also granted options to purchase common
shares to its employees and outside directors. These options have a
dilutive effect on the calculation of earnings per share for the twelve
and forty week periods ended August 3, 2003. The following is a
reconciliation of the numerators and denominators of the basic and
diluted earnings per share computation as required by SFAS 128.
Twelve weeks ended Forty weeks ended
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
------- ------- ------- -------
(In thousands, except per share amounts)
Basic net income (loss) per share:
Net income (loss) available to
common shareholders (numerator) $ (133) $ 1,718 $ (233) $ 3,883
======= ======= ======= =======
Weighted average common shares
outstanding (denominator) 11,311 11,270 11,311 11,227
======= ======= ======= =======
Basic net income (loss) per share $ (0.01) $ 0.15 $ (0.02) $ 0.35
======= ======= ======= =======
Twelve weeks ended Forty weeks ended
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
------- ------- ------- -------
(In thousands, except per share amounts)
Diluted net income (loss) per share:
Net income (loss) available to
common shareholders (numerator) $ (133) $ 1,718 $ (233) $ 3,883
======= ======= ======= =======
Weighted average common shares
outstanding 11,311 11,270 11,311 11,227
Effect of dilutive securities:
Options on common stock - 347 - 249
Total common shares and dilutive ------- ------- ------- -------
securities(denominator) 11,311 11,617 11,311 11,476
======= ======= ======= =======
Diluted net income (loss) per share $ (0.01) $ 0.15 $ (0.02) $ 0.34
======= ======= ======= =======
For the twelve and forty week periods ended August 3, 2003, 10,000 and
14,000 options, respectively, were excluded from the diluted earnings
per share calculations because to do so would have been anti-dilutive.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Note 7: Segment Reporting.
The Company operates four distinct restaurant concepts in the food-
service industry. It owns the Grady's American Grill and two Italian
Dining concepts and operates Burger King restaurants and Chili's Grill &
Bar 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 has aggregated them into a single
reportable operating segment (Full Service). The Company considers the
Burger King restaurants as a separate reportable segment (Quick
Service). Summarized financial information concerning the Company's
reportable segments is shown in the following table. The "other" column
includes corporate related items and income and expense not allocated to
reportable segments.
Full Quick
(Dollars in thousands) Service Service Other Total
- ------------------------------------------------------------------------
Third quarter fiscal 2003
- ---------------------------
Revenues $ 26,961 $ 27,851 $ - $ 54,812
Income from restaurant
operations 2,936 3,616 21 6,573
Operating income (loss) 1,592 1,317 (273) $ 2,636
Interest expense (1,641)
Other expense (1,195)
Loss before income ------
taxes $ (200)
======
Depreciation and
amortization 1,148 1,135 226 2,509
Third quarter fiscal 2002
- ---------------------------
Revenues $ 28,316 $ 30,327 $ - $ 58,643
Income from restaurant
operations 3,287 4,786 2 8,075
Operating income (loss) 1,694 2,059 (96) $ 3,657
Interest expense (1,881)
Other income 207
Income before income ------
taxes $ 1,983
======
Depreciation and
amortization 1,334 1,104 328 2,766
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Full Quick
(Dollars in thousands) Service Service Other Total
- ------------------------------------------------------------------------
First forty weeks of fiscal 2003
- --------------------------------
Revenues $ 89,994 $ 87,244 $ - $177,238
Income from restaurant
operations 11,096 9,472 69 20,637
Operating income (loss)(1) 2,133 1,853 (836) $ 3,150
Interest expense (5,847)
Other income 2,969
Income before income ------
taxes $ 272
======
Depreciation and
amortization 4,064 3,847 904 8,815
First forty weeks of fiscal 2002
- --------------------------------
Revenues $ 103,649 $ 95,404 $ - $199,053
Income from restaurant
operations 12,430 12,785 2 25,217
Operating income (loss) 6,523 4,256 (677) $ 10,102
Interest expense (6,596)
Other income 1,104
Income before income ------
taxes $ 4,610
======
Depreciation and
amortization 4,623 3,511 903 9,037
(1) Includes charges for the impairment of assets totaling $4,411,000
in the Full Service segment.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 3, 2003
(Unaudited)
Note 8: Contingencies.
As previously reported, the Company had been party to a lawsuit with
BFBC Ltd ("BFBC"), a former franchisee of Bruegger's Bagels, and certain
principals of BFBC (the "Franchisee Parties").
During the second quarter of fiscal 2003, the Company entered into a
settlement agreement with the Franchisee Parties that provided for a
cash payment by the Franchisee Parties to the Company in the amount of
$3.75 million and the dismissal of all remaining claims in the lawsuit.
Subsequent to the end of the second quarter of fiscal 2003, and
ancillary to the BFBC settlement, the Company transferred to Bruegger's
Corporation's senior secured lender the Company's interest in the $10.7
million Subordinated Note issued by Bruegger's Corporation to the
Company in connection with the divestiture of the Company's bagel-
related businesses in 1997. The Company received payment of $55,000 for
the Subordinated Note. The Company had previously reserved for the full
amount of the Subordinated Note. Accordingly, the Company recorded a
$55,000 gain in respect of this payment in the third quarter of fiscal
2003.
The Company is involved in various other legal proceedings incidental to
the conduct of its business, including employment discrimination claims.
Based upon currently available information, the Company does not expect
that any such proceedings will have a material adverse effect on the
Company's financial position or results of operations but there can be
no assurance thereof.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company has a 52/53-week fiscal year ending on the last Sunday in
October of each year. The current fiscal year consists of 52 weeks and
ends October 26, 2003. The first quarter of the Company's fiscal year
consists of 16 weeks with all subsequent quarters being 12 weeks in
duration.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages which certain items of revenue and expense bear to total
revenues.
Twelve Weeks Ended Forty Weeks Ended
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 27.0 27.5 27.2 28.0
Payroll and benefits 29.4 28.9 29.5 29.5
Depreciation and amortization 4.1 4.1 4.4 4.1
Other operating expenses 27.5 25.7 27.3 25.8
----- ----- ----- -----
Total restaurant operating expenses 88.0 86.2 88.4 87.4
----- ----- ----- -----
Income from operations 12.0 13.8 11.6 12.6
----- ----- ----- -----
General and administrative 7.0 7.7 7.2 7.4
Impairment of assets and
facility closing costs - (0.3) 2.5 -
Amortization of intangibles 0.2 0.2 0.2 0.2
----- ----- ----- -----
Operating income 4.8 6.2 1.7 5.0
----- ----- ----- -----
Other income (expense):
Recovery of note receivable - - 2.0 -
Stock purchase expense (2.4) - (0.7) -
Interest expense (3.0) (3.2) (3.3) (3.3)
Other income (expense), net 0.2 0.4 0.5 0.5
----- ----- ----- -----
Total other income (expense), net (5.2) (2.8) (1.5) (2.8)
----- ----- ----- -----
Income (loss) from continuing operations
before income taxes (0.4) 3.4 0.2 2.2
Income tax provision 0.3 0.5 0.5 0.5
----- ----- ----- -----
Income (loss) from continuing operations (0.7) 2.9 (0.3) 1.7
Income (loss) from discontinued
operations 0.5 0.1 0.2 0.2
----- ----- ----- -----
Net Income (loss) (0.2)% 3.0% (0.1)% 1.9%
===== ===== ===== =====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Restaurant sales for the Company were $54,812,000 for the third quarter
of fiscal 2003 versus $58,643,000 for the comparable period in fiscal
2002, a decrease of $3,831,000. Restaurant sales for the first forty
weeks of fiscal 2003 were $177,238,000 versus $199,053,000 for the
comparable period in fiscal 2002, a decrease of $21,815,000.
The Company's Burger King restaurant sales were $27,851,000 in the third
quarter of fiscal 2003 compared to sales of $30,327,000 in the same
period of fiscal 2002, a decrease of $2,476,000. The Company had
increased revenue of $642,000 due to additional sales weeks from three
new restaurants opened in fiscal 2003 and two restaurants opened in
fiscal 2002. The Company's Burger King restaurants had average weekly
sales of $19,825 in the third quarter of fiscal 2003 versus $21,865 in
the same period in fiscal 2002. Sales at restaurants open for more than
one year decreased 9.8% in the third quarter of fiscal 2003 when
compared to the same period in fiscal 2002. Sales decreased $8,160,000
to $87,244,000 for the first forty weeks of fiscal 2003 compared to
$95,404,000 for the comparable period in fiscal 2002. The Company had
increased revenue of $2,204,000 due to additional sales weeks from three
restaurants opened in fiscal 2003 and two restaurants opened in fiscal
2002. Average weekly sales were $18,802 in the first forty weeks of
fiscal 2003 versus $20,593 in the same period in fiscal 2002. Sales at
restaurants open for more than one year decreased 9.0% in the first
forty weeks of fiscal 2003 when compared to the same period in fiscal
2002. The Company believes that the decrease in comparable store sales
was mainly due to fierce price competition in the quick service
hamburger segment.
To enhance comparative data, management concluded during the third
quarter of fiscal 2003 that sales of promotional items, consisting
primarily of toys accompanying kids meals in the quick service segment,
should be reported as revenues. Previously, these items were immaterial
in amount and the value attributable to them was recorded as an offset
to other restaurant operating expense. Amounts reported in prior
periods have been reclassified to conform to the current quarter's
presentation. For all periods presented, the reclassifications result
in an increase of approximately 1% in consolidated revenue and
restaurant operating expenses as compared to amounts previously
reported. Such reclassifications had no impact on previously reported
income from restaurant operations, operating income, net income, or
stockholders' equity.
The Company's Chili's Grill & Bar restaurant sales increased $1,501,000
to $19,028,000 in the third quarter of fiscal 2003 compared to
$17,527,000 in the same period in fiscal 2002. The Company had increased
revenue of $1,016,000 due to additional sales weeks from one restaurant
opened during fiscal 2002 and three restaurants opened in fiscal 2003.
Average weekly sales increased to $45,630 in the third quarter of fiscal
2003 versus $44,259 in the same period of fiscal 2002. Sales at
restaurants open for more than one year increased 2.8% in the third
quarter of fiscal 2003 when compared to the same period in fiscal 2002.
Sales for the first forty weeks of fiscal 2003 increased $3,384,000 to
$61,160,000 compared to $57,776,000 for the same period in fiscal 2002.
The Company had increased revenue of $2,248,000 due to additional sales
weeks from one new restaurant opened during fiscal 2002 and three opened
in fiscal 2003. The average weekly sales were $44,675 in the first forty
weeks of fiscal 2003 versus $43,770 in the same period in fiscal 2002.
Sales at restaurants open for more than one year increased 2.4% in the
first forty weeks of fiscal 2003 when compared to the same period in
fiscal 2002. The Company believes that the increase in average weekly
sales was mainly due to successful operational and marketing initiatives
by both the Company and the franchisor.
Sales in the Company's Grady's American Grill restaurant division were
$4,069,000 in the third quarter of fiscal 2003 compared to sales of
$7,113,000 in the same period in fiscal 2002, a decrease of $3,044,000.
The Company had seven units open during the third quarter of fiscal 2002
that were not open in the same period of fiscal 2003. The closed units
contributed approximately $1,852,000 to the sales decrease during fiscal
2003. As required by Statement of Financial Accounting Standards No. 144
(SFAS 144) Accounting for the Impairment or Disposal of Long-Lived
Assets, the results of operations for four restaurants sold in fiscal
2003 have been classified as discontinued operations for all periods
reported. The remaining twelve Grady's American Grill restaurants had
average weekly sales of $28,261 in the third quarter of fiscal 2003
versus $36,533 in the same period in fiscal 2002.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Sales at restaurants open for more than one year decreased 22.0% in the
third quarter of fiscal 2003 when compared to the same period in fiscal
2002. Sales for the first forty weeks of fiscal 2003 were $15,162,000
compared to $33,060,000 for the same period in fiscal 2002, a decrease
of $17,898,000. The absence of the closed restaurants contributed
approximately $13,393,000 to the sales decrease. Average weekly sales,
for the remaining twelve restaurants, were $31,590 in the first forty
weeks of fiscal 2003 versus $40,843 in the same period in fiscal 2002.
Sales at restaurants open for more than one year decreased 23.0% in the
first forty weeks of fiscal 2003 when compared to the same period in
fiscal 2002.
During the second quarter of fiscal 2003 the Company closed three
Grady's American Grill restaurants. The Company sold one of the closed
restaurants in the second quarter of fiscal 2003, receiving net proceeds
of $571,000. The Company sold two restaurants in the third quarter of
fiscal 2003, receiving net proceeds of $3,041,000. The Company sold one
restaurant in the fourth quarter of fiscal 2003, receiving net proceeds
of $1,130,000. In light of these disposals and the continued decline in
sales and cash flow in its Grady's American Grill division, in the
second quarter of fiscal 2003, the Company reviewed the carrying amounts
for the balance of its Grady's American Grill Restaurant assets. The
Company estimated the future cash flows expected to result from the
continued operation and the residual value of the remaining restaurant
locations in the division and concluded that, in eight locations, the
undiscounted estimated future cash flows were less than the carrying
amount of the related assets. Accordingly, the Company concluded that
these assets had been impaired. The Company measured the impairment and
recorded an impairment charge related to these assets aggregating
$4,411,000 in the second quarter of fiscal 2003.
In determining the fair value of the aforementioned restaurants, the
Company relied primarily on discounted cash flow analyses that
incorporated an investment horizon of five years and utilized a risk
adjusted discount factor.
In connection with the impairment charge discussed above the Company
also reviewed the remaining useful life of the Grady's American Grill
trademark. In light of the continuing negative trends in both sales and
cash flows, the increase in the pervasiveness in these declines amongst
individual stores, and the accelerating rate of decline in both sales
and cash flow, the Company determined that the useful life of the
Grady's American Grill trademark should be reduced from 15 to five
years. As part of the above impairment charge, the Company reduced the
net book value of the Grady's American Grill trademark by $2,882,000 and
reduced the net book value of certain fixed assets by $1,529,000.
The Company continues to pursue various management actions in response
to the negative trend in its Grady's business, including evaluating
strategic business alternatives for the division both as a whole and at
each of its restaurant locations.
The Company's Italian Dining Division restaurant sales increased
$188,000 to $3,864,000 in the third quarter of fiscal 2003 compared to
$3,676,000 in the same period in fiscal 2002. The Company had increased
revenue of $465,000 due to additional sales weeks from one restaurant
opened during fiscal 2002. The average weekly sales were $35,776 in the
third quarter of fiscal 2003 versus $38,292 in the same period of fiscal
2002. Sales at restaurants open for more than one year decreased 7.5% in
the third quarter of fiscal 2003 when compared to the same period in
fiscal 2002. Sales for the first forty weeks of fiscal 2003 increased
$859,000 to $13,672,000 compared to $12,813,000 for the same period in
fiscal 2002. The Company had increased revenue of $1,695,000 due to
additional sales weeks from one restaurant opened during fiscal 2002.
The average weekly sales were $37,976 in the first forty weeks of fiscal
2003 versus $40,041 in the same period in fiscal 2002. Sales at
restaurants open for more than one year decreased 6.5% in the first
forty weeks of fiscal 2003 when compared to the same period in fiscal
2002. The Company believes that the decrease in comparable store sales
was mainly due to competitive intrusion and generally unfavorable
economic conditions in the Detroit, Michigan area where five of the
Company's nine Italian Dining restaurants are located.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Total restaurant operating expenses, as a percentage of restaurant
sales, increased to 88.0% for the third quarter of fiscal 2003 versus
86.2% in the third quarter of fiscal 2002, and 88.4% in the first forty
weeks of fiscal 2003 versus 87.4% in the same period of fiscal 2002. The
following factors influenced the operating margins.
Food and beverage costs decreased to 27.0% of total revenues in the
third quarter of fiscal 2003 compared to 27.5% of total revenues in the
same period in fiscal 2002, and 27.2% in the first forty weeks of fiscal
2003 compared to 28.0% in the same period of fiscal 2002. Food and
beverage costs, as a percentage of sales, in the quick service segment
were consistent in the third quarter of fiscal 2003 when compared to the
third quarter of fiscal 2002. During the first forty-weeks of fiscal
2003 food and beverage costs, as a percentage of sales, improved in the
quick service segment.
The improvement was mainly due to improved margins in the Company's
Grand Rapids, Michigan Burger King market. The Company acquired these
restaurants on October 15, 2001, and since the acquisition has made
progress in reducing food costs as a percentage of sales. The full
service segment's food and beverage costs, as a percentage of sales,
were lower in the third quarter and the first forty weeks of fiscal 2003
versus the same periods in fiscal 2002. The decrease was mainly due to
the reduced number of Grady's American Grill restaurants, which
historically have had higher food and beverage costs, as a percentage of
total restaurant sales, than the Company's other full service concepts.
Payroll and benefits were 29.4% of total revenues in the third quarter
of fiscal 2003 compared to 28.9% in the same period of fiscal 2002.
Payroll and benefits were 29.5% of total revenues in the first forty
weeks of fiscal 2003, consistent with the 29.5% in the same period of
fiscal 2002. Payroll and benefits, as a percentage of sales, increased
in the quick service segment and decreased in the full service segment.
The increase in the quick service segment was mainly due to a decrease
in average weekly sales. The decrease in the full service segment was
mainly due to the reduced number of Grady's American Grill restaurants,
which historically have had higher payroll and benefit costs, as a
percentage of total restaurant sales, than the Company's other full
service concepts.
Depreciation and amortization, as a percentage of total revenues, was
4.1% for the third quarter of fiscal 2003 which is consistent with the
4.1% in the same period in fiscal 2002. Depreciation and amortization,
as a percentage of total revenues, increased to 4.4% in the first forty
weeks of fiscal 2003 compared to 4.1% in the same period in fiscal 2002.
The increase, as a percentage of revenues, was mainly due to the
decrease in average weekly sales at the Company's Burger King, Italian
Dining and Grady's American Grill restaurants.
Other restaurant operating expenses include rent and utilities,
royalties, promotional expense, repairs and maintenance, property taxes
and insurance. Other restaurant operating expenses, as a percentage of
total revenues, increased in the third quarter of fiscal 2003 to 27.5%
compared to 25.7% in the same period of fiscal 2002, and to 27.3% in the
first forty weeks of fiscal 2003 compared to 25.8% in the same period of
fiscal 2002. The Company's other operating expenses, as a percentage of
sales, increased mainly due to lower average weekly sales at the
Company's Burger King, Italian Dining and Grady's American Grill
restaurants.
Income from restaurant operations decreased $1,502,000 to $6,573,000, or
12.0% of revenues, in the third quarter of fiscal 2003 compared to
$8,075,000, or 13.8% of revenues, in the comparable period of fiscal
2002. Income from restaurant operations in the Company's Quick Service
segment decreased $1,170,000 while the Company's Full Service segment
decreased $351,000 from the prior year. Income from restaurant
operations decreased $4,580,000 to $20,637,000, or 11.6% of revenues, in
the first forty weeks of fiscal 2003 compared to $25,217,000, or 12.6%
of revenues, in the comparable period of fiscal 2002. Income from
restaurant operations in the Company's Quick Service segment decreased
$3,313,000 while the Company's Full Service segment decreased $1,334,000
when compared to the first forty weeks of the prior year.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
General and administrative expenses were $3,837,000 in the third quarter
of fiscal 2003 compared to $4,531,000 in the third quarter of fiscal
2002 and $12,774,000 in the first forty weeks of fiscal 2003 compared to
$14,796,000 in the same period of fiscal 2002. As a percentage of total
restaurant sales, general and administrative expenses were 7.0% in the
third quarter of fiscal 2003 versus 7.7% in the third quarter of fiscal
2002, and 7.2% in the first forty weeks of fiscal 2003 compared to 7.4%
in the same period of fiscal 2002. The decrease in general and
administrative expense was mainly due to a decrease in litigation
expense. In the third quarter of fiscal 2003 the Company recorded $2,000
in expenses related to the Company's litigation with BFBC, LTD (See Note
8) versus $484,000 in fiscal 2002 third quarter. In the first forty
weeks of fiscal 2003 the Company recorded approximately $286,000 for the
BFBC, LTD litigation versus $1,364,000 in the first forty weeks of
fiscal 2002.
Amortization of intangibles, as a percentage of total revenues, remained
constant as a percent of revenues at 0.2% for the third quarter of
fiscal 2003 compared to 0.2% in the same period in fiscal 2002, and 0.2%
in the first forty weeks of fiscal 2003 compared to 0.2% for the same
period in fiscal 2002.
Total interest expense for the third quarter of fiscal 2003 was
$1,641,000 compared to $1,881,000 during the same period in fiscal 2002.
Total interest expense was $5,847,000 in the first forty weeks of fiscal
2003 compared to interest expense of $6,596,000 in the same period of
fiscal 2002. The decreases were due to lower interest rates and lower
debt levels.
During the third quarter of fiscal 2003, the Chairman and Chief
Executive Officer of the Company Daniel B. Fitzpatrick, purchased all
1,148,014 shares of the Company's common stock, owned by NBO, LLC
("NBO"), for approximately $4.1 million. The Company was required to
take a one-time non-cash charge of $1,294,000, which is equal to the
premium to the market price that Mr. Fitzpatrick paid for the shares.
There was also a corresponding increase in the Company's additional paid-
in capital of $1,294,000.
During the second quarter of fiscal 2003 the Company recorded a
$3,459,000 gain on the collection of a note receivable that had
previously been written off (See Note 8). The Company did not have any
similar activity in fiscal 2002.
The provision for income taxes was $187,000 for the third quarter of
fiscal 2003 versus $318,000 in the comparable period in fiscal 2002. The
provision for income taxes was $800,000 for the first forty weeks of
fiscal 2003 versus $1,061,000 in the comparable period in fiscal 2002.
The provision for income taxes in fiscal 2003 and fiscal 2002 consisted
of the Company's estimated state tax expense. The Company expects to
utilize net operating loss carryforwards to offset current year federal
taxable income.
At the end of the third quarter of fiscal 2003 the Company had a
valuation reserve against its deferred tax asset resulting in a net
deferred tax asset of $10,000,000. 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 believes it is
more likely than not that the net deferred tax asset of $10,000,000 will
be realized. Such evidence is reviewed periodically and could result in
the recognition of additional tax benefit or expense related to its net
deferred tax asset position in the future.
Discontinued operations includes three Grady's American Grill
restaurants sold during the first forty weeks of fiscal 2003 and one
Grady's American Grill restaurant that was sold in the fourth quarter of
fiscal 2003. The decision to dispose of these four locations reflects
the Company's ongoing process of evaluating the performance and cash
flows of its various restaurant locations and using the proceeds from
the sale of closed restaurants to reduce outstanding debt. The net
income from discontinued operations for the quarter ended August 3,
2003, was $254,000 versus income of $53,000 in the same period of fiscal
2002. The total restaurant sales from discontinued operations for the
quarter ended August 3, 2003, were $303,000 versus $1,377,000 in the
same period of fiscal 2002.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The net income from discontinued operations was $295,000 for the forty
weeks ended August 3, 2003, versus $334,000 in the same period of fiscal
2002. The restaurant sales from discontinued operations were $3,197,000
for the forty-weeks ended August 3, 2003, versus $4,910,000 in the same
period of fiscal 2002.
For the third quarter of fiscal 2003, the Company reported a net loss of
$133,000 compared to net income of $1,718,000 for the same period of
fiscal 2002, and a net loss of $233,000 in the first forty-weeks of
fiscal 2003 compared to net income of $3,883,000 in the same period of
fiscal 2002.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for building or acquiring new
restaurants, replacing equipment and remodeling existing restaurants.
The Company's restaurants generate cash immediately through sales. As
is customary in the restaurant industry, the Company does not have
significant assets in the form of trade receivables or inventory, and
customary payment terms generally result in several weeks of trade
credit from its vendors. Therefore, the Company's current liabilities
have historically exceeded its current assets.
During the first forty-weeks of 2003, net cash provided by operating
activities was $10,975,000 compared to $13,166,000 in fiscal 2002. The
decrease was mainly due to decreased profitability of the Company.
During the first forty weeks of fiscal 2003, the Company had $7,841,000
in capital expenditures in connection with the building of one new quick
service restaurant, three new full service restaurants and the
refurbishing of existing restaurants. The Company also replaced one
quick service restaurant building with a new building at the same
location and opened two additional quick service restaurants in
facilities leased from a related party.
The Company had a net repayment of $5,650,000 under its revolving credit
agreement during the first forty weeks of fiscal 2003. As of August 3,
2003, the Company's revolving credit agreement had an additional
$12,829,000 available for future borrowings. The Company's average
borrowing rate on August 3, 2003 was 4.21%.
The Company's primary cash requirements in fiscal 2003 will be capital
expenditures in connection with the building or acquiring of new
restaurants, remodeling of existing restaurants, maintenance
expenditures, and the reduction of debt under the Company's debt
agreements. During the remainder of fiscal 2003 the Company does not
plan to open any more new restaurants but does plan to replace two
existing quick service buildings with new buildings at the same
locations. The actual amount of the Company's cash requirements for
capital expenditures depends in part on the number of new restaurants
opened, whether the Company owns or leases new units and the actual
expense related to remodeling and maintenance of existing units. The
Company's capital expenditures for fiscal 2003 are expected to range
from $9,000,000 to $11,000,000. The Company has debt service
requirements of approximately $1,474,000 in fiscal 2003, consisting
primarily of the principal payments required under the mortgage
facility.
The Company anticipates that its cash flow from operations, together
with the $12,829,000 available under its revolving credit agreement as
of August 3, 2003, will provide sufficient funds for its operating,
capital expenditure, debt service and other requirements through the end
of fiscal 2003.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
As of August 3, 2003, the Company had a financing package totaling
$109,066,000, consisting of a $60,000,000 revolving credit agreement
(the "Bank Facility") and a $49,066,000 mortgage facility (the "Mortgage
Facility"), as described below.
The Mortgage Facility currently includes 34 separate mortgage notes,
with initial terms of 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 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 (nine of which the Company mortgaged its leasehold interest)
and 15 of the Company's Burger King restaurants (three of which the
Company mortgaged its leasehold interest). The mortgage notes contain,
among other provisions, certain restrictive covenants including
maintenance of a consolidated fixed charge coverage ratio for the
financed properties.
The Bank Facility is collateralized by the stock of certain subsidiaries
of the Company, 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 Facility.
The Bank Facility contains 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, cross-default provisions with other
material agreements, 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 Bank Facility provides for borrowings at the adjusted LIBOR rate
plus a contractual spread which is as follows:
RATIO OF FUNDED DEBT
TO CASH FLOW LIBOR MARGIN
Greater than or equal to 3.50 3.00%
Less than 3.5x but greater than or equal to 3.0x 2.75%
Less than 3.0x but greater than or equal to 2.5x 2.25%
Less than 2.5x 1.75%
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Bank Facility also contains covenants requiring maintenance of
funded debt to cash flow and fixed charge coverage ratios as follows:
MAXIMUM FUNDED DEBT
TO CASH FLOW RATIO COVENANT
Fiscal 2003
Q1 through Q3 4.00
Q4 3.75
Fiscal 2004
Q1 through Q3 3.75
Q4 3.50
Fiscal 2005
Q1 through Q2 3.50
Thereafter 3.00
FIXED CHARGE COVERAGE RATIO 1.50
On May 5, 2003, the Bank Facility was amended to exclude the expenses
which the Company incurred in the BFBC litigation (See Note 8) for
purposes of calculating its fixed charge coverage ratio and its funded
debt to cash flow ratio.
The revolving credit agreement is subject to certain restrictive
covenants that require the Company, among other things, to achieve
agreed upon levels of cash flow. Under the revolving credit agreement
the Company's funded debt to consolidated cash flow ratio could not
exceed 4.00 and its fixed charge coverage ratio could not be less than
1.50 on August 3, 2003. The Company was in compliance with these
requirements with a funded debt to consolidated cash flow ratio of 3.75
and a fixed charge coverage ratio of 1.75.
The Company's funded debt to consolidated cash flow ratio is required to
be 3.75 by the end of fiscal 2003. While the Company expects to generate
sufficient cash flow to maintain the required ratio of 3.75 (and 3.50
beginning at the end of the fourth quarter of fiscal 2004), there can be
no assurance thereof, particularly in light of the negative trends that
the Company is experiencing in its Burger King and Grady's American
Grill divisions. The Company could increase its consolidated cash flow
through reductions in general and administrative expenses, mainly
through the reduction in bonus expense. If the Company were not
successful in meeting the required funded debt to consolidated cash flow
ratio it would experience an event of default. The Company would then
need to seek waivers from its lenders or amendments to the covenants.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results
of Operations are based upon the consolidated financial statements,
which were prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require
management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and notes thereto.
Actual results may differ from these estimates, and such differences may
be material to the consolidated financial statements. Management
believes that the following significant accounting policies involve a
higher degree of judgment or complexity.
Property and equipment
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets. The useful lives of the assets are
based upon management's expectations for the period of time that the
asset will be used for the generation of revenue. Management
periodically reviews the assets for changes in circumstances that may
impact their useful lives.
Impairment of long-lived assets
Management periodically reviews property and equipment for impairment
using historical cash flows as well as current estimates of future cash
flows. This assessment process requires the use of estimates and
assumptions that are subject to a high degree of judgment. In addition,
management periodically assesses the recoverability of goodwill and
other intangible assets which requires assumptions regarding the future
cash flows and other factors to determine the fair value of the assets.
If these assumptions change in the future, management may be required to
record impairment charges for these assets.
Income taxes
The Company has recorded a valuation allowance to reduce its deferred
tax assets since it is more likely than not that some portion of the
deferred assets will not be realized. Management has considered all
available evidence, both positive and negative, including its historical
operating results, estimates of future taxable income and ongoing
feasible tax strategies in assessing the need for the valuation
allowance; if these estimates and assumptions change in the future, the
Company may be required to adjust its valuation allowance. This could
result in a charge to, or an increase in, income in the period such
determination is made.
Other estimates
Management is required to make judgments and/or estimates in the
determination of several of the accruals that are reflected in the
consolidated financial statements. Management believes that the
following accruals are subject to a higher degree of judgment.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Management uses estimates in the determination of the required accruals
for general liability, workers' compensation and health insurance. These
estimates are based upon a detailed examination of historical and
industry claims experience. The claim experience may change in the
future and may require management to revise these accruals.
Management continually reassesses its assumptions and judgments and
makes adjustments when significant facts and circumstances dictate.
Historically, actual results have not been materially different than the
estimates that are described above.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk in connection with its
$60.0 million revolving credit facility which provides for interest
payable at the LIBOR rate plus a contractual spread. The Company's
variable rate borrowings under this revolving credit facility totaled
$45.3 million at August 3, 2003. The impact on the Company's annual
results of operations of a one-point interest rate change would be
approximately $453,000.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the
participation of the principal executive officer and principal financial
officer, of its disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the principal executive
officer and principal financial officer concluded that the Company's
disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms. There was no change in the
Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or
is reasonably likely to materially affect the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 8 to the unaudited consolidated financial statements of the Company
included in Part I of this report is incorporated herein by reference.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
A list of exhibits required to be filed as part of this report is
set forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b)Reports on Form 8-K
On June 13, 2003, the Company filed a current report on Form 8-K
furnishing under Item 12 a copy of the Company's press release
dated June 12, 2003.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Quality Dining, Inc.
(Registrant)
Date: September 17, 2003 By: /s/John C. Firth
----------------------------
Executive Vice President
General Counsel and Secretary
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- ---------------------------------
10-E (1) Standstill Agreement by and among Daniel B.
Fitzpatrick, Quality Dining, Inc., NBO,LLC,
Jerome L. Schostak, David W. Schostak,
Robert I. Schostak and Mark S. Schostak
dated June 27, 2003.
31.01 Certification of Daniel B. Fitzpatrick pursuant
to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02 Certification of John C. Firth pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.01 Certification of Daniel B. Fitzpatrick pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of John C. Firth pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(1) The copy of this exhibit filed as exhibit number 4 to Amendment No.
8 of Schedule 13D filed by Daniel B. Fitzpatrick, dated June 30, 2003,
is incorporated herein by reference.
Exhibit 31.01
CERTIFICATIONS
I, Daniel B. Fitzpatrick, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Quality Dining,
Inc.;
2.Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4.The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules l3a-15(e) and 15d-15(e)) for the
registrant and have:
a.Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b.Evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c.Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5.The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function):
a.All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 17, 2003
/s/ Daniel B. Fitzpatrick
-------------------------
Daniel B. Fitzpatrick
President and Chief Executive
Officer
Exhibit 31.02
I, John C. Firth, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Quality Dining,
Inc.;
2.Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4.The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules l3a-15(e) and 15d-15(e)) for the
registrant and have:
a.Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
b.Evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
c.Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5.The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function):
a.All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 17, 2003
/s/ John C. Firth
------------------------------------
John C. Firth
Executive Vice President and General
Counsel
(Principal Financial Officer)
Exhibit 32.01
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Quality Dining, Inc.
(the "Company") on Form 10-Q for the period ending August 3, 2003
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Daniel B. Fitzpatrick, Chairman of the
Board, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to
906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Daniel B. Fitzpatrick
- ------------------------------
Daniel B. Fitzpatrick
Chairman of the Board, President and
Chief Executive Officer
September 17, 2003
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging or otherwise
adopting the signature that appears in typed form within the
electronic version of this written statement required by Section
906, has been provided to Quality Dining, Inc. and will be
retained by Quality Dining, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
Exhibit 32.02
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Quality Dining, Inc.
(the "Company") on Form 10-Q for the period ending August 3, 2003
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, John C. Firth, Executive Vice President
and General Counsel (Principal Financial Officer) of the Company,
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to
906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ John C. Firth
- --------------------------
John C. Firth,
Executive Vice President and
General Counsel (Principal Financial Officer)
September 17, 2003
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging or otherwise
adopting the signature that appears in typed form within the
electronic version of this written statement required by Section
906, has been provided to Quality Dining, Inc. and will be
retained by Quality Dining, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.