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 1, 2004
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______________ to ____________________
Commission file number 0-23420
QUALITY DINING, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1804902
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
4220 Edison Lakes Parkway, Mishawaka, Indiana 46545
(Address of principal executive offices and zip code)
(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 o No x
The number of shares of the registrant's common stock outstanding as of
September 10, 2004 was 11,596,781.
QUALITY DINING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 1, 2004
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 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 30
Item 4. Controls and Procedures 30
Part II - Other Information
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 32
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 1, August 3, August 1, August 3,
2004 2003 2004 2003
Revenues: ------- ------- ------- -------
Burger King $ 31,561 $ 27,851 $90,446 $ 87,244
Chili's Grill & Bar 20,634 19,028 65,787 61,160
Italian Dining Division 3,581 3,864 12,473 13,671
Grady's American Grill 1,163 1,288 4,523 4,789
------- ------- ------- -------
Total revenues 56,939 52,031 173,229 166,864
------- ------- ------- -------
Operating expenses:
Restaurant operating expenses:
Food and beverage 16,011 13,893 47,867 44,742
Payroll and benefits 16,237 15,138 50,132 48,768
Depreciation and amortization 2,153 2,260 7,119 7,620
Other operating expenses 14,560 13,651 44,977 43,729
Total restaurant operating ------- ------- ------- -------
expenses 48,961 44,942 150,095 144,859
------- ------- ------- -------
Income from restaurant operations 7,978 7,089 23,134 22,005
General and administrative 3,675 3,861 12,354 12,841
Amortization of intangibles 25 100 144 302
------- ------- ------- -------
Operating income 4,278 3,128 10,636 8,862
------- ------- ------- -------
Other income (expense):
Recovery of note receivable - - - 3,459
Interest expense (1,462) (1,561) (4,985) (5,554)
Loss on sale of property
and equipment (26) (24) (101) (32)
Minority interest in earnings (618) (604) (1,672) (1,974)
Stock purchase expense - (1,294) - (1,294)
Other income, net 15 125 165 872
------- ------- ------- -------
Total other income(expense),net (2,091) (3,358) (6,593) (4,523)
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes 2,187 (230) 4,043 4,339
Income tax provision 784 181 1,343 777
Income (loss) from continuing ------- ------- ------- -------
operations 1,403 (411) 2,700 3,562
Income (loss) from discontinued
operations, net of taxes (167) 278 (931) (3,795)
------- ------- ------- -------
Net income (loss) $ 1,236 $ (133) $ 1,769 $ (233)
======= ======= ======= =======
Basic net income (loss) per share:
Continuing operations 0.14 (0.04) 0.26 0.32
Discontinued operations (0.02) 0.03 (.09) (0.34)
------- ------- ------- -------
Basic net income (loss) per share $0.12 $(0.01) $0.17 $(0.02)
======= ======= ======= =======
Diluted net income (loss) per share:
Continuing operations 0.14 (0.04) 0.26 0.32
Discontinued operations (0.02) 0.03 (0.09) (0.34)
------- ------- ------- -------
Diluted net income (loss)
per share $0.12 $(0.01) $0.17 $(0.02)
======= ======= ======= =======
Weighted average shares outstanding:
Basic 10,163 10,805 10,163 11,142
======= ======= ======= =======
Diluted 10,212 10,805 10,212 11,156
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
August 1, October 26,
2004 2003
ASSETS ------- -------
Current assets:
Cash and cash equivalents $ 1,692 $ 1,724
Accounts receivable 1,816 1,723
Inventories 1,838 1,670
Deferred income taxes 2,706 2,251
Assets held for sale 9 5,821
Other current assets 1,553 2,192
------- -------
Total current assets 9,614 15,381
------- -------
Property and equipment, net 110,997 112,826
------- -------
Other assets:
Deferred income taxes 5,631 6,749
Trademarks, net 470 1,285
Franchise fees and development fees, net 8,429 8,801
Goodwill 7,960 7,960
Liquor licenses, net 2,839 2,820
Other 3,551 3,454
------- -------
Total other assets 28,880 31,069
------- -------
Total assets $149,491 $159,276
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,181 $ 10,055
Accounts payable 4,756 6,182
Accrued liabilities 22,623 19,520
------- -------
Total current liabilities 36,560 35,757
Long-term debt 73,512 85,335
------- -------
Total liabilities 110,072 121,092
------- -------
Minority interest 13,656 14,272
Stockholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued - -
Common stock, without par value: 50,000,000
shares authorized; 12,955,781 shares issued 28 28
Additional paid-in capital 237,402 237,402
Accumulated deficit (204,745) (206,514)
Unearned compensation (493) (575)
------- -------
32,192 30,341
Treasury stock, at cost, 2,508,587 shares (6,429) (6,429)
------- -------
Total stockholders' equity 25,763 23,912
------- -------
Total liabilities and stockholders' equity $149,491 $159,276
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Forty Weeks Ended
August 1, August 3,
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ 1,769 $ (233)
Loss from discontinued operations 931 3,795
Minority interest in earnings 1,672 1,974
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 6,752 7,370
Amortization of other assets 1,092 1,219
Loss on sale of property and equipment 101 32
Deferred income taxes 663 -
Amortization of unearned compensation 82 71
Changes in current assets and current liabilities:
Net decrease (increase) in current assets 378 356
Net increase (decrease) in current liabilities 903 (3,398)
------- -------
Net cash provided by operating activities 14,343 11,186
------- -------
Cash flows from investing activities:
Purchase of property and equipment (7,359) (7,841)
Proceeds from the sales of property and equipment 8,637 3,665
Purchase of other assets (727) (501)
Other 35 265
------- -------
Net cash provided by (used) for investing activities 586 (4,412)
------- -------
Cash flows from financing activities:
Purchase of treasury stock - (2,806)
Borrowings of long-term debt 41,555 42,435
Repayment of long-term debt (54,252) (43,567)
Cash distributions to minority interest
in consolidated partnerships (2,288) (3,719)
------- -------
Net cash used by financing activities (14,985) (7,657)
------- -------
Cash provided by discontinued operations 24 797
------- -------
Net decrease in cash and cash equivalents (32) (86)
Cash and cash equivalents, beginning of period 1,724 1,174
------- -------
Cash and cash equivalents, end of period $ 1,692 $ 1,088
======= =======
See Notes to Consolidated Financial Statements.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(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"). The Company operates one of its Grady's American Grill(R)
restaurants under the tradename Porterhouse Steaks and Seafood (tm) and one
under the tradename Regas Grill (R). As of August 1, 2004, the Company
operated 179 restaurants, including 123 Burger Kings, 39 Chili's Grill &
Bar restaurants, six Grady's American Grill restaurants, six Papa
Vino's, three Spageddies, one Regas Grill (R) and one Porterhouse Steaks
and Seafood(TM) restaurant.
Note 2: Summary of Significant Accounting Policies.
Basis of Presentation
During the first quarter of 2004, the Company adopted FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities", as
revised by the FASB in December 2003 (FIN 46R). As a result of the
adoption of this Interpretation, the Company changed its consolidation
policy whereby the accompanying consolidated financial statements now
include the accounts of Quality Dining, Inc., its wholly owned
subsidiaries, and certain related party affiliates that are variable
interest entities. Previously, the consolidated financial statements
included only the accounts of Quality Dining, Inc. and its wholly owned
subsidiaries. Prior periods have been restated to reflect this change.
The Company determined that certain affiliated real estate partnerships
from which the Company leases 42 of its Burger King restaurants and that
are substantially owned by certain directors, officers, and stockholders
of the Company meet the definition of variable interest entities as
defined in FIN 46R ("VIE's"). Furthermore, the Company has determined
that it is the primary beneficiary of these VIE's, based on the criteria
in FIN 46R. The Company holds no direct ownership or voting interest in
the VIE's. Additionally, the creditors and beneficial interest holders
of the VIE's have no recourse to the general credit of the Company.
The assets of the VIE's, which consist primarily of property and
equipment, totaled $17,919,000 and $18,599,000 at August 1, 2004 and
October 26, 2003, respectively. The liabilities of the VIE's, which
consist primarily of bank debt, totaled $7,268,000 and $7,493,000 at
August 1, 2004 and October 26, 2003, respectively. Certain of the
assets of the VIE's serve as collateral for the debt obligations.
Because certain of these assets were previously recorded as capital
leases by the Company, with a resulting lease obligation, the
consolidation of the VIE's served to increase total assets as reported
by the Company by $13,477,000 and $13,869,000 and total liabilities by
$3,921,000 and $3,697,000 at August 1, 2004 and October 26, 2003,
respectively. Additionally, the consolidation of the VIE's increased
treasury stock by $2,806,000 at August 1, 2004 and October 26, 2003, as
one of the VIE's owns common stock of the Company. The change had no
impact on reported net income for the forty weeks ended August 1, 2004
and August 3, 2003. However, the change did decrease weighted average
shares outstanding, basic and diluted, for the twelve and forty weeks
ending August 1, 2004 and August 3, 2003, because one of the VIE's
purchased 1,148,014 shares of the Company's common stock on June 27,
2003.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
The following table presents the effect of the consolidation of the
VIE's on depreciation and amortization expense, other operating
expenses, general and administrative expense, interest expense, other
income (expense) and weighted average shares for the twelve weeks and
forty weeks ended August 1, 2004 and August 3, 2003:
(In thousands) 12-Weeks Ended 40-Weeks Ended
---------------- ----------------
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
------- ------- ------- -------
Depreciation and amortization
expense $ 2,124 $ 2,229 $ 7,027 $ 7,513
Change in consolidation policy 29 31 92 107
------ ------ ------ ------
Consolidated depreciation and
amortization $ 2,153 $ 2,260 $ 7,119 $ 7,620
====== ====== ====== ======
Other operating expenses $15,174 $14,230 $46,879 $45,544
Change in consolidation policy (614) (579) (1,902) (1,815)
------ ------ ------ ------
Consolidated other operating
expenses $14,560 $13,651 $44,977 $43,729
====== ====== ====== ======
General and administrative
expenses $ 3,656 $ 3,837 $12,316 $12,774
Change in consolidation policy 19 24 38 67
------ ------ ------ ------
Consolidated general and
Administrative expenses $ 3,675 $ 3,861 $12,354 $12,841
====== ====== ====== ======
Interest expense $ 1,514 $ 1,641 $ 5,160 $ 5,847
Change in consolidation policy (52) (80) (175) (293)
------ ------ ------ ------
Consolidated interest expense $ 1,462 $ 1,561 $ 4,985 $ 5,554
====== ====== ====== ======
Other income, net $ 15 $ 125 $ 440 $ 832
Change in consolidation policy - - (275) 40
------ ------ ------ ------
Consolidated other income, net $ 15 $ 125 $ 165 $ 872
====== ====== ====== ======
Basic net income (loss) per
share $ 0.11 $ (0.01) $ 0.16 $ (0.02)
Change in consolidation policy .01 - 0.01 -
------ ------ ------ ------
Consolidated basic net income
(loss) per share $ 0.12 $ (0.01) $ 0.17 $ (0.02)
====== ====== ====== ======
Diluted net income (loss)
per share $ 0.11 $ (0.01) $ 0.16 $ (0.02)
Change in consolidation policy 0.01 - 0.01 -
------ ------ ------ ------
Consolidated diluted net
income (loss) per share $ 0.12 $ (0.01) $ 0.17 $ (0.02)
====== ====== ====== ======
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
(In thousands) 12-Weeks Ended 40-Weeks Ended
------------------- ------------------
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
------- ------- ------- -------
Weighted average shares outstanding:
Basic 11,311 11,311 11,311 11,311
Change in consolidation policy (1,148) (506) (1,148) (169)
------ ------ ------ ------
Consolidated basic 10,163 10,805 10,163 11,142
====== ====== ====== ======
Diluted 11,360 11,311 11,360 11,325
Change in consolidation policy (1,148) (506) (1,148) (169)
------ ------ ------ ------
Consolidated diluted 10,212 10,805 10,212 11,156
====== ====== ====== ======
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 1, 2004 are not
necessarily indicative of the results that may be expected for the 53-
week year ending October 31, 2004.
These financial statements should be read in conjunction with the
Company's audited financial statements for the fiscal year ended October
26, 2003 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 four Grady's American Grill
restaurants that were sold in fiscal 2003, one Grady's American Grill
restaurant that was sold and one that was closed in fiscal 2004, six
Grady's American Grill restaurants that the Company sold and leased back
in fiscal 2004 and one Grady's American Grill restaurant that was held
for sale at the end of the third quarter of fiscal 2004, 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 1, 2004
(Unaudited)
Trademarks - The Company owns the trademarks for its Grady's American
Grill, Spageddies Italian Kitchen, Papa Vino's Italian Kitchen, Regas
Grill and Porterhouse Steaks and Seafood. 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 $392,000 as of August 1, 2004. 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 1, 2004 and
October 26, 2003.
Amortized Intangible Assets
- ---------------------------
(Dollars in thousands) As of August 1, 2004
--------------------------------
Gross Carrying Accumulated Net
Amount Amortization Book
Value
Amortized intangible assets: ------- ---------- ---------
Trademarks $ 2,050 $ (1,580) $ 470
Franchise fees and development fees 14,988 (6,559) 8,429
------- ------- ------
Total $ 17,038 $ (8,139) $ 8,899
======= ======= =======
As of October 26, 2003
---------------------------------
Gross Carrying Accumulated Net
Amount Amortization Book
Value
Amortized intangible assets: ------- ---------- --------
Trademarks $ 2,961 $ (1,676) $ 1,285
Franchise fees and development fees 14,782 (5,981) 8,801
------- ------- --------
Total $ 17,743 $ (7,657) $ 10,086
======= ======= ========
The Company's intangible asset amortization expense for the forty-week
period ended August 1, 2004 was $721,000 compared to $841,000 for the
comparable period in fiscal 2003. The estimated annual intangible
amortization expense for each of the next five years is as follows:
Year one $ 872,000
Year two $ 872,000
Year three $ 872,000
Year four $ 848,000
Year five $ 768,000
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
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 1, 2004 and
October 26, 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.
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 Forty
Weeks Ended Weeks Ended
August 1, August 3, August 1, August 3,
2004 2003 2004 2003
------- ------- ------- -------
(In thousands, except per share amounts)
- ---------------------------------------
Net income (loss), as reported $1,236 $ (133) $1,769 $ (233)
Deduct: Total stock option based employee
compensation expense determined by using
the Black-Scholes option pricing model,
net of related tax effects (7) (8) (23) (28)
----- ----- ----- -----
Net income (loss), pro forma $1,229 $ (141) $1,746 $(261)
===== ===== ===== =====
Basic and diluted net income (loss)
per common share, as reported $ 0.12 $ (0.01) $0.17 $(0.02)
===== ===== ===== =====
Basic and diluted net income (loss)
per common share, pro forma $ 0.12 $ (0.01) $0.17 $(0.02)
===== ===== ===== =====
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
Note 3: Acquisitions and Dispositions.
During the first forty weeks of fiscal 2004, the Company received net
proceeds of $8,628,000 from the sale of seven Grady's American Grill
restaurants. The Company recorded a loss in discontinued operations of
$1,094,000 related to the disposal of Grady's restaurants during the
first forty weeks of fiscal 2004. Six of the restaurants sold were sale-
leaseback transactions. In each of the six sale-leaseback
transactions, the Company's lease obligations extend for less than one
year.
The Company purchased the operating assets and franchise rights of five
existing Burger King restaurants from a Burger King franchisee in the
third quarter of fiscal 2004 for $1,150,000. The results of operations
for these Burger King restaurants have been included in the consolidated
financial statements since June 16, 2004.
During the first forty weeks of fiscal 2003, the Company sold three
Grady's American Grill restaurants for net proceeds of $3,041,000. The
Company recorded a $4,354,000 loss in discontinued operations related to
these sales and impairments in the first forty weeks of fiscal 2003.
As discussed in Note 2, discontinued operations includes the revenues
and expenses of the four Grady's American Grill restaurants that were
sold in fiscal 2003, the seven restaurants sold and one restaurant
closed in the first forty weeks of fiscal 2004 and the one restaurant
that was being held for sale as of August 1, 2004. The decision to
dispose of the 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 restaurant equipment totaling $9,000 as of August 1, 2004.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
Net income (loss) from discontinued operations for the periods ended
August 1, 2004, and August 3, 2003 were made up of the following
components:
Twelve Forty
Weeks Ended Weeks Ended
August 1, August 3, August1, August 3,
2004 2003 2004 2003
----- ----- ----- ------
(In thousands, except per share amounts)
- ----------------------------------------
Revenue discontinued operations $1,460 $3,084 $7,239 $13,570
Income (loss) discontinued restaurant
operations (63) 62 77 591
Asset impairment and facility closing
expense (94) (50) (1,555) (4,575)
Gain on sale of property and
equipment 2 275 574 221
----- ----- ----- -----
Loss before taxes (159) 287 (904) (3,762)
Income tax provision (8) (9) (27) (33)
----- ----- ----- -----
Income (loss) from discontinued
operations $ (167) $ 278 $ (931) $(3,795)
===== ===== ===== =====
Basic and diluted income (loss) per
share from discontinued operations $(0.02) $ 0.03 $(0.09) $ (0.34)
===== ===== ===== =====
Note 4: Commitments.
The Company is self-insured for a portion of its employee health care
costs. The Company is liable for medical claims up to $125,000 per
eligible employee annually, and aggregate annual claims up to
approximately $3,160,000. The aggregate annual deductible is determined
by the number of eligible covered employees during the year and the
coverage they elect.
The Company is self-insured with respect to any worker's compensation
claims not covered by insurance. The Company maintains a $250,000 per
occurrence deductible and is liable for aggregate claims up to
$2,400,000 for the twelve-month period beginning September 1, 2003 and
ending August 31, 2004.
The Company is self-insured with respect to any general liability claims
below the Company's self-insured retention of $150,000 per occurrence
for the twelve-month period beginning September 1, 2003 and ending
August 31, 2004.
As of August 1, 2004, the Company had accrued $4,311,000 for the
estimated expense for its self-insured insurance plans. These accruals
require management to make significant estimates and assumptions. Actual
results could differ from management's estimates.
At August 1, 2004, the Company had commitments aggregating $108,000 for
the construction of restaurants.
The Company is involved in various legal proceedings incidental to the
conduct of its business, including employment discrimination claims.
Based upon currently available information, the Company does not expect
that any such proceedings will have a material adverse effect on the
Company's financial position or results of operations but there can be
no assurance thereof.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
Note 5: Debt Instruments.
As of August 1, 2004, the Company had a financing package totaling
$89,066,000, consisting of a $40,000,000 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, financial covenants that require the Company to
maintain a consolidated fixed charge coverage ratio of at least 1.30 for
each of six subsets of the financed properties.
The Company was not in compliance with the required consolidated fixed
charge coverage ratio for two of the subsets of the financed properties
as of October 26, 2003. Both of these subsets were comprised solely of
Burger King restaurants and had fixed charge coverage ratios of 1.11 and
1.26 as of October 26, 2003. The Company sought and obtained waivers of
these covenant defaults from the mortgage lenders through November 28,
2004. The Company does not expect to be in compliance with these
covenants by November 28, 2004. If the Company is not in compliance
with these covenants as of November 28, 2004, the Company will most
likely seek additional waivers. The Company believes it would be able
to obtain such waivers but there can be no assurance thereof. If the
Company is unable to obtain such waivers it is contractually entitled to
pre-pay the outstanding balances under one or more of the separate
mortgage notes such that the remaining properties in the subsets would
meet the required ratio. However, any such prepayments would be subject
to prepayment premiums and to the Company's ability to maintain its
compliance with the financial covenants in its Bank Facility.
Alternatively, the Company is contractually entitled to substitute one
or more better performing restaurants for under-performing restaurants
such that the reconstituted subsets of properties would meet the
required ratio. However, any such substitutions would require the
consent of the lenders in the Bank Facility. For these reasons, the
Company believes that its rights to prepay mortgage notes or substitute
properties may be impractical depending on the circumstances existing at
the time.
On June 10, 2002, the Company refinanced its Bank Facility with a
$60,000,000 revolving credit agreement with JP Morgan Chase Bank, as
agent, and four other banks. During the third quarter of fiscal 2004
the Company voluntarily reduced the capacity under the revolving credit
agreement to $40,000,000. 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.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
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 3.00 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 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
The Company's funded debt to consolidated cash flow ratio may not exceed
3.75 through the third quarter of fiscal 2004 and 3.50 by the end of
fiscal 2004. The Company's funded debt to consolidated cash flow ratio
on August 1, 2004 was 3.16.
If the Company does not maintain the required funded debt to
consolidated cash flow ratio, that would constitute an event of default
under the Bank Facility. The Company would then need to seek waivers
from its lenders or amendments to the covenants. If the Company was
unable to obtain waivers from its lenders or amendments to the covenants
the Company would be in default under the Bank Facility. During
continuance of an event of default, the Company would be subject to a
post-default interest rate under the Bank Facility that increases the
otherwise effective interest rate by 1.50%. In addition to the right to
declare all obligations immediately due and payable, the Bank Facility
also has additional rights including, among other things, the right to
sell any of the collateral securing the Company's obligations under the
Bank Facility. In the event the Company's obligations under the Bank
Facility become immediately due and payable the Company does not have
sufficient liquidity to satisfy these obligations and it is likely that
the Company would be forced to seek protection from its creditors. Such
events would also constitute a default under the Company's franchise
agreements with Brinker and Burger King Corporation.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
Note 6: Net Income 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 earnings per share is based on the weighted average number of
common shares outstanding plus all potential dilutive common shares
outstanding. For all years presented, the difference between basic and
diluted shares represents options on common stock. For the twelve and
forty week periods ended August 1, 2004, 528,843 options were excluded
from the diluted earnings per share calculations because to include them
would have been anti-dilutive. For the twelve and forty week periods
ended August 1, 2003, 575,053 and 581,053 options respectively were
excluded from the diluted earnings per share calculations because to
include them would have been anti-dilutive.
Note 7: Other Information
On June 15, 2004 a group of seven shareholders led by Company CEO Daniel
B. Fitzpatrick presented the Board with a proposal to purchase all
outstanding shares of common stock owned by the public shareholders.
Under the terms of the proposed transaction, the public holders of the
outstanding shares of the Company would each receive $2.75 per share in
cash in exchange for their shares. The purchase would take the form of
a merger in which the Company would survive as a privately held
corporation. The group advised the Board that it is not interested in
selling its shares to a third party, whether in connection with a sale
of the company or otherwise.
In response to the proposal, the Board appointed a special committee of
independent directors to evaluate the transaction and make a
recommendation to shareholders. The committee has retained independent
legal and financial advisors to assist the committee.
The proposed transaction is subject to certain conditions, including the
negotiation of definitive agreements, the obtaining of the necessary
financing for the merger and the refinancing of the Company's
outstanding bank debt, the approval of the Company's franchisors and the
approval of the Board of Directors and the shareholders of the Company.
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
Note 8: 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 "all other"
column is the VIE activity, see Note 2. The "other reconciling items"
column includes corporate related items, intercompany eliminations and
income and expense not allocated to reportable segments.
Other
Full Quick All Reconciling
(Dollars in thousands) Service Service Other Items Total
- ----------------------------------------------------------------------------
Third quarter fiscal 2004
- ---------------------------
Revenues $25,378 $31,561 $ 892 $ (892) $ 56,939
Income from restaurant
operations 3,325 4,042 737 (126) 7,978
Operating income (loss) 1,977 1,768 718 (185) 4,278
Interest expense (1,462)
Other expense (629)
Income from continuing
operations before income ------
taxes $ 2,187
======
Total Assets 72,613 48,214 17,919 10,745 $149,491
Depreciation and
amortization 1,047 1,030 113 140 $ 2,330
Third quarter fiscal 2003
- ---------------------------
Revenues $24,180 $27,851 $ 843 $ (843) $ 52,031
Income from restaurant
operations 2,906 3,616 700 (133) 7,089
Operating income (loss) 1,562 1,317 676 (427) 3,128
Interest expense (1,561)
Other income (1,797)
Loss from continuing
operations before income ------
taxes $ (230)
======
Total Assets 76,511 49,246 18,855 16,818 $161,430
Depreciation and
amortization 1,122 1,135 118 238 $ 2,613
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2004
(Unaudited)
Other
Full Quick All Reconciling
(Dollars in thousands) Service Service Other Items Total
- -----------------------------------------------------------------------------
First forty weeks of fiscal 2004
- ---------------------------------------
Revenues $82,783 $90,446 $2,831 $(2,831) $173,229
Income from restaurant
operations 10,890 10,351 2,318 (425) 23,134
Operating income (loss) 6,482 2,796 2,280 (922) 10,636
Interest expense (4,985)
Other income (1,608)
Income from continuing
operations before income -------
taxes $ 4,043
=======
Total Assets 72,613 48,214 17,919 10,745 $149,491
Depreciation and
amortization 3,560 3,373 373 538 $ 7,844
First forty weeks of fiscal 2003
- ---------------------------------------
Revenues $79,620 $87,244 $2,697 (2,697) $166,864
Income from restaurant
operations 10,757 9,472 2,216 (440) 22,005
Operating income (loss) 6,205 1,853 2,149 (1,345) 8,862
Interest expense (5,554)
Other income 1,031
Income from continuing -------
operations before income
taxes $ 4,339
=======
Total Assets 76,511 49,246 18,855 16,818 $161,430
Depreciation and
amortization 3,728 3,847 391 623 $ 8,589
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 53 weeks and
ends October 31, 2004. The first quarter of the Company's fiscal year
consists of 16 weeks. The second and third quarter of fiscal 2004 each
consist of 12 weeks. The fiscal 2004 fourth quarter consists of 13
weeks.
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 1, August 3, August 1, August 3,
2004 2003 2004 2003
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Restaurant operating expenses
Food and beverage 28.1 26.7 27.6 26.8
Payroll and benefits 28.5 29.1 28.9 29.2
Depreciation and amortization 3.8 4.3 4.1 4.6
Other operating expenses 25.6 26.3 26.0 26.2
----- ----- ----- -----
Total restaurant operating expenses 86.0 86.4 86.6 86.8
----- ----- ----- -----
Income from operations 14.0 13.6 13.4 13.2
----- ----- ----- -----
General and administrative 6.5 7.4 7.1 7.7
Amortization of intangibles - 0.2 0.1 0.2
----- ----- ----- -----
Operating income 7.5 6.0 6.2 5.3
----- ----- ----- -----
Other income (expense):
Recovery of note receivable - - - 2.1
Interest expense (2.6) (3.0) (2.9) (3.3)
Minority interest in earnings (1.1) (1.2) (1.0) (1.2)
Stock purchase expense - (2.5) - (0.8)
Other income, net - 0.2 - 0.5
----- ----- ----- -----
Total other income (expense), net (3.7) (6.5) (3.9) (2.7)
----- ----- ----- -----
Income (loss) from continuing
operations before income taxes 3.8 (0.5) 2.3 2.6
Income tax provision 1.4 0.3 0.8 0.5
----- ----- ----- -----
Income (loss) from continuing
operations 2.4 (0.8) 1.5 2.1
Income (loss) from discontinued
operations, net of tax (0.3) 0.5 (0.5) (2.2)
----- ----- ----- -----
Net Income (loss) 2.1% (0.3)% 1.0% (0.1)%
==== ==== ==== ====
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Restaurant sales for the Company were $56,939,000 for the third quarter
of fiscal 2004 versus $52,031,000 for the comparable period in fiscal
2003, an increase of $4,908,000. Restaurant sales for the first forty
weeks of fiscal 2004 were $173,229,000 versus $166,864,000 for the
comparable period in fiscal 2003, an increase of $6,365,000.
The Company's Burger King restaurant sales were $31,561,000 in the third
quarter of fiscal 2004 compared to sales of $27,851,000 in the same
period of fiscal 2003, an increase of $3,710,000. The Company had
increased revenue of $994,000 from the three new restaurants opened in
fiscal 2003 and the five restaurants purchased from a third party in the
third quarter of fiscal 2004. The Company's Burger King restaurants had
average weekly sales of $21,773 in the third quarter of fiscal 2004
versus $19,825 in the same period in fiscal 2003. Sales at restaurants
open for more than one year increased 8.8% in the third quarter of
fiscal 2004 when compared to the same period in fiscal 2003. Sales
increased $3,202,000 to $90,446,000 for the first forty weeks of fiscal
2004 compared to $87,244,000 for the comparable period in fiscal 2003.
The Company had increased revenue of $2,204,000 from the three new
restaurants opened in fiscal 2003 and the five restaurants purchased in
fiscal 2004. Average weekly sales were $19,027 in the first forty weeks
of fiscal 2004 versus $18,802 in the same period in fiscal 2003. Sales
at restaurants open for more than one year increased 0.7% in the first
forty weeks of fiscal 2004 when compared to the same period in fiscal
2003. During the third quarter of fiscal 2004 Burger King introduced
some appealing new products and had improved promotional campaigns. The
Company believes these actions were responsible for the positive same
store sales results.
The Company's Chili's Grill & Bar restaurant sales increased $1,606,000
to $20,634,000 in the third quarter of fiscal 2004 compared to
$19,028,000 in the same period in fiscal 2003. The Company had increased
revenue of $1,986,000 from three restaurants opened during fiscal 2003
and two restaurants opened in fiscal 2004. Average weekly sales
decreased to $44,760 in the third quarter of fiscal 2004 versus $45,630
in the same period of fiscal 2003. Sales at restaurants open for more
than one year decreased 2.0% in the third quarter of fiscal 2004 when
compared to the same period in fiscal 2003. Sales for the first forty
weeks of fiscal 2004 increased $4,627,000 to $65,787,000 compared to
$61,160,000 for the same period in fiscal 2003. The Company had
increased revenue of $5,669,000 from three restaurants opened during
fiscal 2004 and two restaurants opened in fiscal 2003. The average
weekly sales were $43,799 in the first forty weeks of fiscal 2004 versus
$44,675 in the same period in fiscal 2003. Sales at restaurants open for
more than one year decreased 1.9% in the first forty weeks of fiscal
2004 when compared to the same period in fiscal 2003.
The Company's Italian Dining Division restaurant sales decreased
$283,000 to $3,581,000 in the third quarter of fiscal 2004 compared to
$3,864,000 in the same period in fiscal 2003. The average weekly sales
were $33,154 in the third quarter of fiscal 2004 versus $35,776 in the
same period of fiscal 2003. Sales at restaurants open for more than one
year decreased 7.3% in the third quarter of fiscal 2004 when compared to
the same period in fiscal 2003. Sales for the first forty weeks of
fiscal 2004 decreased $1,198,000 to $12,473,000 compared to $13,671,000
for the same period in fiscal 2003. The average weekly sales were
$34,647 in the first forty weeks of fiscal 2004 versus $37,976 in the
same period in fiscal 2003. Sales at restaurants open for more than one
year decreased 9.1% in the first forty weeks of fiscal 2004 when
compared to the same period in fiscal 2003. The Company has experienced
significant competitive intrusion in the markets where it has Italian
Dining restaurants.
Sales in the Company's Grady's American Grill restaurant division were
$1,163,000 in the third quarter of fiscal 2004 compared to sales of
$1,288,000 in the same period in fiscal 2003, a decrease of $125,000.
The Company sold four units in fiscal 2003, closed one unit in fiscal
2004, sold and leased back six restaurants in fiscal 2004 and had one
restaurant classified as held for sale as of August 1, 2004. As required
by SFAS 144, the results of operations for these restaurants have been
classified as discontinued operations for all periods reported. The
remaining three Grady's American Grill restaurants had average weekly
sales of $32,306 in the third quarter of fiscal 2004 versus $35,778 in
the third quarter of fiscal 2003, a decrease of 9.7%.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Sales in the Company's Grady's American Grill restaurant division were
$4,523,000 in the first forty weeks of fiscal 2004 compared to sales of
$4,789,000 in the same period in fiscal 2003, a decrease of $266,000.
The remaining three Grady's American Grill restaurants had average
weekly sales of $37,692 in the first forty weeks of fiscal 2004 versus
$39,908 in the same period of fiscal 2003, a decrease of 5.6%. The
Company believes sales declines in its Grady's American Grill division
resulted from competitive intrusion and the Company's inability to
efficiently market this concept.
Total restaurant operating expenses, as a percentage of restaurant
sales, decreased to 86.0% for the third quarter of fiscal 2004 versus
86.4% in the third quarter of fiscal 2003, and decreased to 86.6% in the
first forty weeks of fiscal 2004 versus 86.8% in the same period of
fiscal 2003. The following factors influenced the operating margins.
Food and beverage costs increased to 28.1% of total revenues in the
third quarter of fiscal 2004 compared to 26.7% of total revenues in the
same period in fiscal 2003, and 27.6% in the first forty weeks of fiscal
2004 compared to 26.8% in the same period of fiscal 2003. Food and
beverage costs have increased in both the full service and quick service
segments. The increases are mainly due to higher dairy, poultry and
beef costs. The Company expects the cost pressures to persist for the
rest of fiscal 2004.
Payroll and benefits were 28.5% of total revenues in the third quarter
of fiscal 2004 compared to 29.1% in the same period of fiscal 2003.
Payroll and benefits were 28.9% of total revenues in the first forty
weeks of fiscal 2004 compared to 29.2% in the same period of fiscal
2003. The Company had lower payroll and benefits expense, as a
percentage of sales, in the quick service segment for both the quarter
and forty weeks ended August 1, 2004. The improvement was mainly due to
the Company's focus on payroll costs and higher average unit volumes.
The Company had lower payroll and benefits expense, as a percentage of
sales, in the full service segment for both the quarter and forty weeks
ended August 1, 2004. The decrease was mainly due to the reduction in
the number of Grady's restaurants operated by the Company.
Depreciation and amortization, as a percentage of total revenues,
decreased to 3.8% for the third quarter of fiscal 2004 compared to 4.3%
in the same period in fiscal 2003. The decrease was mainly due to a
$105,000 decrease in depreciation expense in the quick service segment.
The decrease was mainly due to certain assets becoming fully
depreciated. Depreciation and amortization, as a percentage of total
revenues, decreased to 4.1% in the first forty weeks of fiscal 2004
compared to 4.6% in the same period in fiscal 2003. The decrease was
mainly due to a $474,000 decrease in depreciation expense in the quick
service segment. The decrease was mainly due to certain assets becoming
fully depreciated. As disclosed in note 5 to the 2003 Annual Report on
Form 10-K, in fiscal 2000 the Company executed a "Franchisee Commitment"
pursuant to which it agreed to undertake certain initiatives including
capital improvements and other routine maintenance in all of its Burger
King restaurants. The Capital Portion of the Franchise
Commitment($1,966,000) was originally recorded as a reduction in the
cost of the assets acquired. Consequently, the Company has not and will
not incur depreciation expense over the useful life of these assets
(which range between five and ten years).
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 decreased in the third quarter of fiscal 2004 to 25.6%
compared to 26.3% in the same period of fiscal 2003. They decreased to
26.0% in the first forty weeks of fiscal 2004 compared to 26.2% in the
same period of fiscal 2003. The Company's other operating expenses, as a
percentage of sales, decreased in the third quarter of fiscal 2004,
mainly due to the reduction in the number of Grady's American Grill
restaurants. The Company participated in the Burger King 2000 and 2001
Early Renewal programs that included a royalty reduction as an incentive
to franchisees to renew franchise agreements early. The Company
included 39 restaurants in the Early Renewal programs. In the first
forty weeks of fiscal 2004 and fiscal 2003 the Company's participation
in the Early Renewal program reduced the Company's royalty expense by
$305,000 and $218,000, respectively.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Income from restaurant operations increased $889,000 to $7,978,000, or
14.0% of revenues, in the third quarter of fiscal 2004 compared to
$7,089,000, or 13.6% of revenues, in the comparable period of fiscal
2003. Income from restaurant operations in the Company's Quick Service
segment increased $426,000 while the Company's Full Service segment
increased $419,000 from the prior year. Income from restaurant
operations increased $1,129,000 to $23,134,000, or 13.4% of revenues, in
the first forty weeks of fiscal 2004 compared to $22,005,000, or 13.2%
of revenues, in the comparable period of fiscal 2003. Income from
restaurant operations in the Company's Quick Service segment increased
$879,000 while the Company's Full Service segment increased $133,000
when compared to the first forty weeks of the prior year.
General and administrative expenses were $3,675,000 in the third quarter
of fiscal 2004 compared to $3,861,000 in the third quarter of fiscal
2003 and $12,354,000 in the first forty weeks of fiscal 2004 compared to
$12,841,000 in the same period of fiscal 2003. As a percentage of total
restaurant sales, general and administrative expenses were 6.5% in the
third quarter of fiscal 2004 versus 7.4% in the third quarter of fiscal
2003, and 7.1% in the first forty weeks of fiscal 2004 compared to 7.7%
in the same period of fiscal 2003. The Company has had less legal
expenses in fiscal 2004 than in fiscal 2003. In the third quarter of
fiscal 2003 the Company recorded approximately $2,000 in expenses
related to the Company's litigation with BFBC, LTD and in the first
forty weeks of fiscal 2003 the Company recorded approximately $286,000
for the BFBC, LTD litigation. The Company did not have similar expense
in fiscal 2004. Also, the Company has significantly reduced the number
of Grady's restaurants it owns which has enabled the Company to reduce
the costs associated with supervising the Grady's concept. The Company
had reduced supervisory costs of $51,000 in the third quarter and
$126,000 in the first forty weeks of fiscal 2004 compared to the same
periods in fiscal 2003.
Total interest expense for the third quarter of fiscal 2004 was
$1,462,000 compared to $1,561,000 during the same period in fiscal 2003.
Total interest expense was $4,985,000 in the first forty weeks of fiscal
2004 compared to interest expense of $5,554,000 in the same period of
fiscal 2003. The decreases were mainly due to lower debt levels.
During the third 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. The Company did not have any similar
activity in fiscal 2004.
Minority interest in earnings pertains to certain related party
affiliates that are variable interest entities. The Company holds no
direct ownership or voting interest in the VIE's. Minority interest in
earnings was $618,000 for the third quarter of fiscal 2004 versus
$604,000 in the comparable period in fiscal 2003. Minority interest in
earnings was $1,672,000 for the first forty weeks of fiscal 2004 versus
$1,974,000 in the comparable period in fiscal 2003. See Note 2 in the
Company's consolidated financial statements for the impact of the
variable interest entities on specific income statement categories.
The provision for income taxes was $784,000 for the third quarter of
fiscal 2004 versus $181,000 in the comparable period in fiscal 2003. The
provision for income taxes was $1,343,000 for the first forty weeks of
fiscal 2004 versus $777,000 in the comparable period in fiscal 2003.
The increase in income tax expense is due to the Company recording
$663,000 in federal income tax expense in the first forty weeks of
fiscal 2004 versus none in fiscal 2003. At the end of the third quarter
of fiscal 2004 the Company had a valuation reserve against its deferred
tax asset resulting in a net deferred tax asset of $8.3 million versus a
net deferred tax asset of $9.0 million at the end of fiscal 2003.
Absent a significant and unforeseen change in facts or circumstances,
management re-evaluates the realizability of its tax assets in
connection with its annual budgeting cycle. Management does not believe
there were any significant changes in facts or circumstances through the
end of the third quarter of fiscal 2004.
2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Discontinued operations includes all disposed of restaurants and the six
current Grady's American Grill restaurants, which at the end of the
third quarter the Company expected to sell or close before the end of
fiscal 2004. The decision to dispose of these 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 loss from
discontinued operations for the third quarter of fiscal 2004 was
$167,000 versus income of $278,000 in the same period of fiscal 2003.
The net loss from discontinued operations for the first forty weeks of
fiscal 2004 was $931,000 versus a loss of $3,795,000 in the same period
in fiscal 2003. The fiscal 2004 results include impairment and facility
closing expenses of $1,555,000 versus $4,575,000 in fiscal 2003.
The total restaurant sales from discontinued operations for the third
quarter of fiscal 2004 were $1,460,000 versus $3,084,000 in fiscal 2003.
The total restaurant sales from discontinued operations for the first
forty weeks of fiscal 2004 were $7,239,000 versus $13,570,000 in the
same period in fiscal 2003.
For the third quarter of fiscal 2004, the Company reported net income of
$1,236,000 compared to a net loss of $133,000 for the third quarter of
fiscal 2003. For the first forty weeks of fiscal 2004, the Company
reported net income of $1,769,000 compared to a net loss of $233,000 for
the same period in fiscal 2003.
Management Outlook
The following section contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
including statements about trends in and the impact of certain
initiatives upon 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.
Quick Service
The quick service segment of the restaurant industry is a very mature
and competitive segment, which is dominated by several national chains.
Market share is gained through national media campaigns promoting
specific sandwiches, usually at a discounted price. The national chains
extend marketing efforts to include nationwide premiums and movie tie-
ins. To date in fiscal 2004, other chains in the quick-service
restaurant industry, including McDonald's and Wendy's, have conducted
promotional campaigns and introduced new products which have been
successful in taking market share away from Burger King. During the
third quarter of fiscal 2004 Burger King introduced some appealing new
products and improved promotional campaigns. The Company believes these
changes were responsible for the positive same store sales results
during the third quarter of fiscal 2004. The Company does not know if
this positive sales momentum will continue in the fourth quarter of
fiscal 2004.
Full Service
The full service segment of the restaurant industry is also mature and
competitive. This segment has a few national companies that utilize
national media efficiently. This segment also has numerous regional and
local chains that provide service and products comparable to the
national chains but cannot support significant marketing campaigns. The
Company operates three restaurant concepts that compete in the full
service segment.
2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
During fiscal 2004, the Company has continued to emphasize the
operational and marketing initiatives that contributed to the success of
its Chili's division in fiscal 2003. While the comparable store sales
trends were not as good as the Company had expected, the Company expects
steady financial results for the remainder of fiscal 2004.
During fiscal 2004, the Company continues to experience a deterioration
in its Italian Dining division's profitability. The Company has
experienced significant competitive intrusion in the markets where it
has Italian Dining restaurants. The Company expects the competitive
pressures to continue for the remainder of fiscal 2004.
During fiscal 2004, the Grady's American Grill concept was negatively
affected by competitive intrusion in the Company's markets and
limitations in the Company's ability to efficiently market its
restaurants. The Company will continue to consider opportunities to
divest under-performing or non-strategic restaurants during fiscal 2004.
The Company expects the Grady's American Grill division's operating
performance to continue to decline during fiscal 2004.
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 the Company's
historical operating results, estimates of future taxable income and
ongoing feasible tax strategies in assessing the need for the valuation
allowance. The Company believes the positive evidence includes the
historically consistent profitability of its Chili's, Italian Dining and
Burger King divisions, and the resolution of substantially all of its
bagel-related contingent liabilities. The Company believes the negative
evidence includes the persistent negative trends in its Grady's American
Grill division and the lack of sales momentum in its Burger King
division. During the first forty weeks of fiscal 2004, the Company
continued to experience unusual uncertainty concerning whether, when and
to what extent the recent lack of sales momentum in its Burger King
division will be reversed. In estimating its deferred tax asset,
management used its 2004 operating plan as the basis for a forecast of
future taxable earnings. Management did not incorporate growth
assumptions and limited the forecast to five years, the period that
management believes it can project results that are more likely than not
achievable. Absent a significant and unforeseen change in facts or
circumstances, management re-evaluates the realizability of its tax
assets in connection with its annual budgeting cycle.
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 2004, net cash provided by operating
activities was $14,343,000 compared to $11,186,000 in fiscal 2003. The
increase was mainly due to changes in working capital that provided cash
in fiscal 2004 versus changes in working capital that used cash in
fiscal 2003.
During the first forty weeks of fiscal 2004, the Company had $7,359,000
in capital expenditures in connection with the building of two new full
service restaurants, the purchase of five existing Burger King
restaurants and the refurbishing of existing restaurants.
During the first forty weeks of fiscal 2004, the Company had $8,637,000
in proceeds from the sales of property and equipment.
The Company had a net repayment of $11,250,000 under its revolving
credit agreement during the first forty weeks of fiscal 2004. As of
August 1, 2004, the Company's revolving credit agreement had an
additional $5,670,000 of capacity. The Company's average borrowing rate
on August 1, 2004, was 4.36%.
The Company's primary cash requirements in fiscal 2004 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. The Company plans to open one Burger King restaurant during
the fourth quarter of fiscal 2004. 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 the remainder of fiscal
2004 are expected to range from $1,000,000 to $2,000,000. If the
Company has alternative uses or needs for its cash, the Company believes
it could reduce such planned expenditures without affecting its current
operations. The Company has debt service requirements of approximately
$1,474,000 in fiscal 2004, consisting primarily of the principal
payments required under its mortgage facility. The Company expects to
reduce its borrowings under its revolving credit agreement by $2,000,000
within the next year and therefore has classified $2,000,000 of
revolving credit debt as current. The Company had $4,794,000 of current
debt related to the consolidation of its variable interest entities, see
Note 2.
The Company anticipates that its cash flow from operations, together
with the available capacity under its revolving credit agreement as of
August 1, 2004, will provide sufficient funds for its operating, capital
expenditure, debt service and other requirements through the end of
fiscal 2004.
As of August 1, 2004, the Company had a financing package totaling
$89,066,000, consisting of a $40,000,000 revolving credit agreement (the
"Bank Facility") and a $49,066,000 mortgage facility (the "Mortgage
Facility"), as described below.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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, financial covenants that require the Company to
maintain a consolidated fixed charge coverage ratio of at least 1.30 for
each of six subsets of the financed properties.
The Company was not in compliance with the required consolidated fixed
charge coverage ratio for two of the subsets of the financed properties
as of October 26, 2003. Both of these subsets are comprised solely of
Burger King restaurants and had fixed charge coverage ratios of 1.11 and
1.26. The Company sought and obtained waivers of these covenant defaults
from the mortgage lenders through November 28, 2004. If the Company is
not in compliance with these covenants as of November 28, 2004, the
Company will most likely seek additional waivers. The Company believes
it would be able to obtain such waivers but there can be no assurance
thereof. If the Company is unable to obtain such waivers it is
contractually entitled to pre-pay the outstanding balances under one or
more of the separate mortgage notes such that the remaining properties
in the subsets would meet the required ratio. However, any such
prepayments would be subject to prepayment premiums and to the Company's
ability to maintain its compliance with the financial covenants in its
Bank Facility. Alternatively, the Company is contractually entitled to
substitute one or more better performing restaurants for under-
performing restaurants such that the reconstituted subsets of properties
would meet the required ratio. However, any such substitutions would
require the consent of the lenders in the Bank Facility. For these
reasons, the Company believes that its rights to prepay mortgage notes
or substitute properties may be impractical depending on the
circumstances existing at the time.
On June 10, 2002, the Company refinanced its Bank Facility with a
$60,000,000 revolving credit agreement with JP Morgan Chase Bank, as
agent, and four other banks. During the third quarter of fiscal 2004
the Company exercised its right to unilaterally reduce the capacity
under the revolving credit agreement to $40,000,000. 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 3.00 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 for fiscal
2004 and 2005 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
The Company's funded debt to consolidated cash flow ratio may not exceed
3.75 through the third quarter of fiscal 2004 and 3.50 by the end of
fiscal 2004. The Company's funded debt to consolidated cash flow ratio
on August 1, 2004 was 3.16.
If the Company does not maintain the required funded debt to
consolidated cash flow ratio that would constitute an event of default
under the Bank Facility. The Company would then need to seek waivers
from its lenders or amendments to the covenants. If the Company was
unable to obtain waivers from its lenders or amendments to the covenants
the Company would be in default under the Bank Facility. During
continuance of an event of default, the Company would be subject to a
post-default interest rate under the Bank Facility that increases the
otherwise effective interest rate by 1.50%. In addition to the right to
declare all obligations immediately due and payable, the Bank Facility
also has additional rights including, among other things, the right to
sell any of the collateral securing the Company's obligations under the
Bank Facility. In the event the Company's obligations under the Bank
Facility become immediately due and payable the Company does not have
sufficient liquidity to satisfy these obligations and it is likely that
the Company would be forced to seek protection from its creditors. Such
events would also constitute a default under the Company's franchise
agreements with Brinker and Burger King Corporation.
Critical Accounting Policies
- ----------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations are based upon the Company's 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.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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,
at least annually, or as circumstances dictate, management 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. In determining fair value, the
Company relies primarily on discounted cash flow analyses that
incorporates an investment horizon of five years and utilizes a risk
adjusted discount factor. If these assumptions change in the future,
management may be required to record impairment charges for these
assets.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 the Company's
historical operating results, estimates of future taxable income and
ongoing feasible tax strategies in assessing the need for the valuation
allowance. In estimating its deferred tax asset, management used its
2004 operating plan as the basis for a forecast of future taxable
earnings. Management did not incorporate growth assumptions and limited
the forecast to five years, the period that management believes it can
project results that are more likely than not achievable. Absent a
significant and unforeseen change in facts or circumstances, management
re-evaluates the realizability of its tax assets in connection with its
annual budgeting cycle.
The Company operates in a very competitive industry that can be
significantly affected by changes in local, regional or national
economic conditions, changes in consumer tastes, weather conditions and
various other consumer concerns. Accordingly, the amount of the
deferred tax asset considered by management to be realizable, more
likely than not, could change in the near term if estimates of future
taxable income change. This could result in a charge to, or 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.
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 claims experience may change in the
future and may require management to revise these accruals.
The Company is periodically involved in various legal actions arising in
the normal course of business. Management is required to assess the
probability of any adverse judgments as well as the potential ranges of
any losses. Management determines the required accruals after a careful
review of the facts of each legal action and assistance from outside
legal counsel. The accruals may change in the future due to new
developments in these matters.
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.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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
$40.0 million revolving credit facility that provides for interest
payable at the LIBOR rate plus a contractual spread. The Company's
variable rate borrowings under this revolving credit facility totaled
$32.4 million at August 1, 2004. The impact on the Company's annual
results of operations of a one-point interest rate change would be
approximately $324,000.
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 4 to the unaudited consolidated financial statements of the Company
included in Part I of this report is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
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.
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 15, 2004 By: /s/John C. Firth
----------------------------
Executive Vice President
General Counsel and Secretary
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- ---------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal
Financial Officer
32.1 Section 1350 Certification of Chief Executive
Officer
32.2 Section 1350 Certification of Executive Vice
President and General Counsel (Principal Financial
Officer)
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
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 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 report;
3.Based on my knowledge, the financial statements, and other financial
information included in this 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 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 report is being prepared;
b.Evaluated the effectiveness of the registrant's disclosure controls
and procedures and 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 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; and
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
registrant's board of directors (or persons performing the
equivalent functions):
a.All significant deficiencies or 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 15, 2004
/s/ Daniel B. Fitzpatrick
Daniel B. Fitzpatrick
President and Chief Executive Officer
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
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 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 report;
3.Based on my knowledge, the financial statements, and other financial
information included in this 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 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 report is being prepared;
b.Evaluated the effectiveness of the registrant's disclosure controls
and procedures and 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 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; and
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
registrant's board of directors (or persons performing the equivalent
functions):
a.All significant deficiencies or 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 15, 2004
/s/ John C. Firth
John C. Firth
Executive Vice President and
General Counsel (Principal Financial Officer)
EXHIBIT 32.1
QUALITY DINING, INC.
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 1, 2004 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 15, 2004
EXHIBIT 32.2
QUALITY DINING, INC.
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 1, 2004 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 15, 2004