ITEM 1. BUSINESS.
GENERAL
Quality Dining, Inc. (the "Company") operates four distinct restaurant concepts. It owns the Grady's American Grill(R) and two Italian Dining concepts and operates Burger King(R) restaurants and Chili's Grill & Bar(TM) ("Chili's"(R)) as a franchisee of Burger King Corporation and Brinker International, Inc. ("Brinker"), respectively. The Company operates its Italian Dining restaurants under the tradenames of Spageddies Italian Kitchen(R) ("Spageddies"(R)) and Papa Vino's Italian Kitchen(R) ("Papa Vino's"(R)). As of October 29, 2000, the Company operated 145 restaurants, including 71 Burger King restaurants, 31 Chili's, 35 Grady's American Grill restaurants, three Spageddies and five Papa Vino's. Summarized financial information concerning the Company's reportable segments is included in Note 14 to the Company's financial statements included elsewhere in this report.
The Company was founded in 1981 and has grown from a two-unit Burger King franchisee to a multi-concept restaurant operator. The Company has grown by capitalizing on (i) its significant presence in targeted markets, (ii) the stable operating performance of its Burger King restaurants, (iii) strategic acquisitions of Burger King restaurants, Chili's restaurants and the Grady's American Grill concept, and (iv) management's extensive experience.
The Company is an Indiana corporation, which is the indirect successor to a corporation that commenced operations in 1981. Prior to the consummation of the Company's initial public offering on March 8, 1994 (the "Offering"), the business of the Company was transacted by the Company and eight affiliated corporations. As a result of a reorganization effected prior to the Offering, the Company became a management holding company. The Company, as used herein, means Quality Dining, Inc. and all of its subsidiaries.
DISPOSITION OF BAGEL-RELATED BUSINESSES
On October 20, 1997, the Company sold its bagel-related businesses to Mr. Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and their affiliates. The Company's board of directors determined to sell the bagel-related businesses after a careful evaluation of the future prospects for the bagel business, the competitive environment that then existed in the bagel segment, and the historical performance of the Company's bagel-related businesses. The sale included the stock of Bruegger's Corporation and the stock of all of the other bagel-related businesses. The total proceeds from the sale were $45,164,000. The consideration included the issuance by Bruegger's Corporation of a junior subordinated note in the amount of $10,000,000 (the "Subordinated Note"), which was recorded net of a $4,000,000 reserve for legal indemnification, the transfer of 4,310,740 shares of the Company's common stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a receivable for purchase price adjustment of $500,000, and $16,841,000 in cash. The cash component of the proceeds included an adjustment for the calculation of the net working capital deficit. The calculation used was subject to final adjustment and is being disputed by Messrs. Brue and Dressell. See ITEM 3 - Legal Proceedings. The Subordinated Note has an annual interest rate of 12%, matures in October 2004 and is guaranteed by certain affiliates of Bruegger's Corporation ("Affiliate Guarantors"). The Subordinated Note provides that interest is to be accrued and added to the principal amount of the note through October 2000 and thereafter paid in cash for the remaining life of the note. The Company has never recognized any interest income from this note. Bruegger's Corporation failed to make the interest payment on the Subordinated Note that was due to the Company on December 1, 2000 and the Company has subsequently been advised that the Affiliate Guarantors failed to make an interest payment that was due to their senior secured lender on January 2, 2001. The Affiliate Guarantors own and operate Bruegger's Bagel Bakeries as franchisees of Bruegger's Franchise Corporation, a subsidiary of Bruegger's Corporation. The Company believes that the Bruegger's Bagel Bakeries operated by the Affiliate Guarantors constitute a majority of the Bruegger's Bagel Bakery System and therefore account for a majority of Bruegger's Franchise Corporation revenues. The Company has been advised that Bruegger's Franchise Corporation has
subordinated its right to receive royalty payments from the Affiliate Guarantors to the Affiliate Guarantors' senior secured lender. Consequently, there can be no assurance when, if ever, the Company might receive any principal or interest payments in respect of the Subordinated Note. In view of these and other circumstances, as of the fourth quarter of fiscal 2000, the Company recorded a $10.0 million non-cash charge to fully reserve for the Subordinated Note.
During the second quarter of fiscal 1997, the Company recorded a non-cash impairment charge of $185,000,000 and a store closing charge of $15,513,000 as a result of its decision to divest its bagel-related businesses. The consummation of the sale of the bagel-related businesses in fiscal 1997 did not result in any additional gain or loss.
BUSINESS STRATEGY
The Company's fundamental business strategy is to optimize the cash flow of its operations through proven operating management, reduce debt and appropriately grow the Company's restaurant concepts in a manner focusing on total customer satisfaction, while maximizing the long term value of the Company for its shareholders. Management's operating philosophy, which is shared by all of the Company's concepts, is comprised of the following key elements:
Value-Based Concepts. Value-based restaurant concepts are important to the Company's business strategy. Accordingly, in each of its restaurants, the Company seeks to provide customers with value, which is a product of high-quality menu selections, reasonably priced food, prompt, courteous service and a pleasant dining atmosphere.
Focus on Customer Satisfaction. Through its comprehensive management training programs and experienced management team, the Company seeks to ensure that its employees provide customers with an enjoyable dining experience on a consistent basis.
Hands-On Management Style. Members of the Company's senior management are actively involved in the operations of each of the Company's restaurant concepts. This active management approach is a key factor in the Company's efforts to control costs and optimize operating income.
Quality Franchise Partners. The Company has historically sought franchisors with established reputations for leadership in their various segments of the restaurant industry who have proven integrity and share the Company's focus on value, customer service and quality.
Use of Technology. The Company actively tracks the performance of its business utilizing computer and point-of-sale technology. In addition, the Company's voice and data communications systems provide timely and accurate reporting.
EXPANSION
The Company currently plans to open two to four Burger King restaurants and two to three full service restaurants in fiscal 2001. The Company's long term expansion strategy is focused on the development of restaurants in existing markets in order to achieve increased market penetration. In addition, the Company may consider strategic acquisitions in the Burger King system. During fiscal 2000, the Company added two new Burger King restaurants, closed one Burger King restaurant, sold one Grady's American Grill restaurant and added three new Chili's restaurants.
The amount of the Company's total investment to develop new restaurants depends upon various factors, including prevailing real estate prices and lease rates, raw material costs and construction labor costs in each market in which a new restaurant is to be opened. The Company may own or lease the real estate for future development.
The Company's ability to manage the diverse operations resulting from its past growth will be essential to its ability to succeed. Prior to fiscal 1996, the Company's business historically was focused primarily on the development and operation of Burger King restaurants and Chili's restaurants. The Grady's American Grill and Italian Dining concepts have varying degrees of name recognition. Although the Company opened its first
Spageddies in 1994, the Company's Italian Dining concepts are not yet time proven. In addition, the Company's acquisitions of Grady's American Grill and Spageddies have caused it to assume many functions performed by the previous owners, requiring increased staffing and expenditures in various areas including advertising and marketing, purchasing and management information systems.
BURGER KING RESTAURANTS
General. Headquartered in Miami, Florida, Burger King Corporation is an indirect wholly-owned subsidiary of Diageo, PLC. Burger King Corporation has been franchising Burger King restaurants since 1954 and has since expanded to locations throughout the world.
Menu. Each Burger King restaurant offers a diverse menu containing a variety of traditional and innovative food items, featuring the Whopper(R) sandwich and other flame-broiled hamburgers and sandwiches, which are prepared to order with the customer's choice of condiments. The menu also typically includes breakfast entrees, french fries, onion rings, desserts and soft drinks. The Burger King system philosophy is characterized by its "Have It Your Way"(R) service, generous portions and competitive prices, resulting in high value to its customers. Management believes these characteristics distinguish Burger King restaurants from their competitors and provide a significant competitive advantage.
Advertising and Marketing. As required by its franchise agreements, the Company contributes 4% of its restaurant sales to an advertising and marketing fund controlled by Burger King Corporation. Burger King Corporation uses this fund primarily to develop system-wide advertising, sales promotions and marketing materials and concepts. In addition to its required contribution to the advertising and marketing fund, the Company makes local advertising expenditures intended specifically to benefit its own Burger King restaurants. Typically, the Company spends its local advertising dollars on television and radio.
CHILI'S GRILL & BAR
General. The Chili's concept is owned by Brinker, a publicly-held corporation headquartered in Dallas, Texas. The first Chili's Grill & Bar restaurant opened in 1975.
Menu. Chili's restaurants are full service, casual dining restaurants featuring quick, efficient and friendly table service designed to minimize customer waiting and facilitate table turnover. Service personnel are dressed casually to reinforce the casual, informal environment. Chili's restaurants feature a diverse menu of broadly appealing food items, including a variety of hamburgers, fajitas, chicken and seafood entrees and sandwiches, barbecued ribs, salads, appetizers and desserts, all of which are prepared fresh daily according to recipes specified by Chili's. Emphasis is placed on serving substantial portions of quality food at modest prices. Each Chili's restaurant has a full bar serving beer, wine and cocktails.
Advertising and Marketing. Pursuant to its franchise agreements with Brinker, the Company contributes 0.5% of sales from each restaurant to Brinker for advertising and marketing to benefit all restaurants. As part of a system-wide promotional effort, the Company paid an additional advertising fee of 0.375% of sales for the period beginning September 1, 1999 and ending August 30, 2000 and has agreed to pay a similar fee of 1.0% of sales for the period beginning September 1, 2000 and ending June 20, 2001. The Company is also required to spend 2% of sales from each restaurant on local advertising. The Company's advertising expenditures typically exceed the levels required under its agreements with Brinker and the Company spends substantially all of its advertising dollars on television and radio advertising. The Company also conducts promotional marketing efforts targeted at its various local markets.
The Chili's franchise agreements provide that Brinker may establish advertising cooperatives ("Cooperatives") for geographic areas where one or more restaurants are located. Any restaurants located in areas subject to a Cooperative are required to contribute 3% of sales to the Cooperative in lieu of contributing 0.5% of sales to Brinker. Each such restaurant is also required to directly spend 0.5% of sales on local advertising. To date, no Cooperatives have been established in any of the Company's markets.
GRADY'S AMERICAN GRILL
General. Grady's American Grill restaurants feature high-quality food in a classic American style, served in a warm and inviting setting. Prior to the Company's acquisition of the concept from Brinker on December 21, 1995, Brinker owned and operated 34 of the 35 Grady's American Grill restaurants now owned and operated by the Company. The Company's Grady's American Grill concept is proprietary and provides the Company with flexibility for expansion and development.
Menu. The Grady's American Grill menu features signature prime rib, high-quality steaks, daily servings of seafood, inviting salads, sandwiches, soups and high quality desserts. Entrees emphasize on-premise scratch preparation in a classic American style.
Advertising and Marketing. As the owner of the Grady's American Grill concept, the Company has full responsibility for marketing and advertising. The Company focuses advertising and marketing efforts in local print media, use of direct mail programs, television and radio, with total annual expenditures estimated to range between 2% and 3% of the sales for its Grady's American Grill restaurants.
ITALIAN DINING CONCEPTS
General. The Company's Italian Dining concepts consist of Papa Vino's Italian Kitchen and Spageddies Italian Kitchen. The first Papa Vino's restaurant was opened in 1996 and the first Spageddies restaurant was opened in 1994. The Company had been a franchisee of Spageddies since 1994, and became the owner of the concept in October 1995. Papa Vino's and Spageddies each offers a casual dining atmosphere with high-quality food, generous portions and moderate prices, all enjoyed in a setting featuring the ambiance of a traditional Italian trattoria with stone archways, large wines casks and wine racks lining the walls and exhibition cooking in an inviting, comfortable environment. The Company's Italian Dining concepts are proprietary and provide the Company with flexibility for expansion and development.
Menu. A fundamental component of the Italian Dining concepts is to provide the customer with a wide variety of high-quality, value-priced Italian food. The restaurant menu includes an array of entrees, including traditional Italian pasta, grilled meats and freshly prepared selections of pizzas, soups, salads and sandwiches. The menu also includes specialty appetizers, fresh baked bread and desserts, together with a full-service bar serving beer, wine and cocktails.
Advertising and Marketing. As the owner of these concepts, the Company has full responsibility for marketing and advertising its Italian Dining restaurants. The Company focuses its advertising and marketing efforts in local print media, use of direct mail programs and radio, with total annual expenditures estimated to range between 2% and 3% of the sales for these restaurants.
TRADEMARKS
The Company owns the following registered trademarks: Grady's American Grill(R), Spageddies Italian Kitchen(R), Spageddies(R), Papa Vino's(R) and Papa Vino's Italian Kitchen(R). The Company also owns a number of other trademarks and service marks which are used in connection with its owned concepts. The Company believes its marks are valuable and intends to maintain its marks and any related registrations. Burger King(R) is a registered trademark of Burger King Corporation. Chili's(R) and Chili's Grill & Bar(TM) are a registered trademark and trademark, respectively, of Brinker.
ADMINISTRATIVE SERVICES
From its headquarters in Mishawaka, Indiana, the Company provides accounting, cash management, information technology, purchasing and procurement, human resources, finance, marketing, advertising, menu development, budgeting and planning, legal, site selection and development support services for each of its operating subsidiaries.
Management. The Company is managed by a team of senior managers who are responsible for the establishment and implementation of a strategic plan. The Company believes that its management team possesses the ability to manage its diverse operations.
The Company has an experienced management team in place for each of its concepts. Each concept's operations are managed by geographic region with a senior manager responsible for each specific region of operations.
During fiscal 1999, the Company decreased the span of control within each of its concepts by adding additional multi-unit managers. This action lowered, on average, the number of restaurants for which each multi-unit manager is responsible.
Site Selection. Site selection for new restaurants is made by the Company's senior management under the direction of the Company's Chief Development Officer, subject in the case of the Company's franchised restaurants to the approval of its franchisors. Within a potential market area, the Company evaluates high-traffic locations to determine profitable trading areas. Site-specific factors considered by the Company include traffic generators, points of distinction, visibility, ease of ingress and egress, proximity to direct competition, access to utilities, local zoning regulations and various other factors. In addition, in evaluating potential full service dining sites, the Company considers applicable laws regulating the sale of alcoholic beverages. The Company regularly reviews potential sites for expansion. Once a potential site is selected, the Company utilizes demographic and site selection data to assist in final site selection.
Quality Control. The Company's senior management and restaurant management staff are principally responsible for assuring compliance with the Company's and its franchisors' operating procedures. The Company and its franchisors have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct. Compliance with these standards and specifications is monitored by frequent on-site visits and inspections by the Company's senior management. Additionally, the Company employs the use of toll free customer feedback telephone services and outside "shopper services" to visit restaurants periodically to ensure that the restaurants meet the Company's operating standards. The Company's operational structure encourages all employees to assume a proprietary role ensuring that such standards and specifications are met.
Burger King. The Company's Burger King operations are focused on achieving a high level of customer satisfaction with speed, accuracy and quality of service closely monitored. The Company's senior management and restaurant management staff are principally responsible for ensuring compliance with the Company's and Burger King Corporation's operating procedures. The Company and Burger King Corporation have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct. These standards include food preparation rules regarding, among other things, minimum cooking times and temperatures, sanitation and cleanliness.
Full Service Dining. The Company has uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct in its full service dining concepts. At the Company's Chili's restaurants, compliance with these standards and specifications is monitored by representatives of Brinker. Each Full Service Dining restaurant typically has a general manager and three to four assistant managers who together train and supervise employees and are, in turn, overseen by a multi-unit manager.
Information Technology Systems. Financial controls are maintained through a centralized accounting system, which allows the Company to track the operating performance of each restaurant. The Company has a point-of-sale system in each of its restaurants which is linked directly to the Company's accounting system, thereby making information available on a timely basis. This information enables the Company to analyze customer purchasing habits, operating trends and promotional results. During fiscal 1999 and early fiscal 2000, the Company replaced the point of sale equipment in all of its full service restaurants.
Training. The Company maintains comprehensive training programs for all of its restaurant management personnel. Special emphasis is placed on quality food preparation, service standards and total customer satisfaction.
Burger King. The training program for the Company's Burger King restaurant managers features an intensive hands-on training period followed by classroom instruction and simulated restaurant management activities. Upon certification, new managers work closely with experienced managers to solidify their skills and expertise. The Company's existing restaurant managers regularly participate in the Company's ongoing training efforts, including classroom programs, off-site training and other training/development programs, which the Company's senior concept management designs from time to time. The Company generally seeks to promote from within to fill Burger King restaurant management positions.
Full Service Dining. The Company requires all general and restaurant managers of its full service dining concepts to participate in a system-wide, comprehensive training program. These programs teach management trainees detailed food preparation standards and procedures for each concept. These programs are designed and implemented by the Company's senior concept management teams.
Purchasing. Purchasing and procurement for the Company's Grady's American Grill and Italian Dining concepts are managed by a dedicated purchasing function and are generally contracted with full-service distributors. Unit-level purchasing decisions from an approved list of suppliers are made by each of the Company's restaurant managers based on their assessment of the provisioning needs of the particular location. Purchase orders and invoices are reviewed by restaurant general managers and by concept management.
The Company participates in system-wide purchasing and distribution programs with respect to its Chili's and Burger King restaurants, which have been effective in reducing store-level expenditures on food and paper packaging commodities.
FRANCHISE AND DEVELOPMENT AGREEMENTS
Burger King. The Company and Burger King Corporation entered into a development agreement on December 24, 1993 (the "Burger King Agreement"). The Burger King Agreement reserves for the Company 25 specifically defined limited geographic areas ("Areas") and grants the Company the exclusive right to select and develop one Burger King restaurant in each of up to 18 of those Areas. The Company paid a $90,000 fee for the exclusivity provided by the Burger King Agreement. The Company's exclusive right in an Area expires with the opening by the Company of a Burger King restaurant in that Area. In January of 2000, the Company developed its 18th and final restaurant under the Burger King Agreement. In addition, the Company opened one additional Burger King restaurant under a separate agreement with Burger King in December of 1999.
On November 3, 2000, the Company entered into a Non-Exclusive Development Agreement with Burger King Corporation ("the "BKC II Agreement"). The BKC II Agreement grants the Company the non-exclusive right to develop 12 Burger King restaurants in three specified counties in Michigan, two specified counties in Ohio and 20 specified counties in Indiana. The BKC II Agreement expires June 30, 2004 and establishes the following development schedule:
The Company paid a $60,000 franchise fee deposit to Burger King Corporation. With each new restaurant that the Company opens pursuant to the BKC II Agreement, it will receive a credit of $5,000 against the applicable franchise fee for such restaurant.
The Company is responsible for all costs and expenses incurred in locating, acquiring and developing restaurant sites. The Company must also satisfy Burger King Corporation's development criteria, which include the specific site, the related purchase contract or lease agreement and architectural and engineering plans for each of the Company's new Burger King restaurants. Burger King Corporation may refuse to grant a franchise for any proposed Burger King restaurant if the Company is not conducting the operations of each of its Burger King restaurants in compliance with Burger King Corporation's franchise requirements. Burger King Corporation periodically monitors the operations of its franchised restaurants and notifies its franchisees of failures to comply with franchise or development agreements that come to its attention.
Burger King Corporation's franchise agreements convey the right to use its trade names, trademarks and service marks with respect to specific Burger King restaurants. The franchise fee for each Burger King restaurant opened in fiscal 2000 was $40,000. In addition, each fiscal 2000 franchise agreement requires the Company to pay a monthly royalty fee of 3.5% of sales and advertising fees of 4% of sales.
During fiscal 2000, Burger King Corporation increased its royalty and franchise fees for most new restaurants. The franchise fee for new restaurants increased from $40,000 to $50,000 for a 20 year agreement and the royalty rate increased from 3.5% of sales to 4.5% of sales, after a transitional period. For franchise agreements entered into during the transitional period, the royalty rate will be 4% of sales for the first 10 years and 4.5% of sales for the balance of the term.
For new restaurants, the transitional period will be from July 1, 2000 to June 30, 2003. As of July 1, 2003, the royalty rate will become 4.5% of sales for the full term of new restaurant franchise agreements. For renewals of existing franchise agreements, the transitional period will be from July 1, 2000 through June 30, 2001. As of July 1, 2001, existing restaurants that renew their franchise agreements will pay a royalty of 4.5% of sales for the full term of the renewed agreement. The advertising contribution will remain 4% of sales. Royalties payable under existing franchise agreements are not affected by these changes until the time of renewal, at which time the then prevailing rate structure will apply.
Burger King Corporation offered a voluntary program to incent franchisees to renew their franchise agreements prior to the scheduled expiration date ("Early Renewal Program"). Franchisees that elected to participate in the Early Renewal Program are required to make capital investments in their restaurants by, among other things, bringing them up to Burger King Corporation's current image, and to extend occupancy leases. Franchise agreements entered into under the Early Renewal Program have special provisions regarding the royalty payable during the term, including a reduction in the royalty to 2.75% over five years beginning April, 2002 and concluding in April, 2007.
The Company included 36 restaurants in the Early Renewal Program. The Company paid franchise fees of $877,000 in the third quarter of fiscal 2000 to extend the franchise agreements of the selected restaurants for sixteen to twenty years. The Company expects to invest approximately $7,000,000 to $8,000,000 to remodel the selected restaurants to bring them up to Burger King Corporation's current image. The remodeling is required to be completed by December 31, 2001.
On January 27, 2000 the Company executed a "Franchisee Commitment" in which it agreed to undertake certain "Transformational Initiatives" including capital improvements and other routine maintenance in all of its Burger King restaurants. The capital improvements include the installation of signage bearing the new Burger King logo and the installation of a new drive-through ordering system. The Company is required to complete these capital improvements by December 31, 2001. In addition, the Company agreed to perform, as necessary, certain routine maintenance such as exterior painting, sealing and striping of parking lots and upgraded landscaping. The Company completed this maintenance by September 30, 2000, as required. In consideration for executing the Franchisee Commitment, the Company received "Transformational Payments" totaling approximately $3.9 million during fiscal 2000. The portion of the Transformational Payments that corresponds to the amount required for the capital improvements will be recognized as income over the useful life of the capital improvements. The portion of the Transformational Payments that corresponds to the required routine maintenance was recognized as a reduction in maintenance expense over the period during which maintenance was performed. The remaining balance of the
Transformational Payments is being recognized as other income ratably through December 31, 2001, the term of the Franchisee Commitment.
Burger King Corporation also provides general specifications for designs, color schemes, signs and equipment, formulas for preparation of food and beverage products, marketing concepts, inventory, operations and financial control methods, management training, technical assistance and materials. Each franchise agreement prohibits the Company from transferring a franchise without the prior approval of Burger King Corporation.
Burger King Corporation's franchise agreements prohibit the Company, during the term of the agreements, from owning or operating any other hamburger restaurant. For a period of one year following the termination of a franchise agreement, the Company remains subject to such restriction within a two mile radius of the Burger King restaurant which was the subject of the franchise agreement.
Chili's. The Company has a development agreement with Brinker (the "Chili's Agreement") to develop 37 Chili's restaurants in two regions encompassing counties in Indiana, Michigan, Ohio, Kentucky ("Midwest Region"), and Delaware, New Jersey and Pennsylvania ("Philadelphia Region"). The Company paid development fees totaling $260,000 for the right to develop the restaurants in the regions. Each Chili's franchise agreement requires the Company to pay an initial franchise fee of $40,000, a monthly royalty fee of 4% of sales and advertising fees of 0.5% of sales. As part of a system-wide promotional effort, the Company paid an additional advertising fee of 0.375% of sales for the period beginning September 1, 1999 and ending August 30, 2000 and has agreed to pay a similar fee of 1.0% of sales for the period beginning September 1, 2000 and ending June 20, 2001.
The Company may develop up to 41 Chili's without specific approval of the franchisor, but is obligated to satisfy the following development schedule:
(1) Two of the restaurants to be opened in this year may be located in either region at the Company's discretion.
Failure to adhere to this schedule constitutes a default under the Chili's Agreement and Brinker could terminate the Chili's Agreement. The Chili's Agreement prohibits Brinker or any other Chili's franchisee from establishing a Chili's restaurant within a specified geographic radius of the Company's Chili's restaurants. The term of the Chili's Agreement expires when the Company has completed the development schedule. The Chili's Agreement and the franchise agreements prohibit the Company, for the term of the agreements, from owning or operating other restaurants which are similar to a Chili's restaurant. The Chili's Agreement extends this prohibition, but only within the Company's development territories, for a period of two years following the termination of such agreement. In addition, each franchise agreement prohibits the Company, for the term of the franchise agreement and for a period of two years following its termination, from owning or operating such other restaurants within a 10-mile radius of the Chili's restaurant which was the subject of such agreement.
Under the Chili's Agreement, the Company is responsible for all costs and expenses incurred in locating, acquiring and developing restaurant sites. Each proposed restaurant site, the related purchase contract or lease agreement and the architectural and engineering plans for each of the Company's new Chili's restaurants are subject to Brinker's approval. Brinker may refuse to grant a franchise for any proposed Chili's restaurant if the Company is not conducting the operations of each of its Chili's restaurants in compliance with the Chili's restaurant franchise requirements. Brinker may terminate the Chili's Agreement if the Company defaults in its performance thereunder or under any franchise agreement. Brinker periodically monitors the operations of its franchised restaurants and
notifies the franchisees of any failure to comply with franchise or development agreements that comes to its attention.
The franchise agreements convey the right to use the franchisor's trade names, trademarks and service marks with respect to specific restaurant units. The franchisor also provides general specifications for designs, color schemes, signs and equipment, formulas for preparation of food and beverage products, marketing concepts, inventory, operations and financial control methods, management training and technical assistance and materials. Each franchise agreement prohibits the Company from transferring a franchise without the prior approval of the franchisor.
Risks and Requirements of Franchisee Status. Due to the nature of franchising and the Company's agreements with its franchisors, the success of the Company's Burger King and Chili's concepts is, in large part, dependent upon the overall success of its franchisors, including the financial condition, management and marketing success of its franchisors and the successful operation of restaurants opened by other franchisees. Certain matters with respect to the Company's franchised concepts must be coordinated with, and approved by, the Company's franchisors. In particular, certain franchisors must approve the opening by the Company of any new franchised restaurant, including franchises opened within the Company's existing franchised territories, and the closing of any of the Company's existing franchised restaurants. The Company's franchisors also maintain discretion over the menu items that may be offered in the Company's franchised restaurants.
COMPETITION
The restaurant industry is intensely competitive with respect to price, service, location and food quality. The industry is mature and competition can be expected to increase. There are many well-established competitors with substantially greater financial and other resources than the Company, some of which have been in existence for a substantially longer period than the Company and may have substantially more units in the markets where the Company's restaurants are, or may be, located. McDonald's and Wendy's restaurants are the principal competitors to the Company's Burger King restaurants. The competitors to the Company's Chili's and Italian Dining restaurants are other casual dining concepts such as Applebee's, T.G.I. Friday's, Bennigan's, Olive Garden and Red Lobster restaurants. The primary competitors to Grady's American Grill are Houston's, J. Alexander's, Outback Steakhouse, Houlihan's, Cooker Bar & Grille, and O'Charley's Restaurant & Lounge, as well as a large number of locally-owned, independent restaurants. The Company believes that competition is likely to become even more intense in the future.
The Company and the restaurant industry in general are significantly affected by factors such as changes in local, regional or national economic conditions, changes in consumer tastes, weather conditions and various other consumer concerns. In addition, factors such as increases in food, labor and energy costs, the availability and cost of suitable restaurant sites, fluctuating insurance rates, state and local regulations and the availability of an adequate number of hourly-paid employees can also adversely affect the restaurant industry.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which include alcoholic beverage control in the case of the Chili's, Italian Dining and Grady's American Grill restaurants, and health, safety and fire agencies in the state or municipality in which the restaurant is located. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant in a particular area.
Alcoholic beverage control regulations require each of the Company's Chili's, Italian Dining and Grady's American Grill restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. The loss of a liquor license for a
particular Grady's American Grill, Italian Dining or Chili's restaurant would most likely result in the closing of the restaurant.
The Company may be subject in certain states to "dramshop" statutes, which generally provide a person injured by an intoxicated patron the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance and has never been named as a defendant in a lawsuit involving "dramshop" liability.
The Company's restaurant operations are also subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of the Company's food service and preparation personnel are paid at rates related to the federal minimum wage and, accordingly, increases in the minimum wage could increase the Company's labor costs.
The Company is also subject to various local, state and federal laws regulating the discharge of pollutants into the environment. The Company believes that it conducts its operations in substantial compliance with applicable environmental laws and regulations. In an effort to prevent and, if necessary, to correct environmental problems, the Company conducts environmental audits of a proposed restaurant site in order to determine whether there is any evidence of contamination prior to purchasing or entering into a lease with respect to such site. To date, the Company's operations have not been materially adversely affected by the cost of compliance with applicable environmental laws.
EMPLOYEES
As of October 29, 2000, the Company employed approximately 7,000 persons. Of those employees, approximately 130 held management or administrative positions, approximately 682 were involved in restaurant management, and the remainder were engaged in the operation of the Company's restaurants. None of the Company's employees is covered by a collective bargaining agreement. The Company considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES.
The following table sets forth, as of October 29, 2000, the 17 states in which the Company operated restaurants and the number of restaurants in each state. Of the 145 restaurants which the Company operated as of October 29, 2000, the Company owned 52 and leased 93. Many leases provide for base rent plus an additional rent based upon sales to the extent the additional rent exceeds the base rent, while other leases provide for only a base rent.
NUMBER OF COMPANY-OPERATED RESTAURANTS
Burger King. As of October 29, 2000, 41 of the Company's Burger King restaurants were leased from real estate partnerships owned by certain of the Company's founding shareholders. In addition, the Company leased two of its Burger King restaurants from William R. Schonsheck, a former director and executive officer of the Company, or entities controlled by him. See ITEM 13, "Certain Relationships and Related Transactions." The Company also leased seven Burger King restaurants directly from Burger King Corporation and seven restaurants from unrelated third parties. The seven leases with Burger King Corporation are subject to the renewal of the franchise agreements for those locations. The Company owned 14 of its Burger King restaurants as of October 29, 2000.
Chili's Grill & Bar. As of October 29, 2000, the Company owned 12 of its Chili's restaurants and leased 19 other restaurants from unrelated parties.
Grady's American Grill. As of October 29, 2000, the Company owned 21 of its Grady's American Grill restaurants. The Company leased one Grady's American Grill restaurant from a limited partnership of which a subsidiary of the Company is the general partner. The Company's other 13 Grady's American Grill restaurants were leased from unrelated parties.
Italian Dining. As of October 29, 2000, the Company owned five of the Italian Dining restaurants and leased the three other restaurants from unrelated parties.
Office Lease. The Company leases approximately 53,000 square feet for its headquarters facility in an office building located in Mishawaka, Indiana that was constructed in 1997 and is leased from a limited liability company in which the Company owns a 50% interest. The remaining term of the lease agreement is 11 years. Approximately 4,500 square feet, 12,400 square feet and 5,200 square feet of the Company's headquarters building have been subleased to three tenants with remaining terms of four, five and seven years, respectively.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers and directors are parties to various legal proceedings relating to the Company's purchase, operation and financing of the Company's bagel-related businesses.
D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises, Inc., franchisees of Bruegger's Franchise Corporation, and Ken Wagnon, Dan Carney, Jay Wagnon and Patrick Beatty, principals of the foregoing franchisees, commenced an action on July 16, 1997 in the United States District Court for the District of Maryland, against Bruegger's Corporation, Bruegger's Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick, Michael J. Dressell and Nordahl L. Brue, alleging that the plaintiffs purchased their franchises based upon financial representations that did not materialize, that they purchased preferred stock in Bruegger's Corporation based upon false representations, that Bruegger's Corporation falsely represented its intentions with respect to purchasing bakeries from the plaintiffs or providing financing to the plaintiffs, and that the defendants violated implied covenants of good faith and fair dealing. The parties have reached a tentative settlement of this matter pursuant to which the Company agreed to make an initial payment of $125,000 and an additional payment of $175,000 on December 31, 2001. The Company also agreed to purchase 96,064 shares of its common stock presently owned by the plaintiffs, on December 31, 2001, for an amount equal to the greater of $2.75 per share or the midpoint between $2.59 and the market price of the Company's stock at the time of closing. As part of the tentative settlement, the plaintiffs have agreed to vote their stock in the Company in accordance with the recommendation of the Company's Board of Directors and Bruegger's Corporation has agreed to purchase certain equipment from the plaintiffs for $200,000, payable in December of 2002. The Company has agreed to guarantee $25,000 of this payment.
On or about April 15, 1997, Texas Commerce Bank National Association ("Texas Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd., a Florida limited partnership ("BFBC"). At the time of the Loan, BFBC was a franchisee under franchise agreements with Bruegger's Franchise Corporation (the "Franchisor"). The Company at that time was an affiliate of the Franchisor. In connection with the Loan and as an accommodation of BFBC, the Company executed to Texas Commerce a "Guaranty". By the terms of the Guaranty the Company agreed that upon maturity of the Loan by default or otherwise that it would either (1) pay the Loan obligations or (2) buy the Loan and all of the related loan documents (the "Loan Documents") from Texas Commerce or its successors. In addition several principals of BFBC (the "Principal Guarantors") guaranteed repayment of the Loan by each executing a "Principal Guaranty". On November 10, 1998, Texas Commerce (1) declared that the Loan was in default, (2) notified BFBC, the Principal Guarantors and the Company that all of the Loan obligations were due and payable, and (3) demanded payment.
The Company elected to satisfy its obligations under the Guaranty by purchasing the Loan from Texas Commerce. On November 24, 1998, the Company bought the Loan for $4,294,000. Thereafter, the Company sold the Loan to its Texas affiliate, Grady's American Grill, L.P. ("Grady's"). On November 30, 1998 Grady's commenced an action seeking to recover the amount of the Loan from one of the Principal Guarantors, Michael K. Reilly ("Reilly"). As part of this action Grady's also seeks to enforce a Subordination Agreement that was one of the Loan Documents against MKR Investments, L.P., a partnership ("MKR"). Reilly is the general partner of MKR. This action is pending in the United States District Court for the Southern District of Texas Houston Division as Case No. H-98-4015. Reilly has denied liability and filed a counterclaim against Grady's alleging that Grady's engaged in unfair trade practices, violated Florida's "Rico" statute, engaged in a civil conspiracy and violated state and federal securities laws in connection with the Principal Guaranty (the "Counterclaims"). Reilly also filed a third party complaint against Quality Dining, Inc., Grady's American Grill Restaurant Corporation, David M. Findlay, Daniel B. Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise Corporation, Champlain Management Services, Inc., Nordahl L. Brue, Michael J. Dressell and Ed Davis ("Third Party Defendants") alleging that Reilly invested in BFBC based upon false representations, that the Third Party Defendants violated state franchise statutes, committed unfair trade practices, violated covenants of good faith and fair dealing, violated the state "Rico" statute and violated state and federal securities laws in connection with the Principal Guaranty. In addition, BFBC and certain of its affiliates, including the Principal Guarantors ("Intervenors") have intervened and asserted claims against Grady's and the Third Party Defendants that are similar to those asserted in the counter claims and the third party complaint. In addition, the Company and Bruegger's Corporation are currently disputing the nature and extent of their indemnity obligations, if any, to the other with respect to this litigation (which dispute would be resolved if the "Bruegger's Resolution" is consummated. See description of Bruegger's Resolution below). Based upon the currently available information, the Company does not believe that these matters will have a material adverse effect on the Company's financial position or results of operations. However, there can be no assurance that the Company will be able to realize sufficient value from Reilly to satisfy the amount of the Loan or that the Company will not incur any liability as a result of the Counterclaims or third party complaints filed by Reilly and the Intervenors.
In each of the above cases, one or more present or former officers and directors of the Company were named as party defendants and the Company has and/or is advancing defense costs on their behalf.
Pursuant to the Share Exchange Agreement by and among Quality Dining, Inc., Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell ("Share Exchange Agreement"), the Agreement and Plan of Merger by and among Quality Dining, Inc., Bagel Disposition Corporation and Lethe, LLC, and certain other related agreements entered into as part of the disposition of the Company's bagel-related businesses, the Company is responsible for 50% of the first $14 million of franchise-related litigation expenses, inclusive of attorney's fees, costs, expenses, settlements and judgments (collectively "Franchise Damages"). Bruegger's Corporation and certain of its affiliates are obligated to indemnify the Company from all other Franchise Damages. The Company is obligated to pay the first $3 million of its share of Franchise Damages in cash. As of August 6, 2000, the Company had satisfied this obligation. The remaining $4 million of the Company's share of Franchise Damages is payable by crediting amounts owed to the Company pursuant to the $10 million junior subordinated note issued to the Company by Bruegger's Corporation. However, the Company and Bruegger's Corporation are currently disputing the nature and extent of their indemnity obligations under the Share Exchange Agreement. If the Bruegger's Resolution (described below) is consummated, the remaining $4 million of the Company's share of Franchise Damages would be payable in cash. Through October 29, 2000 the outstanding balance due under the Subordinated Note has been reduced by $600,000 in respect of Franchise Damages. Based upon the currently available information, the Company does not believe that these cases individually or in the aggregate will have a material adverse effect on the Company's financial position and results of operations but there can be no assurance thereof.
On or about September 10, 1999, Bruegger's Corporation, Lethe LLC, Nordahl L. Brue, and Michael J. Dressel commenced an action against the Company in the United States District Court for the District of Vermont alleging that the Company breached various provisions of the Share Exchange Agreement which arise out of the ongoing dispute concerning the net working capital adjustment contemplated by the Share Exchange Agreement. On February 1, 2000, the Company filed counter-claims against Bruegger's Corporation for the working capital adjustment to which it believes it is entitled. Additionally, on or about September 13, 1999, Messrs. Brue and Dressell asserted a claim for breach of representations and warranties under the Share Exchange Agreement. The Company does not expect the ultimate resolution of these matters to have a material adverse effect on the Company's financial position or results of operations, but there can be no assurance thereof.
The Company and Bruegger's Corporation are discussing a resolution (the "Bruegger's Resolution") of their various disputes that may include, among other things, one or more of the following provisions: (a) the principal and accrued interest outstanding under the Subordinated Note would be reduced to $10 million; (b) the Company and Bruegger's Corporation each give up their claim against the other to receive a net working capital adjustment; (c) the Subordinated Note would be modified to, among other things, extend the period through which interest would be accrued and added to the principal amount of the Subordinated Note from October, 2000 through January, 2002. From January, 2002 through June, 2002, one-half of the interest would be accrued and added to the principal amount of the Subordinated Note and one-half of the interest would be paid in cash. Commencing in January, 2003, interest would be paid in cash through the maturity of the Subordinated Note in October 2004; (d) the Company and Bruegger's Corporation would each be responsible for 50% of the Franchise Damages with respect to the claims asserted by D & K Foods, Inc., et al and BFBC Ltd., et al. The Company would be entitled to 25% of any net recovery made by Bruegger's Corporation on its counter-claim against D & K Foods, Inc., et al and Bruegger's Corporation would be entitled to 25% of any net recovery made by the Company on the BFBC, Ltd., Loan; provided, however, that any such recovery shall be credited against the Subordinated Note; (e) Bruegger's Corporation and its affiliates would release their claim for breach of representations and warranties under the Share Exchange Agreement; and (f) the Company would give Bruegger's Corporation a credit of two dollars against the Subordinated Note for every one dollar that Bruegger's Corporation prepays against the Subordinated Note prior to October, 2003 up to a maximum credit of $4 million.
The Company does not expect the Bruegger's Resolution, if consummated on terms substantially the same as those presently being discussed, to have a material adverse effect on the Company's financial position or results of operations, but there can be no assurance thereof. There also can be no assurance that the Bruegger's Resolution will be consummated and whether or not consummated there can be no assurance when, if ever, the Company might receive any
principal or interest payments in respect of the Subordinated Note. See ITEM 1 - Disposition of Bagel-Related Businesses.
On April 19, 2000, NBO, LLC ("NBO") filed a Verified Complaint for Injunctive and Declaratory Relief in the United States District Court for the Northern District of Indiana, South Bend Division, naming as defendants the Company, Daniel B. Fitzpatrick, certain other officers of the Company, certain unidentified associates and affiliates of Daniel B. Fitzpatrick and certain other unidentified members of management. The Complaint alleged among other things, that the director defendants' decision to authorize Daniel B. Fitzpatrick and/or his associates and affiliates and/or other members of management to acquire up to 1,000,000 additional shares of the Company's common stock without triggering the Company's Shareholder Rights Agreement would give management effective control of the Company without the payment of a control premium and would thwart NBO's tender offer. The Complaint alleged that this decision was not made in good faith after a reasonable investigation of the consequences, and was in breach of the director defendants' fiduciary duties. On May 26, 2000 the Court dismissed these allegations for failure to state a claim. The Complaint also alleged violations of the federal securities laws and seeks injunctive and declaratory relief. On June 8, 2000, the Company renewed its Motion to Dismiss the remaining allegations of NBO's complaint on grounds that these allegations were moot. On June 9, 2000 NBO voluntarily withdrew its request for a preliminary injunction and on September 12, 2000 NBO voluntarily dismissed its Complaint, without prejudice. The Company is currently in discussions with NBO with respect to a transaction that would enable NBO to dispose of its shares of Common Stock of the Company.
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 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during the fourth quarter of the 2000 fiscal year.
EXECUTIVE OFFICERS OF THE COMPANY
Daniel B. Fitzpatrick has served as President and Chief Executive Officer and a Director of the Company since 1982. Prior to founding the Company, Mr. Fitzpatrick worked for a franchisee of Burger King Corporation, rising to the level of regional director of operations. He has over 25 years of experience in the restaurant business. Mr. Fitzpatrick also serves as a director of 1st Source Corporation, a publicly held diversified bank holding company based in South Bend, Indiana.
John C. Firth serves as Executive Vice President, General Counsel and Secretary. Prior to joining the Company in June 1996, he was a partner with the law firm of Sopko and Firth. Beginning in 1985, he represented the Company as outside legal counsel with responsibility for the Company's legal affairs.
James K. Fitzpatrick has served as Senior Vice President and Chief Development Officer of the Company since August 1995. Prior to that, Mr. Fitzpatrick served as Vice President or Senior Vice President of the Company in charge of the Company's Fort Wayne, Indiana Burger King restaurant operations since 1984. Prior to joining the Company, he served as a director of operations for a franchisee of Burger King Corporation. He has over 25 years of experience in the restaurant business.
Patrick J. Barry joined the Company in October 1996 and serves as the Company's Senior Vice President - Administration and Information Technology. Prior to joining the Company, Mr. Barry was a management consultant with The Keystone Group and Andersen Consulting.
Lindley E. Burns joined the Company in June of 1995. Prior to joining the Company he worked for Brinker as a multi-unit manager in its Chili's division for two years and was a Chili's franchisee for eight years prior to joining Brinker. He has over 25 years of experience in the restaurant business.
Gerald O. Fitzpatrick serves as a Senior Vice President in the Company's Burger King Division. Mr. Fitzpatrick has served in various capacities in the Company's Burger King operations since 1983. Prior to joining the Company, he served as a district manager for a franchisee of Burger King Corporation. He has over 20 years of experience in the restaurant business.
Christopher L. Collier joined the Company in July of 1996. Since that time he has served in various capacities in the Finance Department, most recently as the Vice President of Financial Reporting. Prior to joining the Company, he served as the Vice President-Finance at a regional restaurant chain. Mr. Collier is a certified public accountant.
Robert C. Hudson joined the Company in December of 1995 when the Company acquired Grady's American Grill. From 1992 until joining the Company, Mr. Hudson held various operational positions at Brinker, most recently as an area director in its Grady's American Grill division.
Jeanne M. Yoder joined the Company in March of 1996. Since that time she has served in various capacities in the Accounting Department, most recently as Assistant Controller. Prior to joining the Company, she served as Controller at a regional travel agency. Ms. Yoder is a certified public accountant.
The above information includes business experience during the past five years for each of the Company's executive officers. Executive officers of the Company serve at the discretion of the Board of Directors. Messrs. Daniel B. Fitzpatrick, James K. Fitzpatrick and Gerald O. Fitzpatrick are brothers. There is no family relationship between any other Directors or executive officers of the Company.
The success of the Company's business is dependent upon the services of Daniel B. Fitzpatrick, Chairman, President and Chief Executive Officer of the Company. The Company maintains key man life insurance on the life of Mr. Fitzpatrick in the principal amount of $1.0 million. The loss of the services of Mr. Fitzpatrick would have a material adverse effect upon the Company.
(Pursuant to General Instruction G(3) of Form 10-K, the foregoing information is included as an unnumbered Item in Part I of this Annual Report in lieu of being included in the Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.)
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ Stock Market's National Market under the symbol QDIN. The prices set forth below reflect the high and low sales quotations for the Company's Common Stock as reported by NASDAQ for the calendar periods indicated. As of January 17, 2001, there were 430 holders of record and approximately 3,600 beneficial owners.
The Company does not pay cash dividends on its Common Stock. The Company does not anticipate paying cash dividends in the foreseeable future. The Company's revolving credit agreement prohibits the payment of cash dividends and restricts other distributions. The agreement expires October 31, 2002.
No unregistered equity securities were sold by the Company during fiscal 2000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
QUALITY DINING, INC.
(1) All fiscal years presented consisted of 52 weeks except fiscal 1999 which had 53 weeks.
(2) The selected statement of operations data include the operations of Bruegger's Corporation from June 7, 1996 until October 19, 1997 and the Grady's American Grill restaurants from December 21, 1995.
(3) General and administrative costs in fiscal 2000 included approximately $1.25 million in unanticipated expenses related to the litigation, proxy contest and tender offer initiated by NBO, LLC.
(4) Operating loss for the fiscal year ended October 26, 1997 includes an impairment of asset charge of $185.0 million, store closing costs of $15.5 million and franchise operating partner expense of $2.1 million which all relate to the divestiture by the Company of its bagel-related companies. Operating income for the fiscal year ended October 27, 1996 includes restructuring and integration charges of $1.9 million associated with costs related to the acquisitions of the Grady's American Grill concept and restaurants and Spageddies Italian Kitchen concept and $8.0 million associated with costs related to the acquisition of Bruegger's Corporation.
(5) Operating income for the fiscal year ended October 31, 1999 includes non-cash charges for the impairment of assets and facility closings totaling $2,501,000. The non-cash charges consisted primarily of $650,000 for the disposal of obsolete point of sale equipment that the Company identified as a result of installing its new point of sale system in its full service dining restaurants, $1,047,000 for the estimated costs and losses associated with the anticipated closing of two regional offices and three restaurant locations and $804,000 primarily for a non-cash asset impairment write down for two under-performing restaurants.
(6) As of the fourth quarter of fiscal 2000 the Company recorded a $10,000,000 non-cash charge to fully reserve for the Subordinated Note.
(7) During the third quarter of fiscal 2000 the Company recorded a $717,000 loss on the sale of a Grady's American Grill restaurant.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
QUALITY DINING, INC.
For an understanding of the significant factors that influenced the Company's performance during the past three fiscal years, the following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere in this Annual Report.
RESULTS OF OPERATIONS
The following table reflects the percentages that certain items of revenue and expense bear to total revenues.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Restaurant sales in fiscal 2000 were $228,016,000, a decrease of 1.2% or $2,735,000, compared to restaurant sales of $230,751,000 in fiscal 1999. Fiscal 2000 was 52 weeks in duration compared to 53 weeks for fiscal 1999.
The Company's Burger King restaurant sales were $81,724,000 in fiscal 2000 compared to restaurant sales of $82,650,000 in fiscal 1999, a decrease of $926,000. The Company closed two restaurants with expired leases: one in the fourth quarter of fiscal 1999 and one in the first quarter of fiscal 2000, which contributed $633,000 to fiscal 1999 sales. The Company had increased revenue of $2,191,000 due to additional sales weeks from two new restaurants opened during fiscal 2000 and one restaurant opened in fiscal 1999 which was open for its first full year in fiscal 2000. The Company's Burger King restaurants had average weekly sales of $22,286 in fiscal 2000 versus $22,164 in the same period in fiscal 1999.
The Company's Grady's American Grill restaurant sales were $68,615,000 in fiscal 2000 compared to restaurant sales of $75,198,000 in fiscal 1999, a decrease of $6,583,000. Two units were sold and one unit with an expired lease was closed in fiscal 1999 and one unit was sold in the third quarter of fiscal 2000. These units did not fit the Company's long-term strategic plan as they were located in geographically remote markets and were not meeting the Company's performance expectations. These units contributed $3,087,000 to fiscal 1999 sales. The Company's Grady's American Grill restaurants had average weekly sales of $36,949 in fiscal 2000 versus $37,769 in the same period in fiscal 1999. The Company continues to implement expanded marketing, operational and menu initiatives intended to stimulate sales at its Grady's American Grill restaurants. The marketing initiatives include the use of radio and television advertising in targeted markets, direct mail promotional programs and enhanced local marketing programs within each unit's specific market. Due to the competitive nature of the restaurant industry, these initiatives have not to date achieved the intended results and there can be no assurances that these initiatives will achieve the intended results.
The Company's Chili's Grill & Bar restaurant sales increased $4,084,000 to $60,921,000 in fiscal 2000 when compared to restaurant sales of $56,837,000 in fiscal 1999. The Company opened three new units in fiscal 2000 that contributed $2,624,000 in sales. The Company's Chili's Grill & Bar restaurants average weekly sales increased to $40,533 in fiscal 2000 versus $38,300 in fiscal 1999.
The Company's Italian Dining Division's restaurant sales increased $690,000 to $16,756,000 in fiscal 2000 when compared to restaurant sales of $16,066,000 in fiscal 1999. The increase was due to the continued success of operational and marketing initiatives which increased average weekly sales to $40,280 in fiscal 2000 from $37,893 in fiscal 1999.
Total restaurant operating expenses were $197,533,000 in fiscal 2000, compared to $201,697,000 in fiscal 1999. As a percentage of restaurant sales, total restaurant operating expenses decreased to 86.6% in fiscal 2000 from 87.5% in fiscal 1999. The following factors influenced the operating margins:
Food and beverage costs were $64,607,000, or 28.3% of total restaurant sales in fiscal 2000, compared to $67,732,000, or 29.4% of total restaurant sales in fiscal 1999. The decrease as a percentage of total revenue was mainly due to increased efficiencies and favorable commodity prices that resulted in decreased food costs at each of the Company's restaurant concepts.
Payroll and benefits were $66,782,000 in fiscal 2000, compared to $67,073,000 in fiscal 1999. As a percentage of total restaurant sales, payroll and benefits increased 0.2% to 29.3% in fiscal 2000 from 29.1% in fiscal 1999. Payroll and benefits increased as a percentage of total revenues in the Company's Burger King, Chili's and Italian Dining divisions. Overall, the Company has increased hourly wages at each of its restaurant concepts due to the high level of competition to attract qualified employees.
Depreciation and amortization increased $310,000 to $11,312,000 in fiscal 2000 compared to $11,002,000 in fiscal 1999. As a percentage of total restaurant sales, depreciation and amortization increased to 5.0% in fiscal 2000 compared to 4.8% in fiscal 1999.
Other restaurant operating expenses include rent and utilities, royalties, promotional expense, repairs and maintenance, property taxes and insurance. Other restaurant operating expenses decreased $1,058,000 to $54,832,000 in fiscal 2000 compared to $55,890,000 in 1999. Other restaurant operating expenses as a percentage of total restaurant sales decreased in fiscal 2000 to 24.0% from 24.2% in fiscal 1999. The decrease was primarily due to the disposition of under-performing restaurants.
General and administrative expenses, which include corporate and district management costs, were $17,073,000 in fiscal 2000, compared to $15,912,000 in fiscal 1999. As a percentage of total revenues, general and administrative expenses increased to 7.5% in fiscal 2000 compared to 6.9% in fiscal 1999. The increase in fiscal 2000 is mainly due to approximately $1,250,000 in unanticipated expenses related to the litigation, proxy contest and tender offer initiated by NBO, LLC.
Amortization of intangibles was $910,000 in fiscal 2000, compared to $1,032,000 in fiscal 1999. As a percentage of total revenues, amortization of intangibles remained consistent at 0.4% in fiscal 2000 compared to 0.4% in fiscal 1999.
During the third quarter of fiscal 1999, the Company recorded non-cash charges for the impairment of assets and facility closings totaling $2,501,000. The fiscal 1999 non-cash charges consisted primarily of $650,000 for the disposal of obsolete point of sale equipment that the Company identified as a result of installing its new point of sale system in its full service dining restaurants, $1,047,000 for the estimated costs and losses associated with the anticipated closing of two regional offices and three restaurant locations and $804,000 primarily for a non-cash asset impairment write down for two under-performing restaurants. This non-cash asset impairment charge resulted from the Company's determination that an impairment write down should be considered when there is a sustained trend of negative operating performance as measured by restaurant level cash flow. The non-cash facility closure charges include amounts for the write off of fixed assets and other costs related to the closing of these facilities. Each of these non-cash charges represents a reduction of the carrying amount of the assets to their estimated fair market value.
The Company had operating income of $12,500,000 in fiscal 2000 compared to operating income of $9,609,000 in fiscal 1999. The increase is primarily due to the non-cash charges of $2,501,000 in fiscal 1999.
Total other expenses, as a percentage of total revenues, increased to 9.3% in fiscal 2000 compared to 4.6% in fiscal 1999. The increase is primarily due to the $10.0 million non-cash charge to reserve for the Subordinated Note. The Company had an increase in other income from Transformational Payments made by Burger King to the Company. See ITEM 1 - Franchise and Development Agreements.
Bruegger's Corporation failed to make the interest payment on the Subordinated Note that was due to the Company on December 1, 2000 and the Company has subsequently been advised that the Affiliate Guarantors failed to make an interest payment that was due to their senior secured lender on January 2, 2001. The Affiliate Guarantors own and operate Bruegger's Bagel Bakeries as franchisees of Bruegger's Franchise Corporation, a subsidiary of Bruegger's Corporation. The Company believes that the Bruegger's Bagel Bakeries operated by the Affiliate Guarantors constitute a majority of the Bruegger's Bagel Bakery System and therefore account for a majority of Bruegger's Franchise Corporation revenues. The Company has been advised that Bruegger's Franchise Corporation has subordinated its right to receive royalty payments from the Affiliate Guarantors to the Affiliate Guarantors' senior secured lender. Consequently, there can be no assurance when, if ever, the Company might receive any principal or interest payments in respect of the Subordinated Note. In view of these and other circumstances, as of the fourth quarter of fiscal 2000, the Company recorded a $10.0 million non-cash charge to fully reserve for the Subordinated Note.
Income tax expense of $1,183,000 was recorded in fiscal 2000 compared to $815,000 in fiscal 1999. The increase in income tax was mainly due to increased state income taxes. The Company has a large portion of state taxes based on criteria other than income. The Company did not have a tax benefit for fiscal 2000 since an increase in the valuation reserve for its net operating loss carryforwards offset the benefit created by the fiscal 2000 net loss.
The Company has net operating loss carryforwards of approximately $52.8 million as well as FICA tip credits and alternative minimum tax credits of $3.5 million. Net operating loss carryforwards of $49.8 million expire in 2012 and $3.0 million expire in 2018. FICA tip credits of $1.3 million expire in 2012, $477,000 expire in 2013, $572,000 expire in 2014 and $571,000 expire in 2015. The alternative minimum tax credits of $521,000 carryforward indefinitely. The Company's federal income tax returns for fiscal years 1994-1997 were examined by the Internal Revenue Service ("IRS"). The IRS completed its audit during fiscal 2000 resulting in a change to the net operating loss carryover of $8.6 million. The increase to the net operating loss was the result of additional tax losses identified as a result of the disposition of various assets of the bagel businesses sold during fiscal 1997. At the end of fiscal 2000 the Company had a valuation reserve against its net operating loss carryforwards of $20.4 million resulting in a net deferred tax asset of $10.0 million. The Company's assessment of its ability to realize the net deferred tax asset was based on the weight of both positive and negative evidence, including the taxable income of its current operations. Based on this assessment, the Company's management believes it is more likely than not that the net deferred tax benefit recorded will be realized. Such evidence will be reviewed prospectively and should the Company's operating performance continue to improve, the Company may recognize additional tax benefits related to its net deferred tax asset position in the future.
The net loss in fiscal 2000 was $9,711,000, or $0.79 per share, compared to net loss of $1,957,000, or $0.15 per share, in fiscal 1999.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Results for fiscal 1999 include 53 weeks compared to 52 weeks for fiscal 1998. Restaurant sales in fiscal 1999 were $230,751,000, a decrease of 0.6% or $1,493,000, compared to restaurant sales of $232,244,000 in fiscal 1998.
The Company's Burger King restaurant sales increased $2,259,000 to $82,650,000 in fiscal 1999 compared to restaurant sales of $80,391,000 in fiscal 1998. The Company's Burger King restaurants had average weekly sales of $22,164 in fiscal 1999 versus $22,806 in the same period in fiscal 1998. The decrease in average weekly sales was offset by revenues of $2,543,000 due to additional sales weeks from one new restaurant opened during fiscal 1999 and four restaurants opened in fiscal 1998 which were open for their first full year in fiscal 1999. The decline in average weekly sales for fiscal 1999 resulted primarily from inclement weather during the first quarter of fiscal 1999 and the intense competition in the quick service restaurant market.
The Company's Grady's American Grill restaurant sales were $75,198,000 in fiscal 1999 compared to restaurant sales of $81,241,000 in fiscal 1998. The decrease of $6,043,000 was attributable in part to the sale of one unit in fiscal 1998 and two units in fiscal 1999 and the closing of one unit in fiscal 1999. The absence of these units contributed approximately $3,264,000 to the sales decrease. The units that were disposed of did not fit the Company's long term strategic plan as they were located in geographically remote markets and were not meeting the Company's performance expectations. The Company's Grady's American Grill restaurants had average weekly sales of $37,769 in fiscal 1999 versus $39,096 in the same period in fiscal 1998.
The Company's Chili's Grill & Bar restaurant sales increased $1,265,000 to $56,837,000 in fiscal 1999 when compared to restaurant sales of $55,572,000 in fiscal 1998. The Company's marketing and operational initiatives implemented during fiscal 1999 increased average weekly sales to $38,300 in fiscal 1999 versus $38,168 in fiscal 1998.
The Company's Italian Dining Division's restaurant sales increased $1,026,000 to $16,066,000 in fiscal 1999 when compared to restaurant sales of $15,040,000 in fiscal 1998. The increase was due to the success of operational and marketing initiatives which increased average weekly sales to $37,893 in fiscal 1999 from $36,153 in fiscal 1998.
Total restaurant operating expenses were $201,697,000 in fiscal 1999, compared to $202,625,000 in fiscal 1998. As a percentage of restaurant sales, total restaurant operating expenses increased slightly to 87.5% in fiscal 1999 from 87.3% in fiscal 1998. The following factors influenced the operating margins:
Food and beverage costs were $67,732,000, or 29.4% of total restaurant sales in fiscal 1999, compared to $69,102,000, or 29.8% of total restaurant sales in fiscal 1998. The decrease as a percentage of total revenue was mainly due to increased efficiencies and favorable commodity prices that resulted in decreased food costs at the Company's Burger King, Chili's and Italian Dining restaurants.
Payroll and benefits were $67,073,000 in fiscal 1999, compared to $66,404,000 in fiscal 1998. As a percentage of total restaurant sales, payroll and benefits increased 0.5% to 29.1% in fiscal 1999 from 28.6% in fiscal 1998. Payroll and benefits increased as a percentage of total revenues in the Company's Burger King, Grady's American Grill and Chili's divisions. Overall, the Company has increased hourly wages at each of its restaurant concepts due to the high level of competition to attract qualified employees.
Depreciation and amortization decreased $473,000 to $11,002,000 in fiscal 1999 compared to $11,475,000 in fiscal 1998. As a percentage of total restaurant sales, depreciation and amortization remained relatively consistent at 4.8% in fiscal 1999 compared to 4.9% in fiscal 1998.
Other restaurant operating expenses include rent and utilities, royalties, promotional expense, repairs and maintenance, property taxes and insurance. Other restaurant operating expenses were $55,890,000 in fiscal 1999 compared to $55,644,000 in 1998. Other restaurant operating expenses as a percentage of total restaurant sales increased in fiscal 1999 to 24.2% from 24.0% in fiscal 1998. The increase was primarily due to a $337,000 increase in workers compensation expense and a $168,000 increase in advertising expense in fiscal 1999 versus fiscal 1998.
General and administrative expenses, which include corporate and district management costs, were $15,912,000 in fiscal 1999, compared to $15,488,000 in fiscal 1998. As a percentage of total revenues, general and administrative expenses increased to 6.9% in fiscal 1999 compared to 6.7% in fiscal 1998. The increase is mainly due to an increased number of multi-unit restaurant managers and a decrease in sales performance.
Amortization of intangibles was $1,032,000 in fiscal 1999, compared to $1,085,000 in fiscal 1998. As a percentage of total revenues, amortization of intangibles remained relatively consistent at 0.4% in fiscal 1999 compared to 0.5% in fiscal 1998.
The Company recorded non-cash charges for the impairment of assets and facility closings totaling $2,501,000 during the third quarter of fiscal 1999. The non-cash charges consisted primarily of $650,000 for the disposal of obsolete point of sale equipment that the Company identified as a result of installing its new point of sale system in its full service dining restaurants, $1,047,000 for the estimated costs and losses associated with the anticipated closing of two regional offices and three restaurant locations and $804,000 primarily for a non-cash asset impairment write down for two under-performing restaurants. This non-cash asset impairment charge resulted from the Company's determination that an impairment write down should be considered when there is a sustained trend of negative operating performance as measured by restaurant level cash flow. The non-cash facility closure charges include amounts for the write off of fixed assets and other costs related to the closing of these facilities. Each of these non-cash charges represents a reduction of the carrying amount of the assets to their estimated fair market value.
The Company had operating income of $9,609,000 in fiscal 1999 compared to operating income of $12,796,000 in fiscal 1998. The decrease is mainly due to the $2,501,000 in non-cash charges for the impairment of assets and facility closings.
Total other expenses, as a percentage of total revenues, decreased to 4.6% in fiscal 1999 compared to 5.0% in fiscal 1998. The decrease was primarily due to a decrease in interest expense resulting from decreased borrowings under the Company's revolving credit agreement. The decrease in interest expense occurred despite a higher interest rate associated with the Company's fixed rate mortgage facility.
Income tax expense of $815,000 was recorded in fiscal 1999 compared to $1,107,000 in fiscal 1998. The decrease in the income tax provision for fiscal 1999 was mainly due to the implementation of state tax strategies to reduce state income tax expense and to lower taxable income.
The net loss in fiscal 1999 was $1,957,000, or $0.15 per share, compared to net income of $113,000, or $0.01 per share, in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's principal sources and uses of cash:
(Dollars in thousands)
In fiscal 2000 cash provided by operations was $20,384,000 compared to $13,762,000 in fiscal 1999. The increase in fiscal 2000 over fiscal 1999 was mainly due to increased income from restaurant operations of $1.4 million and Burger King Transformational Payments totaling approximately $3.9 million.
On August 3, 1999 the Company completed the refinancing of its existing debt with a financing package totaling $125,066,000, consisting of a $76,000,000 revolving credit agreement and a $49,066,000 mortgage facility, as described below. The revolving credit agreement was executed with Chase Bank of Texas, as agent for a group of six banks, providing for borrowings of up to $76,000,000 with interest payable at the adjusted LIBOR rate plus a contractual spread. The Company had $20,975,000 available under its revolving credit agreement as of October 29, 2000. The revolving credit agreement is collateralized by the stock of certain subsidiaries of the Company, the $10 million junior subordinated note issued by Bruegger's Corporation, certain interests in the Company's franchise agreements with Brinker and Burger King Corporation and substantially all of the Company's personal property not pledged in the mortgage financing. The revolving credit agreement will mature on October 31, 2002, at which time all amounts outstanding thereunder are due.
The revolving credit agreement contains, among other provisions, certain restrictive covenants including maintenance of certain prescribed debt and fixed charge coverage ratios, limitations on the incurrence of additional indebtedness, limitations on consolidated capital expenditures, restrictions on the payment of dividends (other than stock dividends) and limitations on the purchase or redemption of shares of the Company's capital stock.
The $49,066,000 mortgage facility has 34 separate mortgage notes and the term of each mortgage note is either 15 or 20 years. The notes have fixed rates of interest of either 9.79% or 9.94%. The notes require equal monthly interest and principal payments. The mortgage notes are collateralized by a first mortgage/deed of trust and security agreement on the real estate, improvements and equipment on 19 of the Company's Chili's restaurants and 15 of the Company's Burger King restaurants. The mortgage notes contain, among other provisions, certain restrictive covenants including maintenance of a consolidated fixed charge coverage ratio for the financed properties. The Company used the proceeds of the mortgage facility to repay indebtedness under its existing revolving credit agreement.
Under the Company's original share repurchase program, which expired in September 2000, the Company purchased 604,500 shares of its common stock in fiscal 2000. The Company spent $1,448,000 for the purchases of these shares in fiscal 2000. In October of 2000 the Board of Directors authorized a new share repurchase program for the purchase of up to an additional 1,000,000 shares of the Company's common stock. Under the current share repurchase program, the Company may purchase shares from time to time, through October, 2001, in the open market or in privately negotiated transactions depending on market conditions and other considerations.
The Company's primary cash requirements in fiscal 2001 will be capital expenditures in connection with the opening of new restaurants, remodeling of existing restaurants, maintenance expenditures, purchases of the Company's common stock and the reduction of debt under the Company's debt agreements. The Company's capital expenditures for fiscal 2001 are expected to range from $12,000,000 to $15,000,000. During fiscal 2001, the Company anticipates opening two to four Burger King restaurants and two to three full service restaurants. The actual amount of the Company's cash requirements for capital expenditures depends in part on the number of new restaurants opened, if the Company owns or leases new units and the actual expense related to remodeling and maintenance of existing units.
The Company anticipates that its cash flow from operations, together with the $20,975,000 available under its revolving credit agreement as of October 29, 2000, will be sufficient to fund its planned internal expansion and other internal operating cash requirements through the end of fiscal 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, FASB issued FAS No. 137, which deferred the effective date of FAS No. 133. In June 2000, the FASB issued FAS No. 138, which amended FAS No. 133 for certain derivative instruments and hedging activities. Accordingly, FAS No. 133 is effective for all fiscal years beginning after June 15, 2000. FAS No. 133, as amended, requires that all changes in derivatives be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company is currently not involved in derivative instruments or hedging activities and therefore the Company does not expect any impact from FAS No. 133, as amended.
IMPACT OF INFLATION
Management does not believe that inflation has had a material effect on the Company's operations during the past several years. Increases in labor, food, and other operating costs could adversely affect the Company's operations. In the past, however, the Company generally has been able to modify its operating procedures or increase menu prices to substantially offset increases in its operating costs.
Many of the Company's employees are paid hourly rates related to federal and state minimum wage laws and various laws that allow for credits to that wage. Although the Company has been able to and will continue to attempt to pass along increases in costs through food and beverage price increases, there can be no assurance that all such increases can be reflected in its prices or that increased prices will be absorbed by customers without diminishing, to some degree, customer spending at the Company's restaurants.
FORWARD-LOOKING STATEMENTS
This report contains and incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about the Company's development plans and trends in the Company's operations and financial results. Forward-looking statements can be identified by the use of words such as "anticipates," "believes," "plans," "estimates," "expects," "intends," "may," and other similar expressions. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that the Company will actually achieve the plans, intentions and expectations discussed in these forward-looking statements. Actual results may differ materially. Among the risks and uncertainties that could cause actual results to differ materially are the following: the availability and cost of suitable locations for new restaurants; the availability and cost of capital to the Company; the ability of the Company to develop and operate its restaurants; the hiring, training and retention of skilled corporate and restaurant management and other restaurant personnel; the integration and assimilation of acquired concepts; the overall success of the Company's franchisors; the ability to obtain the necessary government approvals and third-party consents; changes in governmental regulations, including increases in the minimum wage; the results of pending litigation; and weather and other acts of God. The Company undertakes no obligation to
update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUALITY DINING, INC. CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
{1} NATURE OF BUSINESS, DISPOSITION OF BUSINESS AND PUBLIC OFFERINGS
NATURE OF BUSINESS - Quality Dining, Inc. and its subsidiaries (the "Company") develop and operate both quick service and full service restaurants in 17 states. The Company owns and operates 35 Grady's American Grill restaurants, five restaurants under the tradename of Spageddies Italian Kitchen and three restaurants under the tradename Papa Vino's Italian Kitchen. The Company also operates, as a franchisee, 71 Burger King restaurants and 31 Chili's Grill & Bar restaurants.
DISPOSITION OF BAGEL-RELATED BUSINESSES - On October 20, 1997, the Company sold its bagel-related businesses to Mr. Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and their affiliates. The Company's board of directors determined to sell the bagel-related businesses after a careful evaluation of the future prospects for the bagel business, the competitive environment that then existed in the bagel segment, and the historical performance of the Company's bagel-related businesses. The sale included the stock of Bruegger's Corporation and the stock of all of the other bagel-related businesses. The total proceeds from the sale were $45,164,000. The consideration included the issuance by Bruegger's Corporation of a junior subordinated note in the amount of $10,000,000 (the "Subordinated Note"), which was recorded net of a $4,000,000 reserve for legal indemnification, the transfer of 4,310,740 shares of the Company's common stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a receivable for purchase price adjustment of $500,000, and $16,841,000 in cash. The cash component of the proceeds included an adjustment for the calculation of the net working capital deficit. The calculation used was subject to final adjustment and is being disputed by Messrs. Brue and Dressell, see Note 10. The Subordinated Note has an annual interest rate of 12%, matures in October 2004 and is guaranteed by certain affiliates of Bruegger's Corporation ("Affiliate Guarantors"). The Subordinated Note provides that interest is to be accrued and added to the principal amount of the note through October 2000 and thereafter paid in cash for the remaining life of the note. The Company has never recognized any interest income from this note. Bruegger's Corporation failed to make the interest payment on the Subordinated Note that was due to the Company on December 1, 2000 and the Company has subsequently been advised that the Affiliate Guarantors failed to make an interest payment that was due to their senior secured lender on January 2, 2001. The Affiliate Guarantors own and operate Bruegger's Bagel Bakeries as franchisees of Bruegger's Franchise Corporation, a subsidiary of Bruegger's Corporation. The Company believes that the Bruegger's Bagel Bakeries operated by the Affiliate Guarantors constitute a majority of the Bruegger's Bagel Bakery System and therefore account for a majority of Bruegger's Franchise Corporation revenues. The Company has been advised that Bruegger's Franchise Corporation has subordinated its right to receive royalty payments from the Affiliate Guarantors to the Affiliate Guarantors' senior secured lender. Consequently, there can be no assurance when, if ever, the Company might receive any principal or interest payments in respect of the Subordinated Note. In view of these and other circumstances, as of the fourth quarter of fiscal 2000, the Company recorded a $10.0 million non-cash charge to fully reserve for the Subordinated Note.
{2} SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR - The Company maintains its accounts on a 52/53 week fiscal year ending the last Sunday in October. The fiscal year ended October 29, 2000 (fiscal 2000) contained 52 weeks. The fiscal year ended October 31, 1999 (fiscal 1999) contained 53 weeks. The fiscal year ended October 25, 1998 (fiscal 1998) contained 52 weeks.
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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INVENTORIES - Inventories consist primarily of restaurant food and supplies and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment, including capitalized leased properties, are stated at cost. Depreciation and amortization are being recorded on the straight-line method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the shorter of the estimated useful life or the lease term of the related asset. The general ranges of original depreciable lives are as follows:
Upon the sale or disposition of property and equipment, the asset cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Normal repairs and maintenance costs are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS AND FACILITY CLOSURE EXPENSE - Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets," established accounting standards for the impairment of long-lived assets, certain intangibles and goodwill related to those assets. The Company reviews long-lived assets related to each restaurant annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. An impaired restaurant is written down to its estimated fair market value based on the best information available to the Company. Considerable management judgment is necessary to estimate the fair market value. Accordingly, actual results could vary significantly from such estimates.
The Company recorded non-cash charges totaling $2,501,000 during the third quarter of fiscal 1999 consisting primarily of $650,000 for the disposal of obsolete point of sale equipment in its full service dining restaurants that the Company identified as a result of installing its new point of sale system, $1,047,000 for the estimated costs and losses associated with the anticipated closing of two regional offices and three restaurant locations and $804,000 primarily for a non-cash asset impairment write down for two under-performing restaurants.
The Company recorded a $250,000 non-cash impairment charge in fiscal 1998 in connection with its decision to sell a Grady's American Grill Restaurant.
GOODWILL AND TRADEMARKS - Goodwill arising from the excess of the purchase price over the acquired tangible and intangible net assets acquired in acquisitions and trademarks are being amortized on a straight-line basis, principally over 40 years. Accumulated amortization of goodwill as of October 29, 2000 and October 31, 1999 was $3,250,000 and $2,710,000, respectively. Accumulated amortization of trademarks as of October 29, 2000 and October 31, 1999 was $1,607,000 and $1,275,000, respectively.
FRANCHISE FEES AND DEVELOPMENT FEES - The Company's Burger King and Chili's franchise agreements require the payment of a franchise fee for each restaurant opened. Franchise fees are deferred and amortized on the straight-line method over the lives of the respective franchise agreements. Development fees paid to the respective franchisors are deferred and expensed in the period the related restaurants are opened. The franchise agreements generally provide for a term of 20 years with renewal options upon expiration. Franchise fees are being amortized on a straight-line basis, principally over 20 years. Accumulated amortization of franchise fees as of October 29, 2000 and October 31, 1999 was $3,881,000 and $3,312,000, respectively.
ADVERTISING - The Company incurs advertising expense related to its concepts under franchise agreements (see Note 5) or through local advertising. Advertising costs are expensed at the time the related advertising first takes place. Advertising costs were $7,967,000, $6,975,000 and $6,807,000 for fiscal years 2000, 1999 and 1998, respectively.
PRE-OPENING COSTS - Effective with fiscal 1999, the Company expenses pre-opening costs as incurred in accordance with SOP 98-5 "Reporting on the Costs of Start-up Activities". Prior to fiscal 1999 direct costs incurred in connection with opening new restaurants were deferred and amortized on a straight-line basis over a 12-month period following the opening of a restaurant. Amortization of pre-opening costs aggregated $577,000 for fiscal year 1998.
LIQUOR LICENSES - Costs incurred in securing liquor licenses for the Company's restaurants and the fair value of liquor licenses acquired in acquisitions are capitalized and amortized on a straight-line basis, principally over 20 years. Accumulated amortization of liquor licenses as of October 29, 2000 and October 31, 1999 was $985,000 and $800,000, respectively.
DEFERRED FINANCING COSTS - Deferred costs of debt financing included in other non-current assets are amortized over the life of the related loan agreements, which range from three to 20 years.
COMPUTER SOFTWARE COSTS - Costs of purchased and internally developed computer software are capitalized and amortized over a five-year period using the straight-line method. As of October 29, 2000 and October 31, 1999, capitalized computer software costs, net of related accumulated amortization, aggregated $989,000 and $655,000, respectively. Amortization of computer software costs was $536,000, $476,000 and $445,000 for fiscal years 2000, 1999 and 1998 respectively.
CAPITALIZED INTEREST - Interest costs capitalized during the construction period of new restaurants and major capital projects were $104,000, $24,000 and $57,000 for fiscal years 2000, 1999 and 1998 respectively.
STOCK-BASED COMPENSATION - The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Statement encourages rather than requires companies to adopt a new method that accounts for stock-based compensation awards based on their estimated fair value at the date they are granted. Companies are permitted, however, to continue accounting for stock compensation awards under APB Opinion No. 25 which requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of the grant and the amount an employee must pay to acquire the stock. The Company has elected to continue to apply APB Opinion No. 25 and has disclosed the pro forma net income (loss) per share, determined as if the new method had been applied, in Note 8.
NET INCOME (LOSS) PER SHARE - Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income per share assumes the exercise of stock options using the treasury stock method, if dilutive.
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject the Company to credit risk, consist primarily of cash and cash equivalents and notes receivable. Substantially all of the Company's cash and cash equivalents at October 29, 2000 were concentrated with a bank located in Chicago, Illinois.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
INCOME TAXES - The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. SFAS 109 requires the establishment of a valuation reserve against any deferred tax assets if the realization of such assets is not deemed likely.
RECLASSIFICATION - Certain reclassifications have been made to the fiscal 1999 financial statements to conform them to the fiscal 2000 presentation.
SEGMENT INFORMATION - The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in fiscal 1999. SFAS 131 establishes standards for the reporting of information about operating segments in annual and interim financial statements and requires restatement of prior year information. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect the Company's consolidated financial position or results of operations but did change the disclosure of segment information, as presented in Note 14.
COMPREHENSIVE INCOME - The Company adopted SFAS 130, "Reporting Comprehensive Income" ("SFAS 130") in fiscal 1999. SFAS 130 requires that other comprehensive income items be displayed in financial statements and that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company did not have any comprehensive income items that were required to be reported under SFAS 130.
RECENTLY ISSUED ACCOUNTING STANDARDS - In 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, FASB issued FAS No. 137,which deferred the effective date of FAS No. 133. In June 2000, the FASB issued FAS No. 138, which amended FAS No. 133 for certain derivative instruments and hedging activities. Accordingly, FAS No. 133 is effective for all fiscal years beginning after June 15, 2000. FAS No. 133, as amended, requires that all changes in derivatives be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company is currently not involved in derivative instruments or hedging activities and therefore the Company does not expect any impact from FAS No. 133, as amended.
{3} OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
Other current assets and accrued liabilities consist of the following:
{4} PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
{5} FRANCHISE AND DEVELOPMENT RIGHTS
The Company has entered into franchise agreements with two franchisors for the operation of two of its restaurant concepts, Burger King and Chili's. The existing franchise agreements provide the franchisors with significant rights regarding the business and operations of the Company's franchised restaurants. The franchise agreements with Burger King Corporation require the Company to pay royalty and advertising fees equal to 3.5% and 4.0% of Burger King restaurant sales, respectively. The franchise agreements with Brinker International, Inc. ("Brinker") covering the Company's Chili's restaurant concept require the Company to pay royalty and advertising fees equal to 4.0% and 0.5% of Chili's restaurant sales, respectively. In addition, the Company is required to spend 2% of sales from each of its Chili's restaurants on local advertising. As part of a system-wide promotional effort, the Company paid an additional advertising fee of 0.375% of sales for the period beginning September 1, 1999 and ending August 30, 2000 and has agreed to pay a similar fee of 1.0% of sales for the period beginning September 1, 2000 and ending June 20, 2001.
The Company has entered into development agreements to develop additional restaurants in each of the two concepts. Each of the development agreements requires the Company to pay a development fee. In addition, the development agreements contain certain requirements regarding the number of units to be opened in the future. Each restaurant opened will be subject to a separate franchise agreement, which requires the payment of an initial franchise fee (currently Chili's $40,000, Burger King $50,000) for each such restaurant. Should the Company fail to comply with the required development schedules or with the requirements of the agreements for restaurants within areas covered by the development agreements, the franchisors have the right to terminate the Company's development agreements and the exclusivity provided by the development agreements.
During fiscal 2000, Burger King Corporation increased its royalty and franchise fees for most new restaurants. The franchise fee for new restaurants increased from $40,000 to $50,000 for a 20 year agreement and the royalty rate increased from 3.5% of sales to 4.5% of sales, after a transitional period. For franchise agreements entered into during the transitional period, the royalty rate will be 4% of sales for the first 10 years and 4.5% of sales for the balance of the term.
For new restaurants, the transitional period will be from July 1, 2000 to June 30, 2003. As of July 1, 2003, the royalty rate will become 4-1/2% of sales for the full term of new restaurant franchise agreements. For renewals of existing franchise agreements, the transitional period will be from July 1, 2000 through June 30, 2001. As of July 1, 2001, existing restaurants that renew their franchise agreements will pay a royalty of 4.5% of sales for the full term of the renewed agreement. The advertising contribution will remain 4% of sales. Royalties payable under existing franchise agreements are not affected by these changes until the time of renewal, at which time the then prevailing rate structure will apply.
Burger King Corporation offered a voluntary program to incent franchisees to renew their franchise agreements prior to the scheduled expiration date ("Early Renewal Program"). Franchisees that elected to participate in the Early Renewal Program are required to make capital investments in their restaurants by, among other things, bringing them up to Burger King Corporation's current image, and to extend occupancy leases. Franchise agreements entered into under the Early Renewal Program will have special provisions regarding the royalty payable during the term, including a reduction in the royalty to 2.75% over five years beginning April, 2002 and concluding in April, 2007.
The Company included 36 restaurants in the Early Renewal Program. The Company paid franchise fees of $877,000 in the third quarter of fiscal 2000 to extend the franchise agreements of the selected restaurants for sixteen to twenty years. The Company expects to invest approximately $7,000,000 to $8,000,000 to remodel the selected restaurants to bring them up to Burger King Corporation's current image. The remodeling is required to be completed by December 31, 2001.
On January 27, 2000 the Company executed a "Franchisee Commitment" in which it agreed to undertake certain "Transformational Initiatives" including capital improvements and other routine maintenance in all of its Burger King restaurants. The capital improvements include the installation of signage bearing the new Burger King logo and the installation of a new drive-through ordering system. The Company is required to complete these capital improvements by December 31, 2001. In addition, the Company agreed to perform, as necessary, certain routine maintenance such as exterior painting, sealing and striping of parking lots and upgraded landscaping. The Company completed this maintenance by September 30, 2000, as required. In consideration for executing the Franchisee Commitment, the Company received "Transformational Payments" totaling approximately $3.9 million during fiscal 2000. The portion of the Transformational Payments that corresponds to the amount required for the capital improvements will be recognized as income over the useful life of the capital improvements. The portion of the Transformational Payments that corresponds to the required routine maintenance was recognized as a reduction in maintenance expense over the period during which maintenance
was performed. The remaining balance of the Transformational Payments is being recognized as other income ratably through December 31, 2001, the term of the Franchisee Commitment.
{6} INCOME TAXES
The provision for income taxes for the fiscal years ended October 29, 2000, October 31, 1999 and October 25, 1998 is summarized as follows:
The components of the deferred tax asset and liability are as follows:
The Company has net operating loss carryforwards of approximately $52.8 million as well as FICA tip credits and alternative minimum tax credits of $3.5 million.
Net operating loss carryforwards expire as follows:
FICA tip credits expire as follows:
The alternative minimum tax credits of $521,000 carryforward indefinitely.
During fiscal 2000, the Company increased its valuation reserve against its net operating loss carryforwards to $20.4 million leaving a net deferred tax asset of $10.0 million. The Company's assessment of its ability to realize the net deferred tax asset was based on the weight of both positive and negative evidence, including the taxable income of its current operations. Based on this assessment, the Company's management believes it is more likely than not that the net deferred tax benefit recorded will be realized. Such evidence will be reviewed prospectively and should the Company's operating performance continue to improve, the Company may recognize additional tax benefits related to its net deferred tax asset position in the future.
The Company's federal income tax returns for fiscal years 1994-1997 were examined by the Internal Revenue Service ("IRS"). The IRS completed its audit during fiscal 2000 resulting in an increase to the net operating loss carryover of $8.6 million. The increase to the net operating loss was the result of additional tax losses identified as a result of the disposition of various assets of the bagel businesses sold during fiscal 1997. The schedule of deferred tax assets and valuation allowance have been adjusted accordingly to reflect the results of this audit.
Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:
{7} LONG-TERM DEBT AND CREDIT AGREEMENTS
On August 3, 1999 the Company completed the refinancing of its existing debt with a financing package totaling $125,066,000, consisting of a $76,000,000 revolving credit agreement and a $49,066,000 mortgage facility, as described below. The revolving credit agreement was executed with Chase Bank of Texas, as agent for a group of six banks, providing for borrowings of up to $76,000,000 with interest payable at the adjusted LIBOR rate plus a contractual spread. The Company had $20,975,000 available under its revolving credit agreement as of October 29, 2000. The revolving credit agreement is collateralized by the stock of certain subsidiaries of the Company, the $10 million junior subordinated note issued by Bruegger's Corporation, certain interests in the Company's franchise agreements with Brinker and Burger King Corporation and substantially all of the Company's personal property not pledged in the mortgage financing. The revolving credit agreement will mature on October 31, 2002, at which time all amounts outstanding thereunder are due.
The revolving credit agreement contains, among other provisions, certain restrictive covenants including maintenance of certain prescribed debt and fixed charge coverage ratios, limitations on the incurrence of additional indebtedness, limitations on consolidated capital expenditures, restrictions on the payment of dividends (other than stock dividends) and limitations on the purchase or redemption of shares of the Company's capital stock.
The $49,066,000 mortgage facility has 34 separate mortgage notes and the term of each mortgage note is either 15 or 20 years. The notes have fixed rates of interest of either 9.79% or 9.94%. The notes require equal monthly interest and principal payments. The mortgage notes are collateralized by a first mortgage/deed of trust and security agreement on the real estate, improvements and equipment on 19 of the Company's Chili's restaurants and 15 of the Company's Burger King restaurants. The mortgage notes contain, among other provisions, certain restrictive covenants including maintenance of a consolidated fixed charge coverage ratio for the financed properties. The Company used the proceeds of the mortgage facility to repay indebtedness under its existing revolving credit agreement.
During fiscal 1999 the Company paid fees and expenses totaling $1,327,000 related to the refinancing of its existing debt. These costs related primarily to transaction and legal expenses for the mortgage facility and up-front fees to the bank group and legal expenses for the revolving credit agreement.
The aggregate maturities of long-term debt subsequent to October 29, 2000 are as follows:
{8} EMPLOYEE BENEFIT PLANS
STOCK OPTIONS
The Company has four stock option plans: the 1993 Stock Option and Incentive Plan, the 1997 Stock Option and Incentive Plan , the 1993 Outside Directors Stock Option Plan and the 1999 Outside Directors Stock Option Plan .
On March 26, 1997 the Company's shareholders approved the 1997 Stock Option and Incentive Plan and therefore no awards for additional shares of the Company's common stock will be made under the 1993 Stock Option and Incentive Plan. Under the 1997 Stock Option and Incentive Plan, shares of restricted stock and options to purchase shares of the Company's common stock may be granted to officers and other employees. An aggregate of 1,100,000 shares of common stock has been reserved for issuance under the 1997 Stock Option and Incentive Plan.
In December of 2000 the Company approved the 1999 Outside Directors Stock Option Plan and therefore no awards for additional shares of the Company's common stock will be made under the 1993 Outside Directors Stock Option Plan. Under the 1999 Outside Directors Stock Option Plan, 80,000 shares of common stock have been reserved for the issuance of nonqualified stock options to be granted to non-employee directors of the Company. On May 1, 2001 and on each May 1 thereafter, each then non-employee director of the Company will receive an option to purchase 2,000 shares of common stock at an exercise price equal to the fair market value of the Company's common stock on the date of grant. Each option has a term of 10 years and becomes exercisable six months after the date of grant. As of October 29, 2000, there were 16,000 options outstanding under the 1999 Outside Directors Stock Option Plan.
On June 1, 1999, the Company repurchased options for 298,340 shares of the Company's common stock, that had previously been issued under its 1993 Stock Option and Incentive Plan at strike prices ranging from $13.60 to $34.50, for their fair value of $44,751, or $0.15 per option. These options are not available to be reissued. The Company recorded $44,751 in compensation expense related to this repurchase.
On June 1, 1999, the Company implemented a Long Term Incentive Compensation Plan (the "Long Term Plan") for seven of its executive officers and certain other senior executives (the "Participants"). The Long Term Plan is designed to incent and retain those individuals who are critical to achieving the Company's long term business objectives. The Long Term Plan consists of (a) options granted with an exercise price equal to the closing price of the Company's common stock on the grant date, which vest over three years; (b) restricted stock awards of common shares which vest over seven years, subject to accelerated vesting in the event the price of the Company's common stock achieves certain targets; and, for certain Participants, (c) a cash bonus payable at the conclusion of fiscal year 2000. Under the Long Term Plan, the Company issued 104,360 restricted shares in fiscal 2000 and 155,552 restricted shares in fiscal 1999. The Company issued an additional 93,557 restricted shares in December of 2000. There were 22,615 shares of restricted stock forfeited in fiscal 2000 and none in fiscal 1999.
The Company also entered into agreements with five of its executive officers and two other senior executives pursuant to which the employees have agreed not to compete with the Company for a period of time after the termination of their employment and are entitled to receive certain payments in the event of a change of control of the Company.
As a result of the restricted stock grants, the Company recorded an increase to additional paid in capital and an offsetting deferred charge for unearned compensation. The deferred charge is equal to the number of shares granted multiplied by the Company's closing share price on the day of the grant. The deferred charge is classified in the equity section of the Company's consolidated balance sheet as unearned compensation and is being amortized to compensation expense on a straight-line basis over the vesting period, subject to accelerated vesting if the Company's common stock reaches certain benchmarks.
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 (see Note 2), the Company's net earnings (loss) and net earnings (loss) per share would have been the pro forma amounts indicated below:
(in thousands, except per share amounts)
The weighted average fair value at the date of grant for options granted during fiscal 2000, 1999 and 1998 was $1.12, $1.47 and $1.67 per share, respectively, which, for the purposes of this disclosure, is assumed to be amortized over the respective vesting period of the grants. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in fiscal 2000, 1999 and 1998: dividend yield of 0% for all years; expected volatility of 48.8%, 48.1% and 47.7%, respectively; risk-free interest rate of 6.19%, 5.5% and 5.7%, respectively; and expected lives of 5.00, 5.00 and 4.98 years, respectively.
Activity with respect to the Company's stock option plans for fiscal years 2000, 1999 and 1998 was as follows:
The following table summarizes information relating to fixed-priced stock options outstanding for all plans as of October 29, 2000.
RETIREMENT PLANS
The Company maintains a discretionary, noncontributory profit sharing plan for its eligible employees. Plan contributions are determined by the Company's Board of Directors.
Employees are also eligible to participate in either a 401(k) plan or a deferred compensation program after one year of service in which the employee has worked a minimum of 1,000 hours. The Company matches a portion of the employee's contribution to the plans and provides investment choices for the employee. The Company's contributions under both plans aggregated $226,000, $265,000 and $173,000 for fiscal years 2000, 1999 and 1998, respectively.
{9} LEASES
The Company leases its office facilities and a substantial portion of the land and buildings used in the operation of its restaurants. The restaurant leases generally provide for a noncancelable term of five to 20 years and provide for additional renewal terms at the Company's option. Most restaurant leases contain provisions for percentage rentals on sales above specified minimums. Rental expense incurred under these percentage rental provisions aggregated $961,000, $970,000 and $1,054,000 for fiscal years 2000, 1999 and 1998, respectively.
As of October 29, 2000, future minimum lease payments related to these leases were as follows:
(Dollars in thousands)
Rent expense, including percentage rentals based on sales, was $9,077,000, $9,453,000 and $9,518,000 for fiscal years 2000, 1999 and 1998, respectively.
{10} COMMITMENTS AND CONTINGENCIES
The Company is self-insured for a portion of its employee health care costs. The Company is liable for medical claims up to $100,000 per eligible employee annually, and aggregate annual claims up to approximately $2,500,000. The aggregate annual deductible is determined by the number of eligible covered employees during the year and the coverage they elect.
The Company is self-insured with respect to any worker's compensation claims not covered by insurance. The Company maintains a $250,000 annual deductible per occurrence and is liable for aggregate claims up to $2,300,000 for the three year insurance plan period beginning March 1, 1998 and ending April 30, 2001.
The Company is self-insured with respect to any general liability claims below the Company's per occurrence deductible. The Company currently maintains a $15,000 per occurrence deductible.
At October 29, 2000, the Company had commitments aggregating $901,000 for the construction of restaurants.
The Company and certain of its officers and directors are parties to various legal proceedings relating to the Company's purchase, operation and financing of the Company's bagel-related businesses.
D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises, Inc., franchisees of Bruegger's Franchise Corporation, and Ken Wagnon, Dan Carney, Jay Wagnon and Patrick Beatty, principals of the foregoing franchisees, commenced an action on July 16, 1997 in the United States District Court for the District of Maryland, against Bruegger's Corporation, Bruegger's Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick, Michael J. Dressell and Nordahl L. Brue, alleging that the plaintiffs purchased their franchises based upon financial representations that did not materialize, that they purchased preferred stock in Bruegger's Corporation based upon false representations, that Bruegger's Corporation falsely represented its intentions with respect to purchasing bakeries from the plaintiffs or providing financing to the plaintiffs, and that the defendants violated implied covenants of good faith and fair dealing. The parties have reached a tentative settlement of this matter pursuant to which the Company agreed to make an initial payment of $125,000 and an additional payment of $175,000 on December 31, 2001. The Company also agreed to purchase 96,064 shares of its common stock presently owned by the plaintiffs, on December 31, 2001, for an amount equal to the greater of $2.75 per share or the midpoint between $2.59 and the market price of the Company's stock at the time of closing. As part of the tentative settlement, the plaintiffs have agreed to vote their stock in the Company in accordance with the recommendation of the Company's Board of Directors and Bruegger's Corporation has agreed to purchase certain equipment from the plaintiffs for $200,000, payable in December of 2002. The Company has agreed to guarantee $25,000 of this payment.
On or about April 15, 1997, Texas Commerce Bank National Association ("Texas Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd., a Florida limited partnership ("BFBC"). At the time of the Loan, BFBC was a franchisee under franchise agreements with Bruegger's Franchise Corporation (the "Franchisor"). The Company at that time was an affiliate of the Franchisor. In connection with the Loan and as an accommodation of BFBC, the Company executed to Texas Commerce a "Guaranty". By the terms of the Guaranty the Company agreed that upon maturity of the Loan by default or otherwise that it would either (1) pay the Loan obligations or (2) buy the Loan and all of the related loan documents (the "Loan Documents") from Texas Commerce or its successors. In addition several principals of BFBC (the "Principal Guarantors") guaranteed repayment of the Loan by each executing a "Principal Guaranty". On November 10, 1998, Texas Commerce (1) declared that the Loan was in default, (2) notified BFBC, the Principal Guarantors and the Company that all of the Loan obligations were due and payable, and (3) demanded payment.
The Company elected to satisfy its obligations under the Guaranty by purchasing the Loan from Texas Commerce. On November 24, 1998, the Company bought the Loan for $4,294,000. Thereafter, the Company sold the Loan to its Texas affiliate Grady's American Grill, L.P. ("Grady's"). On November 30, 1998 Grady's commenced an action seeking to recover the amount of the Loan from one of the Principal Guarantors, Michael K. Reilly ("Reilly"). As part of this action Grady's also seeks to enforce a Subordination Agreement that was one of the Loan Documents against MKR Investments, L.P., a partnership ("MKR"). Reilly is the general partner of MKR. This action is pending in the United States District Court for the Southern District of Texas Houston Division as Case No. H-98-4015. Reilly has denied liability and filed a counterclaim against Grady's alleging that Grady's engaged in unfair trade practices, violated Florida's "Rico" statute, engaged in a civil conspiracy and violated state and federal securities laws in connection with the Principal Guaranty (the "Counterclaims"). Reilly also filed a third party complaint against Quality Dining, Inc., Grady's American Grill Restaurant Corporation, David M. Findlay, Daniel B. Fitzpatrick, Bruegger's Corporation, Bruegger's Franchise Corporation, Champlain Management Services, Inc., Nordahl L. Brue, Michael J. Dressell and Ed Davis ("Third Party Defendants") alleging that Reilly invested in BFBC based upon false representations, that the Third Party Defendants violated state
franchise statutes, committed unfair trade practices, violated covenants of good faith and fair dealing, violated the state "Rico" statute and violated state and federal securities laws in connection with the Principal Guaranty. In addition, BFBC and certain of its affiliates, including the Principal Guarantors ("Intervenors") have intervened and asserted claims against Grady's and the Third Party Defendants that are similar to those asserted in the counter claims and the third party complaint. In addition, the Company and Bruegger's Corporation are currently disputing the nature and extent of their indemnity obligations, if any, to the other with respect to this litigation (which dispute would be resolved if the "Bruegger's Resolution" is consummated. See description of Bruegger's Resolution below). Based upon the currently available information, the Company does not believe that these matters will have a materially adverse effect on the Company's financial position or results of operations. However, there can be no assurance that the Company will be able to realize sufficient value from Reilly to satisfy the amount of the Loan or that the Company will not incur any liability as a result of the Counterclaims or third party complaints filed by Reilly and the Intervenors.
In each of the above cases, one or more present or former officers and directors of the Company were named as party defendants and the Company has and/or is advancing defense costs on their behalf.
Pursuant to the Share Exchange Agreement by and among Quality Dining, Inc., Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell ("Share Exchange Agreement"), the Agreement and Plan of Merger by and among Quality Dining, Inc., Bagel Disposition Corporation and Lethe, LLC, and certain other related agreements entered into as part of the disposition of the Company's bagel-related businesses, the Company is responsible for 50% of the first $14 million of franchise-related litigation expenses, inclusive of attorney's fees, costs, expenses, settlements and judgments (collectively "Franchise Damages"). Bruegger's Corporation and certain of its affiliates are obligated to indemnify the Company from all other Franchise Damages. The Company is obligated to pay the first $3 million of its share of Franchise Damages in cash. As of August 6, 2000, the Company had satisfied this obligation. The remaining $4 million of the Company's share of Franchise Damages is payable by crediting amounts owed to the Company pursuant to the $10 million junior subordinated note issued to the Company by Bruegger's Corporation. However, the Company and Bruegger's Corporation are currently disputing the nature and extent of their indemnity obligations under the Share Exchange Agreement. If the Bruegger's Resolution (described below) is consummated, the remaining $4 million of the Company's share of Franchise Damages would be payable in cash. Through October 29, 2000 the outstanding balance due under the Subordinated Note has been reduced by $600,000 in respect of Franchise Damages. Based upon the currently available information, the Company does not believe that these cases individually or in the aggregate will have a material adverse effect on the Company's financial position and results of operations but there can be no assurance thereof.
On or about September 10, 1999, Bruegger's Corporation, Lethe LLC, Nordahl L. Brue, and Michael J. Dressel commenced an action against the Company in the United States District Court for the District of Vermont alleging that the Company breached various provisions of the Share Exchange Agreement which arise out of the ongoing dispute concerning the net working capital adjustment contemplated by the Share Exchange Agreement. On February 1, 2000, the Company filed counter-claims against Bruegger's Corporation for the working capital adjustment to which it believes it is entitled. Additionally, on or about September 13, 1999, Messrs. Brue and Dressell asserted a claim for breach of representations and warranties under the Share Exchange Agreement. The Company does not expect the ultimate resolution of these matters to have a material adverse effect on the Company's financial position or results of operations, but there can be no assurance thereof.
The Company and Bruegger's Corporation are discussing a resolution (the "Bruegger's Resolution") of their various disputes that may include, among other things, one or more of the following provisions: (a) the principal and accrued interest outstanding under the Subordinated Note would be reduced to $10 million; (b) the Company and Bruegger's Corporation each give up their claim against the other to receive a net working capital adjustment; (c) the Subordinated Note would be modified to, among other things, extend the period through which interest would be accrued and added to the principal amount of the Subordinated Note from October, 2000 through January, 2002. From January, 2002 through June, 2002, one-half of the interest would be accrued and added to the principal amount of the Subordinated Note and one-half of the interest would be paid in cash. Commencing in January, 2003, interest would be paid in cash through the maturity of the Subordinated Note in October 2004; (d) the Company and Bruegger's Corporation would each be responsible for 50% of the Franchise Damages with respect to the claims asserted by D & K Foods, Inc., et al and BFBC Ltd., et al. The Company would be entitled to 25% of any net recovery made by Bruegger's Corporation on its counter-claim against D & K Foods, Inc., et al and Bruegger's Corporation would be entitled to 25% of any net recovery made by the Company on the BFBC, Ltd., Loan; provided, however, that any such recovery shall be credited against the Subordinated Note; (e) Bruegger's Corporation and its affiliates would release their claim for breach of representations and warranties under the Share Exchange Agreement; and (f) the Company would give Bruegger's
Corporation a credit of two dollars against the Subordinated Note for every one dollar that Bruegger's Corporation prepays against the Subordinated Note prior to October, 2003 up to a maximum credit of $4 million.
The Company does not expect the Bruegger's Resolution, if consummated on terms substantially the same as those presently being discussed, to have a material adverse effect on the Company's financial position or results of operations, but there can be no assurance thereof. There also can be no assurance that the Bruegger's Resolution will be consummated and whether or not consummated there can be no assurance when, if ever, the Company might receive any principal or interest payments in respect of the Subordinated Note.
On April 19, 2000, NBO, LLC ("NBO") filed a Verified Complaint for Injunctive and Declaratory Relief in the United States District Court for the Northern District of Indiana, South Bend Division, naming as defendants the Company, Daniel B. Fitzpatrick, certain other officers of the Company, certain unidentified associates and affiliates of Daniel B. Fitzpatrick and certain other unidentified members of management. The Complaint alleged among other things, that the director defendants' decision to authorize Daniel B. Fitzpatrick and/or his associates and affiliates and/or other members of management to acquire up to 1,000,000 additional shares of the Company's common stock without triggering the Company's Shareholder Rights Agreement would give management effective control of the Company without the payment of a control premium and would thwart NBO's tender offer. The Complaint alleged that this decision was not made in good faith after a reasonable investigation of the consequences, and was in breach of the director defendants' fiduciary duties. On May 26, 2000 the Court dismissed these allegations for failure to state a claim. The Complaint also alleged violations of the federal securities laws and seeks injunctive and declaratory relief. On June 8, 2000, the Company renewed its Motion to Dismiss the remaining allegations of NBO's complaint on grounds that these allegations were moot. On June 9, 2000 NBO voluntarily withdrew its request for a preliminary injunction and on September 12, 2000 NBO voluntarily dismissed its Complaint, without prejudice. The Company is currently in discussions with NBO with respect to a transaction that would enable NBO to dispose of its shares of common stock of the Company.
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.
{11} IMPAIRMENT OF LONG-LIVED ASSETS
The Company recorded non-cash charges totaling $2,501,000 during the third quarter of fiscal 1999 consisting primarily of $650,000 for the disposal of obsolete point of sale equipment in its full service dining restaurants that the Company identified as a result of installing its new point of sale system, $1,047,000 for the estimated costs and losses associated with the anticipated closing of two regional offices and three restaurant locations and $804,000 primarily for a non-cash asset impairment write down for two under-performing restaurants. This non-cash asset impairment charge resulted from the Company's determination that an impairment write down should be considered for certain locations when there is a sustained trend of negative operating performance as measured by restaurant level cash flow. The non-cash facility closure charges include amounts for the write off of fixed assets and other costs related to the closing of these facilities. Each of these non-cash charges represents a reduction of the carrying amount of the assets to their estimated fair market values. All facility closures were completed during the fourth quarter of fiscal 1999 except for one restaurant which was closed early in fiscal 2000.
The Company recorded a $250,000 non-cash impairment charge in fiscal 1998 in connection with its decision to sell a Grady's American Grill Restaurant.
{12} RELATED PARTY TRANSACTIONS
The Company leases a substantial number of its Burger King restaurants from entities that are substantially owned by certain directors, officers and stockholders of the Company. Amounts paid for leases with these related entities are as follows:
Affiliated real estate partnerships and two other entities related through common ownership pay management fees to the Company as reimbursement for administrative services provided. Total management fees for fiscal 2000, 1999 and 1998 were $14,000, $14,000 and $14,000, respectively.
During the fiscal years 2000, 1999 and 1998, the Company made payments to companies owned by certain directors, stockholders and officers of the Company of $237,000, $260,000 and $185,000, respectively, for air transportation services.
{13} ACQUISITIONS AND DISPOSITIONS
During the third quarter of fiscal 2000 the Company recorded a $717,000 loss on the sale of a Grady's American Grill restaurant.
{14} SEGMENT REPORTING
The Company adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS 131") in its fiscal year ending October 29, 2000.
The Company operates four distinct restaurant concepts in the food-service industry. It owns the Grady's American Grill and two Italian Dining concepts and operates Burger King restaurants and Chili's Grill & Bar as a franchisee of Burger King Corporation and Brinker International, Inc., respectively. The Company has identified each restaurant concept as an operating segment based on management structure and internal reporting. For purposes of applying SFAS 131, the Company considers the Grady's American Grill, the two Italian Concepts and Chili's Grill & Bar to be similar and have aggregated them into a single reportable operating segment (Full Service). The Company considers the Burger King restaurants as a separate reportable segment (Quick Service).
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.
(1) Income from operations is restaurant sales minus total operating expenses.
(2) Non-cash charge for the $10,000,000 reserve for the Bruegger's Subordinated Note.
(3) Includes charges for the impairment of assets and facility closing costs totaling $2,174,000.
(4) Includes charges for the impairment of assets and facility closing costs totaling $159,000.
(5) Includes charges for the impairment of assets and facility closing costs totaling $168,000.
(6) Includes charges for the impairment of assets totaling $250,000.
{15} SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) During the third quarter of fiscal 2000 the Company recorded a $717,000 loss on the sale of a Grady's American Grill restaurant.
(2) Includes the $10,000,000 non-cash charge to fully reserve for the Bruegger's Subordinated Note.
(3) During the third quarter of fiscal 1999 the Company recorded asset impairment charges and a facility closing charge totaling $2,501,000.
QUALITY DINING, INC. REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Quality Dining, Inc.:
In our opinion, the consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Quality Dining, Inc. and its subsidiaries at October 29, 2000 and October 31, 1999 and the results of their operations and their cash flows for each of the three years in the period ended October 29, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois December 20, 2000, except for Note 1 as to which the date is January 5, 2001
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's independent accountants on accounting or financial disclosures.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item concerning the Directors and nominees for Director of the Company and concerning disclosure of delinquent filers is incorporated herein by reference to the Company's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. Information concerning the executive officers of the Company is included under the caption "Executive Officers of the Company" at the end of Part I of this Annual Report. Such information is incorporated herein by reference, in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item concerning remuneration of the Company's officers and Directors and information concerning material transactions involving such officers and Directors is incorporated herein by reference to the Company's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item concerning the stock ownership of management and five percent beneficial owners is incorporated herein by reference to the Company's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item concerning certain relationships and related transactions is incorporated herein by reference to the Company's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The following consolidated financial statements of the Company and its subsidiaries are set forth in Part II, Item 8.
Consolidated Balance Sheets as of October 29, 2000 and October 31, 1999.
Consolidated Statements of Operations for the fiscal years ended October 29, 2000, October 31, 1999, and October 25, 1998.
Consolidated Statements of Stockholders' Equity for the fiscal years ended October 29, 2000, October 31, 1999, and October 25, 1998.
Consolidated Statements of Cash Flows for the fiscal years ended October 29, 2000, October 31, 1999, and October 25, 1998.
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedules:
None
3. Exhibits:
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Quality Dining, Inc.
By: /s/ Daniel B. Fitzpatrick ---------------------------- Daniel B. Fitzpatrick Chairman, President and Chief Executive Officer
Date: January 25, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
Exhibit No. Description --- ----------- 2-F (1) Share Exchange Agreement, by and among Quality Dining, Inc., Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell, dated as of September 3,
2-G (2) Agreement and Plan of Merger, by and among Quality Dining, Inc., Bagel Disposition Corporation and Lethe, LLC, dated as of September 3, 1997
3-A (3) (i) Restated Articles of Incorporation of Registrant
(3) (ii) Amendment to Registrant's Restated Articles of Incorporation establishing the Series A Convertible Cumulative Preferred Stock of the Registrant
(3) (iii) Amendment to Registrant's Restated Articles of Incorporation establishing the Series B Participating Cumulative Preferred Stock of the Registrant
3-B (12) By-Laws of the Registrant, as amended to date
4-A (4) Form of Mortgage, Assignment of Rents, Fixture Filing and Security Agreement
4-B (4) Form of Lease
4-C (4) Form of Promissory Note
4-D (4) Intercreditor Agreement by and among Burger King Corporation, the Company and Chase Bank of Texas, National Association, NBD Bank, N.A. and NationsBank, N.A. effective as of May 11, 1999
4-E (4) Intercreditor Agreement by and among Captec Financial Group, Inc., CNL Financial Services, Inc., Chase Bank of Texas, National Association and the Company dated August 3, 1999.
4-F (4) Collateral Assignment of Lessee's Interest in Leases by and between Southwest Dining, Inc. and Chase Bank of Texas, National Association dated July 26, 1999
4-G (4) Collateral Assignment of Lessee's Interest in Leases by and between Grayling Corporation and Chase Bank of Texas, National Association dated July 26, 1999
4-H (4) Collateral Assignment of Lessee's Interest in Leases by and between Bravokilo, Inc. and Chase Bank of Texas, National Association dated July 26, 1999
4-I (4) Third Amended and Restated Revolving Credit Agreement dated as of May 11, 1999 by and between Quality Dining, Inc. and GAGHC, Inc., as Borrowers, Chase Bank of Texas, National Association, as Administrative Agent, NBD Bank, N.A., as Documentation Agent, NationsBank, N.A. (South) as Co-Agent, and LaSalle Bank, N.A., The Northern Trust Company, KeyBank National Association (successor in interest to Society National Bank), SunTrust Bank, Central Florida, N.A. (collectively the "Banks")
4-J (4) First Amendment to Third Amended and Restated Revolving Credit Agreement dated as of July 26, 1999 by and between Quality Dining, Inc., and GAGHC, Inc., as Borrowers and the Banks
4-K (4) Second Amendment to Third Amended and Restated Revolving Credit Agreement dated as of September 9, 1999 by and between Quality Dining, Inc. and GAGHC, Inc., Banks which are Party thereto and Chase Bank of Texas, National Association
4-L (5) Rights Agreement, dated as of March 27, 1997, by and between Quality Dining, Inc. and KeyCorp Shareholder Services, Inc., with exhibits
4-M (13) Third Amendment to Third Amended and Restated Revolving Credit Agreement dated as of April 26, 2000
4-N (14) Reaffirmation of Subsidiary Guaranty
10-A (6) Form of Burger King Franchise Agreement
10-B (6) Form of Chili's Franchise Agreement
10-C Non-Exclusive Development Agreement between Burger King Corporation and Bravokilo, Inc. dated November 3, 2000
10-D (4) Second Amendment to Development Agreement by and between Southwest Dining, Inc. and Brinker International, Inc. dated July 26, 1999
10-E (6) (i) Target Reservation Agreement between Burger King Corporation and the Registrant dated December 24, 1993; (ii) Side Letter Agreement to Target Reservation Agreement dated December 21, 1993
10-F (6) Development Agreement between Chili's, Inc. and the Registrant dated June 27, 1990
10-G (4) *Employment Agreement between the Company and John C. Firth dated August 24, 1999
10-H (7) *1997 Stock Option and Incentive Plan of the Registrant
10-I (8) *1993 Stock Option and Incentive Plan, as amended of the Registrant
10-J (6) *Outside Directors Stock Option Plan of the Registrant adopted December 17, 1993
10-K (6) Lease Agreement between B.K. Main Street Properties and the Registrant dated January 1, 1994
10-L (7) Schedule of Related Party Leases
10-M (6) Form of Related Party Lease
10-O (12) *1999 Outside Directors Stock Option Plan
10-Q (4) Non Compete Agreement between the Company and James K. Fitzpatrick dated June 1, 1999
10-R (4) Non Compete Agreement between the Company and Gerald O. Fitzpatrick dated June 1, 1999
10-S (4) Non Compete Agreement between the Company and David M. Findlay dated June 1, 1999
10-T (9) First Amendment dated May 2, 1995 to Development Agreement between Chili's, Inc. and the Registrant dated June 27, 1990
10-U (4) Non Compete Agreement between the Company and Robert C. Hudson dated June 1, 1999
10-W (9) Non-Competition Agreement between the Registrant and William R. Schonsheck dated August 14, 1995
10-X (9) Lease Agreement for Farmington Hills #509 between the Registrant and William R. Schonsheck dated August 14,
10-Y (9) Lease Agreement for Belleville #4814 between the Registrant and William R. Schonsheck dated August 14,
10-Z (9) Purchase and Sale Agreement between the Registrant and John D. Fitzpatrick dated July 10, 1995
10-AD (10) Priority Charter Agreement between the Registrant and Burger Management of South Bend #3 Inc., dated September 1, 1994
10-AF (10) Lease Agreement between the Registrant and Six Edison Lakes, L.L.C. dated September 19, 1996
10-AG (11) Amended and Restated Priority Charter Agreement between the Registrant and Burger Management of South Bend #3 Inc., dated October 21, 1998
10-AO Employment Agreement between the Company and Daniel B. Fitzpatrick dated October 30, 2000
10-AP (12) Form of Agreement for Restricted Shares Granted under Quality Dining, Inc. 1997 Stock Option and Incentive Plan dated June 1, 1999 between the Company and certain executive officers identified on the schedule attached thereto.
10-AQ (12) Severance Agreement and General Release between the Company and Marti'n Miranda dated January 14, 2000
10-AR Form of Agreement for Restricted Shares Granted
under Quality Dining, Inc. 1997 Stock Option and Incentive Plan dated December 20, 2000, between the Company and certain executive officers identified on the schedule attached thereto.
10-AS Early Successor Incentive Program (Fiscal 2000) Addendum to Successor Franchise Agreement
10-AV (14) Severance Agreement and General Release between the Company and David M. Findlay dated September 1, 2000
10-AX (4) Consulting Agreement between the Company and William R. Schonsheck dated August 13, 1999
10-AY (12) Form of Agreement for Restricted Shares Granted under Quality Dining, Inc. 1997 Stock Option and Incentive Plan dated December 15, 1999 between the Company and certain executive officers identified on the schedule attached thereto
10-AZ Franchisee Commitment dated January 27, 2000
21 Subsidiaries of the Registrant
23 Written consent of PricewaterhouseCoopers LLP
- -------------
* The indicated exhibit is a management contract, compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as exhibit number 1 to Amendment No. 5 of Schedule 13D filed by Nordahl L. Brue, Michael J. Dressell, Steven P. Schonberg and David T. Austin, dated September 4, 1997, is incorporated herein by reference.
(2) The copy of this exhibit filed as exhibit number 2 to Amendment No. 5 of Schedule 13D filed by Nordahl L. Brue, Michael J. Dressell, Steven P. Schonberg and David T. Austin, dated September 4, 1997, is incorporated herein by reference.
(3) The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form 8-A filed on April 1, 1997 is incorporated herein by reference.
(4) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarterly period ended August 1, 1999, is incorporated herein by reference.
(5) The copy of this exhibit filed as Exhibit 10-AO to the Company's Registration Statement on Form 8-A filed on April 1, 1997 is incorporated herein by reference.
(6) The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form S-1 (Registration No. 33-73826) is incorporated herein by reference.
(7) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 10K for the year ended October 26, 1997 is incorporated herein by reference.
(8) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarterly period ended May 12, 1996 is incorporated herein by reference.
(9) The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form S-1 (Registration No. 33-96806) is incorporated herein by reference.
(10) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 10-K for the year ended October 27, 1996 is incorporated herein by reference.
(11) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 10-K for the year ended October 25, 1998 is incorporated herein by reference.
(12) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 10-K for the year ended October 29, 1999 is incorporated herein by reference.
(13) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 10-Q for the quarterly period ended May 14, 2000 is incorporated herein by reference.
(14) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 10-Q for the quarterly period ended August 6, 2000 is incorporated herein by reference.