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 25, 1998, the Company operated 145 restaurants, including 70 Burger King restaurants, 28 Chili's, 39 Grady's American Grill restaurants, four Spageddies and four Papa Vino's.
The Company was founded in 1981 and has grown from a two-unit Burger King franchisee to a multi-concept restaurant operator. The Company has grown by capitalizing on (i) its significant presence in targeted markets, (ii) the stable operating performance of its Burger King restaurants, (iii) strategic acquisitions of Burger King restaurants, Chili's restaurants and the Grady's American Grill concept, and (iv) management's extensive experience.
The Company is an Indiana corporation, which is the indirect successor to a corporation that commenced operations in 1981. Prior to the consummation of the Company's initial public offering on March 8, 1994 (the "Offering"), the business of the Company was transacted by the Company and eight affiliated corporations. As a result of a reorganization effected prior to the Offering, the Company became a management holding company. The Company, as used herein, means Quality Dining, Inc. and all of its subsidiaries.
DISPOSITION OF BAGEL-RELATED BUSINESSES
On October 20, 1997, the Company sold its bagel-related businesses to Mr. Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and their affiliates. The sale included the stock of Bruegger's Corporation and the stock of all of the other bagel-related businesses. The total proceeds from the sale were $45,164,000. The consideration included the issuance by Bruegger's Corporation of a junior subordinated note in the amount of $10,000,000, which was recorded as $6,000,000 due to a $4,000,000 reserve for legal indemnification, the transfer of 4,310,740 shares of the Company's common stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a receivable for purchase price adjustment of $500,000, and $16,841,000 in cash. The subordinated note has an annual interest rate of 12% and matures in October 2004. Interest will be accrued and added to the principal amount of the note through October 2000 and will be paid in cash for the remaining life of the note. The Company did not recognize any interest income from this note in fiscal 1998. The cash component of the proceeds included an adjustment for the calculation of the net working capital deficit. The calculation used was subject to final adjustment and is being disputed by Messrs. Brue and Dressell. The Company does not expect the ultimate resolution of this dispute to have a material adverse effect on the Company's financial position or results of operations but there can be no assurance thereof.
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 maximize 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 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 maximize 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.
Distinct Management Teams. Each of the Company's concepts is managed by a dedicated, singularly focused management group. The Company strives to allocate proper resources to each concept to ensure operational and financial success within each distinct concept.
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 tracking and reporting.
EXPANSION
The Company intends to limit its expansion in fiscal 1999 and focus on operations. The Company currently plans to open two to four Burger King restaurants and one full service restaurant in fiscal 1999. During fiscal 1998, the Company added four new Burger King restaurants, converted one Spageddies into a Papa Vino's and sold one Grady's American Grill. At the end of fiscal 1998, the Company operated 39 Grady's American Grill restaurants, four Spageddies, four Papa Vino's, 70 Burger King restaurants and 28 Chili's restaurants. Subsequent to the conclusion of fiscal 1998, the Company sold one Grady's American Grill restaurant.
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 the areas of advertising and marketing, purchasing, management information systems and others. Accordingly, the Company's development and operation of these restaurant concepts are subject to a wider range of risks than those associated with the development and operation of its Burger King and Chili's restaurants.
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 1/2% of sales from each restaurant to Brinker for advertising and marketing to benefit all restaurants. As part of a system-wide promotional effort, the Company has agreed that for the period beginning January 1, 1999 and ending June 30, 1999, it will pay an additional advertising fee of 3/4% of sales. The Company is also required to spend 2% of sales from each restaurant on local advertising. The Company's advertising expenditures typically exceed the levels required under its agreements with Brinker and the Company spends substantially all of its advertising dollars on television and radio advertising. The Company also conducts promotional marketing efforts targeted at its various local markets.
The Chili's franchise agreements provide that Brinker may establish advertising cooperatives ("Cooperatives") for geographic areas where one or more restaurants are located. Any restaurants located in areas subject to a Cooperative are required to contribute 3% of sales to the Cooperative in lieu of contributing 1/2% of sales to Brinker. Each such restaurant is also required to directly spend 1/2% of sales on local advertising. To date, no Cooperatives have been established in any of the Company's markets.
GRADY'S AMERICAN GRILL
General. Grady's American Grill restaurants feature high-quality food in a classic American style, served in a warm and inviting setting. Prior to the Company's acquisition of the concept from Brinker on December 21, 1995, Brinker owned and operated 37 of the 38 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 significant flexibility for expansion and development.
Menu. The Grady's American Grill menu features signature prime rib, high- quality steaks, daily servings of fresh seafood, inviting salads, sandwiches, soups and high quality desserts. Entrees emphasize on-premise scratch preparation in a classic American style.
Advertising and Marketing. As the owner of the Grady's American Grill concept, the Company has full responsibility for marketing and advertising. The Company expects to focus advertising and marketing efforts in local print media, use of direct mail programs and radio, with total expenditures estimated to range between 2% and 3% of the sales for its Grady's American Grill restaurants.
ITALIAN DINING CONCEPTS
General. The Company's Italian Dining concept consists of Papa Vino's Italian Kitchen and Spageddies Italian Kitchen. The first Papa Vino's restaurant was opened in 1996 and the first Spageddies restaurant was opened in 1994. The Company had been a franchisee of Spageddies since 1994, and became the owner of the concept in October 1995. Papa Vino's and Spageddies each offers a casual dining atmosphere with high-quality food, generous portions and moderate prices, all enjoyed in a setting featuring the ambiance of a traditional Italian trattoria with stone archways, large wines casks and wine racks lining the walls and exhibition cooking in an inviting, comfortable environment. The Company's Italian Dining concepts are proprietary and provide the Company with significant flexibility for expansion and development.
Menu. A fundamental component of the Italian Dining concept is to provide the customer with a wide variety of high-quality, value-priced Italian food. The restaurant menu includes an array of entrees, including traditional Italian pasta, grilled meats and freshly prepared selections of pizzas, soups, salads and sandwiches. The menu also includes specialty appetizers, fresh baked bread and desserts, together with a full-service bar serving beer, wine and cocktails.
Advertising and Marketing. As the owner of these concepts, the Company has full responsibility for marketing and advertising its Italian Dining restaurants. The Company focuses its advertising and marketing efforts in local print media, use of direct mail programs and radio, with total expenditures estimated to range between 2% and 3% of the sales for these restaurants.
TRADEMARKS
The Company owns the following registered trademarks: Grady's American Grill(R), Spageddies Italian Kitchen(R), Spageddies(R), Papa Vino's(R) and Papa Vino's Italian Kitchen(R). The Company also owns a number of other trademarks and service marks which are used in connection with its owned concepts. The Company believes its marks are valuable and intends to maintain its marks and any related registrations. Burger King(R) is a registered trademark of Burger King Corporation. Chili's(R) and Chili's Grill & Bar(TM) are a registered trademark and trademark, respectively, of Brinker.
ADMINISTRATIVE SERVICES
From its headquarters in Mishawaka, Indiana, the Company provides accounting, cash management, information technology, purchasing and procurement, human resources, finance, marketing, advertising, menu development, budgeting and planning, legal, site selection and development support services for each of its operating subsidiaries.
Management. The Company is managed by a team of senior managers who are responsible for the establishment and implementation of a strategic plan. The Company believes that its management team possesses the ability to manage its diverse operations.
Each of the Company's restaurant concepts is managed by an experienced management team. The Company's Burger King business is managed by geographic region, with a Vice President-Director of Operations responsible for each specific region. Each Vice President reports to the Senior Vice President, Burger King Division. The Company's Chili's, Italian Dining and Grady's American Grill concepts are each managed by a Vice President-Director of Operations who report to a Senior Vice President - Full Service Dining Division.
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 BKC's operating procedures. The Company and BKC 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. In addition, BKC has set maximum time standards for holding unsold prepared food. For example, sandwiches and french fries are required to be discarded after ten minutes following preparation.
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 Grady's American Grill and Italian 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 an Area Director.
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.
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 Manager and are generally contracted with full-service distributors. Unit-level purchasing decisions from an approved list of suppliers are made by each of the Company's restaurant managers based on their assessment of the provisioning needs of the particular location. Purchase orders and invoices are reviewed by restaurant general managers and by concept management.
The Company participates in system-wide purchasing and distribution programs with respect to its Chili's and Burger King restaurants, which have been effective in reducing store-level expenditures on food and paper packaging commodities.
IMPACT OF YEAR 2000
The term "Year 2000" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery and equipment as the year 2000 is approached and thereafter. These problems generally arise from the fact that most of the world's computer hardware and software has historically used only two digits to identify the year in a date, often meaning that the computer will fail to distinguish dates in the "2000's" from dates in the "1900's."
The Company's State of Readiness. The Company has established a formal plan ("Year 2000 Plan") to (i) test its information technology systems to evaluate Year 2000 compliance, (ii) assess the Year 2000 compliance of its information technology vendors, (iii) assess its non-information technology systems that utilize embedded technology such as micro-controllers and (iv) determine the readiness of third parties such as government agencies, utility companies, telecommunication companies, suppliers and other "non-technology" third party vendors. The Company has completed the testing and assessment of its information technology systems including non-information technology systems that utilize embedded technology. The Company has determined that 34 of its critical systems were Year 2000 compliant by December 31, 1998 and anticipates that the 20 remaining critical systems will be Year 2000 compliant by June, 1999.
Independent of the Company's Year 2000 Plan, the Company has previously determined it would replace its point of sale equipment in as many as 75 of its full service dining restaurants. This determination was part of the Company's ongoing efforts to enhance financial controls through a centralized, computerized, accounting system to enhance the tracking of data to enable the Company to better manage its operations. The Company is currently in the process of replacing the point of sale equipment in its full service restaurants and expects to complete this process by August, 1999. The replacement systems will be Year 2000 compliant. The Company expects the replacement of the point of sale equipment in its 75 full service restaurants to cost approximately $3 million. The Company anticipates incurring non-cash charges of approximately $500,000 to $750,000 in connection with the disposition of certain of its point of sale equipment. The Company has determined that its point of sale equipment in its 70 Burger King restaurants is Year 2000 compliant.
Costs to Address the Company's Year 2000 Issues. The Company expenses costs associated with its Year 2000 Plan as the costs are incurred except for costs that the Company would otherwise capitalize. The Company does not expect the costs associated with its Year 2000 Plan to have a material adverse effect on its financial position or results of operations. The Company is unable to estimate the costs it may incur as a result of Year 2000 problems suffered by third parties with which it deals. The Company has surveyed its critical vendors, other than utilities and government agencies, and believes that each vendor will either be Year 2000 compliant by June, 1999 or, if not, suitable alternative suppliers that are Year 2000 compliant will be available.
Risks Presented by Year 2000 Problems. To operate its businesses, the Company relies upon government agencies, utility companies, telecommunications companies, suppliers and other third party service providers over which it can assert little control. The Company's ability to conduct its business is dependent upon the ability of these third parties to avoid Year 2000 related disruption. If they do not adequately address their Year 2000 issues, the Company's business may be materially affected which could result in a materially adverse effect on the
Company's results of operations and financial condition. If the Company is not able to integrate replacement point of sale systems at its full service restaurants, its ability to effectively operate those restaurants could be substantially impaired. As a result of the Company's ongoing assessment, the Company may identify additional areas of its business that are at risk of Year 2000 disruption. The absence of any such determination at this point represents only the current status of the assessment phase of the Company's Year 2000 Plan and should not be construed to mean that there are no other areas of the Company's business which are at risk of a Year 2000 related disruption.
The Company's Contingency Plans. The Company's Year 2000 Plan calls for the development of contingency plans for areas of its business that are susceptible to a substantial risk of a Year 2000 related disruption where the Company determines that such disruption could be mitigated through reasonable, cost effective contingency plans. The Company has not yet developed detailed contingency plans specific to Year 2000 events for any specific area of business. Consistent with its Year 2000 Plan, the Company will develop specific Year 2000 contingency plans for such areas of business as and if such determinations are made.
FRANCHISE AND DEVELOPMENT AGREEMENTS
Burger King. The Company and BKC entered into a development agreement on December 24, 1993 (the "Burger King Agreement"). The Burger King Agreement reserves for the Company 25 specifically defined limited geographic areas ("Areas") and grants the Company the exclusive right to select and develop one Burger King restaurant in each of up to 18 of those Areas. The Company paid a $90,000 fee for the exclusivity provided by the Burger King Agreement. The Company's exclusive right in an Area expires with the opening by the Company of a Burger King restaurant in that Area.
As of October 25, 1998, the Company had developed 16 Burger King restaurants under the Burger King Agreement. To maintain its rights under the Burger King Agreement, the Company must develop two additional Burger King restaurants by December 31, 1999. Although the Company has the right to develop 18 Burger King restaurants, the Company is not obligated to do so and may terminate the Burger King Agreement since it had developed at least 10 Burger King restaurants prior to December 31, 1996.
Under the Burger King Agreement, the Company is responsible for all costs and expenses incurred in locating, acquiring and developing restaurant sites. The Company must also satisfy BKC'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. BKC 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 BKC's franchise requirements. BKC may terminate the Burger King Agreement if the Company defaults in the performance thereunder or under any franchise agreement. BKC 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.
In addition, as of October 25, 1998, the Company had opened two additional Burger King restaurants under separate agreements with Burger King during fiscal 1998.
BKC's franchise agreements convey the right to use its trade names, trademarks and service marks with respect to specific Burger King restaurants. The franchise fee for a free-standing Burger King restaurant is currently $40,000. In addition, each franchise agreement requires the Company to pay a monthly royalty fee of 3 1/2% of sales and advertising fees of 4% of sales.
BKC 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 BKC.
The Burger King Agreement and each franchise agreement prohibit the Company, during the term of the agreements, from owning or operating any other hamburger restaurant. For a period of one year following the termination of a franchise agreement, the Company remains subject to such restriction within a two mile radius of the Burger King restaurant which was the subject of the franchise agreement.
Chili's. The Company has a development agreement with Brinker (the "Chili's Agreement") to develop 37 Chili's restaurants in two regions encompassing counties in Indiana, Michigan, Ohio, Kentucky ("Midwest Region"), Delaware, New Jersey and Pennsylvania ("Philadelphia Region"). The Company paid development fees totaling $260,000 for the right to develop the restaurants in the regions. Each franchise agreement requires the Company to pay an initial franchise fee of $40,000, a monthly royalty fee of 4% of sales and advertising fees of 1/2% of sales. As part of a system-wide promotional effort, the Company has agreed that for the period beginning January 1, 1999 and ending June 30, 1999, it will pay additional advertising fees of 3/4% of sales. In addition, the Company is required to spend 2% of sales from each restaurant on local advertising. As of October 25, 1998, the Company operated 28 Chili's.
The Company may develop up to 41 Chili's without specific approval of the franchisor, but is obligated to satisfy the following development schedule:
(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 T.G.I. Friday's, Applebee's, Bennigan's, Olive Garden and Red Lobster restaurants. The primary competitors to Grady's American Grill are Houston's, J. Alexander's, Outback Steakhouse, Houlihan's, Cooker Bar & Grille, and O'Charley's Restaurant & Lounge, as well as a large number of locally-owned, independent restaurants. The Company believes that competition is likely to become even more intense in the future.
The Company and the restaurant industry in general are significantly affected by factors such as changes in local, regional or national economic conditions, changes in consumer tastes, weather conditions and various other consumer concerns. In addition, factors such as increases in food, labor and energy costs, the availability and cost of suitable restaurant sites, fluctuating insurance rates, state and local regulations and the availability of an adequate number of hourly-paid employees can also adversely affect the restaurant industry.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which include alcoholic beverage control in the case of the Chili's, Italian Dining and Grady's American Grill restaurants, and health, safety and fire agencies in the state or municipality in which the restaurant is located. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant in a particular area.
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, further 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 25, 1998, the Company employed approximately 8,400 persons. Of those employees, approximately 100 held management or administrative positions, approximately 520 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 25, 1998, the 19 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 25, 1998, the Company owned 49 and leased 96. 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.
Burger King. As of October 25, 1998, 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 director and executive officer of the Company, or entities controlled by him. See ITEM 13, "Certain Relationships and Related Transactions." The Company also leased eight Burger King restaurants directly from Burger King Corporation and seven restaurants from unrelated third parties. The eight leases with Burger King Corporation are subject to the renewal of the franchise agreements for those locations. The Company owned 12 of its Burger King restaurants as of October 25, 1998.
Chili's Grill & Bar. As of October 25, 1998, the Company owned 10 of its Chili's restaurants and leased 18 other restaurants from unrelated parties.
Grady's American Grill. As of October 25, 1998, the Company owned 22 of its Grady's American Grill restaurants. The Company leased one Grady's American Grill restaurant from a limited partnership of which a subsidiary of the Company is the general partner. The Company's other 16 Grady's American Grill restaurants were leased from unrelated parties.
Italian Dining. As of October 25, 1998, the Company owned five of the Italian Dining restaurants and leased the three other restaurants from unrelated parties.
Office Leases. 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 has a 50% interest. The term of the lease agreement is 15 years. Approximately 4,500 square feet and 5,200 square feet of the Company's headquarters building have been subleased to two tenants for terms of seven and 10 years, respectively. The Company's former headquarters facility, a 9,700 square foot office building which is leased from an affiliated partnership, has been subleased to a local financial institution for a term extending through the expiration of the Company's lease on December 31, 1999. See Item 13 "Certain Relationships and Related Transactions." The Company is responsible for a lease relating to office space in Burlington, Vermont, which was utilized for regional management of its Bruegger's concept, which was sold on October 20, 1997. The Company is attempting to sublease this office. The Company also leases office space in Detroit, Michigan and Fort Wayne, Indiana for management of its Burger King restaurants and in Dallas, Texas for management of its Grady's American Grill restaurants. The Company no longer utilizes the office space in Detroit, Michigan and is attempting to sublease it.
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.
Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and Mark Ratterman, Chris Galloway and Peter Shipman, principals of Quality Baking, LLC, commenced an action on July 9, 1997 filed in the United States District Court, for the Eastern District of Missouri, Eastern Division, against Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael Dressell, Daniel B. Fitzpatrick and John Firth. On April 22, 1998, the Court granted the defendants' Motion to Transfer this matter to the United States District Court for the Northern District of Indiana. The complaint alleges that the plaintiffs purchased their franchises based upon financial representations that have not materialized, that they purchased preferred stock in Bruegger's Corporation based upon false representations, that the defendants falsely represented their intentions with respect to repurchasing bakeries from the plaintiffs, and that the defendants violated implied covenants of good faith and fair dealing.
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 filed 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 have not materialized, 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.
Both of the above pending franchise related actions are in preliminary stages and only limited discovery has occurred. In each of these cases, one or more present or former officers and directors of the Company have been named as party defendants and the Company has and 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, the Agreement and Plan of Merger by and among Quality Dining, Inc., Bagel Disposition Corporation and Lethe, LLC, and certain other related agreements entered into as part of the disposition of the Company's bagel-related businesses, the Company is responsible for 50% of the first $14 million of franchise related litigation expenses, inclusive of attorney's fees, costs, expenses, settlements and judgments (collectively "Franchise Damages"). Bruegger's Corporation and certain of its affiliates are obligated to indemnify the Company from all other Franchise Damages. The Company is obligated to pay the first $3 million of its share of Franchise Damages in cash. Through October 25, 1998, the Company has paid approximately $850,000 in cash and assigned
its $1.2 million note from BruWest to Bruegger's Corporation which together reduce the Company's remaining obligation to pay cash in respect of Franchisee Damages to approximately $950,000. The remaining $4 million of the Company's share of Franchise Damages is payable by crediting amounts owed to the Company pursuant to the $10 million junior subordinated note issued to the Company by Bruegger's Corporation. Through October 25, 1998, the outstanding balance due under the junior subordinated note has been reduced by $600,000 in respect of Franchisee Damages. Based upon the currently available information, the Company does not believe that these cases individually or in the aggregate will have a material adverse effect on the Company's financial position and results of operations but there can be no assurance thereof. Such assessment is based in part upon the Company's belief that Bruegger's Corporation has and will continue to have the ability to perform its indemnity obligations.
James T. Bies filed a shareholder derivative action in the United States District Court for the Southern District of Michigan on October 14, 1997. The complaint named as defendants 12 individuals who are current or former directors or officers of the Company. The complaint alleged that the individual defendants as directors breached fiduciary duties to the Company by approving certain transactions in 1997 involving loans to Bagel Acquisition Corporation that allegedly benefited Daniel B. Fitzpatrick, the Company's Chairman, President and Chief Executive Officer. The plaintiff also alleged that individual defendants participated in a "conspiracy to waste, dissipate, and improperly use funds, property and assets" of the Company for the benefit of Bagel Acquisition Corporation and Mr. Fitzpatrick. The plaintiff alleged that the Company and its shareholders had been damaged in an amount in excess of $28,000,000. The relief sought also included the appointment of a receiver, an accounting and attorney's fees. On April 27, 1998, the Court dismissed the complaint without prejudice, for failure to make a "demand" upon the Company's board of directors. By letter dated May 12, 1998, Mr. Bies has demanded that the Company pursue these claims against the defendants. In accordance with the Indiana Business Corporation Law, the board of directors has appointed a special committee to investigate the allegations and determine whether it is in the best interests of the Company to pursue this matter. The special committee consists of three of the Company's outside directors, Messrs. Decio, Lewis and Murphy (named defendants in the action) along with David T. Link, Dean of the Notre Dame Law School. Subsequent to the establishment of the special committee, Mr. Bies refiled his action on July 30, 1998. As a result of its investigation of Mr. Bies' demand, the special committee has determined that the claims identified by Mr. Bies are without merit and that it would not be in the Company's best interests to pursue them. Therefore, on January 6, 1999, the special committee filed a motion to dismiss or alternatively for summary judgement.
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, the bank (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 the bank. 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. The Company believes that BFBC is likely to file suit against it and one or more of its affiliates, officers, and Bruegger's Franchise Corporation asserting claims arising out of BFBC's franchise relationship with Bruegger's Franchise Corporation and the Loan. 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 a suit by BFBC.
The Company and certain of its executive officers are defendants in a class action lawsuit filed in the United States District Court for the Northern District of Indiana. The complaint alleges, among other things, that the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder by failing to disclose various matters in connection with the Company's acquisition, development, financing and disposition of its bagel-related businesses. The putative class period in such actions is from June 7, 1996 to May 13, 1997 on which dates the price of the Company's common stock closed at $34.25 and $6.56, respectively. The plaintiffs are seeking, among other things, an award of unspecified compensatory damages, interest, costs and attorney's fees. The Company has filed a motion to dismiss the complaint which is presently pending before the Court. The Company believes that it and its executive officers have meritorious defenses to the allegations and it intends to vigorously defend against the allegations made in the complaints. However, there can be no assurance that the ultimate outcome of this or other actions (including other actions under federal or state securities laws) arising out of the Company's acquisition, development, financing and disposition of its bagel-related businesses will not have a material adverse effect on the Company's financial position or results of operations.
On November 10, 1994, the Company acquired all of the outstanding stock of Grayling Corporation, Grayling Management Corporation ("Grayling Management"), Chili's of Mt. Laurel, Inc. ("Mt. Laurel") and Chili's of Christiana, Inc. ("Christiana"). Prior to entering into negotiations with the Company, Grayling Corporation and its principal shareholder, T. Garrick Steele ("Steele"), had entered into an agreement (the "Asset Agreement") to sell substantially all of Grayling Corporation's assets to a third party, KK&G Enterprises, Inc. ("KK&G"). The Asset Agreement was terminated by Grayling Corporation and was not consummated. On September 27, 1995, KK&G filed suit in the Court of Common Pleas, Philadelphia County, Pennsylvania, against Grayling Corporation, Mt. Laurel, Christiana and Steele seeking damages and specific performance of the Asset Agreement. Steele was obligated to defend the lawsuit and indemnify the Company and Grayling Corporation against any loss or damages resulting from the lawsuit. Steele settled the lawsuit on March 27, 1998 without any liability or expense to the Company. The Company and Grayling Corporation and their affiliates received a general release.
BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation (a former indirect subsidiary of the Company), and Timothy Johnson, Gregory LeMond, Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest") commenced an action on January 30, 1997 filed in the United States District Court, District of Minnesota, against Bruegger's Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick (the "Bruegger's Defendants") and an investment banking firm retained by BruWest, alleging inter alia that the Bruegger's Defendants breached commitments to provide financing to BruWest, interfered with the plaintiffs' efforts to obtain financing from third parties, violated existing franchise and development agreements between BruWest and Bruegger's Franchise Corporation, violated certain provisions of the Minnesota Franchise Act and breached duties and implied covenants of good faith and fair dealing. The Bruegger's Defendants denied all allegations in the complaint. Without admitting any liability or obligation to do so, on March 11, 1997, Bruegger's Corporation loaned $1.2 million to the plaintiffs. The loan was secured by certain assets of the plaintiffs and personal guarantees of Messrs. LeMond and Snow. The loan provides for monthly interest payments commencing April 11, 1997 at the rate of nine percent (9%) per annum and matured on September 11, 1997. On March 14, 1997, the complaint was dismissed, without prejudice. On May 22, 1997, BruWest refiled the complaint with additional allegations challenging the enforceability of the loan documents and personal guarantees. This action was settled on August 19, 1998.
The Company is involved in various other legal proceedings incidental to the conduct of its business. Management does not expect that any such proceedings will have a material adverse effect on the Company's financial position or results of operations.
ITEM 4.
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 1998 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 27 years of experience in the restaurant business.
William R. Schonsheck joined the Company in August 1995 as Senior Vice President, Chief Operating Officer of the Burger King Division. Prior to joining the Company, Mr. Schonsheck held various positions in the Burger King system, most recently as a franchisee in Detroit, Michigan. Pursuant to an employment agreement between the Company and Mr. Schonsheck, he is to serve as the Chief Operating Officer of the Burger King Division. See ITEM 11, "Executive Compensation." Mr. Schonsheck has over 30 years of experience in the Burger King 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.
David M. Findlay has served as Senior Vice President - Finance since April 1997. He has served as Senior Vice President - Finance and Treasurer since February 1998. He joined the Company in May 1995 as Vice President - Director of Planning and Investor Relations and was promoted to Vice President and Treasurer in October 1996. Prior to joining the Company, Mr. Findlay spent 10 years at The Northern Trust Company of Chicago, Illinois, specializing in commercial lending to large companies and financial institutions.
Gerald O. Fitzpatrick serves as a Senior Vice President in the Company's Burger King Division. Mr. Fitzpatrick has served in various capacities in the Company's Burger King operations since 1983. Prior to joining the Company, he served as a district manager for a franchisee of Burger King Corporation. He has over 19 years of experience in the restaurant business.
Scott C. Smith joined the Company in May 1994 and has served as the Company's Senior Vice President in charge of the Company's full service dining operations since October 1996. Prior to that, Mr. Smith served as Vice President or Senior Vice President of the Company in charge of the Company's Chili's and Italian Dining operations. Prior to joining the Company in June of 1994 he served as director of franchise operations for the Chili's and Spageddies divisions of Brinker. He has 24 years of experience in the restaurant business.
Robert C. Hudson joined the Company in December of 1995 when the Company acquired Grady's American Grill. From 1992 until joining the Company, Mr. Hudson held various operational positions at Brinker, most recently as an area director in its Grady's American Grill division.
Martin L. Miranda has served as Vice President, Controller and Assistant Secretary since October 1996. He joined the Company in May 1994 as Controller. Prior to joining the Company, he served in a similar capacity with NBD Insurance, a wholly owned subsidiary of NBD Corporation. Mr. Miranda is a certified public accountant.
Michael J. Wargo has served as Vice President - Director of Human Resources since September 1995. He joined the Company in January 1994 as Director of Human Resources. He was previously employed by Valley American Bank & Trust Company as director of training and development, and prior to that he was a human resources officer at NBD Bank. Mr. Wargo has over 15 years of experience as a human resources professional.
The above information includes business experience during the past five years for each of the Company's executive officers. Executive officers of the Company serve at the discretion of the Board of Directors. Messrs. Daniel B. Fitzpatrick, James K. Fitzpatrick and Gerald O. Fitzpatrick are brothers. There is no family relationship between any other Directors or executive officers of the Company.
The success of the Company's business is dependent upon the services of Daniel B. Fitzpatrick, President and Chief Executive Officer of the Company. The Company maintains key man life insurance on the life of Mr. Fitzpatrick in the principal amount of $3.0 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 1999 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 20, 1999, there were 397 holders of record and approximately 5,450 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 in April of 2000.
No unregistered equity securities were sold by the Company during fiscal 1998.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
QUALITY DINING, INC.
(1) All fiscal years presented consisted of 52 weeks. (2) The selected statement of operations data include the operations of Bruegger's Corporation from June 7, 1996 until October 19, 1997; the Grady's American Grill restaurants from December 21, 1995; SHONCO, Inc. and certain affiliated companies from August 14, 1995; and Grayling Corporation and certain affiliated companies from November 10, 1994 . (3) Operating loss for fiscal year ended October 26, 1997 includes an impairment of asset charge of $185.0 million, store closing costs of $15.5 million and franchise operating partner expense of $2.1 million which all relate to the divestiture by the Company of its bagel-related companies. Operating income for the fiscal year ended October 27, 1996 includes restructuring and integration charges of $1.9 million associated with costs related to the acquisitions of the Grady's American Grill concept and restaurants and Spageddies Italian Kitchen concept and $8.0 million associated with costs related to the acquisition of Bruegger's Corporation . (4) Reflects federal and state income taxes (assuming a 37% effective tax rate) as if the Company had been taxed as a C Corporation rather than an S Corporation during these entire periods.
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, except restaurant operating expenses, which are expressed as a percentage of total restaurant sales. Fiscal 1996 includes Bruegger's Corporation as of June 7, 1996. The Company sold Bruegger's Corporation on October 20, 1997. During fiscal 1997 the Company had asset impairment charges, store closing costs and franchise operating partner expenses all relating to its bagel businesses.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Total revenues were $232,244,000 in fiscal 1998, a decrease of $70,008,000 or 23.2% when compared to the total revenues of $302,252,000 in fiscal 1997. This decrease was primarily attributable to the divestiture of the Company's bagel-related businesses on October 20, 1997. Total revenues in fiscal 1997 included $10,055,000 of franchise related revenues from the Company's bagel- related operations.
Restaurant sales in fiscal 1998 decreased $59,953,000 or 20.5% to $232,244,000, when compared to restaurant sales of $292,197,000 in fiscal 1997. This decrease was primarily attributable to the divestiture of the Company's bagel-related businesses on October 20, 1997. Restaurant sales in fiscal 1997 included $64,928,000 of revenue from the Company's bagel-related operations. Due to the sale of the bagel-related businesses in fiscal 1997, the Company no longer has any bagel related revenues.
The Company's Grady's American Grill restaurants sales decreased $4,162,000 to $81,241,000 in fiscal 1998 compared to restaurant sales of $85,403,000 in fiscal 1997. The decrease was due to the sale of three units in fiscal 1997, one unit during fiscal 1998 and a decrease in average weekly sales to $39,096 in fiscal 1998 from $39,741 in fiscal 1997. The Company has implemented marketing, operational and menu initiatives intended to stimulate sales at its Grady's American Grill restaurants. Due to the competitive nature of the restaurant industry, there can be no assurances that these initiatives will achieve the intended results.
The Company's Burger King restaurant sales increased $5,775,000 to $80,391,000 in fiscal 1998 when compared to restaurant sales of $74,616,000 in fiscal 1997. The sales increase was primarily due to an increase in average weekly sales to $22,806 in fiscal 1998 from $21,972 in fiscal 1997. Sales also increased due to additional sales weeks from four new restaurants opened during fiscal 1998 and three restaurants opened in fiscal 1997 which were open for their first full year in fiscal 1998.
The Company's Chili's Grill & Bar restaurant sales increased $1,295,000 to $55,572,000 in fiscal 1998 when compared to restaurant sales of $54,277,000 in fiscal 1997. The increase was due to six restaurants opened in fiscal 1997 being open for their first full year in fiscal 1998. Average weekly sales were $38,168 in fiscal 1998 versus $40,596 in fiscal 1997. The Company has implemented marketing and operational initiatives intended to stimulate sales at its Chili's Grill & Bar restaurants. Due to the competitive nature of the restaurant industry, there can be no assurances that these initiatives will achieve the intended results.
The Company's Italian Dining Division restaurant sales increased $2,067,000 to $15,040,000 in fiscal 1998 when compared to restaurant sales of $12,973,000 in fiscal 1997. The increase was due to an increase in average weekly sales to $36,153 in fiscal 1998 from $34,321 in fiscal 1997 and additional sales weeks from two restaurants opened in fiscal 1997 being open for their first full year in fiscal 1998.
Total restaurant operating expenses were $202,625,000 in fiscal 1998, compared to $268,916,000 in fiscal 1997. As a percentage of restaurant sales, total restaurant operating expenses decreased to 87.3% in fiscal 1998 from 92.1% in fiscal 1997. The following factors influenced the operating margins:
Food and beverage costs were $69,102,000, or 29.8% of total restaurant sales in fiscal 1998, compared to $88,629,000, or 30.3%, of total restaurant sales in fiscal 1997. The decrease was primarily due to the sale of the bagel- related operations, operational improvements and purchasing efficiencies which occurred during the year.
Payroll and benefits were $66,404,000 in fiscal 1998, compared to $87,905,000 in fiscal 1997. As a percentage of total restaurant sales, payroll and benefits decreased to 28.6% in fiscal 1998 from 30.1% in fiscal 1997. Payroll expense decreased as a percent of restaurant sales due to the sale of the bagel-related businesses, operational improvements and increased labor efficiencies due to the reduction in new unit development. The Company expects to experience continued pressure to raise wages due to competition by all retail businesses to attract qualified employees.
Depreciation and amortization decreased $6,216,000 to $11,475,000 in fiscal 1998 compared to $17,691,000 in fiscal 1997. As a percentage of total restaurant sales, depreciation and amortization decreased to 4.9% in fiscal 1998 from 6.1% in fiscal 1997. The decrease is mainly due to the sale of the bagel- related companies.
Other restaurant operating expenses include rent and utilities, royalties, promotional expense, repairs and maintenance, property taxes and insurance. Other restaurant operating expenses were $55,644,000 in fiscal 1998 compared to $74,691,000 in 1997. Other restaurant operating expenses as a percentage of total restaurant sales decreased in fiscal 1998 to 24.0% from 25.6% in fiscal 1997. This decrease was primarily due to the Company's divestiture of its bagel-related businesses and improvements in these expense categories at the Company's Burger King, Chili's and Italian Dining concepts.
General and administrative expenses, which include corporate and district management costs, were $15,488,000 in fiscal 1998, compared to $28,718,000 in fiscal 1997. As a percentage of total revenues, general and administrative expenses decreased to 6.7% in fiscal 1998 from 9.5% in fiscal 1997. This decrease was primarily due to the Company's divestiture of its bagel-related businesses.
Amortization of intangibles was $1,085,000 in fiscal 1998, compared to $3,112,000 in fiscal 1997. The decrease was mainly due to the elimination of Bruegger's related goodwill in connection with the Bruegger's asset impairment charge taken during fiscal 1997.
The Company executed an agreement during the fourth quarter of fiscal 1998 to sell one Grady's American Grill restaurant. As a result of this agreement the Company recorded a non-cash impairment charge of $250,000 to reduce the carrying amounts of related assets to their estimated fair value. The sale was completed during the first quarter of fiscal 1999.
During the second quarter of fiscal 1997, the Company recorded a non-cash impairment charge of $185,000,000 as a result of the decision to divest its bagel-related businesses. The non-cash impairment charge represented a reduction of the carrying amounts of bagel-related assets to their estimated fair value. The impairment charge included non-cash charges for the write-off of goodwill and the write-down of notes receivable and property and equipment. On October 20, 1997 the Company sold the bagel-related businesses and no further charges were recorded.
In fiscal 1997, the Company elected not to build two Burger King restaurants which it had acquired the development rights to as part of the SHONCO acquisition. In conjunction with this decision the Company recorded a non-cash impairment charge of $300,000 to write-off the capitalized development rights associated with these two locations.
During the second quarter of fiscal 1997, the Company recorded a $2,066,000 charge for expenses related to the Franchise Operating Partner Program. These costs were primarily related to the professional services of financial advisors involved in negotiating with potential equity investors for the Franchise Operating Partner Program. The Franchise Operating Partner Program was canceled due to the Company's decision to divest itself of its bagel-related businesses.
In fiscal 1997, the Company recorded a $15,513,000 charge for closing under-performing Bruegger's units and other Bruegger's units which were at various stages of development when the decision was made to divest the bagel- related businesses. The charge included amounts for terminating occupancy leases, write-offs of fixed assets and pre-opening costs, restaurant management severance costs and other store closing costs. Through fiscal 1998 the Company had incurred $12,916,000 of these costs, of which $2,123,000 were cash payments and $10,793,000 were non-cash charges, primarily the write-down of assets. The remaining costs are primarily associated with terminating occupancy leases which the Company expects to be substantially complete by the end of fiscal 1999.
The Company had operating income of $12,796,000 in fiscal 1998 compared to an operating loss of $201,373,000 in fiscal 1997. The increase in income is mainly due to the special charges in fiscal 1997 relating to the divestiture of the bagel-related businesses.
Total other expenses, as a percentage of total revenues, increased to 5.0% in fiscal 1998 compared to 3.3% in fiscal 1997. The increase was primarily due to an increase in interest expense resulting from increased borrowings and higher borrowing rates under the Company's revolving credit agreement.
Income tax expense of $1,107,000 was recorded in fiscal 1998 compared to a benefit of $14,869,000 in fiscal 1997. The fiscal 1997 benefit was due to the pre-tax loss in fiscal 1997, resulting primarily from the special
charges noted above. The Company's effective income tax rate in fiscal 1998 was 90.7% compared to an income tax rate of 7.0% (benefit) in fiscal 1997. The high effective income tax rate for fiscal 1998 was mainly due to a large portion of state taxes being based on criteria other than income. The fiscal 1997 benefit was primarily due to the operating losses which resulted in a federal income tax benefit and a nominal state income tax provision. The low income tax benefit rate is a result of a significant portion of the $185,000,000 non-cash charge for asset impairment being non-deductible for tax purposes.
The Company has net operating loss carryforwards of approximately $46 million as well as FICA tip credits and alternative minimum tax credits of $2.1 million. Net operating loss carryforwards of $43 million expire in 2012 and $3 million expire in 2018. FICA tip credits of $1.3 million expire in 2012 and $500,000 expire in 2013. The alternative minimum tax credits of $300,000 carryforward indefinitely. During fiscal 1998, the Company increased its valuation reserve against its net operating loss carryforwards to $10.5 million leaving a net deferred tax asset of $10.0 million. The Company's assessment of its ability to realize the net deferred tax asset was based on the weight of both positive and negative evidence, including the taxable income of its current operations. Based on this assessment, the Company's management believes it is more likely than not that the net deferred tax benefit recorded will be realized. Such evidence will be reviewed 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 income in fiscal 1998 was $113,000, or $0.01 per share, compared to a net loss of $196,488,000, or $11.68 per share, in fiscal 1997. The increase in net income is mainly due to the lack of special charges in fiscal 1998 relating to the divestiture of the bagel-related assets.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total revenues were $302,252,000 in fiscal 1997, an increase of 27.2% compared to $237,630,000 reported in fiscal 1996. In addition to restaurant sales, total revenues in fiscal 1997 included $10,055,000 of franchise related revenues from the Company's retail bagel bakery operations versus $5,274,000 in fiscal 1996. Franchise related revenues consist of royalties on franchised restaurant sales, franchise and development fees, net commissary revenue, interest income and other miscellaneous fees from franchised operations related to the Bruegger's concept.
Restaurant sales in fiscal 1997 increased 25.7% to $292,197,000, compared to $232,356,000 in fiscal 1996. This increase was primarily attributable to sales generated by restaurants opened during fiscal 1997 and restaurants open for the first full year in fiscal 1997. These restaurants include: seven Burger King restaurants; 10 Chili's Grill & Bar restaurants; three Italian Dining restaurants; one Grady's American Grill (three Grady's American Grills were sold during fiscal 1997) and 88 bagel bakeries. The Company divested its bagel- related businesses on October 20, 1997. The Company experienced a significant decline in average unit sales at its Grady's American Grill restaurants during fiscal 1997.
Total restaurant operating expenses were $268,916,000 in fiscal 1997, compared to $202,464,000 in fiscal 1996. As a percentage of restaurant sales, total restaurant operating expenses increased to 92.1% in fiscal 1997 from 87.1% in fiscal 1996. The following factors influenced the operating margins:
Food and beverage costs were $88,629,000, or 30.3% of total restaurant sales in fiscal 1997, compared to $72,201,000 or 31.1 % of total restaurant sales in fiscal 1996. The decrease was due primarily to operational improvements, purchasing efficiencies and price increases which occurred during the year.
Payroll and benefits were $87,905,000 in fiscal 1997, compared to $66,176,000 in fiscal 1996. As a percentage of total restaurant sales, payroll and benefits increased to 30.1% in fiscal 1997 from 28.5% in fiscal 1996. Payroll expense increased as a result of the minimum wage increase, the continued competition for qualified restaurant employees and the labor inefficiencies typically associated with new unit development.
Depreciation and amortization increased $6,056,000 to $17,691,000 in fiscal 1997. As a percentage of total restaurant sales, depreciation and amortization increased to 6.1% in fiscal 1997 from 5.0% in fiscal 1996. The increase was attributable to the increased costs associated with the new units the Company developed and the lower than expected sales at the Company's Bruegger's Bagel Bakery and Grady's American Grill units. In addition, pre-opening expenses as a percentage of sales were substantially higher in fiscal 1997 due to significant new unit openings.
Other restaurant operating expenses include rent and utilities, royalties, promotional expense, repairs and maintenance, property taxes and insurance. Other restaurant operating expenses were $74,691,000 in fiscal 1997 compared to $52,452,000 in 1996. Other restaurant operating expenses as a percentage of total restaurant sales increased in fiscal 1997 to 25.6% from 22.5% in fiscal 1996. This increase was primarily due to the Company's Bruegger's Bagel Bakery and Grady's American Grill units having lower than expected sales which produced higher costs as a percentage of sales, as well as increased promotional expenses at these two concepts.
General and administrative expenses, which include corporate and district management costs, were $28,718,000 in fiscal 1997, compared to $11,229,000 in fiscal 1996. As a percentage of total revenues, general and administrative expenses increased to 9.5% in fiscal 1997 from 4.7% in fiscal 1996. The increases in fiscal 1997 were primarily due to costs associated with the development of corporate infrastructure designed to support the anticipated aggressive development of the Bruegger's brand. General and administrative costs also increased due to significant professional services associated with the successful efforts by the Company to divest itself of its bagel-related businesses. During the second quarter of fiscal 1997, in connection with the decision to discontinue Bruegger's development and divest the Company's bagel- related businesses, a staff reduction plan was implemented.
Amortization of intangibles was $3,112,000 in fiscal 1997, compared to $2,537,000 in fiscal 1996. The increase was due to the amortization of intangible assets related to the acquisitions of Bruegger's Corporation and Grady's American Grill.
During the second quarter of fiscal 1997, the Company recorded a non-cash impairment charge of $185,000,000 as a result of the decision to divest its bagel-related businesses. The non-cash impairment charge represented a reduction of the carrying amounts of bagel-related assets to their estimated fair value. The impairment charge included non-cash charges for the write-off of goodwill and the write-down of notes receivable and property and equipment. On October 20, 1997 the Company sold the bagel-related businesses and no further charges were recorded.
During fiscal 1997 the Company elected not to build two Burger King restaurants which it had acquired the development rights to as part of the SHONCO acquisition. In conjunction with this decision the Company recorded a non-cash impairment charge of $300,000 to write-off the capitalized development rights associated with these two locations.
The Company recorded a $2,066,000 charge for expenses related to the Franchise Operating Partner Program during the second quarter of fiscal 1997. These costs were primarily related to the professional services of financial advisors involved in negotiating with potential equity investors for the Franchise Operating Partner Program. The Franchise Operating Partner Program was canceled due to the Company's decision to divest itself of its bagel-related businesses.
The Company recorded a $15,513,000 charge for closing under-performing Bruegger's units and other Bruegger's units which were at various stages of development when the decision was made to divest the bagel-related businesses. The charge included amounts for terminating occupancy leases, write-offs of fixed assets and pre-opening costs, restaurant management severance costs and other store closing costs. Through fiscal 1997 the Company had incurred $11,434,000 of these costs, of which $641,000 were cash payments and $10,793,000 were non-cash charges, primarily the write-down of assets.
The Company had an operating loss of $201,373,000 in fiscal 1997 compared to operating income of $11,462,000 in fiscal 1996. The special charges noted above were the primary reason for the decline in operating income.
Total other expenses, as a percentage of total revenues, increased to 3.3% in fiscal 1997 compared to 2.5% in fiscal 1996. This increase was primarily attributable to higher interest costs arising from increased borrowings under the Company's revolving credit facility to fund acquisitions and new restaurant openings.
An income tax benefit of $14,869,000 was recorded in fiscal 1997 compared to an expense of $2,816,000 in fiscal 1996 due to the pre-tax loss in fiscal 1997, resulting primarily from the special charges noted above. The Company's effective income tax rate in fiscal 1997 was 7.0% (benefit) compared to an income tax rate of 51.3% in fiscal 1996, primarily due to the operating losses experienced resulting in a federal income tax benefit and a
nominal state income tax provision. The low income tax benefit rate is a result of a significant portion of the $185,000,000 non-cash charge for asset impairment being non-deductible for tax purposes.
The net loss in fiscal 1997 was $196,488,000 or $11.68 per share compared to net income of $2,670,000 or $0.23 per share in fiscal 1996. Strong revenue growth in fiscal 1997 was more than offset by the special charges noted above.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The following table summarizes the Company's principal sources and uses of cash:
In fiscal 1998 cash provided by operations increased to $14,899,000 from $3,700,000 in fiscal 1997 due to the divestiture of the Company's bagel-related businesses and improvements in the consolidated financial performance of the Company's other restaurant concepts.
The Company's primary cash requirements in fiscal 1999 will be to finance capital expenditures in connection with the opening of new restaurants, remodeling of existing restaurants, maintenance expenditures, point of sale upgrades and the reduction of debt under the Company's revolving credit agreement. The Company's capital expenditures for fiscal 1999 are expected to range from $9,000,000 to $11,000,000. During the first quarter of fiscal 1999 the Company purchased a loan for $4,294,350 from Texas Commerce Bank National Association in satisfaction of its obligations under a loan guaranty (see Note 11). The purchase of the loan was financed through borrowings under the Company's revolving credit agreement. During fiscal 1999, the Company anticipates opening two to four Burger King restaurants and one full service restaurant. The actual amount of the Company's cash requirements for capital expenditures depends in part on the number of new restaurants opened and the actual expense related to remodeling and maintenance of existing units.
On September 11, 1998, the Company amended its revolving credit agreement with Chase Bank of Texas, as agent for a group of seven banks, providing for borrowings of up to $130,000,000 with interest payable at the adjusted LIBOR rate plus a contractual spread (8.19% at October 25, 1998). 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 interest in its franchise agreements with Brinker and Burger King Corporation and substantially all of the Company's personal property. The revolving credit expires on April 26, 2000, at which time all amounts 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. In addition, the revolving credit agreement contains a mandatory reduction in borrowing availability on December 31, 1999 to the lesser of $125,000,000 or an amount based on a contractual formula. In addition, based on a contractual formula, the borrowing availability may be reduced on June 30, 1999.
The Company anticipates that its cash flows from operations, together with amounts available under its revolving credit agreement, will be sufficient to fund its planned internal expansion and other internal operating cash requirements through the end of fiscal 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997. The Company does not believe the reporting and display of comprehensive income will materially impact the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,"Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be presented. This statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The Company will adopt SFAS No.131 for its fiscal 1999 Financial Statements.
During 1998, Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" was issued, broadly defining costs related to start-up activities and requiring these costs be expensed as incurred. The Company has historically capitalized these costs and expensed them over the first year of operations of the store. The Company plans to adopt this Statement of Position for fiscal year 1999 and does not expect the resulting change to have a significant impact on results of operations.
IMPACT OF YEAR 2000
The term "Year 2000" is a general term used to describe the various problems that may result from the improper processing of dates and date- sensitive calculations by computers and other machinery and equipment as the year 2000 is approached and thereafter. These problems generally arise from the fact that most of the world's computer hardware and software has historically used only two digits to identify the year in a date, often meaning that the computer will fail to distinguish dates in the "2000's" from dates in the "1900's."
The Company's State of Readiness. The Company has established a formal plan ("Year 2000 Plan") to (i) test its information technology systems to evaluate Year 2000 compliance, (ii) assess the Year 2000 compliance of its information technology vendors, (iii) assess its non-information technology systems that utilize embedded technology such as micro-controllers and (iv) determine the readiness of third parties such as government agencies, utility companies, telecommunication companies, suppliers and other "non-technology" third party vendors. The Company has completed the testing and assessment of its information technology systems including non-information technology systems that utilize embedded technology. The Company has determined that 34 of its critical systems were Year 2000 compliant by December 31, 1998 and anticipates that the 20 remaining critical systems will be Year 2000 compliant by June, 1999.
Independent of the Company's Year 2000 Plan, the Company has previously determined it would replace its point of sale equipment in as many as 75 of its full service dining restaurants. This determination was part of the Company's ongoing efforts to enhance financial controls through a centralized, computerized, accounting system to enhance the tracking of data to enable the Company to better manage its operations. The Company is currently in the process of replacing the point of sale equipment in its full service restaurants and expects to complete this process by August, 1999. The replacement systems will be Year 2000 compliant. The Company expects the replacement of the point of sale equipment in its 75 full service restaurants to cost approximately $3 million. The
Company anticipates incurring non-cash charges of approximately $500,000 to $750,000 in connection with the disposition of certain of its point of sale equipment. The Company has determined that its point of sale equipment in its 70 Burger King restaurants is Year 2000 compliant.
Costs to Address the Company's Year 2000 Issues. The Company expenses costs associated with its Year 2000 Plan as the costs are incurred except for costs that the Company would otherwise capitalize. The Company does not expect the costs associated with its Year 2000 Plan to have a material adverse effect on its financial position or results of operations. The Company is unable to estimate the costs it may incur as a result of Year 2000 problems suffered by third parties with which it deals. The Company has surveyed its critical vendors, other than utilities and government agencies, and believes that each vendor will either be Year 2000 compliant by June, 1999 or, if not, suitable alternative suppliers that are Year 2000 compliant will be available.
Risks Presented by Year 2000 Problems. To operate its businesses, the Company relies upon government agencies, utility companies, telecommunications companies, suppliers and other third party service providers over which it can assert little control. The Company's ability to conduct its business is dependent upon the ability of these third parties to avoid Year 2000 related disruption. If they do not adequately address their Year 2000 issues, the Company's business may be materially affected which could result in a materially adverse effect on the Company's results of operations and financial condition. If the Company is not able to integrate replacement point of sale systems at its full service restaurants, its ability to effectively operate those restaurants could be substantially impaired. As a result of the Company's ongoing assessment, the Company may identify additional areas of its business that are at risk of Year 2000 disruption. The absence of any such determination at this point represents only the current status of the assessment phase of the Company's Year 2000 Plan and should not be construed to mean that there are no other areas of the Company's business which are at risk of a Year 2000 related disruption.
The Company's Contingency Plans. The Company's Year 2000 Plan calls for the development of contingency plans for areas of its business that are susceptible to a substantial risk of a Year 2000 related disruption where the Company determines that such disruption could be mitigated through reasonable, cost effective contingency plans. The Company has not yet developed detailed contingency plans specific to Year 2000 events for any specific area of business. Consistent with its Year 2000 Plan, the Company will develop specific Year 2000 contingency plans for such areas of business as and if such determinations are made.
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.
This report contains certain forward-looking statements, including statements about the Company's development plans, that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: the availability and cost of suitable locations for new restaurants; the availability and cost of capital to the Company; the ability of the Company to develop and operate its restaurants; the hiring, training and retention of skilled corporate and restaurant management and other restaurant personnel; the integration and assimilation of acquired concepts; the overall success of the Company's franchisors; the ability to obtain the necessary government approvals and third-party consents; the ability of the Company to modify or redesign its computer systems to work properly in the year 2000; and changes in governmental regulations, including increases in the minimum wage.
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
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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 19 states. The Company owns and operates 39 Grady's American Grill restaurants, four restaurants under the tradename of Spageddies Italian Kitchen and four restaurants under the tradename Papa Vino's Italian Kitchen. The Company also operates, as a franchisee, 70 Burger King restaurants and 28 Chili's Grill & Bar restaurants.
DISPOSITION OF BAGEL-RELATED BUSINESSES - On October 20, 1997, the Company sold its bagel-related businesses to Mr. Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and their affiliates. The sale included the stock of Bruegger's Corporation and the stock of all of the other bagel-related businesses. The total proceeds from the sale were $45,164,000. The consideration included the issuance by Bruegger's Corporation of a junior subordinated note in the amount of $10,000,000, which was recorded as $6,000,000 due to a $4,000,000 reserve for legal indemnification, the transfer of 4,310,740 shares of the Company's common stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a receivable for purchase price adjustment of $500,000, and $16,841,000 in cash. The subordinated note has an annual interest rate of 12% and will mature in seven years. Interest will be accrued and added to the principal amount of the note for the first three years and will be paid in cash for the remaining life of the note. The Company did not recognize any interest income from this note in fiscal 1998. 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 Dressel. The Company does not expect the ultimate resolution of this dispute to have a material adverse effect on the Company's financial position or results of operations but there can be no assurance thereof.
During the second quarter of fiscal 1997, the Company recorded a non-cash impairment charge of $185,000,000 and a store closing charge of $15,513,000 as a result of its decision to divest the bagel related businesses (see Note 12). The consummation of the sale of the bagel-related businesses did not result in any additional gain or loss.
PUBLIC OFFERINGS - On October 16, 1995, the Company completed a public offering consisting of 1,771,288 shares of its common stock at $19.25 per share. Net of underwriting fees and offering expenses, proceeds to the Company aggregated $31,688,000. On July 31, 1996, the Company completed a public offering consisting of 2,541,595 shares of its common stock at $25.00 per share. Net of underwriting fees and offering expenses, proceeds to the Company aggregated $59,775,000.
{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 years ended October 25, 1998 (fiscal 1998), October 26, 1997 (fiscal 1997) and October 27, 1996 (fiscal 1996) each contained 52 weeks.
BASIS OF PRESENTATION - The accompanying consolidated financial statements include the accounts of Quality Dining, Inc. and its wholly-owned subsidiaries. As of May 11, 1997, the Company also consolidated its controlled affiliate, Bagel Acquisition Corporation, into its consolidated financial statements and recorded Bagel Acquisition Corporation's revenues and expenses from May 11, 1997 to October 19, 1997. All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated affiliates are accounted for using the equity method.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INVENTORIES - Inventories consist primarily of restaurant food and supplies and are stated at the lower of cost or market. Cost is determined using the first- in, first-out method.
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:
Years ----- Capitalized Lease Property 17-20 Buildings and Leasehold Improvements 15-31 1/2 Furniture and Equipment 3-7 Computer Equipment & Software 5
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 - The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long- Lived Assets," as of the beginning of its 1997 fiscal year. SFAS No. 121 establishes 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 a $250,000 non-cash impairment charge in fiscal 1998 in connection with its decision to sell a Grady's American Grill Restaurant. In fiscal 1997, the Company recorded a $185,000,000 non-cash impairment charge in connection with its decision to sell its bagel-related businesses (see Note 12). In fiscal 1997, the Company decided not to build two Burger King restaurants which it had acquired the development rights to as part of the SHONCO acquisition. In conjunction with this decision the Company recorded a non-cash impairment charge of $300,000 to write-off the capitalized development rights associated with these two locations.
GOODWILL AND TRADEMARKS - Goodwill arising from the excess of the purchase price over the acquired tangible and intangible net assets acquired in acquisitions and trademarks are being amortized on a straight-line basis, principally over 40 years. Accumulated amortization of goodwill as of October 25, 1998 and October 26, 1997 was $2,169,000 and $1,628,000, respectively. Accumulated amortization of trademarks as of October 25, 1998 and October 26, 1997 was $943,000 and $612,000, respectively. The Company wrote-off all of the goodwill related to its bagel businesses as part of the $185,000,000 non-cash impairment charge recorded during fiscal 1997 (See Note 12).
FRANCHISE FEES AND DEVELOPMENT FEES - The Company's Burger King and Chili's franchise agreements require the payment of a franchise fee for each restaurant opened. Franchise fees are deferred and amortized on the straight-line method over the lives of the respective franchise agreements. Development fees paid to the respective franchisors are deferred and expensed in the period the related restaurants are opened. The excess of the purchase price over the acquired tangible and intangible assets acquired in the SHONCO acquisition has been allocated to franchise rights. The franchise agreements generally provide for a term of 20 years with renewal options upon expiration. Franchise fees are being amortized on a straight-line basis, principally over 20 years. Accumulated amortization of franchise fees and development costs as of October 25, 1998 and October 26, 1997 was $2,704,000 and $2,230,000, respectively.
FRANCHISE RELATED REVENUE RECOGNITION - Franchise related revenue includes royalties, franchise fees, development fees, net commissary revenue, interest income and other miscellaneous fees related to the Company's bagel business which was divested on October 20, 1997. Franchisees were required to pay monthly royalties, generally 4% to 5% of restaurant sales, which the Company recognized as earned. Each franchisee also paid an initial franchise fee for each bakery opened. Development fees, which resulted from area development agreements with franchisees, were deferred and recognized as revenue when all material conditions had been substantially completed by the Company, which generally occurred when the bakeries under the related area development agreements were opened. There were no deferred development fees at October 25, 1998 and October 26, 1997. At October 27, 1996 there were $770,000 in deferred development fees. Net commissary revenue resulted from products sold to franchisees from Company- owned commissaries. Interest income resulted from the Company's notes receivable from franchisees.
ADVERTISING - The Company incurs advertising expense related to its concepts under franchise agreements (see Note 5) or through local advertising. Advertising costs are expensed at the time the related advertising first takes place. Advertising costs were $6,807,000, $7,381,000 and $4,620,000 for fiscal years 1998, 1997 and 1996, respectively. The Company had maintained an advertising fund for national and regional advertising for the Bruegger's Bagel Bakery ("Bruegger's") concept. The advertising fund collected fees paid by Company-owned and franchised bakeries, and disbursed funds relating to costs associated with maintaining, administering and preparing advertising, marketing, public relations and promotional programs for the Bruegger's concept. Contributions to the fund were based on a specified percentage of sales, generally 2%. Such contributions were recorded as earned and were reflected as a reduction of advertising expenses.
PRE-OPENING COSTS - Direct costs incurred in connection with opening new restaurants are 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, $2,953,000 and $1,848,000 for fiscal years 1998, 1997 and 1996, respectively. Effective with fiscal 1999, the Company intends to expense pre-opening costs as incurred in accordance with SOP 98-5 "Reporting on the Costs of Start-up Activities". The adoption of SOP 98-5 will not have a significant effect on the Company's results of operations.
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 25, 1998 and October 26, 1997 was $618,000 and $431,000, respectively.
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 25, 1998 and October 26, 1997, capitalized computer software costs, net of related accumulated amortization, aggregated $1,276,000 and $1,323,000, respectively. Amortization of computer software costs was $445,000, $411,000 and $197,000 for fiscal years 1998, 1997 and 1996 respectively.
CAPITALIZED INTEREST - Interest costs capitalized during the construction period of new restaurants were $57,000, $125,000 and $234,000 for fiscal years 1998, 1997 and 1996 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 9.
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 a note receivable. Substantially all of the Company's cash and cash equivalents at October 25, 1998 were concentrated with a bank located in Michigan City, Indiana.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
INCOME TAXES - The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. SFAS 109 requires the establishment of a valuation reserve against any deferred tax assets if the realization of such assets is not deemed likely.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general- purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997. The Company does not believe the reporting and display of comprehensive income will materially impact the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,"Disclosures about Segments of an Enterprise and Related Information." SFAS No.131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be presented. This statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The Company will adopt SFAS No. 131 for its fiscal 1999 financial statements.
During 1998, Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" was issued, broadly defining costs related to start-up activities and requiring these costs be expensed as incurred. The Company has historically capitalized these costs and expensed them over the first year of operations of the store. The Company plans to adopt this Statement of Position for fiscal year 1999 and does not expect the resulting change to have a significant impact on results of operations.
RECLASSIFICATIONS - Certain information in the consolidated financial statements for fiscal 1997 and fiscal 1996 has been reclassified to conform with the current reporting format. The reclassifications had no effect on total assets, liabilities and stockholders' equity or net income as previously reported.
{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 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 restaurant on local advertising. As part of a system-wide promotional effort, the Company has agreed that for the period beginning January 1, 1999 and ending June 30, 1999, it will pay additional advertising fees of 3/4% of Chili's restaurant sales.
The Company has entered into development agreements to develop additional restaurants in each of the two concepts. Each of the development agreements requires the Company to pay a development fee. In addition, the development agreements contain certain requirements regarding the number of units to be opened in the future. Each restaurant opened will be subject to a separate franchise agreement, which requires the payment of an initial franchise fee (currently $40,000) for each such restaurant. Should the Company fail to comply with the required development schedules or with the requirements of the agreements for restaurants within areas covered by the development agreements, the franchisors have the right to terminate the Company's development agreements and the exclusivity provided by the development agreements.
{6} 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 $173,000, $99,000 and $100,000 for fiscal years 1998, 1997 and 1996, respectively.
{7} INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended October 25, 1998, October 26, 1997 and October 27, 1996 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 $46 million as well as FICA tip credits and alternative minimum tax credits of $2.1 million. Net operating loss carryforwards of $43 million expire in 2012 and $3 million expire in 2018. FICA tip credits of $1.3 million expire in 2012 and $500,000 expire in 2013. The alternative minimum tax credits of $300,000 carryforward indefinitely.
During fiscal 1998, the Company increased its valuation reserve against its net operating loss carryforwards to $10.5 million leaving a net deferred tax asset of $10.0 million. The Company's assessment of its ability to realize the net deferred tax asset was based on the weight of both positive and negative evidence, including the taxable income of its current operations. Based on this assessment, the Company's management believes it is more likely than not that the net deferred tax benefit recorded will be realized. Such evidence will be reviewed 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. Effective with the acquisition of Bruegger's Corporation on June 7, 1996, the Company established a valuation allowance against Bruegger's Corporation's deferred tax assets in the amount of $4.8 million. Subsequent to the acquisition date, the Company reduced the valuation allowance by $680,000 with a corresponding reduction in goodwill. With the sale of Bruegger's Corporation this allowance has been eliminated.
Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:
{8} LONG-TERM DEBT AND CREDIT AGREEMENTS
On September 11, 1998, the Company amended its revolving credit agreement with Chase Bank of Texas, as agent for a group of seven banks, providing for borrowings of up to $130,000,000 with interest payable at the adjusted LIBOR rate plus a contractual spread. The weighted average interest rate of all borrowing as of October 25, 1998 and October 26, 1997 was 8.61% and 8.76%, respectively. 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 interest in its franchise agreements with Brinker and Burger King Corporation and substantially all of the Company's personal property. The revolving credit agreement matures on April 26, 2000, at which time all amounts 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. In addition, the revolving credit agreement contains a mandatory reduction in borrowing availability on December 31, 1999 to the lesser of $125,000,000 or an amount based on a contractual formula. In addition, based on a contractual formula, the borrowing availability may be reduced on June 30, 1999. At October 25, 1998, the fair value of the amount outstanding under the revolving credit agreement approximated the carrying amount.
{9} STOCK OPTION PLANS
The Company has three stock option plans: the 1993 Stock Option and Incentive Plan, the 1997 Stock Option and Incentive Plan and the Outside Directors Stock Option Plan.
On March 26, 1997 the Company's shareholders approved the 1997 Stock Option and Incentive Plan and therefore no awards for additional shares of the Company's common stock will be made under the 1993 Stock Option and Incentive Plan (although the terms of options previously granted pursuant to the 1993 Stock Option and Incentive Plan may still be modified). Under the 1997 Stock Option and Incentive Plan, shares of restricted stock and options to purchase shares of the Company's common stock may be granted to officers and other employees. An aggregate of 1,100,000 shares of common stock has been reserved for issuance under the 1997 Stock Option and Incentive Plan.
Under the Outside Directors Stock Option Plan, 40,000 shares of common stock have been reserved for the issuance of nonqualified stock options to be granted to non-employee directors of the Company. On May 1, 1994 and on each May 1 thereafter, each then non-employee director of the Company will receive an option to purchase 2,000 shares of common stock at an exercise price equal to the fair market value of the Company's common stock on the date of grant. Each option has a term of 10 years and becomes exercisable six months after the date of grant. As of October 25, 1998 there were 38,000 options outstanding under the Outside Directors Stock Option Plan.
The Company accounts for all of its plans in accordance with APB Opinion No. 25 which requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. Under this method , no compensation cost has been recognized for stock option awards.
Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value method as prescribed by SFAS 123 (see Note 2), the Company's net earnings (loss) and net earnings (loss) per share would have been the pro forma amounts indicated below:
The weighted average fair value at the date of grant for options granted during fiscal 1998, 1997 and 1996 was $1.67, $6.80 and $11.38 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 1998, 1997 and 1996: dividend yield of 0% for all years; expected volatility of 47.7%, 40.1% and 34.7%, respectively; risk-free interest rate of 5.7%, 6.5% and 6.3%, respectively; and expected lives of 4.98, 4.39 and 4.24 years, respectively.
Activity with respect to the Company's stock option plans for fiscal years 1998, 1997 and 1997 was as follows:
The following table summarizes information relating to fixed-priced stock options outstanding for all plans as of October 25, 1998.
{10} 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 $1,054,000, $1,003,000 and $1,088,000 for fiscal years 1998, 1997 and 1996, respectively.
As of October 25, 1998, future minimum lease payments related to these leases were as follows:
Rent expense, including percentage rentals based on sales, was $8,995,000, $14,500,000 and $9,900,000 for fiscal years 1998, 1997 and 1996, respectively.
{11} COMMITMENTS AND CONTINGENCIES
The Company is self-insured for the portion of its employee health care costs not covered by insurance. The Company is liable for medical claims up to $100,000 per eligible employee annually, and aggregate annual claims up to approximately $2,500,000. The aggregate annual deductible is determined by the number of eligible covered employees during the year and the coverage they elect.
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 $2,100,000 for the three year insurance plan period beginning March 1, 1998 and ending April 30, 2001.
At October 25, 1998, the Company had commitments aggregating $1,052,000 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.
Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and Mark Ratterman, Chris Galloway and Peter Shipman, principals of Quality Baking, LLC, commenced an action on July 9, 1997 filed in the United States District Court, for the Eastern District of Missouri, Eastern Division, against Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael Dressell, Daniel B. Fitzpatrick and John Firth. On April 22, 1998, the Court granted the defendants' Motion to Transfer this matter to the United States District Court for the Northern District of Indiana. The complaint alleges that the plaintiffs purchased their franchises based upon financial representations that have not materialized, that they purchased preferred stock in Bruegger's Corporation based upon false representations, that the defendants falsely represented their intentions with respect to repurchasing bakeries from the plaintiffs, and that the defendants violated implied covenants of good faith and fair dealing.
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 filed 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 have not materialized, 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.
Both of the above pending franchise related actions are in preliminary stages and only limited discovery has occurred. In each of these cases, one or more present or former officers and directors of the Company have been named as party defendants and the Company has and 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, the Agreement and Plan of Merger by and among Quality Dining, Inc., Bagel Disposition Corporation and Lethe, LLC, and certain other related agreements entered into as part of the disposition of the Company's bagel-related businesses, the Company is responsible for 50% of the first $14 million of franchise related litigation expenses, inclusive of attorney's fees, costs, expenses, settlements and judgments (collectively "Franchise Damages"). Bruegger's Corporation and certain of its affiliates are obligated to indemnify the Company from all other Franchise Damages. The Company is obligated to pay the first $3 million of its share of Franchise Damages in cash. Through October 25, 1998, the Company has paid approximately $850,000 in cash and assigned its $1.2 million note from BruWest to Bruegger's Corporation which together reduce the Company's remaining obligation to pay cash in respect of Franchisee Damages to approximately $950,000. The remaining $4 million of the Company's share of Franchise Damages is payable by crediting amounts owed to the Company pursuant to the $10 million junior subordinated note issued to the Company by Bruegger's Corporation. Through October 25, 1998, the outstanding balance due under the junior subordinated note has been reduced by $600,000 in respect of Franchisee Damages. Based upon the currently available information, the Company does not believe that these cases individually or in the aggregate will have a material adverse effect on the Company's financial position and results of operations but there can be no assurance thereof. Such assessment is based in part upon the Company's belief that Bruegger's Corporation has and will continue to have the ability to perform its indemnity obligations.
James T. Bies filed a shareholder derivative action in the United States District Court for the Southern District of Michigan on October 14, 1997. The complaint named as defendants 12 individuals who are current or former directors or officers of the Company. The complaint alleged that the individual defendants as directors breached fiduciary duties to the Company by approving certain transactions in 1997 involving loans to Bagel Acquisition Corporation that allegedly benefited Daniel B. Fitzpatrick, the Company's Chairman, President and Chief Executive Officer. The plaintiff also alleged that individual defendants participated in a "conspiracy to waste, dissipate, and improperly use funds, property and assets" of the Company for the benefit of Bagel Acquisition Corporation and Mr. Fitzpatrick. The plaintiff alleged that the Company and its shareholders had been damaged in an amount in excess of $28,000,000. The relief sought also included the appointment of a receiver, an accounting and attorney's fees. On April 27, 1998, the Court dismissed the complaint without prejudice, for failure to make a "demand" upon the Company's board of directors. By letter dated May 12, 1998, Mr. Bies has demanded that the Company pursue these claims against the defendants. In accordance with the Indiana Business Corporation Law, the board of directors has appointed a special committee to investigate the allegations and determine whether it is in the best interests of the Company to pursue this matter. The special committee consists of three of the Company's outside directors, Messrs. Decio, Lewis and Murphy (named defendants in the action) along with David T. Link, Dean of the Notre Dame Law School. Subsequent to the establishment of the special committee, Mr. Bies refiled his action on July 30, 1998. As a result of its investigation of Mr. Bies' demand, the special committee has determined that the claims identified by Mr. Bies are without merit and that it would not be in the Company's best interests to pursue them. Therefore, on January 6, 1999, the special committee filed a motion to dismiss or alternatively for summary judgement.
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, the bank (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 the bank. 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. The Company believes that BFBC is likely to file suit against it and one or more of its affiliates, officers, and Bruegger's Franchise Corporation asserting claims arising out of BFBC's franchise relationship with Bruegger's Franchise Corporation and the Loan. 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 a suit by BFBC.
The Company and certain of its executive officers are defendants in a class action lawsuit filed in the United States District Court for the Northern District of Indiana. The complaint alleges, among other things, that the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder by failing to disclose various matters in connection with the Company's acquisition, development, financing and disposition of its bagel-related businesses. The putative class period in such actions is from June 7, 1996 to May 13, 1997 on which dates the price of the Company's common stock closed at $34.25 and $6.56, respectively. The plaintiffs are seeking, among other things, an award of unspecified compensatory damages, interest, costs and attorney's fees. The Company has filed a motion to dismiss the complaint which is presently pending before the Court. The Company believes that it and its executive officers have meritorious defenses to the allegations and it intends to vigorously defend against the allegations made in the complaints. However, there can be no assurance that the ultimate outcome of this or other actions (including other actions under federal or state securities laws) arising out of the Company's acquisition, development, financing and disposition of its bagel-related businesses will not have a material adverse effect on the Company's financial position or results of operations.
On November 10, 1994, the Company acquired all of the outstanding stock of Grayling Corporation, Grayling Management Corporation ("Grayling Management"), Chili's of Mt. Laurel, Inc. ("Mt. Laurel") and Chili's of Christiana, Inc. ("Christiana"). Prior to entering into negotiations with the Company, Grayling Corporation and its principal shareholder, T. Garrick Steele ("Steele"), had entered into an agreement (the "Asset Agreement") to sell substantially all of Grayling Corporation's assets to a third party, KK&G Enterprises, Inc. ("KK&G"). The Asset Agreement was terminated by Grayling Corporation and was not consummated. On September 27, 1995, KK&G filed suit in the Court of Common Pleas, Philadelphia County, Pennsylvania, against Grayling Corporation, Mt. Laurel, Christiana and Steele seeking damages and specific performance of the Asset Agreement. Steele was obligated to defend the lawsuit and indemnify the Company and Grayling Corporation against any loss or damages resulting from the lawsuit. Steele settled the lawsuit on March 27, 1998 without any liability or expense to the Company. The Company and Grayling Corporation and their affiliates received a general release.
BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation (a former indirect subsidiary of the Company), and Timothy Johnson, Gregory LeMond, Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest") commenced an action on January 30, 1997 filed in the United States District Court, District of Minnesota, against Bruegger's Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick (the "Bruegger's Defendants") and an investment banking firm retained by BruWest, alleging inter alia that the Bruegger's Defendants breached commitments to provide financing to BruWest, interfered with the plaintiffs' efforts to obtain financing from third parties, violated existing franchise and development agreements between BruWest and Bruegger's Franchise Corporation, violated certain provisions of the Minnesota Franchise Act and breached duties and implied covenants of good faith and fair dealing. The Bruegger's Defendants denied all allegations in the complaint. Without admitting any liability or obligation to do so, on March 11, 1997, Bruegger's Corporation loaned $1.2 million to the plaintiffs. The loan was secured by certain assets of the plaintiffs and personal guarantees of Messrs. LeMond and Snow. The loan provides for monthly interest payments commencing April 11, 1997 at the rate of nine percent (9%) per annum and matured on September 11, 1997. On March 14, 1997, the complaint was dismissed, without prejudice. On May 22, 1997, BruWest refiled the complaint with additional allegations challenging the enforceability of the loan documents and personal guarantees. This action was settled on August 19, 1998.
The Company is involved in various other legal proceedings incidental to the conduct of its business. Management does not expect that any such proceedings will have a material adverse effect on the Company's financial position or results of operations.
{12} IMPAIRMENT OF LONG-LIVED ASSETS
The Company recorded a $250,000 non-cash impairment charge in fiscal 1998 in connection with its decision to sell a Grady's American Grill Restaurant.
On May 10, 1997, the Company's Board of Directors committed the Company to a plan of action to divest the Bruegger's bagel-related businesses. During the second quarter of fiscal 1997 the Company recorded a non-cash impairment charge of $185,000,000 and a store closing charge of $15,513,000 as a result of this decision. The non-cash impairment charge represents a reduction of the carrying amounts of bagel-related assets to their estimated fair values. The impairment charge includes non-cash charges for the write-off of goodwill and the write-down of notes receivable and property and equipment. During the second quarter of fiscal 1997 the Company received non-binding offers to purchase its bagel-related assets and used these offers, less estimated costs to sell, to determine the current fair value of the bagel-related assets. On October 20, 1997 the Company sold all its bagel-related assets and no further charges were incurred.
The store closing charge represents the estimated costs associated with closing under-performing Bruegger's units and other Bruegger's units which were at various stages of development when the decision was made to divest the Bruegger's bagel-related businesses. The charge includes amounts for terminating leases, the write-off of fixed assets and pre-opening costs, restaurant management severance costs and other store closing costs. During the third quarter of fiscal 1997 the Company closed a total of 22 Bruegger's units in eight markets. As of October 25, 1998, $12,916,000 in costs related to these activities had been incurred, of which $2,123,000 were cash payments and $10,793,000 were non-cash charges, primarily for the write-down of fixed assets. The remaining costs are primarily associated with terminating occupancy leases which the Company expects to be substantially complete by the end of fiscal 1999. The Company believes that the remaining reserve is adequate to cover all future expenses relating to the closed stores.
{13} RELATED PARTY TRANSACTIONS
The Company leases its former headquarters facility and 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:
In October 1996, the Company entered into an agreement with a related party to terminate a lease for office space located in Vermont. Under the agreement a payment of $900,000 was made in fiscal 1997. The estimated cost for the termination of this lease was accrued as part of the cost of the purchase of Bruegger's Corporation at the time of its acquisition.
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 1998, 1997 and 1996 were $14,000, $14,000 and $15,000, respectively.
During the fiscal years 1998, 1997 and 1996, the Company made payments to companies owned by certain directors, stockholders and officers of the Company of $185,000, $327,000 and $399,000, respectively, for air transportation services.
During fiscal 1997 and fiscal 1996, the Company loaned a total of $38,000,000 to Bagel Acquisition Corporation, a company owned by a director and officer of the Company, which used the funds to acquire a number of Bruegger's Bagel Bakeries from independent franchisees. Interest income recognized by the Company on this note in fiscal 1997 and fiscal 1996 was $1,317,000 and $119,000 respectively. The interest income from the note was included as part of franchise related revenue on the Consolidated Statement of Operations. In connection with the Company's decision to divest its bagel-related businesses, the Company began
consolidating the assets and liabilities of Bagel Acquisition Corporation as of May 11, 1997 and Bagel Acquisition Corporation became a wholly owned subsidiary on August 21, 1997, when the Company exercised its option to acquire the stock of Bagel Acquisition Corporation for $1,000. The note receivable from Bagel Acquisition Corporation was eliminated as part of the consolidation. As of May 11, 1997, the Company consolidated Bagel Acquisition Corporation into its consolidated financial statements and recorded Bagel Acquisition Corporation's revenues and expenses from May 11, 1997 to October 19, 1997.
The Company and its Bruegger's concept transacted certain business activities with Bagel Acquisition Corporation and certain other entities whose principal shareholders were directors and/or officers of the Company. A summary of these transactions for the fiscal years 1997 and 1996 included: purchases of cream cheese $1,784,000 and $2,009,000 respectively; sales of bagels and related products $4,054,000 and $2,000,000 respectively; royalties earned $4,485,000 and $1,751,000 respectively; marketing fees earned $2,016,000 and $764,000 respectively; installation of point-of-sale registers $100,000 and $410,000 respectively; management, accounting, legal and computer support services $677,000 and $534,000 respectively; and transaction fees $200,000 and $210,000 respectively.
{14} ACQUISITIONS AND DISPOSITIONS
On October 20, 1997, the Company sold its bagel-related businesses to Mr. Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and their affiliates. The sale included the stock of Bruegger's Corporation and the stock of all of the other bagel-related businesses. The total proceeds from the sale were $45,164,000. The consideration included the issuance by Bruegger's Corporation of a junior subordinated note in the amount of $10,000,000, which was recorded as $6,000,000 due to a $4,000,000 reserve for legal indemnification, the transfer of 4,310,740 shares of the Company's common stock valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a receivable for purchase price adjustment of $500,000, and $16,841,000 in cash. The subordinated note has an annual interest rate of 12% and will mature in seven years. Interest will be accrued and added to the principal amount of the note for the first three years and will be paid in cash for the remaining life of the note. The 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 Dressel. The Company does not expect the ultimate resolution of this dispute to have a material adverse effect on the Company's financial position or results of operations but there can be no assurance therof.
Prior to the transaction, Messrs. Brue and Dressell were directors of the Company and owned approximately 25% of the Company's common stock. In connection with the sale of the bagel-related businesses, Mr. Nordahl L. Brue, Mr. Michael J. Dressell and Mr. David T. Austin resigned from the Company's Board of Directors.
On July 15, 1996, the Company acquired all the assets, including trademarks, of Moe's Broadway Bagel, Inc., operator of three Moe's Broadway Bagel restaurants ("Moe's"), for $3,600,000 in cash. In a concurrent transaction, the Company sold the operating assets of Moe's to a third party in exchange for a promissory note in the amount of $3,500,000 and entered into development and franchise agreements for which the Company collects franchise related revenues. On August 21, 1997 the company exercised its right to purchase Moe's Broadway Bagel for $1,000 and forgiveness of the note. Moe's Broadway Bagel was subsequently sold on October 20, 1997 with the other bagel- related assets.
On June 7, 1996, the Company acquired all of the issued and outstanding shares of common stock of Bruegger's Corporation. Pursuant to the terms of the acquisition and related merger agreement, Bruegger's Corporation became a wholly owned subsidiary of the Company. The purchase price consisted of the issuance of 5,127,121 shares of the Company's common stock, valued at $123,051,000, and direct acquisition and estimated post-merger integration costs aggregating $6,900,000. The Company also issued 117,800 shares of its Series A Convertible Cumulative Preferred Stock, without par value (the "Quality Dining Preferred Stock") in exchange for a like number of issued and outstanding shares (exclusive of those shares held by the Company, which were canceled) of Bruegger's Corporation Class A Cumulative Convertible Preferred Stock, $100 par value per share. Subsequent to the acquisition, 101,150 shares of the Quality Dining Preferred Stock were converted into an aggregate of 285,531 shares of the Company's common stock. The excess of the purchase price over the acquired tangible and intangible net assets of $143,863,000 was allocated to goodwill.
In connection with the acquisition, the Company recorded a special pre- tax charge of $8,000,000 for combining and integrating administrative functions, recruiting and relocating new employees, franchise related costs, and legal and professional fees. This charge was in addition to the $6,000,000 recorded as part of the cost of the acquisition for facility closures, restaurant remodeling and relocation and severance packages for Bruegger's personnel. As of October 26, 1997, all costs related to these activities had been incurred.
On December 21, 1995, the Company acquired 42 Grady's American Grill restaurants and all rights to the Grady's American Grill concept from Brinker International, Inc. The purchase price aggregated $75,367,000 consisting of $74,367,000 in cash and the incurrence of $1,000,000 of liabilities and direct acquisition costs. The cash portion of the purchase price was funded through borrowings under the Company's revolving credit facility. The excess of the purchase price over the acquired tangible and intangible net assets of $13,163,000 has been allocated to trademarks and is being amortized on a straight-line basis over 40 years.
The acquisitions of Bruegger's Corporation and Grady's American Grill were both accounted for using the purchase method and the operating results have been included in the Company's consolidated financial statements since their respective acquisition dates.
In connection with the acquisitions of Grady's American Grill and the rights to the Spageddies restaurant concept in the United States, which was finalized on October 28, 1995, the Company recorded a special pre-tax charge of $1,900,000 during the first quarter of fiscal 1996. The charge reflected the estimated costs for integration of computer systems, employee transition costs, recruitment and relocation costs, and legal and professional fees. At October 27, 1996, all costs related to these activities had been incurred.
The Company has significant intangible assets in connection with the acquisitions of Grady's American Grill, the SHONCO Companies and the Grayling Companies. Applicable accounting standards require the Company to review long- lived assets (such as goodwill and other intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying values of those assets may not be recoverable. In the event that the Company determines that the carrying value of such intangible assets is impaired, it would write- down such carrying value, which would result in a charge to earnings. Any such charge could have a material adverse effect on the Company's financial results.
The following unaudited pro forma results for the fiscal year ended October 27, 1996 were developed assuming Bruegger's, Grady's American Grill and SHONCO had been acquired as of the beginning of the periods presented. The unaudited pro forma results reflect certain adjustments, including interest expense, depreciation of property and equipment and amortization of intangible assets.
The unaudited pro forma results shown above are not necessarily indicative of the consolidated results that would have occurred had the acquisitions taken place at the beginning of the respective periods, nor are they necessarily indicative of results that may occur in the future.
{15} SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) During the second quarter of fiscal 1997 the Company recorded an asset impairment charge of $185,000,000, store closing costs of $15,513,000 and franchise operating partner expense of $2,066,000.
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 25, 1998 and October 26, 1997 the results of their operations and their cash flows for each of the three years in the period ended October 25, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois December 18, 1998
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 1999 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 1999 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 1999 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 1999 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 25, 1998 and October 26, 1997
Consolidated Statements of Operations for the fiscal years ended October 25, 1998, October 26, 1997 and October 27, 1996
Consolidated Statements of Stockholders' Equity for the fiscal years ended October 25, 1998, October 26, 1997 and October 27,
Consolidated Statements of Cash Flows for the fiscal years ended October 25, 1998, October 26, 1997 and October 27, 1996
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 President and Chief Executive Officer Date: January 22, 1999
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 S
* 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 the same exhibit number to the Company's Registration Statement on Form S-1 (Registration No. 33-73826) is incorporated herein by reference.
(2) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 8-K dated November 23, 1994 is incorporated herein by reference.
(3) The copy of this exhibit filed as Exhibit 2 to the Company's Report on Form 8-K dated August 28, 1995 is incorporated herein by reference.
(4) 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.
(5) 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, 1995 is incorporated herein by reference.
(6) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 8-K dated January 5, 1996 is incorporated herein by reference.
(7) The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form S-4 (Registration No. 333-2050) is incorporated herein by reference.
(8) The copy of this exhibit filed as the same exhibit number to the Company's Report on Form 8-K dated May 1, 1996 is incorporated herein by reference.
(9) 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.
(10) 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.
(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 27, 1996 is incorporated herein by reference.
(12) The copy of this exhibit filed as Exhibit 3 to the Company's Report on Form 8-K dated November 4, 1997 is incorporated herein by reference.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) 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 2, 1998, is incorporated herein by reference.