-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CFNte3xtHJPPHO9egGlUjCC3dyoLzbuMYiBTcTOG2zY2MyZRaf3B2mkZICi1G4n7 naWxboyVyQYaSCAx01kCzg== 0000917126-97-000006.txt : 19970626 0000917126-97-000006.hdr.sgml : 19970626 ACCESSION NUMBER: 0000917126-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970511 FILED AS OF DATE: 19970625 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALITY DINING INC CENTRAL INDEX KEY: 0000917126 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 351804902 STATE OF INCORPORATION: IN FISCAL YEAR END: 1030 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23420 FILM NUMBER: 97629467 BUSINESS ADDRESS: STREET 1: 4220 EDISON LAKES PKWY CITY: MISHAWAKA STATE: IN ZIP: 46545 BUSINESS PHONE: 2192714600 MAIL ADDRESS: STREET 1: 4220 EDISON LAKES PKWY CITY: MISHAWAKA STATE: IN ZIP: 46545 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended May 11, 1997 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______________ to ____________________ Commission file number 0-23420 QUALITY DINING, INC. (Exact name of registrant as specified in its charter) Indiana 35-1804902 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4220 Edison Lakes Parkway, Mishawaka, Indiana 46545 (Address of principal executive offices and zip code) (219) 271-4600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X____ No ________ The number of shares of the registrant's common stock outstanding as of June 15, 1997 was 16,909,799. QUALITY DINING, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 11, 1997 INDEX Page PART I. - Financial Information Item 1. Consolidated Financial Statements: Consolidated Statements of Operations....................3 Consolidated Balance Sheets..............................4 Consolidated Statements of Cash Flows....................5 Notes to Consolidated Financial Statements...............6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........10 Part II - Other Information Item 1. Legal Proceedings.......................................16 Item 2. Changes in Securities...................................16 Item 3. Defaults upon Senior Securities.........................16 Item 4. Submission of Matters to a Vote of Security Holders.....16 Item 5. Other Information.......................................17 Item 6. Exhibits and Reports on Form 8-K........................17 Signatures........................................................17 Part I. FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Twelve Weeks Ended Twenty-Eight Weeks Ended May 11, May 12, May 11, May 12, 1997 1996 1997 1996 ------- ------- ------- ------- Revenues: Restaurant sales: Grady's American Grill $ 20,813 $ 24,571 $ 48,368 $ 41,679 Burger King 17,492 16,208 38,310 35,588 Bruegger's Bagel Bakery 13,740 3,228 29,256 6,321 Chili's Grill & Bar 12,500 9,506 28,087 21,086 Italian Dining 3,157 1,889 6,117 4,373 ------- ------- ------- ------- Total restaurant sales 67,702 55,402 150,138 109,047 Franchise related revenue 3,396 - 7,479 - ------- ------- ------- ------- Total revenues 71,098 55,402 157,617 109,047 ------- ------- ------- ------- Operating expenses: Restaurant operating expenses: Food and beverage 20,780 17,406 46,178 34,256 Payroll and benefits 20,677 15,326 45,349 30,650 Depreciation and amortization 3,948 2,351 8,895 4,813 Other operating expenses 19,193 12,620 38,119 24,390 ------- ------- ------- ------- Total restaurant operating expenses 64,598 47,703 138,541 94,109 General and administrative 9,666 2,518 15,496 5,088 Amortization of intangibles 1,097 270 2,561 569 Restructuring and integration costs - - - 1,938 Impairment of assets 185,000 - 185,000 - Store closing costs 15,513 - 15,513 - Franchise operating partner expense 2,066 - 2,066 - ------- ------- ------- ------- Total operating expenses 277,940 50,491 359,177 101,704 ------- ------- ------- ------- Operating income (loss) (206,842) 4,911 (201,560) 7,343 ------- ------- ------- ------- Other income (expense): Interest expense (2,164) (1,701) (4,535) (3,125) Gain on sale of property and equipment - - - 3 Interest income 60 40 122 111 Other income (expense), net (12) 34 118 38 ------- ------- ------- ------- Total other expense, net (2,116) (1,627) (4,295) (2,973) ------- ------- ------- ------- Income (loss) before income taxes (credit) (208,958) 3,284 (205,855) 4,370 Income taxes (credit) (7,217) 1,198 (5,743) 1,595 ------- ------- ------- ------- Net income (loss) $ (201,741) $ 2,086 $ (200,112) $ 2,775 ======= ======= ======= ======= Net income (loss) per share $ (11.93) $ 0.24 $ (11.83) $ 0.31 ======= ======= ======= ======= Weighted average shares outstanding 16,910 8,839 16,910 8,838 ======= ======= ======= ======= See Accompanying Notes to Consolidated Financial Statements QUALITY DINING, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) May 11, October 27, 1997 1996 --------- --------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 2,061 $ 444 Accounts receivable 6,972 4,518 Accounts and note receivable, related parties - 11,651 Notes receivable 1,198 3,585 Refundable income taxes 2,671 - Inventories 3,852 3,082 Deferred income taxes 7,579 1,996 Other current assets 2,896 3,438 ------- ------- Total current assets 27,229 28,714 ------- ------- Property and equipment, net 194,731 177,044 ------- ------- Other assets: Franchise fees and development costs, net 10,319 10,406 Goodwill, net 9,384 152,195 Trademarks, net 12,902 13,082 Pre-opening costs and non-competition agreements, net 2,935 2,463 Liquor licenses, net 3,306 2,876 Other 1,156 1,234 ------- ------- Total other assets 40,002 182,256 ------- ------- Total assets $ 261,962 $ 388,014 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capitalized lease and non-competition obligations $ 479 $ 451 Accounts payable 17,474 8,531 Accrued restructuring and integration costs - 8,984 Accrued store closing costs 15,513 - Accrued liabilities 14,089 12,135 ------- ------- Total current liabilities 47,555 30,101 Long-term debt 133,610 78,610 Capitalized lease and non-competition obligations, principally to related parties, less current portion 6,674 6,436 Deferred income taxes 5,111 3,744 ------- ------- Total liabilities 192,950 118,891 ------- ------- Stockholders' equity: Preferred stock, without par value: 5,000,000 shares authorized; none issued Common stock, without par value: 50,000,000 shares authorized; 16,929,799 and 16,929,035 shares issued, respectively 28 28 Additional paid-in capital 258,243 258,242 Retained earnings (deficit) (189,009) 11,103 ------- ------- 69,262 269,373 Less treasury stock, at cost, 20,000 shares 250 250 ------- ------- Total stockholders' equity 69,012 269,123 ------- ------- Total liabilities and stockholders' equity $ 261,962 $ 388,014 ======= ======= See Accompanying Notes to Consolidated Financial Statements. QUALITY DINING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Twenty-Eight Weeks Ended May 11, May 12, 1997 1996 ------- ------- Cash flows from operating activities: Net income (loss) $(200,112) $ 2,775 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property and equipment 8,180 4,174 Amortization of other assets 4,647 1,658 Impairment of assets 185,000 - Store closing accrual 15,513 - Deferred income taxes (4,216) - Refundable income taxes (2,671) - Gain on sale of property and equipment - (3) Changes in assets and liabilities, net of consolidation of controlled affiliate: Net increase in current assets (2,225) (2,759) Net increase (decrease) in current liabilities (2,058) 1,916 Other (19) 36 Net cash provided by ------- ------- operating activities 2,039 7,797 ------- ------- Cash flows from investing activities: Acquisition of business, net of cash acquired - (74,764) Increase in notes receivable (23,927) - Proceeds from sale of property and equipment - 3 Purchase of property and equipment (28,441) (14,636) Payment of other assets (2,949) (1,812) ------- ------- Net cash (used in) investing activities (55,317) (91,209) ------- ------- Cash flows from financing activities: Proceeds from exercise of stock options 1 55 Borrowings of long-term debt 55,000 81,491 Repayment of capitalized lease and non-competition obligations (106) (114) Payment of redeemable preferred stock subscription payable - (250) Other - (6) ------- ------- Net cash provided by financing activities 54,895 81,176 ------- ------- Net increase (decrease) in cash and cash equivalents 1,617 (2,236) Cash and cash equivalents, beginning of period 444 5,639 ------- ------- Cash and cash equivalents, end of period $ 2,061 $ 3,403 ======= ======= See Accompanying Notes to Consolidated Financial Statements. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 11, 1997 (Unaudited) Note 1: Description of Business. Quality Dining, Inc. and its subsidiaries (the "Company") develop and operate both quick service and full service restaurants throughout the United States. The Company owns, operates and franchises Bruegger's Bagel Bakeries. As of May 11, 1997, there were 489 retail bagel bakeries, of which 310 were operated by independent franchisees, 63 were operated by a controlled affiliate (Bagel Acquisition Corporation) and 116 were Company-owned and operated. As of May 11, 1997 the Company owned and operated 41 Grady's American Grill restaurants, five Spageddies Italian Kitchen restaurants and three Papa Vino's Italian Kitchen restaurants. The Company also operated, as a franchisee, 66 Burger King restaurants and 27 Chili's Grill & Bar restaurants. Note 2: Basis of Presentation. The accompanying condensed 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 balance sheet (see note 8). All significant intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statement reporting purposes. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the twelve- week period and the twenty-eight week period ended May 11, 1997 are not necessarily indicative of the results that may be expected for the 52-week year ending October 26, 1997. These financial statements should be read in conjunction with the Company's audited financial statements for the fiscal year ended October 27, 1996 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 3: Impairment of Long-Lived Assets 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. The Company has recorded a non-cash impairment charge of $185.0 million and a store closing charge of $15.5 million 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. The Company has 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. Actual results, however, could vary significantly from the Company's current estimates. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 11, 1997 (Unaudited) The Company also recorded a store closing charge for 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. As of June 25, 1997, the Company has closed a total of 22 Bruegger's units in six markets. Note 4: Restructuring and Integration Costs. In connection with the Company's acquisition of Bruegger's Corporation on June 7, 1996, the Company recorded a special pre-tax charge of $8.0 million during the third quarter of fiscal 1996 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 $6.0 million 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 May 11, 1997, substantially all costs related to these activities had been incurred (including $9.1 million incurred during the first twenty-eight weeks of fiscal 1997), of which $11.8 million were cash payments and $2.2 million were non-cash charges, primarily for the write-down of assets. In conjunction with the acquisitions of the Grady's American Grill restaurants on December 21, 1995 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 $1.9 million during the sixteen-week period ended February 18, 1996. The charge reflected the estimated costs for integration of computer systems, employee transition costs, recruitment and relocation costs, and legal and professional fees. As of the end of fiscal 1996, substantially all costs related to these activities had been incurred. Note 5: Commitments. As of May 11, 1997, the Company had commitments aggregating approximately $2.0 million for the construction of new restaurants. Note 6: Long-Term Debt. On January 22, 1997, the Company amended its revolving credit agreement with Texas Commerce Bank, as agent for a group of seven banks, providing for borrowings of up to $150 million with interest payable monthly at the adjusted LIBOR rate plus a contractual spread. The revolving credit agreement expires on April 26, 1999 and is unsecured. As of May 11, 1997, there was $133.6 million outstanding under this revolving credit facility. The revolving credit agreement contains, among other provisions, certain restrictive covenants including maintenance of certain prescribed debt and fixed charge coverage ratios, minimum levels of tangible net worth, as defined, limitations on the incurrence of additional indebtedness and annual limitations on the payment of dividends (other than stock dividends) on, or the purchase or redemption of, any shares of the Company's capital stock in aggregate amounts exceeding 40% of the Company's net income for the immediately preceding fiscal year. At the conclusion of the second quarter of fiscal 1997, the Company received a waiver from the bank group for non-compliance of the following QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued May 11, 1997 (Unaudited) financial covenants contained in the revolving credit agreement: minimum tangible net worth, ratio of funded debt to total capitalization, fixed charge coverage ratio and ratio of funded debt to consolidated cash flow. In addition, the bank group waived non-compliance with two non-financial covenants. In order to avoid future non-compliance with the covenants contained in the agreement, the Company will seek an amendment to the revolving credit agreement to revise certain covenants and terms and conditions. There can be no assurance that the Company will be able to amend the existing agreement under terms acceptable to it and the bank group. Note 7: Contingencies. On November 10, 1994, the Company acquired all of the outstanding stock of Grayling Corporation, Grayling Management Corporation, 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, 1994, 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 is obligated to continue to defend the lawsuit and indemnify the Company and Grayling Corporation against any loss or damages resulting from the lawsuit. Management does not expect that the lawsuit will have a material adverse effect on the Company's financial position or results of operations. In making such assessment, management considered the financial ability of Steele to defend the lawsuit and indemnify the Company against any loss or damages resulting from the lawsuit. BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation, and Timothy Johnson, Gregory LeMond, Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest") commenced an action on January 30, 1997 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 is secured by certain assets of the plaintiffs and personal guarantees of Mssrs. LeMond and Snow. The loan provides for monthly interest payments commencing April 11, 1997 at the rate of nine (9%) percent per annum and matures 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. BruWest has ceased payment of royalties as required under its Franchise agreements and Bruegger's Franchise Corporation has issued a written notice of default to BruWest. 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. QUALITY DINING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Concluded May 11, 1997 (Unaudited) Note 8: Related Party Transactions During the twenty-eight weeks ended May 11, 1997, the Company loaned $28.1 million to a related company ("Bagel Acquisition Corporation") 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 and for working capital purposes. Bagel Acquisition Corporation was formed for the sole purpose of facilitating the acquisition of bakeries and markets on behalf of the Company for inclusion in the Company's proposed Franchise Operating Partner Program. The Company had loaned Bagel Acquisition Corporation an aggregate of $38.0 million as of May 11, 1997. The $38.0 million promissory note bears interest at 11% and is collateralized by substantially all assets of Bagel Acquisition Corporation. On May 10, 1997, the Company's Board of Directors decided to divest the Bruegger's bagel-related businesses and therefore has canceled the Franchise Operating Partner Program. In connection with this decision, the Company has consolidated the assets and liabilities of Bagel Acquisition Corporation into its consolidated balance sheet as of May 11, 1997. The note receivable from Bagel Acquisition Corporation has been eliminated as part of the consolidation. Bagel Acquisition Corporation was consolidated into the Company's consolidated balance sheet as of May 11, 1997 and therefore its results of operations have not been included in the Company's consolidated financial results for the twenty-eight weeks ending May 11, 1997. Note 9: Franchise Operating Partner Program During the second quarter of fiscal 1997 the Company recorded a $2.1 million charge for expenses relating 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 has been canceled due to the Company's decision to divest Bruegger's Corporation. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company has a 52/53-week fiscal year ending on the last Sunday in October of each year. The first quarter of the Company's fiscal year consists of 16 weeks with all subsequent quarters being 12 weeks in duration. The current fiscal year ends October 26, 1997. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages which certain items of revenue and expense bear to total revenues, except where otherwise noted. Twelve Weeks Ended Twenty-Eight Weeks Ended May 11, May 12, May 11, May 12, 1997 1996 1997 1996 ------ ------ ------ ------ Revenues: Restaurant sales 95.2% 100.0% 95.3% 100.0% Franchise related revenue 4.8 - 4.7 - ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Operating expenses: Restaurant operating expenses (as % of restaurant sales) Food and beverage 30.7 31.4 30.8 31.4 Payroll and benefits 30.5 27.7 30.2 28.1 Depreciation and amortization 5.8 4.2 5.9 4.4 Other operating expenses 28.3 22.8 25.4 22.4 ----- ----- ----- ----- Total restaurant operating expenses 95.3 86.1 92.3 86.3 General and administrative 13.6 4.5 9.8 4.7 Amortization of intangibles 1.5 .5 1.6 .5 Restructuring and integration costs - - - 1.8 Impairment of assets 260.2 - 117.4 - Store closing costs 21.8 - 9.8 - Franchise operating partner expense 2.9 - 1.3 - ----- ----- ----- ----- Total operating expenses 390.9 91.1 227.9 93.3 ----- ----- ----- ----- Operating income (loss) (290.9) 8.9 (127.9) 6.7 ----- ----- ----- ----- Other income (expense): Interest expense (3.1) (3.1) (2.9) (2.8) Interest income .1 .1 .1 .1 Other income (expense), net - .1 .1 - ----- ----- ----- ----- Total other expense, net (3.0) (2.9) (2.7) (2.7) ----- ----- ----- ----- Income (loss) before income taxes (credit) (293.9) 6.0 (130.6) 4.0 Income taxes (credit) (10.1) 2.2 (3.6) 1.5 ----- ----- ----- ----- Net income (loss) (283.8)% 3.8% (127.0)% 2.5% ===== ===== ===== ===== Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Restaurant sales for the second quarter of fiscal 1997 were $67.7 million, an increase of 22.2% over restaurant sales of $55.4 million for the comparable period in fiscal 1996. The increase was primarily attributable to the acquisition of Bruegger's Corporation and sales generated by other Company restaurants operating in the second quarter of fiscal 1997 that were not operating during the second quarter of fiscal 1996. During the second quarter of fiscal 1997 the Company opened eight Bruegger's units, one Grady's American Grill restaurant, one Papa Vino's Italian Kitchen restaurant, one Burger King restaurant and three Chili's Grill & Bar restaurants. Also during the second quarter the Company closed two Grady's American Grill restaurants in conjunction with an agreement to sell these units. The Company operated 258 restaurants at the end of the second quarter of fiscal 1997 compared to 150 at the end of the second quarter of fiscal 1996. Sales from new restaurants and the addition of Bruegger's Corporation were partially offset by a $3.8 million decrease in sales at the Company's Grady's American Grill restaurants. Total revenues for the Company were $71.1 million for the second quarter of fiscal 1997, an increase of 28.3% over $55.4 million for the comparable period in fiscal 1996. Total revenues for the Company includes restaurant sales and franchise-related revenues from Bruegger's Corporation. Franchise-related revenues include royalties on franchised restaurant sales, franchise and development fees, interest income and other miscellaneous fees from franchised operations. Restaurant sales for the first twenty-eight weeks of fiscal 1997 were $150.1 million, an increase of 37.7% over restaurant sales of $109.0 million for the comparable period in fiscal 1996. The increase was primarily attributable to the acquisitions of Grady's American Grill restaurants and Bruegger's Corporation and sales generated by other Company restaurants operating in the first twenty-eight weeks of fiscal 1997 that were not operating during the same period of fiscal 1996. For the twenty-eight weeks ending May 11, 1997, the Company's Grady's American Grill and Bruegger's Bagel Bakery restaurants contributed $29.6 million in increased sales, or 72.1% of the total sales increase of $41.1 million. Total revenues for the Company were $157.6 million for the first 28 weeks of fiscal 1997, an increase of 44.6% over $109.0 million for the comparable period in fiscal 1996. As a percentage of restaurant sales, total restaurant operating expenses increased to 95.3% for the second quarter of fiscal 1997 from 86.1% in the second quarter of fiscal 1996. Contributing to this increase were higher payroll and benefits expense, higher depreciation and amortization expense and higher other operating expenses. These increases are primarily due to the following three factors. First, sales at the Company's Bruegger's Bagel Bakery and Grady's American Grill units have been lower than expected, producing higher costs as a percentage of sales than at the Company's other concepts. Second, payroll expenses increased as a percentage of sales 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 as well as higher payroll levels at the Company's Grady's American Grill and Bruegger's units. Third, other operating expenses increased as a percentage of sales due to increased advertising and promotional expenses, including increased local store marketing at the Company's Bruegger's Bagel Bakery, Grady's American Grill, Chili's Grill & Bar and Burger King restaurants. In addition, pre-opening expenses as a percentage of sales were substantially higher due to significant new unit openings. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) As a percentage of restaurant sales, total restaurant operating expenses increased to 92.3% in the first twenty-eight weeks of fiscal 1997 from 86.3% in the same period of fiscal 1996. Contributing to this increase were higher payroll and benefits expense, higher depreciation and amortization expense and higher other operating expenses as discussed above. General and administrative expenses, as a percentage of total revenues, were 13.6% in the second quarter of fiscal 1997 versus 4.5% in the comparable period in fiscal 1996. The increase was primarily due to costs associated with the development of a regional and corporate infrastructure designed to support the now terminated Franchise Operating Partner Program and the anticipated aggressive development of the Bruegger's brand. In connection with the decision to discontinue Bruegger's development and divest the Company's bagel-related businesses, a staff reduction plan was implemented during the third quarter of fiscal 1997. A significant number of positions were eliminated by this action. The Company does not expect to make additional reductions prior to the divestiture of the bagel-related businesses, but does anticipate significant further reductions following the intended divestiture. During the second quarter of fiscal 1997, the Company recorded a $15.5 million 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 Bruegger's bagel-related businesses. The charge includes amounts for terminating leases, write-offs of fixed assets and pre-opening costs, restaurant management severance costs and other store closing costs. As of June 25, 1997, the Company has closed a total of 22 Bruegger's restaurants in six markets. During the second quarter of fiscal 1997, the Company recorded a $2.1 million 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 has been canceled due to the Company's decision to divest Bruegger's Corporation. Amortization of intangibles, as a percentage of total revenues, increased to 1.5% for the second quarter of fiscal 1997 compared to .5% for the same period in fiscal 1996. The increase for the quarter was primarily due to the amortization of intangible assets relating to the acquisition of Bruegger's Corporation. Amortization of intangibles, as a percentage of total revenues, increased to 1.6% for the first twenty-eight weeks of fiscal 1997 compared to .5% for the same period in fiscal 1996. The increase was primarily due to the amortization of intangible assets relating to the acquisitions of Bruegger's Corporation and Grady's American Grill. The Company will record less amortization of intangibles in the future due to elimination of Bruegger's- related goodwill in connection with the Bruegger's asset impairment charge taken during the second quarter of fiscal 1997. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company recorded a non-cash impairment charge of $185.0 million as a result of the decision to divest its bagel-related businesses. The non-cash impairment charge represents a reduction of the carrying amounts of bagel-related assets to their estimated fair value. The impairment charge includes non-cash charges for the write-off of goodwill and the write-down of notes receivable and property and equipment. The Company has received non-binding offers to purchase its bagel-related assets and used these offers, less estimated costs to sell, to calculate the current fair value of the bagel-related assets. Actual results, however, could vary significantly from the Company's current estimates. During the first quarter of fiscal 1996, the Company recorded a special pre- tax charge of $1.9 million for restructuring and integration costs related to the acquisitions of Grady's American Grill restaurants and Spageddies Italian Kitchen. Total other expenses, as a percentage of total revenues, increased to 3.0% for the second quarter of fiscal 1997 from 2.9% during the comparable period in fiscal 1996. Total other expenses, as a percentage of total revenues, remained consistent at 2.7% for the first twenty-eight weeks of fiscal 1997 and fiscal 1996. Total other expenses remained consistent as a percent of sales for these periods due to increases in interest expense being offset by similar increases in revenue. The effective income tax rates for the twelve and twenty-eight weeks ended May 11, 1997 were 3.5% and 2.8%, respectively, compared to 36.5% for the twelve and twenty-eight weeks ended May 12, 1996. The low income tax benefit rate for the fiscal 1997 period is a result of a significant portion of the $185.0 million non-cash charge for asset impairment being non-deductible for tax purposes. A benefit for income taxes was recognized for the amount of the charge giving rise to a net operating loss carryback and the amount of the deferred income tax assets which can be justified by taxes paid in prior years. A valuation allowance was established for the remaining deferred tax assets. For the second quarter of fiscal 1997, the Company reported a net loss of $201.7 million compared to net income of $2.1 million for the second quarter of fiscal 1996. The net loss for the quarter ended May 11, 1997 was primarily due to the $185.0 million non-cash asset impairment charge relating to the decision to divest the Bruegger's bagel-related businesses. For the first twenty-eight weeks of fiscal 1997, the Company reported a net loss of $200.1 million compared to net income of $2.8 million for the same period in fiscal 1996. The net loss for the twenty-eight weeks ended May 11, 1997 was primarily due to the $185.0 million non-cash asset impairment charge relating to the Company's decision to divest the Bruegger's bagel-related businesses. In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") was issued by the Financial Accounting Standards Board. The Company is required to initially adopt this pronouncement during its fiscal 1998 first quarter ending February 15, 1998. SFAS No. 128 will require the Company to make a dual presentation of basic and fully diluted earnings per share on the face of its consolidated statements of operations. The Company does not presently anticipate that SFAS No. 128 will have a significant impact on the Company's historically reported earnings per share. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $2.1 million at May 11, 1997, an increase of $1.6 million from the $0.4 million at October 27, 1996. Principal sources of funds consisted of: (i) those provided by operations ($2.0 million) and (ii) net proceeds from the Company's revolving credit facility ($55.0 million). The primary uses of funds consisted of: (i) expenditures associated with new restaurant development ($28.4 million), (ii) net increase in notes receivable ($23.9 million) and (iii) franchise, liquor license and preopening costs ($2.9 million). The Company's primary cash requirements for the remainder of fiscal 1997 will be to finance capital expenditures in connection with the opening of new restaurants, to remodel existing restaurants and to provide for general working capital purposes. The Company's growth plans for the remainder of fiscal 1997 include one Bruegger's Bagel Bakery, which opened on June 10, 1997, and one Chili's Grill & Bar restaurant. The Company expects to incur capital expenditures of two to four million dollars for the remaining twenty-four weeks of fiscal 1997. On January 22, 1997, the Company amended its existing revolving credit facility with Texas Commerce Bank, as agent for a group of seven banks. The facility, as amended, provides for borrowings up to a maximum of $150 million, with interest payable at the adjusted LIBOR rate plus a contractual spread. The loan agreement expires on April 26, 1999 and is unsecured. As of May 11, 1997, there was $133.6 million outstanding under this revolving credit facility. The revolving credit agreement contains, among other provisions, certain restrictive covenants including maintenance of certain prescribed debt and fixed charge coverage ratios, minimum levels of tangible net worth, as defined, limitations on the incurrence of additional indebtedness and annual limitations on the payment of dividends (other than stock dividends) on, or the purchase or redemption of, any shares of the Company's capital stock in aggregate amounts exceeding 40% of the Company's net income for the immediately preceding fiscal year. At the conclusion of the second quarter of fiscal 1997, the Company received a waiver from the bank group for non-compliance of the following financial covenants contained in the revolving credit agreement: minimum tangible net worth, ratio of funded debt to total capitalization, fixed charge coverage ratio and ratio of funded debt to consolidated cash flow. In addition, the bank group waived non-compliance with two non-financial covenants. In order to avoid future non-compliance with the covenants contained in the agreement, the Company will seek an amendment to the revolving credit agreement to revise certain covenants and terms and conditions. The Company also intends to request an increase in borrowing capacity under the revolving credit agreement as part of the amendment. If the Company does not receive additional borrowing capacity, it may not have sufficient funds for its planned expansion and other internal operating cash requirements through the end of fiscal 1997. In such event, the Company would delay, to the extent feasible, any capital expenditures and would take other appropriate actions to raise capital or reduce cash outlays. There can be no assurance that the Company will be able to amend the existing agreement under terms acceptable to it and the bank group. Except for the historical information contained herein, the matters discussed in this press release are forward looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: the timing of and the amount realized from the divestiture of the bagel-related businesses, the availability and cost of the necessary capital to enable the Company to meet its obligations and to develop additional units, the availability and cost of suitable locations for new restaurants, the hiring, training and retention of skilled management and other restaurant personnel, the ability to obtain the necessary government approvals and third party consents, changes in governmental regulations, including an increase in the minimum wage, and other risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission. PART II - OTHER INFORMATION Item 1. Legal Proceedings Note 7 to the unaudited consolidated financial statements of the Company included in Part I of this report is incorporated herein by reference. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On March 26, 1997, the Company held its annual meeting of shareholders. At the meeting, the shareholders elected the following directors by the vote indicated to serve until the year 2000 annual meeting of shareholders. Broker For Withheld Non-votes Arthur J. Decio 15,543,272 60,577 3,809 Stephen A. Finn 11,020,725 4,583,124 3,809 Daniel B. Fitzpatrick 11,218,270 4,385,579 3,809 In addition, the following directors continue in office until the annual meeting of shareholders in the year indicated: Term Expires James K. Fitzpatrick 1998 Steven M. Lewis 1998 Christopher J. Murphy, III 1999 William R. Schonsheck 1999 Ezra H. Friedlander 1998 Nordahl L. Brue 1999 Michael J. Dressell 1999 David T. Austin 1998 William W. Moreton 2000 Coopers & Lybrand, L.L.P. was approved as auditors for the Company for 1997 by the following vote: 15,563,532 For; 36,111 Against; 8,015 Abstentions and Broker non-votes The adoption of the Company's 1997 Stock Option and Incentive Plan was approved by the following vote: 8,752,835 For; 345,765 Against; 4,331,154 Abstentions and 2,177,904 Broker non-votes Item 5. Other Information On March 27, 1997, the Company amended its By-Laws to increase the size of the Board of Directors to 12 members from 11. The Company also elected William W. Moreton to the Board of Directors upon his employment as Executive Vice President, Treasurer and Chief Financial Officer. Mr. Moreton's term expires at the 2000 annual meeting of shareholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K None Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Quality Dining, Inc. (Registrant) Date: June 25, 1997 By: /s/ William W. Moreton Executive Vice President, Treasurer and Chief Financial Officer INDEX TO EXHIBITS Exhibit No. Description 10-AM Second amendment to revolving credit loan agreement, Promissory note and security agreement 27 Financial Data Schedule Exhibit 10-AM SECOND AMENDMENT TO REVOLVING CREDIT LOAN AGREEMENT, PROMISSORY NOTE AND SECURITY AGREEMENT THIS SECOND AMENDMENT to Revolving Credit Loan Agreement, Promissory Note and Security Agreement ("Amendment") is made and entered into as of this 19th day of February, 1997 by and between BAGEL ACQUISITION CORPORATION, an Indiana Corporation ("Borrower") and QUALITY DINING, INC., an Indiana Corporation ("Lender."). R E C I T A L S A. Borrower and Lender entered into a certain Revolving Credit Loan Agreement, dated August 12, 1996 ("Loan Agreement"). B. Borrower signed, as maker, a certain Promissory Note related to the Loan Agreement, dated August 12, 1996, in the face amount of Eleven Million ($11,000,000) Dollars and in favor of Lender as named payee ("Note"). C. Borrower and Lender entered into a certain Security Agreement, dated August 12, 1996 securing the repayment of the Note ("Security Agreement"). D. Borrower and Lender entered into a certain First Amendment to Revolving Credit Loan Agreement, Promissory Note and Security Agreement, dated as of December 2, 1996 amending the Loan Agreement, Note and Security Agreement. E. Borrower and Lender wish to amend, once again, the Loan Agreement, Note and Security Agreement. NOW, THEREFORE, the parties hereto, each in consideration of the other's promises and agreements hereinafter contained and for other good and valuable consideration, agree that the Recitals above set forth are a part of this Amendment for all purposes and further agree as follows: 1. The Loan Agreement is hereby amended, again, by deleting the words and figures "Thirty Million Dollars ($30,000,000)" from the second line of Recital A and replacing them with "Forty Million ($40,000,000) Dollars." 2. The Note is hereby amended, again, by: (a) Deleting the figures "$30,000,000" from the third line and replacing them with "$40,000,000", and (b) Deleting the words and figures "Thirty Million Dollars ($30,000,000)" from the eighth and ninth lines and replacing them with "Forty Million Dollars ($40,000,000);" and (c) Deleting the date "April 15, 1997" from the tenth line and replacing it with "June 15, 1997." 3. The Security Agreement is hereby amended, again, by deleting the words and figures "Thirty Million Dollars and no cents ($30,000,000.00)" from the eleventh line and replacing them with "Forty Million Dollars and no cents ($40,000,000)." 4. All of the terms, provisions and conditions of the Loan Agreement, Note and Security Agreement, as amended heretofore, shall remain in full force and effect to the extent they are not amended hereby; and the Loan Agreement, Note and Security Agreement, as amended heretofore and as amended hereby, shall continue in full force and effect in all respects. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. "BORROWER" Bagel Acquisition Corporation /s/ Daniel B. Fitzpatrick By: Daniel B. Fitzpatrick, Its: President "LENDER" Quality Dining, Inc. /s/ John C. Firth By: John C. Firth, Its: Senior Vice President EX-27 2
5 1,000 6-MOS OCT-26-1997 MAY-11-1997 2,061 0 8,170 0 3,852 27,229 255,520 60,789 261,962 47,555 140,284 0 0 28 68,984 261,962 150,138 157,617 46,178 138,541 220,636 0 4,535 (205,855) (5,743) (200,112) 0 0 0 (200,112) (11.83) (11.83)
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