<PAGE>
Sequential Page 1 of 15
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 June 30, 1994, 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 1-9364
FLAGSTAR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3027522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
203 East Main Street
Spartanburg, South Carolina 29319-9966
(Address of principal executive offices)
(Zip Code)
(803) 597-8700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
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 [ ]
As of August 15, 1994, 440 shares of the registrant's Common Stock, par value
$0.01 per share, were outstanding, all of which are owned by registrant's
parent, Flagstar Companies, Inc.
1
<PAGE>
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Flagstar Corporation
Statements of Consolidated Operations
For the Three Months and Six Months Ended June 30, 1994 and 1993
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues..................... $ 679,563 $658,201 $1,305,836 $1,250,984
Operating Expenses:
Product costs........................ 234,770 227,622 452,377 425,785
Payroll & benefits................... 241,419 229,267 468,737 445,586
Depreciation & amortization expense.. 31,765 42,064 63,478 82,708
Utilities expense.................... 24,003 23,032 48,441 46,713
Other................................ 102,301 98,463 188,672 185,287
634,258 620,448 1,221,705 1,186,079
Operating Income....................... 45,305 37,753 84,131 64,905
Other Charges:
Interest and debt expense............ 58,433 56,991 115,620 112,650
Other non-operating expenses - net... 441 928 697 605
58,874 57,919 116,317 113,255
Loss From Continuing Operations
Before Income Taxes.................. (13,569) (20,166) (32,186) (48,350)
Provision For(Benefit From) Income Taxes 2,857 (12,065) 446 (14,301)
Loss From Continuing Operations........ (16,426) (8,101) (32,632) (34,049)
Gain on Sale of Discontinued Operation,
Net of Income Taxes of $7,056........ 383,944 --- 383,944 ---
Loss From Discontinued
Operations........................... (6,137) (4,278) (19,087) (17,032)
Provision For (Benefit From) Income
Taxes On Discontinued Operations..... 3,302 3,018 771 (2,067)
Income(Loss) From Discontinued
Operations, Net...................... 374,505 (7,296) 364,086 (14,965)
Extraordinary Item, Net of Income Tax
Benefit of $1,111 and $51 in 1994 and
1993, respectively................... (10,822) --- (10,822) (81)
Cumulative Effect of Change in Accounting
Principle, Net of Income Tax Benefit
of $4,659............................ --- --- --- (7,441)
Net Income (Loss)...................... $ 347,257 $(15,397) $ 320,632 $ (56,536)
</TABLE>
2
<PAGE>
FORM 10-Q
Flagstar Corporation
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
(In thousands)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............... $ 148,573 $ 24,174
Receivables, less allowance for doubtful
accounts of:
1994 - $4,032; 1993 - $4,790......... 41,696 32,940
Merchandise and supply inventories....... 64,763 62,633
Net assets held for sale................. 34,053 103,208
Other.................................... 3,000 2,495
292,085 225,450
Property:
Property owned (at cost):
Land................................... 268,713 265,345
Buildings and improvements............. 764,313 749,001
Other property and equipment........... 422,099 413,212
Total property owned...................... 1,455,125 1,427,558
Less accumulated depreciation............. 432,613 387,439
Property owned - net...................... 1,022,512 1,040,119
Buildings and improvements, vehicles, and
other equipment held under capital
leases.................................. 186,132 177,819
Less accumulated amortization............. 60,442 51,095
Property held under capital leases - net.. 125,690 126,724
1,148,202 1,166,843
Other Assets:
Other intangible assets - net............. 23,687 25,567
Deferred financing costs.................. 74,944 91,086
Other..................................... 43,940 36,486
142,571 153,139
Total Assets $1,582,858 $1,545,432
</TABLE>
3
<PAGE>
FORM 10-Q
Flagstar Corporation
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
(In thousands)
<S> <C> <C>
Liabilities
Current Liabilities:
Current maturities of long-term debt................ $ 30,412 $ 34,213
Accounts payable.................................... 93,220 93,435
Accrued salaries and vacations...................... 53,003 47,338
Accrued insurance................................... 54,312 49,585
Accrued taxes....................................... 27,054 21,853
Accrued interest ................................... 42,019 41,187
Accrued restructuring costs......................... 8,142 19,404
Other............................................... 71,331 88,217
379,493 395,232
Long-Term Liabilities:
Debt, less current maturities....................... 2,074,620 2,341,164
Deferred income taxes............................... 25,806 23,861
Liability for self-insured claims................... 64,538 60,720
Other non-current liabilities and deferred credits.. 133,808 140,495
2,298,772 2,566,240
Note Payable to FCI.................................... 150,000 150,000
Total Liabilities 2,828,265 3,111,472
Stockholders' Deficit (1,245,407) (1,566,040)
Total Liabilities & Stockholders' Deficit $1,582,858 $ 1,545,432
</TABLE>
4
<PAGE>
FORM 10-Q
Flagstar Corporation
Statements of Consolidated Cash Flows
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1993
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income(loss) $ 320,632 $ (56,536)
Adjustments to reconcile net income(loss)
to cash flows from operating
activities:
Depreciation and amortization
of property 60,114 62,524
Amortization of goodwill --- 13,706
Amortization of other
intangible assets 3,364 6,478
Amortization of deferred
financing costs 3,448 5,142
Deferred income tax benefit (228) (46,989)
Extraordinary items, net 10,822 81
Gain on sale of discontinued operation, net (383,944) ---
Equity loss from discontinued operations, net 19,858 14,965
Cumulative effect of change
in accounting
principle, net --- 7,441
Other 6,702 5,196
Decrease (increase) in assets:
Receivables (6,915) (1,444)
Inventories (2,401) (7,088)
Other current assets (505) (2,175)
Other assets (8,255) (2,530)
Increase (decrease) in
liabilities:
Accounts payable (215) 21,472
Accrued salary and vacations 5,665 9,261
Accrued taxes 4,430 32,760
Other accrued liabilities (35,642) (21,837)
Other non-current liabilities
and deferred credits (9,330) (19,819)
Total adjustments (333,032) 77,144
Net cash flows from (used in) operating
activities (12,400) 20,608
Cash Flows From (Used In) Investing Activities:
Purchases of property (45,024) (46,237)
Proceeds from disposition of
property 8,956 13,732
Proceeds from sale of discontinued operation 450,000 ---
Receipts from discontinued operations 1,904 496
Other long-term assets, net 818 (2,056)
Net cash flows from (used in)
investing activities 416,654 (34,065)
</TABLE>
5
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FORM 10-Q
Flagstar Corporation
Statements of Consolidated Cash Flows
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1993
(In thousands)
<S> <C> <C>
Cash Flows From (Used in) Financing Activities:
Net short-term borrowings(repayments)
under credit agreement $ (93,000) $ 39,100
Long-term borrowings --- 10,785
Deferred financing costs (8) (514)
Long-term debt payments (186,845) (25,966)
Other (2) 364
Net cash flows provided by (used in)
financing activities (279,855) 23,769
Increase in cash and
cash equivalents 124,399 10,312
Cash and Cash Equivalents at:
Beginning of period 24,174 20,661
End of period $ 148,573 $ 30,973
Supplemental Cash Flow Information:
Income taxes paid $ 2,307 $ 4,124
Interest paid $ 133,413 $ 115,734
Non-cash financing activities:
Capital lease obligations $ 10,194 $ 26,648
</TABLE>
6
FORM 10-Q
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
(Unaudited)
Note 1. Introduction.
Flagstar Corporation ("Flagstar" or the "Company") is a wholly-owned
subsidiary of Flagstar Companies, Inc. ("FCI"). Flagstar, through its wholly-
owned subsidiaries, Denny's Holdings, Inc. and Spartan Holdings, Inc. (and
their respective subsidiaries), operates four restaurant chains.
Note 2. Interim Period Presentation.
The Statements of Consolidated Operations of Flagstar and its subsidiaries
for the three months and six months ended June 30, 1994 and 1993,
respectively, include all adjustments management believes are necessary for
a fair presentation of the results of operations for such interim periods.
All such adjustments are of a normal and recurring nature.
Note 3. Per Share Amounts
As described in Note 1, the Company is a wholly-owned subsidiary of FCI.
Accordingly, per share data is not meaningful and has been omitted for all
periods.
Note 4. Divestiture of Canteen Operations
On April 27, 1994, the Company announced the signing of a definitive
agreement to sell the food and vending business and its intent to dispose of
the remaining concession and recreation services businesses of its
subsidiary, Canteen Holdings, Inc. The Consolidated Balance Sheets and
Statements of Consolidated Operations and Cash Flows for 1993 periods have
been reclassified to reflect such businesses as discontinued operations. The
Company sold its food and vending business for $450.0 million on June 17,
1994, recognizing a net gain of approximately $383.9 million in the second
quarter of 1994. The Company is currently seeking buyers for its concession
and recreation services businesses. Dispositions of such businesses are
expected to occur within 12 months of the announcement date and to result in
gains in the periods of disposal.
The Company has allocated to the discontinued segment a pro-rata portion
of its interest expense of $12.3 million and $11.0 million for the quarters
ended June 30, 1994 and 1993, respectively, and $24.6 million and $22.1
million for the six months ended June 30, 1994 and 1993, respectively.
Note 5. Settlement of Class Actions
On May 24, 1994, the Company announced the settlement of two public
accommodations class actions, one filed against the Company and its Denny's
subsidiary on March 24, 1993 in the U. S. District Court for the Northern
District of California, and the second filed against it and Denny's on May
24, 1993 in the U. S. District Court for the District of Maryland. Each such
action had alleged racially discriminatory practices and sought unspecified
actual, compensatory and punitive damages. Monetary settlements in these two
actions totalled $46 million with an additional $8.7 million paid in
attorneys' fees to plaintiffs' counsel. The settlement cost had no effect on
the Company's 1994 operating results as these costs were charged to
previously established reserves. The Company simultaneously announced that
it had entered into extended and expanded consent decrees with the U. S.
Department of Justice and the private plaintiffs to prevent future
discrimination. Terms of such consent decrees include retention of an
independent civil rights monitor and a training and testing program for
Denny's employees.
7
<PAGE>
FORM 10-Q
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results of Operations
The following discussion is intended to highlight significant changes in
financial position as of June 30, 1994 and the results of operations for the
three months and six months ended June 30, 1994 as compared to the
corresponding 1993 periods.
The interim Consolidated Financial Statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto for the year ended December 31, 1993 and the related
Management's Discussion and Analysis of Financial Condition and Results of
Operations, both of which are contained in the Flagstar Corporation 1993
Annual Report on Form 10-K.
Results of Operations
Three Months Ended June 30, 1994 Compared to Three Months Ended June 30, 1993
Operating revenues from continuing operations for the second quarter of
1994 increased by approximately $21.4 million (3.2%) as compared with the
same period in 1993. Denny's revenues increased by $9.5 million (2.5%) due
to increased outside revenues of $13.0 million from its food distribution
operations offset in part by a reduction in restaurant revenues of $3.5
million. At June 30, 1994 as compared with June 30, 1993, Denny's had a 33-
unit decrease in the number of Company-owned units and a 77-unit increase in
the number of franchise-owned restaurants (resulting from a management
decision to expand Denny's franchise operations). Denny's average unit sales
were flat for the quarter as compared with the second quarter of 1993,
reflecting a 0.2% decrease in the average check, offset by a 0.2% increase in
customer traffic. The increase in customer traffic during the second quarter
of 1994 is the result of the introduction of the $1.99 Original Grand Slam
Breakfast promotion despite a prior year comparison with the All-You-Can-Eat
breakfast promotion which significantly increased customer traffic during the
comparative period of 1993. Hardee's experienced an increase in revenues for
the quarter of $3.7 million (2.1%) as compared to the prior year quarter
primarily due to a 39-unit increase in the number of restaurants. Hardee's
experienced a 5.0% decrease in average unit sales resulting from a 7.1%
decrease in customer traffic offset in part by a 2.2% increase in the average
check. The decline in customer traffic at Hardee's is attributable to an
emphasis on value promotions by competitors during the 1994 quarter.
Quincy's revenues increased by $1.0 million (1.4%) as compared with the
second quarter of 1993, despite a 3-unit decrease in the number of Quincy's
restaurants at June 30, 1994 as compared with June 30, 1993. Average unit
sales increased by 3.1% as a result of a 5.9% increase in the average check
offset in part by a 2.7% decrease in customer traffic. Revenues of El Pollo
Loco, which account for only 5.1% of total operating revenues from continuing
operations, increased by $7.2 million (26.1%) during the second quarter of
1994 over the same period in 1993 as a result of a 16-unit increase in
Company-owned restaurants and an increase in average unit sales of 12.8%.
The increase in average unit sales at El Pollo Loco was the result of an
increase in customer traffic of 14.4% offset in part by a decrease in the
average check of 1.4%. The number of franchised and international El Pollo
Loco restaurants decreased by 14-units at June 30, 1994 as compared with June
30, 1993.
8
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FORM 10-Q
The Company's operating expenses from continuing operations increased by
$13.8 million (2.2%) in the second quarter of 1994 as compared with the same
period of 1993. A significant portion ($9.5 million) of the increase in
operating expenses is attributable to Denny's. The increase in operating
expenses at Denny's is attributable primarily to increased revenues and is
comprised principally of increases in payroll and benefits expense of $8.2
million and product costs of $5.4 million which were partially offset by
reduced depreciation and amortization charges of $5.7 million related to the
year-end 1993 write-off of assets. Denny's operating expenses during the
quarter also reflect a gain of $0.4 million related to the sale of 6 Company-
owned restaurants. An increase in operating expenses of $4.0 million at
Hardee's is mainly attributable to increased revenues and consists of
increases in payroll and benefits expenses of $2.7 million, product costs of
$1.1 million, and utilities expense of $0.7 million. Such increases were
partially offset by reduced depreciation and amortization charges of $1.8
million related to the year-end 1993 write-off of assets. A decrease in
operating expenses of $4.1 million at Quincy's is primarily attributable to
a 3-unit decrease in the number of restaurants resulting in decreases in
product costs of $0.4 million, occupancy and maintenance expenses of $0.3
million, and a $2.2 million reduction in depreciation and amortization
charges related to the year-end 1993 write-off of assets. Corporate and
other expenses decreased by $0.6 million, primarily due to decreases in
payroll and benefits expense of $1.0 million as a result of a reduction in
work force as a part of the Company's plan of restructuring and a $0.5
million reduction in depreciation and amortization charges related to the
year-end 1993 write-off of assets.
Interest and debt expense increased by $1.4 million in the second quarter
of 1994 as compared to the same period of 1993, primarily due to an increase
in cash interest of $2.2 million. This increase is attributable to the
higher fixed interest rates that accrued during the 1994 quarter on the
$400.0 million of senior notes and senior subordinated debentures issued
during the third quarter of 1993, the proceeds of which were used to
refinance a portion of the Company's bank facility that during the second
quarter of 1993 accrued interest at lower variable rates. Such increases
were offset in part by lower effective interest rates resulting from interest
rate swaps during the 1994 quarter in comparison to the prior year quarter.
The increase in cash interest was also offset in part by a reduction in non-
cash interest expense of $0.8 million resulting primarily from reduced
amortization of deferred financing costs which resulted from the write-off of
unamortized deferred financing costs associated with the prepayment of a
portion of the Company's indebtedness under its bank facility in September
1993.
The Company's contract food and vending and recreation services
businesses, which are accounted for as discontinued operations, recorded
operating revenues of $351.4 million during the second quarter of 1994, an
increase of $6.5 million (1.9%) over the same period of 1993. This increase
in revenues includes a $3.1 million (1.2%) increase in the food and vending
segment of Canteen primarily due to revenues from acquisitions consummated
during 1993. Revenues from the concession and recreation services operations
increased by $3.4 million (4.2%) to $83.5 million during the second quarter
of 1994 as compared to the same period of 1993. Operating expenses for
Canteen's contract food and vending and recreation services businesses
increased by $6.8 million primarily due to increases in product costs of $2.7
million and payroll and benefits expense of $6.6 million, respectively.
During the second quarter of 1994, the Company recognized an extraordinary
loss totalling $11.9 million, net of income tax benefits of $1.1 million.
The extraordinary loss represents the charge-off of unamortized deferred
financing costs associated with the prepayment in June 1994 of senior bank
debt.
9
<PAGE>
FORM 10-Q
Six Months Ended June 30, 1994 Compared to Six Months Ended June 30, 1993
Operating revenues from continuing operations for the first six months of
1994 increased by approximately $54.9 million (4.4%) as compared with the
same period in 1993. Denny's revenues increased $27.4 million (3.8%) due to
increased outside revenues of $29.3 million from its food distribution
operations offset in part by a reduction of restaurant revenues of $1.9
million. At June 30, 1994 as compared with June 30, 1993, the Company had a
33-unit decrease in the number of Company owned units and a 77-unit increase
in the number of franchise-owned restaurants (resulting from a management
decision to expand Denny's franchise operations). Denny's average unit sales
were flat during the six month period as compared with the first six months
of 1993, reflecting a decrease in customer traffic of 3.2% offset by a 3.3%
increase in average check. Management believes that the negative trends in
customer traffic which Denny's experienced during the first quarter of 1994
began to reverse during the second quarter of 1994 as a result of the
company-wide $1.99 Original Grand Slam Breakfast promotion. Hardee's
experienced an increase in revenues of $13.5 million for the first six months
of 1994 as compared to the prior year period primarily due to a 39-unit
increase in the number of restaurants. Hardee's experienced a 3.0% decrease
in average unit sales resulting from a 5.1% decrease in customer traffic
mitigated in part by a 2.2% increase in the average check. The decline in
customer traffic at Hardee's is attributable to an emphasis on value
promotions by competitors during the six month period of 1994. Quincy's
revenues increased by $0.9 million (0.7%) as compared with the first six
months of 1993, primarily due to a 2.6% increase in average unit sales and
despite a 3-unit decrease in the number of units. The increase in average
unit sales resulted from a 5.8% increase in the average check offset in part
by a 3.0% decrease in customer traffic. Revenues at El Pollo Loco, which
account for only 5.1% of total operating revenues, increased by $13.0 million
(24.6%) during the first six months of 1994 over the same period in 1993
partially as a result of a 16-unit increase in the number of Company-owned
restaurants and an increase in average unit sales of 10.0%. The increase in
average unit sales at El Pollo Loco reflects a 10.7% increase in customer
traffic offset in part by a 0.6% decrease in the average check. The number of
franchised and international restaurants at El Pollo Loco decreased by 14-
units at June 30, 1994 as compared with June 30, 1993.
The Company's overall operating expenses increased by $35.6 million (3.0%)
in the first six months of 1994 as compared with the same period of 1993. A
significant portion of the increase ($22.7 million) is attributable to
Denny's. The increase in operating expenses at Denny's is attributable
primarily to increased revenues and is comprised principally of increases in
product costs of $22.3 million and in payroll and benefits expenses of $14.1
million. Such increases were partially offset by an $11.4 million reduction
in depreciation and amortization related to the year-end 1993 write-off of
assets. In addition, Denny's operating expenses for the first six months of
1994 reflect a gain of approximately $3.9 million related to the sale of 19
Company-owned restaurants. At Hardee's, an increase in operating expenses of
$11.5 million is mainly attributable to increased revenues and reflects
increases in payroll and benefits expenses of $6.6 million, product costs of
$4.8 million, and utilities expense of $1.4 million. Such increases were
partially offset by reduced depreciation and amortization charges of $3.6
million related to the year-end 1993 write-off of assets. Conversely, a
decrease in operating expenses of $7.4 million at Quincy's is principally
attributable to decreases in product cost of $1.0 million and reduced
depreciation and amortization charges of $4.4 million related to the year-end
1993 write-off of assets. Corporate and other expenses increased by a $0.3
million, and reflect reduced depreciation and amortization charges of $0.9
million related to the year-end 1993 write-off of assets.
10
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FORM 10-Q
Interest and debt expense increased by $3.0 million in the first six
months of 1994 as compared to the same period of 1993, primarily due to an
increase in cash interest of $4.1 million. This increase is attributable to
the higher fixed interest rates that accrued during the 1994 period on the
$400 million of senior notes and senior subordinated debentures issued during
the third quarter of 1993, the proceeds of which were used to refinance a
portion of the Company's bank facility that during the first six months of
1994 accrued interest at lower variable rates. Such increases were offset in
part by lower effective interest rates resulting from interest rate swaps
during the 1994 period in comparison to the prior year period. The increase
in cash interest was also offset in part by a reduction in non-cash interest
expense of $1.1 million resulting primarily from reduced amortization of
deferred financing costs. This reduction relates to the write-off of
unamortized deferred financing costs associated with the prepayment of a
portion of the Company's indebtedness under its bank facility in September
1993.
The Company's contract food and vending and recreation services
businesses, which are accounted for as discontinued operations, recorded
operating revenues of $665.4 million during the first six months of 1994, an
increase of $34.3 million (5.4%) over the same period of 1993. This increase
in revenues includes a $26.6 million (5.2%) increase in the food and vending
segment of Canteen primarily due to revenues from acquisitions consummated
during 1993. Revenues from the concession and recreation services operations
increased by $7.8 million (6.3%) to $131.0 million during the first six
months of 1994 as compared to the same period of 1993. Operating expenses
for Canteen's contract food and vending and recreation services businesses
increased by $33.4 million primarily due to increases in product costs of
$14.2 million, payroll and benefits expenses of $17.5 million, and
commissions and royalties expense of $5.4 million, respectively.
For the six months ended June 30, 1994, the Company recognized an
extraordinary loss totalling $11.9 million, net of income tax benefits of
$1.1 million. The extraordinary loss represents the charge-off of unamortized
deferred financing costs associated with the prepayment in June 1994 of
senior bank debt. The extraordinary loss reflected in the six month period
ended June 30, 1993 represents premiums paid, costs incurred, and the charge-
off of unamortized deferred financing costs on indebtedness retired during
the first quarter of 1993.
11
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FORM 10-Q
Liquidity And Capital Resources
At June 30, 1994 and December 31, 1993, the Company had working capital
deficits of $87.4 million and $169.8 million, respectively. The decrease in
the working capital deficit is attributable primarily to an increase in cash
and cash equivalents from the sale of the Company's food and vending
subsidiary and the liquidation of certain liabilities during the quarter. On
June 17, 1994, the Company sold its food and vending subsidiary for $450.0
million, the proceeds of which were used to pay off the $170.7 million
principal amount of the Company's term loan and an additional $126.5 million
of working capital advances which were outstanding under the Company's credit
facility. As a result, assets held for sale were reduced by $41.5 million to
reflect the sale of such subsidiary. The decrease in other accrued
liabilities reflects the payment of $48.4 million during the second quarter
of 1994 in settlement of claims of racial discrimination by Denny's, as
further discussed at Part II, Item I "Legal Proceedings". The decrease of
$11.3 million in the accrued liability for restructuring from December 31,
1993 to June 30, 1994 is primarily due to payments for severance and
relocation. The Company is able to operate with a substantial working
capital deficiency because (i) restaurant operations and most other food
service operations are conducted primarily on a cash (and cash equivalent)
basis with a low level of accounts receivable, (ii) rapid turnover allows a
limited investment in inventories and (iii) accounts payable for food,
beverages and supplies usually become due after the receipt of cash from the
related sales.
In the fourth quarter of 1993, the Company approved a restructuring plan
which included a restructuring of the restaurant field management and a
downsizing of the work force at the corporate office. Most of the corporate
office downsizing was accomplished near the end of the first quarter and the
changes in field management structures and personnel are in process. Also as
part of the restructuring plan, the Company identified approximately 240
restaurant units to be sold to franchisees, closed or converted to another
concept. At June 30, 1994, twenty-one units had been sold, converted to
another concept, or closed, with the majority of the remaining units expected
to be sold to franchisees.
12
<PAGE>
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 24, 1994, the Company announced the settlement of two
public accommodations class actions, one filed against the
Company and its Denny's subsidiary on March 24, 1993 in the
U. S. District Court for the Northern District of California,
and the second filed against it and Denny's on May 24, 1993 in
the U. S. District Court for the District of Maryland. Each
such action had alleged racially discriminatory practices and
sought unspecified actual, compensatory and punitive damages.
Monetary settlements in these two actions totalled $46 million
with an additional $8.7 million paid in attorneys' fees to
plaintiffs' counsel. The Company simultaneously announced
that it had entered into extended and expanded consent decrees
with the U. S. Department of Justice and the private
plaintiffs to prevent future discrimination. Terms of such
consent decrees include retention of an independent civil
rights monitor and a training and testing program for Denny's
employees.
On June 15, 1994, a derivative action was filed in the Alameda
County Superior Court for the State of California by Mr. Adam
Lazar, purporting to act on behalf of the Company, against the
Company's directors and certain of its officers alleging
breach of fiduciary duty and waste of corporate assets by the
defendants relating to alleged acts of mismanagement or the
alleged failure to act with due care, resulting in policies
and practices at Denny's that allegedly gave rise to the
public accommodations lawsuits referred to above. The action
seeks unspecified damages against the defendants on behalf of
the Company and its stockholders, including punitive damages,
and injunctive relief. There has been no substantive
discovery in this action to date.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
13
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FORM 10-Q
Item 4. Submission of Matters to a Vote of Security Holders.
As of June 7, 1994, Flagstar, by action of FCI as its sold shareholder,
re-elected its Board of Directors as previously reported to the
Commission.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Not applicable.
b. The registrant filed a report on Form 8-K dated April 28, 1994
providing certain information under Item 5 (Other Events) and Item
7 (Financial Statements and Exhibits) thereof relating to the
execution by Flagstar Corporation of a Stock Purchase Agreement
with Compass Group PLC, a public limited company incorporated in
England and Wales, for the sale of the Company's food and vending
operation. The filing also included, as an exhibit, the press
release of FCI dated April 27, 1994 which announced the event.
14
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FORM 10-Q
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.
FLAGSTAR CORPORATION
Date: August 15, 1994 By: /s/ Robert L. Wynn, III
Robert L. Wynn, III
Senior Vice President and
General Counsel
Date: August 15, 1994 By: /s/ A. Ray Biggs
A. Ray Biggs
Senior Vice President and
Chief Financial Officer
15
