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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-9364
FLAGSTAR CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3027522
(State or other jurisdiction (I.R.S. employer
of incorporation or identification no.)
organization)
203 EAST MAIN STREET 29319-9966
SPARTANBURG, SOUTH CAROLINA (Zip code)
(Address of principal
executive offices)
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Registrant's telephone number, including area code: (803) 597-8700.
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (x)
As of March 31, 1994, 440 shares of registrant's Common Stock, $.01 par
value per share, were outstanding, all of which are owned by registrant's
parent, Flagstar Companies, Inc.
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TABLE OF CONTENTS
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PART I
Item 1. Business..................................................................................................... 1
Item 2. Properties................................................................................................... 9
Item 3. Legal Proceedings............................................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 12
Item 6. Selected Financial Data...................................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 13
Item 8. Financial Statements and Supplementary Data.................................................................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant........................................................... 19
Item 11. Executive Compensation....................................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 29
Item 13. Certain Relationships and Related Transactions............................................................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................. 38
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES......................................................... F-1
SIGNATURES..............................................................................................................
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Flagstar Corporation ("Flagstar") is one of the largest food service
enterprises in the United States, operating (directly and through franchisees)
2,500 moderately priced restaurants and providing contract food services to more
than 1,600 business, industrial and institutional clients and vending services
at approximately 11,400 locations.
The Company's restaurant operations are conducted through three principal
chains. Denny's is the nation's largest chain of family-oriented full service
restaurants, with over 1,500 units in 49 states and eight foreign countries,
including 490 in California and Florida. According to an independent survey
conducted in 1993, Denny's has the leading share of the national market in the
family segment. Hardee's is a chain of fast-food restaurants of which the
Company, with 564 units located primarily in the southeast, is the largest
franchisee. Although specializing in sandwiches, the Company's Hardee's
restaurants have introduced fresh fried chicken and also offer a breakfast menu
that accounts for approximately 38% of total sales and features the chain's
famous "made-from-scratch" biscuits. Quincy's, with more than 200 locations, is
one of the largest chains of steakhouse restaurants in the southeastern United
States, offering steak, chicken and seafood entrees as well as a buffet food
bar, called the "Country Sideboard," that features as many as 87 different
items. A weekend breakfast buffet is available at most Quincy's locations. The
Company also operates El Pollo Loco, a chain of fast-food restaurants featuring
flame-broiled chicken and steak products and related Mexican food items, with a
strong regional presence in California.
Although operating in three distinct segments of the restaurant
industry -- family-style, fast-food and steakhouse -- the Company's restaurants
benefit from a single management strategy that emphasizes superior value and
quality, friendly and attentive service and appealing facilities. During the
past year, the Company has remodeled 59 of its existing restaurants and added a
net of 86 new restaurants to its principal chains.
The Company's contract food and vending services are conducted through
Canteen, one of the three largest contract food and vending companies in the
nation. Canteen also operates food, beverage and lodging facilities and gift
shops and provides ancillary services at various national and state parks,
sports stadiums, amphitheaters and arenas throughout the United States.
Incorporated in 1980, Flagstar is a wholly-owned subsidiary of Flagstar
Companies, Inc. ("FCI"). FCI is a holding company that was organized in Delaware
in 1988 in order to effect the acquisition of Flagstar in 1989. On November 16,
1992, FCI and Flagstar consummated the principal elements of a recapitalization
(the "Recapitalization"), which included, among other things, an equity
investment in FCI by TW Associates, L.P. ("TW Associates") and KKR Partners II,
L.P. ("KKR Partners II") (collectively, "Associates"), partnerships affiliated
with Kohlberg Kravis Roberts & Co. ("KKR"), and a restructuring of Flagstar's
bank credit facility and public debt securities. As a result of such
transactions, Associates acquired control of FCI and Flagstar. Prior to June 16,
1993, FCI and Flagstar had been known, respectively, as TW Holdings, Inc. and TW
Services, Inc. As used herein, the term "Company" includes Flagstar and its
subsidiaries, except as the context otherwise requires.
GENERAL
The Company's operating revenues and operating income by business segment
for the periods shown were as follows:
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PREDECESSOR SUCCESSOR
JANUARY 1 JULY 21 TO
TO JULY 20, DECEMBER 31, YEAR ENDED DECEMBER 31,
1989 1989 1990 1991 1992
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(IN MILLIONS)
Operating Revenues:
Restaurants.......................................... $ 1,180.9 $ 931.7 $2,303.9 $2,338.7 $2,443.0
Contract food service................................ 735.9 586.2 1,322.6 1,279.2 1,277.3
$ 1,916.8 $1,517.9 $3,626.5 $3,617.9 $3,720.3
Operating Income (Loss):
Restaurants.......................................... $ 112.9 $ 74.4 $ 196.5 $ 192.0 $ 214.1
Contract food service................................ 29.4 26.5 51.9 45.9 50.9
Corporate, net....................................... (7.1) (4.0) (10.1) (13.9) (18.6)
Acquisition-related costs and unusual expenses....... (30.1) (69.9) -- -- --
$ 105.1 $ 27.0 $ 238.3 $ 224.0 $ 246.4
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1993
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Operating Revenues:
Restaurants.......................................... $ 2,598.9
Contract food service................................ 1,371.3
$ 3,970.2
Operating Income (Loss):
Restaurants.......................................... $(1,085.9)(1)
Contract food service................................ (313.3)(1)
Corporate, net....................................... (61.6)(1)
Acquisition-related costs and unusual expenses....... --
$(1,460.8)
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(1) Operating income by business segment reflects the write-off of goodwill and
other intangible assets and the provision for restructuring charges (see
Notes 2 and 3 to the Consolidated Financial Statements) as follows:
restaurants $1,265.6 million, contract food service $359.8 million, and
corporate, net $41.4 million.
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For additional financial information about the Company's business segments, see
Note 14 of the Notes to Consolidated Financial Statements appearing elsewhere
herein.
On July 1, 1993, culminating a dialogue which began in early 1992, the
Company signed a Fair Share Agreement with the NAACP "as a commitment to
continue and expand opportunities at Flagstar for African-American and other
minorities." Pursuant to that agreement, the Company agreed to place special
emphasis on management and employment advancement, advertising and marketing,
franchising opportunities, purchasing and professional service opportunities,
philanthropic and charitable contributions and policy development, to enhance
policies and programs by which African-Americans and other minorities realize
greater participation in business opportunities at Flagstar. The Company and the
NAACP have agreed to meet quarterly during the first year of the agreement and
semiannually thereafter to review progress toward the stated goals of the
agreement.
RESTAURANTS
The Company believes its restaurant operations benefit from the diversity
of the restaurant concepts represented by its three principal chains, the strong
market positions and consumer recognition enjoyed by each of these chains, the
benefits of a centralized support system for purchasing, menu development, human
resources, management information systems, site selection, restaurant design and
construction, and an aggressive new management team. The Company owns or has
rights in all trademarks it believes are material to its restaurant operations.
Denny's and Quincy's are expected to benefit from the demographic trend of aging
baby boomers and the growing population of elderly persons. The largest
percentage of "family style" customers comes from the 35 and up age group. The
Company also expects its chain of Hardee's restaurants to maintain its strong
market position in the southeast.
During the fourth quarter of 1993, the Company approved a restructuring
plan which includes the identification of units that have produced inadequate
returns on investment, have been difficult to supervise or lack market
penetration, so that such units can be sold, closed or converted to another
restaurant concept. These actions should result in a redeployment of capital to
activities which produce a higher rate of return. Accordingly, such units were
written down to their net realizable value. The plan includes changes to the
field management structure which will eliminate a layer of management,
increasing the regional manager's "span of control" and expanding the restaurant
general manager's decision making role. Also, the Company will consolidate
certain Company operations and eliminate overhead positions in the field and in
its corporate marketing, accounting, and administrative functions. The Company's
restructuring charge reflected in the accompanying Consolidated Financial
Statements includes the severance and relocation costs related to these changes.
The plan includes specific action plans to fundamentally change the competitive
positions of Denny's, El Pollo Loco, and Quincy's, as discussed below.
DENNY'S
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YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
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Operating Units (end of year)
Owned/operated.................................................................... 1,001 992 996 1,013
Franchised........................................................................ 273 302 326 378
International..................................................................... 68 64 69 69
Revenues (in millions) (1).......................................................... $1,284 $1,407 $1,429 $1,449
Operating Income (Loss) (in millions) (1)........................................... $ 98 $ 118 $ 128 $ 130
Depreciation and Amortization (in millions) (1)..................................... $ 57 $ 68 $ 75 $ 82
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,117 $1,209 $1,232 $1,231
Franchised........................................................................ $ 865 $ 949 $1,040 $1,065
Average Check....................................................................... $ 4.05 $ 4.20 $ 4.37 $ 4.56
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1993
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Operating Units (end of year)
Owned/operated.................................................................... 1,024
Franchised........................................................................ 427
International..................................................................... 63
Revenues (in millions) (1).......................................................... $1,530
Operating Income (Loss) (in millions) (1)........................................... $ (625)(2)
Depreciation and Amortization (in millions) (1)..................................... $ 88
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,233
Franchised........................................................................ $1,057
Average Check....................................................................... $ 4.76
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(1) Includes distribution and processing operations.
(2) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $716 million.
Denny's is the largest full-service family restaurant chain in the United
States in terms of both number of units and total revenues and, according to an
independent survey conducted in 1993 by Consumer Reports on Eating Share Trends
(CREST), an industry market research firm, Denny's has the leading share of the
national market in the family segment. Denny's restaurants currently operate in
49 states and eight foreign countries, with principal concentrations in
California, Florida, Texas, Washington, Arizona, Illinois, Pennsylvania and
Ohio. Denny's restaurants are designed to provide a casual
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dining atmosphere with moderately priced food and quick, efficient service to a
broad spectrum of customers. The restaurants generally are open 24 hours a day,
seven days a week. All Denny's restaurants have uniform menus (with some
regional and seasonal variations) offering traditional family fare (including
breakfast, steaks, seafood, hamburgers, chicken and sandwiches) and provide both
counter and table service for breakfast, lunch and dinner as well as a "late
night" menu.
The Company acquired the Denny's chain in September 1987. Since the
acquisition, the Company has reduced corporate level overhead (including through
the relocation of key operating personnel to the Company's Spartanburg, South
Carolina headquarters), accelerated Denny's remodeling program, added
point-of-sale ("POS") systems to the chain's restaurants, simplified the menu
and created new advertising and marketing programs.
The Company remodeled 125 Denny's restaurants in 1992 and another 41 in
1993, raising the total number of restaurants remodeled since the Company's
aquisition of Denny's to over one-half of all Denny's restaurants. The Company
expects to remodel approximately 90 units this year so that, by the end of 1994,
Company-owned Denny's restaurants will be remodeled on an eight year cycle. A
typical Denny's remodeling requires approximately ten days to complete (with the
temporary closing of the restaurant), is managed by the Company's in-house
design and construction staff, and currently costs approximately $265,000 per
unit. The 90 units to be remodeled in 1994 will represent the first phase in a
"reimaging" strategy. This reimaging strategy includes an updated exterior look,
new signage, an improved interior layout with more comfortable seating and
enhanced lighting. Reimaging also includes a new menu, new menu offerings, new
uniforms, and enhanced dessert offerings, including a current market test of
Baskin-Robbins ice cream. The Company believes this reimaging program, currently
being tested at its units in Houston, will increase customer satisfaction and
customer traffic.
The Company completed the rollout of its Denny's restaurants with POS
systems in January 1993. This system provides hourly sales reports, cash control
and marketing data and information regarding product volumes. POS systems
improve labor scheduling, provide information to evaluate more effectively the
impact of menu changes on sales, and reduce the paperwork of managers.
Additional efficiency improvements are being designed in 1994.
Marketing initiatives in 1994 will emphasize positioning Denny's as the
price value leader within its segment, initially concentrating on breakfast. The
Company intends to support these initiatives by expanding the number of media
markets and using co-op advertising with franchisees in other markets. These
promotions are designed to capitalize on the strong public recognition of the
Denny's name.
The Company intends to open relatively few Company-owned Denny's
restaurants and to expand its franchising efforts in 1994 in order to increase
its market share, establish a presence in new areas and further penetrate
existing markets. To accelerate the franchise expansion, the Company will
identify units to sell to franchisees which are not part of its growth strategy
for Company-owned Denny's units. These units are in addition to 105 units that
are to be sold to franchisees or closed under the Company's restructuring plan.
The restructured field management infrastructures established to serve the
existing Denny's system are expected to provide sufficient support for
additional units with moderate incremental expense. Expanded franchising also
will permit the Company to exploit smaller markets where a franchisee's ties to
the local community are advantageous.
During 1993, the Company added a net of 49 new Denny's franchises, bringing
total franchised units to 427, or 28% of all Denny's restaurants. The initial
fee for a single Denny's franchise is $35,000, and the current royalty payment
is 4% of gross sales. In 1993, Denny's realized $33.5 million of revenues from
franchising. Franchisees also purchase food and supplies from a Company
subsidiary.
During 1993, the Company also made certain changes in the management of
Denny's, including the appointment of C. Ronald Petty as chief operating
officer. Mr. Petty, 49, has twenty years of experience in the food service
industry, including senior leadership positions with other national restaurant
chains. Mr. Petty has assumed overall responsibility for the operation of the
Denny's chain.
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HARDEE'S
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YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
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Operating Units (end of year)
Owned/operated.................................................................... 465 483 500 528
Revenues (in millions).............................................................. $ 467 $ 510 $ 525 $ 607
Operating Income (Loss) (in millions)............................................... $ 61 $ 52 $ 52 $ 72
Depreciation and Amortization (in millions)......................................... $ 27 $ 40 $ 40 $ 44
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,040 $1,077 $1,062 $1,185
Average Check....................................................................... $ 2.55 $ 2.64 $ 2.72 $ 2.88
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1993
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Operating Units (end of year)
Owned/operated.................................................................... 564
Revenues (in millions).............................................................. $ 682
Operating Income (Loss) (in millions)............................................... $ (179)(1)
Depreciation and Amortization (in millions)......................................... $ 48
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,255
Average Check....................................................................... $ 3.09
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(1) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $260 million.
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). The Company is HFS' largest franchisee,
operating 17% of Hardee's restaurants nationwide. HFS is the third largest
sandwich chain in the United States. Of the 564 Hardee's restaurants operated by
the Company at December 31, 1993, 544 were located in ten southeastern states.
The Company's Hardee's restaurants provide uniform menus in a fast-food format
targeted to a broad spectrum of customers. The restaurants offer hamburgers,
chicken, roast beef and fish sandwiches, hot dogs, salads and low-fat yogurt, as
well as a breakfast menu featuring Hardee's popular "made-from-scratch"
biscuits. To add variety to its menu, further differentiate its restaurants from
those of its major competitors and increase customer traffic during the
traditionally slower late afternoon and evening periods, HFS added fresh fried
chicken as a menu item in a number of its restaurants beginning in 1991. The
Company first tested fresh fried chicken in one of its market areas in October
1991. Based on the success experienced in this market area and the early success
experienced by HFS, the Company accelerated the introduction of fresh fried
chicken as a regular menu item during 1992 and completed the planned rollout in
1993.
Substantially all of the Company's Hardee's restaurants have drive-thru
facilities, which provided 51% of the chain's revenues in 1993. Most of the
restaurants are open 18 hours a day, seven days a week. Operating hours of
selected units have been extended to 24 hours a day, primarily on weekends.
Hardee's breakfast menu, featuring the chain's signature "made-from-scratch"
biscuits, accounts for approximately 38% of total sales at the Company's
Hardee's restaurants. The Company plans to remodel its Hardee's restaurants
every ten years at a current average cost of $175,000 per unit for major
remodels.
Each Hardee's restaurant is operated under a separate license from HFS.
Each license grants the exclusive right, in exchange for a franchise fee,
royalty payments and certain covenants, to operate a Hardee's restaurant in a
described territory, generally a town or an area measured by a radius from the
restaurant site. Each license has a term of 20 years from the date the
restaurant is first opened for business and is non-cancellable by HFS, except
for the Company's failure to abide by its covenants. Earlier issued license
agreements are renewable under HFS' renewal policy; more recent license
agreements provide for successive five-year renewals upon expiration, generally
at rates then in effect for new licenses. A number of the Company's licenses are
scheduled for renewal. The Company has historically experienced no difficulty in
obtaining such renewals and does not anticipate any problems in the future.
The Company has a territorial development agreement with HFS which calls
for the Company to open an additional 69 new Hardee's restaurants in its
existing development territory in the southeast (and certain adjacent areas) by
the end of 1996. The Company presently plans to open new restaurants in an
amount not less than that required by the territorial development agreement. It
is anticipated that construction of 69 additional units will require
approximately $69 million in capital expenditures. If the Company determines not
to open the total number of specified units in the territory within the time
provided, its development rights may become non-exclusive. The Company may seek
to expand its Hardee's operations by purchasing existing Hardee's units from HFS
and other franchisees, subject to HFS' right of first refusal, but any such
purchases will not be counted toward the number of new unit openings called for
under the agreement.
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QUINCY'S
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YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
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Operating Units (end of year)
Owned/operated.................................................................... 213 212 216 217
Revenues (in millions).............................................................. $ 263 $ 282 $ 283 $ 290
Operating Income (Loss) (in millions)............................................... $ 18 $ 20 $ 15 $ 11
Depreciation and Amortization (in millions)......................................... $ 17 $ 21 $ 22 $ 22
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,247 $1,324 $1,320 $1,335
Average Check....................................................................... $ 5.30 $ 5.38 $ 5.40 $ 5.32
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1993
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Operating Units (end of year)
Owned/operated.................................................................... 213
Revenues (in millions).............................................................. $ 279
Operating Income (Loss) (in millions)............................................... $ (154)(1)
Depreciation and Amortization (in millions)......................................... $ 21
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,302
Average Check....................................................................... $ 5.61
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(1) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $164 million.
Ranked by 1993 sales, Quincy's is the sixth largest steakhouse chain in the
country and one of the largest such chains in the southeastern United States.
The Quincy's chain consists of 213 Company-owned restaurants at December 31,
1993 which are designed to provide families with limited-service dining at
moderate prices. All Quincy's are open seven days a week for lunch and dinner.
The restaurants serve steak, chicken and seafood entrees along with a
buffet-style food bar, called the "Country Sideboard," offering hot foods,
soups, salads and desserts and featuring as many as 87 items at a time. In
addition, weekend breakfast service, which is available at most locations,
allows Quincy's to utilize its asset base more efficiently.
Since 1986 Quincy's has remodeled approximately 85 restaurants to expand
seating capacity from approximately 225 to approximately 280 seats. During 1993,
seven units were remodeled to introduce the new scatter bar format.
The Company also began testing a unit concept conversion in 1993 by
remodeling and converting three steakhouses in Columbia, S.C., to a buffet only
concept. Under the Company's restructuring plan, 90 units have been identified
that currently are not producing adequate returns and, therefore, are to be
converted, sold, or closed. Upon successful completion of its concept conversion
tests, the Company plans to convert most of these units to the buffet only
concept or other concepts under consideration. The concept remodels are expected
to have an average cost of approximately $250,000 per unit.
EL POLLO LOCO
El Pollo Loco, which accounted for only 4.2% of the Company's total
restaurant revenues (2.7% of consolidated revenues) in the year ended December
31, 1993, is the leading chain in the quick service chain segment of the
restaurant industry to specialize in flame-broiled chicken. As of December 31,
1993, there were 209 El Pollo Loco units (of which 139 were operated by the
Company, 64 were operated by franchisees and 6 were operated under foreign
licensing agreements). Approximately 92% of these restaurants are located in
southern California. El Pollo Loco directs its marketing at customers desiring
an alternative to other fast food products. The Company's El Pollo Loco
restaurants are designed to facilitate customer viewing of the preparation of
the flame-broiled chicken. El Pollo Loco restaurants generally are open 12 hours
a day, seven days per week. El Pollo Loco restaurants feature a limited, but
expanding menu highlighted by marinated flame-broiled chicken and steak products
and related Mexican food items.
As a part of the restructuring plan, the Company has identified 45 units
which do not generate an adequate return on investment, and thus will be sold to
franchisees or closed. The Company's restructuring plan includes reimaging the
existing units through a limited remodeling program, expanded menu items
(including fried foods) and an all-you-can-eat salsa bar. These changes are
intended to increase customer satisfaction and expand the customer market
resulting in higher customer traffic.
OPERATIONS
The Company believes that successful execution of basic restaurant
operations in each of its restaurant chains is critical to its success.
Accordingly, significant effort is devoted to ensuring that all restaurants
offer quality food and service. Through a network of division leaders, region
leaders, district leaders and restaurant managers, the Company standardizes
specifications for the preparation and efficient service of quality food, the
maintenance and repair of its premises and the appearance and conduct of its
employees. Major emphasis is placed on the proper preparation and delivery of
the product to the consumer and on the cost-effective procurement and
distribution of quality products.
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A principal feature of the Company's restaurant operations is the constant
focus on improving operations at the unit level. Unit managers are especially
hands-on and versatile in their supervisory activities. Region and district
leaders have no offices and spend substantially all of their time in the
restaurants. A significant majority of restaurant management personnel began as
hourly employees in the restaurants and therefore perform restaurant functions
and train by example. The Company benefits from an experienced management team.
Each of the Company's restaurant chains maintains training programs for
employees and restaurant managers. Restaurant managers and assistant managers
receive training at specially designated training units. Areas of training for
managers include customer interaction, kitchen management and food preparation,
data processing and cost control techniques, equipment and building maintenance
and leadership skills. Video training tapes demonstrating various restaurant job
functions are located at each restaurant location and are viewed by employees
prior to a change in job function or utilizing new equipment or procedures.
Each of the Company's restaurant chains continuously evaluates its menu.
New products are developed in Company test kitchens and then introduced in
selected restaurants to determine customer response and to ensure that
consistency, quality standards and profitability are maintained. If a new item
proves successful at the research and development level, it is usually tested in
selected markets, both with and without market support. A successful menu item
is then incorporated into the restaurant system. In the case of the Hardee's
restaurants, menu development is coordinated through HFS.
Financial and management control of the Company's restaurants is
facilitated by the use of POS systems. Detailed sales reports, payroll data and
periodic inventory information are transmitted to the Company for management
review. These systems economically collect accounting data and enhance the
Company's ability to control and manage these restaurant operations. Such
systems are in use in all of the Company's Hardee's and Quincy's restaurants,
and installation of such systems in the Denny's chain was completed in January
1993.
Denny's size allows it to operate its own distribution and supply
facilities, thereby controlling costs and improving efficiency of food delivery
while enhancing quality and availability of products. Denny's operates seven
regional centers for distribution of substantially all of the ingredients and
supplies used by the Denny's restaurants. As opportunities arise, the Company is
extending these operations to its other restaurant chains. The Company also
operates a food-processing facility in Texas which supplies beef, pork sausage,
soup and many other food products currently used by the Company's restaurants.
Food and packaging products for the Company's Hardee's restaurants are
purchased from HFS and independent suppliers approved by HFS. A substantial
portion of the products for the Company's Hardee's and Quincy's restaurants is
obtained from MBM Corporation, an independent supplier/distributor. Adequate
alternative sources of supply for required items are believed to be available.
ADVERTISING
Denny's primarily relies upon regional television and radio advertising.
Advertising expenses for Denny's restaurants were $41.1 million for 1993, or
about 3.1% of Denny's system-wide restaurant revenues. Individual restaurants
are also given the discretion to conduct local advertising campaigns. In
accordance with HFS licensing agreements, the Company spends approximately 5.6%
of Hardee's total gross sales on marketing and advertising. Of this amount,
approximately 2.4% of total gross sales is contributed to media cooperatives and
HFS' national advertising fund. The balance is directed by the Company on local
levels. HFS engages in substantial advertising and promotional activities to
maintain and enhance the Hardee's system and image. The Company participates
with HFS in planning promotions and television support for the Company's primary
markets and engages in local radio, outdoor and print advertising for its
Hardee's operations. The Company, together with a regional advertising agency,
advertises its Quincy's restaurants primarily through print, radio and
billboards. Quincy's has focused on in-store promotions as well as regional
marketing. The Company spent approximately 4.1% of Quincy's gross sales on
Quincy's marketing in 1993. During 1993, El Pollo Loco's advertising focused on
promoting large meals and menu variety.
SITE SELECTION
The success of any restaurant depends, to a large extent, on its location.
The site selection process for Company-owned restaurants consists of three main
phases: strategic planning, site identification and detailed site review. The
planning phase ensures that restaurants are located in strategic markets. In the
site identification phase, the major trade areas within a market area are
analyzed and a potential site identified. The final and most time consuming
phase is the detailed
6
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<PAGE>
site review. In this phase, the site's demographics, traffic and pedestrian
counts, visibility, building constraints and competition are studied in detail.
A detailed budget and return on investment analysis are also completed. The
Company considers its site selection standards and procedures to be rigorous and
will not compromise those standards or procedures in order to achieve
accelerated growth.
CONTRACT FOOD, VENDING AND RECREATION SERVICES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
<S> <C> <C> <C> <C>
(IN MILLIONS)
Revenues:
Food and Vending.......................................................... $1,073 $1,071 $1,015 $ 990
Concession and Recreation Services........................................ 249 252 264 287
Total................................................................... $1,322 $1,323 $1,279 $1,277
Operating Income (Loss)..................................................... $ 56 $ 52 $ 46 $ 51
Depreciation and Amortization............................................... $ 61 $ 70 $ 69 $ 68
<CAPTION>
1993
<S> <C>
Revenues:
Food and Vending.......................................................... $1,049
Concession and Recreation Services........................................ 322
Total................................................................... $1,371
Operating Income (Loss)..................................................... $ (313)(1)
Depreciation and Amortization............................................... $ 75
</TABLE>
(1) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $360 million.
Through Canteen, the Company conducts its contract food and vending
services on a national basis. According to NATION'S RESTAURANT NEWS (published
August 9, 1993), Canteen is the third largest provider of contract food and
vending services in the United States (on the basis of U.S. system-wide sales).
It had approximately 1,600 food service clients and served approximately 11,400
vending locations at December 31, 1993. Canteen provides its clients with
on-site food preparation, cooking and service as well as vending machines that
dispense a variety of food and beverage products. These services are offered
both independently and in conjunction with each other. Canteen also grants
franchises to distributors to operate contract food service facilities and
vending businesses. In addition, Canteen licenses its trademark internationally
and currently has licensees in Japan and Sweden. Canteen provides both its
franchised distributors and international licensees with marketing assistance,
training, purchasing services and financial and accounting systems.
Canteen's concession and recreation services operations provide food,
beverage, novelty, and ancillary services in sports stadiums, amphitheaters,
arenas and other locations, including five major league baseball parks (Hubert
H. Humphrey Metrodome, Oakland-Alameda County Coliseum, Royals Stadium, Yankee
Stadium and Candlestick Park), five minor league baseball parks and five
professional football stadiums (Arrowhead Stadium, Hubert H. Humphrey Metrodome,
Los Angeles Coliseum, Tampa Stadium and Candlestick Park). It operates food,
beverage and lodging facilities and gift shops and provides other ancillary
services at a number of national parks (including Yellowstone, Mount Rushmore,
Everglades, Bryce Canyon, Zion and the North Rim of the Grand Canyon) and at
state parks in Ohio and New York. In addition, Canteen operates food and
beverage services, gift shops, bus tours and the IMAX Theatre at Spaceport USA
at the Kennedy Space Center. Contracts to provide these services usually are
obtained on the basis of competitive bids. In most instances, Canteen receives
the exclusive right to provide the services in a particular location for a
period of several years, with the duration of the term often a function of the
required investment in facilities or other financial considerations.
Canteen's contract food service and vending operations are conducted
throughout the United States. Approximately 30% of the Company's revenues from
these operations are derived from industrial plants in the automotive, defense
and other manufacturing industries. These industries have experienced a general
reduction in employment over the past several years, which has been accelerated
by the nation's recent recession. To ameliorate the effects of this trend,
Canteen has increased its penetration of the educational, lifecare and
correctional facility markets and has targeted these (along with concession and
recreation services) as areas of potential growth. These target markets, which
accounted for 39% of Canteen's revenues in 1993, are recession-resistant and, at
present, are not widely served by contract food service companies. Management
believes that growing budgetary pressures on institutions in these target
markets should favor their increasing reliance on private sector contractors who
can provide required food service at lower costs. As part of the restructuring
plan, the Company will de-emphasize vending operations in certain markets
resulting in the sale of certain vending branches, with the related
severance and lease buy-out costs included in the restructuring charges.
Canteen operates through four primary divisions: the Eastern, Central, and
California divisions within the food and vending divisions, and the concession
and recreation services division. These operations are managed on a regional
basis, each of which is led by a regional vice president with responsibility for
operations, sales and marketing in the assigned area. Field operations are
supported by centralized legal, human resources, finance, purchasing, data
processing and other services. Formal training programs on a variety of subjects
are regularly provided to field personnel at 28 learning centers
7
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maintained on clients' premises and at other on-site locations. In addition,
management training is provided at the Company's central training facility in
Spartanburg, South Carolina.
Canteen has improved its performance and responsiveness to clients by
transferring more responsibility to field operations, while at the same time
ensuring that innovative ideas for servicing the customer are shared across
operations. Redundant accounting functions were reduced when Canteen closed 12
field accounting centers in 1993. The restructuring plan includes severance
and other costs related to further consolidation of accounting and
administrative functions. These steps have created a more focused and
responsive operational structure and reduced administrative costs.
Canteen normally contracts with customers for food and vending services on
a local basis, but, in the case of national customers, it may serve many
geographically dispersed facilities. Approximately 47% of Canteen's food service
accounts are conducted under management fee arrangements, whereby Canteen
typically receives a fixed dollar amount or a fixed percentage of revenues in
return for providing food services at price and service levels determined by its
clients. Management fee arrangements are prevalent where companies subsidize
food services as part of the benefits provided to employees. In other food
service accounts, Canteen contracts to provide food service on a profit/loss
basis. In the case of vending operations, service is predominantly provided on a
profit/loss basis, and a commission is usually payable by Canteen to the owner
of the premises on which the vending machines are located. The ability of
Canteen to increase its prices in order to cover its cost increases is an
important factor in maintaining satisfactory profit levels from operations not
conducted pursuant to management fee arrangements. Canteen's ability to increase
prices is materially affected by competitive factors and resistance from
consumers and from firms and institutions on whose premises Canteen's operations
are conducted and whose prior approval is usually required. Food and vending
service contracts generally may be terminated on short notice given by either
side. The equipment, other than vending equipment (which can be moved to another
location), used by Canteen at an on-site operation is usually owned by its
customer.
New business is obtained primarily through solicitation of new customers
and responding to requests for bids. In competitive bid situations, financial
terms as well as other factors, such as reputation and ability to perform,
influence customers' decisions in awarding contracts, particularly in the
private sector. Canteen capitalizes on its name recognition and owns or has
rights in all trademarks it believes are material to its operations. Canteen's
sales force is decentralized in order to tailor sales efforts to customers in
various regions. As opportunities arise, Canteen also seeks to expand its
operations through the acquisition of small regional food service companies that
can be integrated into its existing operations.
COMPETITION
The restaurant industry can be divided into three main categories: quick
service (fast-food), midscale (family) and upscale (dinner house). The quick
service segment (which includes Hardee's and El Pollo Loco) is overwhelmingly
dominated by the large sandwich, pizza and chicken chains. The midscale segment
(which includes Denny's and Quincy's) includes a much smaller number of national
chains and many local and regional chains, as well as thousands of independent
operators. The upscale segment consists primarily of small independents in
addition to several regional chains.
The restaurant industry is highly competitive and affected by many factors,
including changes in economic conditions affecting consumer spending, changes in
socio-demographic characteristics of areas in which restaurants are located,
changes in customer tastes and preferences and increases in the number of
restaurants generally and in particular areas. Competition among a few major
companies that own or operate fast-food restaurant chains is especially intense.
Restaurants, particularly those in the fast-food segment, compete on the basis
of name recognition and advertising, the quality and perceived value of their
food offerings, the quality and speed of their service, the attractiveness of
their facilities and, to a large degree in a recessionary environment, price and
perceived value.
Denny's, which has a strong national presence, competes primarily with
regional family chains such as IHOP, Big Boy, Shoney's, Friendly's and
Perkins -- all of which are ranked among the top six midscale restaurant chains.
According to an independent survey conducted during 1993, Denny's had a 14.4%
share of the national market in the family segment.
Hardee's restaurants compete principally with four other national fast food
chains: McDonald's, Burger King, Wendy's and Taco Bell. In addition, Hardee's
restaurants compete with fast-food restaurants serving other kinds of foods,
such as chicken outlets (e.g., Kentucky Fried and Bojangles), family restaurants
(e.g., Shoney's and Friendly's) and dinner houses. Management believes that
Hardee's has the highest breakfast sales per unit of any major fast-food
restaurant chain.
Quincy's primary competitors include Ryan's and Western Sizzlin', both of
which are based in the southeast. Quincy's also competes with other family
restaurants and with dinner houses and fast-food outlets. Nationwide, the top
five chains
8
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are Sizzler, Ponderosa, Golden Corral, Ryan's, and Western Sizzlin'. According
to NATION'S RESTAURANT NEWS (published August 9, 1993), Quincy's ranked sixth
nationwide in system-wide sales and third in sales per unit among the steak
chains.
All aspects of Canteen's operations are highly competitive. Competition
takes a number of different forms, including pricing, capital investment,
maintaining food and service standards and securing and maintaining accounts
with firms and institutions. Canteen competes with several national and a large
number of local and regional companies, some of which, including Marriott and
ARA, are substantial in size and scope. In addition, firms and institutions may,
as an alternative to using a food service company such as Canteen, operate
vending and food service businesses themselves. Many Canteen facilities must
also compete with local alternatives such as restaurants, sandwich shops,
convenience stores, delicatessans and other public arenas, convention centers,
and entertainment venues.
EMPLOYEES
At December 31, 1993, the Company had approximately 123,000 employees, of
whom 88,000 were employed in restaurant operations and 34,000 were engaged in
contract food, vending and recreation services. Less than 1% of the restaurant
employees are union members. Many of the Company's restaurant employees work
part time, and many are paid at or slightly above minimum wage levels.
Approximately 20% of Canteen's employees are unionized. The Company has
experienced no significant work stoppages and considers its relations with its
employees to be satisfactory.
ITEM 2. PROPERTIES
Most of the Company's restaurants are free-standing facilities. An average
Denny's restaurant ranges from 3,900 to 5,800 square feet and seats 100 to 175
customers. Denny's restaurants generally occupy 35,000 to 45,000 square feet of
land. An average Hardee's restaurant operated by the Company has approximately
3,300 square feet and provides seating for 94 persons, and most have drive-thru
facilities. Each of the Company's Hardee's restaurants occupies approximately
50,000 square feet of land. The average Quincy's restaurant has approximately
7,100 square feet and provides seating for 250 persons. Each Quincy's restaurant
occupies approximately 63,000 square feet of land. A typical El Pollo Loco
restaurant has 2,250 square feet and seats 66 customers.
The following table sets forth certain information regarding the Company's
restaurant properties as of December 31, 1993:
<TABLE>
<CAPTION>
LAND LEASED
LAND AND AND LAND AND
BUILDING BUILDING BUILDING
OWNED OWNED LEASED
<S> <C> <C> <C>
TYPE OF RESTAURANT
DENNY'S............... 284 42 698
HARDEE'S.............. 266 102 196
QUINCY'S.............. 161 45 7
EL POLLO LOCO......... 12 42 85
Total............... 723 231 986
</TABLE>
9
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<PAGE>
The number and location of the Company's restaurants in each chain as of
December 31, 1993 are presented below:
<TABLE>
<CAPTION>
DENNY'S EL POLLO LOCO
FRANCHISED FRANCHISED
STATE OWNED LICENSED HARDEE'S QUINCY'S OWNED LICENSED
<S> <C> <C> <C> <C> <C> <C>
Alabama.................................................... 1 9 152 47 -- --
Alaska..................................................... -- 4 -- -- -- --
Arizona.................................................... 34 23 -- -- -- --
Arkansas................................................... 5 1 1 -- -- --
California................................................. 255 82 -- -- 137 59
Colorado................................................... 25 9 -- -- -- --
Connecticut................................................ 9 1 -- -- -- --
Delaware................................................... 3 -- -- -- -- --
Florida.................................................... 103 50 50 41 -- --
Georgia.................................................... -- 23 9 11 -- --
Hawaii..................................................... 4 3 -- -- -- --
Idaho...................................................... 4 2 -- -- -- --
Illinois................................................... 50 6 -- -- -- --
Indiana.................................................... 19 5 -- -- -- --
Iowa....................................................... 6 -- -- -- -- --
Kansas..................................................... 8 3 -- -- -- --
Kentucky................................................... 3 16 -- 1 -- --
Louisiana.................................................. 8 2 1 -- -- --
Maine...................................................... -- 3 -- -- -- --
Maryland................................................... 14 14 -- -- -- --
Massachusetts.............................................. 10 -- -- -- -- --
Michigan................................................... 40 1 -- -- -- --
Minnesota.................................................. 14 4 -- -- -- --
Mississippi................................................ 2 2 38 8 -- --
Missouri................................................... 30 5 -- -- -- --
Montana.................................................... -- 1 -- -- -- --
Nebraska................................................... 4 2 -- -- -- --
Nevada..................................................... 11 1 -- -- 2 2
New Hampshire.............................................. 2 1 -- -- -- --
New Jersey................................................. 15 2 -- -- -- --
New Mexico................................................. 2 11 -- -- -- --
New York................................................... 26 6 -- -- -- --
North Carolina............................................. 9 9 66 41 -- --
North Dakota............................................... -- 2 -- -- -- --
Ohio....................................................... 39 14 18 1 -- --
Oklahoma................................................... 9 5 -- -- -- --
Oregon..................................................... 16 5 -- -- -- --
Pennsylvania............................................... 52 5 2 -- -- --
Rhode Island............................................... -- -- -- -- -- --
South Carolina............................................. 11 5 116 41 -- --
South Dakota............................................... -- 1 -- -- -- --
Tennessee.................................................. 3 10 108 17 -- --
Texas...................................................... 70 31 -- -- -- 3
Utah....................................................... 7 7 -- -- -- --
Vermont.................................................... -- 3 -- -- -- --
Virginia................................................... 20 6 3 5 -- --
Washington................................................. 58 10 -- -- -- --
West Virginia.............................................. -- 2 -- -- -- --
Wisconsin.................................................. 13 5 -- -- -- --
Wyoming.................................................... -- 6 -- -- -- --
Canada..................................................... 10 13 -- -- -- --
International.............................................. -- 59 -- -- -- 6
Total.................................................... 1,024 490 564 213 139 70
</TABLE>
At December 31, 1993, the Company owned seven warehouses in California,
Illinois, Florida, Pennsylvania, Texas and Washington, and one manufacturing
facility in Texas. At that date, Canteen owned approximately 94,600 vending
machines in its food and vending service operations, of which approximately
6,700 were leased to distributors. In addition, Canteen owned approximately 42
buildings with approximately 704,000 square feet and leased approximately
934,000 square feet for warehousing and office space throughout the United
States for use in its food and vending services and recreation services
operations.
The Company also owns a 19-story, 187,000 square foot office tower, which
serves as its corporate headquarters, located in Spartanburg, South Carolina.
The Company's corporate offices currently occupy approximately 14 floors of the
tower, with the balance leased to others.
See Item 13. Certain Relationships and Related Transactions -- Description
of Indebtedness and Note 4 to the accompanying Consolidated Financial Statements
for information concerning encumbrances on certain properties of the Company.
10
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ITEM 3. LEGAL PROCEEDINGS
Trans World Airlines, Inc. ("TWA") commenced a lawsuit on October 8, 1986
against Transworld Corporation ("Transworld"), certain contingent liabilities of
which were assumed by Flagstar, and against certain of its past and present
directors and certain former TWA directors, in the Supreme Court of the State of
New York, New York County, alleging fraud and breach of fiduciary obligations in
the execution and subsequent termination of a tax allocation agreement between
Transworld and its former subsidiary, TWA. TWA's complaint seeks the following
remedies: (i) damages equal to $52 million for investment tax credits ("ITC")
claimed by Transworld on its 1984 federal income tax return, (ii) damages equal
to the "present value" of Transworld's potential liability to TWA as of December
31, 1983 for net operating losses and ITC claimed by Transworld, including the
$52 million in ITC, (iii) the voiding of a tax allocation agreement and damages
to be determined at trial, or (iv) the voiding of certain sections of the tax
allocation agreement and the payment to TWA of certain amounts as provided in
such tax allocation agreement. There has been no activity relating to this
lawsuit since 1988.
FCI, Flagstar, El Pollo Loco and Denny's, along with several officers and
directors of those companies, have been named as defendants in an action filed
on August 28, 1991 in the Superior Court of Orange County, California. The
plaintiffs are several current and former El Pollo Loco franchisees. They allege
that the defendants, among other things, failed or caused a failure to promote,
develop and expand the El Pollo Loco franchise system in breach of contractual
obligations to the plaintiff franchisees and made certain misrepresentations to
the plaintiffs concerning the El Pollo Loco system. Asserting various legal
theories, the plaintiffs seek actual and punitive damages in excess of $90
million, together with declaratory and certain other equitable relief. FCI,
Flagstar and the other defendants have filed answers in this action. FCI and
Flagstar have also filed cross-complaints against various plaintiffs in the
action for breach of contract and other claims. Discovery has not yet been
completed. Accordingly, it is premature for the Company to express a judgment
herein as to the likely outcome of the action. The defendants, through counsel,
intend to defend the action vigorously.
The Company has received proposed deficiencies from the Internal Revenue
Service (the "IRS") for federal income taxes and penalties totalling
approximately $46.6 million. Proposed deficiencies of $34.3 million relate to
examinations of certain income tax returns filed by Denny's for periods ending
prior to the Company's purchase of Denny's on September 11, 1987. The
deficiencies primarily involve the proposed disallowance of certain expenses
associated with borrowings and other costs incurred at the time of the leveraged
buy-out of Denny's in 1985 and the purchase of Denny's by the Company in 1987.
The Company has filed protests of the proposed deficiencies with the Appeals
Division of the IRS, stating that, with minor exceptions, it believes the
proposed deficiencies are erroneous. The Company and the IRS have reached a
preliminary agreement on substantially all of the issues included in the
original proposed deficiency. Based on this preliminary agreement, the IRS has
agreed to waive all penalties and the Company estimates that its ultimate
federal income tax deficiency will be less than $5 million. The remaining $12.3
million of proposed deficiencies relates to examinations of certain income tax
returns filed by FCI and the Company for the four fiscal years ended December
31, 1989. The deficiencies primarily involve the proposed disallowance of
deductions associated with borrowings and other costs incurred prior to, at and
just following the time of the acquisition of Flagstar in 1989. FCI and the
Company intend to vigorously contest the proposed deficiencies because it
believes the proposed deficiencies are substantially incorrect.
On March 26, 1993, a consent decree was signed by Flagstar and its
subsidiary Denny's, Inc. and by the U.S. Department of Justice with respect to a
complaint filed by the Department of Justice on that same date in the U.S.
District Court for the Northern District of California. Such complaint alleged
that the Company, through Denny's, had engaged in a pattern or practice of
discrimination against African-American customers. The Company denied any
wrongdoing. The consent decree, which was approved by the court on April 1,
1993, enjoins the Company from racial discrimination and requires the Company to
implement certain employee training and testing programs and provide public
notice of Denny's non-discrimination policies. It carries no direct monetary
penalties. In a related matter, on March 24, 1993, a public accommodations
lawsuit was filed against the Company by certain private plaintiffs in the U.S.
District Court for the Northern District of California alleging that certain
Denny's restaurants in California have engaged in racially discriminatory
practices and seeking certification as a class action in California, unspecified
actual, compensatory and punitive damages, and injunctive relief. The Company is
also a defendant in various other public accommodations actions brought in
various jurisdictions. The principal additional action was filed on May 24, 1993
in Maryland. This action was filed in the U.S. District for the District of
Maryland, alleging that a Denny's restaurant in Annapolis, Maryland engaged in
racially discriminatory practices, and seeks certification as a class action
covering all states except California, unspecified actual compensatory and
punitive damages, and injunctive relief. Other individual public accommodations
cases have also been filed, including some cases which allege substantial
compensatory and punitive damages for each plaintiff, statutory damages and
injunctive relief. Discovery in these actions has not yet been completed. Class
certification hearings in the two
11
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purported class actions are scheduled to occur in 1994. The Company believes
that these actions lack merit and, unless there is an early resolution thereof,
intends to defend them vigorously.
The Company is also the subject of pending and threatened employment
discrimination claims principally in California and Alabama. In certain of these
claims, the plaintiffs have threatened to seek to represent a class alleging
racial discrimination in employment practices at Company restaurants and to seek
actual, compensatory and punitive damages, and injunctive relief. The Company
believes that these claims also lack merit and, unless there is an early
resolution thereof, intends to defend them vigorously.
The parties in the foregoing actions have explored and continue to explore
the possibility of reaching an early resolution of these matters in an effort to
avoid the costs and risks of litigation. No assurances can be given, however,
that these matters can be resolved on mutually acceptable terms.
Other proceedings are pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company, and in
others presenting allegations that are nonroutine and include compensatory or
punitive damage claims. The ultimate legal and financial liability of the
Company with respect to the matters mentioned above and these other proceedings
cannot be estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that sufficient
accruals have been established by the Company to provide for known
contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Flagstar is a wholly-owned subsidiary of FCI. As a result, there is no
established public trading market for the common stock of Flagstar and all per
share data is omitted. As of March 31, 1994, 440 shares of common stock of
Flagstar were outstanding, all of which are owned by FCI.
Dividends were not paid by Flagstar during 1992 or 1993. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources and Note 4 to the accompanying
Consolidated Financial Statements of Flagstar regarding certain restrictions on
the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain selected financial data concerning the Company
for each of the five years ended December 31, 1993. Such data have been derived
from the Consolidated Financial Statements of the Company for such periods which
have been audited. The following information should be read in conjunction with
the Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere herein and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<TABLE>
<CAPTION>
PREDECESSOR(1) SUCCESSOR(1)
JANUARY 1 JULY 21 TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO JULY 20, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1989(2) 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT RATIOS)
Income Statement data:
Operating revenues................. $ 1,916.8 $1,517.9 $3,626.5 $3,617.9 $3,720.3 $3,970.2
Operating income................... 105.1 27.0 238.3 224.0 246.4 (1,460.8)(3)
Income (loss) from continuing
operations (4)................... 20.8 (77.1) (67.8) (67.6) (57.9) (1,662.4)
Ratio of earnings to fixed
charges(5)....................... 1.53x -- -- -- -- --
Deficiency in the coverage of fixed
charges to earnings before fixed
charges(5)....................... -- 85.7 78.3 85.9 64.7 1,743.8
Balance Sheet data (at end of
period):
Current assets..................... -- 257.4 222.0 199.7 206.6 251.0
Working capital (deficiency)(6).... -- (616.4) (318.4) (356.9) (284.0) (304.6)
Net property and equipment......... -- 1,519.6 1,490.4 1,447.6 1,442.9 1,337.4
Total assets....................... -- 3,637.3 3,507.8 3,394.5 3,396.5 1,803.8
Long-term debt(7).................. -- 1,948.0 2,305.7 2,261.3 2,329.5 2,502.2
</TABLE>
FOOTNOTES APPEAR ON THE FOLLOWING PAGE.
12
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(1) Certain amounts for the four years ended December 31, 1992 have been
reclassified to conform to the 1993 presentation.
(2) FCI acquired Flagstar as of July 20, 1989 in a business combination
accounted for as a purchase. As a result of the acquisition, the financial
data for the Successor periods are presented on a different basis of
accounting than that of the Predecessor period, and therefore, are not
directly comparable.
(3) Operating income for the year ended December 31, 1993 reflects charges for
the write-off of goodwill and other intangible assets of $1,474.8 million
and the provision for restructuring costs of $192.0 million.
(4) The Company sold American Medical Services, Inc., The Rowe Corporation and
Milnot Company in 1990 and Preferred Meal Systems, Inc. in 1991. These
entities have been treated as discontinued operations for all periods
indicated above.
(5) The ratio of earnings to fixed charges has been calculated by dividing
pre-tax earnings by fixed charges. Earnings, as used to compute the ratio,
equal the sum of income before income taxes and fixed charges excluding
capitalized interest. Fixed charges are the total interest expenses
including capitalized interest, amortization of debt expenses and a rental
factor that is representative of an interest factor (estimated to be one
third) on operating leases.
(6) A negative working capital position is not unusual for a restaurant
operating company. The negative working capital amount at December 31, 1989
is principally a result of classifying a portion of the Company's
acquisition financing as a current liability. The reduction in the working
capital deficit at December 31, 1990 is due principally to the refinancing
of that acquisition debt to long-term debt during 1990. The increase at
December 31, 1991 is primarily attributable to an increase in current
maturities of long-term debt. At December 31, 1992, the decrease in the
working capital deficiency from December 31, 1991 is due primarily to
decreased current maturities of the Company's bank debt as a result of the
Recapitalization. The increase in the working capital deficiency from
December 31, 1992 to December 31, 1993 is attributable primarily to an
increase in restructuring and other liabilities which was partially offset
by an increase in receivables and inventories from the acquisition of
contract food service operations during 1993.
(7) At December 31, 1992 and 1993, such amount includes a $150.0 million note
payable to FCI (the "Note Payable to FCI"). See Item 13. Certain
Relationships and Related Transactions -- Description of
Indebtedness -- Note Payable to FCI.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Item 6.
Selected Financial Data and the Consolidated Financial Statements and other more
detailed financial information appearing elsewhere herein.
1993 COMPARED TO 1992
Operating revenues for 1993 increased by approximately $249.9 million
(6.7%) as compared with 1992. This increase was the result of a $155.9 million
(6.4%) increase in revenues from restaurant operations and a $94.0 million
(7.4%) increase in revenues from Canteen's contract food service operations.
Canteen's concession and recreation revenues increased by $35.0 million (12.2%)
and its food and vending revenues increased by $59.0 million (6.0%) as compared
with 1992, primarily as a result of regional acquisitions. Food and vending
revenues from Canteen's existing customer base continue to be adversely impacted
by reduced employment levels at Canteen's business and industrial accounts.
Denny's revenues increased $80.8 million (5.6%) principally as a result of the
following: an 11-unit increase in the number of Company-owned restaurants, the
addition of 49 net new franchised units, and favorable outside sales at the
Company's distribution and food processing operations. Revenues at Denny's,
however, were adversely affected by severe weather conditions in the first
quarter, which forced the temporary closing of many of its restaurants, by the
delay in implementation of certain promotional programs, and, management
believes, by the negative publicity relating to the litigation described above
in Item 3. Legal Proceedings. As a result of these factors, Denny's increase in
average unit sales of 0.1% included a decrease in customer traffic of 4.1% while
the average check increased 4.4%. Hardee's accounted for a significant portion
of the increase in restaurant operating revenues for the year with a $75.0
million (12.4%) increase in 1993 as compared with 1992, due to a 6.0% increase
in average unit sales and a 36-unit increase in the number of restaurants. The
increase in average unit sales resulted from an 7.2% increase in the average
check offset, in part, by a decrease of 1.1% in customer traffic. The increases
in average unit sales and average check at Hardee's are primarily attributable
to the fresh fried chicken product and the continued development of Hardee's
"Frisco" product line. Quincy's revenues decreased by $11.1 million (3.8%) in
1993 as compared with 1992, primarily due to a 2.5% decrease in average unit
sales combined with
13
<PAGE>
<PAGE>
a 4-unit decline in the number of units. The decrease in average unit sales
resulted from a decrease in customer traffic of 7.5% which was offset, in part,
by a 5.3% increase in average check. The significant decrease in traffic at
Quincy's as compared with 1992 reflects the impact of a number of programs that
were in place in early 1992 which increased customer traffic in 1992, but which
proved to be more costly than anticipated and were subsequently refined or
discontinued, resulting in the comparative decline in 1993 traffic. Revenues of
El Pollo Loco, which account for only 4.2% of total restaurant operating
revenues, increased by $11.2 million (11.5%) in 1993 as compared to 1992 as a
result of a full year's impact in 1993 of 11 franchised units which were
acquired by the Company in the fourth quarter of 1992 and a 1.8% increase in
average unit sales.
The Company's operating expenses before considering the effects of the
write-off of goodwill and certain other intangible assets and the provision for
restructuring charges, discussed below, increased by $290.3 million (8.4%) in
1993 as compared with 1992. This increase was primarily attributable to an
increase of $190.3 million (8.5%) in operating expenses before the effects of
the write-off of goodwill and certain other intangible assets and the provision
for restructuring charges relating to the Company's restaurant operations, and a
$98.5 million (8.0%) increase in the operating expenses before the effects of
the write-off of goodwill and certain other intangible assets and the provision
for restructuring charges relating to Canteen's contract food service
operations. Canteen's increased expenses were primarily a result of the
corresponding increase in operating revenues described above. Of the total
increase in operating expenses relating to restaurant operations, a significant
portion ($118.7 million) is attributable to Denny's. The significant increase in
operating expenses before the effects of the write-off of goodwill and certain
other intangible assets and the provision for restructuring charges at Denny's
is due primarily to an increase in product costs of $84.8 million and an
increase in payroll and benefit expense of $30.0 million. These increases
resulted from higher commodity costs, additional labor associated with a Denny's
breakfast promotion (which was discontinued in the second quarter) and an
initiative to improve Denny's service capabilities, one time charges of $8.3
million related to efforts to address claims of discrimination, $1.1 million for
the write-off of an international joint venture, and an increase in the number
of Denny's units. Management expects the discrimination claims at Denny's to
have an ongoing cost impact on the Company at least until resolution of the
matters described above in Item 3. Legal Proceedings. The increase in operating
expenses before the effects of the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges at Hardee's of
$66.4 million is mainly attributable to increased revenues and is comprised
principally of an increase in payroll and benefits expenses of $21.0 million and
an increase in product costs of $29.9 million. Conversely, the decrease in
operating expenses before the effects of the write-off of goodwill and certain
intangible assets and the provision for restructuring charges at Quincy's of
$8.9 million is attributable to the decrease in revenues. Quincy's experienced
decreases in payroll and benefits expense of $3.9 million and in product costs
of $3.8 million. Corporate and other expenses before the effects of the
write-off of goodwill and certain intangible assets and the provision for
restructuring charges increased by $1.5 million in 1993 as compared with 1992,
primarily due to an increase in payroll and benefits expense of $1.9 million.
The write-off of goodwill and certain other intangible assets, primarily
tradenames and franchise agreements, represent noncash charges of $1,267.7
million and $207.1 million, respectively. Since the acquisition of Flagstar in
1989, the Company has not achieved the revenue and earnings projections that
were prepared and utilized at the time of the acquisition. In assessing the
recoverability of goodwill and other intangible assets in prior years, the
Company developed projections of future operations which indicated the Company
would become profitable within several years and fully recover the carrying
value of its goodwill and other intangible assets. Actual results, however, have
fallen short of these projections, primarily due to increased competition,
intensive pressure on pricing due to discounting, declining customer traffic,
adverse economic conditions, and relatively limited capital resources to respond
to these changes. During the fourth quarter of 1993, management determined that
projections of future operating results, based on the assumption that historical
operating trends derived from the last four years would continue (rather than
projections derived from those utilized in 1989 or projections based on
assumptions that the restructuring plan described below will be successful), did
not support the future amortization of the remaining goodwill balance and
certain other intangible assets at December 31, 1993. See Notes 1 and 2 to the
Consolidated Financial Statements for a description of the methodology employed
to assess the recoverability of the Company's goodwill and other intangible
assets.
Effective in the fourth quarter of 1993, the Company approved a
restructuring plan that includes the sale or closure of restaurants, a reduction
in personnel, and a reorganization of certain management structures. The
provision for restructuring charges is the result of disappointing operating
results and a comprehensive financial and operational review initiated in 1993
due to a re-engineering study that evaluated the Company's major business
processes. The restructuring charge of $192 million includes primarily a
non-cash charge of $156 million to write-down certain assets and incremental
14
<PAGE>
<PAGE>
cash charges of $36 million for severance, relocation and other costs. See Note
3 to the Consolidated Financial Statements for further details.
The write-down of assets under the restructuring plan represents
predominantly non-cash adjustments made to reduce the carrying value of
approximately 240 of the Company's 1,376 Denny's, Quincy's, and El Pollo Loco
restaurants. Approximately 105 Denny's and 45 El Pollo Loco restaurants will be
sold to franchisees or closed over a twelve month period and have been written
down to net realizable value. The Quincy's concept is over-penetrated in a
number of its markets; thus, most of the 90 Quincy's units identified in the
restructuring plan will be converted to another concept with some units closed.
As a result of the conversion to another concept, the estimated amount of the
units' carrying value with no future benefit has been written off. The
write-down of assets also includes a charge of $22 million to establish a
reserve for operating leases primarily related to restaurant units which will be
sold to franchisees or closed. The 240 restaurant units identified in the
restructuring plan had aggregate operating revenues during 1993 of approximately
$227 million and a negative operating cash flow of approximately $2.4 million.
Such units had a net remaining carrying value after the write-down of
approximately $43 million.
The restructuring plan will consolidate certain Company operations and
eliminate overhead positions in the field and in its corporate marketing,
accounting, and administrative functions. Also, the Company's field management
structure will be reorganized to eliminate a layer of management. The
restructuring charge includes a provision of approximately $25 million for the
related severance, relocation, and office closure costs. The Company's
restructuring plan also includes the decision to fundamentally change the
competitive positioning of Denny's, El Pollo Loco, and Quincy's. The Company
anticipates that the restructuring plan will result in reduced general and
administrative costs of approximately $10 million annually.
Interest and debt expense decreased by $29.6 million in 1993 as compared
with 1992, primarily due to a reduction in the Company's weighted average
borrowing rate following the Recapitalization, the principal elements of which
were consummated in the fourth quarter of 1992. The decrease in interest and
debt expense includes a net decrease of $68.3 million in non-cash charges
related to the accretion of original issue discount on the Company's 17% Senior
Subordinated Discount Debentures Due 2001 which were retired in the fourth
quarter of 1992 as part of the Recapitalization. Non-cash interest expense
related to the accretion of insurance liabilities also decreased by
approximately $7.0 million in 1993 as a result of a change in the method of
determining the discount rate applied to insurance liabilities retroactive to
January 1, 1993, as discussed below. These decreases in non-cash interest
expense were offset, in part, by an increase in cash interest of $46.9 million
from the refinance debt which was issued as part of the Recapitalization.
The Company's accounting change pursuant to Staff Accounting Bulletin No.
92 resulted in a charge of $12.0 million, net of income tax benefits, for the
cumulative effect of the change in accounting principle as of January 1, 1993.
The impact of this change on the Company's 1993 operating results was to
increase operating expenses and decrease interest expense by approximately $7.0
million, respectively.
For the year ended December 31, 1993, the Company recognized extraordinary
losses totalling $26.4 million, net of income tax benefits of $0.2 million. The
extraordinary losses resulted from the write-off of $26.5 million of unamortized
deferred financing costs associated with the prepayment in September 1993 of
$387.5 million of term facility indebtedness and a charge of $0.1 million in
March 1993 related to the repurchase of $741,000 in principal amount of the 10%
Debentures. During the year ended December 31, 1992, the Company recognized
extraordinary losses totalling $155.4 million, net of income tax benefits of
$85.1 million from (i) premiums paid to retire certain indebtedness in
connection with the Recapitalization and the write-off of related unamortized
deferred financing costs, resulting in a charge of $144.8 million, net of income
tax benefits of $83.6 million, (ii) the write-off of unamortized deferred
financing costs associated with the prepayment of a portion of the Company's
indebtedness under its prior credit agreement from the proceeds of the offer and
sale (the "Preferred Stock Offering") in July 1992 of FCI's $2.25 Series A
Cumulative Convertible Exchangeable Preferred Stock, $.10 par value per share
(the "Preferred Stock"), resulting in a charge of $8.8 million, net of income
tax benefits of $1.3 million, and (iii) the defeasance of $7.6 million of
mortgage notes payable resulting in a charge of $1.8 million, net of income tax
benefits of $0.2 million.
1992 COMPARED TO 1991
Operating revenues for 1992 increased by approximately $102.3 million
(2.8%) as compared with 1991. This increase was the result of a $104.3 million
(4.5%) increase in revenues from restaurant operations that was partially offset
by a $2.0 million (0.2%) decrease in revenues from Canteen's contract food
service operations. Canteen's concession and recreation revenues increased by
$22.4 million or 8.5% over 1991. However, Canteen's food and vending revenues
decreased by
15
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<PAGE>
$24.4 million or 2.4% as compared with 1991 as the food and vending segment
continued to be adversely impacted by reduced employment levels, particularly in
the western and northeastern sections of the United States. Denny's accounted
for $20.0 million of the $104.3 million increase in revenues from restaurant
operations. The increase in revenues of Denny's was primarily attributable to a
17-unit increase in the number of Company-owned restaurants. Average unit sales
decreased 0.1% as a result of a 4.2% decrease in customer traffic, offset by a
4.3% increase in the average check. The decrease in traffic during 1992 resulted
from intense competition and discounting in the midscale market segment, limited
television exposure during the second half of 1992, and the continuing weakness
of the west coast economy. The increase in the average check at Denny's
primarily reflects a shift in consumer preferences to higher-priced menu items.
Denny's also added 52 new franchise units during the year. Hardee's accounted
for $81.2 million of the increase in restaurant operating revenues, primarily
due to an 11.5% increase in average unit sales and a 28-unit increase in the
number of restaurants. The increase in average unit sales resulted from a 5.9%
increase in the average check at the Company's Hardee's restaurants combined
with an increase of 5.3% in customer traffic. These increases are believed to be
attributable, in part, to the introduction in the Company's Hardee's restaurants
of fresh fried chicken as a new menu item in 300 units and the introduction in
July 1992 of the "Frisco Burger" sandwich in all units. Quincy's contributed
$6.6 million to the increase in restaurant operating revenues. The increase at
Quincy's reflects a 1.1% increase in average unit sales, primarily due to a 2.6%
increase in customer traffic (principally for breakfast service), which was
offset in part by a 1.5% decrease in the average check. Quincy's results also
reflect a number of programs which were introduced in the first quarter and were
designed to increase customer traffic. Such programs, which proved to be more
costly than originally anticipated, were refined or eliminated in the second
quarter. Revenues of El Pollo Loco, which accounted for only 4.0% of total
restaurant operating revenues, decreased by $3.5 million as a result of a
decrease in the number of Company-owned restaurants for the first three quarters
of 1992 as compared to the same period in 1991.
The Company's overall operating expenses increased by $79.9 million in 1992
as compared with 1991. This increase was primarily attributable to an increase
of $82.3 million (3.8%) in operating expenses of the restaurant operations,
partially offset by a $7.0 million (0.6%) decrease in operating expenses of
Canteen's contract food service operations. The increases in the operating
expenses of the restaurant operations reflected the increased revenues and
consisted primarily of increased payroll and benefit expenses at Denny's ($7.3
million), Hardee's ($22.6 million) and Quincy's ($0.8 million). Aggressive
product cost management and favorable commodity prices reduced the effects of
product costs which increased at Hardee's ($22.4 million) and Quincy's ($7.9
million), and decreased at Denny's ($10.6 million). The product cost increases
at Quincy's were due in part to the programs discussed in the preceding
paragraph. The decrease in Canteen's operating expenses was due principally to a
$8.5 million decline in product costs. Canteen's operating expenses were also
reduced in the first quarter by approximately $2.6 million of unusual credits
resulting from settlements of various insurance matters. Corporate and other
expenses increased by $4.6 million, primarily due to a full year's impact in
1992 of certain support function expenses that, in 1991, were reflected in the
restaurants' and Canteen's operating expenses.
Interest and debt expense decreased by $1.1 million in 1992 as compared
with 1991, due primarily to a net decrease in cash interest of $7.4 million in
1992 due to lower interest rates on outstanding variable rate indebtedness,
principal payments made during the year (including prepayment of a portion of
the Company's term loan under its prior credit agreement with proceeds of the
Preferred Stock Offering) and the issuance of the Preferred Stock. This decrease
was offset, in part, by an increase of $8.5 million in non-cash charges
principally related to the accretion of discounts recorded on certain
self-insurance liabilities.
For the year, the Company recognized extraordinary losses totalling $155.4
million, net of income tax benefits of $85.1 million. The extraordinary losses
resulted primarily from premiums paid to retire certain indebtedness in
connection with the Recapitalization and the write-off of related unamortized
deferred financing costs, resulting in a charge of $144.8 million, net of income
tax benefits of $83.6 million, and from the write-off of unamortized deferred
financing costs associated with the prepayment of a portion of the Company's
term loan under its prior credit agreement from the proceeds of the Preferred
Stock Offering, resulting in a charge of $8.8 million, net of income tax
benefits of $1.3 million. In addition, in May 1992 the Company defeased $7.6
million of mortgage notes payable resulting in a charge of $1.8 million, net of
income tax benefits of $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has met its liquidity needs and capital
requirements with internally generated funds and external borrowings. The
Company expects to continue to rely on internally generated funds, supplemented
by available
16
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<PAGE>
working capital advances under its Amended and Restated Credit Agreement, dated
as of October 26, 1992, among Flagstar and TWS Funding, Inc., as borrowers,
certain lenders and co-agents named therein, and Citibank, N.A., as managing
agent (as amended, from time to time, the "Restated Credit Agreement"), and
other external borrowings, as its primary sources of liquidity and believes that
funds from these sources will be sufficient for the next twelve months to meet
the Company's working capital, debt service and capital expenditure
requirements.
Although the Company reported net losses in 1992 and 1993, those losses
have been attributable in major part to non-cash charges, consisting principally
of the write-off of goodwill and certain intangible assets, depreciation of
tangible assets, amortization of intangible assets and goodwill, accretion of
original issue discount, non-cash charges for extraordinary items related to
refinancings and defeasance of indebtedness, and non-cash charges related to the
cumulative effect of changes in accounting principles. The following table sets
forth, for each of the years indicated, a calculation of the Company's cash from
operations available for debt repayment and capital expenditures:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1992 1993
<S> <C> <C>
(IN MILLIONS)
Net loss................................................................................... $(231.1) $(1,700.8)
Write-off of goodwill and certain intangible assets........................................ -- 1,474.8
Provision for restructuring charges........................................................ -- 192.0
Non-cash charges........................................................................... 307.6 263.5
Deferred income tax benefits............................................................... (20.8) (85.4)
Extraordinary items, net................................................................... 155.4 26.4
Cumulative effect of changes in accounting principles, net................................. 17.8 12.0
Changes in certain working capital items................................................... (15.0) 1.4
Increase in other assets and increase (decrease) in other liabilities, net................. 0.1 (27.1)
Cash from operations available for debt repayment and capital expenditures................. $ 214.0 $ 156.8
</TABLE>
The provision for restructuring charges of $192.0 million recorded during
1993 includes approximately $36.0 million in incremental cash charges. Such cash
charges, less approximately $6.5 million expended in 1993, are expected to
require funding predominantly over a period of approximately twelve months.
Included in the $156 million of primarily non-cash charges is a reserve of $22
million for the present value of operating leases, net of estimated sublease
rentals, related to restaurant units that will be sold to franchisees or closed
and offices to be closed. This liability will be liquidated over the remaining
terms of the operating leases. The Company plans to fund the cash portion of the
restructuring through the sale of certain Denny's and El Pollo Loco restaurant
units to franchisees, increased cash flows from operations as a result of
reduced general and administrative expenses and increased royalties on newly
franchised restaurants, and borrowings under the Restated Credit Agreement.
During 1993, the Company sold in a public offering (the "1993 Offering")
$275 million aggregate principal amount of 10 3/4% Senior Notes Due 2001 (the
"10 3/4% Notes") and $125 million aggregate principal amount of 11 3/8% Senior
Subordinated Debentures Due 2003 (the "11 3/8% Debentures"). Proceeds of the
1993 Offering were used to reduce the term facility under the Restated Credit
Agreement. Although the interest rates payable on the 10 3/4% Notes and 11 3/8%
Debentures are higher than the rate paid by the Company under the term facility
partially refinanced thereby, the 1993 Offering and the related amendment to
Restated Credit Agreement served to extend the scheduled maturities of the
Company's long-term indebtedness and thereby provide the Company with additional
financial flexibility.
The Restated Credit Agreement includes a working capital and letter of
credit facility of up to $350.0 million with a working capital sublimit of $200
million and a letter of credit sublimit of $245 million. The amendment to the
Restated Credit Agreement consummated in conjunction with the 1993 Offering
included, among other things, a modification to the former requirement that
working capital advances under the credit facility be repaid in full and not
reborrowed for at least 30 consecutive days during any 13-month period but at
least once during each year to provide that working capital advances under the
credit facility be paid down to a maximum borrowing thereunder of $100 million
in 1993, reducing to $50 million in 1998, for such 30 day period in each year.
Such amendment also made less restrictive certain financial covenants under the
Restated Credit Agreement. An additional amendment to the Restated Credit
Agreement was consummated in 1993 for the Company to use up to $50 million of
net cash proceeds from the disposition of Denny's and El Pollo Loco restaurant
units to acquire new Denny's restaurant units and refurbish other existing units
and to exclude from limitations on capital expenditures (as defined) and
investments (as defined) up to $25.6 million of cash or debt assumed
17
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<PAGE>
in the purchase of certain franchisee units. For additional information see Item
13. Certain Relationships and Related Transactions -- Description of
Indebtedness.
The Restated Credit Agreement and the indentures governing the Company's
outstanding public debt contain negative covenants that restrict, among other
things, the Company's ability to pay dividends, incur additional indebtedness,
further encumber its assets and purchase or sell assets. In addition, the
Restated Credit Agreement includes provisions for the maintenance of a minimum
level of interest coverage, limitations on ratios of indebtedness to earnings
before interest, taxes, depreciation and amortization (EBITDA) and limitations
on annual capital expenditures.
At December 31, 1993 scheduled debt maturities of long-term debt for the
years 1994 through 1998 are as follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
(IN MILLIONS)
1994.................................................................................... $ 41.7
1995.................................................................................... 42.5
1996.................................................................................... 55.3
1997.................................................................................... 96.7
1998.................................................................................... 119.6
</TABLE>
In addition to scheduled maturities of principal, approximately $265.0
million of cash will be required in 1994 to meet interest payments on long-term
debt (including interest on variable rate term indebtedness under the Restated
Credit Agreement of approximately $11.0 million, assuming an annual interest
rate of 6.3%).
The Company's principal capital requirements are those associated with
opening new restaurants and expanding its contract food service business, as
well as those associated with remodeling and maintaining its existing
restaurants and facilities. During 1993, total capital expenditures were
approximately $225.5 million, of which approximately $83.0 million was used to
open new restaurants, $22.0 million was used for new products equipment, $61.2
million was applied to expand and maintain the Company's contract food service
business, and $59.3 million was expended to upgrade and maintain existing
facilities. Of these expenditures, approximately $77.1 million were financed
through capital leases and secured borrowings. Capital expenditures during 1994
are expected to total approximately $185 million, of which approximately $60
million is expected to be financed externally.
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. At
December 31, 1993 the Company's working capital deficiency was $304.6 million as
compared with $284.0 million at the end of 1992. Such increase is attributable
primarily to an increase in restructuring and other liabilities which was
partially offset by an increase in receivables and inventories from the
acquisition of contract food service operations during 1993.
During November 1992, the Financial Accounting Standards Board issued
Statement No. 112 "Employers' Accounting for Postemployment Benefits" which
requires that benefits provided to former or inactive employees prior to
retirement be recognized as an obligation when earned, subject to certain
conditions, rather than when paid. The Company does not expect Statement No. 112
to have a material impact on the Company's operations and will implement this
statement during the first quarter of 1994.
On April 11, 1994, Standard & Poor's Corporation downgraded the
long-term credit ratings on Flagstar's outstanding senior debt securities
from B+ to B and on its subordinated debt securities and FCI's
Preferred Stock from B- to CCC+. Moody's Investors' Service, Inc. has also
indicated that it is reviewing the ratings of Flagstar's debt securities for
a possible downgrade. As a result of this action, certain payments by the
Company relating to a subsidiary's mortgage financing will become due and
payable on a monthly, rather than semi-annual, basis. See Item 13. Certain
Relationships and Related Transactions - Description of Indebtedness -
Mortgage Financings. Although the Company has not yet had an opportunity
to evaluate the effect of such downgrade,
management does not currently anticipate a significant impact on the
Company's liquidity or ongoing operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules which
appears on page F-1 herein.
FORM 11-K INFORMATION
Flagstar, pursuant to Rule 15d-21 promulgated under the Securities Exchange
Act of 1934, as applicable, will file as an amendment to this Annual Report on
Form 10-K the information, financial statements and exhibits required by Form
11-K with respect to the Flagstar Thrift Plan and the Denny's, Inc. Profit
Sharing Retirement Plan.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the directors of
Flagstar. Each director of Flagstar is also a director of FCI.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
<S> <C> <C>
Michael Chu......................... 45 Director of FCI and Flagstar; Director of Latin American Operations, ACCION
International (1993-present); Executive of KKR and a Limited Partner of KKR
Associates, the sole partner of TW Associates and KKR Partners II (1989-1993);
Director of World Color Press, Inc., Commercial Printing Holding Co., FINANSOL
Compania de Financiamiento Comercil and Banco Solidario S.A.
Vera King Farris.................... 53 Director of FCI and Flagstar; President of The Richard Stockton College of New
Jersey (1983-present); Director of Elizabethtown Gas Corporation.
Hamilton E. James................... 43 Director of FCI and Flagstar; Managing Director of Donaldson, Lufkin & Jenrette
Securities Corporation (investment banking) (1987-present); Senior Vice President
and Principal of Donaldson, Lufkin & Jenrette Securities Corporation (1982-1987);
Director of Price/Costco Inc. and County Seat Stores, Inc.
Henry R. Kravis (a)................. 50 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of AutoZone, Inc., Duracell International Inc., IDEX Corporation, K-III
Communications Corporation, Owens-Illinois, Inc., Owens-Illinois Group, Inc., RJR
Nabisco Holdings Corp., RJR Nabisco, Inc., Safeway Inc., The Stop & Shop
Companies, Inc., Union Texas Petroleum Holdings, Inc., Walter Industries, Inc.
and American Re Corporation.
Augustus K. Oliver.................. 44 Director of FCI and Flagstar; General Partner of Gollust, Tierney and Oliver
(investment banking) (1985-present); Director of Gollust, Tierney and Oliver
International Ltd. (administrative and management services) (1988-present);
Managing Director of Gollust, Tierney and Oliver, Inc. (investment banking)
(1984-present); Partner of Skadden, Arps, Slate, Meagher & Flom (law firm)
(1983-1984).
Paul E. Raether..................... 47 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of Duracell International, Inc., Fred Meyer, Inc., IDEX Corporation, RJR Nabisco
Holdings Corp., RJR Nabisco, Inc., The Stop & Shop Companies, Inc. and Walter
Industries, Inc.
Jerome J. Richardson................ 57 Chairman of FCI and Flagstar (1992-present); Chief Executive Officer and Director
of FCI (1989-present); President of FCI (1989-1992); Chief Executive Officer of
Flagstar (1989-present); Director of Flagstar (1980-present); President of
Flagstar (1987-1992); Chairman of Denny's (1989-present); President and Chief
Executive Officer of Canteen (1989-present); Chairman of Flagstar Systems, Inc.
(1990-present); President and Chief Executive Officer of Flagstar Systems, Inc.
(1989-present); President and Chief Executive Officer of Denny's (1988); Senior
Vice President of Flagstar (1986-1987); President of Spartan Food Systems,
division of Flagstar (1986-1989); President of Flagstar Systems, Inc.
(1962-1986); Director of Isotechnologies, Inc., NCAA Foundation and Sonat Inc.;
Member of the Board of Visitors, Duke University Medical Center.
Clifton S. Robbins.................. 36 Director of FCI and Flagstar; Executive of KKR and a Limited Partner of KKR
Associates; Director of IDEX Corporation, RJR Nabisco Holdings Corp., RJR
Nabisco, Inc. and The Stop & Shop Companies, Inc.
George R. Roberts (a)............... 50 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of AutoZone, Inc., Duracell International Inc., IDEX Corporation, K-III
Communications Corporation, Owens-Illinois, Inc., Owens-Illinois Group, Inc., Red
Lion Properties, Inc., RJR Nabisco, Inc., RJR Nabisco Holdings Corp., Safeway
Inc., The Stop & Shop Companies, Inc., Union Texas Petroleum Holdings, Inc.,
Walter Industries, Inc. and American Re Corporation.
</TABLE>
19
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
<S> <C> <C>
L. Edwin Smart...................... 70 Director of FCI and Flagstar; Counsel, Hughes, Hubbard & Reed (law firm which
performed services for the Company in 1993) (1989-present); Chairman of the Board
and Chief Executive Officer of Flagstar (1986-1987); Chairman of the Board and
Chief Executive Officer of Transworld (1978-1986); Chairman of the Board of TWA
(1977-1985); Chief Executive Officer of TWA (1977-1979); Vice Chairman of TWA
(1976-1977); Senior Vice President of TWA (1967-1975); Director of The
Continental Corporation and Sonat Inc.
Michael T. Tokarz................... 44 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of Homes Holdings Corporation, IDEX Corporation, K-III Communications
Corporation, RJR Nabisco, Inc., RJR Nabisco Holdings Corp., Safeway Inc. and
Walter Industries, Inc.
</TABLE>
(a) Messrs. Kravis and Roberts are first cousins.
In connection with the Recapitalization, FCI and Flagstar agreed that their
respective Boards of Directors would be expanded to eleven members and that a
majority of each such board will consist of persons designated by affiliates of
KKR. For additional information concerning agreements regarding the composition
of the Board of Directors, see Item 12. Security Ownership of Certain Beneficial
Owners and Management -- The Stockholder's Agreement.
EXECUTIVE OFFICERS OF FLAGSTAR
The following table sets forth information with respect to the executive
officers of Flagstar (other than as identified above).
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
<S> <C> <C>
H. Stephen McManus (a).............. 51 Executive Vice President, Restaurant Operations of Flagstar (1991-present);
Senior Vice President of Flagstar (1989-1991); Chief Operating Officer of
Hardee's (1990-1991); Senior Vice President of Flagstar Systems, Inc. (1990-
1991); Vice President of Operations of Spartan Food Systems, division of Flagstar
(1986-1989); Vice President of Operations of Flagstar Systems, Inc. (1984-1986).
A. Ray Biggs........................ 52 Senior Vice President and Chief Financial Officer of Flagstar and Vice President
and Chief Financial Officer of FCI (1992-present); Partner, Deloitte & Touche
(accounting firm which served as independent auditors for the Company in 1993)
(1978-1992).
Gregory M. Buckley.................. 40 Senior Vice President of Flagstar and Chief Operating Officer of Quincy's
(1993-present); Vice President, Central Division of Pizza Hut (1990-1993);
President, Southeast Division of Progressive Corp. (1986-1990).
Jerry A. Houck...................... 51 Senior Vice President, Construction and Real Estate of Flagstar (1990-present);
Vice President of Construction and Real Estate of Flagstar Systems, Inc.
(1988-1990); Vice President of Construction of Flagstar Systems, Inc.
(1987-1988); Director of New Construction for Flagstar Systems, Inc. (1976-1987).
James R. Kibler..................... 39 Senior Vice President of Flagstar and Chief Operating Officer of Hardee's
(1991-present); Senior Vice President of Flagstar Systems, Inc. (1991-present);
Vice President of Operations -- Denny's West Coast (1989-1991); Division Leader
for Hardee's (1989); Region Leader for Hardee's (1979-1989).
Samuel H. Maw (a)................... 60 Senior Vice President, Product Development and Distribution of Flagstar
(1990-present); Chief Operating Officer of Canteen Corporation (1993-present);
Senior Vice President of Flagstar (1989); President and Chief Executive Officer
of Denny's (1988-1990); Senior Vice President of Spartan Food Systems, division
of Flagstar (1987-1988); Vice President of Research and Development of Flagstar
Systems, Inc. (1974-1986); Director of Isotechnologies, Inc.
Edna K. Morris...................... 42 Senior Vice President, Human Resources of Flagstar (1993-present); Vice
President, Education and Development of Flagstar (1992-1993); Senior Vice
President/Human Resources of Hardee's Food Systems, Inc. (1987-1992); Director of
Employee Relations of Hardee's Food Systems, Inc. (1987); Personnel Manager,
Consolidated Diesel Company, a joint venture between J. I. Case and Cummins
Engine Company (1981-1987); Personnel Manager, Manufacturing of Hardee's Food
Systems, Inc. (1980-1981).
</TABLE>
20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
<S> <C> <C>
Raymond J. Perry.................... 52 Senior Vice President of Flagstar and Chief Operating Officer of El Pollo Loco
(1993-present); President of Kelly's Coffee & Fudge Factory (1991-1993);
Executive Vice President of Carl's Jr. Restaurants (1989-1991); Group Vice
President of Carl's Jr. Restaurants (1988-1989); Vice President of Operations of
Carl's Jr. Restaurants (1986-1988).
C. Ronald Petty..................... 49 Senior Vice President of Flagstar and Chief Operating Officer of Denny's
(1993-present); Independent Consultant (1992-1993); President and Chief Executive
Officer of Miami Subs Corporation (1990-1992); President and Chief Operating
Officer of Burger King Corporation, US Division (1988-1990); President,
International Division of Burger King Corporation (1986-1988).
Robert L. Wynn, III................. 52 Senior Vice President and General Counsel of Flagstar (1992-present); Vice
President and General Counsel of FCI (1992-present); General Counsel of Denny's
(1991-present); Partner, Holcombe, Bomar, Wynn, Cothran and Gunn (law firm which
performed services for the Company in 1993) (1969-1990).
C. Burt Duren....................... 35 Vice President, Tax of Flagstar (1993-present); Treasurer of Flagstar (January
1994-present); Director of Tax of Flagstar (1989-1993); Senior Tax Manager,
Deloitte & Touche (1988-1989).
Norman J. Hill...................... 51 Vice President, Field Human Resources of Flagstar (1993-present); Vice President,
Human Resources of Perkins Family Restaurants, L.P. (1986-1993).
Thomas R. Holt...................... 37 Vice President, Information Services of Flagstar (1993-present); Director,
Information Services of Flagstar (1991-1993); Director, Management Information
Services of Flagstar Systems, Inc. (1988-1990); Manager, Information Services of
Carpet and Rug Division of Fieldcrest Cannon (1987-1988).
James A. Marshall................... 44 Vice President and Associate General Counsel of Flagstar (1992-present); Director
of Asset Management of Hardee's Food Systems, Inc. (1990-1992); Assistant General
Counsel and Assistant Secretary of Hardee's Food Systems, Inc. (1985-1990).
George E. Moseley................... 54 Vice President and Secretary of FCI and Flagstar (1991-present); Associate
General Counsel of FCI and Flagstar (1990-present); General Counsel of Flagstar
Systems, Inc. (1990-present); Vice President, Secretary and General Counsel of
Reeves Brothers, Inc. (manufacturing concern) (1977-1989).
Coleman J. Sullivan................. 44 Vice President, Communications of Flagstar (1990-present); Vice President of
Brown Boxenbaum, Inc. (public relations firm) (1986-1990); Director, Financial
Relations, Transworld (1984-1986).
Stephen W. Wood..................... 35 Vice President, Compensation, Benefits and Employee Information Systems of
Flagstar (1993-present); Senior Director, Compensation, Benefits and Employee
Information Systems of Flagstar (1993); Director, Benefits and Executive
Compensation of Hardee's Food Systems, Inc. (1991-1993); Consultant of Hewitt
Associates (benefit consultants that performed services for the Company in 1993)
(1990); McGuire, Woods, Battle & Boothe (law firm) (1984-1990).
Mark E. Young....................... 36 Vice President and Controller of Flagstar (January 1994-present); Special
Projects Manager, Finance of Flagstar (1993-January 1994); Vice President,
Finance and Treasurer of BET USA Inc. (contract services) (1988-1992); Senior
Manager, Deloitte & Touche (accounting firm which served as independent auditors
for the Company in 1993) (1986-1988).
</TABLE>
(a) Messrs. Maw and McManus are brothers-in-law.
See Item 12. Security Ownership of Certain Beneficial Owners and Management
for certain additional information concerning directors, executive officers and
certain beneficial owners of the Company.
21
<PAGE>
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
Set forth below is information for 1993, 1992 and 1991 with respect to
compensation for services to the Company of Jerome J. Richardson, the Chief
Executive Officer of the Company, and each of the five most highly compensated
executive officers (other than the Chief Executive Officer) of the Company
during 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION ALL
AWARDS OTHER
NAME AND ANNUAL COMPENSATION (1) SECURITIES UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($)(2) BONUS($) OPTIONS (#)(3) ($)(4)
<S> <C> <C> <C> <C> <C>
Jerome J. Richardson 1993 $ 824,355 -- -- $ 13,652
Chief Executive Officer 1992 $ 776,804 $750,000 600,000 $ 15,286
of Flagstar 1991 $ 641,663 $500,000 -- $ 16,739
A. Ray Biggs 1993 $ 198,132 -- 60,000 --
Senior Vice President 1992 $ 166,468 $104,500 6,000(5) --
and Chief Financial 1991 -- -- -- --
Officer of Flagstar
David F. Hurwitt 1993 $ 230,664 -- 35,000(6) --
Formerly Senior Vice 1992 $ 179,347 $103,125 7,200(5) --
President, Marketing 1991 -- -- -- --
of Flagstar
Samuel H. Maw 1993 $ 280,861 -- 80,000 --
Senior Vice President, 1992 $ 273,024 $124,888 -- --
Product Development 1991 $ 245,361 $ 66,300 -- --
and Distribution of Flagstar and
Chief Operating Officer of Canteen
Corporation
H. Stephen McManus 1993 $ 238,495 -- 80,000 --
Executive Vice President, 1992 $ 215,271 $104,545 -- --
Restaurant Operations 1991 $ 173,687 $ 57,400 -- --
of Flagstar
Alan R. Plassche 1993 $ 201,773 -- (6) --
Formerly Senior Vice 1992 $ 124,705 $ 67,035 -- --
President of Flagstar and 1991 -- -- -- --
Chief Operating Officer
of Canteen Corporation
</TABLE>
(1) The amounts shown for each named executive officer exclude perquisites and
other personal benefits that did not exceed, in the aggregate, the lesser of
either $50,000 or 10% of the total of annual salary and bonus reported for
the named executive officer for any year included in this table.
(2) The amounts shown for 1993 include accruals of $62,082, $26,823 and $9,027
for Messrs. Richardson, Maw and McManus, respectively, under a supplemental
executive retirement plan. The amounts shown for 1992 include accruals of
$58,053, $30,119 and $11,920 for Messrs. Richardson, Maw and McManus,
respectively, under the same plan, while the amounts shown for 1991 include
accruals of $34,421, $25,220 and $5,966 for Messrs. Richardson, Maw and
McManus, respectively.
(3) For additional information concerning the grant of options in 1993, see Item
11. Executive Compensation -- Stock Options below. Options to purchase
common stock of FCI, $.50 par value per share (the "Common Stock"), were
granted to Mr. Richardson on December 15, 1992 pursuant to the 1989
Non-Qualified Stock Option Plan of FCI, as adopted December 1, 1989 and
thereafter amended (the "1989 Option Plan"), and his employment agreement
dated as of August 11, 1992, upon the termination of his prior option to
purchase 160,000 shares of Common Stock. Such options become exercisable at
the rate of 20% per year beginning on November 16, 1993, conditioned upon
his
22
<PAGE>
<PAGE>
continued employment with the Company. Pursuant to Mr. Richardson's
employment agreement, all shares of Common Stock that Mr. Richardson
acquires upon any exercise of such options shall be subject to the
Richardson Shareholder Agreement (as defined herein). See Item 11. Executive
Compensation -- Employment Agreements -- Richardson Employment Agreement and
Item 12. Security Ownership of Certain Beneficial Owners and Management --
Richardson Shareholder Agreement for additional information.
(4) The amounts shown for Mr. Richardson are all split-dollar insurance premium
payments paid by the Company for the years indicated.
(5) Options granted in 1992 to Messrs. Biggs and Hurwitt were canceled in 1993
in connection with the issuance of new options having a lower exercise
price. For additional information, see Item 11. Executive
Compensation -- Stock Options.
(6) All options granted to Mr. Hurwitt in 1993 were terminated upon termination
of his employment with the Company as of March 31, 1994. Mr. Plassche
received options to purchase 80,000 shares of Common Stock in 1993. Such
options were terminated, however, upon termination of his employment with
the Company as of November 15, 1993.
STOCK OPTIONS
Set forth below is information with respect to individual grants of stock
options with respect to the Common Stock made during 1993 to Messrs. Biggs,
Hurwitt, Maw, McManus and Plassche. No stock options were granted in 1993 to Mr.
Richardson.
OPTION GRANTS IN 1993
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
NUMBER OF % OF REALIZABLE VALUE
SECURITIES TOTAL AT ASSUMED ANNUAL
UNDERLYING OPTIONS EXERCISE RATES OF STOCK
OPTIONS GRANTED TO OR BASE PRICE APPRECIATION
GRANTED EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM
NAME (#)(1) 1993 ($/SH) DATE 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
A. Ray Biggs 60,000 2.4% $11.25 06-29-03 $425,250 $1,073,250
David F. Hurwitt 35,000 1.4% $11.25 06-29-03 $248,063 $ 626,063
Samuel H. Maw 80,000 3.2% $11.25 06-29-03 $567,000 $1,431,000
H. Stephen McManus 80,000 3.2% $11.25 06-29-03 $567,000 $1,431,000
Alan R. Plassche 80,000 3.2% $11.25 06-29-03 $567,000 $1,431,000
</TABLE>
(1) Such options were granted on June 29, 1993 pursuant to the 1989 Option Plan.
The exercise price for such options was established at the market price for
the Common Stock at the date of grant. Such grant was effected in
conjunction with, in the case of Messrs. Biggs, Hurwitt, Maw and McManus,
the termination of prior options to purchase 6,000, 7,200, 8,400 and 7,200
shares, respectively. Such options are exercisable at the rate of 40% as of
June 29, 1995 and 20% per year thereafter, conditioned upon continued
employment with the Company. Under the 1989 Option Plan, the exercise price
of shares of Common Stock purchased upon the exercise of an option may be
paid in cash or by surrender of other shares of Common Stock having a fair
market value on the date of exercise equal to such exercise price, or in a
combination of cash and such shares. Upon termination of employment of a
holder, all of such holder's options not then exercisable expire and
terminate, but all of such holder's exercisable options generally remain
exercisable for one year; PROVIDED that, if such termination is voluntary or
without cause, such holder's exercisable options remain exercisable for
sixty days, and PROVIDED FURTHER that if such termination is for cause, such
exercisable options shall expire and terminate as of the date of
termination. Mr. Hurwitt's and Mr. Plassche's options were later terminated
in connection with the termination of their employment with the Company.
23
<PAGE>
<PAGE>
The following table sets forth information with respect to the 1993
year-end values of unexercised options, all of which were granted by the Company
pursuant to the 1989 Option Plan, held by Jerome J. Richardson, the Chief
Executive Officer of the Company, and each of the other persons named in the
Summary Compensation Table above:
AGGREGATED OPTION EXERCISES IN 1993 AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
YEAR-END (#) YEAR-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
<S> <C> <C>
Jerome J. Richardson....................................................................... 120,000/480,000 -- / --
A. Ray Biggs............................................................................... -- /60,000 -- / --
David F. Hurwitt........................................................................... -- /35,000 -- / --
Samuel H. Maw.............................................................................. -- /80,000 -- / --
H. Stephen McManus......................................................................... -- /80,000 -- / --
Alan R. Plassche........................................................................... -- / -- -- / --
</TABLE>
No options held by the foregoing officers were exercised in 1993.
RETIREMENT PLANS
Separate retirement plans are maintained by Flagstar subsidiaries, Canteen
Corporation and Flagstar Systems, Inc. Each plan is described below.
The following table shows the estimated annual benefits for a single life
annuity that could be payable under the Canteen Retirement Plan (as defined) and
Flagstar Retirement Plan (as defined), each as amended, upon a person's normal
retirement at age 65 if that person were in one of the following classifications
of assumed compensation and years of credited service:
<TABLE>
<CAPTION>
AVERAGE ANNUAL YEARS OF SERVICE
REMUNERATION OVER A FIVE-YEAR PERIOD 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$ 200,000.................................................. $ 43,410 $ 57,881 $ 72,351 $ 86,821 $100,000
250,000................................................. 54,660 72,881 91,101 109,321 125,000
300,000................................................. 65,910 87,881 109,851 131,821 150,000
350,000................................................. 77,160 102,881 128,601 154,321 175,000
400,000................................................. 88,410 117,881 147,351 176,821 200,000
500,000................................................. 110,910 147,881 184,851 221,821 250,000
600,000................................................. 133,410 177,881 222,351 266,821 300,000
700,000................................................. 155,910 207,881 259,851 311,821 350,000
800,000................................................. 178,410 237,881 297,351 356,821 400,000
900,000................................................. 200,910 267,881 334,851 401,821 450,000
1,000,000................................................. 223,410 297,881 372,351 446,821 500,000
1,200,000................................................. 268,410 357,881 447,351 536,821 600,000
1,400,000................................................. 313,410 417,881 522,351 626,821 700,000
1,600,000................................................. 358,410 477,881 597,351 716,821 800,000
</TABLE>
The Canteen Corporation Retirement Plan for Salaried Employees (the
"Canteen Retirement Plan") is noncontributory and covers salaried employees of
the Company's Canteen operations (and its predecessors) and certain of Canteen's
subsidiaries other than "highly compensated employees" as defined in the
Internal Revenue Code of 1986, as amended (the "Code"). Highly compensated
employees were excluded from future service accruals effective January 1, 1989.
A participant's annual benefit under the Canteen Retirement Plan at normal
retirement age is calculated by multiplying the number of years of participation
in the Canteen Retirement Plan (not to exceed 35 years) by the sum of one
percent of the average Compensation (as defined below) paid during 60
consecutive calendar months chosen to produce the highest average ("Average
Compensation" for purposes of this paragraph) plus an additional one-half of one
percent of the Average Compensation in excess of the average Social Security
wage base. Benefits payable cannot exceed 50% of
24
<PAGE>
<PAGE>
Average Compensation. Plan benefits are normally in the form of a life annuity
or, if the retiree is married, a joint and survivor annuity. An employee becomes
a participant as of any January 1 following the later of the date of employment
or the attainment of age twenty and one-half. "Compensation" for purposes of
this paragraph consists of all remuneration paid by the employer to the employee
for services rendered as reported or reportable on Form W-2 for federal income
tax withholding purposes (including the amount of any 1992 year-end bonus paid
in 1993), excluding severance pay, pay during layoff, relocation allowance, cost
of living differentials, special overseas premiums, compensation resulting from
participation in, or cancellation of, stock option plans, contributions by the
employer to the Canteen Retirement Plan or any other benefit plan and imputed
income resulting from the use of the corporate aircraft or company cars. Except
for limited purposes described in the plan, Compensation also shall include any
deferred compensation under a Section 401(k) plan maintained by the employer and
salary reduction amounts under a Section 125 plan maintained by the employer.
The funding of the Canteen Retirement Plan is based upon actuarial
determinations.
Ancillary to the Canteen Retirement Plan is a nonqualified plan for key
executive employees to provide future service benefits and benefits in excess of
the annual maximum benefits limit under the Code to highly compensated
employees. "Compensation" and "Average Compensation" are defined in this
ancillary plan the same way they are defined in the Canteen Retirement Plan. The
supplemental executive retirement plan provides additional benefits to certain
key executives. Benefits payable under the ancillary plan are included in the
table above.
The Flagstar Pension Plan (the "Flagstar Retirement Plan"), which is
noncontributory, generally covers all employees of Flagstar and its subsidiaries
(other than its Canteen and Denny's subsidiaries) who have attained the age of
21 and who have completed twelve consecutive months of service. There are two
entry dates per year for new employees, January 1 and July 1. As a result of a
plan amendment effective January 1, 1989, a participant's annual retirement
benefit under the Flagstar Retirement Plan at normal retirement age is
calculated by multiplying the number of years of participation in the Flagstar
Retirement Plan (not to exceed 35 years) by the sum of one percent of the
average Compensation (as defined below) paid during 60 consecutive calendar
months chosen to produce the highest average ("Average Compensation" for the
purposes of this paragraph) plus an additional one-half of one percent of the
Average Compensation in excess of the average Social Security wage base.
Benefits payable cannot exceed 50% of the Average Compensation. Plan benefits
are normally in the form of a life annuity or, if the retiree is married, a
joint and survivor annuity. "Compensation" for the purposes of this paragraph
consists of all remuneration paid by the employer to the employee for services
rendered as reported or reportable on Form W-2 for federal income tax
withholding purposes (including the amount of any 1992 year-end bonus paid in
1993), excluding severance pay, pay during layoff, relocation allowance, cost of
living differentials, special overseas premiums, compensation resulting from
participation in, or cancellation of, stock option plans, contributions by the
employer to the Flagstar Retirement Plan or any other benefit plan and imputed
income resulting from the use of the corporate aircraft or company cars. Except
for limited purposes described in the plan, Compensation also shall include any
deferred compensation under a Section 401(k) plan maintained by the employer and
salary reduction amounts under a Section 125 plan maintained by the employer.
The funding of the Flagstar Retirement Plan is based on actuarial
determinations.
Ancillary to the Flagstar Retirement Plan is a nonqualified plan for key
executive employees to provide future service benefits and benefits in excess of
the annual maximum benefits limit under the Code to certain key employees.
"Compensation" and "Average Compensation" are defined in this ancillary plan the
same way they are defined in the Flagstar Retirement Plan. A supplemental
executive retirement plan provides additional benefits to certain key
executives. Benefits payable under the ancillary plan are included in the table
above.
The annual limit for both qualified plans for 1993 was $115,641, except
that, for those plan participants whose accrued benefits exceeded $90,000 prior
to January 1, 1983, the annual limit is equal to the 1982 accrued benefit. All
benefits under the nonqualified plans are paid out of the general funds of the
employer.
Except for the addition of 1992 bonuses paid in 1993, the Compensation
included under the Canteen and Flagstar Retirement Plans (including the
ancillary nonqualified plans) generally corresponds with the annual compensation
of the named executive officers in the Summary Compensation Table above.
Includable Compensation for 1993 for Messrs. Richardson, Biggs and Hurwitt was
$1,016,323, $220,199 and $286,721, respectively.
As of December 31, 1993, the estimated credited years of service under the
Flagstar Retirement Plan for Messrs. Richardson, Biggs, Hurwitt, Maw and McManus
at normal retirement age was 40, 14, 11, 29 and 36, respectively.
25
<PAGE>
<PAGE>
The early retirement provisions of the Canteen and Flagstar Retirement
Plans were amended effective January 1, 1989 to provide an improved benefit for
long service employees. Employees with age and service equalling or exceeding 85
and who are within five years of the Social Security normal retirement age will
receive no reduction of accrued benefits. Employees who are at least 55 years of
age with 15 years of service will receive a reduction of three percent in
accrued benefits for the first five years prior to normal retirement date and
six percent for the next five years. Accrued benefits for employees retiring
with less than 15 years of service will be actuarially reduced beginning at age
55. Vesting of retirement benefits was also changed to comply with the law from
ten-year cliff vesting at Canteen and 12-year graduating vesting at Flagstar to
five-year cliff vesting for both plans.
FLAGSTAR THRIFT PLAN
The Flagstar Thrift Plan (the "Thrift Plan") is designed to encourage and
facilitate systematic savings by eligible employees. The Thrift Plan is
available to salaried employees who are not governed by a collective bargaining
agreement and who are employed by Flagstar or any subsidiary that adopts the
Thrift Plan with the consent of the Board of Directors. Participation in the
Thrift Plan is voluntary. The Thrift Plan may be amended by the Board of
Directors from time to time, but such amendments may not diminish the securities
or cash in the account of a participant.
A participant in the Thrift Plan generally may choose either of two options
for contributions: an after-tax option or a pre-tax option. An employee may not
make both after-tax and pre-tax contributions in the same month.
A salaried employee is eligible to participate in the Thrift Plan if the
employee (i) has attained 21 years of age, (ii) has completed one year of
service (as defined) and (iii) is not subject to a collective bargaining
agreement. Under the after-tax option, each participant specifies a percentage
of compensation (as defined in the Thrift Plan) to be contributed to the Thrift
Plan, which contribution is made by payroll deduction. No participant may
contribute more than 10% of annual compensation. Flagstar contributes a matching
amount equivalent to 25% of the participant's monthly contribution, subject to
certain statutory limits. Contributions of the participants and Flagstar are
invested in investment vehicles designated by the plan administrator. A
participant is able to withdraw certain eligible contributions once per calendar
year or at early retirement age, upon normal retirement, upon termination of
employment, upon disability or at death.
Under the pre-tax option, an eligible employee may make a contribution to
the Thrift Plan on a pre-tax basis, pursuant to Section 401(k) of the Code, by
deferring up to 10% of such employee's compensation (as defined in the Thrift
Plan) but not more than $8,994 (for 1993, the amount being indexed annually) per
year, which is then contributed by Flagstar to the Thrift Plan. Flagstar
currently matches 25% of the employee pre-tax contribution up to 6% of the
employee's compensation (as defined in the Thrift Plan) plus 75% of the first
$500 of employee pre-tax contributions. Contributions are invested in investment
vehicles designated by the plan administrator. Flagstar's matching contributions
are invested pursuant to participants' investment directions for their pre-tax
and after-tax contributions. A participant is able to withdraw pre-tax matching
contributions (and earnings thereon) once per quarter, provided such
contributions were made prior to January 1, 1988. A participant may withdraw his
own pre-tax contributions (including earnings thereon through December 31, 1988)
upon the showing of an immediate and substantial financial hardship as defined
in the plan. Upon the attainment of age 59 1/2, as well as upon the occurrence
of retirement, death, disability or termination of service, a participant
generally may withdraw all contributions and earnings thereon. Flagstar's
contributions vest upon contribution.
Effective June 14, 1990, Common Stock again became an optional investment
vehicle under the Thrift Plan. Participants may direct the investment of up to
25% of their own contributions and the matching contributions in Common Stock.
Participants also may transfer amounts from other investment vehicles into
Common Stock. In no event, however, may a participant transfer amounts into
Common Stock that would result in the ownership of Common Stock exceeding 25% of
the participant's total interest in the Thrift Plan.
On October 26, 1988, the Board of Directors approved certain amendments to
the Thrift Plan. These amendments were necessitated by changes in the federal
tax laws and became effective on January 1, 1989. As a result of the amendments,
highly compensated employees, as defined by the Code and the regulations
thereunder and including the executive officers of Flagstar, are no longer
eligible to make pre-tax or after-tax contributions to the Thrift Plan. In lieu
of this benefit, such employees received certain salary increases.
Under the Thrift Plan, shares of the Common Stock attributable to
participating employees' contributions and contributions by Flagstar will be
voted by the plan trustee in accordance with the employee's instructions and,
absent such instructions, in the trustee's discretion.
26
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENTS
RICHARDSON EMPLOYMENT AGREEMENT
Concurrently with the execution of a Stock and Warrant Purchase Agreement
dated August 11, 1992 by and between TW Associates and FCI (the "Purchase
Agreement"), Mr. Richardson and Flagstar entered into an employment agreement
(the "Employment Agreement"), which took effect on November 16, 1992, and which
provides that Flagstar will employ Mr. Richardson as Chief Executive Officer and
Chairman of the Board of Flagstar until November 16, 1997 or his earlier death
or termination of employment by reason of permanent disability, voluntary
termination of employment or involuntary termination for cause (as defined). The
Employment Agreement prohibits Mr. Richardson from soliciting employees of
Flagstar or its affiliates and from engaging in certain competitive activities
generally during his term of employment and for a period of three years after
termination of employment. The Employment Agreement further prohibits Mr.
Richardson from using or disclosing certain "confidential" or "proprietary"
information for purposes other than carrying out his duties with the Company.
Under the Employment Agreement, Mr. Richardson is entitled to receive (i)
an annual base salary at the rate of $750,000 per year from November 16, 1992
through December 31, 1993 and at a rate determined by the Compensation and Stock
Option Committee of Flagstar's Board of Directors annually thereafter, (ii) an
annual performance bonus targeted to equal his base salary if Flagstar and Mr.
Richardson achieve budgeted financial and other performance targets, to be
established annually by the Compensation and Stock Option Committee, and (iii)
subject to the termination of the ten-year option that Mr. Richardson received
from FCI in 1989 to purchase 160,000 shares of Common Stock at $20.00 per share
(the "Prior Option") (and provided that he continues to be employed by the
Company unless his employment is terminated as a result of a "Termination
Without Cause" (as defined therein)), the grant of a new option or options to
purchase 600,000 shares of Common Stock, to be exercisable at the rate of 20%
per year beginning on November 16, 1993 and subject to exercise prices of $15.00
per share for 100,000 shares and $17.50 per share for 500,000 shares. In
December 1992, Mr. Richardson terminated his Prior Option and was granted such
options to purchase 600,000 shares of Common Stock. The Employment Agreement
also entitles Mr. Richardson to participate in all of the Company's benefit
plans. As a condition to Mr. Richardson entering into the Employment Agreement
which extends his term of employment with Flagstar for an additional three
years, FCI advanced funds (the "Richardson Loan") to refinance approximately
$13,900,000 outstanding principal and certain interest due on a 1989 loan from
NationsBank of North Carolina, N.A. to Mr. Richardson. Mr. Richardson used the
proceeds of the 1989 loan to finance his purchase of approximately 800,000
shares of Common Stock. For additional information concerning the Richardson
Loan, see Item 13. Certain Relationships and Related Transactions.
In the event of Mr. Richardson's termination of employment during the term
of the Employment Agreement, Flagstar is required to make payments as follows
based upon the cause of termination of employment: (i) if by reason of death,
Mr. Richardson's surviving spouse is entitled to be paid an amount equal to Mr.
Richardson's base salary for a one-year period after his death; (ii) if by
reason of permanent disability, Mr. Richardson is entitled to be paid one-half
of his base salary and annual bonus for a period of two years after termination
of employment; and (iii) if by Flagstar other than for "cause," or by Mr.
Richardson following a material breach by Flagstar of a material provision of
the Employment Agreement (each, a "Termination Without Cause"), Mr. Richardson
is entitled to be paid immediately upon such termination a lump sum amount equal
to his base salary and bonuses (deemed to be $1,500,000, in the aggregate, per
year) and his other benefits for the remaining term of the agreement.
OTHER EMPLOYMENT AGREEMENTS
Mr. Biggs has in effect a three (3) year employment agreement with Flagstar
to serve at the direction of the Chief Executive Officer of Flagstar, subject to
earlier termination upon his death or termination of employment by reason of
permanent disability, voluntary termination of employment or involuntary
termination for cause (as defined). The agreement prohibits Mr. Biggs from
soliciting employees of Flagstar or its affiliates and from engaging in certain
competitive activities generally during the term of his employment and for a
period of one year after termination of employment. The agreement further
prohibits Mr. Biggs from using or disclosing certain "confidential" or
"proprietary" information for purposes other than carrying out his duties with
the Company.
Under the agreement, Mr. Biggs is entitled to receive (i) an annual base
salary at the rate of $190,000 per year (subject to increase in the Company's
discretion based on annual reviews and annual cost of living adjustments) and
(ii) an
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annual cash bonus determined under the terms of the Company's senior management
incentive compensation plan provided certain performance targets are met. The
agreement also entitles Mr. Biggs to participate in all of the Company's benefit
plans.
In the event of Mr. Biggs' termination of employment during the term of his
employment agreement, Flagstar is required to make payments as follows based
upon the cause of termination of employment: (i) if by reason of death, Mr.
Biggs' surviving spouse is entitled to be paid an amount equal to Mr. Biggs'
base salary for a one-year period after his death, together with accrued but
unpaid bonuses then owing to Mr. Biggs; (ii) if by reason of permanent
disability, Mr. Biggs is entitled to be paid one-half of his base salary for a
period of two years after termination of employment, together with accrued but
unpaid bonuses then owing to Mr. Biggs; and (iii) if by Flagstar other than for
"cause," Mr. Biggs is entitled to be paid immediately upon such termination a
lump sum amount equal to his base salary and bonuses and his other benefits for
the remaining term of the agreement.
Prior to the March 31, 1994 termination of his employment, Mr. Hurwitt was
party to an employment agreement having terms and conditions providing his base
salary (subject to annual increases in the Company's discretion and certain cost
of living adjustments), a potential annual bonus under the Company's senior
management incentive plan, and termination and restrictive covenant provisions
similar to those for Mr. Biggs. In connection with the termination of Mr.
Hurwitt's employment with the Company, Mr. Hurwitt received an amount equal to
one year's base salary (consistent with his employment agreement) and an
additional severance benefit (consistent with the Company's severance policy).
See the Summary Compensation Table above.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Raether, Robbins and Tokarz served on the Company's Compensation
and Stock Option Committee during 1993. Mr. Smart served on the former
Compensation Committee until September 1993. Mr. Smart formerly served as an
officer of Flagstar. He is currently counsel to Hughes, Hubbard & Reed, a law
firm which performed services for the Company in 1993. Messrs. Tokarz and
Robbins serve as officers of certain subsidiaries of the Company. Messrs.
Raether and Tokarz are general partners and Mr. Robbins is an executive of KKR.
In 1993, KKR received an annual financial advisory fee of $1,250,000.
Pursuant to the Purchase Agreement, Associates has agreed that it will not,
directly or indirectly, sell, assign, pledge, hypothecate or otherwise transfer
any of the shares of Common Stock acquired under the Purchase Agreement or the
Common Stock issuable upon exercise of the Warrants (as defined herein) prior to
December 31, 1994 (or such later date as is specified in the Purchase Agreement)
except (i) in connection with a sale of or acceptance of an offer to purchase
90% or more of the outstanding shares of Common Stock, (ii) in connection with a
merger or other similar extraordinary corporate transaction which results in a
change of control of FCI and involves an entity which immediately prior thereto
is not an affiliate of TW Associates or KKR Partners II, any partner thereof or
FCI, or (iii) to certain affiliates of Associates or any partner thereof.
The Purchase Agreement further provides that, until November 16, 1995, FCI
shall maintain in full force and effect its existing directors' and officers'
liability insurance policy with respect to events occurring prior to November
16, 1992 (or, if such insurance is not available at a reasonable cost, as much
such insurance as is available to it at a reasonable cost). FCI and its
subsidiaries will maintain in effect the provisions in their respective charters
and bylaws which provide for indemnification of FCI's and its subsidiaries'
officers and directors with respect to events occurring prior to November 16,
1992. Associates also agreed not to engage in a Rule 13e-3 Transaction (as
defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended)
prior to March 31, 1995 without the approval of a majority of the disinterested
directors of FCI and a fairness opinion from an investment banking firm selected
by such directors.
Pursuant to the Purchase Agreement, FCI has agreed to indemnify and hold
harmless Associates and its affiliates, directors, officers, advisors, agents
and employees to the fullest extent lawful, from and against any and all losses,
damages, claims, liabilities and actions arising out of or in connection with
the Recapitalization and all expenses of investigating, preparing or defending
any such claim or action (including reasonable legal fees and expenses);
PROVIDED, however, that nothing contained in such indemnification provision is
to be construed as a guarantee by FCI with respect to the value of the shares of
Common Stock acquired under the Purchase Agreement or indemnification of
Associates against any diminution in value thereof which may occur; and
PROVIDED, FURTHER, that no indemnified party will be entitled to indemnification
by FCI with respect to any of the foregoing arising solely from the bad faith or
gross negligence (as finally determined by a court of competent jurisdiction) of
such indemnified party or any of the affiliates, directors, officers, agents or
employees of such indemnified party.
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See Item 12. Security Ownership of Certain Beneficial Owners and Management
for additional information concerning other agreements among Associates,
Gollust, Tierney & Oliver ("GTO"), DLJ Capital Corporation ("DLJ Capital"), Mr.
Richardson and FCI.
COMPENSATION OF DIRECTORS
Directors of the Company other than Mr. Richardson are entitled to an
annual retainer of $40,000. Directors are also reimbursed for expenses incurred
in attending meetings of the Board of Directors and its committees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Currently, 100% of Flagstar's outstanding common stock, $.01 par value per
share, is owned by FCI. The following table sets forth, as of March 31, 1994,
the beneficial ownership of the Common Stock (and thereby proportionate
beneficial ownership of Flagstar) by each stockholder known by the Company to
own more than 5% of the outstanding shares, by each director of FCI, by each
officer of the Company included in the Summary Compensation Table in Item 11.
Executive Compensation above, and by all directors and executive officers of and
Flagstar as a group. Except as otherwise noted, the persons named in the table
below have sole voting and investment power with respect to all shares shown as
beneficially owned by them. The number of FCI shares and options indicated
herein (including shares issuable upon the exercise of stock options), as well
as corresponding option exercise and market prices, have been adjusted to give
effect to the five-for-one reverse stock split of the Common Stock effected by
FCI as of June 16, 1993.
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT AND NATURE OF OF COMMON
BENEFICIAL OWNER BENEFICIAL OWNERSHIP STOCK
<S> <C> <C>
KKR Associates
(and related entities)
9 West 57th Street
New York, NY 10019 (1)........................................................... 19,999,999(2) 47.20%
Gollust, Tierney and Oliver
(and related entities)
500 Park Avenue
New York, NY 10022 (3)........................................................... 11,251,052 26.55%
DLJ Capital Corporation
(and related entities)
140 Broadway
New York, NY 10005............................................................... 3,041,562 7.18%
Michael Chu........................................................................ -- --
Vera King Farris................................................................... 100 *
Hamilton E. James.................................................................. 34,187(4) *
Henry R. Kravis (1)................................................................ -- --
Augustus K. Oliver (3)............................................................. -- --
Paul E. Raether (1)................................................................ -- --
Jerome J. Richardson............................................................... 938,164(5)(6) 2.21%
Clifton S. Robbins................................................................. -- --
George R. Roberts (1).............................................................. -- --
L. Edwin Smart..................................................................... 12,066(4)(7) *
Michael T. Tokarz (1).............................................................. -- --
A. Ray Biggs....................................................................... -- --
David F. Hurwitt................................................................... 60 *
Samuel H. Maw...................................................................... 22,092(5) *
H. Stephen McManus................................................................. 17,661(5) *
Alan R. Plassche................................................................... -- --
All directors and executive officers as a group (29 persons)....................... 1,059,908(5)(8) 2.50%
</TABLE>
* Less than one percent.
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(1) Shares shown as owned by KKR Associates are owned of record by TW Associates
(19,913,333 shares) and KKR Partners II (86,666 shares). KKR Associates is
the sole general partner and possesses sole voting and investment power as
to each of TW Associates and KKR Partners II. Messrs. Kravis, Raether,
Roberts and Tokarz (directors of FCI and Flagstar) and Messrs. Robert J.
MacDonnell, Michael W. Michelson and Saul A. Fox, as the general partners of
KKR Associates, may be deemed to share beneficial ownership of the shares
shown as beneficially owned by KKR Associates. Such persons disclaim
beneficial ownership of such shares.
(2) Excludes 15,000,000 shares of Common Stock underlying warrants (the
"Warrants"), which become exercisable in 1995, acquired by TW Associates
(14,935,000 shares) and KKR Partners II (65,000 shares) under the Purchase
Agreement. The Warrants were issued pursuant to the Warrant Agreement dated
November 16, 1992 by and between FCI and Associates (the "Warrant
Agreement"). Each Warrant entitles the holder thereof to purchase one fully
paid and nonassessable share of Common Stock at an initial exercise price
(the "Exercise Price") of $17.50, subject to adjustment from time to time
upon the occurrence of certain events. Any or all of the Warrants may be
exercised at any time after December 31, 1994 (or the date to which such
date may be extended in accordance with certain provisions of the
Stockholders' Agreement (as defined herein) or March 31, 1995 if GTO has
complied with its obligations thereunder to sell specified amounts of its
Common Stock) (the "Warrant Effectiveness Date") and until November 16,
2000. Notwithstanding the foregoing, in the event (a) a sale of or
acceptance of an offer to purchase 90% or more of the outstanding shares of
Common Stock, or (b) a merger or other similar extraordinary corporate
transaction involving an entity which immediately prior thereto is not an
affiliate of Associates or any partner thereof or of FCI which modifies the
outstanding Common Stock and which results in a change of control of FCI
occurs on or prior to the Warrant Effectiveness Date, each Warrant will
become exercisable immediately prior to such sale or acceptance or
consummation of such transaction.
(3) The Saurer Group Investments Ltd., North Atlantic Continental Capital Ltd.
and The Common Fund (who are parties to certain investment management
arrangements with GTO) own, respectively, 403,014, 301,358 and 1,872,540 of
the shares listed. GTO disclaims beneficial ownership of such shares. GTO
and related entities own the balance of the shares listed. Mr. Oliver is a
general partner of GTO and as such may be deemed to share beneficial
ownership of the shares owned by GTO. Mr. Oliver disclaims beneficial
ownership of such shares.
(4) Excludes shares underlying options that are not currently exercisable, but
includes 7,500 shares that each of Messrs. James and Smart has a right to
acquire upon the exercise of currently exercisable options granted by the
Company in 1990. Mr. James also has a limited investment in GTO or related
entities, or both. Shares listed for Mr. James exclude shares held by DLJ
Capital.
(5) Includes shares held by the trustee of the Thrift Plan as of January 31,
1994 for the individual accounts of employee participants. Under the Thrift
Plan, shares attributable to participating employees' contributions and
Company contributions are voted by the trustee in accordance with the
employees' instructions, while shares as to which no instructions are
received are voted by the trustee in its discretion. Of shares held in the
Thrift Plan for the accounts of directors and executive officers of FCI and
Flagstar, approximately 3,364, 222 and 1,596 are credited to the accounts of
Messrs. Richardson, Maw and McManus, respectively, and 6,808 are credited to
the accounts of all directors and executive officers as a group.
(6) Includes 120,000 shares that Mr. Richardson has the right to acquire upon
the exercise of currently exercisable options under the 1989 Option Plan.
(7) Includes 4,166 shares that Mr. Smart has the right to acquire upon
conversion of the 10% Debentures.
(8) Excludes shares owned by KKR Associates through TW Associates and KKR
Partners II, as set forth above. Messrs. Kravis, Raether, Roberts and Tokarz
are general partners of KKR Associates, the sole general partner of TW
Associates and KKR Partners II. They also are directors of FCI and Flagstar.
Each of Messrs. Kravis, Raether, Roberts and Tokarz disclaims beneficial
ownership of those shares listed above as owned by KKR Associates. Also
excludes shares held by GTO and related entities, as set forth above. Mr.
Oliver is a general partner of GTO and also is a director of FCI and
Flagstar. Mr. Oliver disclaims beneficial ownership of those shares listed
above as owned by GTO and related entities.
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THE STOCKHOLDERS' AGREEMENT. Concurrently with the execution of the
Purchase Agreement, GTO and certain of its affiliates (collectively, the "GTO
Group"), DLJ Capital, Mr. Richardson, TW Associates (the "Stockholder Parties")
and FCI entered into an agreement (the "Stockholders' Agreement") pursuant to
which the Stockholder Parties have agreed not to transfer or sell shares of
Common Stock held by them prior to December 31, 1994 (or, in certain
circumstances, March 31, 1995), except in connection with the sale of 90% or
more of the outstanding Common Stock and except for transfers in connection with
extraordinary corporate transactions, transfers in certain cases to certain
affiliates of GTO or Associates and sales to the public by GTO commencing on or
after June 30, 1993. The GTO Group has agreed not to purchase any additional
Common Stock.
Pursuant to the Stockholders' Agreement, each of the Stockholder Parties
has agreed to nominate and vote all shares of Common Stock owned by it to elect
as directors (a) six persons designated by Associates, (b) Mr. Richardson (for
so long as Mr. Richardson remains Chief Executive Officer of FCI), (c) one
representative designated by each of the GTO Group and DLJ Capital (for so long
as the GTO Group and DLJ Capital, respectively, continue to own at least 2% of
the outstanding shares of Common Stock on a fully-diluted basis) and (d) two
independent directors. The Stockholder Parties have further agreed to increase
by two the number of directors constituting the entire Board of Directors of FCI
and to nominate (if requested) and vote to elect as directors two additional
persons to be designated by Associates if at any time the holders of the
Preferred Stock, voting together as a class with all other classes or series of
preferred stock ranking junior to or on a parity with the Preferred Stock, are
entitled to elect two additional directors; PROVIDED that the two Associates'
designees so elected shall resign and the size of the FCI Board of Directors
shall be reduced accordingly at such time as the directors elected by preferred
stockholders shall resign or their term shall end.
Under the Stockholders' Agreement, the GTO Group is granted the right to
make two written requests to FCI for registration of shares of Common Stock
owned by the GTO Group under the Securities Act of 1933, as amended (the
"Securities Act"), exercisable on or after June 30, 1993, and is obligated, if
the trading price of the Common Stock exceeds $20.00 per share for fifteen
consecutive trading days and a registration statement of FCI under the
Securities Act is effective for specified periods, to dispose of up to 50% of
its shares of Common Stock prior to September 30, 1994. FCI may, but is not
obligated to, file and maintain an effective shelf registration (the "Shelf
Registration") with respect to the shares of Common Stock to be disposed of by
the GTO Group. At any time after December 31, 1994 (or, in certain
circumstances, March 31, 1995), (i) DLJ Capital may make two written requests to
FCI for registration under the Securities Act of all or any part of the shares
of Common Stock owned by DLJ Capital, and (ii) the holders of a majority of all
shares of Common Stock and Warrants issued to Associates and all shares of
Common Stock issued or issuable to Associates upon exercise of any Warrant (the
"Associates Registrable Securities") may make five written requests to FCI for
registration of all or part of such securities under the Securities Act. In
addition, the GTO Group, DLJ Capital and Associates have customary "piggyback"
registration rights to include their securities, subject to certain limitations,
in any other registration statement filed by FCI (other than the Shelf
Registration and certain demand registrations by the GTO Group), pursuant to any
of the foregoing requests or otherwise under the Securities Act. If Associates
exercises its demand or "piggyback" registration rights and Mr. Richardson is
then employed by the Company, then Mr. Richardson has the right to have included
in any registration statement relating to the exercise of such rights by
Associates the same percentage of his Common Stock as the fully-diluted
percentage of Associates Registrable Securities registered thereunder. If at any
time Mr. Richardson shall have the right to participate in a "piggyback"
registration and Mr. Richardson elects not to exercise such "piggyback"
registration right, he may make one written request to FCI for registration
under the Securities Act of up to the number of shares of Common Stock that he
had the right to include, but did not so include, in such one or more
registrations pursuant to his "piggyback" registration rights. The Company has
agreed to pay all expenses in connection with the performance of its obligations
to effect demand or "piggyback" registrations under the Securities Act of
securities covered by the registration rights of the Stockholder Parties, and to
indemnify and hold harmless, to the full extent permitted by law, each holder of
such securities against liability under the securities laws.
The Stockholders' Agreement will terminate upon the sale of all shares of
Common Stock now owned or hereafter acquired by the GTO Group, DLJ Capital, Mr.
Richardson or Associates; PROVIDED that, (i) at such time as the GTO Group or
DLJ Capital shall own less than 2% of the outstanding Common Stock on a
fully-diluted basis, the GTO Group or DLJ Capital, as the case may be, shall be
released from its respective obligations and forfeit its respective rights under
the Stockholders' Agreement, and (ii) at such time after December 31, 1994, or
the date to which such date may be extended in accordance with the provisions of
the Stockholders' Agreement, as GTO or a related entity shall cease to have
investment advisory authority over the shares of Common Stock now owned or
hereafter acquired by certain affiliates of GTO, and the GTO Group shall have
complied with the provisions of the Stockholders' Agreement requiring it to
dispose
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of certain of its shares of Common Stock under certain circumstances, each such
affiliate will be released from its respective obligations and forfeit its
respective rights under the Stockholders' Agreement.
In any event, the provisions of the Stockholders' Agreement with respect to
voting arrangements and restrictions will terminate no later than ten years from
the date of the Stockholders' Agreement, subject to extension in accordance with
applicable law by the agreement of the remaining parties to the Stockholders'
Agreement.
RICHARDSON SHAREHOLDER AGREEMENT. Shares of Common Stock currently owned by
Mr. Richardson ("Owned Stock") and shares that he would acquire upon exercise of
any stock options granted to him by the Company under the 1989 Option Plan
("Option Stock") are subject to various rights and restrictions contained in a
shareholder agreement (the "Richardson Shareholder Agreement") executed by Mr.
Richardson and FCI concurrently with the execution of the Purchase Agreement.
In general, the Richardson Shareholder Agreement provides that, (i) subject
to Mr. Richardson's registration rights under the Stockholders' Agreement, Mr.
Richardson may not sell or transfer the Owned Stock or Option Stock until after
November 16, 1997, unless Mr. Richardson's employment terminates by reason of
death or permanent disability, or is terminated by Flagstar without "cause" and
FCI elects to require payment of the balance of the principal and accrued
interest on the Richardson Loan (as defined herein) (in which case he may
transfer the Owned Stock), (ii) before November 16, 1997, with respect to any
Owned Stock permitted to be transferred pursuant to clause (i) above, and after
November 16, 1997 with respect to the Option Stock, Mr. Richardson may not
transfer any such Owned Stock or Option Stock without first offering to sell it
to FCI at the price offered by a third party, (iii) upon Mr. Richardson's death
or permanent disability while he is employed by Flagstar or following his
retirement after November 16, 1997, Mr. Richardson and his estate each have a
one-time right, exercisable within six months after death or permanent
disability, to elect to require FCI, except under certain circumstances, to
purchase all or part of Mr. Richardson's Option Stock at its market value and to
cash out the value of his exercisable options based on the excess of such value
over the exercise price, and FCI may elect to require Mr. Richardson and his
estate to sell such stock and cash out such options at such prices, (iv) if Mr.
Richardson's employment is terminated by him voluntarily or by Flagstar with
"cause," then FCI may repurchase 20% (if he voluntarily terminates his
employment between July 26, 1993 and July 26, 1994) or all (if his employment is
terminated for "cause" prior to July 26, 1994), as the case may be, of the Owned
Stock at $20.00 per share and (v) if Mr. Richardson's employment is terminated
for any reason other than his death or permanent disability or his retirement on
or after November 16, 1997, FCI may repurchase all but not less than all of Mr.
Richardson's Option Stock at the lesser of (i) its market value or (ii) the sum
of the exercise price of the options pursuant to which such stock was acquired,
plus a multiple of 20% of any excess of such market value over such exercise
price for each year of his employment after November 16, 1992, and, in the event
of an exercise by FCI of any option to repurchase (described above), FCI shall
cash out his exercisable options at a price equal to the excess of the
applicable repurchase price over the option exercise price; PROVIDED that, if
Mr. Richardson's employment is terminated as a result of a termination without
cause pursuant to the Employment Agreement (as defined herein), the
exercisability of Mr. Richardson's option with respect to 160,000 shares of
Common Stock will be determined on the basis of the vesting schedule applicable
to options granted to Mr. Richardson and in effect prior to December 15, 1992,
and the market value of the shares for the purpose of cashing out the value of
his exercisable options is to be reduced on a per share basis by the difference
between $20.00 and the exercise price of his current options.
The Richardson Shareholder Agreement provides that all shares of Owned
Stock and Option Stock shall be deemed to be "Registrable Securities" under the
Stockholders' Agreement and shall be entitled to registration rights as set
forth herein. For additional information, see Item 11. Executive
Compensation -- Employment Agreements -- Richardson Employment Agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Pursuant to the Employment Agreement, the Company advanced funds to Mr.
Richardson during 1992 to refinance approximately $13.9 million of his
outstanding bank indebtedness. Interest and principal on the Richardson Loan is
payable, subject to acceleration upon Mr. Richardson's earlier termination of
employment for any reason, on November 16, 1997, and interest thereon accrues at
the rate prescribed for five-year term loans under Section 7872 of the Code
(5.6% per annum) as of the date the loan by the Company was made. The Richardson
Loan is secured by 812,000 shares of Common Stock and certain other collateral
as is required to comply with margin regulations. See Item 11. Executive
Compensation -- Employment Agreements -- Richardson Employment Agreement.
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GTO received fees of $250,000 in 1993 for certain financial advisory
services. Under an existing agreement, GTO will be entitled to an additional
$250,000 for such services in 1994.
DLJ served as an underwriter in connection with the Company's issuance of
certain indebtedness in 1993 in consideration for an underwriting discount of
$4,059,000.
In connection with his employment with the Company, Mr. Buckley, the Chief
Operating Officer of Quincy's, received a non-interest bearing home equity
advance from the Company in the amount of $113,000. Such advance was repaid in
full by Mr. Buckley in 1994.
For information concerning certain transactions in which KKR (and their
affiliates) have an interest, see Item 11. Executive
Compensation -- Compensation and Stock Option Committee Interlocks and Insider
Participation.
DESCRIPTION OF INDEBTEDNESS
The following summary of the principal terms of the indebtedness of the
Company does not purport to be complete and is qualified in its entirety by
reference to the documents governing such indebtedness, including the
definitions of certain terms therein, copies of which have been filed as
exhibits to this Annual Report. Whenever particular provisions of such documents
are referred to herein, such provisions are incorporated herein by reference,
and the statements are qualified in their entirety by such reference.
THE RESTATED CREDIT AGREEMENT
In connection with the Recapitalization, Flagstar entered into the Restated
Credit Agreement, pursuant to which senior debt facilities were established
consisting (after certain adjustments and prepayments subsequent to the closing
of the Recapitalization) of (i) a $171.3 million senior term loan (the "Term
Facility"), and (ii) a $350 million senior revolving credit facility (the
"Revolving Credit Facility" and, together with the Term Facility, the "Bank
Facilities"), with sublimits for working capital advances and standby letters of
credit, and a swing line facility of up to $30 million. The proceeds of the Term
Facility were used principally to refinance comparable facilities under a prior
credit agreement and the balance was used to finance the redemption of certain
debt securities pursuant to the Recapitalization and to pay certain transaction
costs. Proceeds of the Revolving Credit Facility may be used solely to provide
working capital to the Company.
The Restated Credit Agreement provides generally that Flagstar must repay
the Term Facility over six years in increasing quarterly installments (subject
to the effects of a reallocation of a portion of a 1993 prepayment that would
otherwise have been applied to scheduled principal installments that mature
after December 31, 1996 to installments due on or prior to such date) and that
the working capital advances under the Revolving Credit Facility must be paid
down to a maximum amount (ranging from $100 million in 1993 to $50 million in
1998) and not reborrowed for at least 30 consecutive days during any
thirteen-month period but at least once during each fiscal year. Under the
Restated Credit Agreement, Flagstar is required to prepay advances outstanding
under the Term Facility (or, if no advances are outstanding thereunder, to
permanently reduce the Revolving Credit Facility) with the aggregate amount of
Net Cash Proceeds (as defined therein) received from (i) the sale, lease,
transfer or other disposition of assets of the Company (other than dispositions
of assets permitted by the terms of the Restated Credit Agreement and other
dispositions of assets not exceeding $5,000,000 in any fiscal year or $1,000,000
in any transaction or series of related transactions) and (ii) the sale or
issuance by FCI or any of its subsidiaries of any Debt (as defined therein)
(other than Debt permitted by the terms of the Restated Credit Agreement and to
the extent the Net Cash Proceeds are applied to refinance certain existing
Subordinated Debt).
The Restated Credit Agreement contains covenants customarily found in
credit agreements for leveraged financings that restrict, among other things,
(i) liens and security interests other than liens securing the obligations under
the Restated Credit Agreement, certain liens existing as of the date of
effectiveness of the Restated Credit Agreement, certain liens in connection with
the financing of capital expenditures, certain liens arising in the ordinary
course of business, including certain liens in connection with intercompany
transactions and certain other exceptions; (ii) the incurrence of Debt, other
than Debt in respect of the Recapitalization, Debt under the Loan Documents (as
defined therein), the 10 3/4% Notes, the 11 3/8% Debentures, certain capital
lease obligations, certain Debt in existence on the date of the Restated Credit
Agreement, certain Debt in connection with the financing of capital
expenditures, certain Debt in connection with investments (as defined therein)
in new operations, properties and franchises, certain trade letters of credit,
certain unsecured borrowings in the ordinary course of business, certain
intercompany indebtedness and certain other
33
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<PAGE>
exceptions; (iii) lease obligations, other than obligations in existence as of
the effectiveness of the Restated Credit Agreement, certain leases entered into
in the ordinary course of business, certain capital leases, certain intercompany
leases and certain other exceptions; (iv) mergers or consolidations, except for
certain intercompany mergers or consolidations and certain mergers to effect
certain transactions otherwise permitted under the Restated Credit Agreement;
(v) sales of assets, other than certain dispositions of inventory and obsolete
or surplus equipment in the ordinary course of business, certain dispositions in
the ordinary course of business of properties no longer used or useful to the
business of the Company, certain intercompany transactions, certain dispositions
in connection with sale and leaseback transactions and certain exchanges of real
property, fixtures and improvements for other real property, fixtures and
improvements; (vi) investments, other than certain intercompany indebtedness,
certain investments made in connection with joint venture or franchise
arrangements, certain loans to employees, investments in new operations,
properties or franchises subject to certain limitations and certain other
exceptions; (vii) payment of dividends or other distributions with respect to
capital stock of Flagstar, other than dividends from Flagstar to FCI to enable
FCI to repurchase Common Stock and FCI stock options from employees in certain
circumstances, payments to FCI with respect to fees and expenses incurred in the
ordinary course of business by FCI in its capacity as a holding company for
Flagstar, payments under a tax sharing agreement among FCI, Flagstar and its
subsidiaries and certain other exceptions; (viii) sales or dispositions of the
capital stock of subsidiaries other than sales by certain subsidiaries of
Flagstar to Flagstar or certain other subsidiaries and certain other exceptions;
(ix) the conduct by Flagstar or certain of its subsidiaries of business
inconsistent with its status as a holding company or single purpose subsidiary,
as the case may be, or entering into transactions inconsistent with such status;
and (x) the prepayment of Debt, other than certain payments of Debt in existence
on the date of the Restated Credit Agreement, certain payments to retire Debt in
connection with permitted dispositions of assets, certain prepayments of
advances under the Restated Credit Agreement and certain other exceptions.
The Restated Credit Agreement also contains covenants that require Flagstar
and its subsidiaries on a consolidated basis to meet certain financial ratios
and tests described below:
TOTAL DEBT TO EBITDA RATIO. Flagstar and its subsidiaries on a consolidated
basis are required not to permit the ratio of (a) Adjusted Total Debt (as
defined below) outstanding on the last day of any fiscal quarter to (b) EBITDA
(as defined below) for the Rolling Period (as defined below) ending on such day
to be more than a specified ratio, ranging from a ratio of 5.70:1.00 applicable
upon the effectiveness of the Restated Credit Agreement to a ratio of 4.30:1.00
applicable on or after December 31, 1997.
SENIOR DEBT TO EBITDA RATIO. Flagstar and its subsidiaries on a
consolidated basis are required not to permit the ratio of (a) Adjusted Senior
Debt (as defined below) outstanding on the last day of any fiscal quarter to (b)
EBITDA for the Rolling Period ending on such day to be more than a specified
ratio, ranging from a ratio of 3.50:1.00 applicable upon the effectiveness of
the Restated Credit Agreement to a ratio of 2.75:1.00 on or after December 31,
1996.
INTEREST COVERAGE RATIO. Flagstar and its subsidiaries on a consolidated
basis are required not to permit the ratio, determined on the last day of each
fiscal quarter for the Rolling Period then ended, of (a) EBITDA less Cash
Capital Expenditures (as defined below) to (b) Adjusted Cash Interest Expense to
be less than a specified ratio, ranging from a ratio of 1.20:1.00 applicable
upon the effectiveness of the Restated Credit Agreement to a ratio of 1.60:1.00
on or after December 31, 1997.
CAPITAL EXPENDITURES TEST. Flagstar and its subsidiaries are prohibited
from making capital expenditures in excess of $195,000,000, $210,000,000 and
$250,000,000 in the aggregate for the fiscal years ending in December 1992
through 1994, respectively, and $275,000,000 in the aggregate for each of the
fiscal years 1995 through 1998.
"Adjusted Cash Interest Expense " is defined in the Restated Credit
Agreement to mean, for any Rolling Period (as defined below), Cash Interest
Expense (as defined below) for such Rolling Period.
"Adjusted Senior Debt " is defined in the Restated Credit Agreement to mean
Senior Debt (as defined therein) outstanding on the last day of any fiscal
quarter.
"Adjusted Total Debt " is defined in the Restated Credit Agreement to mean
Total Debt (as defined below) outstanding on the last day of any fiscal quarter.
"Capex Financing " is defined in the Restated Credit Agreement to mean,
with respect to any capital expenditure, the incurrence by certain subsidiaries
of Flagstar of any Debt (including capitalized leases) secured by a mortgage or
other lien on the asset that is the subject of such capital expenditure, to the
extent that the Net Cash Proceeds of such Debt do not exceed the amount of such
capital expenditure.
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<PAGE>
"Cash Capital Expenditures" is defined in the Restated Credit Agreement to
mean, for any period, without duplication, capital expenditures of the Company
for such period, LESS (without duplication) (i) the Net Cash Proceeds of all
Capex Financings during such period and (ii) the aggregate amount of the
principal component of all obligations of the Company in respect of capitalized
leases entered into during such period.
"Cash Interest Expense" is defined in the Restated Credit Agreement to
mean, for any Rolling Period, without duplication, interest expense net of
interest income, whether paid or accrued during such Rolling Period (including
the interest component of capitalized lease obligations) on all Debt, INCLUDING,
without limitation, (a) interest expense in respect of advances under the
Restated Credit Agreement, the 10 7/8% Notes and the Subordinated Debt (as
defined therein), (b) commissions and other fees and charges payable in
connection with letters of credit, (c) the net payment, if any, payable in
connection with all interest rate protection contracts and (d) interest
capitalized during construction, but EXCLUDING, in each case, interest not
payable in cash (including amortization of discount and deferred debt expenses),
all as determined in accordance with generally accepted accounting principles as
in effect on December 31, 1991.
"EBITDA" of any person is defined in the Restated Credit Agreement to mean,
for any period, on a consolidated basis, net income (or net loss) PLUS the sum
of (a) interest expense net of interest income, (b) income tax expense, (c)
depreciation expense, (d) amortization expense, (e) extraordinary or unusual
losses included in net income (net of taxes to the extent not already deducted
in determining such losses) and (f) in the case of the fiscal quarter ending in
December 1992 only, an amount (not to exceed $18,500,000) equal to the aggregate
amount of fees paid in connection with the Recapitalization that are not
otherwise excluded in determining net income (or net loss), LESS extraordinary
or unusual gains included in net income (net of taxes to the extent not already
deducted in determining such gains), in each case determined in accordance with
generally accepted accounting principles as in effect on December 31, 1991.
"Funded Debt" is defined in the Restated Credit Agreement to mean the
principal amount of Debt in respect of advances under the Bank Facilities and
the principal amount of all Debt that should, in accordance with generally
accepted accounting principles as in effect on December 31, 1991, be recorded as
a liability on a balance sheet and matures more than one year from the date of
creation or matures within one year from such date but is renewable or
extendible, at the option of the debtor, to a date more than one year from such
date or arises under a revolving credit or similar agreement that obligates the
lender or lenders to extend credit during a period of more than one year from
such date, including, without limitation, all amounts of Funded Debt required to
be paid or prepaid within one year from the date of determination.
"Rolling Period" is defined in the Restated Credit Agreement to mean, for
any fiscal quarter, such quarter and the three preceding fiscal quarters.
"Total Debt" outstanding on any date is defined in the Restated Credit
Agreement to mean the sum, without duplication, of (a) the aggregate principal
amount of all Debt of Flagstar and its subsidiaries, on a consolidated basis,
outstanding on such date to the extent such Debt constitutes indebtedness for
borrowed money, obligations evidenced by notes, bonds, debentures or other
similar instruments, obligations created or arising under any conditional sale
or other title retention agreement with respect to property acquired or
obligations as lessee under leases that have been or should be, in accordance
with generally accepted accounting principles, recorded as capital leases, (b)
the aggregate principal amount of all Debt of Flagstar and its subsidiaries, on
a consolidated basis, outstanding on such date constituting direct or indirect
guarantees of certain Debt of others and (c) the aggregate principal amount of
all Funded Debt of Flagstar and its subsidiaries on a consolidated basis
consisting of obligations, contingent or otherwise, under acceptance, letter of
credit or similar facilities; PROVIDED that advances under the Revolving Credit
Facility shall be included in Total Debt only to the extent of the average
outstanding principal amount thereof outstanding during the 12-month period
ending on the date of determination.
Under the Restated Credit Agreement, an event of default will occur if,
among other things, (i) any person or group of two or more persons acting in
concert (other than KKR, GTO and their respective affiliates) acquires, directly
or indirectly, beneficial ownership of securities of FCI representing, in the
aggregate, more of the votes entitled to be cast by all voting stock of FCI than
the votes entitled to be cast by all voting stock of FCI beneficially owned,
directly or indirectly, by KKR and its affiliates, (ii) any person or group of
two or more persons acting in concert (other than KKR and its affiliates)
acquires by contract or otherwise, or enters into a contract or arrangement that
results in its or their acquisition of the power to exercise, directly or
indirectly, a controlling influence over the management or policies of Flagstar
or FCI or (iii) Flagstar shall cease at any time to be a wholly-owned subsidiary
of FCI. If such an event of default were to occur, the lenders under the Related
Credit Agreement would be entitled to exercise a number of remedies, including
acceleration of all amounts owed under the Restated Credit Agreement.
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PUBLIC DEBT
As part of the Recapitalization, Flagstar consummated on November 16, 1992
the sale of $300 million aggregate principal amount of 10 7/8% Senior Notes Due
2002 (the "10 7/8% Notes") and issued pursuant to an exchange offer for
previously outstanding debt issues $722.4 million principal amount of 11.25%
Senior Subordinated Debentures Due 2004 (the "11.25% Debentures"). On September
23, 1993, Flagstar consummated the sale of $275 million aggregate principal
amount of the 10 3/4% Notes and $125 million aggregate principal amount of the
11 3/8% Debentures. The 10 7/8% Notes and the 10 3/4% Notes are general
unsecured obligations of Flagstar and rank PARI PASSU in right of payment with
Flagstar's obligations under the Restated Credit Agreement. The 11.25%
Debentures are general unsecured obligations of Flagstar and are subordinate in
right of payment to the obligations of Flagstar under the Restated Credit
Agreement, the 10 7/8% Notes and the 10 3/4% Notes. The 11.25% Debentures rank
PARI PASSU in right of payment with the 11 3/8% Debentures. All such debt is
senior in right of payment to the 10% Debentures.
THE SENIOR NOTES. Interest on the 10 7/8% Notes is payable semi-annually in
arrears on each June 1 and December 1. They will mature on December 1, 2002. The
10 7/8% Notes will be redeemable, in whole or in part, at the option of
Flagstar, at any time on or after December 1, 1997, initially at a redemption
price equal to 105.4375% of the principal amount thereof to and including
November 30, 1998, at a decreased price thereafter to and including November 30,
1999 and thereafter at 100% of the principal amount thereof, together in each
case with accrued interest.
Interest on the 10 3/4% Notes is payable semi-annually in arrears on each
March 15 and September 15. They will mature on September 15, 2001. The 10 3/4%
Notes may not be redeemed prior to maturity, except that prior to September 15,
1996, the Company may redeem up to 35% of the original aggregate principal
amount of the 10 3/4% Notes, at 110% of their principal amount, plus accrued
interest, with that portion, if any, of the net proceeds of any public offering
for cash of the Common Stock that is used by FCI to acquire from the Company
shares of common stock of the Company.
THE SENIOR SUBORDINATED DEBENTURES. Interest on the 11.25% Debentures is
payable semi-annually in arrears on each May 1 and November 1. They will mature
on November 1, 2004. The 11.25% Debentures will be redeemable, in whole or in
part, at the option of Flagstar, at any time on or after November 1, 1997,
initially at a redemption price equal to 105.625% of the principal amount
thereof to and including October 31, 1998, at decreasing prices thereafter to
and including October 31, 2002 and thereafter at 100% of the principal amount
thereof, together in each case with accrued interest.
Interest on the 11 3/8% Debentures is payable semi-annually in arrears on
each March 15 and September 15. They will mature on September 15, 2003. The
11 3/8% Debentures will be redeemable, in whole or in part, at the option of the
Flagstar, at any time on or after September 15, 1998, initially at a redemption
price equal to 105.688% of the principal amount thereof to and including
September 14, 1999, at 102.844% of the principal amount thereof to and including
September 14, 2000 and thereafter at 100% of the principal amount thereof,
together in each case with accrued interest.
THE 10% DEBENTURES. Interest on the 10% Debentures is payable semi-annually
in arrears on each May 1 and November 1. The 10% Debentures mature on November
1, 2014. Unless previously redeemed, the 10% Debentures are convertible at any
time at the option of the holders thereof by exchange into shares of Common
Stock at a conversion price of $24.00 per share, subject to adjustment. The 10%
Debentures are redeemable, in whole or in part, at the option of the Company
upon payment of a premium. The Company is required to call for redemption on
November 1, 2002 and on November 1 of each year thereafter, through and
including November 1, 2013, $7,000,000 principal amount of the 10% Debentures. A
"Change of Control" having occurred on November 16, 1992, holders of the 10%
Debentures had the right, under the indenture relating thereto, to require the
Company, subject to certain conditions, to repurchase such securities at 101% of
their principal amount together with interest accrued to the date of purchase.
On February 19, 1993, FCI made such an offer to repurchase the $100 million of
10% Debentures then outstanding. As of March 24, 1993 the Company repurchased
$741,000 principal amount of the 10% Debentures validly tendered and accepted
pursuant to such offer.
MORTGAGE FINANCINGS
A subsidiary of Flagstar had issued and outstanding, at December 31, 1993,
$208.5 million in aggregate principal amount of 10 1/4% Guaranteed Secured Bonds
due 2000. Interest is payable semi-annually in arrears on each November 15 and
May 15. As a result of the recent downgrade of Flagstar's outstanding
debt securities, certain payments by the Company which fund such interest
payments are now due and payable on a monthly
basis. Principal payments total $2.9 million annually through 1995; $12.5
million annually through 1999; and $152.7 million in 2000. The bonds are secured
by a financial guaranty insurance policy issued by Financial Security Assurance,
Inc. and by collateral assignment of mortgage loans on 237 Hardee's and 148
Quincy's restaurants.
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Another subsidiary of Flagstar has outstanding $160 million aggregate
principal amount of 11.03% Notes due 2000. Interest is payable quarterly in
arrears, with the principal maturing in a single installment payable in July
2000. These notes are redeemable, in whole, at the subsidiary's option, upon
payment of a premium. They are secured by a pool of cross-collateralized
mortgages on approximately 240 Denny's restaurant properties.
NOTE PAYABLE TO FCI
The Note Payable to FCI evidences Flagstar's borrowing from FCI of $150.0
million of the net proceeds of the Preferred Stock Offering. It matures July 28,
2017 and bears interest from time to time at a rate per annum that, when
multiplied by the principal amount then outstanding, equals the aggregate amount
of cash dividends then accumulated (but unpaid) with respect to the Preferred
Stock. Interest is payable on the Note Payable to FCI on the same dates that
dividends are payable on the Preferred Stock. The Note Payable to FCI is not
subject to prepayment. The Note Payable to FCI, is a general unsecured
obligation of Flagstar, subordinate in right of payment to the obligations of
Flagstar under the Restated Credit Agreement, the 10 7/8% Notes, the 10 3/4%
Notes, the 11.25% Debentures, the 11 3/8% Debentures, and the 10% Debentures and
any other indebtedness for borrowed money and other similar obligations
(including capital lease obligations, guarantees and interest rate swaps and
hedges) not by its terms PARI PASSU with or subordinated to the Note Payable to
FCI.
37
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PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) -- Financial Statements:
See the Index to Financial Statements and Financial Statement
Schedules which appears on page F-1 hereof.
(2) -- Financial Statements Schedules:
See the Index to Financial Statement Schedules which appears on
page F-24 hereof.
(3) -- Exhibits:
Certain of the exhibits to this Report, indicated by an
asterisk, are hereby incorporated by reference to other
documents on file with the Commission with which they
are physically filed, to be a part hereof as of their
respective dates.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
* 3.1 Restated Certificate of Incorporation of Flagstar (incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-2 (No. 33-49843) of Flagstar (the "Form S-2")).
<C> <S>
* 3.2 Certificate of Amendment to the Restated Certificate of Incorporation of Flagstar dated June 16, 1993 (incorporated
by reference to Exhibit 3.2 to the Form S-2).
* 3.3 By-Laws of Flagstar as amended November 16, 1992 (incorporated by reference to Exhibit 3.2 to Flagstar's 1992 Form
10-K, File No. 1-9364).
* 4.1 Indenture between Flagstar and United States Trust Company of New York, as Trustee, relating to the 10% Debentures
(including the form of security) (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form
S-4 (No. 33-48923) of Flagstar (the "11.25% Debentures S-4")).
* 4.2 Supplemental Indenture, dated as of August 7, 1992, between Flagstar and United States Trust Company of New York,
as Trustee, relating to the 10% Debentures (incorporated by reference to Exhibit 4.9A to the 11.25% Debentures
S-4).
* 4.3 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and Assignment of
Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company, dated July 12, 1990
(incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to the Registration Statement on Form
S-1 (No. 33-29769) of FCI (the "Form S-1 Amendment")).
* 4.4 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended and restated as of
July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-1 Amendment).
* 4.5 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust Company relating
to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-1 Amendment).
* 4.6 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.15 to the 11.25% Debentures S-4).
* 4.7 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.16 to the 11.25% Debentures S-4).
* 4.8 Mortgage Note in the amount of $98,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.17 to the 11.25% Debentures S-4).
* 4.9 Indenture between Secured Restaurants Trust and The Citizens and Southern National Bank of South Carolina, dated as
of November 1, 1990, relating to certain Secured Bonds (incorporated by reference to Exhibit 4.18 to the 11.25%
Debentures S-4).
* 4.10 Amended and Restated Trust Agreement between Spartan Holdings, Inc., as Depositor for Secured Restaurants Trust,
and Wilmington Trust Company, dated as of October 15, 1990 (incorporated by reference to Exhibit 3.3 to the
Registration Statement on Form S-11 (No. 33-36345) of Secured Restaurants Trust (the "Form S-11")).
* 4.11 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8% Notes
(incorporated by reference to Exhibit 4.13 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992 Form 10-K")).
* 4.12 Supplemental Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8%
Notes (incorporated by reference to Exhibit 4.14 to the 1992 Form 10-K).
* 4.13 Form of 10 7/8% Note (incorporated by reference to Exhibit 4.15 to the 1992 Form 10-K).
* 4.14 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11.25%
Debentures (incorporated by reference to Exhibit 4.16 to the 1992 Form 10-K).
* 4.15 Form of 11.25% Debenture (incorporated by reference to Exhibit 4.17 to the 1992 Form 10-K).
* 4.16 Amended and Restated Credit Agreement, dated as of October 26, 1992, among Flagstar and TWS Funding, Inc., as
borrowers, certain lenders and co-agents named therein, and Citibank, N.A., as managing agent (incorporated by
reference to Exhibit 28.1 to the Current Report on Form 8-K of Flagstar filed as of November 20, 1992 (the "Form
8-K")).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
* 4.17 Closing Agreement dated as of November 12, 1992, among Flagstar and TWS Funding Inc., as borrowers, certain lenders
and co-agents named therein, and Citibank, N.A., as managing agent (incorporated by reference to Exhibit 28.2 to
the Form 8-K).
* 4.18 First Amendment to the Amended and Restated Credit Agreement dated as of December 23, 1992 (incorporated by
reference to Exhibit 4.20 to the 1992 Form 10-K).
* 4.19 Second Amendment to the Amended and Restated Credit Agreement dated as of August 5, 1993 (incorporated by reference
to Exhibit 4.23 to the Form S-2).
* 4.20 Third Amendment to the Amended and Restated Credit Agreement dated as of December 15, 1993 (incorporated by
reference to Exhibit 4.22 to FCI's 1993 Form 10-K, File No. 0-18051 (the "1993 Form 10-K")).
* 4.21 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 3/4% Notes
(incorporated by reference to Exhibit 4.23 to the 1993 Form 10-K).
* 4.22 Form of 10 3/4% Note (incorporated by reference to Exhibit 4.24 to the 1993 Form 10-K).
* 4.23 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11 3/8%
Debentures (incorporated by reference to Exhibit 4.25 to the 1993 Form 10-K).
* 4.24 Form of 11 3/8% Debenture (incorporated by reference to Exhibit 4.26 to the 1993 Form 10-K).
*10.1 Flagstar's Executive Incentive Compensation Plan (incorporated by reference to Flagstar's 1986 Form 10-K, Exhibit
10(iii), File No. 1-9364).
*10.2 Warrant Agreement, dated November 16, 1992, among FCI, TW Associates and KKR Partners II (incorporated by reference
to Exhibit 10.41 to the 1992 Form 10-K).
*10.3 Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's, Inc. (incorporated
by reference to Exhibit 10.42 to the Form S-2).
*10.4 Fair Share Agreement dated July 1, 1993 between FCI and the NAACP (incorporated by reference to Exhibit 10.43 to
the Form S-2).
*10.5 Amendment No. 2 to Stockholders' Agreement, dated as of April 6, 1993, among FCI, GTO and certain affiliated
partnerships, DLJ Capital, Jerome J. Richardson and Associates (incorporated by reference to Exhibit 10 to
Flagstar's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-9364).
*10.6 Employment Agreement between Flagstar and A. Ray Biggs dated February 10, 1992 (incorporated by reference to
Exhibit 10.6 to the 1993 Form 10-K).
*10.7 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to Exhibit 10.7 to
the 1992 Form 10-K).
*10.8 Form of Supplemental Executive Retirement Plan Trust of Flagstar (incorporated by reference to Exhibit 10.8 to the
1992 Form 10-K).
*10.9 FCI 1989 Non-Qualified Stock Option Plan, as adopted December 1, 1989 and amended November 16, 1992 (incorporated
by reference to Exhibit 10.9 to the 1992 Form 10-K).
*10.10 FCI 1990 Non-Qualified Stock Option Plan, as adopted July 31, 1990 (incorporated by reference to Exhibit 10.9 to
the Form S-1 Amendment).
*10.11 Form of Non-Qualified Stock Option Award Agreement pursuant to FCI 1990 Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Form S-1 Amendment).
*10.12 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.1 to the
Form S-11).
*10.13 Mortgage Note in the amount of $521,993,982, made by Flagstar Enterprises, Inc. in favor of Spartan Holdings, Inc.,
dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.12
to the 11.25% Debentures S-4).
*10.14 Mortgage Note in the amount of $210,077,402, made by Quincy's Restaurants, Inc. in favor of Spartan Holdings, Inc.,
dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.13
to the 11.25% Debentures S-4).
*10.15 Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of November 1, 1990
(incorporated by reference to Exhibit 10.14 to the 11.25% Debentures S-4).
*10.16 Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of November 1, 1990
(incorporated by reference to Exhibit 10.15 to the 11.25% Debentures S-4).
*10.17 Insurance and Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.16 to the 11.25% Debentures S-4).
*10.18 Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.17 to the 11.25% Debentures S-4).
*10.19 Bank Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.18 to the 11.25% Debentures S-4).
*10.20 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4).
</TABLE>
39
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.21 Liquidity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated
by reference to Exhibit 10.20 to the 11.25% Debentures S-4).
*10.22 Financial Guaranty Insurance Policy, issued November 15, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.21 to the 11.25% Debentures S-4).
*10.23 Amended and Restated Lease between Quincy's Realty, Inc. and Quincy's Restaurants, Inc., dated as of November 1,
1990 (incorporated by reference to Exhibit 10.22 to the 11.25% Debentures S-4).
*10.24 Amended and Restated Lease between Spardee's Realty, Inc. and Spardee's Restaurants, Inc., dated as of November 1,
1990 (incorporated by reference to Exhibit 10.23 to the 11.25% Debentures S-4).
*10.25 Collateral Assignment Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.24 to the 11.25% Debentures S-4).
*10.26 Form of Assignment of Leases and Rents related to Secured Restaurants Trust transaction (incorporated by reference
to Exhibit 10.12 to the Form S-11).
*10.27 Spartan Guaranty, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.26 to the 11.25% Debentures S-4).
*10.28 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.14 to the Form S-11).
*10.29 Stock Pledge Agreement among Flagstar Enterprises, Inc. and Secured Restaurants Trust, dated as of November 1, 1990
(incorporated by reference to Exhibit 10.28 to the 11.25% Debentures S-4).
*10.30 Stock Pledge Agreement among Quincy's Restaurants, Inc. and Secured Restaurants Trust, dated as of November 1, 1990
(incorporated by reference to Exhibit 10.29 to the 11.25% Debentures S-4).
*10.31 Management Agreement, dated as of November 1, 1990, related to the Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.30 to the 11.25% Debentures S-4).
*10.32 Form of Collateral Assignment of Security Documents related to Secured Restaurants Trust transaction (incorporated
by reference to Exhibit 10.17 to the Form S-11).
*10.33 Flagstar Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.32 to the 11.25% Debentures S-4).
*10.34 Subordinated Promissory Note, dated July 28, 1992, from Flagstar to FCI (incorporated by reference to Exhibit 10.33
to the 11.25% Debentures S-4).
*10.35 Development Agreement between the Company and Hardee's Food Systems, Inc., dated January 1992 (incorporated by
reference to Exhibit 10.33 to the Registration Statement on Form S-1 (No. 33-47339) of FCI (the "Preferred Stock
S-1")).
*10.36 Stock and Warrant Purchase Agreement, dated as of August 11, 1992, between FCI and TW Associates (incorporated by
reference to Exhibit 10.38 to the 11.25% Debentures S-4).
*10.37 Stockholders' Agreement, dated as of August 11, 1992, among FCI, GTO (on behalf of itself and certain affiliated
partnerships), DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit 10.39 to
the 11.25% Debentures S-4).
*10.38 Technical Amendment to the Stockholders' Agreement dated as of September 30, 1992, among FCI , GTO and certain
affiliated partnerships, DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit
10.39A to the 11.25% Debentures S-4).
*10.39 Richardson Shareholder Agreement, dated as of August 11, 1992, between FCI and Jerome J. Richardson (incorporated
by reference to Exhibit 10.40 to the 11.25% Debentures S-4).
*10.40 Employment Agreement, dated as of August 11, 1992, between Flagstar and Jerome J. Richardson (incorporated by
reference to Exhibit 10.41 to the 11.25% Debentures S-4).
*10.41 Employment Agreement, dated as of March 16, 1992, between Flagstar and David F. Hurwitt (incorporated by reference
to Exhibit 10.41 to the 1993 Form 10-K).
12 Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of Flagstar (incorporated by reference to Exhibit 22 to the Preferred Stock S-1).
</TABLE>
* Certain of the exhibits to this Annual Report on Form 10-K, indicated by an
asterisk, are hereby incorporated by reference to other documents on file with
the Commission with which they are physically filed, to be part hereof as of
their respective dates.
(b) Flagstar filed no reports on Form 8-K during the fourth quarter of 1993.
40
<PAGE>
<PAGE>
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report........................................................................................... F-2
Statements of Consolidated Operations for the Three Years Ended December 31, 1991, 1992 and 1993....................... F-3
Consolidated Balance Sheets as of December 31, 1992 and 1993........................................................... F-4
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1991, 1992 and 1993....................... F-5
Notes to Consolidated Financial Statements............................................................................. F-7
Index to Financial Statement Schedules................................................................................. F-24
</TABLE>
F-1
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
FLAGSTAR COMPANIES, INC.:
We have audited the accompanying consolidated balance sheets of Flagstar
Corporation and subsidiaries (the Company), as of December 31, 1992 and 1993,
and the related statements of consolidated operations and consolidated cash
flows for each of the three years in the period ended December 31, 1993. Our
audits also included the financial statement schedules listed in the index at
page F-24. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1992 and 1993 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Notes 8 and 1 to the consolidated financial statements, the
Company changed its method of accounting for other postretirement benefits,
effective January 1, 1992, to conform with Statement of Financial Accounting
Standards No. 106 and also changed its method of accounting for self-insurance
liabilities, effective January 1, 1993.
DELOITTE & TOUCHE
Greenville, South Carolina
March 25, 1994
F-2
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
Operating revenues............................................................ $ 3,617,934 $3,720,281 $ 3,970,205
Operating expenses:
Product cost................................................................ 1,259,777 1,266,901 1,389,668
Payroll & benefits.......................................................... 1,250,548 1,293,478 1,378,507
Depreciation & amortization expense......................................... 218,132 227,191 247,003
Commissions & royalties..................................................... 123,833 130,903 148,828
Other....................................................................... 541,684 555,384 600,118
Write-off of goodwill and other intangible assets (Note 2).................. -- -- 1,474,831
Provision for restructuring charges (Note 3)................................ -- -- 192,003
3,393,974 3,473,857 5,430,958
Operating income (loss)....................................................... 223,960 246,424 (1,460,753 )
Other charges:
Interest and debt expense (Note 4).......................................... 308,837 303,889 266,139
Interest expense on note payable to FCI (Note 4)............................ -- 6,064 14,175
Other -- net................................................................ 797 914 2,501
309,634 310,867 282,815
Loss before income taxes, extraordinary items, and cumulative effect of
changes in accounting principles............................................ (85,674 ) (64,443) (1,743,568 )
Benefit from income taxes (Note 6)............................................ (18,099 ) (6,583) (81,149 )
Loss before extraordinary items and cumulative effect of changes in accounting
principles.................................................................. (67,575 ) (57,860) (1,662,419 )
Extraordinary items, net of income tax benefits of: 1992 -- $85,053;
1993 -- $196 (Note 12)...................................................... -- (155,401) (26,405 )
Loss before cumulative effect of changes in accounting principles............. (67,575 ) (213,261) (1,688,824 )
Cumulative effect of changes in accounting principles, net of income tax
benefits of: 1992 -- $8,785 (Note 8); 1993 -- $90 (Note 1).................. -- (17,834) (12,010 )
Net loss...................................................................... $ (67,575 ) $ (231,095) $(1,700,834 )
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1992 1993
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 39,266 $ 45,046
Receivables, less allowance for doubtful accounts of: 1992 -- $9,385;
1993 -- $7,538............................................................................... 71,359 97,821
Merchandise and supply inventories............................................................. 91,041 101,621
Other.......................................................................................... 4,925 6,499
206,591 250,987
Property:
Property owned (at cost) (Note 4):
Land......................................................................................... 272,733 271,660
Buildings and improvements................................................................... 875,026 814,703
Merchandising equipment...................................................................... 213,105 226,323
Other property and equipment................................................................. 466,702 455,749
Total property owned............................................................................. 1,827,566 1,768,435
Less accumulated depreciation.................................................................... 491,316 576,174
Property owned -- net............................................................................ 1,336,250 1,192,261
Buildings and improvements, vehicles, and other equipment held under capital leases (Note 5)..... 149,074 205,564
Less accumulated amortization.................................................................... 42,425 60,469
Property held under capital leases -- net........................................................ 106,649 145,095
1,442,899 1,337,356
Other Assets:
Goodwill, net of accumulated amortization: 1992 -- $123,301 (Note 2)........................... 1,305,284 --
Other intangible assets, net of accumulated amortization: 1992 -- $58,980; 1993 --
$33,868 (Note 2)............................................................................. 267,775 66,882
Deferred financing costs -- net................................................................ 114,543 91,085
Other (including loan receivable from officer of: 1992 -- $14,026; 1993 -- $14,815 and
receivable from FCI of: 1992 -- $6,528; 1993 -- $6,532) (Note 13)............................ 59,391 57,483
1,746,993 215,450
$3,396,483 $ 1,803,793
LIABILITIES
Current Liabilities:
Short-term borrowings (Note 4)................................................................. $ 39,000 $ --
Current maturities of long-term debt (Note 4).................................................. 71,969 41,668
Accounts payable............................................................................... 116,549 145,370
Accrued salaries and vacations................................................................. 66,857 67,134
Accrued insurance.............................................................................. 77,863 76,557
Accrued taxes.................................................................................. 22,661 30,190
Accrued interest............................................................................... 28,365 41,225
Accrued restructuring cost (Note 3)............................................................ -- 33,527
Other.......................................................................................... 67,367 119,921
490,631 555,592
Long-Term Liabilities:
Debt, less current maturities (Note 4)......................................................... 2,179,496 2,352,178
Deferred income taxes (Note 6)................................................................. 130,935 23,861
Liability for self-insured claims.............................................................. 72,380 84,713
Other non-current liabilities and deferred credits............................................. 227,159 203,492
2,609,970 2,664,244
Note payable to FCI (Note 4)..................................................................... 150,000 150,000
Commitments and Contingent Liabilities (Note 9)
Shareholder's Equity (Deficit) (Note 10):
Common stock:
$0.01 par value; 1992 -- 10,000 shares authorized, 440 issued and outstanding................ -- --
Paid-in capital................................................................................ 602,896 602,896
Deficit........................................................................................ (457,014) (2,157,848 )
Minimum pension liability adjustment (Note 7).................................................. -- (11,091 )
145,882 (1,566,043 )
$3,396,483 $ 1,803,793
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................................... $ (67,575) $ (231,095) $(1,700,834 )
Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities:
Write-off of goodwill and intangible assets.............................. -- -- 1,474,831
Provision for restructuring charges...................................... -- -- 192,003
Depreciation and amortization of property................................ 162,658 170,795 183,105
Amortization of goodwill................................................. 35,775 35,744 36,053
Amortization of other intangible assets.................................. 19,699 20,652 27,845
Amortization of deferred financing costs................................. 13,910 11,998 11,815
Interest accretion on debt............................................... 67,573 68,283 --
Deferred income tax benefit.............................................. (27,036) (20,803) (85,409 )
Other.................................................................... 2,746 130 4,730
Extraordinary items, net................................................. -- 155,401 26,405
Cumulative effect of changes in accounting principle, net................ -- 17,834 12,010
Changes in Assets and Liabilities Net of Effects from
Acquisitions and Restructuring:
Decrease (increase) in assets:
Receivables.............................................................. (2,067) (6,916) (24,605 )
Inventories.............................................................. (6,929) (1,217) (4,802 )
Other current assets..................................................... 4,750 412 (1,555 )
Other assets............................................................. -- (6,735) (2,468 )
Increase (decrease) in liabilities:
Accounts payable......................................................... (9,113) (9,615) 21,786
Accrued salaries and vacations........................................... (2,511) 10,910 277
Accrued taxes............................................................ 4,219 (10,186) 4,475
Other accrued liabilities................................................ (16,898) 1,567 5,848
Other noncurrent liabilities and deferred credits........................ 7,669 6,831 (24,722 )
Net cash flows from operating activities...................................... 186,870 213,990 156,788
Cash Flows from Investing Activities:
Purchase of property........................................................ (109,484) (135,525) (133,128 )
Proceeds from dispositions of property...................................... 3,732 11,010 36,454
Proceeds from dispositions of assets held for sale.......................... 5,170 -- --
Purchase of other businesses................................................ -- (15,940) (32,895 )
Purchase of other long-term assets.......................................... (2,719) (2,995) (31,602 )
Net cash flows used in investing activities................................... (103,301) (143,450) (161,171 )
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net working capital advances under credit agreements........................ $ (25,000) $ 4,000 $ 54,000
Long-term debt issued in connection with refinancings....................... -- 1,022,505 400,778
Other long-term borrowings.................................................. -- -- 22,146
Premiums paid in connection with refinancings............................... -- (150,593 ) --
Deferred financing costs.................................................... (8,870) (92,521 ) (14,916 )
Long-term debt payments..................................................... (55,700) (1,138,750 ) (451,843 )
Additional paid-in capital.................................................. -- 286,078 --
Other....................................................................... 6 (85 ) (2 )
Net cash flows used in financing activities................................... (89,564) (69,366 ) 10,163
Increase (decrease) in cash and cash equivalents.............................. (5,995) 1,174 5,780
Cash and Cash Equivalents at:
Beginning of period......................................................... 44,087 38,092 39,266
End of period............................................................... $ 38,092 $ 39,266 $ 45,046
Supplemental Cash Flow Information:
Income taxes paid........................................................... $ 12,755 $ 10,229 $ 4,917
Interest paid............................................................... $ 221,254 $ 192,591 $ 234,348
Non-cash financing activities:
Debt issued in exchange for $700,880 of debt tendered in exchange
offers................................................................. $ -- $ 722,411 $ --
Capital lease obligations................................................ $ 19,220 $ 36,200 $ 75,842
Other financings......................................................... $ 1,594 $ 4,841 $ 1,278
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
Flagstar Corporation (Company) was acquired by Flagstar Companies, Inc.
(FCI) as of July 20, 1989. Prior to June 16, 1993 the Company and FCI had been
known, respectively, as TW Services, Inc. and TW Holdings, Inc.
The acquisition of the Company was accounted for under the purchase method
of accounting as of July 20, 1989. Accordingly, FCI has allocated its total
purchase cost of approximately $1.7 billion to the assets and liabilities of the
Company based upon their respective fair values, which were determined by
valuations and other studies. As discussed in Note 2, during 1993 the Company
determined that goodwill and certain intangible assets arising principally from
the acquisition were impaired resulting in a $1.5 billion write-off.
On November 16, 1992, a recapitalization of FCI was substantially completed
which included the issuance of 20 million shares of FCI common stock and
warrants to acquire an additional 15 million shares of FCI common stock at
$17.50 per share to TW Associates, L.P., an affiliate of Kohlberg Kravis Roberts
& Co. (KKR) in exchange for $300 million, the consummation of a Restated Bank
Credit Agreement, the consummation of the offers to exchange the 17% Senior
Subordinated Discount Debentures Due 2001 (the 17% Debentures) and the 15%
Subordinated Debentures Due 2001 (the 15% Debentures) for 11.25% Senior
Subordinated Debentures Due 2004, the consummation of the sale of $300 million
aggregate principal amount of Senior Notes, the call for redemption of all 17%
Debentures and all 15% Debentures not acquired pursuant to the Exchange Offers,
and the call for redemption of all of the outstanding 14.75% Senior Notes Due
1998 (the 14.75% Senior Notes).
On December 16, 1992 the 17% Debentures and 15% Debentures that were not
exchanged were called for redemption on November 16, 1992, were redeemed at 110%
of accreted value or principal amount. In addition, the 14.75% Senior Notes were
redeemed including a make-whole premium.
On March 24, 1993 the Company repurchased, pursuant to the change in
control provision of the indenture, $741,000 in principal amount from the
holders of its 10% Convertible Debentures such securities at 101% of their
principal amount plus unpaid accrued interest.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows and results of
operations are as follows:
(a) CONSOLIDATED FINANCIAL STATEMENTS. The Company is a wholly-owned
subsidiary of FCI. The Consolidated Financial Statements include the
accounts of the Company and all its subsidiaries. Certain 1992 amounts
have been reclassified to conform to the 1993 presentation.
(b) CASH AND CASH EQUIVALENTS. For purposes of the Statements of
Consolidated Cash Flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
(c) INVENTORIES. Merchandise and supply inventories are valued primarily at
the lower of average cost or market.
(d) PROPERTY AND DEPRECIATION. Property and equipment owned are depreciated
principally on the straight-line method over its estimated useful life.
Property held under capital leases (at capitalized value) is amortized
over its estimated useful life, limited generally by the lease period.
The following estimated useful service lives were in effect during all
periods presented in the financial statements:
Merchandising equipment -- Principally five to ten years
Buildings -- Fifteen to forty years
Other equipment -- Two to ten years
Leasehold improvements -- Estimated useful life limited by the lease
period.
(e) GOODWILL AND OTHER INTANGIBLE ASSETS. The excess of cost over the fair
value of net assets of companies acquired had been amortized over a
40-year period on the straight-line method prior to being written-off
at December 31,
F-7
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
1993. Other intangible assets consist primarily of costs allocated in the
acquisition to tradenames, franchise and other operating agreements.
Such assets are being amortized on the straight-line basis over the
useful lives of the franchise or the contract period of the operating
agreements. Certain tradenames, franchise and other operating
agreements were amortized over periods up to 40 years on the
straight-line basis prior to being written-off at December 31, 1993.
The Company assesses the recoverability of goodwill and other
intangible assets by projecting future net income, before the effect of
amortization of goodwill and other intangible assets, over the
remaining amortization period of such assets. The Company's large debt
burden requires approximately 60% of the Company's annual cash flow for
current interest cost, as a result, it is appropriate to reduce
operating income by interest expense to evaluate the recoverability of
goodwill and other intangibles. The results of this evaluation allow
the Company to assess whether the amortization of the goodwill or other
intangible assets balance over its remaining life can be recovered
through expected non-discounted future results. The projected future
results used in the evaluation performed in 1993 are based on the four
year historical trends since the 1989 leveraged buy out. Management
believes that the projected future results are the most likely scenario
assuming historical trends continue. See Note 2 for further discussion
of the write-off of goodwill and other intangible assets.
(f) DEFERRED FINANCING COSTS. Costs related to the issuance of debt are
deferred and amortized as a component of interest and debt expense over
the terms of the respective debt issues using the interest method.
(g) PREOPENING COSTS. The Company capitalizes certain costs incurred in
conjunction with the opening of restaurants and food services locations
and amortizes such costs over a twelve month period from the date of
opening.
(h) INCOME TAXES. Income taxes are accounted for under the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes."
(i) INSURANCE. The Company is primarily self insured for workers
compensation, general liability, and automobile risks which are
supplemented by stop loss type insurance policies. The liabilities for
estimated incurred losses are discounted to their present value based
on expected loss payment patterns determined by independent actuaries
or experience. During 1993, the Company changed its method of
determining the discount rate applied to insurance liabilities
retroactive to January 1, 1993 pursuant to Staff Accounting Bulletin
(SAB) No. 92 issued by the staff of the Securities and Exchange
Commission in June 1993 concerning the accounting for environmental and
other contingent liabilities. The SAB requires, among other things,
that a risk free rate (approximately 4% at December 31, 1993) be used
to discount such liabilities rather than a rate based on average cost
of borrowing which had been the Company's practice. As a result of this
change, the Company recognized an additional liability, measured as of
January 1, 1993 through a one-time charge of $12,100,000 (net of income
tax benefits of $90,000). The effect of this accounting change on 1993
operating results, in addition to recording the cumulative effect for
years prior to 1993, was to increase insurance expense and decrease
interest expense by approximately $7,000,000 (see Note 15). The total
discounted self-insurance liabilities recorded at December 31, 1992 and
1993 were $120.7 million and $139.5 million, respectively. The related
undiscounted amounts at such dates were $142.8 million and $151.9
million, respectively.
(j) POSTRETIREMENT BENEFITS. In 1992, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." This new
standard requires that the Company's expected cost of retiree health
benefits be charged to expense during the years of employee service.
Previously, such costs were expensed as paid. See Note 8 for a further
description of the accounting for postretirement benefits other than
pensions.
(k) POSTEMPLOYMENT BENEFITS. During November 1992, the Financial Accounting
Standards Board issued Statement No. 112 "Employers' Accounting for
Postemployment Benefits" which requires that benefits provided to
former or inactive employees prior to retirement be recognized as an
obligation when earned, subject to certain conditions, rather than when
paid. The Company does not expect Statement No. 112 to have a material
impact on its operations and will implement this statement during the
first quarter of 1994.
F-8
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 WRITE-OFF OF GOODWILL AND OTHER INTANGIBLE ASSETS
For the year ended December 31, 1993, the Company's consolidated statement
of operations reflects non-cash charges totaling $1,474.8 million, including
$1,267.7 million and $207.1 million for the write-off of goodwill and other
intangible assets, primarily tradenames and franchise agreements, respectively.
Since its acquisition in 1989, the Company has not achieved the revenue and
earnings projections prepared at the time of the acquisition. In assessing the
recoverability of goodwill and other intangible assets in prior years, the
Company developed projections of future operations which indicated the Company
would become profitable within several years and fully recover the carrying
value of the goodwill and other intangible assets.
However, actual results have fallen short of these projections primarily
due to increased competition, intensive pressure on pricing due to discounting,
declining customer traffic, adverse economic conditions, and relatively limited
capital resources to respond to these changes. During the fourth quarter of
1993, management determined that the most likely projections of future operating
results would be based on the assumption that historical operating trends
derived from the last four years would continue rather than projections based on
assumptions that the restructuring plan (described in Note 3) will be
successful. Thus, the Company has determined that the projected financial
results would not support the future amortization of the remaining goodwill
balance and certain other intangible assets at December 31, 1993.
The methodology employed to assess the recoverability of the Company's
goodwill and other intangible assets involved a detail six year projection of
operating results extrapolated forward 30 years, which approximates the maximum
remaining amortization period for such assets as of December 31, 1993. The
Company then evaluated the recoverability of goodwill on the basis of this
projection of future operations. Based on this projection over the next six
years, the Company would have a net loss each year before income taxes and
amortization of goodwill and other intangibles. Extension of these trends to
include the entire 36 year amortization period indicates that there would be
losses each year, unless the restructuring plan or other activities are
successful in reversing the present operating trends; thus, the analysis
indicates that there is insufficient net income to recover the goodwill and
other intangible asset balances at December 31, 1993. Accordingly, the Company
wrote off the goodwill balance and certain other intangible asset balances
including tradename and franchise agreements for its Denny's, Quincy's, and El
Pollo Loco restaurant operations and tradename and location contracts for its
contract food and vending services operations. See Note 14 for a description of
the Company's operations.
The projections generally assumed that historical trends experienced by the
Company over the past four years would continue. The current mix between
company-owned and franchised restaurants was assumed to continue, customer
traffic for Denny's, Quincy's, and El Pollo Loco was assumed to decline at
historical rates, average check amounts for Denny's, Hardee's, Quincy's, and El
Pollo Loco were assumed to increase indefinitely at historical rates due to
inflation and changes in product mix, volume for Canteen was assumed to decline
at historical rates, and pricing for Canteen was assumed to increase at
historical rates, as a result of inflation. Capital expenditures are assumed to
continue at a level necessary to repair and maintain current facilities and
systems. No new unit growth was assumed. Variable costs for food and labor are
assumed to remain at their historical percentage of revenues. Other costs are
assumed to increase at the historical inflation rate consistent with revenue
pricing increases. Through the year 1999, the Company's projections indicate
that interest expense will exceed operating income, which is determined after
deducting annual depreciation expense; however, operating income before
depreciation is adequate to cover interest expense. A continuation of this trend
for the next 30 years does not generate cash to repay the current debt and
management assumes it will be refinanced at constant interest rates.
F-9
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 PROVISION FOR RESTRUCTURING CHARGES
Effective the fourth quarter of 1993, as a result of a comprehensive
financial and operational review initiated in 1993, the Company approved a
restructuring plan. The plan involves the sale or closure of restaurants,
reduction in personnel, a reorganization of certain management structures, and a
decision to fundamentally change the competitive positioning of Denny's, El
Pollo Loco, and Quincy's. The plan resulted in a restructuring charge, which is
comprised of the following:
<TABLE>
<S> <C>
Write-down of assets...................................................................... $156,179
Severance and relocation.................................................................. 24,995
Other..................................................................................... 10,829
Total..................................................................................... $192,003
</TABLE>
The write-down of assets represents predominantly non-cash adjustments made
to reduce to net realizable value approximately 240 of the Company's 1,376
Denny's, Quincy's, and El Pollo Loco restaurants. These 240 restaurants have
been identified for sale to franchisees, conversion to another concept, or
closure. The write-down of assets also includes a charge of $22 million to
establish a reserve for operating leases related to restaurant units which will
be sold to franchisees or closed and offices which will be closed.
Approximately $36 million of the restructuring charges represent
incremental cash charges of which approximately $6.5 million had been incurred
and paid in 1993. The reorganization of the field management structure of the
restaurant group and the contract food services group will result in elimination
of a layer of supervisory management and consolidation of field offices
resulting in related severance and relocation costs. In addition, the Company
will eliminate a number of positions in the corporate marketing, accounting, and
administrative functions.
NOTE 4 DEBT
Short-term borrowings of $39.0 million at December 31, 1992 represent
advances under the working capital facility of the Company's credit agreement
(Restated Credit Agreement). Interest on the advances under the working capital
facility at December 31, 1992 accrued at a weighted average rate of 7.1% per
annum and was based on prime or LIBOR. During 1993, an amendment to the Restated
Credit Agreement was consummated and included a modification to the requirement
that working capital advances under the credit facility be repaid in full and
not reborrowed for at least 30 consecutive days during any 13-month period but
at least once during each year to provide that working capital advances under
the credit facility be paid down to a maximum borrowing thereunder of $100
million in 1993 reducing to $50 million in 1998 for such 30 day period in each
year. Accordingly, the $93.0 million outstanding under the working capital
portion of the revolving credit facility at December 31, 1993, is classified as
long-term debt. The Restated Credit Agreement includes a working capital and
letter of credit facility up to a total of $350.0 million with a working capital
sublimit of $200.0 million and a letter of credit sublimit of $245.0 million.
All amounts outstanding under the facility must be repaid by November 16, 1998.
See also discussion below.
F-10
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1992 1993
<S> <C> <C>
(IN THOUSANDS)
Restated Credit Agreement:
Borrowings under working capital facility, interest varies with prime and LIBOR at December 31,
1993 -- 6.5%................................................................................. $ -- $ 93,000
Senior term loan, due in installments through 1998, interest varies with prime and LIBOR at
December 31, 1992 -- 6.4375% and December 31, 1993 -- 5.9375%................................ 572,505 171,295
Notes and Debentures:
10.75% Senior Notes due September 15, 2001, interest payable semi-annually...................... -- 275,000
10.875% Senior Notes due December 1, 2002, interest payable semi-annually....................... 300,000 300,000
11.25% Senior Subordinated Debentures due November 1, 2004, interest payable
semi-annually................................................................................ 722,411 722,411
11.375% Senior Subordinated Debentures due September 15, 2003, interest payable semi-annually... -- 125,000
10% Convertible Junior Subordinated Debentures due 2014 (10% Convertible Debentures), interest
payable semi-annually; convertible into Company common stock any time prior to maturity at
$24.00 per share............................................................................. 100,000 99,259
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000........................................................ 211,404 208,508
11.03% Notes due 2000........................................................................... 160,000 160,000
10.51% Note, due December 1, 1993............................................................... 11,200 --
Other notes payable, mature over various terms to 20 years, payable in monthly or quarterly
installments with interest rates ranging from 6.5% to 15.0% (a).............................. 26,882 25,348
Capital lease obligations (see Note 5)............................................................ 141,264 190,808
Notes payable secured by equipment, mature over various terms up to 7 years, payable in monthly
installments with interest rates ranging from 8.5% to 9.64%(b).................................. 1,053 21,912
Sundry indebtedness............................................................................... 4,746 1,305
Total............................................................................................. 2,251,465 2,393,846
Less current maturities (c)....................................................................... 71,969 41,668
$2,179,496 $2,352,178
</TABLE>
(a) Collateralized by restaurant and other properties with a net book value of
$41.7 million at December 31, 1993.
(b) Collateralized by equipment with a net book value of $23.5 million at
December 31, 1993.
(c) Aggregate annual maturities during the next five years of long-term debt are
as follows (in thousands): 1994 -- $41,668; 1995 -- $42,450;
1996 -- $55,293; 1997 -- $96,732, and 1998 -- $119,609.
The Restated Credit Agreement provides for a senior term loan and a senior
revolving credit facility. The Company had drawings under the senior term loan
of $572.5 million during 1992 and $778,000 during 1993. The borrowings under the
Restated Credit Agreement are secured by the stock of certain operating
subsidiaries and the Company's trade and service marks and are guaranteed by
certain operating subsidiaries. Such guarantees are further secured by certain
operating subsidiary assets.
The Restated Credit Agreement and indentures under which the debt
securities have been issued contain a number of restrictive covenants. Such
covenants restrict, among other things, the ability of the Company and its
subsidiaries to incur indebtedness, create liens, engage in business activities
which are not in the same field as that in which the Company currently operates,
mergers and acquisitions, sales of assets, transactions with affiliates and the
payment of dividends. In addition, the Restated Credit Agreement contains
affirmative and negative financial covenants including provisions for the
maintenance of a minimum level of interest coverage (as defined), limitations on
ratios of indebtedness (as defined) to earnings before interest, taxes,
depreciation and amortization (EBITDA), and limitations on annual capital
expenditures.
During September 1993, net proceeds of $387.5 million from the issuance of
$275 million of 10.75% Senior Notes and $125 million of 11.375% Senior
Subordinated Debentures were used to reduce the Company's senior term loan. In
F-11
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
connection with the reduction of the senior term loan, the Restated Credit
Agreement was amended to include, among other things, the following: an increase
in the amount of annual capital expenditures permitted for remodeling and
expansion of operations, modification of financial ratios of debt to EBITDA and
of interest coverage, a rescheduling of the remaining principal installments
under the senior term loan, and modification of the requirement that working
capital advances under the credit facility be repaid in full and not reborrowed
for at least 30 consecutive days during any 13-month period but at least once
during each year to provide that working capital advances under the credit
facility be paid down to a maximum borrowing thereunder of $100 million in 1993
reducing to $50 million in 1998 for such 30 day period in each year.
The Company was in compliance with the terms of the Restated Credit
Agreement at December 31, 1993. Under the most restrictive provision of the
Restated Credit Agreement (ratio of total debt to EBITDA, as defined), at
December 31, 1993, the Company could incur approximately $44.0 million of
additional indebtedness.
At December 31, 1993, the 10.25% guaranteed bonds were secured by, among
other things, mortgage loans on 385 restaurants, a lien on the related
restaurant equipment, assignment of intercompany lease agreements, and the stock
of the issuing subsidiaries. At December 31, 1993, the restaurant properties and
equipment had a net book value of $347.8 million. In addition, the bonds are
insured with a financial guaranty insurance policy written by a company that
engages exclusively in such coverage. Principal and interest on the bonds is
payable semiannually. Principal payments total $2.9 million annually through
1995; $12.5 million annually through 1999; and $152.7 million in 2000. The
Company through its operating subsidiaries covenants that it will maintain the
properties in good repair and expend annually to maintain the properties at
least $15.8 million in 1994 and increasing each year to $23.7 million in 2000.
The 11.03% mortgage notes are secured by a pool of cross collateralized
mortgages on 240 restaurants with a net book value at December 31, 1993 of
$228.1 million. In addition, the notes are collateralized by, among other
things, a security interest in the restaurant equipment, the assignment of
intercompany lease agreements and the stock of the issuing subsidiary. Interest
on the notes is payable quarterly with the entire principal due at maturity in
2000. The notes are redeemable, in whole, at the issuer's option beginning in
July 1993. The Company through its operating subsidiary covenants that it will
use each property as a food service facility, maintain the properties in good
repair and expend at least $5.3 million per annum and not less than $33 million,
in the aggregate, in any five year period to maintain the properties.
On July 28, 1992, FCI loaned $150.0 million to the Company, on a
subordinated basis, in exchange for a note payable. Such borrowing matures on
July 28, 2017 and accrues interest at a rate which will yield the amount of cash
dividends to be paid by FCI to holders of its preferred stock (approximately
9.45%, assuming no redemption or conversion of the preferred stock).
At December 31, 1993, the Company has $400 million aggregate notional
amount in effect of reverse interest rate exchange agreements with maturities
ranging from thirty-six to seventy-two months. The Company receives interest on
such notional amount at fixed rates (average rate of 5.64% at December 31, 1993)
and pays interest at six months LIBOR in arrears based floating rates on like
notional amount. Subsequent to December 31, 1993, an additional $400 million
aggregate notional amount of reverse interest rate exchange agreements with
maturities of thirty-six months became effective. The Company will receive
interest on the notional amount at average fixed rates of 5.29% and pay interest
at six months LIBOR in arrears based floating rates on like notional amount.
Also at December 31, 1993 the Company has a $50 million aggregate notional
amount interest rate exchange agreement which matures within twelve months. The
Company pays interest on such notional amount (9.76% at December 31, 1993) and
is paid interest at LIBOR based floating rates (3.30% at December 31, 1993) on
like notional amount. The net payments on all such agreements are reflected in
interest and debt expense.
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) approximates the principal amount of such debt outstanding at
December 31, 1993. Such computations are based on market quotations for the same
or similar debt issues or the estimated borrowing rates available to the
Company. The estimated fair value of the $50 million notional amount interest
rate exchange agreement at December 31, 1993 is $2.8 million which represents an
unrealized loss and is the amount at which such exchange agreement could be
settled based on estimates obtained from
F-12
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
dealers. At December 31, 1993, the estimated fair value of the $400 million
notional amount of reverse interest rate exchange agreements was zero. The fair
value of accounts receivable, short-term borrowings, and accounts payable
approximate their carrying value.
NOTE 5 LEASES AND RELATED GUARANTEES
The Company's operations utilize property, facilities, equipment and
vehicles leased from others. In addition, certain owned and leased property,
facilities and equipment are leased to others.
Buildings and facilities leased from others primarily are for restaurants
and support facilities. At December 31, 1993, 974 restaurants were operated
under lease arrangements which generally provide for a fixed basic rent, and, in
some instances, contingent rental based on a percentage of gross operating
profit or gross revenues. Initial terms of land and restaurant building leases
generally are not less than twenty years exclusive of options to renew. Leases
of other equipment primarily consist of merchandising equipment, computer
systems and vehicles, etc.
As lessor, leasing operations principally consist of merchandising
equipment under noncancelable leases for a term of eight years to franchised
distributors of a subsidiary. Numerous miscellaneous sublease agreements also
exist.
Information regarding the Company's leasing activities at December 31, 1993
is as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
CAPITAL LEASES MINIMUM LEASE
MINIMUM MINIMUM PAYMENTS NET OF
LEASE SUBLEASE SUBLEASE RENTALS OF
PAYMENTS PAYMENTS IMMATERIAL AMOUNTS
<S> <C> <C> <C>
(IN THOUSANDS)
Year:
1994........................................................................... $ 45,035 $ 1,836 $ 52,800
1995........................................................................... 39,756 1,822 50,074
1996........................................................................... 34,833 1,730 46,579
1997........................................................................... 30,116 1,566 43,030
1998........................................................................... 23,322 1,360 38,652
Subsequent years............................................................... 149,004 3,337 229,155
Total....................................................................... $322,066 $11,651 $ 460,290
Less imputed interest............................................................ 131,258
Present value of capital lease obligations....................................... $190,808
</TABLE>
The total rental expense included in the determination of operating income
for the three years ended December 31, 1991, 1992 and 1993 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
(IN THOUSANDS)
Basic rents................................................................... $ 49,114 $ 51,373 $ 56,699
Contingent rents.............................................................. 13,305 12,842 12,306
Total......................................................................... $ 62,419 $ 64,215 $ 69,005
</TABLE>
Total rental expense does not include sublease rental income of
$10,068,000, $9,437,000 and $8,998,000 for the three years ended December 31,
1991, 1992, and 1993, respectively.
F-13
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES
A summary of the provision (benefit) from income taxes attributable to loss
before extraordinary items and cumulative effect of change in accounting
principle is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal..................................................................... $ 4,374 $ 9,452 $ 1,423
State, Foreign and Other.................................................... 4,563 4,768 2,837
8,937 14,220 4,260
Deferred:
Federal..................................................................... (24,183) (17,955) (75,897)
State, Foreign and Other.................................................... (2,853) (2,848) (9,512)
(27,036) (20,803) (85,409)
Benefit from income taxes..................................................... $(18,099) $ (6,583) $(81,149)
The total benefit from income taxes related to:
Loss before extraordinary items and cumulative effect of changes in
accounting principles.................................................... $(18,099) $ (6,583) $(81,149)
Extraordinary items......................................................... -- (85,053) (196)
Cumulative effect of changes in accounting principles....................... -- (8,785) (90)
Total benefit from income taxes............................................... $(18,099) $ (100,421) $(81,435)
</TABLE>
The deferred federal tax benefit for the year ended December 31, 1993
includes a reduction for the utilization of regular tax net operating loss
carryforwards of approximately $9.5 million. In addition, the deferred federal
tax benefit for the year ended December 31, 1993, has been offset by
approximately $2.7 million due to the 1% corporate tax rate increase included in
the Omnibus Budget Reconciliation Act of 1993.
F-14
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES -- Continued
The following represents the approximate tax effect of each significant
type of temporary difference and carryforward giving rise to the deferred income
tax liability or asset:
<TABLE>
<CAPTION>
DECEMBER 31,
1992 1993
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Amortization (including write-down) of intangible assets............................................. $ -- $ 3,055
Self-insurance reserves.............................................................................. 48,892 15,229
Capitalized leases................................................................................... 7,834 726
Post-retirement benefits............................................................................. 14,749 3,914
Other accruals and reserves (includes restructuring reserves)........................................ 58,491 31,583
Alternative minimum tax credit carryforwards......................................................... 12,418 13,330
General business credit carryforwards................................................................ 4,751 4,751
Net operating loss carryforwards..................................................................... 71,583 72,539
Less: valuation allowance............................................................................ -- (110,644)
Total deferred tax assets............................................................................ 218,718 34,483
Deferred tax liabilities:
Depreciation of fixed assets......................................................................... 270,801 58,344
Amortization of intangible assets.................................................................... 78,852 --
Total deferred tax liabilities....................................................................... 349,653 58,344
Total deferred income tax liability.................................................................. $130,935 $ 23,861
</TABLE>
The Company has provided a valuation allowance for the portion of the
deferred tax asset for which it is more likely than not that a tax benefit will
not be realized.
The difference between the statutory federal income tax rate and the
effective tax rate on loss before extraordinary items and cumulative effect of
accounting changes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
Statutory rate................................................................ 34% 34% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit.......... (1) (3) --
Amortization and write-off of goodwill...................................... (14) (20) (26)
Portion of losses not benefited as a result of the establishment of
valuation allowance...................................................... -- -- (4)
Other net permanent differences between the tax return and the statement of
consolidated operations.................................................. 2 -- --
Effective tax rate............................................................ 21% 11% 5%
</TABLE>
At December 31, 1993, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $4.7 million which expire in approximately 2000, and alternative
minimum tax (AMT) credits of $13.3 million. The AMT credits may be carried
forward indefinitely. In addition, the Company has available regular income tax
net operating loss carryforwards of $207.2 million, of which approximately $14.4
million expires in 2006 and $192.8 million expires in 2007. Due to the
Recapitalization of the Company which occurred during 1992, the Company's
ability to utilize general business credits, AMT credits and net operating loss
carryforwards which arose prior to 1992 will be limited to a specified annual
amount. The annual limitation for the utilization of the tax credit
F-15
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES -- Continued
carryforwards is approximately $8 million and the annual limitation for the
utilization of the net operating loss carryforwards is approximately $24
million. The usage of the net operating loss carryforward which arose in 1992 of
$192.8 million is not expected to be subject to any annual limitation.
NOTE 7 EMPLOYEE BENEFIT PLANS
The Company maintains several defined benefit plans which cover a
substantial number of employees. Benefits are based upon each employee's years
of service and average salary. The Company's funding policy is based on the
minimum amount required under the Employee Retirement Income Security Act of
1974. The Company also maintains defined contribution plans.
Total net pension cost of defined benefit plans for the years ended
December 31, 1991, 1992, and 1993 amounted to $4,576,000, $4,311,000 and
$6,103,000, respectively, of which $3,172,000, $2,231,000 and $3,906,000 related
to funded defined benefit plans and $1,404,000, $2,080,000 and $2,197,000
related to nonqualified unfunded supplemental defined benefit plans for
executives.
The components of net pension cost of the funded and unfunded defined
benefit plans for the three years ended December 31, 1991, 1992, and 1993
determined under SFAS 87 follow:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost-benefits earned during the year.................................. $ 4,707 $ 4,979 $ 5,794
Interest cost on projected benefit obligations................................ 6,980 7,932 8,779
Actual return on plan assets.................................................. (15,350) (3,125) (7,134)
Net amortization and deferral................................................. 8,239 (5,475) (1,336)
Net pension cost.............................................................. $ 4,576 $ 4,311 $ 6,103
</TABLE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's balance sheet for its defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31,
1992 1993
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits...................................................................................... $75,388 $ 94,403
Non-vested benefits.................................................................................. 2,319 2,238
Accumulated benefit obligations........................................................................ $77,707 $ 96,641
Plan assets at fair value.............................................................................. $91,449 $ 96,279
Projected benefit obligation........................................................................... 89,943 111,650
Funded status.......................................................................................... 1,506 (15,371)
Unrecognized net loss from past experience different from that assumed................................. 7,791 23,345
Unrecognized prior service cost........................................................................ 634 548
Unrecognized net asset at January 1, 1987 being recognized over 15 years............................... (415) (232)
Additional liability................................................................................... (272) (10,761)
Prepaid (accrued) pension costs........................................................................ $ 9,244 $ (2,471)
</TABLE>
As of December 31, 1992 and 1993, the accrued pension liability related to
unfunded plans was $9,940,000 and $10,817,000, respectively, the accumulated
benefit obligation was $6,310,000 and $7,711,000, respectively, and the
projected benefit obligation was $12,118,000 and $13,758,000, respectively.
F-16
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1992 1993
<S> <C> <C>
Discount rate.................................................................. 8.5% 7.5%
Rates of salary progression.................................................... 5.0-5.5% 4.0%
Long-term rates of return on assets............................................ 10.0% 10.0%
</TABLE>
In addition, the Company has defined contribution plans whereby eligible
employees can elect to contribute from 1%-15% of their compensation to the
plans. These plans include profit sharing and savings plans under which the
Company makes matching contributions, with certain limitations. Amounts charged
to income under these plans were $6,706,000, $7,406,000 and $5,327,000 for the
years ended December 31, 1991, 1992, and 1993, respectively.
Incentive compensation plans provide for awards to management employees
based on meeting or exceeding certain levels of income as defined by such plans
The amounts charged to income under the plans for the years ended December 31,
1991, 1992, and 1993 were as follows: $2,605,000, $5,344,000 and zero. In
addition to these incentive compensation plans, certain operations have
incentive plans in place under which regional, divisional and local management
participate.
NOTE 8 OTHER POSTRETIREMENT BENEFITS
The Company adopted, in the fourth quarter of 1992, Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" retroactive to January 1, 1992. This statement requires the
accrual of the cost of providing postretirement benefits, including medical and
life insurance benefits, during the active service period of covered employees.
The Company has recognized the accumulated liability, measured as of January 1,
1992 through a one-time charge of $17,834,000 (net of income tax benefit of
$8,785,000). This charge excludes amounts accrued in prior years related to the
acquisition of the Company. The effect of this accounting change on 1992
operating results, in addition to recording the cumulative effect for years
prior to 1992, was to recognize additional benefits expense of $3,983,000.
Accordingly, the operating results for the first three quarters of 1992 have
been restated to reflect this change (see Note 15). Prior to 1992, the Company
recognized the cost of postretirement benefits in the year the benefits were
paid.
The Plan, which provides certain medical and life insurance benefits for
eligible retired employees, is unfunded. The Company's contract food service
employees become eligible for such benefits upon at least 15 years of credited
service (as defined in the Plan) and retirement at age 55 or later. The Plan
also requires monthly medical contributions by retired participants based upon
age, credited service, and salary at retirement. Dependent benefits cease after
the death of the retiree. Life insurance benefits provided are non-contributory.
The Company amended the Plan in 1993. The amendment decreased the Company's
accumulated benefit obligation at January 1, 1993 by approximately $17,535,000
which is being accounted for by amortization to income over future periods. The
amendment curtails life and medical benefits for certain eligible employee
groups and phases out the Company's subsidy of the cost of coverage for certain
eligible employee groups over a five year period beginning in 1993.
The components of net periodic postretirement benefit cost determined under
SFAS 106 follow:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1992 1993
<S> <C> <C>
(IN THOUSANDS)
Service cost-benefits earned during the year...................................... $2,221 $ 22
Interest cost on accumulated postretirement benefit obligation.................... 2,967 1,428
Net amortization.................................................................. -- (1,639)
Net postretirement benefit cost (income).......................................... $5,188 $ (189)
</TABLE>
F-17
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 OTHER POSTRETIREMENT BENEFITS -- Continued
The amount charged to expense for years prior to adoption of SFAS 106 was
$1,035,000 for the year ended December 31, 1991. For this period, the cost of
providing benefits for the Company's retired participants is not separable from
the cost of benefits for the Company's active participants.
The following table sets forth the amounts recognized in the Company's
consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
1992 1993
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of accumulated postretirement benefit obligation:
Retirees...................................................................... $19,706 $17,676
Other fully eligible plan participants........................................ 5,198 386
Other active plan participants................................................ 13,891 329
Unrecognized prior service cost (unamortized effect of
plan amendment)............................................................ -- 16,074
Unrecognized net gain......................................................... -- 3,151
Accumulated postretirement benefit obligation................................... $38,795 $37,616
</TABLE>
For measuring the expected postretirement benefit obligation, a 20% annual
rate of increase in the cost of covered health care and death benefits was
assumed for 1994. This rate was assumed to decrease to 6.5% in 1997 and remain
at that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rate by 1% each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $3,385,000 and
would increase the aggregate of the service and interest components of net
periodic postretirement benefit cost for the year then ended by $131,000.
The weighted average discount rate used in determining the accumulated
postretirement obligation was 8.5% at December 31, 1992 and 7.5% at December 31,
1993.
NOTE 9 COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or indirectly
involving the Company, including actions concerned with financing matters, civil
rights of employees and customers, taxes, sales of franchise rights, and other
matters. Certain of these are seeking damages in substantial amounts. The
amounts of liability, if any, on these direct or indirect claims and actions at
December 31, 1993, over and above any insurance coverage in respect to certain
of them, are not specifically determinable at this time.
The Company has received proposed deficiencies from the Internal Revenue
Service (IRS) for federal income taxes and penalties totalling approximately
$46.6 million. Proposed deficiencies of $34.3 million relate to examinations of
certain income tax returns filed by Denny's for periods ending prior to the
Company's purchase of Denny's on September 11, 1987. These deficiencies
primarily involve the proposed disallowance of certain expenses associated with
borrowings and other costs incurred at the time of the leveraged buyout of
Denny's in 1985 and the purchase of Denny's by the Company in 1987. The Company
filed protests of the proposed deficiencies with the Appeals Division of the IRS
stating that it believed the proposed deficiencies were erroneous. The Company
and the IRS have reached a preliminary agreement on substantially all of the
issues included in the original proposed deficiency. Based on this preliminary
agreement, the IRS has agreed to waive all penalties and the Company estimates
that its ultimate federal income tax deficiency will be less than $5 million.
The remaining $12.3 million of proposed deficiencies relate to examinations of
certain income tax returns filed by the Company and FCI for the four fiscal
periods ended December 31, 1989. The deficiencies primarily involve the proposed
disallowance of deductions associated with borrowings and other costs incurred
prior to, at and just following the time of the acquisition of the Company in
1989. FCI and the Company intend to vigorously contest the proposed deficiencies
because it believes the proposed deficiencies are substantially incorrect.
On March 26, 1993, a consent decree was signed by the Company and the U.S.
Department of Justice resolving a complaint filed by the Department of Justice
that alleged that the Company, through Denny's had engaged in a pattern or
F-18
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 COMMITMENTS AND CONTINGENCIES -- Continued
practice of discrimination against African-American customers. The Company
denied any allegation of wrongdoing. The consent decree, which carries no direct
monetary penalties, enjoins the Company from racial discrimination and requires
the Company to implement certain employee training and testing programs and
provide public notice of Denny's nondiscrimination policies. In a related
matter, on March 24, 1993, a public accommodations lawsuit was filed against the
Company in California. The lawsuit alleges that certain Denny's restaurants in
California have engaged in racially discriminatory practices, and seeks
certification as a class action, unspecified actual, compensatory and punitive
damages, and injunctive relief.
On May 24, 1993 and July 8, 1993 two additional public accommodations
lawsuits were filed against the Company. The May 24, 1993 action alleges that a
Denny's restaurant in Annapolis, Maryland engaged in racially discriminatory
practices, and seeks certification as a class action covering all states except
California, unspecified actual compensatory and punitive damages, and injunctive
relief. Other individual public accommodations cases have also been filed,
including some cases which allege substantial compensatory and punitive damages
for each plaintiff, statutory damages, and injunctive relief.
The Company is also the subject of pending and threatened employment
discrimination claims principally in California and Alabama. In certain of these
claims, the plaintiffs have threatened to seek to represent a class alleging
racial discrimination in employment practices at Company restaurants and to seek
actual, compensatory and punitive damages, and injunctive relief.
It is the opinion of Management (including General Counsel), after
considering a number of factors, including but not limited to the current status
of the litigation (including any settlement discussions), the views of retained
counsel, the nature of the litigation or proposed tax deficiencies, the prior
experience of the consolidated companies, and the amounts which the Company has
accrued for known contingencies that the ultimate disposition of these matters
will not materially affect the consolidated financial position or results of
operations of the Company.
NOTE 10 SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
TOTAL SHAREHOLDER'S
OTHER EQUITY DEFICIT EQUITY (DEFICIT)
<S> <C> <C> <C>
(IN THOUSANDS)
Balance December 31, 1990...................................................... $297,572 $ (158,344) $ 139,228
Activity:
Net Loss.................................................................. -- (67,575) (67,575)
Issuance of Common Stock.................................................. 5,324 -- 5,324
Balance December 31, 1991...................................................... 302,896 (225,919) 76,977
Activity:
Net Loss.................................................................. -- (231,095) (231,095)
Additional Paid-in-Capital................................................ 300,000 -- 300,000
Balance December 31, 1992...................................................... 602,896 (457,014) 145,882
Activity:
Net Loss.................................................................. -- (1,700,834) (1,700,834)
Minimum pension liability adjustment...................................... (11,091) -- (11,091)
Balance December 31, 1993...................................................... $591,805 $(2,157,848) $ (1,566,043)
</TABLE>
NOTE 11 LOSS PER SHARE
As described in the introduction, the Company is a wholly-owned subsidiary
of FCI; accordingly, per share data is not meaningful and has been omitted for
all years.
F-19
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 EXTRAORDINARY ITEMS
The Company recorded losses from extraordinary items as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
INCOME LOSSES,
TAX NET OF
LOSSES BENEFITS TAXES
<S> <C> <C> <C>
(IN THOUSANDS)
Recapitalization:
Premiums paid to retire certain indebtedness.......................................... $170,762 $(62,513) $108,249
Write-off of unamortized deferred financing costs on indebtedness retired............. 57,583 (21,080) 36,503
228,345 (83,593) 144,752
Prepayment of Term B Loan:
Write-off of unamortized deferred financing costs on Term B loan...................... 10,099 (1,310) 8,789
Defeasance of Mortgage Notes Payable:
Premiums paid to defease
certain indebtedness............................................................... 1,362 (102) 1,260
Write-off of unamortized deferred financing costs on indebtedness retired............. 648 (48) 600
2,010 (150) 1,860
Total................................................................................... $240,454 $(85,053) $155,401
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
INCOME LOSSES,
TAX NET OF
LOSSES BENEFITS TAXES
(IN THOUSANDS)
<S> <C> <C> <C>
Prepayment of Term Loan:
Write-off of unamortized deferred financing costs on indebtedness retired............. $ 26,469 $ (179) $ 26,290
Recapitalization:
Premiums and costs to repurchase 10% Convertible Debentures........................... 90 (12) 78
Write-off of unamortized deferred financing cost on indebtedness retired.............. 42 (5) 37
132 (17) 115
Total................................................................................... $ 26,601 $ (196) $ 26,405
</TABLE>
Losses during the fourth quarter of 1992 were attributable to the
recapitalization and related transactions for premiums paid to retire the 14.75%
Senior Notes, 17% Debentures, and 15% Debentures. In addition, the remaining
unamortized deferred financing costs related to such indebtedness and the Term A
loan under the Prior Bank Credit Agreement, were charged-off simultaneously.
During the third quarter of 1992, the prepayment of the Term B loan under
the Prior Bank Credit Agreement resulted in a charge-off of the remaining
unamortized deferred financing costs on the Term B loan. Proceeds received from
the sale of 6,300,000 shares of $2.25 Series A Cumulative Convertible
Exchangeable Preferred Stock were used to prepay the Term B loan.
During the second quarter of 1992, $7,648,000 of the Company's 10.25%
Guaranteed Secured Bonds were defeased in accordance with the provisions of the
bond indenture. Accordingly, premiums were paid on the defeased debt and the
related unamortized deferred financing costs were charged-off.
During the third quarter of 1993, the prepayment of $387.5 million of the
Company's term loan under the Restated Credit Agreement resulted in a charge-off
of $26.5 million of unamortized deferred financing costs.
F-20
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 EXTRAORDINARY ITEMS -- Continued
During the first quarter of 1993, the Company purchased $741,000 in
principal amount of 10% Convertible Debentures at 101% of their principal amount
plus unpaid accrued interest, pursuant to change in control provisions of the
indenture. The repurchase of the 10% Convertible Debentures resulted in a charge
of $132,000.
NOTE 13 RELATED PARTY TRANSACTIONS
The Company expensed annual advisory fees of $1,000,000 during 1991 and
1992, respectively, and $250,000 during 1993 for Gollust, Tierney & Oliver,
Incorporated (GTO). Annual advisory fees of $250,000 will be received by GTO
through 1994. GTO earned interest of $3,574,000 in 1991 and $1,344,000 in 1992
from senior indebtedness which was previously outstanding. In addition, GTO and
related entities received premiums of $2,689,000 related to the redemption of
such indebtedness during 1992.
The Company expensed annual advisory fees to Donaldson, Lufkin & Jenrette
Securities Corporation (DLJ) of $200,000 for 1991 and 1992, respectively. DLJ
earned interest of $5,298,000 in 1991 from senior indebtedness which was
previously outstanding. During 1991, DLJ received $897,000 related to the
disposition of certain non-core businesses of the Company. In 1992 DLJ received
fees of $1,380,000 related to investment banking services for the sale of the
Company's preferred stock, $7,000,000 as financial advisor to the Company, and
$3,738,000 related to the exchange of and issuance of certain indebtedness in
the recapitalization. DLJ received $4,059,000 during 1993 for investment banking
services related to the issuance of indebtedness by the Company.
In 1992, the Company paid a fee to KKR of $15,000,000 for financial
advisory services in connection with the recapitalization. In 1993, KKR received
financial advisory fees of $1,250,000.
In November 1992 in connection with the recapitalization, the Company
loaned $13,922,000 to its chairman and chief executive officer, the proceeds of
which were used to repay a 1989 loan obtained by the officer for the purchase of
FCI common stock. The loan is due in November 1997 and is secured by 812,000
shares of common stock of FCI and certain other collateral. During 1993, the
Company earned $789,000 on the loan which accrues interest at 5.6% per annum and
is payable at maturity.
NOTE 14 BUSINESS SEGMENTS
The Company's restaurant operations are concentrated in the western and
southeastern United States and consist of Denny's, Hardee's, Quincy's and El
Pollo Loco restaurants. The Company's restaurants include basic food concepts
found in various segments of the food industry: family restaurants, fast-food
hamburger restaurants, steak houses, and char-broiled chicken restaurants. The
Company's contract food service business is conducted by Canteen Corporation,
which directly and through subsidiaries and independent franchised distributors,
engages in vending and contract food and recreation service operations
throughout the United States.
Revenues and operating income by business segment for each of the last
three years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
OPERATING OPERATING OPERATING
REVENUES INCOME REVENUES INCOME REVENUES INCOME
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Restaurants................................. $2,338,666 $ 191,997 $2,442,991 $ 214,062 $2,598,893 $(1,085,899)
Contract Food Service....................... 1,279,268 45,913 1,277,290 50,947 1,371,312 (313,320)
Corporate and other, net.................... -- (13,950) -- (18,585) -- (61,534)
Total....................................... $3,617,934 $ 223,960 $3,720,281 $ 246,424 $3,970,205 $(1,460,753)
</TABLE>
F-21
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 BUSINESS SEGMENTS -- Continued
Operating income by business segment for the year ended December 31, 1993
reflects nonrecurring charges for the write-off of goodwill and other intangible
assets and the provision for restructuring as follows: restaurants -- $1,265.6
million, contract food service -- $359.8 million, and corporate and other,
net -- $41.4 million.
Depreciation/amortization expense and capital expenditures for each of the
last three years are as follows:
<TABLE>
<CAPTION>
DEPRECIATION/AMORTIZATION CAPITAL EXPENDITURES
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Restaurants.................. $146,850 $155,098 $167,061 $ 93,690 $141,597 $161,891
Contract Food
Service.................... 69,243 68,188 75,540 36,279 35,389 61,174
Corporate and Other.......... 2,039 3,905 4,402 329 1,263 2,423
Total........................ $218,132 $227,191 $247,003 $130,298 $178,249 $225,488
</TABLE>
Identifiable assets as of the specified dates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1993
<S> <C> <C> <C>
(IN THOUSANDS)
Restaurants................................................................... $2,601,984 $2,598,426 $1,364,377
Contract Food Service......................................................... 683,970 673,811 377,282
Corporate and Other........................................................... 108,511 124,246 62,134
Total......................................................................... $3,394,465 $3,396,483 $1,803,793
</TABLE>
F-22
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 QUARTERLY DATA (UNAUDITED)
The results for each quarter include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
interim periods. The consolidated financial results on an interim basis are not
necessarily indicative of future financial results on either an interim or an
annual basis. Selected consolidated financial data for each quarter within 1992
and 1993 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1992:
Operating revenues..................................................... $859,784 $ 938,465 $ 996,154 $ 925,878
Operating expenses:
Product costs........................................................ 297,996 323,706 332,369 312,830
Payroll & benefits................................................... 311,077 329,140 330,190 323,071
Depreciation & amortization expense.................................. 54,231 55,076 56,955 60,929
Commissions & royalties.............................................. 24,924 31,871 41,662 32,446
Other................................................................ 132,243 137,546 149,137 136,458
820,471 877,339 910,313 865,734
Operating income....................................................... $ 39,313 $ 61,126 $ 85,841 $ 60,144
Income (loss) before extraordinary items and cumulative effect of
change in accounting principle....................................... $(35,080) $ (12,501) $ 6,736 $ (17,015)
Net loss............................................................... $(52,914) $ (14,361) $ (2,053) $ (161,767)
Year Ended December 31, 1993:
Operating revenues..................................................... $878,968 $1,000,795 $1,075,304 $ 1,015,138
Operating expenses:
Product costs........................................................ 307,701 354,257 370,275 357,435
Payroll and benefits................................................. 323,657 350,040 357,049 347,761
Depreciation and amortization expense................................ 58,570 60,794 61,507 66,132
Commissions and royalties............................................ 25,915 36,633 47,245 39,035
Other................................................................ 136,042 152,671 171,484 139,921
Write-off of goodwill and intangible assets.......................... -- -- -- 1,474,831
Provision for restructuring charges.................................. -- -- -- 192,003
851,885 954,395 1,007,560 2,617,118
Operating income (loss)................................................ $ 27,083 $ 46,400 $ 67,744 $(1,601,980)
Loss before extraordinary items and cumulative effect of change in
accounting principle................................................. $(33,617) $ (15,398) $ (10,251) $(1,603,153)
Net loss............................................................... (41,139) $ (15,398) $ (26,410) $(1,617,887)
</TABLE>
In the fourth quarter of 1992, the Company retroactively adopted to January
1, 1992 SFAS No. 106. Accordingly, operating expenses for the first, second and
third quarters of 1992 have been restated by $1,067,000, $1,071,000, and
$806,000, respectively, to reflect charges related to the implementation of this
statement.
During the third quarter of 1993, the Company changed its method of
determining the discount rate applied to insurance liabilities retroactive to
January 1, 1993 pursuant to Staff Accounting Bulletin (SAB) No. 92 issued by the
staff of the Securities and Exchange Commission in June 1993 concerning the
accounting for environmental and other contingent liabilities. Accordingly,
operating expenses for the first and second quarters of 1993 have been restated
by $1,869,000 and $1,869,000, respectively, to reflect charges related to the
implementation of this pronouncement.
F-23
<PAGE>
<PAGE>
FLAGSTAR CORPORATION
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
V. Property, Plant and Equipment for the Years Ended December 31, 1991, 1992 and 1993.............................. F-25
VI. Accumulated Depreciation and Amortization of Property, Plant and Equipment for the Years Ended December 31,
1991, 1992 and 1993........................................................................................... F-28
IX. Short-Term Borrowings for the Years Ended December 31, 1991, 1992 and 1993...................................... F-31
X. Supplemental Income Statement Information for the Years Ended December 31, 1991, 1992 and 1993.................. F-32
</TABLE>
Schedules not filed herewith are omitted because of the absence of
conditions under which they are required or because the information called for
is shown in the Consolidated Financial Statements or Notes thereto.
F-24
<PAGE>
<PAGE>
SCHEDULE V
FLAGSTAR CORPORATION
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(AMOUNTS IN THOUSANDS)
CONSOLIDATED
<TABLE>
<CAPTION>
COLUMN E COLUMN F
COLUMN C COLUMN D OTHER BALANCE
ADDITIONS RETIREMENTS CHANGES ADD AT END
COLUMN A AT COST OR SALES (DEDUCT) OF PERIOD
COLUMN B
BALANCE AT
BEGINNING
OF PERIOD
<S> <C> <C> <C> <C> <C>
Classification
Property owned:
Merchandising equipment............................... $ 180,955 $21,038 $ (4,839) $(3,641) $ 193,513
Land, buildings, and improvements:
Land............................................... 264,328 4,940 (1,252) (519) 267,497
Buildings and improvements......................... 791,055 47,554 (3,313) (3,803) 831,493
Total................................................. 1,055,383 52,494 (4,565) (4,322) 1,098,990
Other property and equipment consisting of furniture
and fixtures, etc.................................. 374,380 37,546 (4,428) 213 407,711
Total property owned.................................. 1,610,718 111,078 (13,832) (7,750) 1,700,214
Property held under capital leases:
Building and improvements............................. 90,305 5,583 (450) (90) 95,348
Vehicles and other property and equipment............. 4,252 13,637 (570) 33 17,352
Total property held under capital leases.............. 94,557 19,220 (1,020) (57) 112,700
Total property.......................................... $1,705,275 $130,298 $ (14,852) $(7,807) $1,812,914
</TABLE>
F-25
<PAGE>
<PAGE>
SCHEDULE V
FLAGSTAR CORPORATION
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(AMOUNTS IN THOUSANDS)
CONSOLIDATED
<TABLE>
<CAPTION>
COLUMN E COLUMN F
COLUMN C COLUMN D OTHER BALANCE
ADDITIONS RETIREMENTS CHANGES ADD AT END
COLUMN A AT COST OR SALES (DEDUCT) OF PERIOD
COLUMN B
BALANCE AT
BEGINNING
OF PERIOD
<S> <C> <C> <C> <C> <C>
Classification
Property owned:
Merchandising equipment............................... $ 193,513 $21,088 $ (4,536) $ 3,040 $ 213,105
Land, buildings, and improvements:
Land............................................... 267,497 7,561 (3,869) 1,544 272,733
Buildings and improvements......................... 831,493 47,734 (8,062) 3,861 875,026
Total................................................. 1,098,990 55,295 (11,931) 5,405 1,147,759
Other property and equipment consisting of furniture
and fixtures, etc.................................. 407,711 65,666 (5,470) (1,205) 466,702
Total property owned.................................. 1,700,214 142,049 (21,937) 7,240 1,827,566
Property held under capital leases:
Buildings and improvements............................ 95,348 15,087 (209) 1,068 111,294
Vehicles and other property and equipment............. 17,352 21,113 (253) (432) 37,780
Total property held under capital leases.............. 112,700 36,200 (462) 636 149,074
Total property.......................................... $1,812,914 $178,249 $ (22,399) $ 7,876 $1,976,640
</TABLE>
F-26
<PAGE>
<PAGE>
SCHEDULE V
FLAGSTAR CORPORATION
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(AMOUNTS IN THOUSANDS)
CONSOLIDATED
<TABLE>
<CAPTION>
COLUMN E COLUMN F
COLUMN C COLUMN D OTHER BALANCE
ADDITIONS RETIREMENTS CHANGES ADD AT END
COLUMN A AT COST OR SALES (DEDUCT) OF PERIOD
COLUMN B
BALANCE AT
BEGINNING
OF PERIOD
<S> <C> <C> <C> <C> <C>
Classification
Property owned:
Merchandising equipment............................... $ 213,105 $32,934 $ (4,494) $ (15,222) $ 226,323
Land, buildings, and improvements:
Land............................................... 272,733 6,916 (8,235) 246 271,660
Buildings and improvements......................... 875,026 53,072 (23,733) (89,662) 814,703
Total................................................. 1,147,759 59,988 (31,968) (89,416) 1,086,363
Other property and equipment consisting of furniture
and fixtures, etc.................................. 466,702 56,724 (17,690) (49,987) 455,749
Total property owned.................................. 1,827,566 149,646 (54,152) (154,625) 1,768,435
Property held under capital leases:
Buildings and improvements............................ 111,294 38,530 (1,075) (15,992) 132,757
Vehicles and other property and equipment............. 37,780 37,312 (1,895) (390) 72,807
Total property held under capital leases.............. 149,074 75,842 (2,970) (16,382) 205,564
Total property.......................................... $1,976,640 $225,488 $ (57,122) $(171,007)(1) $1,973,999
</TABLE>
(1) Substantially all of the amount represents the write-down of property
relating to the Company's restructuring.
F-27
<PAGE>
<PAGE>
SCHEDULE VI
FLAGSTAR CORPORATION
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(AMOUNTS IN THOUSANDS)
CONSOLIDATED
<TABLE>
<CAPTION>
COLUMN B COLUMN E COLUMN F
BALANCE AT COLUMN D OTHER BALANCE
BEGINNING RETIREMENTS CHANGES ADD AT END
COLUMN A OF PERIOD OR SALES (DEDUCT) OF PERIOD
COLUMN C
ADDITIONS
CHARGED
TO COSTS
& EXPENSES
<S> <C> <C> <C> <C> <C>
Classification
Property owned:
Merchandising equipment................................. $ 49,107 $ 34,117 $(3,535) $(3,581) $ 76,108
Buildings and improvements.............................. 69,240 54,692 (2,275) 415 122,072
Other property and equipment consisting of furniture and
fixtures, etc........................................ 82,822 61,726 (2,590) (80) 141,878
Total property owned.................................... 201,169 150,535 (8,400) (3,246) 340,058
Property held under capital leases:
Building and improvements............................... 12,147 9,077 (106) 2 21,120
Vehicles and other property and
equipment............................................ 1,523 3,046 (171) 52 4,450
Total property held under capital leases................ 13,670 12,123 (277) 54 25,570
Total property............................................ $214,839 $162,658 $(8,677) $(3,192) $ 365,628
</TABLE>
F-28
<PAGE>
<PAGE>
SCHEDULE VI
FLAGSTAR CORPORATION
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(AMOUNTS IN THOUSANDS)
CONSOLIDATED
<TABLE>
<CAPTION>
COLUMN E
COLUMN B OTHER COLUMN F
BALANCE AT COLUMN D CHANGES BALANCE
BEGINNING RETIREMENTS ADD AT END
COLUMN A OF PERIOD OR SALES (DEDUCT) OF PERIOD
COLUMN C
ADDITIONS
CHARGED
TO COSTS
& EXPENSES
<S> <C> <C> <C> <C> <C>
Classification
Property owned:
Merchandising equipment.................................... $ 76,108 $ 34,591 $(3,169) $ 4,203 $ 111,733
Buildings and improvements................................. 122,072 57,381 (1,405) 1,167 179,215
Other property and equipment consisting of furniture and
fixtures, etc........................................... 141,878 62,495 (4,241) 236 200,368
Total property owned....................................... 340,058 154,467 (8,815) 5,606 491,316
Property held under capital leases:
Buildings and improvements................................. 21,120 9,030 (54) 1,132 31,228
Vehicles and other property and
equipment............................................... 4,450 7,298 (144) (407 ) 11,197
Total property held under capital leases................... 25,570 16,328 (198) 725 42,425
Total property............................................... $365,628 $170,795 $(9,013) $ 6,331 $ 533,741
</TABLE>
F-29
<PAGE>
<PAGE>
SCHEDULE VI
FLAGSTAR CORPORATION
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(AMOUNTS IN THOUSANDS)
CONSOLIDATED
<TABLE>
<CAPTION>
COLUMN E
COLUMN B OTHER COLUMN F
BALANCE AT COLUMN D CHANGES BALANCE
BEGINNING RETIREMENTS ADD AT END
COLUMN A OF PERIOD OR SALES (DEDUCT) OF PERIOD
COLUMN C
ADDITIONS
CHARGED
TO COSTS
& EXPENSES
<S> <C> <C> <C> <C> <C>
Classification
Property owned:
Merchandising equipment.................................. $111,733 $ 36,215 $ (3,106) $(10,134) $ 134,708
Buildings and improvements............................... 179,215 58,718 (3,136) (25,733 ) 209,064
Other property and equipment consisting of furniture and
fixtures, etc......................................... 200,368 64,025 (8,165) (23,826 ) 232,402
Total property owned..................................... 491,316 158,958 (14,407) (59,693 ) 576,174
Property held under capital leases:
Buildings and improvements............................... 31,228 10,468 (746) (3,744 ) 37,206
Vehicles and other property and
equipment............................................. 11,197 13,679 (1,312) (301 ) 23,263
Total property held under capital leases................. 42,425 24,147 (2,058) (4,045 ) 60,469
Total property............................................. $533,741 $183,105 $ (16,465) $(63,738)(1) $ 636,643
</TABLE>
(1) Substantially all of the amount represents the write-down of property
relating to the Company's restructuring.
F-30
<PAGE>
<PAGE>
SCHEDULE IX
FLAGSTAR CORPORATION
SHORT-TERM BORROWINGS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN F
COLUMN D COLUMN E WEIGHTED
COLUMN A COLUMN C MAXIMUM AVERAGE AVERAGE
CATEGORY OF COLUMN B WEIGHTED AMOUNT AMOUNT INTEREST
AGGREGATE BALANCE AT AVERAGE OUTSTANDING OUTSTANDING RATE
SHORT-TERM END OF INTEREST DURING THE DURING THE DURING THE
BORROWINGS PERIOD RATE PERIOD PERIOD(1) PERIOD(2)
<S> <C> <C> <C> <C> <C>
Working capital and letters of credit:
For the year ended December 31, 1991..................... $ 35,000 8.0% $ 70,000 $38,804 9.42%
For the year ended December 31, 1992..................... 39,000 7.08% 70,100 31,550 7.02%
For the year ended December 31, 1993..................... --(3) --%(3) --(3) --(3) --%(3)
</TABLE>
(1) Amount computed by dividing the total of daily outstanding principal
balances by the number of days in the year.
(2) Amount computed by dividing total interest expense by the average amount
outstanding.
(3) Working capital advances at December 31, 1993 under the Restated Credit
Agreement totalled $93,000 and accrued interest at a weighted average
interest rate of 6.51%. For the year ended December 31, 1993 the maximum
amount outstanding was $103,000, the average amount outstanding during the
period was $49,397 and the weighted average interest rate during the period
was 6.26%. The Restated Credit Agreement, as amended, provides for the
advances outstanding at December 31, 1993 to be classified as long-term.
F-31
<PAGE>
<PAGE>
SCHEDULE X
FLAGSTAR CORPORATION
SUPPLEMENTAL INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(AMOUNTS IN THOUSANDS)
CONSOLIDATED
<TABLE>
<CAPTION>
COLUMN B
CHARGED TO COSTS AND EXPENSES
YEAR ENDED YEAR ENDED YEAR ENDED
COLUMN A DECEMBER 31 DECEMBER 31 DECEMBER 31
ITEM 1991 1992 1993
<S> <C> <C> <C>
Utilities....................................................................... $99,668 $ 102,834 $ 113,605
Maintenance and repairs......................................................... $55,078 $ 51,673 $ 60,315
Advertising and publicity....................................................... $72,639 $ 79,770 $ 89,365
</TABLE>
F-32
<PAGE>
<PAGE>
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.
FLAGSTAR CORPORATION
By: /s/ ROBERT L. WYNN, III
Robert L. Wynn, III
(Senior Vice President and General
Counsel)
Date: April 12, 1994
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ JEROME J. RICHARDSON Director, Chairman and Chief Executive Officer April 12, 1994
(Principal Executive Officer)
(Jerome J. Richardson)
/s/ A. RAY BIGGS Senior Vice President and Chief Financial Officer April 12, 1994
(Principal Financial and Accounting Officer)
(A. Ray Biggs)
/s/ MICHAEL CHU Director April 12, 1994
(Michael Chu)
/s/ VERA KING FARRIS Director April 12, 1994
(Vera King Farris)
/s/ HAMILTON E. JAMES Director April 12, 1994
(Hamilton E. James)
/s/ HENRY R. KRAVIS Director April 12, 1994
(Henry R. Kravis)
/s/ AUGUSTUS K. OLIVER Director April 12, 1994
(Augustus K. Oliver)
/s/ PAUL E. RAETHER Director April 12, 1994
(Paul E. Raether)
/s/ CLIFTON S. ROBBINS Director April 12, 1994
(Clifton S. Robbins)
/s/ GEORGE R. ROBERTS Director April 12, 1994
(George R. Roberts)
/s/ L. EDWIN SMART Director April 12, 1994
(L. Edwin Smart)
/s/ MICHAEL T. TOKARZ Director April 12, 1994
(Michael T. Tokarz)
</TABLE>
<PAGE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
* 3.1 Restated Certificate of Incorporation of Flagstar (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-2 (No. 33-49843) of Flagstar (the "Form S-2")).
<C> <S> <C>
* 3.2 Certificate of Amendment to the Restated Certificate of Incorporation of Flagstar dated June 16, 1993
(incorporated by reference to Exhibit 3.2 to the Form S-2).
* 3.3 By-Laws of Flagstar as amended November 16, 1992 (incorporated by reference to Exhibit 3.2 to
Flagstar's 1992 Form 10-K, File No. 1-9364).
* 4.1 Indenture between Flagstar and United States Trust Company of New York, as Trustee, relating to the
10% Debentures (including the form of security) (incorporated by reference to Exhibit 4.9 to the
Registration Statement on Form S-4 (No. 33-48923) of Flagstar (the "11.25% Debentures S-4")).
* 4.2 Supplemental Indenture, dated as of August 7, 1992, between Flagstar and United States Trust Company
of New York, as Trustee, relating to the 10% Debentures (incorporated by reference to Exhibit 4.9A to
the 11.25% Debentures S-4).
* 4.3 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and
Assignment of Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company,
dated July 12, 1990 (incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to the
Registration Statement on Form S-1 (No. 33-29769) of FCI (the "Form S-1 Amendment")).
* 4.4 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended and
restated as of July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-1 Amendment).
* 4.5 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust
Company relating to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-1
Amendment).
* 4.6 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990
(incorporated by reference to Exhibit 4.15 to the 11.25% Debentures S-4).
* 4.7 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990
(incorporated by reference to Exhibit 4.16 to the 11.25% Debentures S-4).
* 4.8 Mortgage Note in the amount of $98,000,000 of Denny's Realty, Inc., dated as of July 12, 1990
(incorporated by reference to Exhibit 4.17 to the 11.25% Debentures S-4).
* 4.9 Indenture between Secured Restaurants Trust and The Citizens and Southern National Bank of South
Carolina, dated as of November 1, 1990, relating to certain Secured Bonds (incorporated by reference
to Exhibit 4.18 to the 11.25% Debentures S-4).
* 4.10 Amended and Restated Trust Agreement between Spartan Holdings, Inc., as Depositor for Secured
Restaurants Trust, and Wilmington Trust Company, dated as of October 15, 1990 (incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form S-11 (No. 33-36345) of Secured
Restaurants Trust (the "Form S-11")).
* 4.11 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8%
Notes (incorporated by reference to Exhibit 4.13 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992
Form 10-K")).
* 4.12 Supplemental Indenture between Flagstar and First Trust National Association, as Trustee, relating to
the 10 7/8% Notes (incorporated by reference to Exhibit 4.14 to the 1992 Form 10-K).
* 4.13 Form of 10 7/8% Note (incorporated by reference to Exhibit 4.15 to the 1992 Form 10-K).
* 4.14 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to
the 11.25% Debentures (incorporated by reference to Exhibit 4.16 to the 1992 Form 10-K).
* 4.15 Form of 11.25% Debenture (incorporated by reference to Exhibit 4.17 to the 1992 Form 10-K).
* 4.16 Amended and Restated Credit Agreement, dated as of October 26, 1992, among Flagstar and TWS Funding,
Inc., as borrowers, certain lenders and co-agents named therein, and Citibank, N.A., as managing agent
(incorporated by reference to Exhibit 28.1 to the Current Report on Form 8-K of Flagstar filed as of
November 20, 1992 (the "Form 8-K")).
* 4.17 Closing Agreement dated as of November 12, 1992, among Flagstar and TWS Funding Inc., as borrowers,
certain lenders and co-agents named therein, and Citibank, N.A., as managing agent (incorporated by
reference to Exhibit 28.2 to the Form 8-K).
* 4.18 First Amendment to the Amended and Restated Credit Agreement dated as of December 23, 1992
(incorporated by reference to Exhibit 4.20 to the 1992 Form 10-K).
* 4.19 Second Amendment to the Amended and Restated Credit Agreement dated as of August 5, 1993 (incorporated
by reference to Exhibit 4.23 to the Form S-2).
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
<C> <S> <C>
* 4.20 Third Amendment to the Amended and Restated Credit Agreement dated as of December 15, 1993
(incorporated by reference to Exhibit 4.22 to FCI's 1993 Form 10-K, File No. 0-18051 (the "1993 Form
10-K")).
* 4.21 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 3/4%
Notes (incorporated by reference to Exhibit 4.23 to the 1993 Form 10-K).
* 4.22 Form of 10 3/4% Note (incorporated by reference to Exhibit 4.24 to the 1993 Form 10-K).
* 4.23 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to
the 11 3/8% Debentures (incorporated by reference to Exhibit 4.25 to the 1993 Form 10-K).
* 4.24 Form of 11 3/8% Debenture (incorporated by reference to Exhibit 4.26 to the 1993 Form 10-K).
*10.1 Flagstar's Executive Incentive Compensation Plan (incorporated by reference to Flagstar's 1986 Form
10-K, Exhibit 10(iii), File No. 1-9364).
*10.2 Warrant Agreement, dated November 16, 1992, among FCI, TW Associates and KKR Partners II (incorporated
by reference to Exhibit 10.41 to the 1992 Form 10-K).
*10.3 Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's, Inc.
(incorporated by reference to Exhibit 10.42 to the Form S-2).
*10.4 Fair Share Agreement dated July 1, 1993 between FCI and the NAACP (incorporated by reference to
Exhibit 10.43 to the Form S-2).
*10.5 Amendment No. 2 to Stockholders' Agreement, dated as of April 6, 1993, among FCI, GTO and certain
affiliated partnerships, DLJ Capital, Jerome J. Richardson and Associates (incorporated by reference
to Exhibit 10 to Flagstar's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File
No. 1-9364).
*10.6 Employment Agreement between Flagstar and A. Ray Biggs dated February 10, 1992 (incorporated by
reference to Exhibit 10.6 to the 1993 Form 10-K).
*10.7 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to
Exhibit 10.7 to the 1992 Form 10-K).
*10.8 Form of Supplemental Executive Retirement Plan Trust of Flagstar (incorporated by reference to Exhibit
10.8 to the 1992 Form 10-K).
*10.9 FCI 1989 Non-Qualified Stock Option Plan, as adopted December 1, 1989 and amended November 16, 1992
(incorporated by reference to Exhibit 10.9 to the 1992 Form 10-K).
*10.10 FCI 1990 Non-Qualified Stock Option Plan, as adopted July 31, 1990 (incorporated by reference to
Exhibit 10.9 to the Form S-1 Amendment).
*10.11 Form of Non-Qualified Stock Option Award Agreement pursuant to FCI 1990 Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.10 to the Form S-1 Amendment).
*10.12 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.1 to the Form S-11).
*10.13 Mortgage Note in the amount of $521,993,982, made by Flagstar Enterprises, Inc. in favor of Spartan
Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated
by reference to Exhibit 10.12 to the 11.25% Debentures S-4).
*10.14 Mortgage Note in the amount of $210,077,402, made by Quincy's Restaurants, Inc. in favor of Spartan
Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated
by reference to Exhibit 10.13 to the 11.25% Debentures S-4).
*10.15 Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of November 1,
1990 (incorporated by reference to Exhibit 10.14 to the 11.25% Debentures S-4).
*10.16 Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of November 1,
1990 (incorporated by reference to Exhibit 10.15 to the 11.25% Debentures S-4).
*10.17 Insurance and Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.16 to the 11.25% Debentures S-4).
*10.18 Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.17 to the 11.25% Debentures S-4).
*10.19 Bank Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.18 to the 11.25% Debentures S-4).
*10.20 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4).
*10.21 Liquidity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.20 to the 11.25% Debentures S-4).
*10.22 Financial Guaranty Insurance Policy, issued November 15, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.21 to the 11.25% Debentures S-4).
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
<C> <S> <C>
*10.23 Amended and Restated Lease between Quincy's Realty, Inc. and Quincy's Restaurants, Inc., dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.22 to the 11.25% Debentures S-4).
*10.24 Amended and Restated Lease between Spardee's Realty, Inc. and Spardee's Restaurants, Inc., dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.23 to the 11.25% Debentures S-4).
*10.25 Collateral Assignment Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.24 to the 11.25% Debentures S-4).
*10.26 Form of Assignment of Leases and Rents related to Secured Restaurants Trust transaction (incorporated
by reference to Exhibit 10.12 to the Form S-11.)
*10.27 Spartan Guaranty, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.26 to the 11.25% Debentures S-4).
*10.28 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.14 to the Form S-11).
*10.29 Stock Pledge Agreement among Flagstar Enterprises, Inc. and Secured Restaurants Trust, dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.28 to the 11.25% Debentures S-4).
*10.30 Stock Pledge Agreement among Quincy's Restaurants, Inc. and Secured Restaurants Trust, dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.29 to the 11.25% Debentures S-4).
*10.31 Management Agreement, dated as of November 1, 1990, related to the Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.30 to the 11.25% Debentures S-4).
*10.32 Form of Collateral Assignment of Security Documents related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.17 to the Form S-11).
*10.33 Flagstar Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.32 to the 11.25% Debentures S-4).
*10.34 Subordinated Promissory Note, dated July 28, 1992, from Flagstar to FCI (incorporated by reference to
Exhibit 10.33 to the 11.25% Debentures S-4).
*10.35 Development Agreement between the Company and Hardee's Food Systems, Inc., dated January 1992
(incorporated by reference to Exhibit 10.33 to the Registration Statement on Form S-1 (No. 33-47339)
of FCI (the "Preferred Stock S-1")).
*10.36 Stock and Warrant Purchase Agreement, dated as of August 11, 1992, between FCI and TW Associates
(incorporated by reference to Exhibit 10.38 to the 11.25% Debentures S-4).
*10.37 Stockholders' Agreement, dated as of August 11, 1992, among FCI, GTO (on behalf of itself and certain
affiliated partnerships), DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by
reference to Exhibit 10.39 to the 11.25% Debentures S-4).
*10.38 Technical Amendment to the Stockholders' Agreement dated as of September 30, 1992, among FCI , GTO and
certain affiliated partnerships, DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by
reference to Exhibit 10.39A to the 11.25% Debentures S-4).
*10.39 Richardson Shareholder Agreement, dated as of August 11, 1992, between FCI and Jerome J. Richardson
(incorporated by reference to Exhibit 10.40 to the 11.25% Debentures S-4).
*10.40 Employment Agreement, dated as of August 11, 1992, between Flagstar and Jerome J. Richardson
(incorporated by reference to Exhibit 10.41 to the 11.25% Debentures S-4).
*10.41 Employment Agreement, dated as of March 16, 1992, between Flagstar and David F. Hurwitt (incorporated
by reference to Exhibit 10.41 to the 1993 Form 10-K).
12 Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of Flagstar (incorporated by reference to Exhibit 22 to the Preferred Stock S-1).
</TABLE>
* Certain of the exhibits to this Annual Report on Form 10-K, indicated by an
asterisk, are hereby incorporated by reference to other documents on file with
the Commission with which they are physically filed, to be a part hereof as of
their respective dates.
<PAGE>
EXHIBIT 12
FLAGSTAR CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIOS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
JANUARY 1 JULY 21 TO YEAR ENDED
TO JULY 20, DECEMBER 31, DECEMBER 31,
1989 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C>
Pretax earnings (losses).................... $ 38,421 $(85,333) $(77,808) $(85,674) $(64,443) $(1,743,568)
Add:
Net interest expense after capitalized
interest............................... 62,031 113,851 290,507 294,927 297,955 268,499
Amortization of debt expense.............. 499 3,692 23,807 13,910 11,998 11,815
Interest factor in rents.................. 8,635 6,539 16,424 16,371 17,124 18,900
Total earnings (losses).............. $ 109,586 $ 38,749 $252,930 $239,534 $262,634 $(1,444,354)
Fixed charges:
Gross interest expense before capitalized
interest............................... $ 62,340 $114,232 $290,993 $295,157 $298,245 $ 268,777
Amortization of debt expense.............. 499 3,692 23,807 13,910 11,998 11,815
Interest factor in rents.................. 8,635 6,539 16,424 16,371 17,124 18,900
Total fixed charges.................. $ 71,474 $124,463 $331,224 $325,438 $327,367 $ 299,492
Ratio of earnings to fixed charges.......... 1.53 -- -- -- -- --
Deficiency in the coverage of fixed charges
by earnings before fixed charges.......... $ 85,714 $ 78,294 $ 85,904 $ 64,733 $ 1,743,846
</TABLE>
For purposes of these computations, the ratio of earnings to fixed charges
has been calculated by dividing pretax earnings by fixed charges. Earnings, as
used to compute the ratio, equals the sum of income before income taxes and
fixed charges excluding capitalized interest. Fixed charges are the total
interest expenses including capitalized interest, amortization of debt expenses
and a rental factor that is representative of an interest factor (estimated to
be one third) on operating leases.
<PAGE>
