FLAGSTAR CORP, 10-K405, 1995-03-27

FLAGSTAR CORP
10-K405, 1995-03-27
EATING PLACES

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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, 1994
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)
<TABLE>
<S> <C>
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)
</TABLE>

Registrant's telephone number, including area code: (803) 597-8000.
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
<S> <C>
None None
</TABLE>

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 15, 1995, 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.

<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I
Item 1. Business..................................................................................................... 1
Item 2. Properties................................................................................................... 7
Item 3. Legal Proceedings............................................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 10
Item 6. Selected Financial Data...................................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 11
Item 8. Financial Statements and Supplementary Data.................................................................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant........................................................... 17
Item 11. Executive Compensation....................................................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 27
Item 13. Certain Relationships and Related Transactions............................................................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................. 36
INDEX TO FINANCIAL STATEMENTS........................................................................................... F-1
SIGNATURES..............................................................................................................
</TABLE>

<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Flagstar Corporation ("Flagstar") is one of the largest restaurant
companies in the United States, operating (directly and through franchisees)
more than 2,500 moderately priced restaurants.
Flagstar's restaurant operations are conducted through three principal
chains or concepts. Denny's is the nation's largest chain of family-oriented
full service restaurants, with over 1,500 units in 49 states and six foreign
countries, including 498 in California and Florida. According to an independent
survey conducted in 1994, Denny's has the leading share of the national market
in the family segment. Hardee's is a chain of quick-service restaurants of which
Flagstar, with 595 units located primarily in the Southeast, is the largest
franchisee. Although specializing in sandwiches, Flagstar's Hardee's restaurants
serve fresh fried chicken and offer a breakfast menu that accounts for
approximately 39% 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." A weekend breakfast buffet is available at most
Quincy's locations. Flagstar also operates El Pollo Loco, a chain of 209
quick-service 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, quick-service 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, Flagstar remodeled 245 of its Company-owned restaurants
and added a net of 59 (both franchised and Company-owned) new restaurants to its
chains.
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 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"). 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.
As a result of the 1989 acquisition of Flagstar, the Company became and
remains very highly leveraged. As discussed in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations and in Notes 1 and
2 to the Consolidated Financial Statements, while the Company's cash flows have
been, and are expected to continue to be, sufficient to cover interest costs,
operating results since the acquisition in 1989 have fallen short of
expectations. Such shortfalls have resulted from negative operating trends as
evidenced by consistently low annual growth in average unit sales at the
Company's Denny's, Quincy's and El Pollo Loco restaurants and decreased sales
volume, primarily during the period 1990 through 1993, at the Company's (now
sold) food and vending business. These trends have been 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. In the fourth quarter of 1993, management
determined that the most likely projections of future results were those based
on the assumption that these historical operating trends of each of the
Company's restaurant concepts and at its food and vending business would
continue, and that such projected financial results of the Company would not
support the carrying value of the remaining balance of goodwill and certain
other intangible assets. Accordingly, such balances were written-off during
1993. See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1 and 2 to the Consolidated Financial
Statements for additional information.
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 may 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 expects
its chain of Hardee's restaurants to maintain its strong market position in the
Southeast.
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During the fourth quarter of 1993, the Company approved a restructuring
plan which included the following key features: (1) the identification of units
for sale, closure or conversion to another concept because of poor operating
performance or location in markets that have been determined to be nonstrategic
(with a resulting write-down of such units to their net realizable values); (2)
changes to the field management structure to eliminate a layer of management and
increase the regional managers' "span of control"; and (3) consolidation of
certain Company operations and elimination of overhead positions in the field
and in certain of its corporate functions. The restructuring charge reflected in
the Company's 1993 Consolidated Financial Statements consisted primarily of the
write-down in the carrying value of assets referred to in (1) above and
severance and relocation costs associated with (2) and (3) above. During 1994
the Company completed the realignment of the field and corporate management
structure contemplated by the restructuring and adjusted the estimated costs
associated with these components of the restructuring plan. Specific plans to
fundamentally change the competitive positions of Denny's, Quincy's and El Pollo
Loco are ongoing, as discussed below.
DENNY'S
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1990 1991 1992 1993
<S> <C> <C> <C> <C>
Operating Units (end of year)
Owned/operated.................................................................... 992 996 1,013 1,024
Franchised........................................................................ 306 330 382 431
International..................................................................... 60 65 65 59
Revenues (in millions) (1).......................................................... $1,407 $1,429 $1,449 $1,546
Operating Income (Loss) (in millions) (1)........................................... $ 118 $ 128 $ 130 $ (625)(2)
Depreciation and Amortization (in millions) (1)..................................... $ 68 $ 75 $ 82 $ 88
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,209 $1,232 $1,231 $1,233
Franchised........................................................................ $ 949 $1,040 $1,065 $1,057
Average Check....................................................................... $ 4.20 $ 4.37 $ 4.56 $ 4.76
<CAPTION>

1994
<S> <C>
Operating Units (end of year)
Owned/operated.................................................................... 978
Franchised........................................................................ 512
International..................................................................... 58
Revenues (in millions) (1).......................................................... $1,548
Operating Income (Loss) (in millions) (1)........................................... $ 123
Depreciation and Amortization (in millions) (1)..................................... $ 68
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,247
Franchised........................................................................ $1,060
Average Check....................................................................... $ 4.75
</TABLE>

(1) Includes distribution and processing operations.
(2) Operating income reflects the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges for the year
ended December 31, 1993 of $716 million. For a discussion of the write-off
and restructuring and the reasons therefor, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 2 and 3 to the Consolidated Financial Statements.
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 1994 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, Puerto Rico, and six foreign countries, with principal concentrations
in California, Florida, Texas, Washington, Arizona, Pennsylvania, Illinois, and
Ohio. Denny's restaurants are designed to provide a casual 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.
In 1994, the Company began to implement a "reimaging" strategy intended to
result in a fundamental change in the competitive positioning of Denny's. This
reimaging strategy involves all restaurants within a market area and 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 in
some markets Baskin-Robbins(Register mark) ice cream. The Company completed the
reimaging of 124 restaurant units during 1994 and plans to significantly
increase the number of restaurants reimaged in 1995. A typical remodeling under
the reimaging strategy 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 $325,000 per
unit. A reimaged market is supported by increased marketing expenditures and a
marketing campaign directed specifically toward the reopening of the
restaurants. The Company's reimaging program during 1995 includes the San Diego,
Tampa, and South Florida markets.
Prior to the implementation of the reimaging strategy in 1994, remodeling
of Denny's restaurant units was principally based on an evaluation of the
maintenance needs of the restaurant with no fundamental change in the image of
the restaurant chain. Individual restaurants within a market were remodeled, and
the reopening of the restaurant was not
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supported by marketing. As a result, there was no consistent demonstrable
increase in revenues as a result of the previous remodeling programs. Prior to
1994, the Company had not attempted a reimaging program for any of its concepts.
Although preliminary results of the current program indicate that year-over-year
sales increases are 15% to 20% in reimaged restaurants, no assurance can be
given that such program will result in a long-term reversal of historical
trends.
The Company completed the rollout of its Denny's restaurants with POS
systems in 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.
Marketing initiatives in 1995 will focus on the positioning of Denny's as
the price value leader within its segment, offering value menus at breakfast,
lunch, and dinner, and the reimaging of units in selected markets. The Company
intends to support these initiatives by using television marketing in its
reimaging markets and 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 1995 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 the 105 units
previously identified to be sold or closed under the Company's 1993
restructuring plan (of which, at December 31, 1994, 16 such units had been sold
or closed). 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 1994, the Company added a net of 81 new Denny's franchises, of which
47 units were previously owned by the Company, bringing total franchised units
to 512, or 33% 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
1994, Denny's realized $38.8 million of revenues from franchising. Franchisees
also purchase food and supplies from a Company subsidiary.
The average unit sales for Company-owned Denny's units has increased only
slightly during the past five years principally as a result of declining traffic
counts, offset by increases in average check. The restructuring and reimaging
programs at Denny's are intended to increase customer satisfaction and traffic.
While initial results indicate that year-over-year sales increases are in the
range of 15% to 20% in reimaged markets completed in 1994, the Company has not
previously attempted a reimaging program such as the one being undertaken. There
can be no assurance that implementation of the program will result in a
long-term reversal of Denny's previous operating trends. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1 and 2 to the Consolidated Financial Statements, for
discussion of such trends and the write-off of goodwill and certain other
intangible assets during 1993.
HARDEE'S
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1990 1991 1992 1993
<S> <C> <C> <C> <C>
Operating Units (end of year)
Owned/operated.................................................................... 483 500 528 564
Revenues (in millions).............................................................. $ 510 $ 525 $ 607 $ 682
Operating Income (Loss) (in millions)............................................... $ 52 $ 52 $ 72 $ (179)(1)
Depreciation and Amortization (in millions)......................................... $ 40 $ 40 $ 44 $ 48
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,077 $1,062 $1,185 $1,255
Average Check....................................................................... $ 2.64 $ 2.72 $ 2.88 $ 3.09
<CAPTION>

1994
<S> <C>
Operating Units (end of year)
Owned/operated.................................................................... 595
Revenues (in millions).............................................................. $ 701
Operating Income (Loss) (in millions)............................................... $ 76
Depreciation and Amortization (in millions)......................................... $ 41
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,206
Average Check....................................................................... $ 3.11
</TABLE>

(1) Operating income reflects the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges for the year
ended December 31, 1993 of $260 million. For a discussion of the write-off
and restructuring and the reasons therefor, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 2 and 3 to the Consolidated Financial Statements.
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 fifth largest
sandwich chain in the United States based on national systemwide sales. Of the
595 Hardee's restaurants operated by the Company at December 31, 1994, 574 were
located in ten southeastern states. The Company's Hardee's restaurants provide
uniform menus in a quick-service 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
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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 1994. 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 39% of total sales at the Company's
Hardee's restaurants. The Company plans to remodel its Hardee's restaurants at a
current average cost of $130,000 per unit for image enhancement 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 31 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 31 additional units will require
approximately $31 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.
Although Hardee's has had annual increases in revenues and increases in
average unit sales during three of the last five years, the Company as a whole
has experienced disappointing operating trends due to its highly-leveraged
nature and revenue trends at the Company's other restaurant concepts and, prior
to its sale in 1994, at its food and vending services business. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1 and 2 to the Consolidated Financial Statements, for a
discussion of the Company-wide write-off of goodwill and certain other
intangible assets during 1993, and the bases therefor.
QUINCY'S
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1990 1991 1992 1993
<S> <C> <C> <C> <C>
Operating Units (end of year)
Owned/operated.............................................................. 212 216 217 213
Revenues (in millions)........................................................ $ 282 $ 283 $ 290 $ 279
Operating Income (Loss) (in millions)......................................... $ 20 $ 15 $ 11 $ (154)(1)
Depreciation and Amortization (in millions)................................... $ 21 $ 22 $ 22 $ 21
Average Unit Sales (in thousands)
Owned/operated.............................................................. $1,324 $1,320 $1,335 $1,302
Average Check................................................................. $ 5.38 $ 5.40 $ 5.32 $ 5.61
<CAPTION>

1994
<S> <C<C>
Operating Units (end of year)
Owned/operated.............................................................. 207
Revenues (in millions)........................................................ $ 284
Operating Income (Loss) (in millions)......................................... $ 23
Depreciation and Amortization (in millions)................................... $ 11
Average Unit Sales (in thousands)
Owned/operated.............................................................. $1,350
Average Check................................................................. $ 5.79
</TABLE>

(1) Operating income reflects the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges for the year
ended December 31, 1993 of $164 million. For a discussion of the write-off
and restructuring and the reasons therefor, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 2 and 3 to the Consolidated Financial Statements.
Ranked by 1994 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 207 Company-owned restaurants at December 31,
1994 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. In addition, weekend breakfast service, which is
available at most locations, allows Quincy's to utilize its asset base more
efficiently.
The Company began testing a unit concept conversion in 1993 by remodeling
and converting three steakhouses in Columbia, S.C., to a buffet only concept. As
part of the restructuring plan adopted in the fourth quarter of 1993, 90 poor
performing restaurants were identified to be sold, closed or converted to
another concept and were written down to net realizable value. At December 31,
1994, the Company had closed seven units and determined that the performance of
the buffet restaurants did not justify further conversions to that concept.
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During 1994 the Company continued the introduction of the scatter bar
format by remodeling 39 units in the Birmingham and Greenville-Spartanburg
markets at a cost of approximately $180,000 per unit. To date, year-over-year
sales increases are 15% to 20% in these reimaged restaurants.
The average unit sales of Quincy's has increased only slightly during the
past five years. The restructuring program and concurrent reimaging and
refurbishment program are intended to result in increased customer satisfaction
and traffic. There can be no assurance, however, that implementation of such
programs will result in a long-term reversal of the historical operating trends
of the Company. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes 1 and 2 to the Consolidated
Financial Statements, for a discussion of such trends and the write-off of
goodwill and certain other intangible assets during 1993.
EL POLLO LOCO
El Pollo Loco is the leading chain in the quick-service segment of the
restaurant industry to specialize in flame-broiled chicken. As of December 31,
1994, there were 209 El Pollo Loco units (of which 127 were operated by the
Company, 78 were operated by franchisees and 4 were operated under foreign
licensing agreements). Approximately 95% 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.
Average unit sales at El Pollo Loco declined during the four year period
1990 through 1993 following the Company's 1989 acquisition. As a part of the
1993 restructuring plan, the Company identified 45 units which did not generate
an adequate return on investment, and thus are to be sold or closed. At December
31, 1994, 9 such units had been sold pursuant to the restructuring plan. The
Company's restructuring plan included 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 were intended to increase customer
satisfaction and expand the customer market resulting in higher customer
traffic. To date, year-over-year sales increases are approximately 10% in these
reimaged restaurants. During 1994, average unit sales at El Pollo Loco increased
by 12.4% over 1993 as a result of new menu items, combination meals, and a full
year's impact of the acquisition of high-volume franchise units in the fourth
quarter of 1993. There can be no assurance, however, that El Pollo Loco's
reimaging program will result in a long-term reversal of the historical
operating trends of the Company. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 1 and 2 to
the Consolidated Financial Statements, for a discussion of such trends and the
write-off of goodwill and certain other intangible assets in 1993.
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.
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,
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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 Denny's, Hardee's, Quincy's and El
Pollo Loco restaurants.
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 $43.2 million for 1994, or
about 2.4% of Denny's system-wide restaurant sales. Individual restaurants are
also given the discretion to conduct local advertising campaigns. In accordance
with HFS licensing agreements, the Company spent during 1994 approximately 6.3%
of Hardee's total gross sales on marketing and advertising. Of this amount,
approximately 2.5% 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 4.5% of Quincy's gross sales on
Quincy's marketing in 1994. During 1994, El Pollo Loco spent approximately 4.9%
of its system-wide restaurant sales on advertising.
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 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. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations, for a discussion of
certain management projections that assume no new unit growth for the Company in
the future and the bases therefor.
DISCONTINUED OPERATIONS
The Company's concession and recreation services subsidiaries provide food,
beverage, novelty, and ancillary services in sports stadiums, amphitheaters,
arenas and other locations. Volume Services, Inc. ("Volume") provides
concessions services at five major league baseball parks (Hubert H. Humphrey
Metrodome, Oakland-Alameda County Coliseum, Royals Stadium, Yankee Stadium and
Candlestick Park), nine minor league baseball parks, and five professional
football stadiums (Arrowhead Stadium, Hubert H. Humphrey Metrodome, Los Angeles
Coliseum, Tampa Stadium and Candlestick Park). TW Recreational Services, Inc.
("TWRS") 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. Contracts to provide
these services usually are obtained on the basis of competitive bids. In most
instances, Volume or TWRS, as applicable, receives the exclusive right to
provide 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.
6

<PAGE>
The Company operates and manages its Volume and TWRS operations on a
regional basis, with each region 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 three learning
centers 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.
During April 1994, the Company announced that it had entered into an
agreement to sell the food and vending business of its Canteen subsidiary and
its intent to dispose of Volume and TWRS, which constitute the balance of the
Company's Canteen operations. Canteen's 1993 total annual revenues were $1.37
billion (out of total Company revenues of $3.97 billion for the year), of which
$187.4 million and $134.6 million were attributable to Volume and TWRS,
respectively. In June 1994, the Company closed the sale of such food and vending
business. In November 1994, the Company announced that it had agreed to sell
TWRS. Such transaction is subject to resolution of certain issues that have been
raised by the National Park Service. The Company is continuing its efforts to
sell Volume; however, the major league baseball strike has delayed the sale of
Volume beyond the time originally anticipated. See Note 14 to the accompanying
Consolidated Financial Statements for additional information.
COMPETITION
According to the National Restaurant Association, in the past five years,
the total food service industry experienced annual real growth of approximately
1.25%. The restaurant industry not only competes within the food consumed away
from home segment of the food industry, but also with sources of food consumed
at home. In order to grow at a real growth rate in excess of 1.25%, the
Company's restaurant concepts must take market share from other competing
restaurant and non-restaurant food sources.
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 quick-service restaurant chains is especially
intense. Restaurants, particularly those in the quick-service 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 1994, Denny's had a 14.3%
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 quick-service restaurants serving other kinds of foods,
such as chicken outlets (e.g., KFC 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 quick-service 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 quick-service outlets. Nationwide, the
top five chains are Sizzler, Ponderosa, Golden Corral, Ryan's, and Western
Sizzlin'. According to NATION'S RESTAURANT NEWS (published August 1, 1994),
Quincy's ranked sixth nationwide in system-wide sales and third in sales per
unit among the steak chains.
As a result of such competition and other factors, the Company's historical
growth has been disappointing. Although initial results of the 1993
restructuring plan have been encouraging, particularly at Denny's and El Pollo
Loco, there can be no assurance that such changes will result in a long-term
reversal of the historical operating trends of the Company. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1 and 2 to the Consolidated Financial Statements, for a
discussion of such trends and the write-off of goodwill and certain other
intangible assets in 1993.
7

<PAGE>
EMPLOYEES
At December 31, 1994, the Company had approximately 90,000 employees of
which less than 1% are union members. Many of the Company's restaurant employees
work part-time, and many are paid at or slightly above minimum wage levels. 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, 1994:
<TABLE>
<CAPTION>
LAND LEASED
LAND AND AND LAND AND
BUILDING BUILDING BUILDING
OWNED OWNED LEASED
<S> <C> <C> <C>
TYPE OF RESTAURANT
DENNY'S............... 271 42 665
HARDEE'S.............. 285 107 203
QUINCY'S.............. 157 43 7
EL POLLO LOCO......... 11 40 76
Total............... 724 232 951
</TABLE>

<PAGE>
The number and location of the Company's restaurants in each chain as of
December 31, 1994 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 9 156 46 -- --
Alaska..................................................... -- 4 -- -- -- --
Arizona.................................................... 33 31 -- -- -- --
Arkansas................................................... 1 5 3 -- -- --
California................................................. 251 88 -- -- 127 72
Colorado................................................... 25 9 -- -- -- --
Connecticut................................................ 7 3 -- -- -- --
Delaware................................................... 3 -- -- -- -- --
Florida.................................................... 104 55 55 41 -- --
Georgia.................................................... -- 23 10 11 -- --
Hawaii..................................................... 4 3 -- -- -- --
Idaho...................................................... -- 6 -- -- -- --
Illinois................................................... 49 7 -- -- -- --
Indiana.................................................... 16 8 -- -- -- --
Iowa....................................................... 1 5 -- -- -- --
Kansas..................................................... 9 3 -- -- -- --
Kentucky................................................... -- 19 -- 1 -- --
Louisiana.................................................. 8 2 1 -- -- --
Maine...................................................... -- 4 -- -- -- --
Maryland................................................... 14 16 -- -- -- --
Massachusetts.............................................. 10 -- -- -- -- --
Michigan................................................... 40 1 -- -- -- --
Minnesota.................................................. 13 3 -- -- -- --
Mississippi................................................ 2 2 42 8 -- --
Missouri................................................... 30 5 -- -- -- --
Montana.................................................... -- 1 -- -- -- --
Nebraska................................................... -- 7 -- -- -- --
Nevada..................................................... 12 3 -- -- -- 4
New Hampshire.............................................. 2 1 -- -- -- --
New Jersey................................................. 15 2 -- -- -- 2
New Mexico................................................. 2 12 -- -- -- --
New York................................................... 24 8 -- -- -- --
North Carolina............................................. 8 12 65 40 -- --
North Dakota............................................... -- 3 -- -- -- --
Ohio....................................................... 36 18 19 1 -- --
Oklahoma................................................... 9 6 -- -- -- --
Oregon..................................................... 14 8 -- -- -- --
Pennsylvania............................................... 52 4 2 -- -- --
Rhode Island............................................... -- -- -- -- -- --
South Carolina............................................. 9 5 123 42 -- --
South Dakota............................................... -- 1 -- -- -- --
Tennessee.................................................. 3 10 116 13 -- --
Texas...................................................... 66 41 -- -- -- --
Utah....................................................... 7 8 -- -- -- --
Vermont.................................................... -- 2 -- -- -- --
Virginia................................................... 20 6 3 4 -- --
Washington................................................. 55 12 -- -- -- --
West Virginia.............................................. -- 3 -- -- -- --
Wisconsin.................................................. 13 7 -- -- -- --
Wyoming.................................................... -- 6 -- -- -- --
Canada..................................................... 10 15 -- -- -- --
International.............................................. -- 58 -- -- -- 4
Total.................................................... 978 570 595 207 127 82
</TABLE>

At December 31, 1994, the Company owned seven warehouses in California,
Illinois, Florida, Pennsylvania, Texas and Washington, and one manufacturing
facility in Texas.
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.
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
9

<PAGE>
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 current and
former officers and directors of those companies, are 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 Flagstar'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 Flagstar 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 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. The Company intends to vigorously contest the proposed
deficiencies because it believes the proposed deficiencies are substantially
incorrect.
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.
On June 15, 1994, a derivative action was filed in the Alameda County
Superior Court for the State of California by Mr. Adam Lazar, purporting to act
on behalf of the Company, against the Company's directors and certain of its
current and former officers alleging breach of fiduciary duty and waste of
corporate assets by the defendants relating to alleged acts of mismanagement or
the alleged failure to act with due care, resulting in policies and practices at
Denny's that allegedly gave rise to certain public accommodations class action
lawsuits against the Company that were settled in 1994. The action seeks
unspecified damages against the defendants on behalf of the Company and its
stockholders, including punitive damages, and injunctive relief. There has been
only limited discovery in this action to date. Accordingly, it is premature to
express a judgment herein as to the likely outcome of the action.
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.
10

<PAGE>
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 15, 1995, 440 shares of common stock of
Flagstar were outstanding, all of which are owned by FCI.
Dividends were not paid by Flagstar during 1993 or 1994. 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, 1994. 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>
YEAR ENDED DECEMBER 31,
1990 (1) 1991 (1) 1992 (1) 1993 (1) 1994
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT RATIOS)
Income Statement data:
Operating revenues................................. $2,303.9 $2,338.7 $2,443.0 $2,615.2 $2,666.0
Operating income (loss)............................ 187.7 179.3 196.7 (1,102.4)(2) 211.1
Loss from continuing operations (3)................ (57.6) (54.1) (45.3) (1,252.7) (31.0)
Ratio of earnings to fixed charges (4)............. -- -- -- -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (4)................ 69.1 69.8 51.8 1,332.4 33.5
Balance Sheet data (at end of period):
Current assets (5)................................. 99.4 95.3 98.4 122.2 180.7
Working capital (deficiency) (5)(6)................ (261.0) (326.7) (256.3) (273.0) (205.6)
Net property and equipment......................... 1,282.5 1,256.9 1,269.6 1,166.8 1,196.0
Total assets....................................... 3,264.1 3,186.9 3,177.4 1,545.4 1,588.6
Long-term debt (7)................................. 2,303.7 2,255.3 2,321.3 2,491.2 2,217.6
</TABLE>

(1) Certain amounts for the four years ended December 31, 1993 have been
reclassified to conform to the 1994 presentation.
(2) Operating loss for the year ended December 31, 1993 reflects charges for the
write-off of goodwill and certain other intangible assets of $1,104.6
million and the provision for restructuring charges of $158.6 million.
(3) The Company's food and vending and concessions and recreation services
subsidiaries have been reclassified as discontinued operations (its food and
vending subsidiary having been sold in 1994). The Company sold American
Medical Services, Inc., The Rowe Corporation and Milnot Company in 1990 and
Preferred Meal Systems, Inc. in 1991. Such entities were also classified as
discontinued operations.
(4) 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.
(5) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $595.8 million, $503.0 million, $480.8 million,
$103.2 million, and $77.3 million as of December 31, 1990 through 1994,
respectively. Such assets held for sale relate to the Company's food and
vending and concessions and recreation services subsidiaries.
(6) A negative working capital position is not unusual for a restaurant
operating company. The increase in the working capital deficit 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. The decrease in the working capital deficiency from
December 31, 1993 to December 31, 1994 is due primarily to an increase in
cash following the sale of the Company's food and vending subsidiary during
1994.
11

<PAGE>
(7) At December 31, 1992, 1993 and 1994, 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.
OPERATING TRENDS
During the past year a number of significant changes were made in the
leadership of the Company and its operations in an effort to address the
operating performance of the Company's restaurants. Over the past several years,
the Company's overall restaurant operations have reflected low comparable store
sales growth particularly at the Company's Denny's, Quincy's, and El Pollo Loco
chains. The lack of comparable store sales growth has resulted from the
continuation of a long-term trend of 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.
Because of these trends and in an effort to reverse them, the Company initiated
a restructuring plan in the fourth quarter of 1993 that included: (1) the sale,
conversion to another concept, or closure of approximately 240 of the Company's
Denny's, Quincy's, and El Pollo Loco restaurants; (2) consolidation of certain
corporate administrative operations; and (3) the elimination of a layer of field
management. At the same time, the Company initiated certain reimaging programs
intended to fundamentally change the competitive positioning of Denny's,
Quincy's, and El Pollo Loco.
During 1994 the Company completed the realignment of its field and
corporate management structures and sold or closed 31 of the stores identified
in the restructuring plan. The Company currently estimates that the remaining
such units will be sold or closed during 1995. The new designs for Denny's and
El Pollo Loco were also finalized based on extensive market tests during 1994.
Rollout of the reimaging programs began in 1994, with 124 Denny's and 27 El
Pollo Loco restaurants completed in 1994. The reimaging program at Denny's has,
to date, shown 15% to 20% year-over-year gains in comparable store sales and
customer counts, while El Pollo Loco has experienced year-over-year sales gains
of approximately 10%. The reimaging program will be completed at El Pollo Loco
in 1995. Because of the number of restaurants and capital required, the Denny's
reimaging program will require a period of two to three years to complete.
Introduction of the scatter bar and related steakhouse reimaging program at
Quincy's combined with increased promotional advertising has also shown initial
favorable results. The test conversion of Quincy's steakhouses to an all buffet
concept was not satisfactory, however, and the Company continues to review
alternatives for underperforming Quincy's restaurants. While these initial
results of the restructuring are encouraging, the ultimate outcome of the
Company's restructuring effort continues to be uncertain. Accordingly, no
assurance can be given that such results will continue or that they will lead to
a reversal of long-term trends, or that the Company will be able to generate the
funds needed to fund the capital improvements that these programs require.
Only a limited number of restaurants were reimaged for a portion of 1994
pursuant to the restructuring plan. Accordingly, the impact of the reimaging
program on year-to-year comparisons and trends has been minimal. A more detailed
discussion of each of the Company's restaurant chains and their operating
results in 1994 as compared to 1993 is set forth below. For more information
concerning previous Company trends and the Company's restructuring, see
"Write-off of Goodwill and Certain Other Intangible Assets; Restructuring
Charge" set forth below.
1994 COMPARED TO 1993
Operating revenues from continuing operations for 1994 increased by
approximately $50.8 million (1.9%) as compared with 1993. Denny's revenues
increased $1.9 million (0.1%) due to increased outside revenues of $36.3 million
from its food distribution operations offset in part by a reduction of
restaurant revenues of $34.4 million, principally as a result of a net decrease
of 46 units in the number of Company-owned units. This decrease in the number of
Company-owned units was partially offset by a net increase of 81 units in the
number of franchise-owned restaurants and by a 0.3% increase in comparable store
sales during 1994 as compared to 1993. The increase in comparable store sales
resulted from a 0.6% increase in customer traffic offset, in part, by a decrease
in average check of 0.4%. Management believes that the positive trend in
customer traffic in 1994 was primarily during the third and fourth quarters as a
result of the Company-wide $1.99 Original Grand Slam Breakfast promotion.
Hardee's revenues increased $18.8 million (2.8%) during 1994 as compared to the
prior year due to a net increase of 31 units. Although Hardee's total revenues
increased, comparable store sales decreased 3.6% as a result of a 3.9% decrease
in customer traffic mitigated in part by a 0.3% increase in average check. The
decline in customer traffic at Hardee's during 1994 was principally the result
of aggressive discounting by the Company's quick-service competitors. Quincy's
revenues increased by $5.6 million (2.0%) in 1994 as compared with 1993,
primarily due to successful product promotions and the impact of remodeled
restaurants resulting in a 2.9% increase in
12

<PAGE>
comparable store sales which more than offset a net decrease of 6 units. The
increase in comparable store sales at Quincy's reflects an increase of 3.2% in
average check and a 0.3% decrease in customer traffic. Revenues at El Pollo Loco
increased by $24.6 million (22.7%) during 1994 over 1993 due primarily to new
products and combination meals, including barbeque chicken, additional taco and
burrito entrees, and new side orders such as french fries, black beans, corn,
and potatoes, introduced during 1994, and the acquisition of high-volume
franchise restaurants in late 1993. Comparable store sales increased 6.5% and
reflect increases in customer traffic of 6.0% and in average check of 0.5%.
The Company's overall operating expenses before considering the effects of
the write-off of goodwill and certain other intangible assets and the provision
for restructuring charges in 1993 increased by $0.5 million in 1994 as compared
with 1993. At Denny's, operating expenses before considering the effects of the
write-off of goodwill and certain other intangible assets and the provision for
restructuring charges in 1993 decreased by $29.9 million in 1994 as compared
with 1993. A significant portion of the decrease ($20.7 million) was
attributable to a reduction in depreciation and amortization expense related to
the year-end 1993 write-off of assets and a reduction of $18.5 million in
payroll and benefits expense. Such decreases were partially offset by a $3.9
million increase in occupancy expense and a $2.1 million increase in
advertising. In addition, Denny's operating expenses for 1994 reflect a gain of
approximately $8.8 million related to the sale of Company-owned restaurants. At
Hardee's, an increase in operating expenses of $24.4 million was mainly
attributable to the increase in the number of restaurants in operation and
reflects increases in payroll and benefits expenses of $14.6 million, product
costs of $7.4 million, occupancy and maintenance expenses of $2.6 million, and
utilities expense of $1.8 million. Such increases were partially offset by
reduced depreciation and amortization charges of $1.2 million related to the
year-end 1993 write-off of assets. A decrease in operating expenses of $7.6
million at Quincy's was principally attributable to a decrease in depreciation
and amortization charges of $9.6 million related to the year-end 1993 write-off
of assets which was offset, in part, by increased payroll and benefits expense
of $2.3 million. General corporate overhead expense (before allocation to
specific operating companies) decreased by $5.2 million in 1994 as compared to
1993 primarily as a result of the effect of the Company's restructuring plan.
Interest and debt expense increased by $14.0 million in 1994 as compared to
1993. During 1993, $45.6 million was allocated to discontinued operations;
however, the allocation decreased to $33.7 million as a result of the sale of
the Company's food and vending subsidiary in June 1994. Cash interest increased
by $6.9 million during 1994 as compared with 1993 due to the higher fixed
interest rates on the $400.0 million of the 10 3/4% Senior Notes due 2001 (the
"10 3/4% Notes") and 11 3/8% Senior Subordinated Debentures due 2003 (the
"11 3/8% Debentures") issued during the third quarter of 1993, the proceeds of
which were used to refinance a portion of the Company's bank facility that
during 1993 had interest at lower variable rates. Interest expense for 1994
included charges of $9.2 million related to interest rate exchange agreements
compared to charges of $12.2 million during 1993. See Notes 1 and 4 to the
Consolidated Financial Statements for additional information relating to the
interest rate exchange agreements.
The Company's concession and recreation services businesses, which are
accounted for as discontinued operations, recorded a revenue increase of $3.3
million (1.0%) to $325.4 million during 1994 as compared to 1993. During April
1994, the Company announced its intent to dispose of these businesses. In
November 1994, the Company announced that it had reached an agreement to sell
TWRS (which operates its recreation services business). Such transaction is
subject to resolution of certain issues that have been raised by the National
Park Service. The Company is continuing its efforts to sell Volume (which
operates its concession services business). However, the major league baseball
strike, which was initiated by the players union in August 1994 and which is
currently unresolved, has delayed the sale of Volume beyond the time originally
anticipated. See Note 14 to the accompanying Consolidated Financial Statements
for additional information.
1993 COMPARED TO 1992
Operating revenues for 1993 increased by approximately $172.2 million
(7.0%) as compared with 1992. 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
certain litigation involving claims of discrimination (subsequently settled) at
Denny's. As a result of these factors, Denny's comparable store sales were flat
and included a decrease in customer traffic of 2.6% while the average check
increased 2.8%. 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 6.4% increase in comparable store sales
and a 36-unit increase in the number of restaurants. The increase in comparable
store sales resulted from a 6.8% increase in the average check offset, in part,
by a decrease of 0.4% in customer traffic. The increases in comparable store
sales and average check at Hardee's were primarily attributable to its 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
13

<PAGE>
to a 2.8% decrease in comparable store sales combined with a 4-unit decline in
the number of units. The decrease in comparable store sales resulted from a
decrease in customer traffic of 8.2% which was offset, in part, by a 5.9%
increase in average check. The significant decrease in traffic at Quincy's as
compared with 1992 reflected 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 accounted 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 3.0% increase in
comparable store 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 $208.1 million (9.3%) in
1993 as compared with 1992. Of the total increase in operating expenses, a
significant portion ($118.7 million) was 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 was 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. 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 was mainly attributable to increased revenues and was 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 was 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 other 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.
Interest and debt expense decreased by $20.2 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 $5.9 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.
Interest expense for 1993 includes charges of $12.2 million related to interest
rate exchange agreements, which represents a decrease of $3.7 million from $15.9
million recorded in 1992. See Notes 1 and 4 to the Consolidated Financial
Statements for additional information relating to the interest rate exchange
agreements.
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 from continuing
operations by approximately $5.9 million, respectively.
WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLE ASSETS; RESTRUCTURING
CHARGE
The Company's operating results since the Company's 1989 acquisition of
Flagstar have fallen short of projections prepared at the date of such
acquisition 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. As discussed
further below and in Notes 1 and 2 to the Consolidated Financial Statements,
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 of the Company derived from the prior four years
would continue, and that such projections indicated an inability to recover the
recorded balance of goodwill and certain other intangible assets. Accordingly
such assets were written off in 1993, resulting in non-cash charges of $1,475
million ($1,104.6 million to continuing operations and $370.2 million to
discontinued operations). Also in response to such trends, the Company adopted a
plan of restructuring that resulted in a separate charge in 1993 of $192.0
million ($158.6 million to continuing operations and $33.4 million to
discontinued operations).
14

<PAGE>
While total operating revenues increased 2.8% in 1992 and 6.7% in 1993,
operating income for each of the four full years since the Company's 1989
acquisition of Flagstar through 1993 were insufficient to cover the Company's
interest and debt expense. Operating cash flows have been sufficient to cover
interest costs. The primary factor affecting the Company's ability to generate
operating income sufficient to cover interest and debt expense and amortization
of goodwill and other intangibles has been the average unit sales at the
restaurant concepts and the sales volume at the Company's contract food and
vending operation. At the time of the Company's 1989 acquisition of Flagstar,
projections of future operations assumed annual growth rates in average unit
sales at all concepts and corresponding increases in operating income. Such
projections and those prepared since the 1989 acquisition and prior to the
fourth quarter of 1993, indicated that the Company would become profitable
within several years. However, since the 1989 acquisition through the end of
1993 and despite increases in average unit sales at Hardee's, average unit sales
at Denny's and Quincy's increased only slightly and food and vending sales
volume declined. Specifically, for the four years since the acquisition through
the end of 1993, average unit sales for Company-owned units increased
(decreased) at an average annual rate of 2.5%, (4.7)%, 5.0% and 1.1% for
Denny's, El Pollo Loco, Hardee's and Quincy's, respectively. See Item 1.
Business. Revenue increases during the four year period since the acquisition
through the end of 1993 were achieved as a result of an increase in the number
of units at Hardee's and Denny's and certain regional food and vending
acquisitions, in addition to increased average unit sales at Hardee's. However,
such increased revenues did not result in positive earnings after interest and
debt expense. Projections prepared during the fourth quarter of 1993 indicated
that, if the four year trends in customer traffic and other operating factors
were to continue, future operating income less interest and debt expense would
continue to be insufficient to recover the carrying value of goodwill and other
intangible assets. The projections assumed that average unit sales at each of
the restaurant concepts and food and vending sales volume would increase or
decrease consistent with the four year historical trends described above. These
fourth quarter 1993 projections assumed no additional borrowing to fund new unit
growth (because even if new units continued to be developed at historical
levels, it would not have a material impact on projected net income) and no
reversal of the historical trends of the Company that may result from successful
restructuring and reimaging programs, since management determined, based on all
information available, that historical trends provided the best estimate of
future operating results.
Also as a result of the historical operating trends described above and in
an attempt to reverse them, effective in the fourth quarter of 1993, the Company
approved a restructuring plan that included the sale or closure of restaurants,
a reduction in personnel, and a reorganization of certain management structures.
The provision for restructuring charges resulted from a comprehensive financial
and operational review initiated in 1993 which included a re-engineering study
that evaluated the Company's major business processes. The restructuring charge
for continuing operations of $158.6 million included primarily a non-cash charge
of $130.7 million to write-down certain assets and incremental charges of $27.9
million for severance, relocation, and other costs. The restructuring charge for
discontinued operations of $33.4 million included $25.5 million to write-down
certain assets and $7.9 million for severance. See Note 3 to the Consolidated
Financial Statements for further details.
The write-down of assets under the fourth quarter 1993 restructuring plan
represented predominantly non-cash adjustments made to reduce the carrying value
of approximately 240 of the Company's Denny's, Quincy's, and El Pollo Loco
restaurants. Approximately 105 Denny's and 45 El Pollo Loco restaurants were
identified to be sold or closed over a twelve month period and were written down
to net realizable value. The Quincy's concept was over-penetrated in a number of
its markets; thus, most of the 90 Quincy's units identified in the restructuring
plan were identified to be sold, closed or converted to another concept. As a
result, the estimated amount of the units' carrying value with no future benefit
was written off. The write-down of assets also included a charge of $15 million
to establish a reserve for operating leases primarily related to restaurant
units to be sold 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 also included consolidation of certain Company
operations, eliminating overhead positions in the field and in its corporate
marketing, accounting, and administrative functions. Also, the Company's field
management structure was reorganized to eliminate a layer of management. The
restructuring charge included a provision of approximately $25 million for the
related severance, relocation, and office closure costs. The Company's
restructuring plan also included the decision to fundamentally change the
competitive positioning of Denny's, Quincy's and El Pollo Loco.
The Company continues to believe that the restructuring plan is the most
appropriate manner in which to respond to the historical operating trends
experienced since the Company's 1989 acquisition of Flagstar. Management
anticipates that such plan will continue to provide the opportunity to reverse
the traffic trends at Denny's, Quincy's and El Pollo Loco. However, there can be
no assurance that such plan will result in a long-term reversal of historical
operating trends of the Company.
15

<PAGE>
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 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.
The Company reported net income in 1994 as a result of a gain recognized on
the sale of its food and vending business subsidiary and a net loss in 1993
attributable in major part to non-cash charges, consisting principally of the
write-off of goodwill and certain other intangible assets and the write-down of
certain operating assets in the restructuring. 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,
1993 1994
<S> <C> <C>
(IN MILLIONS)
Net income (loss).......................................................................... $(1,700.8) $ 349.9
Write-off of goodwill and certain other intangible assets.................................. 1,104.6 --
Provision for restructuring charges........................................................ 158.6 (7.2)
Non-cash charges and credits............................................................... 185.3 128.7
Deferred income tax benefits............................................................... (84.4) (2.8)
Discontinued operations.................................................................... 409.7 (392.7)
Extraordinary items, net................................................................... 26.4 11.8
Cumulative effect of changes in accounting principles, net................................. 12.0 --
Changes in certain working capital items................................................... 66.2 (24.3)
Decrease in other assets and increase (decrease) in other liabilities, net................. (62.9) (23.0)
Cash from operations available for debt repayment and capital expenditures................. $ 114.7 $ 40.4
</TABLE>

The Restated Credit Agreement consists of a working capital and letter of
credit facility of up to $250.0 million with a working capital sublimit of $160
million and a letter of credit sublimit of $157.9 million. In connection with
the sale of the Company's food and vending subsidiary and the use of proceeds
therefrom to liquidate $296.3 million of borrowings under the Restated Credit
Agreement, the agreement was amended to include, among other things, less
restrictive financial covenants, a 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, and a reduction in annual capital
expenditures to reflect the reduced size of ongoing operations.
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. By its terms, the Restated Credit Agreement
expires in June of 1996.
At December 31, 1994 scheduled debt maturities of long-term debt for the
years 1995 through 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
(IN MILLIONS)
1995.................................................................................... $ 31.4
1996.................................................................................... 40.2
1997.................................................................................... 39.8
1998.................................................................................... 33.3
1999.................................................................................... 28.0
</TABLE>

In addition to scheduled maturities of principal, approximately $250
million of cash will be required in 1995 to meet interest payments on long-term
debt and dividends on FCI's $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock, par value $.10 per share (the "Preferred Stock").
The projections of future operating results prepared in the fourth quarter
of 1993, which resulted in the conclusion that goodwill and certain other
intangibles were impaired (see Write-off of Goodwill and Certain Other
Intangible Assets; Restructuring Charge herein), assumed that the historical
operating trends experienced by the Company since the 1989
16

<PAGE>
acquisition will continue in the future. Although the 1994 results of the
Company's restructuring plan have been encouraging, the ultimate outcome of the
Company's restructuring effort continues to be uncertain. If historical trends
are not reversed, the Company may need to refinance or renegotiate the terms of
existing debt prior to their maturities. While management believes that the
Company will be able, if necessary, to refinance or renegotiate the terms of its
existing debt prior to maturity, no assurance can be given that it will be able
to do so on acceptable terms.
The Company's principal capital requirements are those associated with
opening new restaurants and remodeling and maintaining its existing restaurants
and facilities. During 1994, total capital expenditures were approximately
$173.3 million, of which approximately $58.3 million was used to reimage
existing restaurants pursuant to the Company's restructuring plan described
above, $55.9 million was used to open new restaurants, and $59.1 million was
expended to maintain existing facilities. Of these expenditures, approximately
$18.8 million were financed through capital leases and secured borrowings.
Capital expenditures during 1995 are expected to total approximately $120.0
million to $150.0 million, including costs associated with the Denny's, Quincy's
and El Pollo Loco reimaging programs. The Company currently expects to finance
such capital expenditures internally through continuing operations and asset
sales. For additional information, see "Operating Trends" above.
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, 1994, the Company's working capital deficiency was $128.3 million
as compared with $169.8 million at the end of 1993. Such decrease is
attributable primarily to an increase in cash as a result of the sale of the
Company's food and vending subsidiary during 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements 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.
17

<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each current
director of Flagstar and Mr. A. Andrew Levinson, a nominee to the Board of
Directors of Flagstar. Each director of Flagstar is also a director of FCI.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL
OCCUPATION OR EMPLOYMENT AND
NAME AGE FIVE-YEAR EMPLOYMENT HISTORY
<S> <C> <C>
James B. Adamson.................... 47 Director of FCI and Flagstar; President and Chief Executive Officer of FCI and
Flagstar (February 1995-present); Chief Executive Officer of Burger King
Corporation (1993-January 1995); Chief Operating Officer of Burger King
Corporation (1991-1993); President of Burger King U.S.A. Retail Division (1991);
Executive Vice President, Marketing of Revco, Inc. (1988-1991).
Michael Chu......................... 46 Director of FCI and Flagstar; President and Chief Executive Officer of ACCION
International (1994-present); Director of Latin American Operations, ACCION
International (1993-1994); Executive of KKR and a Limited Partner of KKR
Associates (1989-1993); Director of Banco Solidario S.A., Commercial Printing
Holding Co., FINANSOL Compania de Financiamiento Comercial and World Color Press,
Inc.
Vera King Farris.................... 54 Director of FCI and Flagstar; President of The Richard Stockton College of New
Jersey (1983-present); Director of National Utility Investors.
Hamilton E. James................... 44 Director of FCI and Flagstar; Managing Director of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") (investment banking) (1987-present); Chairman, DLJ
Merchant Banking Group (1992-present); Director of County Seat Stores, Inc. and
Price/Costco Inc.
Henry R. Kravis (a)................. 51 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of American Re Corporation, Auto Zone, Inc., Borden, 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. and World Color Press, Inc.
A. Andrew Levinson.................. 38 Managing Director, Investment Banking of DLJ (1989-present); Managing Director,
Leverage Buyout Group of Drexel Burnham Lambert (1984-1989); Director of
Ferrellgas Companies, Inc. and Rickel Home Centers, Inc.
Paul E. Raether..................... 48 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of Duracell International, Inc., Fred Meyer, Inc., IDEX Corporation and The Stop
& Shop Companies, Inc.
Jerome J. Richardson................ 58 Chairman of FCI and Flagstar (1992-present); Director of FCI (1989-present);
Director of Flagstar (1980-present); Chief Executive Officer of FCI and Flagstar
(1989-January 1995); President of FCI (1989-1992); President of Flagstar
(1987-1992); Chairman of Denny's (1989-1994); President and Chief Executive
Officer of Canteen (1989-1994); Chairman of Flagstar Systems, Inc. (1990-1994);
President and Chief Executive Officer of Flagstar Systems, Inc. (1989-1994);
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; Founder and President of the corporate
general partner of Richardson Sports, the franchisee of the NFL Carolina
Panthers.
Clifton S. Robbins.................. 37 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of Borden, Inc., IDEX Corporation, RJR Nabisco Holdings Corp., RJR Nabisco, Inc.
and The Stop & Shop Companies, Inc.
George R. Roberts (a)............... 51 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of American Re Corporation, Auto Zone, Inc., Borden, 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. and World Color Press, Inc.
</TABLE>
18

<PAGE>
<TABLE>
<CAPTION>
CURRENT PRINCIPAL
OCCUPATION OR EMPLOYMENT AND
NAME AGE FIVE-YEAR EMPLOYMENT HISTORY
<S> <C> <C>
L. Edwin Smart...................... 71 Director of FCI and Flagstar; Counsel, Hughes Hubbard & Reed (law firm which
performed services for the Company in 1994) (1989-present); Chairman of the Board
and Chief Executive Officer of Flagstar (1986-1987); Chairman of the Board and
Chief Executive Officer of Transworld Corporation (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 Sonat Inc.
Michael T. Tokarz................... 45 Director of FCI and Flagstar; General Partner of KKR and KKR Associates; Director
of IDEX Corporation, K-III Communications Corporation, RJR Nabisco, Inc., RJR
Nabisco Holdings Corp. and Safeway, 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 would consist of persons designated by affiliates of
KKR. For additional information concerning agreements regarding the composition
of the Board of Directors, see Item 11. Executive Compensation -- Employment
Agreements and Item 12. Security Ownership of Certain Beneficial Owners and
Management -- The Stockholder's Agreement and -- Adamson Shareholder 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>
CURRENT PRINCIPAL
OCCUPATION OR EMPLOYMENT AND
NAME AGE FIVE-YEAR EMPLOYMENT HISTORY
<S> <C> <C>
Samuel H. Maw (a)................... 61 Executive Vice President, Product Development and Distribution of Flagstar
(1994-present); Senior Vice President, Product Development and Distribution of
Flagstar (1990-1994); Chief Operating Officer of Canteen Corporation (1993-1994);
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.
H. Stephen McManus (a).............. 52 Executive Vice President, Special Projects of Flagstar (February 1995-present);
President of Flagstar Systems, Inc. (1994-present); Executive Vice President,
Restaurant Operations of Flagstar (1991-February 1995); Senior Vice President of
Flagstar (1989-1991); Chief Operating Officer of Flagstar Enterprises, Inc.
(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).
Edna K. Morris...................... 43 Executive Vice President, Human Resources and Corporate Affairs
of Flagstar (February 1995-present); Senior Vice President, Human Resources of
Flagstar (1993-February 1995); Vice President, Education and Development of
Flagstar (1992-1993); Senior Vice President/Human Resources of HFS (1987-1992);
Director of Employee Relations of HFS (1987); Personnel Manager, Consolidated
Diesel Company, a joint venture between J. I. Case and Cummins Engine Company
(1981-1987); Personnel Manager, Manufacturing of HFS (1980-1981).
C. Ronald Petty..................... 50 Executive Vice President of Flagstar and President of Denny's (1994-present);
Chief Executive Officer of Denny's (February 1995-present); Chief Operating
Officer of Denny's (1993-present); Senior Vice President of Flagstar (1993-1994);
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).
A. Ray Biggs........................ 53 Senior Vice President and Chief Financial Officer of Flagstar and Vice President
and Chief Financial Officer of FCI (1992-present); Partner, Deloitte & Touche LLP
(accounting firm which served as independent auditors for the Company in 1994)
(1978-1992).
</TABLE>
19

<PAGE>
<TABLE>
<CAPTION>
CURRENT PRINCIPAL
OCCUPATION OR EMPLOYMENT AND
NAME AGE FIVE-YEAR EMPLOYMENT HISTORY
<S> <C> <C>
Gregory M. Buckley.................. 41 Senior Vice President of Flagstar and Chief Operating Officer of Quincy's
Restaurants, Inc. (1993-present); President of Quincy's Restaurants, Inc.
(1994-present); Vice President, Central Division of Pizza Hut (1990-1993);
President, Southeast Division of Progressive Corp. (1986-1990).
Jerry A. Houck...................... 52 Senior Vice President, Real Estate and Construction 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..................... 40 Senior Vice President of Flagstar and Chief Operating Officer of
Flagstar Enterprises, Inc. (Hardee's) (1991-present); President of Flagstar
Enterprises, Inc. (Hardee's) (1994-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).
Rhonda J. Parish.................... 38 Senior Vice President and General Counsel of Flagstar and Vice President and
General Counsel of FCI (January 1995-present); Secretary of FCI and Flagstar
(February 1995-present); Assistant General Counsel of Wal-Mart Stores, Inc.
(1990-1994); Corporate Counsel of Wal-Mart Stores, Inc. (1983-1990).
Raymond J. Perry.................... 53 Senior Vice President of Flagstar and Chief Operating Officer of El Pollo Loco
(1993-present); President of El Pollo Loco (1994-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).
Kent M. Smith....................... 57 Senior Vice President and Assistant to the Chief Executive Officer of Flagstar
(March 1995-present); Consultant of Pollo Tropical (1994-February 1995); Senior
Vice President of Burger King Corporation (1992-1994); President of Strategic
Marketing Group (1984-1992).
Coleman J. Sullivan................. 45 Senior Vice President, Corporate Affairs of Flagstar (February 1995-present);
Vice President, Communications of Flagstar (1990-February 1995); Vice President
of Brown Boxenbaum, Inc. (public relations firm) (1986-1990); Director, Financial
Relations, Transworld Corporation (1984-1986).
C. Burt Duren....................... 36 Vice President, Tax of Flagstar (1993-present); Treasurer of Flagstar (1994-
present); Director of Tax of Flagstar (1989-1993); Senior Tax Manager, Deloitte &
Touche LLP (1988-1989).
Thomas R. Holt...................... 38 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).
Honorio J. Padron................... 42 Vice President, Business Transformation of Flagstar (March 1995-present); Senior
Director of Research and Development of Burger King Corporation (January
1995-March 1995); Director of Reengineering of Burger King Corporation
(1993-January 1995); Director of Worldwide Profit and Loss Improvement of Burger
King Corporation (1993); Manager of Systems Support of Burger King Corporation
(1990-1993).
Stephen W. Wood..................... 36 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 HFS (1991-1993); Consultant of Hewitt Associates, L.P. (benefit
consultants that performed services for the Company in 1994) (1990); McGuire,
Woods, Battle & Boothe (law firm) (1984-1990).
</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.
20

<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
Set forth below is information for 1994, 1993 and 1992 with respect to
compensation for services to the Company of Mr. Richardson, the Chief Executive
Officer of the Company during 1994, and each of the four most highly compensated
executive officers (other than the Chief Executive Officer) of the Company
during 1994.
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)(5)
<S> <C> <C> <C> <C> <C>
Jerome J. Richardson 1994 $ 856,594 $250,000 -- $ 10,250
Chairman; Formerly 1993 $ 824,355 -- -- $ 13,652
Chief Executive 1992 $ 776,804 $750,000 600,000 $ 15,286
Officer of Flagstar
Gregory M. Buckley 1994 $ 221,416 $126,563 80,000 $111,747
Senior Vice President of 1993 $ 136,533 -- 60,000 $460,852
Flagstar and President 1992 -- -- -- --
and Chief Operating
Officer of Quincy's
Samuel H. Maw 1994 $ 301,145 $ 95,625 80,000 --
Executive Vice President, 1993 $ 280,861 -- 80,000 --
Product Development 1992 $ 273,024 $124,888 -- --
and Distribution
of Flagstar
Raymond J. Perry 1994 $ 237,339 $135,000 80,000 --
Senior Vice President 1993 $ 136,606 -- 60,000 $130,000
of Flagstar and President 1992 -- -- -- --
and Chief Operating
Officer of El Pollo Loco
C. Ronald Petty 1994 $ 284,284 $144,281 80,000 $ 78,194
Executive Vice President 1993 $ 142,500 -- 80,000 $483,125
of Flagstar and President 1992 -- -- -- --
and Chief Executive
Officer of Denny's
</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 1994 include accruals of $112,938 and $41,086 for
Messrs. Richardson and Maw, respectively, under a supplemental executive
retirement plan. The amounts shown for 1993 include accruals of $62,082 and
$26,823, and the amounts shown for 1992 include accruals of $58,053 and
$30,119, for Messrs. Richardson and Maw, respectively, under the same plan.
Such amounts also reflect certain costs and credits to the named executive
officers relating to certain life, health and disability insurance coverage
provided through the Company.
(3) For additional information concerning the grant of options in 1994, 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 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.
Options were granted to Messrs. Buckley, Maw, Perry and Petty on June 29,
1993 pursuant to the 1989 Option Plan. The exercise price for such options
is $11.25 per share. Such options become exercisable at the rate of 50% as
of June 29, 1995 and 25% per year thereafter.
(4) The amounts shown for Mr. Richardson are split-dollar insurance premium
payments paid by the Company for the years indicated.
21

<PAGE>
(5) The amounts shown for Messrs. Buckley, Perry and Petty consist of additional
compensation and/or expense reimbursement paid to the respective named
executive officers at or near the time of, or otherwise arising in
connection with, their initial employment with the Company.
STOCK OPTIONS
Set forth below is information with respect to individual grants of stock
options with respect to the Common Stock made during 1994 to Messrs. Buckley,
Maw, Perry and Petty. No stock options were granted in 1994 to Mr. Richardson.
OPTION GRANTS IN 1994
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
% OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED EXERCISE STOCK PRICE
OPTIONS TO OR BASE APPRECIATION FOR
GRANTED EMPLOYEES PRICE EXPIRATION OPTION TERM
NAME (#)(1) IN 1994 ($/SH)(2) DATE 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Gregory M. Buckley 80,000 6.3% $ 9.00 08-16-04 $ 453,600 $1,144,800
Samuel H. Maw 80,000 6.3% $ 9.00 08-16-04 $ 453,600 $1,144,800
Raymond J. Perry 80,000 6.3% $ 9.00 08-16-04 $ 453,600 $1,144,800
C. Ronald Petty 80,000 6.3% $ 9.00 08-16-04 $ 453,600 $1,144,800
</TABLE>

(1) Such options were granted on August 16, 1994 pursuant to the 1989 Option
Plan and become exercisable at the rate of 50% as of August 16, 1996 and 25%
per year thereafter, conditioned upon continued employment with the Company.
Under the 1989 Option Plan, the exercise price of shares 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. If such termination is by reason of death,
retirement or disability, such holder's exercisable options remain
exercisable for one year following termination. If such termination is
voluntary or without cause, such holder's exercisable options generally
remain exercisable for sixty days following termination. If such termination
is for cause, such holder's exercisable options expire and terminate as of
the date of termination.
(2) The exercise price for such options was established at the closing sales
price for the Common Stock as of the date prior to the date of grant.
The following table sets forth information with respect to the 1994
year-end values of unexercised options, all of which were granted by the Company
pursuant to the 1989 Option Plan, held by Mr. Richardson, the Chief Executive
Officer of the Company during 1994, and each of the other persons named in the
Summary Compensation Table above:
AGGREGATED OPTION EXERCISES IN 1994 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....................................................................... 240,000/360,000 -- / --
Gregory M. Buckley......................................................................... -- /140,000 -- / --
Samuel H. Maw.............................................................................. -- /160,000 -- / --
Raymond J. Perry........................................................................... -- /140,000 -- / --
C. Ronald Petty............................................................................ -- /160,000 -- / --
</TABLE>

No options held by the foregoing officers were exercised in 1994.
22

<PAGE>
RETIREMENT PLANS
A tax-qualified defined benefit retirement plan is maintained by Flagstar
Systems, Inc. and certain other Flagstar subsidiaries. Such plan is described
below.
The following table shows the estimated annual benefits for a single life
annuity that could be payable under the Flagstar Retirement Plan (as defined),
as amended, and the ancillary plan described below 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.................................................. $ 43,296 $ 57,728 $ 72,161 $ 86,593 $100,000
250,000................................................. 54,546 72,728 90,911 109,093 125,000
300,000................................................. 65,796 87,728 109,661 131,593 150,000
350,000................................................. 77,046 102,728 128,411 154,093 175,000
400,000................................................. 88,296 117,728 147,161 176,593 200,000
500,000................................................. 110,796 147,728 184,661 221,593 250,000
600,000................................................. 133,296 177,728 222,161 266,593 300,000
700,000................................................. 155,796 207,728 259,661 311,593 350,000
800,000................................................. 178,296 237,728 297,161 356,593 400,000
900,000................................................. 200,796 267,728 334,661 401,593 450,000
</TABLE>

The Flagstar Pension Plan (the "Flagstar Retirement Plan"), which is
noncontributory, generally covers all employees of Flagstar and its subsidiaries
(other than its Denny's restaurant and distribution, El Pollo Loco, and
concessions and recreation services subsidiaries) who have attained the age of
21 and who have completed one thousand hours 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 generally 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 1993 year-end bonus paid in 1994), excluding
reimbursements and other expense allowances, fringe benefits, moving expenses,
deferred compensation and welfare benefits (such exclusions to include, without
limitation, severance pay, relocation allowance, gross-up pay to compensate for
taxable reimbursements, hiring bonuses, 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
Company property or services). Except for limited purposes described in the
plan, Compensation also includes 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 that provides future service benefits and benefits in excess
of the annual maximum benefits limit under the Internal Revenue Code of 1986, as
amended (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. Benefits payable under the ancillary plan are
included in the table above. A supplemental executive retirement plan provides
additional benefits to certain key executives calculated as a percentage of base
salary.
The maximum annual pension benefit payable under the Flagstar Retirement
Plan for 1994 was $118,800 (or, if greater, the participant's 1982 accrued
benefit).
Except for the exclusion of 1994 bonuses paid in 1995 and the accrual of
certain nonqualified benefits as described herein, the Compensation included
under the Flagstar Retirement Plan (including the ancillary nonqualified plan)
generally corresponds with the annual compensation of the named executive
officers in the Summary Compensation Table above. Includable Compensation for
1994 for Messrs. Richardson, Buckley, Maw and Petty was $750,000, $225,000,
$261,236 and $285,000 respectively.
As of December 31, 1994, the estimated credited years of service under the
Flagstar Retirement Plan for Messrs. Richardson, Buckley, Maw and Petty at
normal retirement age was 40, 24, 29 and 15, respectively.
23

<PAGE>
The early retirement provisions of the Flagstar Retirement Plan 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 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
12-year graduating vesting to five-year cliff vesting for the plan.
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 $9,240 (for 1994, 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, although
certain executive officers continue to have accounts thereunder. 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.
24

<PAGE>
EMPLOYMENT AGREEMENTS
RICHARDSON EMPLOYMENT AGREEMENT
Concurrently with the execution of the Purchase Agreement (as defined
herein), Mr. Richardson and Flagstar entered into an employment agreement (the
"Richardson Employment Agreement"), which took effect on November 16, 1992,
which provided that Flagstar would 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 Richardson 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 Richardson 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 Richardson Employment Agreement as in effect in 1994, Mr.
Richardson was 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 Benefits 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 achieved budgeted financial
and other performance targets, to be established annually by the Compensation
and Benefits 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"), the grant of a new
option or options to purchase 600,000 shares of Common Stock (the "Richardson
Options"), exercisable at the rate of 20% per year beginning on November 16,
1993 (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 below), in which case the option to purchase 160,000 of such shares
would be exercisable pursuant to the schedule for the Prior Option) 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
Richardson Employment Agreement also entitled Mr. Richardson to participate in
all of the Company's benefit plans applicable to the Company's executive
officers generally. As a condition to Mr. Richardson entering into the
Richardson Employment Agreement which extended 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, N.A. (Carolinas) 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 Richardson Employment Agreement, Flagstar is required to make payments as
follows based upon the cause of such termination: (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 Richardson 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. Under the terms of the Amended Richardson Agreement (as defined
below) such other benefits referred to in (iii) above shall include certain
health, welfare and retirement plan benefits through the remaining term of the
agreement or the cash equivalents thereof.
As of January 10, 1995, Mr. Richardson and the Company entered into an
amended and restated employment agreement (the "Amended Richardson Agreement")
to provide that Flagstar would employ Mr. Richardson as its Chief Executive
Officer until February 6, 1995, as its Chairman until November 16, 1997 unless a
successor is chosen upon 30 days' prior notice and, thereafter, as Chairman
Emeritus until November 16, 1997, unless earlier terminated as provided in the
agreement. Under the Amended Richardson Agreement, (i) Mr. Richardson shall be
entitled to receive a base salary at a rate of $750,000 per year and an annual
bonus, if any, as determined in the reasonable discretion of the Board, (ii) the
Richardson Options remain outstanding generally in accordance with terms
previously established, provided, however, that if the Company terminates Mr.
Richardson's employment other than for "cause" or if Mr. Richardson dies, the
Richardson Options immediately become fully exercisable, and (iii) the
Richardson Loan remains outstanding generally in accordance with terms
previously established, except as otherwise described in Item 13. Certain
Relations and Related
25

<PAGE>
Transactions. Such amended agreement also provides that during the employment
term, while Mr. Richardson shall be the Chief Executive Officer, Chairman and/or
Chairman Emeritus of the Company, he shall serve on the Board.
ADAMSON EMPLOYMENT AGREEMENT
Concurrently with the execution of the Adamson Shareholder Agreement (as
defined below), Mr. Adamson and FCI entered into an employment agreement (as
amended on February 27, 1995, the "Adamson Employment Agreement") which took
effect on January 23, 1995 and which provides that FCI will employ Mr. Adamson
as President and Chief Executive Officer of FCI until January 23, 1998 or until
his earlier death or termination of employment by reason of permanent
disability, voluntary termination of employment or involuntary termination with
or without cause (as defined). The Adamson Employment Agreement also provides
that Mr. Adamson shall be appointed as a director of FCI (on or before the first
meeting of the Board of Directors of FCI that is held after January 23, 1995)
and as the Chairman of the Board of Directors of FCI (on or before July 23,
1995, or upon 30 days' prior notice if such date is extended at Mr. Adamson's
sole discretion). The Adamson Employment Agreement prohibits Mr. Adamson from
soliciting employees of the Company or its affiliates and from engaging in
certain competitive activities generally during his term of employment and for a
period of two years after the later of the termination of his employment or the
date on which the Company is no longer required to make certain termination
benefits. The Adamson Employment Agreement further prohibits Mr. Adamson from
using or disclosing certain "confidential" or "proprietary" information for
purposes other than carrying out his duties with the Company.
Under the Adamson Employment Agreement, Mr. Adamson is entitled to receive
(i) an annual base salary at the annual rate of $950,000, $1,000,000 and
$1,050,000 for the first, second and third years of employment, respectively,
(ii) a one-time signing bonus equal to $500,000, (iii) an annual performance
bonus at an annual rate up to 200% of his base salary (targeted to equal 75% of
his base salary) if the Company and Mr. Adamson achieve budgeted financial and
other performance targets to be established by the Compensation and Benefits
Committee, with a guaranteed minimum bonus of $500,000 for his first year of
employment, (iv) 65,306 shares (the "Restricted Shares") of Common Stock (plus
an amount in cash to reimburse Mr. Adamson in part for his income tax
liabilities with respect to such shares), fifty percent (50%) of which are
subject to forfeiture upon the termination of Mr. Adamson's employment under
certain conditions prior to January 23, 1996, and (v) the grant under the 1989
Option Plan of a ten-year option to purchase 800,000 shares of Common Stock, to
become exercisable at the rate of 20% per year beginning on January 9, 1996 and
each anniversary thereafter (conditioned upon Mr. Adamson's continuing to be
employed by the Company on such dates), and subject to an exercise price of
$6.125 per share (the "Adamson Option"). Vested shares of Common Stock acquired
by Mr. Adamson pursuant to (iv) and (v) above (including shares as to which Mr.
Adamson is entitled, under certain circumstances, to accelerated vesting) are
subject to and have the rights and benefits of the Adamson Shareholder Agreement
(as defined below). See Item 12. Security Ownership of Certain Beneficial Owners
and Management -- Adamson Shareholder Agreement. The Adamson Employment
Agreement also entitles Mr. Adamson to reimbursement of expenses of relocation
and certain other privileges and benefits, including participation in all of the
Company's benefit plans applicable to the Company's executive officers
generally.
In the event of Mr. Adamson's termination of employment during the term of
the Adamson Employment Agreement, the Company is required to make payments as
follows based upon the cause of such termination: (i) if by reason of death, Mr.
Adamson's surviving spouse is entitled to be paid an amount equal to Mr.
Adamson's base salary and annual bonus and continuation of certain benefits for
a one-year period after his death; (ii) if by reason of permanent disability,
Mr. Adamson is entitled to be paid one-half of his base salary and annual bonus
and continuation of certain benefits for a period of two years after termination
of employment; and (iii) if by FCI other than for "cause," Mr. Adamson is, in
general, entitled to (a) a lump sum in the amount of the base salary remaining
to be paid over the remaining unexpired contract term but not less than an
amount equal to two years' base salary, (b) a pro rata portion of the annual
bonus otherwise payable during the calendar year of termination, (c) the
continued vesting of the Adamson Option until the option to purchase an
aggregate of 480,000 shares thereunder shall have become exercisable, (d) the
immediate vesting of 100% of the Restricted Shares, and (e) continuation of
certain benefits and other contract rights; provided, however, that in the event
of termination by FCI without "cause" following a "change of control", the
Adamson Option shall be 100% vested and exercisable as of the date of such
termination and Mr. Adamson shall be entitled to a lump sum payment on such date
equal to 200% of his targeted bonus for the year during which such termination
occurs. Furthermore, the Adamson Option shall expire and terminate as follows in
the event of Mr. Adamson's termination of employment for the following reasons:
(i) if for "cause" or voluntary termination, the Adamson Option shall expire and
terminate as of the date of termination; (ii) if by reason of death, permanent
disability or without "cause" following a "change in control", the
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<PAGE>
Adamson Option shall expire and terminate on the later of (a) the date the
Company is no longer required to provide certain termination benefits, and (b)
the first anniversary of the date of termination; and (iii) if without "cause"
(but not following a "change in control"), the Adamson Option shall expire and
terminate on the latest of January 9, 1999 and (a) and (b) above.
OTHER EMPLOYMENT ARRANGEMENTS
During 1994, Messrs. Buckley, Perry and Petty were each party to employment
agreements with the Company providing for specified base salaries, subject to
annual adjustment by the Compensation and Benefits Committee, an annual
performance bonus and options to purchase Common Stock. These agreements also
contained provisions for the payment of certain additional compensation to each
of the named executive officers at or near the time of their initial employment.
See the Summary Compensation Table above. Mr. Petty's agreement also contained
termination provisions for the payment of severance benefits equal to two years'
annual base salary and bonus upon termination of his employment under certain
circumstances. Also, in 1994, Messrs. Buckley, Maw and Perry entered into
separate agreements providing for severance benefits equal to two years' annual
base salary upon termination of their employment under certain circumstances or
the occurrence of certain other events, including a change of control of the
Company.
COMPENSATION AND BENEFITS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Raether, Robbins and Tokarz served on the Company's Compensation
and Benefits Committee during 1994. Messrs. Tokarz and Robbins serve as officers
of certain subsidiaries of the Company. Messrs. Raether, Robbins and Tokarz are
general partners of KKR. In 1994, KKR received an annual financial advisory fee
of $1,250,000.
Pursuant to the Purchase Agreement (as defined below), 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 below) prior to March 31, 1995 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 Associates, 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 (the
"Exchange Act")) 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.
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 and Mr. Adamson 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.
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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 15, 1995,
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 and nominee to the
Board of Directors 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 FCI 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............................................................... 34,999,999(1)(2) 60.94%
Gollust, Tierney & Oliver
(and related entities)
500 Park Avenue
New York, NY 10022............................................................... 4,844,445(3) 11.42%
DLJ Capital Corporation
(and related entities)
140 Broadway
New York, NY 10005............................................................... 3,040,407 7.16%
James B. Adamson................................................................... 65,306(4) *
Michael Chu........................................................................ -- --
Vera King Farris................................................................... 100 *
Hamilton E. James.................................................................. 36,687(5) *
Henry R. Kravis (1)................................................................ -- --
A. Andrew Levison.................................................................. 9,473(6) *
Paul E. Raether (1)................................................................ -- --
Jerome J. Richardson............................................................... 1,058,164(7)(8) 2.48%
Clifton S. Robbins (1)............................................................. -- --
George R. Roberts (1).............................................................. -- --
L. Edwin Smart..................................................................... 14,566(5)(9) *
Michael T. Tokarz (1).............................................................. -- --
Gregory M. Buckley................................................................. 12,000 *
Samuel H. Maw...................................................................... 22,092(7) *
Raymond J. Perry................................................................... -- --
C. Ronald Petty.................................................................... -- --
All directors and executive officers as a group (27 persons)....................... 1,247,417(7 (10)(11) 2.92%
</TABLE>

* Less than one percent.
(1) Includes 19,999,999 shares of Common Stock owned of record. Such shares 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, Robbins, Roberts and Tokarz
(directors of FCI and Flagstar) and Messrs. Saul A. Fox, Edward A. Gilhuly,
Perry Golkin, James H. Greene, Jr., Robert J. MacDonnell, Michael W.
Michelson and Scott Stuart, 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) Includes 15,000,000 shares of Common Stock underlying warrants (the
"Warrants"), which become exercisable on March 31, 1995, acquired by TW
Associates (14,935,000 shares) and KKR Partners II (65,000 shares) under a
Stock
28

<PAGE>
and Warrant Purchase Agreement dated August 11, 1992 by and between FCI and
TW Associates (the "Purchase Agreement"). The Warrants were issued pursuant
to a Warrant Agreement dated November 16, 1992 by and between FCI and
Associates. Each Warrant entitles the holder thereof to purchase one fully
paid and nonassessable share of Common Stock at an exercise price of
$17.50, subject to adjustment from time to time upon the occurrence of
certain events.
(3) The Common Fund (which is a party to an investment management arrangement
with GTO) owns 1,872,540 of the shares lised. GTO disclaims beneficial
ownership of such shares. GTO and related entities own the balance of the
shares listed. According to a Schedule 13D filed by GTO and related
entities dated as of January 3, 1995, The Saurer Group Investments Ltd. and
North Atlantic Continental Capital Ltd., formerly parties to investment
management arrangements with GTO with respect to their ownership of shares
of Common Stock, no longer maintain such arrangements. Accordingly, shares
owned by such entities are not included in the shares listed.
(4) Shares listed are those received by Mr. Adamson pursuant to the terms of
his employment agreement with the Company, 50% of which are subject to
forfeiture upon the termination of Mr. Adamson's employment with the
Company under certain conditions prior to January 23, 1996. See Item 11.
Executive Compensation -- Employment Agreements -- Adamson Employment
Agreement.
(5) Includes 10,000 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 pursuant to the 1990 Non-Qualified Stock Option Plan of
FCI, as adopted July 31, 1990 and thereafter amended (the "1990 Option
Plan"). Mr. James is Managing Director of DLJ and Chairman, DLJ Merchant
Banking Group. He also has a limited investment in GTO or related entities,
or both. Shares listed for Mr. James exclude shares held by DLJ Capital and
related entities or by GTO and related entities.
(6) Mr. Levison is a nominee to the Board of Directors of FCI for election at
the Annual Meeting and Managing Director, Investment Banking of DLJ. Shares
listed for Mr. Levison exclude shares held by DLJ Capital and related
entities.
(7) Includes shares held by the trustee of the Thrift Plan as of December 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 and 222 are credited to the accounts of
Messrs. Richardson and Maw, respectively, and 7,551 are credited to the
accounts of all directors and executive officers as a group.
(8) Includes 240,000 shares that Mr. Richardson has the right to acquire upon
the exercise of currently exercisable options granted by the Company under
the 1989 Option Plan.
(9) Includes 4,166 shares that Mr. Smart has the right to acquire upon
conversion of Flagstar's 10% Convertible Junior Subordinated Debentures Due
2014 (the "10% Debentures").
(10) Includes shares referred to in (5), (8) and (9) above and otherwise that
individual directors or officers have the right to acquire upon the
exercise of options or conversion of certain securities.
(11) Excludes shares owned by KKR Associates through TW Associates and KKR
Partners II, as set forth above. Messrs. Kravis, Raether, Robbins, 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, Robbins, Roberts and Tokarz
disclaims beneficial ownership of those shares listed above as owned by KKR
Associates. Also excludes shares shown as beneficially owned by GTO or DLJ
Capital and related entities, as set forth above.
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<PAGE>
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 (as amended from time to time thereafter, the
"Stockholders' Agreement") pursuant to which the Stockholder Parties 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. Effective as of January 1, 1995, pursuant
to the latest amendment thereto, the GTO Group is no longer a Stockholder Party
or otherwise a party to or bound by the Stockholders' Agreement.
Pursuant to the Stockholders' Agreement, each of the Stockholder Parties
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 remained Chief Executive Officer of FCI), (c) one
representative designated by DLJ Capital (for so long as DLJ Capital continues
to own at least 2% of the outstanding shares of Common Stock on a fully-diluted
basis) and (d) two independent directors. GTO's right to a Board representative
terminated as of January 1, 1995. For information regarding Mr. Richardson's
continuing participation on the Board following his resignation as Chief
Executive Officer, see Item 11. Executive Compensation -- Employment
Agreements -- Richardson Employment Agreement. 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 terms shall
end.
Under the Stockholders' Agreement, at any time after March 31, 1995, (i)
DLJ Capital may make two written requests to FCI for registration under the
Securities Act of 1933, as amended (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, DLJ Capital, Mr. Richardson and Associates have customary
"piggyback" registration rights to include their securities, subject to certain
limitations, in any other registration statement filed by FCI, 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 DLJ Capital and Mr. Richardson
or by Associates; provided that, at such time as DLJ Capital shall own less than
2% of the outstanding Common Stock on a fully-diluted basis, DLJ Capital shall
be released from its obligations and forfeit its 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.
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<PAGE>
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 (if permitted by the Amended Richardson Agreement) to require payment
of the balance of the principal and accrued interest on the Richardson Loan (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, and (iv) 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 Amended Richardson Agreement, the market value with
respect to 160,000 shares of the Option Stock is to be reduced on a per share
basis by the difference between $20.00 and the exercise price thereof.
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.
ADAMSON SHAREHOLDER AGREEMENT. Pursuant to a shareholder agreement (the
"Adamson Shareholder Agreement") dated January 10, 1995 between Mr. Adamson and
Associates, Associates has agreed to vote all shares of Common Stock owned by it
to elect Mr. Adamson to the Board of Directors of FCI as long as Mr. Adamson is
employed by FCI. If at any time during Mr. Adamson's Employment Term (as defined
in the Adamson Employment Agreement) for so long as Mr. Adamson is an active
employee of the Company, Associates proposes to sell or exchange any shares of
its Common Stock to any third party which is not an affiliate of Associates,
then Mr. Adamson has the right to have included in such sale or exchange a
number of his vested shares of Common Stock (including shares as to which Mr.
Adamson is entitled, under certain circumstances, to accelerated vesting)
determined by multiplying (i) the total number of shares of Common Stock
proposed to be sold or exchanged by Associates by (ii) a fraction, the numerator
of which is equal to the number of such shares of Common Stock owned by Mr.
Adamson and the denominator of which is equal to the aggregate number of such
shares of Common Stock owned by Mr. Adamson and the number of shares owned by
Associates. The Adamson Shareholder Agreement terminates upon the termination of
Mr. Adamson's Employment Term. For additional information, see Item 11.
Executive Compensation -- Employment Agreements -- Adamson Employment Agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Pursuant to the Richardson 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 on November 16, 1997, subject to acceleration, as provided pursuant to
the Amended Richardson Agreement, upon Mr. Richardson's earlier termination of
employment by reason of a voluntary termination or termination for "cause".
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. In the event of a payment to Mr. Richardson upon the acceleration of
benefits due to a Termination Without Cause, such payment shall be offset
against amounts due on the Richardson Loan, with the balance due on November 16,
1997. The Richardson Loan is secured by 812,000 shares of Common Stock and
certain other collateral. See Item 11. Executive Compensation -- Employment
Agreements -- Richardson Employment Agreement.
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GTO received fees of $250,000 in 1994 for certain financial advisory
services.
Mr. Richardson, the Company's Chairman, is also an officer, director and
principal shareholder of P.F.F., Inc., the corporate general partner of
Richardson Sports, the franchisee of the NFL Carolina Panthers. Several members
of Mr. Richardson's immediate family have similar interests in P.F.F., Inc. The
stadium to be used by the team beginning with the 1996-1997 NFL season is owned
by Carolinas Stadium Corp. ("CSC") and is leased to Richardson Sports for NFL
football games and for Richardson Sports' day-to-day operations. Neither Mr.
Richardson nor members of his immediate family hold any ownership interest in
CSC. The Company has entered into the Concession Agreements with Richardson
Sports and CSC described below. These agreements were the result of arms'-length
negotiations and were approved by a disinterested majority of the Board of
Directors of the Company.
On or about February 15, 1994, Volume, an indirect wholly-owned subsidiary
of the Company, entered into Concession Agreements (the "Concession Agreements")
pursuant to which Volume was granted the exclusive right to sell food and
beverage concessions and novelties at the Carolinas Stadium currently under
construction for a 20-year period commencing with the 1996-1997 NFL season (with
CSC) and at the Clemson University Memorial Stadium for the 1995-1996 NFL season
(with Richardson Sports) and until completion of the Carolinas Stadium. As
consideration for the exclusive rights granted under the Concession Agreements,
Volume is required to pay Richardson Sports an aggregate amount of $6 million
over a ten-year period beginning in 1994 as well as certain minimum commissions
during each year of operation. Volume has also committed to incur construction
costs and other related capital expenditures for the project of an additional
$10.5 million by 1996.
The Company has also entered into certain suite rentals and has purchased
permanent seat licenses and season tickets at Carolinas Stadium at an aggregate
cost to the Company in 1994 of $137,250. Such transactions were on terms and
conditions identical with those applicable to unrelated third parties.
For information concerning certain transactions in which KKR (and their
affiliates) have an interest, see Item 11. Executive
Compensation -- Compensation and Benefits 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.
In connection with the sale of its food and vending operation on June 17,
1994 the Term Facility was repaid in full and the Revolving Credit Facility was
reduced to $250 million. Under the Restated Credit Agreement, the repayment of
the Term Facility will cause the Revolving Credit Facility to terminate on June
17, 1996 (the "Termination Date"), the second anniversary of the repayment.
The Restated Credit Agreement provides generally that the working capital
advances under the Revolving Credit Facility must be repaid in full 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 permanently reduce the Revolving Credit Facility by 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
32

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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 (as defined therein)).
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 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, certain exchanges of real property,
fixtures and improvements for other real property, fixtures and improvements and
the disposition of its concessions and recreation services businesses (subject
to certain conditions, including the reduction of the Revolving Credit Facility
by the amount of Net Cash Proceeds from such disposition); (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 5.90:1.00
applicable on or after March 31, 1995.
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 2.50:1.00 on or after December 31,
1999 (3.30:1.00 as of the Termination Date).
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 Adjusted
Cash Capital Expenditures (as defined below) to (b) Adjusted Cash Interest
Expense (as defined below) 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 (1.25:1.00 as of
the Termination Date).
33

<PAGE>
CAPITAL EXPENDITURES TEST. Flagstar and its subsidiaries are prohibited
from making capital expenditures in excess of $195,000,000, $210,000,000,
$200,000,000 and $175,000,000 in the aggregate for the fiscal years ending in
December 1992 through 1995, respectively, and $275,000,000 in the aggregate for
each fiscal year thereafter.
"Adjusted Cash Capital Expenditures" is defined in the Restated Credit
Agreement to mean, for any period, Cash Capital Expenditures (as defined below)
less, for each of the Rolling Periods (as defined below) ending December 31,
1994 through March 31, 1996, a specified amount, ranging from $75,000,000 for
the Rolling Period ending December 31, 1994, to $125,000,000 for the Rolling
Period ending June 30, 1995, to $65,000,000 for the Rolling Period ending March
31, 1996.
"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.
"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 (as defined below) 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.
34

<PAGE>
"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.
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
35

<PAGE>
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. On 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, 1994,
$205.6 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 downgrade of Flagstar's outstanding debt securities
during 1994, certain payments by the Company which fund such interest payments
are due and payable on a monthly basis. Principal payments total $2.9 million
annually in 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 238 Hardee's and 148 Quincy's restaurants.
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 FCI's public sale of 6,300,000 shares of
Preferred Stock. 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 date 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.
36

<PAGE>
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 which appears on page F-1
hereof.
(2) -- Financial Statement Schedules:
No schedules are filed herewith because of the absence of
conditions under which they are required or because the
information called for is in the Consolidated Financial
Statements or Notes thereto.
(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
<C> <S>
* 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")).
* 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 through March 22, 1995.
* 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).
</TABLE>
37

<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
* 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).
* 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).
* 4.25 Fourth Amendment to the Amended and Restated Credit Agreement dated as of April 26, 1994 (incorporated by reference
to Exhibit 10.2 to FCI's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1994 (the "1994
Form 10-Q")).
* 4.26 Sixth Amendment to the Amended and Restated Credit Agreement dated as of June 17, 1994 (incorporated by reference
to Exhibit 4.28 to FCI's 1994 Form 10-K, File No. 0-18051 (the "1994 Form 10-K")).
* 4.27 Seventh Amendment to the Amended and Restated Credit Agreement dated as of October 7, 1994 (incorporated by
reference to Exhibit 4.29 to the 1994 Form 10-K).
*10.1 Stock Purchase Agreement, dated as of April 26, 1994, among Flagstar, Canteen Holdings, Inc., Compass Group PLC and
Compass Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the 1994 Form 10-Q).
*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 Amendment (No. 3) to Stockholders' Agreement, dated as of January 1, 1995, among FCI, GTO and certain affiliated
partnerships, DLJ Capital, Jerome J. Richardson and Associates (incorporated by reference to Exhibit 10.6 to the
1994 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 through June 7, 1994
(incorporated by reference to Exhibit 10.9 to the 1994 Form 10-K).
*10.10 FCI 1990 Non-Qualified Stock Option Plan, as adopted July 31, 1990 and amended through April 28, 1992 (incorporated
by reference to Exhibit 10.10 to the 1994 Form 10-K).
*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).
</TABLE>
38

<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*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).
*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).
</TABLE>
39

<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.41 Amended and Restated Employment Agreement, dated as of January 10, 1995, between Flagstar and Jerome J. Richardson
(incorporated by reference to Exhibit 10.41 to the 1994 Form 10-K).
*10.42 Employment Agreement, dated as of January 10, 1995, between FCI and James B. Adamson (incorporated by reference to
Exhibit 10.42 to the 1994 Form 10-K).
*10.43 Adamson Shareholder Agreement, dated as of January 10, 1995, between Associates and James B. Adamson (incorporated
by reference to Exhibit 10.43 to the 1994 Form 10-K).
*10.44 Amendment to Employment Agreement, dated as of February 27, 1995, between FCI and James B. Adamson (incorporated by
reference to Exhibit 10.44 to the 1994 Form 10-K).
*10.45 Employment Agreement, dated as of May 15, 1993, between Flagstar and Gregory M. Buckley (incorporated by reference
to Exhibit 10.45 to the 1994 Form 10-K).
*10.46 Employment Agreement, dated as of May 26, 1993, between Flagstar and Raymond J. Perry (incorporated by reference to
Exhibit 10.46 to the 1994 Form 10-K).
*10.47 Employment Agreement, dated as of June 7, 1993, between Flagstar and C. Ronald Petty (incorporated by reference to
Exhibit 10.47 to the 1994 Form 10-K).
*10.48 Form of Agreement providing certain severance benefits (incorporated by reference to Exhibit 10.48 to the 1994 Form
10-K).
*10.49 Flagstar's 1994 Senior Management Incentive Plan (incorporated by reference to Exhibit 10.49 to the 1994 Form
10-K).
*10.50 Amended Consent Decree dated May 24, 1994. (incorporated by reference to Exhibit 10.50 to the 1994 Form 10-K).
*10.51 Consent Decree dated May 24, 1994 among certain named claimants, individually and on behalf of others similarly
situated, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit 10.51 to the 1994 Form 10-K).
12 Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of Flagstar (incorporated by reference to Exhibit 21 to the 1994 Form 10-K).
27 Financial Data Schedules.
</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 1994.
40

<PAGE>
FLAGSTAR CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report........................................................................................... F-2
Statements of Consolidated Operations for the Three Years Ended December 31, 1992, 1993 and 1994....................... F-3
Consolidated Balance Sheets as of December 31, 1993 and 1994........................................................... F-4
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1992, 1993 and 1994....................... F-5
Notes to Consolidated Financial Statements............................................................................. F-7
</TABLE>

F-1

<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, 1993 and 1994, and
the related statements of consolidated operations and consolidated cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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,
1993 and 1994 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for self-insurance liabilities,
effective January 1, 1993.
(Signature of Deloitte & Touche LLP)
Greenville, South Carolina
February 17, 1995
F-2

<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
<S> <C> <C> <C>
Operating revenues............................................................ $2,442,992 $ 2,615,169 $2,665,966
Operating expenses:
Product cost................................................................ 795,372 899,145 919,087
Payroll & benefits.......................................................... 852,424 905,231 919,928
Depreciation & amortization expense......................................... 157,771 170,231 129,633
Utilities expenses.......................................................... 90,930 99,767 99,021
Other....................................................................... 349,791 379,992 394,377
Write-off of goodwill and certain other intangible assets (Note 2).......... -- 1,104,553 --
Provision for (recovery of) restructuring charges (Note 3).................. -- 158,620 (7,207)
2,246,288 3,717,539 2,454,839
Operating income (loss)....................................................... 196,704 (1,102,370 ) 211,127
Other charges:
Interest and debt expense (Note 4).......................................... 241,401 213,097 227,059
Interest expense on Note Payable to FCI (Note 4)............................ 6,064 14,175 14,175
Other -- net................................................................ 793 2,434 3,110
248,258 229,706 244,344
Loss before income taxes...................................................... (51,554) (1,332,076 ) (33,217)
Benefit from income taxes (Note 6)............................................ (6,244) (79,328 ) (2,213)
Loss from continuing operations............................................... (45,310) (1,252,748 ) (31,004)
Gain on sale of discontinued operation, net of income tax provision of $9,999
(Note 14)................................................................... -- -- 399,188
Loss from discontinued operations, net of income tax provision (benefit) of:
1992 -- $(339) 1993 -- $(1,821); 1994 -- $471 (Note 14)..................... (12,550) (409,671 ) (6,518)
Income (loss) before extraordinary items and cumulative effect of change in
accounting principle........................................................ (57,860) (1,662,419 ) 361,666
Extraordinary items, net of income tax benefit of: 1992 -- $85,053;
1993 -- $196; 1994 -- $174 (Note 12)........................................ (155,401) (26,405 ) (11,757)
Cumulative effect of change in accounting principles, net of income tax
benefit of: 1992 -- $8,785 (Note 8); 1993 -- $90 (Note 1)................... (17,834) (12,010 ) --
Net income (loss)............................................................. $ (231,095) $(1,700,834 ) $ 349,909
</TABLE>

See notes to consolidated financial statements.
F-3

<PAGE>
FLAGSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1994
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 24,174 $ 66,720
Receivables, less allowance for doubtful accounts of: 1993 -- $4,790;
1994 -- $4,561............................................................................... 32,940 37,392
Merchandise and supply inventories............................................................. 62,633 62,293
Net assets held for sale (Note 14)............................................................. 103,208 77,320
Other.......................................................................................... 2,495 14,344
225,450 258,069
Property:
Property owned (at cost) (Note 4):
Land......................................................................................... 265,345 273,085
Buildings and improvements................................................................... 749,001 813,305
Other property and equipment................................................................. 413,212 462,421
Total property owned............................................................................. 1,427,558 1,548,811
Less accumulated depreciation.................................................................... 387,439 477,176
Property owned -- net............................................................................ 1,040,119 1,071,635
Buildings and improvements, vehicles, and other equipment held under capital leases (Note 5)..... 177,819 194,348
Less accumulated amortization.................................................................... 51,095 69,958
Property held under capital leases -- net........................................................ 126,724 124,390
1,166,843 1,196,025
Other Assets:
Other intangible assets, net of accumulated amortization: 1993 -- $13,892; 1994 --
$14,646...................................................................................... 25,567 25,009
Deferred financing costs -- net................................................................ 91,086 71,955
Other (including loan receivable from officer of: 1993 -- $14,815; 1994 -- $15,657 and
receivable from FCI of: 1993 -- $6,532; 1994 -- $6,534) (Note 13)............................ 36,486 37,574
153,139 134,538
$ 1,545,432 $ 1,588,632
LIABILITIES
Current Liabilities:
Current maturities of long-term debt (Note 4).................................................. $ 34,213 $ 31,408
Accounts payable............................................................................... 93,435 102,464
Accrued salaries and vacations................................................................. 47,338 56,159
Accrued insurance.............................................................................. 49,585 45,165
Accrued taxes.................................................................................. 21,853 21,795
Accrued interest............................................................................... 41,187 47,568
Accrued restructuring cost (Note 3)............................................................ 19,404 13,771
Other.......................................................................................... 88,220 67,986
395,235 386,316
Long-Term Liabilities:
Debt, less current maturities (Note 4)......................................................... 2,341,164 2,067,648
Deferred income taxes (Note 6)................................................................. 23,861 21,679
Liability for self-insured claims.............................................................. 60,720 58,128
Other non-current liabilities and deferred credits............................................. 140,495 110,864
2,566,240 2,258,319
Note Payable to FCI (Note 4)..................................................................... 150,000 150,000
Commitments and Contingencies (Notes 5 and 9)
Shareholder's Equity (Deficit) (Note 10):
Common stock:
$0.01 par value; 1993 and 1994 -- 10,000 shares authorized, 440 issued and outstanding....... -- --
Paid-in capital................................................................................ 602,896 602,896
Deficit........................................................................................ (2,157,848 ) (1,807,939 )
Minimum pension liability adjustment (Note 7).................................................. (11,091 ) (960 )
(1,566,043 ) (1,206,003 )
$ 1,545,432 $ 1,588,632
</TABLE>

See notes to consolidated financial statements.
F-4

<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................................................... $ (231,095) $(1,700,834 ) $ 349,909
Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating
Activities:
Write-off of goodwill and certain other intangible assets................ -- 1,104,553 --
Provision for (recovery of) restructuring charges........................ -- 158,620 (7,207 )
Depreciation and amortization of property................................ 120,259 129,222 122,870
Amortization of goodwill................................................. 27,362 27,449 --
Amortization of other intangible assets.................................. 10,150 13,560 6,763
Amortization of deferred financing costs................................. 9,362 9,416 6,453
Interest accretion on debt............................................... 68,283 -- --
Deferred income tax benefit.............................................. (15,414) (84,413 ) (2,793 )
Other.................................................................... 1,422 5,675 (7,363 )
Loss from discontinued operations, net................................... 12,550 409,671 6,485
Gain on sale of discontinued operation, net.............................. -- -- (399,188 )
Extraordinary items, net................................................. 155,401 26,405 11,757
Cumulative effect of change 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.............................................................. (3,049) (10,105 ) (4,410 )
Inventories.............................................................. (3,111) (5,159 ) 340
Other current assets..................................................... 870 (864 ) (11,849 )
Other assets............................................................. (4,559) 2,873 2,241
Increase (decrease) in liabilities:
Accounts payable......................................................... (14,806) 10,105 9,029
Accrued salaries and vacations........................................... 9,320 612 8,821
Accrued taxes............................................................ (11,369) 10,878 (9,582 )
Other accrued liabilities................................................ (3,159) 60,796 (16,696 )
Other noncurrent liabilities and deferred credits........................ 8,586 (65,737 ) (25,198 )
Net cash flows from operating activities...................................... 154,837 114,733 40,382
Cash Flows from Investing Activities:
Purchase of property........................................................ (112,737) (99,007 ) (154,480 )
Proceeds from dispositions of property...................................... 9,269 33,678 20,135
Receipts from (advances to) discontinued operations, net.................... 17,766 (51,607 ) (9,670 )
Proceeds from sale of discontinued operation................................ -- -- 447,073
Purchase of other long-term assets.......................................... (1,741) (19,070 ) (6,205 )
Net cash flows provided by (used in) investing activities..................... (87,443) (136,006 ) 296,853
</TABLE>

See notes to consolidated financial statements.
F-5

<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,
1992 1993 1994
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net working capital advances (repayments) under credit agreements........... $ 4,000 $ 54,000 $(93,000)
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.................................................... (92,521 ) (11,388) (25)
Long-term debt payments..................................................... (1,135,275 ) (440,750) (201,664)
Additional paid-in capital.................................................. 286,078 -- --
Other....................................................................... (84 ) -- --
Net cash flows provided by (used in) financing activities..................... (65,890 ) 24,786 (294,689)
Increase in cash and cash equivalents......................................... 1,504 3,513 42,546
Cash and Cash Equivalents at:
Beginning of period......................................................... 19,157 20,661 24,174
End of period............................................................... $ 20,661 $ 24,174 $ 66,720
Supplemental Cash Flow Information:
Income taxes paid........................................................... $ 10,229 $ 4,917 $ 8,035
Interest paid............................................................... $ 211,732 $247,846 $258,653
Non-cash financing activities:
Debt issued in exchange for $700,880 of debt tendered in exchange
offers................................................................. $ 722,411 $ -- $ --
Capital lease obligations................................................ $ 29,043 $ 64,029 $ 18,800
Other financings......................................................... $ 4,841 $ 1,278 $ --
Additional paid-in capital............................................... $ 13,922 $ -- $ --
</TABLE>

See notes to consolidated financial statements.
F-6

<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, the Company has allocated its
total purchase cost of approximately $1.7 billion to the assets and liabilities
of Flagstar 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 write-off of such assets.
On November 16, 1992, a recapitalization of the Company and Flagstar was
substantially completed which included the issuance of 20 million shares of
common stock and warrants to acquire an additional 15 million shares of common
stock at $17.50 per share to affiliates 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).
The Company conducts business through its Denny's, Hardee's, Quincy's, and
El Pollo Loco restaurant concepts which serve the family, quick-service
hamburger, steak house, and quick-service chicken segments, respectively.
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 its subsidiaries. See also Note 14, related
to accounting for unconsolidated subsidiaries held for sale. Certain
1992 and 1993 amounts have been reclassified to conform to the 1994
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
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, 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
F-7

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 allowed
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 certain 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 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 $5,900,000 (see Note 15). The total discounted
self-insurance liabilities recorded at December 31, 1993 and 1994 were
$97,400,000 and $86,300,000 respectively, reflecting a 4% discount
rate. The related undiscounted amounts at such dates were $107,000,000
and $94,300,000, respectively.
(j) INTEREST RATE EXCHANGE AGREEMENTS. As a hedge against fluctuations in
interest rates, the Company has entered into interest rate exchange
agreements to swap a portion of its fixed rate interest payment
obligations for floating rates without the exchange of the underlying
principal amounts. The Company does not speculate on the future
direction of interest rates nor does the Company use these derivative
financial instruments for trading purposes. Since such agreements are
not entered into on a speculative basis, the Company uses the
settlement basis of accounting. See Note 4 for further discussion of
the interest rate exchange agreements.
(k) DISCONTINUED OPERATIONS. The Company has allocated to discontinued
operations a pro-rata portion of interest and debt expense related to
its acquisition debt based on a ratio of the net assets of its
discontinued operations to its total consolidated net assets as of the
1989 acquisition date. Interest included in discontinued operations for
the years ended December 31, 1992, 1993, and 1994 was $62.5 million,
$53.0 million, and $37.4 million, respectively.
(m) POSTRETIREMENT BENEFITS. Effective January 1, 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
F-8

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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.
(n) POSTEMPLOYMENT BENEFITS. During 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards 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 impact of Statement No. 112 on
the Company's statement of operations for 1994 is not material.
NOTE 2 WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLE ASSETS
For the year ended December 31, 1993, the Company's consolidated statement
of operations reflects charges totaling $1,474.8 million ($1,104.6 million in
continuing operations and $370.2 million in discontinued operations) for the
write-off of goodwill and certain other intangible assets, primarily tradenames
and franchise agreements.
Since the acquisition of Flagstar 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 prior to
1993, 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 certain 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 would
continue. Thus, the Company 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 certain other intangible assets involved a detail six year
projection of operating results extrapolated forward 30 years, which
approximated the maximum remaining amortization period for such assets as of
December 31, 1993. The Company then evaluated the recoverability of goodwill and
certain other intangibles 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 certain
other intangibles. Extension of these trends to include the entire 36 year
amortization period indicated that there would be losses each year, unless the
restructuring plan or other activities were successful in reversing the present
operating trends; thus, the analysis indicated that there was insufficient net
income to recover the goodwill and certain 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 former contract food and vending
services 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 (see Note 14) 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
were 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 were assumed to remain at their historical percentage of revenues.
Other costs were assumed to increase at the historical inflation rate consistent
with revenue pricing increases. Through the year 1999, the Company's projections
indicated that interest expense would exceed operating income, which was
determined after deducting annual
F-9

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLE ASSETS -- Continued
depreciation expense; however, operating income before depreciation is adequate
to cover interest expense. A continuation of this trend for the next 30 years
did not generate cash to repay the current debt and management assumes it will
be refinanced at constant interest rates.
NOTE 3 RESTRUCTURING
Effective in 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 involved the sale or closure of restaurants, a
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 reorganization of the field management structure of
the restaurant group resulted in the elimination of a layer of supervisory
management and consolidation of field offices resulting in related severance and
relocation costs. In addition, the Company has eliminated a number of positions
in the corporate marketing, accounting and administrative functions. The plan
resulted in a restructuring chargeduring the year ended December 31, 1993
comprised of the following:
<TABLE>
<S> <C>
Write-down of assets...................................................................... $130,711
Severance and relocation.................................................................. 17,080
Other..................................................................................... 10,829
Continuing operations..................................................................... 158,620
Discontinued operations................................................................... 33,383
Total..................................................................................... $192,003
</TABLE>

The write-down of assets represented 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 were
identified for sale, conversion to another concept, or closure. The 240
restaurants identified in the restructuring plan had aggregate operating
revenues during 1993 of approximately $227 million and a negative cash flow of
approximately $2.4 million. As of December 31, 1994, 31 units had been sold,
closed or converted to another concept. The remaining 209 restaurants had
aggregate operating revenues during 1994 of approximately $200.0 million. The
Company estimates that the remaining portions of the restructuring plan will be
completed during 1995.
The write-down of assets also included a charge of $15 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. During 1994,
approximately $1.4 million in lease payments were charged against the
restructuring reserves.
Approximately $28 million of the restructuring charges represent
incremental cash charges of which approximately $6.5 million and $8.2 million
were incurred and paid in 1993 and 1994, respectively. Unpaid amounts are
included in accrued restructuring cost on the accompanying balance sheet.
NOTE 4 DEBT
At December 31, 1993, advances of $93.0 million were outstanding under the
working capital facility portion of the Company's credit agreement (Restated
Credit Agreement). Such advances were classified as long-term debt in accordance
with the terms of the Restated Credit Agreement at such date. At December 31,
1994, the Restated Credit Agreement includes a working capital and letter of
credit facility of up to a total of $250.0 million which includes a working
capital sublimit of $160.0 million and a letter of credit sublimit of $157.9
million. At such date, the Company had no working capital borrowings; however,
letters of credit outstanding were $108.9 million. All outstanding amounts under
the Restated Credit Agreement must be repaid by June 17, 1996. See also
discussion below.
F-10

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994
<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, interest varies with prime and LIBOR at December 31, 1993 -- 5.9375%.......... 171,295 --
Notes and Debentures:
10.75% Senior Notes due September 15, 2001, interest payable semi-annually...................... 275,000 275,000
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... 125,000 125,000
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............................................................................. 99,259 99,259
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000........................................................ 208,508 205,612
11.03% Notes due 2000........................................................................... 160,000 160,000
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).............................. 24,893 23,129
Capital lease obligations (see Note 5)............................................................ 174,099 170,697
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).................................. 21,912 17,948
Total............................................................................................. 2,375,377 2,099,056
Less current maturities (c)....................................................................... 34,213 31,408
$2,341,164 $2,067,648
</TABLE>

(a) Collateralized by restaurant and other properties with a net book value of
$37.9 million at December 31, 1994.
(b) Collateralized by equipment with a net book value of $18.8 million at
December 31, 1994.
(c) Aggregate annual maturities during the next five years of long-term debt are
as follows (in thousands): 1995 -- $31,408; 1996 -- $40,248;
1997 -- $39,779; 1998 -- $33,301, and 1999 -- $28,017.
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 Flagstar 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.
During June 1994, net proceeds from the sale of Canteen Corporation, a
wholly-owned subsidiary, were used to prepay $170.2 million of outstanding
principal under the senior term loan and repay $126.1 million of outstanding
working capital advances. In connection with such sale and use of the net
proceeds, the Restated Credit Agreement was
F-11

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
amended to include, among other things, less restrictive financial covenants, a
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, and a reduction in annual capital expenditures to reflect the reduced
size of ongoing operations.
The Company was in compliance with the terms of the Restated Credit
Agreement at December 31, 1994. Under the most restrictive provision of the
Restated Credit Agreement (ratio of total debt to EBITDA, as defined), at
December 31, 1994, the Company could incur approximately $138 million of
additional indebtedness.
At December 31, 1994, the 10.25% guaranteed bonds were secured by, among
other things, mortgage loans on 386 restaurants, a lien on the related
restaurant equipment, assignment of intercompany lease agreements, and the stock
of the issuing subsidiaries. At December 31, 1994, the restaurant properties and
equipment had a net book value of $343.9 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; certain payments are made by the Company on a monthly
basis. Principal payments total $2.9 million in 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 $16.9 million in 1995 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, 1994 of
$220.7 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. 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, 1994, the Company has $900 million aggregate notional
amount in effect of reverse interest rate exchange agreements with maturities
ranging from twenty-four to sixty months. These notional amounts reflect only
the extent of the Company's involvement in these financial instruments and do
not represent the Company's exposure to market risk. The Company receives
interest at fixed rates calculated on such notional amounts and pays interest at
floating rates based on six months LIBOR in arrears calculated on like notional
amounts. The net income or expense from such agreements is reflected in interest
and debt expense. Management intends to maintain its exchange agreements until
maturity, unless there is a material change in the underlying hedged instruments
of the Company.
The counterparties to the Company's interest rate exchange agreements are
major financial institutions who participate in the Company's senior bank credit
facility. Such financial institutions are leading market-makers in the financial
derivatives markets, are well capitalized, and are expected to fully perform
under the terms of such exchange agreements, thereby mitigating the credit risk
to the Company.
The Company is exposed to market risk for such exchange agreements due to
the interest rate differentials described above. The Company monitors its market
risk by periodically preparing sensitivity analyses of various interest rate
fluctuation scenarios and the results of such scenarios on the Company's cash
flows on a nominal and discounted basis. In addition, the Company obtains
portfolio mark-to-market valuations from market-makers of financial derivatives
products.
F-12

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
Information regarding the Company's reverse interest rate exchange
agreements at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
AMOUNT OF WEIGHTED AVERAGE
YEAR OF NOTIONAL INTEREST RATE
MATURITY PAYMENT RECEIVED PAID
<S> <C> <C> <C>
1997 $500,000 5.15% 7.03%
1998 300,000 5.57% 6.97%
1999 100,000 5.82% 6.93%
$900,000 5.37% 7.00%
</TABLE>

The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is approximately $1.74 billion at December 31, 1994. Such
computations are based on market quotations for the same or similar debt issues
or the estimated borrowing rates available to the Company. At December 31, 1994,
the estimated fair value of the $900 million notional amount of reverse interest
rate swaps was a net payable of approximately $74.1 million and represents the
estimated amount that the Company would be required to pay to terminate the swap
agreements at December 31, 1994. This estimate is based upon a mark-to-market
valuation of the Company's swap portfolio obtained from a major financial
institution which is one of the counterparties to the exchange agreements.
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, 1994, 951 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, 1994
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:
1995........................................................................... $ 38,788 $ 3,690 $ 39,225
1996........................................................................... 35,204 3,549 36,183
1997........................................................................... 32,107 3,275 34,036
1998........................................................................... 25,788 2,915 30,936
1999........................................................................... 20,902 2,526 27,674
Subsequent years............................................................... 144,401 4,598 178,148
Total....................................................................... $297,190 $20,553 $ 346,202
Less imputed interest............................................................ 126,493
Present value of capital lease obligations....................................... $170,697
</TABLE>

F-13

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 LEASES AND RELATED GUARANTEES -- Continued
The total rental expense included in the determination of operating income
for the years ended December 31, 1992, 1993 and 1994 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Basic rents................................................................... $ 44,441 $ 48,870 $ 49,234
Contingent rents.............................................................. 12,842 12,306 12,178
Total......................................................................... $ 57,283 $ 61,176 $ 61,412
</TABLE>

Total rental expense does not include sublease rental income of $9,437,000,
$8,998,000, and $9,975,000 for the years ended December 31, 1992, 1993, and
1994, respectively.
NOTE 6 INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to
loss before discontinued operations, 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,
1992 1993 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal..................................................................... $ 6,301 $ 1,323 $ 365
State, Foreign and Other.................................................... 2,869 3,762 215
9,170 5,085 580
Deferred:
Federal..................................................................... (13,471) (74,606) --
State, Foreign and Other.................................................... (1,943) (9,807) (2,793)
(15,414) (84,413) (2,793)
Benefit from income taxes..................................................... $ (6,244) $(79,328) $ (2,213)
The total provision (benefit) from income taxes related to:
Loss before discontinued operations, extraordinary items, and cumulative
effect of change in accounting principles................................ $ (6,244) $(79,328) $ (2,213)
Discontinued operations..................................................... (339) (1,821) 10,470
Extraordinary items......................................................... (85,053) (196) (174)
Cumulative effect of change in accounting principles........................ (8,785) (90) --
Total provision (benefit) from income taxes................................... $ (100,421) $(81,435) $ 8,083
</TABLE>

For the year ended December 31, 1993, the Company utilized regular tax net
operating loss carryforwards of approximately $9.5 million. During 1994, the
provision for income taxes relating to discontinued operations was reduced due
to the utilization of regular tax net operating loss carryforwards of
approximately $89 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>
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,
1993 1994
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Amortization (including write-down) of intangible assets............................................. $ 1,768 $ --
Self-insurance reserves.............................................................................. 33,947 40,269
Capitalized leases................................................................................... 6,984 2,978
Assets held for sale................................................................................. 31,945 7,343
Other accruals and reserves (includes restructuring reserves)........................................ 93,404 38,246
Alternative minimum tax credit carryforwards......................................................... 13,330 14,125
General business credit carryforwards................................................................ 4,751 13,225
Net operating loss carryforwards..................................................................... 72,539 44,450
Less: valuation allowance............................................................................ (102,235) (28,767)
Total deferred tax assets............................................................................ 156,433 131,869
Deferred tax liabilities:
Depreciation of fixed assets......................................................................... 180,294 148,904
Amortization of intangible assets.................................................................... -- 4,644
Total deferred tax liabilities....................................................................... 180,294 153,548
Total deferred income tax liability.................................................................. $ 23,861 $ 21,679
</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 from continuing operations before discontinued
operations, extraordinary items and cumulative effect of accounting change is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
<S> <C> <C> <C>
Statutory rate................................................................ 34% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit.......... (4) -- 12
Amortization and write-off of goodwill...................................... (16) (26) --
Portion of losses not benefited as a result of the establishment of
valuation allowance...................................................... -- (3) (35)
Other....................................................................... (2) -- (5)
Effective tax rate............................................................ 12% 6% 17%
</TABLE>

At December 31, 1994, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $13.2 million most of which expire in 2002 through 2004, and
alternative minimum tax (AMT) credits of $14.1 million. The AMT credits may be
carried forward indefinitely. In addition, the Company has available regular
income tax net operating loss carryforwards of $127 million which expires in
2007. Due to the Recapitalization of the Company which occurred during 1992, the
Company's ability to utilize general business credits, and AMT credits which
arose prior to 1992 will be limited to a specified annual amount. The annual
limitation for the utilization of the tax credit carryforwards is approximately
$8 million. The remaining amount of net operating loss carryforward which arose
in 1992 of $127 million is not expected to be subject to any annual limitation.
F-15

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1992, 1993, and 1994 amounted to $2,672,000, $3,724,000 and
$3,995,000, respectively, of which $1,738,000, $2,802,000 and $3,270,000 related
to funded defined benefit plans and $934,000, $922,000 and $725,000 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 years ended December 31, 1992, 1993, and 1994 determined
under SFAS No. 87 follow:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost-benefits earned during the year.................................. $ 2,137 $ 2,625 $ 3,076
Interest cost on projected benefit obligations................................ 1,864 2,281 2,427
Actual return on plan assets.................................................. (115) (1,284) 761
Net amortization and deferral................................................. (1,214) 102 (2,269)
Net pension cost.............................................................. $ 2,672 $ 3,724 $ 3,995
</TABLE>

The following table sets forth the funded status of the plans and amounts
recognized in the Company's balance sheet for its funded defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits....................................................................................... $20,087 $19,887
Non-vested benefits................................................................................... 1,077 1,412
Accumulated benefit obligations......................................................................... $21,164 $21,299
Plan assets at fair value............................................................................... $20,600 $21,859
Projected benefit obligation............................................................................ 28,027 27,556
Funded status........................................................................................... (7,427) (5,697)
Unrecognized net loss from past experience different from that assumed.................................. 8,684 7,270
Unrecognized prior service cost......................................................................... 441 137
Unrecognized net asset.................................................................................. (152) --
Additional liability.................................................................................... (2,109) --
Prepaid (accrued) pension costs......................................................................... $ (563) $ 1,710
</TABLE>

Assets held by the Company's plans are invested in money market and other
fixed income funds as well as equity funds.
F-16

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
The following sets forth the funded status of the plans and amounts
recognized in the Company's balance sheet for its unfunded defined benefit
plans:
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits........................................................................................ $ 3,467 $ 3,888
Non-vested benefits.................................................................................... 294 343
Accumulated benefit obligations.......................................................................... $ 3,761 $ 4,231
Plan assets at fair value................................................................................ $ -- $ --
Projected benefit obligation............................................................................. (5,727) (4,623)
Funded status............................................................................................ (5,727) (4,623)
Unrecognized net loss from past experience different from that assumed................................... 2,234 468
Unrecognized prior service cost.......................................................................... 849 738
Unrecognized net asset at January 1, 1987 being amortized over 15 years.................................. (179) (123)
Additional liability..................................................................................... (1,300) (1,163)
Accrued pension costs.................................................................................... $(4,123) $(4,703)
</TABLE>

Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Discount rate..................................................................... 7.5% 8.25%
Rates of salary progression....................................................... 4.0% 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 $4,107,000, $3,767,000, $3,932,000 for the
years ended December 31, 1992, 1993, and 1994, 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,
1992, 1993, and 1994 were as follows: $4,335,000, zero and $4,212,000. 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
During 1992, the Company adopted Statement of Financial Standards No. 106
"Employer's Accounting for Postretirement Benefits Other Than Pensions". This
statement requires the accrual of the cost of providing postretirement benefits,
including medical and life insurance benefits, during the active service period
of the covered employees. The Company 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). Charges of the Company for such
postretirement benefits during the years ended December 31, 1992, 1993, and
1994, respectively, were recorded at Canteen Corporation, a wholly-owned
subsidiary. During 1994, Canteen Corporation was sold by the Company (see Note
14).
For the years ended December 31, 1992, 1993, and 1994, the net
postretirement benefit cost (income) included in loss from discontinued
operations was $5,188,000, $(189,000), and $(100,000), respectively.
F-17

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or indirectly
involving the Company, including actions concerned with civil rights of
employees and customers, other employment related matters, 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, 1994, over and above any insurance
coverage in respect to certain of them, are not specifically determinable at
this time.
Flagstar 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
Flagstar'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 Flagstar in 1987. Flagstar filed
protests of the proposed deficiencies with the Appeals Division of the IRS
stating that it believed the proposed deficiencies were erroneous. Flagstar 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 Flagstar 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 Flagstar 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 Flagstar in 1989.
The Company intends to vigorously contest the proposed deficiencies because it
believes the proposed deficiencies are substantially incorrect.
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, 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)
Activity:
Net Income................................................................ -- 349,909 349,909
Minimum pension liability adjustment...................................... 10,131 -- 10,131
Balance December 31, 1994...................................................... $601,936 $(1,807,939) $ (1,206,003)
</TABLE>

F-18

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 EARNINGS (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.
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>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
INCOME LOSSES,
TAX NET OF
LOSSES BENEFITS TAXES
<S> <C> <C> <C>
(IN THOUSANDS)
Prepayment of Term Loan:
Write-off of unamortized deferred financing costs on indebtedness retired............. $11,931 $ (174) $11,757
</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.
F-19

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 EXTRAORDINARY ITEMS -- Continued
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.
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.
During the second quarter of 1994, the Company sold Canteen Corporation, a
wholly-owned subsidiary. A portion of the proceeds from the sale was used to
prepay $170.2 million of term and $126.1 million of working capital advances
which were outstanding under the Company's Restated Credit Agreement resulting
in a charge-off of $11.9 million of unamortized deferred financing costs.
NOTE 13 RELATED PARTY TRANSACTIONS
The Company expensed annual advisory fees of $1,000,000 during 1992 and
$250,000 during 1993 and 1994 for Gollust, Tierney & Oliver, Incorporated (GTO).
GTO earned interest of $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 1992. 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 and 1994, KKR
received annually financial advisory fees of $1,250,000.
In November 1992 in connection with the recapitalization, the Company
loaned $13,922,000 to its chairman, 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
and certain other collateral. During 1993 and 1994, the Company earned $789,000
and $842,000, respectively, on the loan which accrues interest at 5.6% per annum
and is payable at maturity.
During 1994, the Company, through Volume Services, Inc. a stadium
concession subsidiary, and Carolinas Stadium Corporation entered into a
long-term agreement whereby Volume Services, Inc. will be the concession manager
of Carolinas Stadium upon completion of the stadium for a term of 20 years, and
will provide concession services for National Football League games played at
Clemson University during 1995. The agreement provides for a $2.0 million
payment by the Company during 1994 and additional payments of $1.5 million
during each of 1995 and 1996, respectively, and $1.0 million during 2004 as well
as certain minimum commissions during each year of operation. Volume has also
committed to incur construction costs and other related capital expenditures for
the project of an additional $10.5 million by 1996. The chairman of the Company
is affiliated with Carolinas Stadium Corporation.
F-20

<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 DISCONTINUED OPERATIONS
During April 1994, the Company announced the signing of a definitive
agreement to sell the food and vending business and its intent to dispose of the
remaining concession and recreation services businesses of its subsidiary,
Canteen Holdings, Inc. The Company sold Canteen Corporation, a food and vending
subsidiary, for $447.1 million during June 1994, and recognized a net gain of
approximately $399.2 million, net of income taxes, during the year ended
December 31, 1994. A portion of the proceeds from such transaction was used to
prepay $170.2 million of outstanding principal under the senior term loan and
liquidate $126.1 million of outstanding working capital advances.
During November 1994, the Company announced that it had agreed to sell TW
Recreational Services, Inc., a concession and recreation services subsidiary.
Such transaction is subject to resolution of certain issues that have been
raised by the National Park Service. The Company is continuing its efforts to
sell Volume Services, Inc., a stadium concession services subsidiary; however,
the major league baseball strike has delayed the sale of Volume beyond the time
originally anticipated.
Prior period financial statements and related notes have been reclassified
to present Canteen Holdings, Inc. and its subsidiaries as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30.
Revenues and operating income (loss) of the discontinued operations for the
years ended December 31, 1992, 1993, and 1994 were $1.28 billion, $1.37 billion,
and $859.7 million and $50.9 million, $(313.3) million, and $32.6 million,
respectively.
F-21

<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 1993
and 1994 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, 1993:
Operating Revenues........................................................ $592,783 $658,201 $689,941 $ 674,244
Operating expenses:
Product costs........................................................... 198,163 227,622 240,406 232,954
Payroll & benefits...................................................... 216,319 229,267 231,758 227,887
Depreciation & amortization expense..................................... 40,644 42,064 41,438 46,085
Other................................................................... 110,505 121,495 133,826 113,933
Write-off of goodwill and certain other intangibles..................... -- -- -- 1,104,553
Provision for restructuring charges..................................... -- -- -- 158,620
Operating income (loss)................................................... $ 27,152 $ 37,753 $ 42,513 $(1,209,788)
Loss before extraordinary item and cumulative effect of change in
accounting principle.................................................... $(33,617) $(15,397) $(10,252) $(1,603,153)
Net loss.................................................................. $(41,139) $(15,397) $(26,411) $(1,617,887)
Year Ended December 31, 1994:
Operating Revenues........................................................ $626,273 $679,563 $700,589 $ 659,541
Operating expenses:
Product costs........................................................... 217,607 234,770 239,479 227,231
Payroll & benefits...................................................... 227,318 241,419 238,075 213,116
Depreciation & amortization expense..................................... 31,713 31,765 32,866 33,288
Other................................................................... 110,809 126,304 128,228 128,058
Recovery of restructuring charges....................................... -- -- -- (7,207)
Operating income.......................................................... $ 38,826 $ 45,305 $ 61,941 $ 65,055
Income (loss) before extraordinary items and cumulative effect of change
in accounting principle................................................. $(26,625) $358,078 $ 19,971 $ 10,242
Net income (loss)......................................................... $(26,625) $347,257 $ 19,971 $ 9,306
</TABLE>

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.
During the second quarter of 1994, the Company sold its food and vending
subsidiary (see Note 14) and recorded a $383.9 million net gain on the sale of
the discontinued operation. During the fourth quarter of 1994, the Company
increased its gain by $15.3 million to reflect the final settlement of such
sale.
During the fourth quarter of 1994, the Company recognized a reduction in
operating expenses of approximately $15.0 million principally due to favorable
claims trends associated with the Company's self-insurance liabilities.
F-22

<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/ RHONDA J. PARISH
Rhonda J. Parish
(Senior Vice President, General
Counsel and Secretary)
Date: March 27, 1995
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/ JAMES B. ADAMSON Director, President and Chief Executive Officer March 27, 1995
(Principal Executive Officer)
(James B. Adamson)
/s/ A. RAY BIGGS Senior Vice President and Chief Financial Officer March 27, 1995
(Principal Financial and Accounting Officer)
(A. Ray Biggs)
/s/ MICHAEL CHU Director March 27, 1995
(Michael Chu)
/s/ VERA KING FARRIS Director March 27, 1995
(Vera King Farris)
/s/ HAMILTON E. JAMES Director March 27, 1995
(Hamilton E. James)
/s/ HENRY R. KRAVIS Director March 27, 1995
(Henry R. Kravis)
/s/ PAUL E. RAETHER Director March 27, 1995
(Paul E. Raether)
/s/ JEROME J. RICHARDSON Director March 27, 1995
(Jerome J. Richardson)
/s/ CLIFTON S. ROBBINS Director March 27, 1995
(Clifton S. Robbins)
/s/ GEORGE R. ROBERTS Director March 27, 1995
(George R. Roberts)
/s/ L. EDWIN SMART Director March 27, 1995
(L. Edwin Smart)
/s/ MICHAEL T. TOKARZ Director March 27, 1995
(Michael T. Tokarz)
</TABLE>

<PAGE>
EXHIBIT 3.3
BY-LAWS1
OF
FLAGSTAR CORPORATION
A DELAWARE CORPORATION
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation in
the State of Delaware shall be in the City of Wilmington.
SECTION 2. OTHER OFFICES. The Corporation may have other offices, either
within or without the state of Delaware, at such place or places as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETING OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the
election of directors and for such other business as may stated in the notice of
the meeting shall be held at such place, either within or without the state of
Delaware, and at such time and date, commencing in the year 1989, as the Board
of Directors, by resolution, shall determine and as set forth in the notice of
the meeting.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next business day. At each annual meeting, the
stockholders entitled to vote shall elect a Board of Directors and they may
transact such other corporate business as shall be stated in the notice of the
meeting.
SECTION 2. OTHER MEETINGS. Special meetings of stockholders for any purpose
may be held at such time and place, within or without the state of Delaware, as
may be fixed by the Board of Directors and shall be stated in the notice of
meeting.
SECTION 3. INSPECTOR OF ELECTION. At each meeting of stockholders at which
an election of directors is to be held, the chairman of the meeting may, but
shall not be required to, appoint one person, who need not be a stockholder, to
act as inspector of election at such meeting. The inspector so appointed, before
entering on the discharge of his duties, shall take and subscribe to an oath or
affirmation to faithfully execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability, and thereupon
their inspector shall take charge of the polls and after the balloting shall
canvas the votes and make a certificate of the results of the vote taken. No
director or candidate for the office of director shall be appointed inspector.
SECTION 4. VOTING. At each meeting of the stockholders, each stockholder
entitled to vote at such meeting in accordance with the terms of the Certificate
of Incorporation and in accordance with the provisions of these By-Laws shall be
entitled to one vote, in person or by proxy, for each share of stock entitled to
vote held by such stockholder, but no proxy shall be voted after three years
from its date unless such proxy provides for a longer period. Every proxy must
be executed in writing by the stockholder or by the stockholder's duly
authorized attorney. Upon the demand of any stockholder, the vote for directors
and the vote upon any question before the meeting, shall be by ballot. All
elections for directors and all other questions shall be decided by majority
vote except as otherwise provided by the Certificate of Incorporation or the
laws of the state of Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
1. As amended through March 22, 1995.

<PAGE>
SECTION 5. QUORUM. At all meetings of the stockholders, except as otherwise
required by law, by the Certificate of Incorporation or by these By-Laws, the
presence, in person or by proxy, of stockholders of record holding a majority of
the shares of stock of the Corporation issued, outstanding and entitled to vote
thereat shall constitute a quorum for the transaction of business. In case a
quorum shall not be present at any meeting, the holders of record of a majority
of the shares of stock entitled to vote thereat, present in person or by proxy,
shall have the power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until the requisite amount of stock
entitled to vote shall be present. At any such adjourned meeting at which the
requisite amount of stock entitled to vote shall be represented, any business
may be transacted which might have been transacted at the meeting as originally
called; but only those stockholders entitled to vote at the meeting as
originally called shall be entitled to vote at any adjournment or adjournments
thereof.
SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose or purposes may be called by the Chairman of the Board of Directors, the
President or the Secretary, or the resolution of the Board of Directors.
SECTION 7. NOTICE OF MEETINGS. Written notice, stating the place, date and
time of the meeting, and the general nature of the business to be considered,
shall be given to each stockholder entitled to vote thereat at his address as it
appears on the records of the Corporation, not less than ten nor more than sixty
days before the date of the meeting. No business other than that stated in the
notice shall be transacted at any meeting without the unanimous consent of all
the stockholders entitled to vote thereat.
SECTION 8. ACTION WITHOUT MEETING. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Such written consent shall be filled in the
minute book of the Corporation.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. The number of directors of the Corporation
shall be not less than one nor more than fifteen. Within the limits above
specified, the number of directors shall be determined from time to time by the
stockholders or by the Board of Directors at any meeting thereof. The directors
shall be elected at the annual meeting of the stockholders. Each director shall
be elected to serve until his successor shall be elected and shall qualify or
until his earlier death, resignation or removal as provided in these Bylaws.
Directors need not be stockholders. No person who has attained the age of 70
shall be eligible to stand for election or re-election by the stockholders or
otherwise to be appointed to serve as a director of the Corporation.
SECTION 2. RESIGNATION. Any director, member of a committee or other
officer may resign at any time. Such resignation shall be made in writing to the
Board of Directors, the Chairman of the Board of Directors, the President or the
Secretary. Unless otherwise specified therein, such resignation shall take
effect on receipt thereof. The acceptance of a resignation shall not be
necessary to make it effective.
SECTION 3. VACANCIES. If the office of any director, member of a committee
or other officer becomes vacant, the remaining directors in office, though less
than a quorum, by a majority vote, may appoint any qualified person to fill such
vacancy, who shall hold office for the unexpired term and until his successor
shall be duly chosen or until his earlier death, resignation or removal. In the
event that the resignation of any director shall specify that it shall take
effect at a future date, the vacancy resulting from such resignation may be
filled prospectively in the same manner as provided in this paragraph.
SECTION 4. REMOVAL. Except as hereinafter provided, any director or
directors may be removed either for or without cause at any time by affirmative
vote of the holders of a majority of all the shares of stock outstanding and
entitled to vote, at a special meeting of the stockholders called for the
purpose, and the vacancies thus created may be filled, at the
2

<PAGE>
meeting held for the purpose of removal, by the affirmative vote of a majority
in interest of the stockholders entitled to vote.
Any director may be removed at any time for cause by the action of the
directors, at a special meeting called for that purpose, by the vote in favor of
removal of a majority of the total number of directors.
SECTION 5. INCREASE OF NUMBER. The maximum number of directors may be
increased by amendment of these By-Laws by the affirmative vote of a majority of
the directors, though less than a quorum, or, by affirmative vote of a majority
interest of the stockholders, at the annual meeting or at a special meeting
called for that purpose, and by like vote the additional directors may be chosen
at such meeting to hold office until the next annual election and until their
successors are elected and qualify or until earlier death, resignation or
removal.
SECTION 6. POWERS. The Board of Directors shall exercise all of the powers
of the Corporation except such as are by law, by the Certificate of
Incorporation of the Corporation or by these By-Laws conferred upon or reserved
to the stockholders.
SECTION 7. COMMITTEES. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole board, designate one or more
committees, each committee to consist of two or more directors of the
Corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, or in these By-Laws, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation; and, unless the resolution, these By-Laws, or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
SECTION 8. MEETINGS. The newly elected directors may hold their first
meeting for the purpose of organization and the transaction of business, if a
quorum be present, immediately after the annual meeting of the stockholders; or
the time and place of such meeting may be fixed [by] consent in writing of all
the directors.
Regular meetings of the directors may be held without notice at such places
and times as shall be determined from time to time by resolution of the
directors.
Special meetings of the Board of Directors may be called by the Chairman of
the Board of Directors, the President or the Secretary on the written request of
any two directors on at least two day's notice to each director and shall be
held at such place or places as may be determined by the directors, or shall be
stated in the call of the meeting.
Unless otherwise restricted by the Certificate of Incorporation or by these
By-Laws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
SECTION 9. QUORUM. A majority of the total number of directors shall
constitute a quorum for the transaction of business. If a quorum shall be
present, the act of a majority of the directors present shall be the act of the
Board of Directors, except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws. If at any meeting of the Board of Directors
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need by given other than by announcement at the meeting which
shall be so adjourned.
SECTION 10. COMPENSATION. Directors shall not receive any stated salary for
their services as directors or as members of committees, but by resolution of
the Board of Directors a fixed fee and expenses of attendance may be
3

<PAGE>
allowed for attendance at each meeting. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity as an officer, agent or otherwise, and receiving compensation therefor.
SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting, if prior to such action a written consent thereto is
signed by all members of the Board of Directors, or of such committee as the
case may be, and such written consent is filed with the minutes of proceedings
of the Board of Directors or committee.
SECTION 12. RULES AND REGULATIONS. The Board of Directors may adopt such
rules and regulations for the conduct of its meetings and for the management of
the property, affairs and business of the Corporation as it may deem proper,
except as otherwise provided by law, by the Certificate of Incorporation or by
these By-Laws.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of
the Board of Directors, if any shall have been elected, a President, a
Treasurer, and a Secretary, all of whom shall be elected by the Board of
Directors and who shall hold office until their successors are elected and
qualified or until their earlier death, resignation or removal. In addition, the
Board of Directors may elect one or more Vice Presidents and such Assistant
Secretaries and Assistant Treasurers as they may deem proper. None of the
officers of the Corporation need be directors (except for the Chairman of the
Board of Directors, if any) or stockholders. The officers shall be elected at
the first meeting of the Board of Directors after each annual meeting. Any
person may hold one or more offices. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint
such other officers and agents as it may deem advisable, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors. The Board of
Directors may delegate to any officer or officers the power to appoint any such
officer, to fix their respective terms of office, to prescribe their respective
powers and duties, to remove them and to fill vacancies in any such offices.
SECTION 3. CHAIRMAN. The Chairman of the Board of Directors, if one be
elected, shall preside at all meetings of the Board of Directors and of the
stockholders, and absent instructions to the contrary by the Board of Directors,
shall exercise general supervision over the property, affairs and business of
the Corporation, shall authorize the other officers of the Corporation to
exercise such powers as he may deem to be in the best interests of the
Corporation and shall have and perform such other duties as from time to time
may be assigned to him by the Board of Directors.
SECTION 4. PRESIDENT. The President shall have such duties as may from time
to time be delegated to him by the Board of Directors. In the event there shall
be no Chairman, the President shall exercise all powers conferred on the
Chairman by Section 3 of this Article. In the event a Chairman is elected, the
President shall be the Chief Executive Officer of the Corporation and, in the
absence or disability of the Chairman, shall have the powers of the Chairman.
SECTION 5. VICE PRESIDENTS. Each Vice President shall have such power[s]
and shall perform such duties as shall be assigned to him by the directors. The
Board of Directors may further designate the area or areas of responsibility
assigned to a Vice President by appropriate words, such as Senior Vice President
or Group Vice President added to the title of the office or offices held by such
Vice President.
SECTION 6. TREASURER. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the Corporation. He shall deposit all moneys
and other valuables in the name and to the credit of the Corporation in such
depositaries as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation in such manner as
may be ordered by the Board of Directors, the Chairman or the President, taking
proper vouchers for such disbursements. He shall render to the Chairman, the
President and the Board of Directors at the regular meetings of the Board of
Directors, or whenever they may request it, an account of all his transactions
as Treasurer and of the financial condition of the Corporation.
SECTION 7. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by law or by these By-Laws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman, the President, or the directors, or
4

<PAGE>
stockholders, upon whose requisition the meeting is called as provided in these
By-Laws. He shall record all the proceedings of the meetings of the Corporation
and of the directors, in a book to be kept for that purpose, and shall perform
such other duties as may be assigned to him by the directors, the Chairman or
the President. He shall have the custody of the seal of the Corporation and
shall affix the same to all instruments requiring it, when authorized by the
directors or the President, and attest the same.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
SECTION 9. RESIGNATION. Any officer may resign at any time, unless
otherwise provided in any contract with the Corporation, by giving written
notice to the Chairman, if any, or the President or the Secretary. Unless
otherwise specified therein, such resignation shall take effect upon receipt
thereof.
SECTION 10. REMOVAL. Any officer may be removed at any time by an
affirmative vote of a majority of the Board of Directors, with or without cause.
Any officer not elected by the Board of Directors may be removed in such manner
as may be determined by, or pursuant to delegation from, the Board of Directors.
SECTION 11. VACANCIES. If a vacancy shall occur in any office, such vacancy
may be filled for the unexpired portion of the term by the Board of Directors.
SECTION 12. SURETY BONDS. In the event the Board of Directors shall so
require, any officer or agent of the Corporation shall execute to the
Corporation a bond in such sum and with such surety or sureties as the Board of
Directors may direct, conditioned on the faithful performance of the officer's
duties to the Corporation.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK. A certificate or certificates of stock,
signed by the Chairman of the Board of Directors, if one be elected, the
President or a Vice President, and the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary, and sealed with the seal of the
Corporation, shall be issued to each stockholder certifying the number of shares
owned by him in the Corporation. Any of or all of the signatures may be
facsimiles. The certificate or certificates or stock shall be in such form as
the Board of Directors may from time to time adopt and shall be countersigned
and registered in such manner, if any, as the Board of Directors may prescribe.
In case any officer who shall have signed, or whose facsimile signature shall
have been used on any such certificate, shall cease to be such officer of the
Corporation before such certificate shall have been issued by the Corporation,
such certificate may nevertheless be adopted by the Corporation and be issued
and delivered as though the person who signed such certificate, or whose
facsimile signature shall have been used thereon, had not ceased to be such
officer; and such issuance and delivery shall constitute adoption of such
certificate by the Corporation.
There shall be entered on the books of the Corporation the number of each
certificate issued, the number (and class or series, if any) of shares
represented thereby, the name and address of the person to whom such certificate
was issued and the date of issuance thereof.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. A new certificate of
stock may be issued in the place of any certificate theretofore issued by the
Corporation, alleged to have been lost, stolen or destroyed, and the directors
may, in their discretion, require the owner of the lost, stolen or destroyed
certificate, or his legal representatives, to give the Corporation a bond, in
such sum as they may direct, not exceeding double the value of the stock, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss of any such certificate, or the issuance of any such
new certificate and to provide such evidence of loss, theft or destruction as
the Board of Directors may require.
SECTION 3. TRANSFER OF SHARES. The shares of stock of the Corporation shall
be transferable only upon its books by the holders of record thereof in person
or by their duly authorized attorneys or legal representatives, and upon such
transfer the old certificates shall be surrendered, along with such evidence of
the authenticity of such transfer, authorization and other matters as the
Corporation or its agents may reasonably require, to the Corporation by the
delivery thereof to the person in charge of the stock and transfer books, or to
such other person as the directors may designate, by whom they shall be
cancelled, and new certificates shall thereupon be issued. A record shall be
made of each transfer
5

<PAGE>
and whenever a transfer shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer.
SECTION 4. REGULATIONS, TRANSFER AGENTS AND REGISTRARS. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issuance and transfer of certificates for shares of the stock of
the Corporation, may appoint transfer agents or registrars, or both, and may
require all certificates of stock to bear the signature of either or both.
Nothing herein shall be construed to prohibit the Corporation from acting as its
own transfer agent at any of its offices.
SECTION 5. STOCKHOLDERS RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance a record date, which shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 6. SHAREHOLDERS RECORD OWNERSHIP. The Corporation shall be entitled
to recognize the exclusive right of a person registered as such on the books of
the Corporation as the owner of shares of the Corporation's stock to receive
dividends and to vote as such owner. The Corporation shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, regardless of whether the Corporation shall have express or
other notice thereof, except as otherwise provided by law.
SECTION 7. DIVIDENDS AND RESERVES. Subject to the applicable provisions of
law or of the Certificate of Incorporation, the Board of Directors may, out of
funds legally available therefor, at any regular or special meeting, declare
dividends upon the capital stock of the Corporation as and when they deem
expedient. Before declaring any dividend there may be set apart out of any funds
of the Corporation available for dividends, such sum or sums as the directors
from time to time in their discretion deem proper for working capital, or as a
reserve fund to meet contingencies, or for equalizing dividends, or for the
purpose of repairing, maintaining or increasing the property or business of the
Corporation or for such other purposes as the directors shall deem conducive to
the interests of the Corporation. The Board of directors may, in its discretion,
modify or abolish any such reserve at any time.
SECTION 8. SEAL. The corporate seal shall be circular in form and shall
contain the name of the Corporation, the year of its creation and the words
"CORPORATE SEAL, DELAWARE". Said seal may be used by causing it or a facsimile
thereof to be impressed, affixed, reproduced, engraved, printed or otherwise
represented.
SECTION 9. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION 10. EXECUTION OF INSTRUMENTS. All agreements, deeds, contracts,
proxies, covenants, bonds, checks, drafts or other orders for the payment of
money, bills of exchange, notes, acceptances and endorsements, and all evidences
of indebtedness and other documents, instruments or writings of any nature
whatsoever, issued in the name of the Corporation, shall be signed by such
officers, agents or employees of the Corporation, or by any one of them, and in
such manner, as from time to time may be determined, either generally or in
specific instances, by the Board of Directors or by such officer or officers to
whom the Board of Directors may delegate the power to so determine.
SECTION 11. STOCK OF OTHER CORPORATIONS. Subject to such limitations as the
Board of Directors may from time to time prescribe, any officer of the
Corporation shall have full power and authority on behalf of the Corporation to
attend, to act and vote at, and to waive notice of, any meeting of stockholders
of any corporations, shares of stock of which are owned by or stand in the name
of the Corporation, and to execute and deliver proxies and actions in writing
for the voting of any such shares, and at any such meeting or by action in
writing may exercise on behalf of the Corporation any and all rights and powers
incident to the ownership of such shares.
SECTION 12. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by
these By-Laws to be given, personal notice is not meant unless expressly so
stated, and any notice so required shall be deemed to be sufficient if given by
depositing the same in the United states mail, postage prepaid, addressed to the
person entitled thereto at his address as it appears on the records of the
Corporation, and such notice shall be deemed to have been given on the day of
6

<PAGE>
such mailing. Stockholders not entitled to vote shall not be entitled to receive
notice of any meetings except as otherwise provided by statute.
Whenever any notice whatever is required to be given under the provisions
of any law, or under the provisions of the Certificate of Incorporation of the
Corporation or these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
Attendance of a person at a meeting, whether of stockholders (in person or
by proxy) or of directors or of any committee of the Board of Directors, shall
constitute a waiver of notice of such meeting, except when such person attends
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting is
not legally called or convened.
SECTION 13. BOOKS, ACCOUNTS AND OTHER RECORDS. Except as otherwise provided
by law, the books, accounts and other records of the Corporation shall be kept
at such place or places (within or without the state of Delaware) as the Board
of Directors, the Chairman or the President may form time to time designate.
SECTION 14. INDEMNIFICATION. The Corporation shall, to the fullest extent
permitted by the Section 145 of the Delaware General Corporation Law, as the
same exists or may hereafter be amended, indemnify all persons whom it may
indemnify pursuant thereto.
ARTICLE VI
AMENDMENTS
These By-Laws may be altered, amended or repealed and By-Laws may be made
at any annual meeting of the stockholders or at any special meeting thereof if
notice of the proposed alteration or repeal or By-Law or By-Laws to be made be
contained in the notice of such special meeting, by the affirmative vote of a
majority of the stock issued and outstanding and entitled to vote thereat, or by
the affirmative vote of a majority of the Board of Directors, at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors, if notice of the proposed alteration or repeal, or By-Law or By-Laws
to be made, be contained in the notice of such special meeting.
7

<PAGE>
EXHIBIT 12
FLAGSTAR CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C>
Loss from continuing operations before income taxes........... $(68,631) $(69,596) $(51,554) $(1,332,076) $(33,217)
Add:
Net interest expense excluding capitalized interest......... 233,899 236,372 238,103 217,856 234,781
Amortization of debt expense................................ 21,050 11,249 9,362 9,416 6,453
Interest factor in rents.................................... 13,119 13,450 14,814 16,290 16,411
Total earnings (losses)................................ $199,437 $191,475 $210,725 $(1,088,514) $224,428
Fixed charges:
Gross interest expense including capitalized
interest................................................. $234,325 236,602 238,393 218,134 235,041
Amortization of debt expense................................ 21,050 11,249 9,362 9,416 6,453
Interest factor in rents.................................... 13,119 13,450 14,814 16,290 16,411
Total fixed charges.................................... $268,494 $261,301 $262,569 $ 243,840 $257,905
Ratio of earnings (losses) to fixed charges................... -- -- -- -- --
Deficiency in the coverage of fixed charges by earnings
(losses) before fixed charges............................... $ 69,057 $ 69,826 $ 51,844 $ 1,332,354 $ 33,477
</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.

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Flagstar Corporation as contained in its
Form 10-K for the year ended December 31, 1994 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>

<S> <C> <C>
<PERIOD-TYPE> 12-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1994
<PERIOD-END> DEC-31-1994 DEC-31-1994
<CASH> 66,720 0
<SECURITIES> 0 0
<RECEIVABLES> 37,392 0
<ALLOWANCES> 4,561 0
<INVENTORY> 62,293 0
<CURRENT-ASSETS> 258,069 0
<PP&E> 1,743,159 0
<DEPRECIATION> 547,134 0
<TOTAL-ASSETS> 1,588,632 0
<CURRENT-LIABILITIES> 386,316 0
<BONDS> 2,217,648 0
<COMMON> 0 0
0 0
0 0
<OTHER-SE> (1,206,003) 0
<TOTAL-LIABILITY-AND-EQUITY> 1,588,632 0
<SALES> 0 0
<TOTAL-REVENUES> 0 2,665,966
<CGS> 0 0
<TOTAL-COSTS> 0 2,454,839
<OTHER-EXPENSES> 0 3,110
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 241,234
<INCOME-PRETAX> 0 (33,217)
<INCOME-TAX> 0 (2,213)
<INCOME-CONTINUING> 0 (31,004)
<DISCONTINUED> 0 392,670
<EXTRAORDINARY> 0 (11,757)
<CHANGES> 0 0
<NET-INCOME> 0 349,909
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0

</TABLE>