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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-9364
FLAGSTAR CORPORATION
(Exact name of registrant as specified in its charter)
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<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) 597-8700.
Securities registered pursuant to Section 12(b) of the Act:
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<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 31, 1994, 440 shares of registrant's Common Stock, $.01 par
value per share, were outstanding, all of which are owned by registrant's
parent, Flagstar Companies, Inc.
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FORM 10-K/A
The undersigned registrant hereby amends the following items of its 1993
Annual Report on Form 10-K, as set forth in the pages attached hereto:
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<S> <C>
Part I, Item 1. Business
Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
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<S> <C>
FLAGSTAR CORPORATION
DATE: January 11, 1995 BY: /s/ A. RAY BIGGS
A. RAY BIGGS
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
</TABLE>
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Flagstar Corporation ("Flagstar") is one of the largest food service
enterprises in the United States, operating (directly and through franchisees)
2,500 moderately priced restaurants and providing contract food services to more
than 1,600 business, industrial and institutional clients and vending services
at approximately 11,400 locations.
The Company's restaurant operations are conducted through three principal
chains 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 eight foreign
countries, including 490 in California and Florida. According to an independent
survey conducted in 1993, Denny's has the leading share of the national market
in the family segment. Hardee's is a chain of fast-food restaurants of which the
Company, with 564 units located primarily in the southeast, is the largest
franchisee. Although specializing in sandwiches, the Company's Hardee's
restaurants have introduced fresh fried chicken and also offer a breakfast menu
that accounts for approximately 38% of total sales and features the chain's
famous "made-from-scratch" biscuits. Quincy's, with more than 200 locations, is
one of the largest chains of steakhouse restaurants in the southeastern United
States, offering steak, chicken and seafood entrees as well as a buffet food
bar, called the "Country Sideboard," that features as many as 87 different
items. A weekend breakfast buffet is available at most Quincy's locations. The
Company also operates El Pollo Loco, a chain of fast-food restaurants featuring
flame-broiled chicken and steak products and related Mexican food items, with a
strong regional presence in California.
Although operating in three distinct segments of the restaurant
industry -- family-style, fast-food and steakhouse -- the Company's restaurants
benefit from a single management strategy that emphasizes superior value and
quality, friendly and attentive service and appealing facilities. During the
past year, the Company has remodeled 59 of its existing restaurants and added a
net of 86 new restaurants to its principal chains.
The Company's contract food and vending services are conducted through
Canteen, one of the three largest contract food and vending companies in the
nation. Canteen also operates food, beverage and lodging facilities and gift
shops and provides ancillary services at various national and state parks,
sports stadiums, amphitheaters and arenas throughout the United States.
Incorporated in 1980, Flagstar is a wholly-owned subsidiary of Flagstar
Companies, Inc. ("FCI"). FCI is a holding company that was organized in Delaware
in 1988 in order to effect the acquisition of Flagstar in 1989. On November 16,
1992, FCI and Flagstar consummated the principal elements of a recapitalization
(the "Recapitalization"), which included, among other things, an equity
investment by TW Associates, L.P. ("TW Associates") and KKR Partners II, L.P.
("KKR Partners II") (collectively, "Associates"), partnerships affiliated with
Kohlberg Kravis Roberts & Co. ("KKR"), and a restructuring of Flagstar's bank
credit facility and public debt securities. As a result of such transactions,
Associates acquired control of FCI and Flagstar. Prior to June 16, 1993, FCI and
Flagstar had been known, respectively, as TW Holdings, Inc. and TW Services,
Inc. As used herein, the term "Company" includes Flagstar and its subsidiaries,
except as the context otherwise requires.
GENERAL
The Company's operating revenues and operating income by business segment
for the periods shown were as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
JANUARY 1 JULY 21 TO
TO JULY 20, DECEMBER 31, YEAR ENDED DECEMBER 31,
1989 1989 1990 1991 1992
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Operating Revenues:
Restaurants.......................................... $ 1,180.9 $ 931.7 $2,303.9 $2,338.7 $2,443.0
Contract food service................................ 735.9 586.2 1,322.6 1,279.2 1,277.3
$ 1,916.8 $1,517.9 $3,626.5 $3,617.9 $3,720.3
Operating Income (Loss):
Restaurants.......................................... $ 112.9 $ 74.4 $ 196.5 $ 192.0 $ 214.1
Contract food service................................ 29.4 26.5 51.9 45.9 50.9
Corporate, net....................................... (7.1) (4.0) (10.1) (13.9) (18.6)
Acquisition-related costs and unusual expenses....... (30.1) (69.9) -- -- --
$ 105.1 $ 27.0 $ 238.3 $ 224.0 $ 246.4
<CAPTION>
1993
<S> <C>
Operating Revenues:
Restaurants.......................................... $ 2,598.9
Contract food service................................ 1,371.3
$ 3,970.2
Operating Income (Loss):
Restaurants.......................................... $(1,085.9)(1)
Contract food service................................ (313.3)(1)
Corporate, net....................................... (61.6)(1)
Acquisition-related costs and unusual expenses....... --
$(1,460.8)
</TABLE>
(1) Operating income by business segment reflects the write-off of goodwill and
other intangible assets and the provision for restructuring charges Notes 2
and 3 to the Consolidated Financial Statements as follows: restaurants
$1,265.6 million, contract food service $359.8 million, and corporate, net
$41.4 million. For a discussion of the write-off and restructuring and the
reasons therefor, see Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes 2 and 3 to the Consolidated
Financial Statements.
1
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For additional financial information about the Company's business segments, see
Note 14 of the Notes to Consolidated Financial Statements appearing elsewhere
herein.
On July 1, 1993, culminating a dialogue which began in early 1992, the
Company signed a Fair Share Agreement with the NAACP "as a commitment to
continue and expand opportunities at Flagstar for African-American and other
minorities." Pursuant to that agreement, the Company agreed to place special
emphasis on management and employment advancement, advertising and marketing,
franchising opportunities, purchasing and professional service opportunities,
philanthropic and charitable contributions and policy development, to enhance
policies and programs by which African-Americans and other minorities realize
greater participation in business opportunities at Flagstar. The Company and the
NAACP have agreed to meet quarterly during the first year of the agreement and
semiannually thereafter to review progress toward the stated goals of the
agreement.
As a result of the 1989 acquisition of Flagstar, the Company
became and remains very highly leveraged. As discussed in 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 have fallen short of the
projections prepared at the time of the acquisition and have been insufficient
to recover the recorded balances of the Company's goodwill and intangible
assets, despite an annual increase in average unit sales at Hardee's. Such
shortfalls have resulted from negative historical 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 at
Canteen's food and vending business. These trends are 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 Canteen 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. See 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.
During the fourth quarter of 1993, the Company approved a restructuring
plan which includes the identification of units that have produced inadequate
returns on investment, have been difficult to supervise or lack market
penetration so that such units can be sold, closed or converted to another
restaurant concept. These actions should result in a redeployment of capital to
activities which produce a higher rate of return. Accordingly, such units were
written down to their net realizable value. The plan includes changes to the
field management structure which will eliminate a layer of management,
increasing the regional manager's "span of control" and expanding the restaurant
general manager's decision making role. Also, the Company will consolidate
certain Company operations and eliminate overhead positions in the field and in
its corporate marketing, accounting, and administrative functions. The Company's
restructuring charge reflected in the accompanying Consolidated Financial
Statements includes the severance and relocation costs related to these changes.
The plan includes specific action plans to fundamentally change the competitive
positions of Denny's, El Pollo Loco, and Quincy's, as discussed below.
2
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DENNY'S
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<CAPTION>
YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
<S> <C> <C> <C> <C>
Operating Units (end of year)
Owned/operated.................................................................... 1,001 992 996 1,013
Franchised........................................................................ 273 302 326 378
International..................................................................... 68 64 69 69
Revenues (in millions) (1).......................................................... $1,284 $1,407 $1,429 $1,449
Operating Income (Loss) (in millions) (1)........................................... $ 98 $ 118 $ 128 $ 130
Depreciation and Amortization (in millions) (1)..................................... $ 57 $ 68 $ 75 $ 82
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,117 $1,209 $1,232 $1,231
Franchised........................................................................ $ 865 $ 949 $1,040 $1,065
Average Check....................................................................... $ 4.05 $ 4.20 $ 4.37 $ 4.56
<CAPTION>
1993
<S> <C>
Operating Units (end of year)
Owned/operated.................................................................... 1,024
Franchised........................................................................ 427
International..................................................................... 63
Revenues (in millions) (1).......................................................... $1,530
Operating Income (Loss) (in millions) (1)........................................... $ (625)(2)
Depreciation and Amortization (in millions) (1)..................................... $ 88
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,233
Franchised........................................................................ $1,057
Average Check....................................................................... $ 4.76
</TABLE>
(1) Includes distribution and processing operations.
(2) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $716 million. For a discussion of the write-off and
restructuring and the reasons therefor, see 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 1993 by Consumer Reports on Eating Share Trends
(CREST), an industry market research firm, Denny's has the leading share of the
national market in the family segment. Denny's restaurants currently operate in
49 states and eight foreign countries, with principal concentrations in
California, Florida, Texas, Washington, Arizona, Illinois, Pennsylvania and
Ohio. Denny's restaurants are designed to provide a casual dining atmosphere
with moderately priced food and quick, efficient service to a broad spectrum of
customers. The restaurants generally are open 24 hours a day, seven days a week.
All Denny's restaurants have uniform menus (with some regional and seasonal
variations) offering traditional family fare (including breakfast, steaks,
seafood, hamburgers, chicken and sandwiches) and provide both counter and table
service for breakfast, lunch and dinner as well as a "late night" menu.
The Company acquired the Denny's chain in September 1987. Since the
acquisition, the Company has reduced corporate level overhead (including through
the relocation of key operating personnel to the Company's Spartanburg, South
Carolina headquarters), accelerated Denny's remodeling program, added
point-of-sale ("POS") systems to the chain's restaurants, simplified the menu
and created new advertising and marketing programs.
The Company remodeled 125 Denny's restaurants in 1992 and another 41 in
1993, raising the total number of restaurants remodeled since the Company's
aquisition of Denny's to over one-half of all Denny's restaurants. The Company
expects to remodel approximately 90 units this year so that, by the end of 1994,
Company-owned Denny's restaurants will be remodeled on an eight year cycle. A
typical Denny's remodeling requires approximately ten days to complete (with the
temporary closing of the restaurant), is managed by the Company's in-house
design and construction staff, and currently costs approximately $265,000 per
unit. In prior years such remodeling 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 supported by marketing. As a
result, there has not been a consistent demonstrable increase in revenues as a
result of the previous remodeling programs. In contrast with prior remodeling
programs, the 90 units to be remodeled in 1994 will represent the first phase in
a "reimaging" strategy intended to result in a fundamental change in the
competitive positioning of Denny's. This reimaging strategy will involve all of
the restaurants in a market 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 a current market test of
Baskin-Robbins(Register mark) ice cream. In addition, the reimaged market will
be supported by increased marketing expenditures and a marketing campaign
directed specifically toward the reopening of the restaurants. The Company is
currently testing this reimaging program in its Houston market. The Company has
not previously attempted a reimaging program of any of its concepts. No
assurances can be given that such program will result in a long-term reversal of
historical operating trends.
The Company completed the rollout of its Denny's restaurants with POS
systems in January 1993. This system provides hourly sales reports, cash control
and marketing data and information regarding product volumes. POS systems
improve labor scheduling, provide information to evaluate more effectively the
impact of menu changes on sales, and reduce the paperwork of managers.
Marketing initiatives in 1994 will emphasize positioning Denny's as the
price value leader within its segment, initially concentrating on breakfast. The
Company intends to support these initiatives by expanding the number of media
markets and using co-op advertising with franchisees in other markets. These
promotions are designed to capitalize on the strong public recognition of the
Denny's name.
The Company intends to open relatively few Company-owned Denny's
restaurants and to expand its franchising efforts in 1994 in order to increase
its market share, establish a presence in new areas and further penetrate
existing
3
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markets. To accelerate the franchise expansion, the Company will identify units
to sell to franchisees which are not part of its growth strategy for
Company-owned Denny's units. These units are in addition to 105 units that are
to be sold to franchisees or closed under the Company's restructuring plan. The
restructured field management infrastructures established to serve the existing
Denny's system are expected to provide sufficient support for additional units
with moderate incremental expense. Expanded franchising also will permit the
Company to exploit smaller markets where a franchisee's ties to the local
community are advantageous.
During 1993, the Company added a net of 49 new Denny's franchises, bringing
total franchised units to 427, or 28% of all Denny's restaurants. The initial
fee for a single Denny's franchise is $35,000, and the current royalty payment
is 4% of gross sales. In 1993, Denny's realized $33.5 million of revenues from
franchising. Franchisees also purchase food and supplies from a Company
subsidiary.
The average unit sales for Company-owned Denny's units has increased only
slightly during the four years since the 1989 acquisition of Flagstar,
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. However, the Company has not
previously attempted a reimaging program such as the one being undertaken. There
can be no assurance that implementation of the restructuring and reimaging
programs will result in a long term reversal of the operating trends of the
Company experienced since the acquisition. Consequently, as discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Notes 1 and 2 to the Consolidated Financial Statements,
management estimates that future operating results will nonetheless continue to
be insufficient to recover goodwill and other intangible assets.
During 1993, the Company also made certain changes in the management of
Denny's, including the appointment of C. Ronald Petty as chief operating
officer. Mr. Petty, 49, has twenty years of experience in the food service
industry, including senior leadership positions with other national restaurant
chains. Mr. Petty has assumed overall responsibility for the operation of the
Denny's chain.
HARDEE'S
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<CAPTION>
YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
<S> <C> <C> <C> <C>
Operating Units (end of year)
Owned/operated.................................................................... 465 483 500 528
Revenues (in millions).............................................................. $ 467 $ 510 $ 525 $ 607
Operating Income (Loss) (in millions)............................................... $ 61 $ 52 $ 52 $ 72
Depreciation and Amortization (in millions)......................................... $ 27 $ 40 $ 40 $ 44
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,040 $1,077 $1,062 $1,185
Average Check....................................................................... $ 2.55 $ 2.64 $ 2.72 $ 2.88
<CAPTION>
1993
<S> <C>
Operating Units (end of year)
Owned/operated.................................................................... 564
Revenues (in millions).............................................................. $ 682
Operating Income (Loss) (in millions)............................................... $ (179)(1)
Depreciation and Amortization (in millions)......................................... $ 48
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,255
Average Check....................................................................... $ 3.09
</TABLE>
(1) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $260 million. For a discussion of the write-off and
restructuring and the reasons therefor, see 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 third largest
sandwich chain in the United States. Of the 564 Hardee's restaurants operated by
the Company at December 31, 1993, 544 were located in ten southeastern states.
The Company's Hardee's restaurants provide uniform menus in a fast-food format
targeted to a broad spectrum of customers. The restaurants offer hamburgers,
chicken, roast beef and fish sandwiches, hot dogs, salads and low-fat yogurt, as
well as a breakfast menu featuring Hardee's popular "made-from-scratch"
biscuits. To add variety to its menu, further differentiate its restaurants from
those of its major competitors and increase customer traffic during the
traditionally slower late afternoon and evening periods, HFS added fresh fried
chicken as a menu item in a number of its restaurants beginning in 1991. The
Company first tested fresh fried chicken in one of its market areas in October
1991. Based on the success experienced in this market area and the early success
experienced by HFS, the Company accelerated the introduction of fresh fried
chicken as a regular menu item during 1992 and completed the planned rollout in
1993.
Substantially all of the Company's Hardee's restaurants have drive-thru
facilities, which provided 51% of the chain's revenues in 1993. Most of the
restaurants are open 18 hours a day, seven days a week. Operating hours of
selected units have been extended to 24 hours a day, primarily on weekends.
Hardee's breakfast menu, featuring the chain's signature "made-from-scratch"
biscuits, accounts for approximately 38% of total sales at the Company's
Hardee's restaurants. The Company plans to remodel its Hardee's restaurants
every ten years at a current average cost of $175,000 per unit for major
remodels.
Each Hardee's restaurant is operated under a separate license from HFS.
Each license grants the exclusive right, in exchange for a franchise fee,
royalty payments and certain covenants, to operate a Hardee's restaurant in a
described territory, generally a town or an area measured by a radius from the
restaurant site. Each license has a term of 20 years
4
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from the date the restaurant is first opened for business and is non-cancellable
by HFS, except for the Company's failure to abide by its covenants. Earlier
issued license agreements are renewable under HFS' renewal policy; more recent
license agreements provide for successive five-year renewals upon expiration,
generally at rates then in effect for new licenses. A number of the Company's
licenses are scheduled for renewal. The Company has historically experienced no
difficulty in obtaining such renewals and does not anticipate any problems in
the future.
The Company has a territorial development agreement with HFS which calls
for the Company to open an additional 69 new Hardee's restaurants in its
existing development territory in the southeast (and certain adjacent areas) by
the end of 1996. The Company presently plans to open new restaurants in an
amount not less than that required by the territorial development agreement. It
is anticipated that construction of 69 additional units will require
approximately $69 million in capital expenditures. If the Company determines not
to open the total number of specified units in the territory within the time
provided, its development rights may become non-exclusive. The Company may seek
to expand its Hardee's operations by purchasing existing Hardee's units from HFS
and other franchisees, subject to HFS' right of first refusal, but any such
purchases will not be counted toward the number of new unit openings called for
under the agreement.
Despite annual increases in average unit sales and revenues at Hardee's,
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 Canteen. See 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, the
Company-wide write-off of goodwill and other intangibles, and the bases
therefor.
QUINCY'S
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<CAPTION>
YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
<S> <C> <C> <C> <C>
Operating Units (end of year)
Owned/operated.................................................................... 213 212 216 217
Revenues (in millions).............................................................. $ 263 $ 282 $ 283 $ 290
Operating Income (Loss) (in millions)............................................... $ 18 $ 20 $ 15 $ 11
Depreciation and Amortization (in millions)......................................... $ 17 $ 21 $ 22 $ 22
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,247 $1,324 $1,320 $1,335
Average Check....................................................................... $ 5.30 $ 5.38 $ 5.40 $ 5.32
<CAPTION>
1993
<S> <C>
Operating Units (end of year)
Owned/operated.................................................................... 213
Revenues (in millions).............................................................. $ 279
Operating Income (Loss) (in millions)............................................... $ (154)(1)
Depreciation and Amortization (in millions)......................................... $ 21
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,302
Average Check....................................................................... $ 5.61
</TABLE>
(1) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $164 million. For a discussion of the write-off and
restructuring and the reasons therefor, see Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 2 and 3
to the Consolidated Financial Statements.
Ranked by 1993 sales, Quincy's is the sixth largest steakhouse chain in the
country and one of the largest such chains in the southeastern United States.
The Quincy's chain consists of 213 Company-owned restaurants at December 31,
1993 which are designed to provide families with limited-service dining at
moderate prices. All Quincy's are open seven days a week for lunch and dinner.
The restaurants serve steak, chicken and seafood entrees along with a
buffet-style food bar, called the "Country Sideboard," offering hot foods,
soups, salads and desserts and featuring as many as 87 items at a time. In
addition, weekend breakfast service, which is available at most locations,
allows Quincy's to utilize its asset base more efficiently.
Since 1986 Quincy's has remodeled approximately 85 restaurants to expand
seating capacity from approximately 225 to approximately 280 seats. During 1993,
seven units were remodeled to introduce the new scatter bar format.
The Company also began testing a unit concept conversion in 1993 by
remodeling and converting three steakhouses in Columbia, S.C., to a buffet only
concept. Under the Company's restructuring plan, 90 units have been identified
that currently are not producing adequate returns and, therefore, are to be
converted, sold, or closed. Upon successful completion of its concept conversion
tests, the Company plans to convert most of these units to the buffet only
concept or other concepts under consideration. The concept remodels are expected
to have an average cost of approximately $250,000 per unit.
The average unit sales of Quincy's has increased only slightly during the
four years since the 1989 acquisition of Flagstar. The restructuring
plan is intended to result in increased customer satisfaction and traffic.
However, the Company has not previously attempted a concept conversion for
Quincy's of the type included in the restructuring plan. There can be no
assurance that implementation of the restructuring plan will result in a
long-term reversal of the historical operating trends of the Company.
Consequently, as discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Notes 1 and 2 to the Consolidated
Financial Statements, management estimates that future operating results will
nonetheless continue to be insufficient to recover goodwill and other intangible
assets.
5
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EL POLLO LOCO
El Pollo Loco, which accounted for only 4.2% of the Company's total
restaurant revenues (2.7% of consolidated revenues) in the year ended December
31, 1993, is the leading chain in the quick service chain segment of the
restaurant industry to specialize in flame-broiled chicken. As of December 31,
1993, there were 209 El Pollo Loco units (of which 139 were operated by the
Company, 64 were operated by franchisees and 6 were operated under foreign
licensing agreements). Approximately 92% of these restaurants are located in
southern California. El Pollo Loco directs its marketing at customers desiring
an alternative to other fast food products. The Company's El Pollo Loco
restaurants are designed to facilitate customer viewing of the preparation of
the flame-broiled chicken. El Pollo Loco restaurants generally are open 12 hours
a day, seven days per week. El Pollo Loco restaurants feature a limited, but
expanding menu highlighted by marinated flame-broiled chicken and steak products
and related Mexican food items.
Average unit sales at El Pollo Loco has declined in the four years since
the 1989 acquisition of Flagstar. As a part of the restructuring plan,
the Company has identified 45 units which do not generate an adequate return on
investment, and thus will be sold to franchisees or closed. The Company's
restructuring plan includes reimaging the existing units through a limited
remodeling program, expanded menu items (including fried foods) and an
all-you-can-eat salsa bar. These changes are intended to increase customer
satisfaction and expand the customer market resulting in higher customer
traffic. However, there can be no assurance that the program will result in a
long-term reversal of the historical operating trends of the Company.
Consequently, as discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Notes 1 and 2 to the Consolidated
Financial Statements, management estimates that future operating results will
nonetheless continue to be insufficient to recover goodwill and other intangible
assets.
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, it is usually tested in
selected markets, both with and without market support. A successful menu item
is then incorporated into the restaurant system. In the case of the Hardee's
restaurants, menu development is coordinated through HFS.
Financial and management control of the Company's restaurants is
facilitated by the use of POS systems. Detailed sales reports, payroll data and
periodic inventory information are transmitted to the Company for management
review. These systems economically collect accounting data and enhance the
Company's ability to control and manage these restaurant operations. Such
systems are in use in all of the Company's Hardee's and Quincy's restaurants,
and installation of such systems in the Denny's chain was completed in January
1993.
Denny's size allows it to operate its own distribution and supply
facilities, thereby controlling costs and improving efficiency of food delivery
while enhancing quality and availability of products. Denny's operates seven
regional centers for distribution of substantially all of the ingredients and
supplies used by the Denny's restaurants. As opportunities arise, the Company is
extending these operations to its other restaurant chains. The Company also
operates a food-processing facility in Texas which supplies beef, pork sausage,
soup and many other food products currently used by the Company's restaurants.
Food and packaging products for the Company's Hardee's restaurants are
purchased from HFS and independent suppliers approved by HFS. A substantial
portion of the products for the Company's Hardee's and Quincy's restaurants is
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obtained from MBM Corporation, an independent supplier/distributor. Adequate
alternative sources of supply for required items are believed to be available.
ADVERTISING
Denny's primarily relies upon regional television and radio advertising.
Advertising expenses for Denny's restaurants were $41.1 million for 1993, or
about 3.1% of Denny's system-wide restaurant revenues. Individual restaurants
are also given the discretion to conduct local advertising campaigns. In
accordance with HFS licensing agreements, the Company spends approximately 5.6%
of Hardee's total gross sales on marketing and advertising. Of this amount,
approximately 2.4% of total gross sales is contributed to media cooperatives and
HFS' national advertising fund. The balance is directed by the Company on local
levels. HFS engages in substantial advertising and promotional activities to
maintain and enhance the Hardee's system and image. The Company participates
with HFS in planning promotions and television support for the Company's primary
markets and engages in local radio, outdoor and print advertising for its
Hardee's operations. The Company, together with a regional advertising agency,
advertises its Quincy's restaurants primarily through print, radio and
billboards. Quincy's has focused on in-store promotions as well as regional
marketing. The Company spent approximately 4.1% of Quincy's gross sales on
Quincy's marketing in 1993. During 1993, El Pollo Loco's advertising focused on
promoting large meals and menu variety.
SITE SELECTION
The success of any restaurant depends, to a large extent, on its location.
The site selection process for Company-owned restaurants consists of three main
phases: strategic planning, site identification and detailed site review. The
planning phase ensures that restaurants are located in strategic markets. In the
site identification phase, the major trade areas within a market area are
analyzed and a potential site identified. The final and most time consuming
phase is the detailed 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 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 basis therefor.
CONTRACT FOOD, VENDING AND RECREATION SERVICES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1989 1990 1991 1992
<S> <C> <C> <C> <C>
(IN MILLIONS)
Revenues:
Food and Vending.......................................................... $1,073 $1,071 $1,015 $ 990
Concession and Recreation Services........................................ 249 252 264 287
Total................................................................... $1,322 $1,323 $1,279 $1,277
Operating Income (Loss)..................................................... $ 56 $ 52 $ 46 $ 51
Depreciation and Amortization............................................... $ 61 $ 70 $ 69 $ 68
<CAPTION>
1993
<S> <C>
Revenues:
Food and Vending.......................................................... $1,049
Concession and Recreation Services........................................ 322
Total................................................................... $1,371
Operating Income (Loss)..................................................... $ (313)(1)
Depreciation and Amortization............................................... $ 75
</TABLE>
(1) Operating income reflects the write-off of goodwill and other intangible
assets and the provision for restructuring charges for the year ended
December 31, 1993 of $360 million. For a discussion of the write-off and
restructuring and the reasons therefor, see Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 2 and 3
to the Consolidated Financial Statements.
Through Canteen, the Company conducts its contract food and vending
services on a national basis. According to NATION'S RESTAURANT NEWS (published
August 9, 1993), Canteen is the third largest provider of contract food and
vending services in the United States (on the basis of U.S. system-wide sales).
It had approximately 1,600 food service clients and served approximately 11,400
vending locations at December 31, 1993. Canteen provides its clients with
on-site food preparation, cooking and service as well as vending machines that
dispense a variety of food and beverage products. These services are offered
both independently and in conjunction with each other. Canteen also grants
franchises to distributors to operate contract food service facilities and
vending businesses. In addition, Canteen licenses its trademark internationally
and currently has licensees in Japan and Sweden. Canteen provides both its
franchised distributors and international licensees with marketing assistance,
training, purchasing services and financial and accounting systems.
Canteen's concession and recreation services operations provide food,
beverage, novelty, and ancillary services in sports stadiums, amphitheaters,
arenas and other locations, including five major league baseball parks (Hubert
H. Humphrey Metrodome, Oakland-Alameda County Coliseum, Royals Stadium, Yankee
Stadium and Candlestick Park), five minor league baseball parks and five
professional football stadiums (Arrowhead Stadium, Hubert H. Humphrey Metrodome,
Los Angeles Coliseum, Tampa Stadium and Candlestick Park). It operates food,
beverage and lodging facilities and gift shops and provides other ancillary
services at a number of national parks (including Yellowstone, Mount Rushmore,
Everglades, Bryce Canyon, Zion and the North Rim of the Grand Canyon) and at
state parks in Ohio and New York. In addition, Canteen operates food and
beverage services, gift shops, bus tours and the IMAX Theatre at Spaceport
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USA at the Kennedy Space Center. Contracts to provide these services usually are
obtained on the basis of competitive bids. In most instances, Canteen receives
the exclusive right to provide the services in a particular location for a
period of several years, with the duration of the term often a function of the
required investment in facilities or other financial considerations.
Canteen's contract food service and vending operations are conducted
throughout the United States. Approximately 30% of the Company's revenues from
these operations are derived from industrial plants in the automotive, defense
and other manufacturing industries. These industries have experienced a general
reduction in employment over the past several years, which has been accelerated
by the nation's recent recession. To ameliorate the effects of this trend,
Canteen has increased its penetration of the educational, lifecare and
correctional facility markets and has targeted these (along with concession and
recreation services) as areas of potential growth. These target markets, which
accounted for 39% of Canteen's revenues in 1993, are recession-resistant and, at
present, are not widely served by contract food service companies. Management
believes that growing budgetary pressures on institutions in these target
markets should favor their increasing reliance on private sector contractors who
can provide required food service at lower costs. As part of the restructuring
plan, the Company will de-emphasize vending operations in certain markets
resulting in the sale of certain vending branches, with the related severance
and lease buy-out costs included in the restructuring charges.
Canteen operates through four primary divisions: the Eastern, Central, and
California divisions within the food and vending divisions, and the concession
and recreation services division. These operations are managed on a regional
basis, each of which is led by a regional vice president with responsibility for
operations, sales and marketing in the assigned area. Field operations are
supported by centralized legal, human resources, finance, purchasing, data
processing and other services. Formal training programs on a variety of subjects
are regularly provided to field personnel at 28 learning centers maintained on
clients' premises and at other on-site locations. In addition, management
training is provided at the Company's central training facility in Spartanburg,
South Carolina.
Canteen has improved its performance and responsiveness to clients by
transferring more responsibility to field operations, while at the same time
ensuring that innovative ideas for servicing the customer are shared across
operations. Redundant accounting functions were reduced when Canteen closed 12
field accounting centers in 1993. The restructuring plan includes severance and
other costs related to further consolidation of accounting and administrative
functions. These steps have created a more focused and responsive operational
structure and reduced administrative costs.
Canteen normally contracts with customers for food and vending services on
a local basis, but, in the case of national customers, it may serve many
geographically dispersed facilities. Approximately 47% of Canteen's food service
accounts are conducted under management fee arrangements, whereby Canteen
typically receives a fixed dollar amount or a fixed percentage of revenues in
return for providing food services at price and service levels determined by its
clients. Management fee arrangements are prevalent where companies subsidize
food services as part of the benefits provided to employees. In other food
service accounts, Canteen contracts to provide food service on a profit/loss
basis. In the case of vending operations, service is predominantly provided on a
profit/loss basis, and a commission is usually payable by Canteen to the owner
of the premises on which the vending machines are located. The ability of
Canteen to increase its prices in order to cover its cost increases is an
important factor in maintaining satisfactory profit levels from operations not
conducted pursuant to management fee arrangements. Canteen's ability to increase
prices is materially affected by competitive factors and resistance from
consumers and from firms and institutions on whose premises Canteen's operations
are conducted and whose prior approval is usually required. Food and vending
service contracts generally may be terminated on short notice given by either
side. The equipment, other than vending equipment (which can be moved to another
location), used by Canteen at an on-site operation is usually owned by its
customer.
New business is obtained primarily through solicitation of new customers
and responding to requests for bids. In competitive bid situations, financial
terms as well as other factors, such as reputation and ability to perform,
influence customers' decisions in awarding contracts, particularly in the
private sector. Canteen owns or has rights in all trademarks it believes are
material to its operations. Canteen's sales force is decentralized in order to
tailor sales efforts to customers in various regions. As opportunities arise,
Canteen also seeks to expand its operations through the acquisition of small
regional food service companies that can be integrated into its existing
operations.
During the four years since the 1989 acquisition of Flagstar,
Canteen's food and vending sales volume has declined as a result of a continuing
trend of reduced employment levels at Canteen's business and industrial
accounts. As a consequence of this and other factors, including the
highly-leveraged nature of the Company, and as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
Notes 1 and 2 to the Consolidated Financial Statements, historical results of
the Company have fallen short of the projections prepared at the time of the
acquisition and have been, and are expected to continue to be, insufficient to
recover the carrying value of goodwill and certain other intangible assets.
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COMPETITION
According to the National Restaurant Association, in the four years since
1989, the total food service industry has experienced annual real growth of
approximately 1%. 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%,
the Company's restaurant concepts and Canteen 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 fast-food restaurant chains is especially intense.
Restaurants, particularly those in the fast-food segment, compete on the basis
of name recognition and advertising, the quality and perceived value of their
food offerings, the quality and speed of their service, the attractiveness of
their facilities and, to a large degree in a recessionary environment, price and
perceived value.
Denny's, which has a strong national presence, competes primarily with
regional family chains such as IHOP, Big Boy, Shoney's, Friendly's and
Perkins -- all of which are ranked among the top six midscale restaurant chains.
According to an independent survey conducted during 1993, Denny's had a 14.4%
share of the national market in the family segment.
Hardee's restaurants compete principally with four other national fast food
chains: McDonald's, Burger King, Wendy's and Taco Bell. In addition, Hardee's
restaurants compete with fast-food restaurants serving other kinds of foods,
such as chicken outlets (e.g., Kentucky Fried and Bojangles), family restaurants
(e.g., Shoney's and Friendly's) and dinner houses. Management believes that
Hardee's has the highest breakfast sales per unit of any major fast-food
restaurant chain.
Quincy's primary competitors include Ryan's and Western Sizzlin', both of
which are based in the southeast. Quincy's also competes with other family
restaurants and with dinner houses and fast-food outlets. Nationwide, the top
five chains are Sizzler, Ponderosa, Golden Corral, Ryan's, and Western Sizzlin'.
According to NATION'S RESTAURANT NEWS (published August 9, 1993), Quincy's
ranked sixth nationwide in system-wide sales and third in sales per unit among
the steak chains.
All aspects of Canteen's operations are highly competitive. Competition
takes a number of different forms, including pricing, capital investment,
maintaining food and service standards and securing and maintaining accounts
with firms and institutions. Canteen competes with several national and a large
number of local and regional companies, some of which, including Marriott and
ARA, are substantial in size and scope. In addition, firms and institutions may,
as an alternative to using a food service company such as Canteen, operate
vending and food service businesses themselves. Many Canteen facilities must
also compete with local alternatives such as restaurants, sandwich shops,
convenience stores, delicatessans and other public arenas, convention centers,
and entertainment venues.
As a result of such competition and other factors, the Company's historical
growth, particularly at Denny's, Quincy's, El Pollo Loco and Canteen, have
fallen short of the projections prepared at the date of the acquisition. The
restructuring plan is intended to result in increased customer satisfaction and
traffic. However, there can be no assurance that such changes will result in a
long-term reversal of the historical operating trends of the Company.
Consequently, as discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Notes 1 and 2 to the Consolidated
Financial Statements, management estimates that operating results will continue
to be insufficient to recover goodwill and other intangible assets.
EMPLOYEES
At December 31, 1993, the Company had approximately 123,000 employees, of
whom 88,000 were employed in restaurant operations and 34,000 were engaged in
contract food, vending and recreation services. Less than 1% of the restaurant
employees are union members. Many of the Company's restaurant employees work
part time, and many are paid at or slightly above minimum wage levels.
Approximately 20% of Canteen's employees are unionized. The Company has
experienced no significant work stoppages and considers its relations with its
employees to be satisfactory.
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PART II
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; WRITE-OFF OF GOODWILL AND OTHER INTANGIBLE ASSETS;
RESTRUCTURING CHARGE
The Company's operating results since the 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. See Item 1.
Business for information regarding operating trends of the Company's various
restaurant concepts and Canteen. 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 last four years would continue, and that such
projections indicate an inability to recover the recorded balance of goodwill
and other intangible assets. Accordingly such assets were written off, resulting
in non-cash charges of $1,475 million. Also in response to such trends, the
Company adopted a plan of restructuring that resulted in a separate charge of
$192 million.
While operating revenues increased 2.8% in 1992 and 6.7% in 1993, operating
income for each of the four full years since the 1989 acquisition of
Flagstar has been 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 is the average unit sales at the restaurant concepts and the sales
volume at Canteen's contract food and vending operation. At the time of the
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 and despite increases in average unit sales at Hardee's, average
unit sales at Denny's and Quincy's have increased only slightly and Canteen's
food and vending sales volume has declined. Specifically, for the four years
since the acquisition, average unit sales for Company-owned units have 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
have been achieved as a result of an increase in the number of units at Hardee's
and Denny's and certain regional acquisitions by Canteen, in addition to
increased average unit sales at Hardee's. However, such increased revenues have
not resulted in positive earnings after interest and debt expense. Projections
prepared during the fourth quarter of 1993 indicate 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 sales volume at Canteen would increase or decrease
consistent with the four year historical trends described above. These fourth
quarter 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 provide 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 includes 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
of $192 million includes primarily a non-cash charge of $156 million to
write-down certain assets and incremental cash charges of $36 million for
severance, relocation and other costs. See Note 3 to the Consolidated Financial
Statements for further details.
The write-down of assets under the restructuring plan represents
predominantly non-cash adjustments made to reduce the carrying value of
approximately 240 of the Company's 1,376 Denny's, Quincy's, and El Pollo Loco
restaurants. Approximately 105 Denny's and 45 El Pollo Loco restaurants will be
sold to franchisees or closed over a twelve month period and have been written
down to net realizable value. The Quincy's concept is over-penetrated in a
number of its markets; thus, most of the 90 Quincy's units identified in the
restructuring plan will be converted to another concept with some units closed.
As a result of the conversion to another concept, the estimated amount of the
units' carrying value with no future benefit has been written off. The
write-down of assets also includes a charge of $22 million to establish a
reserve for operating leases primarily related to restaurant units which will be
sold to franchisees or closed. The 240 restaurant units identified in the
restructuring plan had aggregate operating revenues during 1993 of approximately
$227 million and a negative operating cash flow of approximately $2.4 million.
Such units had a net remaining carrying value after the write-down of
approximately $43 million.
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The restructuring plan will consolidate certain Company operations and
eliminate overhead positions in the field and in its corporate marketing,
accounting, and administrative functions. Also, the Company's field management
structure will be reorganized to eliminate a layer of management. The
restructuring charge includes a provision of approximately $25 million for the
related severance, relocation, and office closure costs. The Company's
restructuring plan also includes the decision to fundamentally change the
competitive positioning of Denny's, Quincy's and El Pollo Loco. The Company
anticipates that the restructuring plan will result in reduced general and
administrative costs of approximately $10 million annually.
The Company believes that the restructuring plan is the most appropriate
manner in which to respond to the historical operating trends experienced since
the 1989 acquisition of Flagstar. Management anticipates that such
plan will 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. While cash flows are anticipated to be sufficient to cover interest
costs, management estimates that if historical trends continue, operating
results will nonetheless be insufficient to recover the carrying value of
goodwill and other intangible assets.
1993 COMPARED TO 1992
Operating revenues for 1993 increased by approximately $249.9 million
(6.7%) as compared with 1992. This increase was the result of a $155.9 million
(6.4%) increase in revenues from restaurant operations and a $94.0 million
(7.4%) increase in revenues from Canteen's contract food service operations.
Canteen's concession and recreation revenues increased by $35.0 million (12.2%)
and its food and vending revenues increased by $59.0 million (6.0%) as compared
with 1992, primarily as a result of regional acquisitions. Food and vending
revenues from Canteen's existing customer base continue to be adversely impacted
by reduced employment levels at Canteen's business and industrial accounts.
Denny's revenues increased $80.8 million (5.6%) principally as a result of the
following: an 11-unit increase in the number of Company-owned restaurants, the
addition of 49 net new franchised units, and favorable outside sales at the
Company's distribution and food processing operations. Revenues at Denny's,
however, were adversely affected by severe weather conditions in the first
quarter, which forced the temporary closing of many of its restaurants, by the
delay in implementation of certain promotional programs, and, management
believes, by the negative publicity relating to the litigation described above
in Item 3. Legal Proceedings. As a result of these factors, Denny's increase in
average unit sales of 0.1% included a decrease in customer traffic of 4.1% while
the average check increased 4.4%. Hardee's accounted for a significant portion
of the increase in restaurant operating revenues for the year with a $75.0
million (12.4%) increase in 1993 as compared with 1992, due to a 6.0% increase
in average unit sales and a 36-unit increase in the number of restaurants. The
increase in average unit sales resulted from an 7.2% increase in the average
check offset, in part, by a decrease of 1.1% in customer traffic. The increases
in average unit sales and average check at Hardee's are primarily attributable
to the fresh fried chicken product and the continued development of Hardee's
"Frisco" product line. Quincy's revenues decreased by $11.1 million (3.8%) in
1993 as compared with 1992, primarily due to a 2.5% decrease in average unit
sales combined with a 4-unit decline in the number of units. The decrease in
average unit sales resulted from a decrease in customer traffic of 7.5% which
was offset, in part, by a 5.3% increase in average check. The significant
decrease in traffic at Quincy's as compared with 1992 reflects the impact of a
number of programs that were in place in early 1992 which increased customer
traffic in 1992, but which proved to be more costly than anticipated and were
subsequently refined or discontinued, resulting in the comparative decline in
1993 traffic. Revenues of El Pollo Loco, which account for only 4.2% of total
restaurant operating revenues, increased by $11.2 million (11.5%) in 1993 as
compared to 1992 as a result of a full year's impact in 1993 of 11 franchised
units which were acquired by the Company in the fourth quarter of 1992 and a
1.8% increase in average unit sales.
The Company's operating expenses before considering the effects of the
write-off of goodwill and certain other intangible assets and the provision for
restructuring charges, discussed below, increased by $290.3 million (8.4%) in
1993 as compared with 1992. This increase was primarily attributable to an
increase of $190.3 million (8.5%) in operating expenses before the effects of
the write-off of goodwill and certain other intangible assets and the provision
for restructuring charges relating to the Company's restaurant operations, and a
$98.5 million (8.0%) increase in the operating expenses before the effects of
the write-off of goodwill and certain other intangible assets and the provision
for restructuring charges relating to Canteen's contract food service
operations. Canteen's increased expenses were primarily a result of the
corresponding increase in operating revenues described above. Of the total
increase in operating expenses relating to restaurant operations, a significant
portion ($118.7 million) is attributable to Denny's. The significant increase in
operating expenses before the effects of the write-off of goodwill and certain
other intangible assets and the provision for restructuring charges at Denny's
is due primarily to an increase in product costs of $84.8 million and an
increase in payroll and benefit expense of $30.0 million. These increases
resulted from higher commodity costs, additional labor associated with a Denny's
breakfast promotion (which was discontinued in the second quarter) and an
initiative to improve Denny's service capabilities, one time charges of $8.3
million related to efforts to address claims of discrimination, $1.1 million for
the write-off of an international joint venture, and an increase in the number
of Denny's units. Management expects the discrimination claims at Denny's to
have an ongoing cost impact on the Company at least until resolution of the
matters described above in Item 3. Legal Proceedings. The increase in operating
expenses before the effects of the write-off of
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goodwill and certain other intangible assets and the provision for restructuring
charges at Hardee's of $66.4 million is mainly attributable to increased
revenues and is comprised principally of an increase in payroll and benefits
expenses of $21.0 million and an increase in product costs of $29.9 million.
Conversely, the decrease in operating expenses before the effects of the
write-off of goodwill and certain intangible assets and the provision for
restructuring charges at Quincy's of $8.9 million is attributable to the
decrease in revenues. Quincy's experienced decreases in payroll and benefits
expense of $3.9 million and in product costs of $3.8 million. Corporate and
other expenses before the effects of the write-off of goodwill and certain
intangible assets and the provision for restructuring charges increased by $1.5
million in 1993 as compared with 1992, primarily due to an increase in payroll
and benefits expense of $1.9 million.
Interest and debt expense decreased by $29.6 million in 1993 as compared
with 1992, primarily due to a reduction in the Company's weighted average
borrowing rate following the Recapitalization, the principal elements of which
were consummated in the fourth quarter of 1992. The decrease in interest and
debt expense includes a net decrease of $68.3 million in non-cash charges
related to the accretion of original issue discount on the Company's 17% Senior
Subordinated Discount Debentures Due 2001 which were retired in the fourth
quarter of 1992 as part of the Recapitalization. Non-cash interest expense
related to the accretion of insurance liabilities also decreased by
approximately $7.0 million in 1993 as a result of a change in the method of
determining the discount rate applied to insurance liabilities retroactive to
January 1, 1993, as discussed below. These decreases in non-cash interest
expense were offset, in part, by an increase in cash interest of $46.9 million
from the refinance debt which was issued as part of the Recapitalization.
The Company's accounting change pursuant to Staff Accounting Bulletin No.
92 resulted in a charge of $12.0 million, net of income tax benefits, for the
cumulative effect of the change in accounting principle as of January 1, 1993.
The impact of this change on the Company's 1993 operating results was to
increase operating expenses and decrease interest expense by approximately $7.0
million, respectively.
For the year ended December 31, 1993, the Company recognized extraordinary
losses totalling $26.4 million, net of income tax benefits of $0.2 million. The
extraordinary losses resulted from the write-off of $26.5 million of unamortized
deferred financing costs associated with the prepayment in September 1993 of
$387.5 million of term facility indebtedness and a charge of $0.1 million in
March 1993 related to the repurchase of $741,000 in principal amount of the 10%
Debentures. During the year ended December 31, 1992, the Company recognized
extraordinary losses totalling $155.4 million, net of income tax benefits of
$85.1 million from (i) premiums paid to retire certain indebtedness in
connection with the Recapitalization and the write-off of related unamortized
deferred financing costs, resulting in a charge of $144.8 million, net of income
tax benefits of $83.6 million, (ii) the write-off of unamortized deferred
financing costs associated with the prepayment of a portion of the Company's
indebtedness under its prior credit agreement from the proceeds of the offer and
sale (the "Preferred Stock Offering") in July 1992 of FCI's $2.25 Series A
Cumulative Convertible Exchangeable Preferred Stock, $.10 par value per share
(the "Preferred Stock"), resulting in a charge of $8.8 million, net of income
tax benefits of $1.3 million, and (iii) the defeasance of $7.6 million of
mortgage notes payable resulting in a charge of $1.8 million, net of income tax
benefits of $0.2 million.
1992 COMPARED TO 1991
Operating revenues for 1992 increased by approximately $102.3 million
(2.8%) as compared with 1991. This increase was the result of a $104.3 million
(4.5%) increase in revenues from restaurant operations that was partially offset
by a $2.0 million (0.2%) decrease in revenues from Canteen's contract food
service operations. Canteen's concession and recreation revenues increased by
$22.4 million or 8.5% over 1991. However, Canteen's food and vending revenues
decreased by $24.4 million or 2.4% as compared with 1991 as the food and vending
segment continued to be adversely impacted by reduced employment levels,
particularly in the western and northeastern sections of the United States.
Denny's accounted for $20.0 million of the $104.3 million increase in revenues
from restaurant operations. The increase in revenues of Denny's was primarily
attributable to a 17-unit increase in the number of Company-owned restaurants.
Average unit sales decreased 0.1% as a result of a 4.2% decrease in customer
traffic, offset by a 4.3% increase in the average check. The decrease in traffic
during 1992 resulted from intense competition and discounting in the midscale
market segment, limited television exposure during the second half of 1992, and
the continuing weakness of the west coast economy. The increase in the average
check at Denny's primarily reflects a shift in consumer preferences to
higher-priced menu items. Denny's also added 52 new franchise units during the
year. Hardee's accounted for $81.2 million of the increase in restaurant
operating revenues, primarily due to an 11.5% increase in average unit sales and
a 28-unit increase in the number of restaurants. The increase in average unit
sales resulted from a 5.9% increase in the average check at the Company's
Hardee's restaurants combined with an increase of 5.3% in customer traffic.
These increases are believed to be attributable, in part, to the introduction in
the Company's Hardee's restaurants of fresh fried chicken as a new menu item in
300 units and the introduction in July 1992 of the "Frisco Burger" sandwich in
all units. Quincy's contributed $6.6 million to the increase in restaurant
operating revenues. The increase at Quincy's reflects a 1.1% increase in average
unit sales, primarily due to a 2.6% increase in customer traffic (principally
for breakfast service), which was offset in part by a 1.5% decrease in the
average check. Quincy's results also reflect a number of programs which were
introduced in the first quarter and were designed to increase customer traffic.
Such programs, which proved to be more costly than originally anticipated, were
refined or eliminated in the second quarter. Revenues of El Pollo Loco, which
accounted for only 4.0%
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of total restaurant operating revenues, decreased by $3.5 million as a result of
a decrease in the number of Company-owned restaurants for the first three
quarters of 1992 as compared to the same period in 1991.
The Company's overall operating expenses increased by $79.9 million in 1992
as compared with 1991. This increase was primarily attributable to an increase
of $82.3 million (3.8%) in operating expenses of the restaurant operations,
partially offset by a $7.0 million (0.6%) decrease in operating expenses of
Canteen's contract food service operations. The increases in the operating
expenses of the restaurant operations reflected the increased revenues and
consisted primarily of increased payroll and benefit expenses at Denny's ($7.3
million), Hardee's ($22.6 million) and Quincy's ($0.8 million). Aggressive
product cost management and favorable commodity prices reduced the effects of
product costs which increased at Hardee's ($22.4 million) and Quincy's ($7.9
million), and decreased at Denny's ($10.6 million). The product cost increases
at Quincy's were due in part to the programs discussed in the preceding
paragraph. The decrease in Canteen's operating expenses was due principally to a
$8.5 million decline in product costs. Canteen's operating expenses were also
reduced in the first quarter by approximately $2.6 million of unusual credits
resulting from settlements of various insurance matters. Corporate and other
expenses increased by $4.6 million, primarily due to a full year's impact in
1992 of certain support function expenses that, in 1991, were reflected in the
restaurants' and Canteen's operating expenses.
Interest and debt expense decreased by $1.1 million in 1992 as compared
with 1991, due primarily to a net decrease in cash interest of $7.4 million in
1992 due to lower interest rates on outstanding variable rate indebtedness,
principal payments made during the year (including prepayment of a portion of
the Company's term loan under its prior credit agreement with proceeds of the
Preferred Stock Offering) and the issuance of the Preferred Stock. This decrease
was offset, in part, by an increase of $8.5 million in non-cash charges
principally related to the accretion of discounts recorded on certain
self-insurance liabilities.
For the year, the Company recognized extraordinary losses totalling $155.4
million, net of income tax benefits of $85.1 million. The extraordinary losses
resulted primarily from premiums paid to retire certain indebtedness in
connection with the Recapitalization and the write-off of related unamortized
deferred financing costs, resulting in a charge of $144.8 million, net of income
tax benefits of $83.6 million, and from the write-off of unamortized deferred
financing costs associated with the prepayment of a portion of the Company's
term loan under its prior credit agreement from the proceeds of the Preferred
Stock Offering, resulting in a charge of $8.8 million, net of income tax
benefits of $1.3 million. In addition, in May 1992 the Company defeased $7.6
million of mortgage notes payable resulting in a charge of $1.8 million, net of
income tax benefits of $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has met its liquidity needs and capital
requirements with internally generated funds and external borrowings. The
Company expects to continue to rely on internally generated funds, supplemented
by available working capital advances under its Amended and Restated Credit
Agreement, dated as of October 26, 1992, among Flagstar and TWS Funding, Inc.,
as borrowers, certain lenders and co-agents named therein, and Citibank, N.A.,
as managing agent (as amended, from time to time, the "Restated Credit
Agreement"), and other external borrowings, as its primary sources of liquidity
and believes that funds from these sources will be sufficient for the next
twelve months to meet the Company's working capital, debt service and capital
expenditure requirements.
Although the Company reported net losses in 1992 and 1993, those losses
have been attributable in major part to non-cash charges, consisting principally
of the write-off of goodwill and certain intangible assets, depreciation of
tangible assets, amortization of intangible assets and goodwill, accretion of
original issue discount, non-cash charges for extraordinary items related to
refinancings and defeasance of indebtedness, and non-cash charges related to the
cumulative effect of changes in accounting principles. The following table sets
forth, for each of the years indicated, a calculation of the Company's cash from
operations available for debt repayment and capital expenditures:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1992 1993
<S> <C> <C>
(IN MILLIONS)
Net loss................................................................................... $(231.1) $(1,700.8)
Write-off of goodwill and certain intangible assets........................................ -- 1,474.8
Provision for restructuring charges........................................................ -- 192.0
Non-cash charges........................................................................... 307.6 263.5
Deferred income tax benefits............................................................... (20.8) (85.4)
Extraordinary items, net................................................................... 155.4 26.4
Cumulative effect of changes in accounting principles, net................................. 17.8 12.0
Changes in certain working capital items................................................... (15.0) 1.4
Increase in other assets and increase (decrease) in other liabilities, net................. 0.1 (27.1)
Cash from operations available for debt repayment and capital expenditures................. $ 214.0 $ 156.8
</TABLE>
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The provision for restructuring charges of $192.0 million recorded during
1993 includes approximately $36.0 million in incremental cash charges. Such cash
charges, less approximately $6.5 million expended in 1993, are expected to
require funding predominantly over a period of approximately twelve months.
Included in the $156 million of primarily non-cash charges is a reserve of $22
million for the present value of operating leases, net of estimated sublease
rentals, related to restaurant units that will be sold to franchisees or closed
and offices to be closed. This liability will be liquidated over the remaining
terms of the operating leases. The Company plans to fund the cash portion of the
restructuring through the sale of certain Denny's and El Pollo Loco restaurant
units to franchisees, increased cash flows from operations as a result of
reduced general and administrative expenses and increased royalties on newly
franchised restaurants, and borrowings under the Restated Credit Agreement.
During 1993, the Company sold in a public offering (the "1993 Offering")
$275 million aggregate principal amount of 10 3/4% Senior Notes Due 2001 (the
"10 3/4% Notes") and $125 million aggregate principal amount of 11 3/8% Senior
Subordinated Debentures Due 2003 (the "11 3/8% Debentures"). Proceeds of the
1993 Offering were used to reduce the term facility under the Restated Credit
Agreement. Although the interest rates payable on the 10 3/4% Notes and 11 3/8%
Debentures are higher than the rate paid by the Company under the term facility
partially refinanced thereby, the 1993 Offering and the related amendment to the
Restated Credit Agreement served to extend the scheduled maturities of the
Company's long-term indebtedness and thereby provide the Company with additional
financial flexibility.
The Restated Credit Agreement includes a working capital and letter of
credit facility of up to $350.0 million with a working capital sublimit of $200
million and a letter of credit sublimit of $245 million. The amendment to the
Restated Credit Agreement consummated in conjunction with the 1993 Offering
included, among other things, a modification to the former requirement that
working capital advances under the credit facility be repaid in full and not
reborrowed for at least 30 consecutive days during any 13-month period but at
least once during each year to provide that working capital advances under the
credit facility be paid down to a maximum borrowing thereunder of $100 million
in 1993, reducing to $50 million in 1998, for such 30 day period in each year.
Such amendment also made less restrictive certain financial covenants under the
Restated Credit Agreement. An additional amendment to the Restated Credit
Agreement was consummated in 1993 for the Company to use up to $50 million of
net cash proceeds from the disposition of Denny's and El Pollo Loco restaurant
units to acquire new Denny's restaurant units and refurbish other existing units
and to exclude from limitations on capital expenditures (as defined) and
investments (as defined) up to $25.6 million of cash or debt assumed in the
purchase of certain franchisee units. For additional information see Item 13.
Certain Relationships and Related Transactions -- Description of Indebtedness.
The Restated Credit Agreement and the indentures governing the Company's
outstanding public debt contain negative covenants that restrict, among other
things, the Company's ability to pay dividends, incur additional indebtedness,
further encumber its assets and purchase or sell assets. In addition, the
Restated Credit Agreement includes provisions for the maintenance of a minimum
level of interest coverage, limitations on ratios of indebtedness to earnings
before interest, taxes, depreciation and amortization (EBITDA) and limitations
on annual capital expenditures.
At December 31, 1993 scheduled debt maturities of long-term debt for the
years 1994 through 1998 are as follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
(IN MILLIONS)
1994.................................................................................... $ 41.7
1995.................................................................................... 42.5
1996.................................................................................... 55.3
1997.................................................................................... 96.7
1998.................................................................................... 119.6
</TABLE>
In addition to scheduled maturities of principal, approximately $265.0
million of cash will be required in 1994 to meet interest payments on long-term
debt (including interest on variable rate term indebtedness under the Restated
Credit Agreement of approximately $11.0 million, assuming an annual interest
rate of 6.3%).
The projections of future operating results prepared in the fourth quarter
of 1993, which resulted in the conclusion that goodwill and other intangibles
were impaired (see Operating Trends; Write-Off of Goodwill and Other Intangible
Assets; Restructuring Charge), assume that the historical operating trends
experienced by the Company since the 1989 acquisition will continue in the
future. If such trends do continue, 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 expanding its contract food service business, as
well as those associated with remodeling and maintaining its existing
restaurants and facilities. During 1993, total capital expenditures were
approximately $225.5 million, of which approximately $83.0 million was used to
open new restaurants, $22.0 million was used for new products equipment, $61.2
million was applied to expand and maintain the Company's contract food service
business, and $59.3 million was expended to upgrade and maintain existing
facilities. Of these expenditures, approximately $77.1 million were financed
through capital leases and secured borrowings. Capital expenditures during 1994
are expected to total approximately $185 million, of which approximately $60
million is expected to be financed externally.
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The Company is able to operate with a substantial working capital
deficiency because (i) restaurant operations and most other food service
operations are conducted primarily on a cash (and cash equivalent) basis with a
low level of accounts receivable, (ii) rapid turnover allows a limited
investment in inventories, and (iii) accounts payable for food, beverages and
supplies usually become due after the receipt of cash from the related sales. At
December 31, 1993 the Company's working capital deficiency was $304.6 million as
compared with $284.0 million at the end of 1992. Such increase is attributable
primarily to an increase in restructuring and other liabilities which was
partially offset by an increase in receivables and inventories from the
acquisition of contract food service operations during 1993.
During November 1992, the Financial Accounting Standards Board issued
Statement No. 112 "Employers' Accounting for Postemployment Benefits" which
requires that benefits provided to former or inactive employees prior to
retirement be recognized as an obligation when earned, subject to certain
conditions, rather than when paid. The Company does not expect Statement No. 112
to have a material impact on the Company's operations and will implement this
statement during the first quarter of 1994.
On April 11, 1994, Standard & Poor's Corporation downgraded the long-term
credit ratings on Flagstar's outstanding senior debt securities from B+ to B and
on its subordinated debt securities and FCI's Preferred Stock from B- to CCC+.
Moody's Investors' Service, Inc. has also indicated that it is reviewing the
ratings of Flagstar's debt securities for a possible downgrade. As a result of
this action, certain payments by the Company relating to a subsidiary's mortgage
financing will become due and payable on a monthly, rather than semi-annual,
basis. See Item 13. Certain Relationships and Related
Transactions -- Description of Indebtedness -- Mortgage Financings. Although the
Company has not yet had an opportunity to evaluate the effect of such downgrade,
management does not currently anticipate a significant impact on the Company's
liquidity or ongoing operations.
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