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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, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-9364
FLAGSTAR CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3027522
(State or other jurisdiction (I.R.S. employer
of incorporation or identification no.)
organization)
203 EAST MAIN STREET 29319-9966
SPARTANBURG, SOUTH CAROLINA (Zip code)
(Address of principal
executive offices)
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Registrant's telephone number, including area code: (864) 597-8000.
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $74,818,531 based upon the closing sales price
of registrant's Common Stock on March 7, 1996 of $3.88 per share.
As of March 26, 1996, 440 shares of registrant's Common Stock, $0.01 par
value per share, were outstanding, all of which are owned by the registrant's
parent, Flagstar Companies, Inc.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (J)
(1) (A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business................................................................................................... 1
Item 2. Properties................................................................................................. 9
Item 3. Legal Proceedings.......................................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........................................................ 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................... 12
Item 6. Selected Financial Data.................................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13
Item 8. Financial Statements and Supplementary Data................................................................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................... 19
Item 11. Executive Compensation..................................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 19
Item 13. Certain Relationships and Related Transactions............................................................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 24
INDEX TO FINANCIAL STATEMENTS.......................................................................................... F-1
SIGNATURES.............................................................................................................
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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 four 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, Puerto Rico, and four foreign
countries, including 508 in California and Florida. According to an independent
survey conducted in 1995, 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 593 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 42% 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 family 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 217
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 two distinct segments of the restaurant
industry -- full-service and quick-service -- 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 333 of its Company-owned restaurants and added a net of seven
(both franchised and Company-owned) new restaurants to its chains (reflecting an
increase of 82 franchised and international units offsetting a 75 unit decline
in Company-owned restaurants).
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. 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 which 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 of its now sold 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 1 and 3 to the Consolidated Financial
Statements for additional information. These operating trends have generally
continued through 1995.
RESTAURANTS
The Company believes its restaurant operations benefit from the diversity
of the restaurant concepts represented by its four 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 a strong market position in the
Southeast.
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During the fourth quarter of 1993, the Company approved a restructuring
plan for its restaurant concepts which included the following key features: (1)
the identification of units for sale, closure or conversion to another concept;
(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. As of December
31, 1995, the Company had closed or sold 69 restaurant units referred to in (1)
above and intends to close or dispose of an additional 17 units generally in
1996. Management intends to operate the remaining units. As of December 31,
1995, substantially all of the incremental changes relating to (2) and (3) above
had been completed. During 1995, the Company identified 36 underperforming units
for sale or closure generally during 1996. The carrying value of these units
have been written-down to estimated fair value based on sales of similar units
or other estimates of selling price, less cost to sell. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 1, 2, and 3 to the Consolidated Financial Statements for additional
information.
DENNY'S
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YEAR ENDED DECEMBER 31,
1991 1992 1993 1994
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Operating Units (end of year)
Owned/operated.................................................................... 996 1,013 1,024 978
Franchised........................................................................ 330 382 431 512
International..................................................................... 65 65 59 58
Revenues (in millions) (1).......................................................... $1,429 $1,449 $1,546 $1,548
Operating Income (Loss) (in millions) (1)........................................... $ 128 $ 130 $ (625)(2) $ 123
Depreciation and Amortization (in millions) (1)..................................... $ 75 $ 82 $ 88 $ 68
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,232 $1,231 $1,233 $1,248
Franchised........................................................................ $1,040 $1,065 $1,057 $1,060
Average Check (4)................................................................... $ 4.37 $ 4.56 $ 4.76 $ 4.75
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1995
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Operating Units (end of year)
Owned/operated.................................................................... 933
Franchised........................................................................ 596
International..................................................................... 24
Revenues (in millions) (1).......................................................... $1,491
Operating Income (Loss) (in millions) (1)........................................... $ 97(3)
Depreciation and Amortization (in millions) (1)..................................... $ 70
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,283
Franchised........................................................................ $1,086
Average Check (4)................................................................... $ 4.86
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(1) Includes distribution and processing operations. The distribution operations
were sold September 8, 1995.
(2) Operating income reflects the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges of $716
million for the year ended December 31, 1993. 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 1 and 3 to the Consolidated Financial Statements.
(3) Operating income reflects a provision for restructuring of $5 million and a
charge for impaired assets of $24 million for the year ended December 31,
1995. For a discussion of the provision for restructuring and charge for
impaired assets, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 1 and 2 to the Consolidated
Financial Statements.
(4) Amount is calculated on an average unit sales basis for owned/operated
units.
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 1995 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 four foreign countries, with principal
concentrations in California, Florida, Texas, Arizona, Washington, Ohio,
Illinois, and Pennsylvania. 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 involved all restaurants within a market area and included an
updated exterior look, new signage, an improved interior layout with more
comfortable seating and enhanced lighting. Reimaging also included a new menu,
new menu offerings, new uniforms, and enhanced dessert offerings, including in
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some markets Baskin-Robbins(Register mark) ice cream. The Company completed the
reimaging of 306 restaurant units during 1994 and 1995. During 1995 management
curtailed the efforts of its reimaging program in order to focus its attention
on programs specifically designed at improving customer service, restaurant
efficiency, and value positioning. In 1996, the Company plans to complete
limited exterior refurbishments to enhance the curb appeal of the remaining 627
Company-owned restaurants.
To achieve improvements in customer service and restaurant efficiency,
Denny's introduced the "Managing Partners Program" during the fourth quarter of
1995. Under this program, a managing partner will typically have full
accountability for three to five restaurants and report directly to the
president of Denny's. Managing partners will be compensated for improving
customer service and running their restaurants efficiently. This program is
expected to provide additional support to the restaurants by flattening the
organizational structure and creating more open communications between the
restaurants and Denny's senior management.
The Company's POS system provides hourly sales reports, cash control and
marketing data and information regarding product volumes. POS systems provide
guest traffic information for labor scheduling, provide information to evaluate
more effectively the impact of menu changes on sales, and reduce the paperwork
of managers.
Marketing initiatives in 1996 will focus on the positioning of Denny's as
the price value leader within its segment, offering value menus at breakfast and
lunch through its tiered menu items priced at $1.99, $2.99, $3.99, and $4.99.
The Company rolled-out its value menu system-wide in January 1996. 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 1996 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. As of December 31, 1995, 15 units have been
identified for sale or closure generally during 1996. The 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 1995, the Company added a net of 84 new Denny's franchises, of which
36 units were previously owned by the Company, bringing total franchised units
to 596, or 38% 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
1995, Denny's realized $47.7 million of revenues from franchising. Franchisees
also purchase food and supplies from a Company subsidiary.
HARDEE'S
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YEAR ENDED DECEMBER 31,
1991 1992 1993 1994
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Operating Units (end of year)
Owned/operated.................................................................... 500 528 564 595
Revenues (in millions).............................................................. $ 525 $ 607 $ 682 $ 701
Operating Income (Loss) (in millions)............................................... $ 52 $ 72 $ (179)(1) $ 76
Depreciation and Amortization (in millions)......................................... $ 40 $ 44 $ 48 $ 41
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,062 $1,185 $1,255 $1,206
Average Check (3)................................................................... $ 2.72 $ 2.88 $ 3.09 $ 3.11
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1995
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Operating Units (end of year)
Owned/operated.................................................................... 593
Revenues (in millions).............................................................. $ 660
Operating Income (Loss) (in millions)............................................... $ 4(2)
Depreciation and Amortization (in millions)......................................... $ 42
Average Unit Sales (in thousands)
Owned/operated.................................................................... $1,104
Average Check (3)................................................................... $ 3.16
</TABLE>
(1) Operating income reflects the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges of $260
million for the year ended December 31, 1993. 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 1 and 3 to the Consolidated Financial Statements.
(2) Operating income reflects a provision for restructuring of $8 million and a
charge for impaired assets of $24 million for the year ended December 31,
1995. For a discussion of the provision for restructuring and charge for
impaired assets see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 1 and 2 to the Consolidated
Financial Statements.
(3) Amount is calculated on an average unit sales basis.
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
593 Hardee's restaurants operated by the Company at December 31, 1995, 572 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,
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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 accelerated the
introduction of fresh fried chicken as a regular menu item during 1992 and
completed the rollout in 1993.
Substantially all of the Company's Hardee's restaurants have drive-thru
facilities, which provided 52% of the chain's revenues in 1995. 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 42% of total sales at the Company's
Hardee's restaurants.
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's territorial development agreement with HFS which called for
the Company to open a specified number of Hardee's restaurants in a development
territory in the Southeast (and certain adjacent areas) by the end of 1996 was
terminated during the fourth quarter of 1995. Termination of such agreement
makes the Company's development rights non-exclusive in the development
territory. As a result, other Hardee's franchisees along with the Company are
permitted to open Hardee's restaurants in such territory.
During 1995, the Company experienced an 8.6% decline in comparable store
sales at its Hardee's restaurants due to continued promotions and discounting by
quick-service competitors. In an effort to reverse these negative trends, the
Company has taken a variety of steps, including the introduction of the new
$0.79 Big Value Menu, as well as, the engagement of a new advertising agency to
create and enhance advertising for the value pricing and other Hardee's
programs. In addition, the Company is currently working together with HFS and
other large franchisees to develop a brand positioning which will better
differentiate Hardee's in the marketplace. As of December 31, 1995, 26 units
have been identified for sale or closure generally during 1996.
QUINCY'S
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YEAR ENDED DECEMBER 31,
1991 1992 1993 1994
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Operating Units (end of year)
Owned/operated.............................................................. 216 217 213 207
Revenues (in millions)........................................................ $ 283 $ 290 $ 279 $ 284
Operating Income (Loss) (in millions)......................................... $ 15 $ 11 $ (154)(1) $ 23
Depreciation and Amortization (in millions)................................... $ 22 $ 22 $ 21 $ 11
Average Unit Sales (in thousands)
Owned/operated.............................................................. $1,320 $1,335 $1,302 $1,350
Average Check (3)............................................................. $ 5.40 $ 5.32 $ 5.61 $ 5.79
<CAPTION>
1995
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Operating Units (end of year)
Owned/operated.............................................................. 203
Revenues (in millions)........................................................ $ 294
Operating Income (Loss) (in millions)......................................... $ 22(2)
Depreciation and Amortization (in millions)................................... $ 12
Average Unit Sales (in thousands)
Owned/operated.............................................................. $1,438
Average Check (3)............................................................. $ 5.88
</TABLE>
(1) Operating income reflects the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges of $164
million for the year ended December 31, 1993. 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 1 and 3 to the Consolidated Financial Statements.
(2) Operating income reflects a charge for impaired assets of $3 million for the
year ended December 31, 1995. For a discussion of the charge for impaired
assets see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 1 and 2 to the Consolidatd Financial
Statements.
(3) Amount is calculated on an average unit sales basis.
Ranked by 1995 sales, Quincy's is the sixth largest family steakhouse
(grill buffet) chain in the country and one of the largest such chains in the
southeastern United States. The Quincy's chain consists of 203 Company-owned
restaurants at December 31, 1995 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.
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During 1995, the Company continued its reimaging program at Quincy's with a
total of 35 restaurant units reimaged. After experimenting with a number of
formats at Quincy's during the years 1993 through 1995, including enhancements
to the scatter bar buffet and a few buffet only restaurants, the Company has
concluded that it can achieve its greatest success with Quincy's by moving away
from the low margin buffet concept and repositioning itself with a simpler menu
which emphasizes "value-steak." As of December 31, 1995, 4 units have been
identified for sale or closure generally during 1996.
EL POLLO LOCO
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YEAR ENDED DECEMBER 31,
1991 1992 1993 1994
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Operating Units (end of year)
Owned/operated.................................................................. 111 120 139 127
Franchised...................................................................... 83 77 64 78
International................................................................... 17 13 6 4
Revenues (in millions)............................................................ $ 101 $ 97 $ 109 $ 133
Operating Income (Loss) (in millions)............................................. $ (2) $ -- $(128)(1) $ 9
Depreciation and Amortization (in millions)....................................... $ 8 $ 8 $ 10 $ 6
Average Unit Sales (in thousands)
Owned/operated.................................................................. $ 808 $ 814 $ 829 $ 932
Franchised...................................................................... $ 816 $ 877 $ 918 $ 893
Average Check (2)................................................................. $6.37 $6.36 $6.54 $6.59
<CAPTION>
1995
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Operating Units (end of year)
Owned/operated.................................................................. 103
Franchised...................................................................... 112
International................................................................... 2
Revenues (in millions)............................................................ $ 127
Operating Income (Loss) (in millions)............................................. $ 13
Depreciation and Amortization (in millions)....................................... $ 5
Average Unit Sales (in thousands)
Owned/operated.................................................................. $1,019
Franchised...................................................................... $ 858
Average Check (2)................................................................. $ 6.77
</TABLE>
(1) Operating income reflects the write-off of goodwill and certain other
intangible assets and the provision for restructuring charges of $126
million for the year ended December 31, 1993. For a discussion of the
write-off and restructuring and reasons therefor, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Notes 1 and 3 to the Consolidated Financial Statements.
(2) Amount is based on an average unit sales basis for owned/operated units.
El Pollo Loco is the leading chain in the quick-service segment of the
restaurant industry to specialize in flame-broiled chicken. Approximately 91% 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.
Since 1993, the Company has been able to increase average annual unit sales
at its El Pollo Loco restaurants by over 10%. Much of its recent progress can be
attributed to the remodels of units, successful menu positioning, and dual
branding of the Foster's Freeze dessert line. During 1995, the Company remodeled
57 of its Company-owned El Pollo Loco units. As of December 31, 1995, 8 units
have been identified for sale or closure generally during 1996.
Based on El Pollo Loco's recent success, the Company is optimistic about
future expansion of the El Pollo Loco concept, principally through franchising
in Texas and in other California markets. By the year 2000, the Company hopes to
add as many as 250 additional El Pollo Loco restaurant units. In the first
quarter of 1996, the Company secured the international rights to the El Pollo
Loco brand to facilitate expansion opportunities in Mexico and other countries.
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.
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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 Denny's, Hardee's, Quincy's and El
Pollo Loco restaurants.
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 ("MBM"), an independent supplier/distributor. In
connection with the 1995 sale of its distribution subsidiary, Proficient Food
Company ("PFC"), to MBM, the Company entered into new long-term supply contracts
with MBM for the supply of products to its Hardee's and Quincy's units and with
PFC for the supply of products to Denny's and El Pollo Loco. Adequate
alternative sources of supply for required items are believed to be available.
ADVERTISING
Denny's primarily relies upon national and regional television and radio
advertising. Advertising expenses for Denny's restaurants were $49.2 million for
1995, representing approximately 2.6% 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 approximately 6.8% of Hardee's total gross sales on marketing and
advertising during 1995. Of this amount, approximately 2.1% 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 television, print, radio and billboards. In addition, Quincy's
has focused on in-store promotions. The Company spent approximately 5.1% of
Quincy's gross sales on Quincy's marketing in 1995. During 1995, El Pollo Loco
spent approximately 5.1% of its system-wide restaurant sales on advertising,
primarily through regional television, radio, and print media in its market
areas.
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.
6
<PAGE>
COMPETITION
According to the National Restaurant Association, in the past five years,
the total food service industry experienced annual real growth of approximately
1.8%. 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 1.8%, 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:
full-service restaurants, quick-service restaurants, and other miscellaneous
establishments. Since the early 1970s, growth in eating places has been driven
primarily by quick-service restaurants. On a segment-wide basis, the
full-service and quick-service restaurants currently have approximately the same
revenues and an equal share of the market. Full-service restaurants include the
mid-scale (family-style and family-steak), casual dining and upscale (fine
dining) segments. The mid-scale segment, which includes Denny's and Quincy's, is
characterized by complete meals, menu variety and moderate prices ($4-$7 average
check), and includes a small number of national chains, many local and regional
chains, and thousands of independent operators. The casual dining segment, which
typically has higher menu prices ($8-$16 average check) and availability of
alcoholic beverages, primarily consists of regional chains and small
independents. The quick-service segment, which includes Hardee's and El Pollo
Loco, is characterized by low prices ($3-$5 average check), finger foods, fast
service, and convenience. Large sandwich, pizza, and chicken chains
overwhelmingly dominate the quick-service segment.
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 Big Boy, Shoney's, Friendly's, Perkins and
Cracker Barrel -- all of which are ranked among the top six midscale restaurant
chains. According to an independent survey conducted during 1995, Denny's had a
14.5% 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. According to an independent survey conducted during 1995, Hardee's had a
17.1% share of the Southeast market in the hamburger segment.
Quincy's primary competitors include Ryan's and Golden Corral, both of
which are based in the Southeast. Quincy's also competes with other family
restaurants and with casual dining 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 7, 1995),
Quincy's ranked sixth nationwide in system-wide sales and third in sales per
unit among the family steakhouse (grill buffet) chains. According to an
independent survey conducted during 1995, Quincy's had a 19.3% share of the
Southeast market in the family steakhouse segment.
El Pollo Loco's business is split approximately evenly between the lunch
daypart and the dinner daypart. During the lunch daypart, El Pollo Loco competes
primarily with McDonald's, Burger King, Taco Bell and Carl's Jr. During the
dinner daypart, El Pollo Loco's menu mix is more heavily oriented towards
bone-in chicken in large meal combinations (8 or 12 pieces), the majority of
which is taken home by consumers. El Pollo Loco's major competitors during the
dinner daypart are KFC, Popeyes, Boston Market, and the take-out and delivery
pizza restaurants (e.g., Pizza Hut and Domino's). According to an independent
survey conducted during 1995, El Pollo Loco had a 35.8% share of the Los Angeles
DMA (over 5 million households) in the chicken segment, and had a 4.6% share of
the total of all of the quick-service restaurants segment.
7
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each executive
officer of FCI, along with certain executive officers of Flagstar.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL OCCUPATION OR
NAME AGE EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
<S> <C> <C>
James B. Adamson 48 Chairman, 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).
C. Robert Campbell 51 Vice President and Chief Financial Officer of FCI and Executive Vice President and
Chief Financial Officer of Flagstar (October 1995-present); Executive Vice President of
Human Resources and Administration for Ryder System, Inc. (1991-1995); Executive Vice
President -- Finance of Vehicle Leasing Division of Ryder System, Inc. (1981-1991).
Edna K. Morris 44 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 51 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).
James R. Kibler 41 Senior Vice President of Flagstar and Chief Operating Officer of Flagstar Enterprises,
Inc. (1991-present); President of Flagstar Enterprises, Inc. (1994-present); President
of Quincy's Restaurants, Inc. (November 1995-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 39 Vice President and General Counsel of FCI and Senior Vice President and General Counsel
of Flagstar (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).
John A. Romandetti 45 Senior Vice President of Flagstar and President of El Pollo Loco (December
1995-present); Vice President of Operations for Burger King Corporation (1981-1995).
Kent M. Smith 58 Senior Vice President and Special Assistant to the Chairman 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).
Paul R. Wexler 52 Senior Vice President, Procurement and Distribution of Flagstar (October 1995-present);
Vice President, Procurement and Quality Assurance -- Marriott International
(1991-1995).
Donna M. Mascolo 41 Vice President and Controller of Flagstar (February 1996-present); Vice President and
Broker Associate, Transworld Business Brokers, Inc., (1995-present); President, DonMar
Global Business Services (1995-present); Regional Vice President and Chief Financial
Officer, Kentucky Fried Chicken International Latin American/Carribbean Region
(1990-1994).
William H. Mitchell 43 Vice President, Real Estate and Development of Flagstar (September 1995-present); Vice
President, Real Estate for Flagstar Enterprises, Inc. (1991-1995); Vice President of
Real Estate and Construction for Denny's, Inc.
Honorio J. Padron 43 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).
</TABLE>
8
<PAGE>
EMPLOYEES
At December 31, 1995, the Company had approximately 88,000 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, 1995:
<TABLE>
<CAPTION>
LAND LEASED
LAND AND AND LAND AND
BUILDING BUILDING BUILDING
OWNED OWNED LEASED
<S> <C> <C> <C>
TYPE OF RESTAURANT
DENNY'S............... 265 37 631
HARDEE'S.............. 287 104 202
QUINCY'S.............. 155 42 6
EL POLLO LOCO......... 9 34 60
Total............... 716 217 899
</TABLE>
9
<PAGE>
The number and location of the Company's restaurants in each chain as of
December 31, 1995 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.................................................... 32 41 -- -- -- 1
Arkansas................................................... 1 5 3 -- -- --
California................................................. 234 107 -- -- 103 104
Colorado................................................... 25 11 -- -- -- --
Connecticut................................................ 5 3 -- -- -- --
Delaware................................................... 3 -- -- -- -- --
Florida.................................................... 103 64 57 41 -- --
Georgia.................................................... -- 24 10 11 -- --
Hawaii..................................................... 4 2 -- -- -- --
Idaho...................................................... -- 7 -- -- -- --
Illinois................................................... 48 9 -- -- -- --
Indiana.................................................... 15 9 -- -- -- --
Iowa....................................................... 1 5 -- -- -- --
Kansas..................................................... 9 4 -- -- -- --
Kentucky................................................... -- 20 -- -- -- --
Louisiana.................................................. 8 2 1 -- -- --
Maine...................................................... -- 4 -- -- -- --
Maryland................................................... 14 16 -- -- -- --
Massachusetts.............................................. 9 -- -- -- -- --
Michigan................................................... 39 1 -- -- -- --
Minnesota.................................................. 13 3 -- -- -- --
Mississippi................................................ 2 2 41 8 -- --
Missouri................................................... 30 6 -- -- -- --
Montana.................................................... -- 2 -- -- -- --
Nebraska................................................... -- 6 -- -- -- --
Nevada..................................................... 12 4 -- -- -- 4
New Hampshire.............................................. 2 1 -- -- -- --
New Jersey................................................. 14 2 -- -- -- --
New Mexico................................................. 2 12 -- -- -- --
New York................................................... 19 14 -- -- -- --
North Carolina............................................. 8 12 61 39 -- --
North Dakota............................................... -- 3 -- -- -- --
Ohio....................................................... 36 22 19 1 -- --
Oklahoma................................................... 9 9 -- -- -- --
Oregon..................................................... 5 18 -- -- -- --
Pennsylvania............................................... 52 3 2 -- -- --
Rhode Island............................................... -- -- -- -- -- --
South Carolina............................................. 9 5 125 42 -- --
South Dakota............................................... -- 1 -- -- -- --
Tennessee.................................................. 3 10 115 12 -- --
Texas...................................................... 66 47 -- -- -- 3
Utah....................................................... 7 10 -- -- -- --
Vermont.................................................... -- 2 -- -- -- --
Virginia................................................... 20 6 3 3 -- --
Washington................................................. 50 18 -- -- -- --
West Virginia.............................................. -- 3 -- -- -- --
Wisconsin.................................................. 13 7 -- -- -- --
Wyoming.................................................... -- 5 -- -- -- --
Canada..................................................... 10 16 -- -- -- --
International.............................................. -- 24 -- -- -- 2
Total.................................................... 933 620 593 203 103 114
</TABLE>
At December 31, 1995, the Company owned 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 "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
FCI, Flagstar, El Pollo Loco and Denny's, along with several 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, who are current and former El Pollo Loco franchisees 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.
10
<PAGE>
Asserting various legal theories, the plaintiffs seek actual and punitive
damages in excess of $90 million, together with declaratory and certain other
equitable relief. The defendants have denied all material allegations, and
certain defendants have filed cross-complaints against various plaintiffs in the
action for breach of contract and other claims. Since the filing of the action
the defendants have entered into settlements with five of the plaintiffs leaving
three remaining in the lawsuit. The cost of the settlements, which included the
purchase of 15 operating EPL franchises, was in the aggregate amount of $20.6
million. With respect to the remaining plaintiffs, the litigation is in the
final stages of discovery, with a trial date to hear the outstanding issues in
the case, anticipated sometime during 1996.
The Company has received proposed deficiencies from the Internal Revenue
Service (the "IRS") for federal income taxes and penalties totalling
approximately $12.7 million. The proposed deficiencies relate to examinations of
certain income tax returns filed by the Company for the seven fiscal periods
ended December 31, 1992. 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.
11
<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 26, 1996, 440 shares of common stock of
Flagstar were outstanding, all of which are owned by FCI.
Dividends were not paid by Flagstar during 1994 or 1995. See "Management's
Discussion and Analysis of Financial Condition and Result 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, 1995. Such data generally 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1991 (1) 1992 (1) 1993 (1) 1994 (1) 1995
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT RATIOS)
Income Statement data:
Operating revenue.................................. $2,338.7 $2,443.0 $2,615.2 $2,666.0 $2,571.5
Operating income (loss)............................ 179.3 196.7 (1,102.4)(2) 211.5(3) 98.2(4)
Loss from continuing operations (5)................ (54.1) (45.3) (1,252.7) (31.0) (147.1)
Ratio of earnings to fixed charges (6)............. -- -- -- -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (6)................ 69.8 51.8 1,332.4 33.5 147.2
Balance Sheet data (at end of period):
Current assets (7)................................. 95.3 98.4 122.2 186.1 285.4
Working capital (deficiency) (7)(8)................ (326.7) (256.3) (273.0) (205.6) (122.2)
Net property and equipment......................... 1,256.9 1,269.9 1,166.8 1,196.0 1,104.0
Total assets....................................... 3,186.9 3,177.4 1,545.4 1,594.0 1,513.8
Long-term debt..................................... 2,255.3 2,321.3 2,491.2 2,217.6 2,146.1
</TABLE>
(1) Certain amounts for the four years ended December 31, 1994 have been
reclassified to conform to the 1995 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) Operating income for the year ended December 31, 1994 reflects a recovery of
restructuring charges of $7.2 million.
(4) Operating income for the year ended December 31, 1995 reflects a provision
for restructuring charges of $15.9 million and a charge for impaired assets
of $51.4 million.
(5) The Company has reclassified as discontinued operations Preferred Meal
Systems, Inc., which was sold in 1991, Canteen Corporation, a food and
vending subsidiary, sold in 1994, TW Recreational Services, Inc. ("TWRS"), a
recreation services subsidiary, and Volume Services ("VS"), Inc., a stadium
concessions subsidiary. TWRS and VS were sold during 1995.
(6) 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 from continuing operations before income taxes and
fixed charges excluding capitalized interest. Fixed charges are the total
interest expense 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.
(7) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $503.0 million, $480.8 million, $103.2 million, and
$77.3 million as of December 31, 1991 through 1994, respectively. Such
assets held for sale relate to the Company's food and vending and
concessions and recreation services subsidiaries.
(8) A negative working capital position is not unusual for a restaurant
operating company. 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.
12
<PAGE>
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. The decrease in
the working capital deficiency from December 31, 1994 to December 31, 1995
is due primarily to an increase in cash following the 1995 sales of the
Company's (i) distribution subsidiary, Proficient Food Company, net of
current assets and liabilities of such subsidiary, and (ii) the concession
and recreation services subsidiaries.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data and the Consolidated Financial Statements" and other more
detailed financial information appearing elsewhere herein.
1995 COMPARED TO 1994
OPERATING TRENDS: During 1995, the Company experienced comparable store
sales increases at Denny's, Quincy's, and El Pollo Loco, due to the success of
the Denny's value menu strategy, the impact of remodelings at Quincy's, and El
Pollo Loco's successful menu positioning, dual-branding of Foster's Freeze, and
favorable results from remodeled restaurants. However, the Company experienced a
significant decline in comparable store sales at Hardee's due to continued
competitive promotions and discounting by quick-service competitors. Primarily
as a result of lower revenues at Hardee's, the Company experienced a reduction
in operating income (before considering the provision for (recovery of)
restructuring charges and charge for impaired assets) of $38.8 million. As a
result, the trends experienced since the 1989 acquisition generally have
continued through 1995; operating income has been insufficient to cover the
interest and debt expense (although operating cash flows have been sufficient to
cover interest costs), resulting in continued losses from continuing operations.
The external factors that have contributed to such trends, including increased
competition and intensive pressure on pricing due to discounting, are expected
to continue.
In response to these factors, during 1995, management instituted the
changes described above that have contributed to improving sales on a comparable
store basis at Denny's, Quincy's, and El Pollo Loco. Management continues to
explore alternatives in an attempt to reverse the negative sales trends at
Hardee's. During 1995 the Company began the upgrading of all marketing programs
by hiring new marketing agencies for all its restaurant concepts and completed
the analytical stage of a comprehensive business transformation program which is
intended to result in better customer support at the restaurant level, increased
operational efficiencies, and a more streamlined organizational structure. In
addition, the proceeds from the sale of certain operations have partially been
used to reduce the Company's long-term debt; however, the majority of such
proceeds have been retained in short-term liquidity or have been used to fund
capital expenditures.
OPERATING REVENUES: Operating revenues from continuing operations for 1995
decreased by approximately $94.5 million (3.5%) as compared with 1994 primarily
reflecting the sale of non-core assets coupled with continued weakness at
Hardee's.
Denny's revenues decreased by $57.3 million (3.7%), of which $53.0 million
was attributable to a decrease in outside revenues at the Company's food
processing and distribution subsidiaries. Such revenue decrease reflects the
sale of the Company's distribution subsidiary during the third quarter of 1995.
The remaining decrease of $4.3 million is primarily due to a 45-unit net
decrease in the number of Company-owned restaurants at December 31, 1995 as
compared to December 31, 1994 which was partially offset by an 84-unit increase
in the number of franchised restaurants. Comparable store sales at Denny's
increased 2.4% during 1995 as compared with 1994 reflecting increases in average
check of 2.3% and 0.2% in traffic. During 1995, Denny's completed remodels on
182 Company-owned restaurants.
Hardee's revenues decreased during 1995 by $40.6 million to $659.9 million
from $700.5 million during 1994 principally due to a decline of 8.6% in
comparable store sales. The decrease in comparable store sales resulted from a
10.0% decline in traffic which was mitigated by a 1.6% increase in average
check. Although Hardee's traffic continues to be impacted by continued
aggressive promotions and discounting by quick service competitors, active
involvement by the Company with Hardee's Food Systems, Inc. and a continued
focus on a value menu strategy is planned to address this issue. During 1995,
the Company remodeled 59 Hardee's restaurants.
Quincy's revenues increased by $9.9 million (3.5%) during 1995 as compared
with 1994 despite a 4-unit decrease in the number of restaurants operated at
December 31, 1995 as compared to December 31, 1994. Such increase in revenues is
primarily due to a 4.8% increase in comparable store sales as a result of
increases of 3.3% in traffic and 1.5% in average check. During 1995, the
increased traffic is partially attributable to the remodeling of 35 of its
Quincy's restaurants.
13
<PAGE>
Revenues at El Pollo Loco decreased $6.4 million (4.8%) to $126.7 million
during 1995 from $133.1 million during 1994 primarily due to a 24-unit net
decrease in the number of Company-owned restaurants following the sales of units
to franchisees. Comparable store sales at Company-owned El Pollo Loco units
increased by 2.0% reflecting an increase in average check of 2.4% which was
partially offset by a 0.4% decrease in traffic. During 1995, El Pollo Loco
completed remodels on 57 of its Company-owned restaurants.
OPERATING EXPENSES: The Company's operating expenses from continuing
operations, before considering the effects of the provision for (recovery of)
restructuring charges and charge for impaired assets, decreased by $55.7 million
(2.3%) in 1995 as compared with 1994.
Operating expenses before the provision for restructuring charges and
charge for impaired assets at Denny's decreased $59.9 million principally due to
decreases in product costs including $43.6 million attributable to Denny's
distribution subsidiary which was sold in September 1995. Operating expenses for
1994 include twelve months of charges for the food distribution subsidiary;
whereas, 1995 includes approximately nine months of such charges. Denny's
operating expenses before the provision for restructuring charges and charge for
impaired assets were also reduced during 1995 by gains on the sale of
restaurants to franchisees of $20.7 million, including a gain on the sale of
Denny's joint venture in Mexico for $6.0 million. This compares to gains in 1994
of $8.8 million. Such decreases in operating expenses were offset, in part, by
an increase in advertising expense of $6.0 million.
At Hardee's, operating expenses before considering the effects of the
provision for restructuring charges and charge for impaired assets decreased by
$0.8 million. This reflects increased expenses during 1995 of $12.8 million for
general and administrative, payroll and benefits, restructuring of field
management, workers' compensation charges, and expenses related to promotional
programs. Such increases were more than offset by a $13.6 million decrease in
product costs directly associated with decreased revenues in 1995.
An increase in operating expenses before considering the effects of the
provision for restructuring charges and charge for impaired assets of $9.8
million at Quincy's is principally attributable to increases in payroll and
benefits expense of $4.4 million, product costs of $3.3 million associated with
an increase in revenues during 1995, and advertising expense of $2.7 million.
Operating expenses before considering the effects of the provision for
restructuring charges and charge for impaired assets at El Pollo Loco decreased
by $9.6 million during 1995 due primarily to a 24-unit net decrease at December
31, 1995 as compared with December 31, 1994 in the number of Company-operated
restaurants following the sale of restaurants to franchisees. El Pollo Loco's
operating expenses before considering the effects of the provision for
restructuring charges and charge for impaired assets during 1995 included gains
on the sale of restaurants of $3.8 million as compared with $1.2 million during
1994.
Corporate and other expenses before considering the effects of the
provision for (recovery of) restructuring charges and charge for impaired assets
increased by $4.8 million during 1995 as compared with 1994 due primarily to
increased charges of $4.2 million related to various management recruiting,
training, and information services initiatives.
RESTRUCTURING: Effective in the fourth quarter of 1995, as a result of a
comprehensive financial and operational review, the Company approved a
restructuring plan. The plan generally involves the reduction in personnel and a
decision to outsource the Company's information systems function. Operating
expenses for 1995 reflect a provision for restructuring of $15.9 million
including charges for severance of $5.4 million, $7.6 million for the write-down
of computer hardware and other assets, and $2.9 million for various other
charges. Approximately $7.5 million of the restructuring charges represent cash
charges of which approximately $0.6 million was incurred and paid in 1995.
ACCOUNTING CHANGE: During 1995 the Company adopted Statement of Financial
Accounting Standards No. 121 which resulted in a charge to operating expenses of
$51.4 million for the write-down of Denny's, Hardee's, and Quincy's restaurant
properties. This charge reflects the write-down of 99 units which the Company
will continue to operate and an additional 36 units which will be closed or sold
generally in 1996. See Note 2 to the Consolidated Financial Statements for
further details. As a result of this write-down, the Company estimates that its
depreciation expense in future years will be reduced by an average of $6.0
million annually over the estimated remaining useful life of such assets.
INTEREST AND DEBT EXPENSE: Total interest and debt expense from continuing
and discontinued operations decreased by $18.1 million in 1995 as compared to
1994 ($18.5 million decrease attributable to discontinued operations offset by a
$0.4 million increase in continuing operations) principally as a result of a
reduction in interest expense of $7.0 million following the payment during June
1994 of the principal amount ($170.2 million) outstanding under the term
14
<PAGE>
facility of the Company's Restated Credit Agreement then outstanding and certain
other indebtedness upon the sale of the Company's food and vending subsidiary, a
reduction in interest expense of $4.0 million during 1995 for other indebtedness
which was related to such subsidiaries which have been sold, and a decrease in
interest expense of $6.1 million during 1995 related to interest rate exchange
agreements.
DISCONTINUED OPERATIONS: The Company's concession and recreation services
businesses were sold during 1995 and resulted in a net gain of $77.9 million.
These businesses are accounted for as discontinued operations and recorded
operating revenues of $322.3 million during 1995, a decrease of $3.1 million
(0.9%) from 1994. Revenues related to the stadium concession subsidiary
increased $9.2 million during 1995 to $190.8 million from $181.6 million in
1994. Operating income and depreciation and amortization expense of the
concession subsidiary were $2.4 million and $10.9 million, respectively, during
1995 as compared with $6.5 million and $9.8 million, respectively in 1994. Such
decrease in operating income during 1995 is due principally to a decrease in
average attendance at major league baseball games during the 1995 season.
Revenues related to the recreation services subsidiary decreased by $12.3
million during 1995 to $131.5 million from $143.8 million during 1994. Operating
income and depreciation and amortization expense of the recreation services
subsidiary for 1995 were $14.7 million and $3.8 million, respectively, as
compared with $16.3 million and $4.7 million, respectively, during 1994. Such
decrease in revenues and operating income of the recreation services subsidiary
is due principally to the loss of the service contract at the Kennedy Space
Center during 1995.
EXTRAORDINARY ITEMS: The Company recognized an extraordinary gain totaling
$0.5 million, net of income taxes, during 1995 which represents a gain on the
repurchase of $24,975,000 principal amount of certain indebtedness, net of the
charge-off of the related unamortized deferred financing costs. During 1994, the
Company also recognized an extraordinary loss totaling $11.7 million, net of
income tax benefits of $0.2 million representing the charge-off of unamortized
deferred financing costs associated with the prepayment in June 1994 of senior
bank debt.
1994 COMPARED TO 1993
OPERATING REVENUES: 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, primarily during the third and
fourth quarters of 1994, was the 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 comparable store sales which more
than offset a net decrease of 6 units. The increase in comparable store sales at
Qunicy'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%.
OPERATING EXPENSE: The Company's overall operating expenses before
considering the effects of the write-off of goodwill and certain other
intangible assets and the provisions for restructuring charges in 1993 increased
by $0.5 million in 1994 as compared with 1993.
15
<PAGE>
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 1993 restructuring plan.
INTEREST AND DEBT EXPENSE: Interest and debt expense increased by $13.9
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 Statement for additional information relating to
the interest rate exchange agreements.
DISCONTINUED OPERATIONS: 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. See Note 13 to the accompanying Consolidated Financial
Statements for additional information.
WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLES AND RESTRUCTURING CHARGES IN
1993
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 (1990-1993) would continue, and that such projections indicated an
inability to recover the recorded balance of goodwill and certain other
intangible assets. The Company's operating results since the 1989 acquisition of
Flagstar had 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. 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).
While total operating revenues increased 2.8% in 1992 and 6.7% in 1993,
operating income for each of the four full years from the Company's 1989
acquisition of Flagstar through 1993 were insufficient to cover the Company's
interest and debt expense as discussed under "Operating Trends", and this trend
has continued through 1995. 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 expenses and amortization
of goodwill and other intangibles has been the comparable store 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 comparable store
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
16
<PAGE>
become profitable within several years. However, since the 1989 acquisition
through the end of 1993, and despite increases in comparable store sales at
Hardee's, comparable store sales at Denny's and Quincy's increased only slightly
and food and vending sales volume declined through 1993. (Since 1993, comparable
store sales have increased at Denny's and Quincy's, however, Hardee's comparable
store sales have declined during that time.) Projections prepared during the
fourth quarter of 1993 indicated that, if the four years trends in customer
traffic and other operating factors were to continue future operating income
less interest and debt expenses would continue to be insufficient to recover the
carrying value of goodwill and other intangible assets. The projections assumed
that comparable store sales at each of the restaurants 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 borrowings 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 that
may result from successful restructuring and reimaging programs instituted by
management in 1993, since management determined, based on all information then
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, closure, or conversion of
restaurants, a reduction in personnel, and a reorganization of certain
management structures. The restructuring charge (for continuing operations)
included primarily a non-cash charge of $130.7 million (including $15 million
related to reserves for operating leases) to write-down assets, and incremental
charges of $27.9 million for severance, relocation, and other costs. The
restructuring charge for discontinued operations was $33.4 million. In
conjunction with this plan, 240 units were identified for sale, closure, or
conversion to another concept. As of December 31, 1995, 69 units had been
closed, sold, or converted to another concept, and 17 units are intended to be
disposed of generally during 1996. Management intends to operate the remaining
units. As of December 31, 1995, substantially all of the other incremental
charges identified in conjunction with the 1993 restructuring have been
incurred.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has met its liquidity 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, including by means of a second amended and
restated credit agreement (the "New Facility") anticipated to be consummated in
early 1996, the "Restated Credit Agreement"), and other external borrowings, as
its primary sources of liquidity. The Company 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 a net loss in 1995 attributable in major part to
non-cash charges, including a provision for restructuring charges and a charge
for impaired assets related to certain restaurants properties. 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 YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
Net income (loss)..................................................... $ 349.9 $(69.4)
Charge for impaired assets............................................ -- 51.4
Provision for (recovery of) restructuring charges..................... (7.2) 15.9
Non-cash charges (credits)............................................ 128.7 120.3
Deferred income tax benefits.......................................... (2.8) (3.5)
Discontinued operations............................................... (392.7) (77.2)
Extraordinary items, net.............................................. 11.8 (0.5)
Change in certain working capital items............................... (24.4) (6.1)
Change in other assets and other liabilities, net..................... (22.9) (31.0)
Cash from (used in) operations available for debt repayment and
capital expenditures................................................ $ 40.4 $ (0.1)
</TABLE>
17
<PAGE>
The Restated Credit Agreement currently consists of a working capital and
letter of credit facility of up to $160.1 million with a working capital
sublimit of $78.6 million and a letter of credit sublimit of $125.0 million. By
its terms, the Restated Credit Agreement expires in June 1996. The Company is
currently in the process of renewing its bank credit agreement. It is
anticipated that the New Facility will consist of a $150 million working capital
and letter of credit facility secured by a pledge of the stock of the Company's
operating subsidiaries and all of its and their respective trademarks,
tradenames, copyrights, hedge agreements, tax sharing agreements and bank
accounts. The New Facility, as presently contemplated, would terminate March 31,
1999, subject to mandatory prepayments and commitment reductions under certain
circumstances upon the Company's sale of assets or incurrence of additional
debt. The New Facility would also include certain financial and other operating
covenants generally consistent with those provided in the Restated Credit
Agreement currently in effect.
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, 1995 scheduled debt maturities of long-term debt for the
years 1996 through 2000 are as follows:
<TABLE>
<CAPTION>
AMOUNT
(IN MILLIONS)
<S> <C>
1996........................................................................ $ 38.8
1997........................................................................ $ 38.5
1998........................................................................ $ 32.7
1999........................................................................ $ 26.3
2000........................................................................ $ 322.2
</TABLE>
In addition to scheduled maturities of principal, approximately $240
million of cash will be required in 1996 to meet interest payments on long-term
debt and dividends on FCI's $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock, par value $0.10 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
Intangibles and Restructuring Charges in 1993"), assumed that the historical
operating trends experienced by the Company since the 1989 acquisition will
continue in the future. Such trends have generally continued through 1995. 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 1995, total capital expenditures were approximately
$129.2 million, of which approximately $71.7 million was used to reimage
existing restaurants, $7.2 million was used to open new restaurants, and $50.3
million was used to maintain existing facilities. Of these expenditures,
approximately $5.5 million were financed through capital leases. Capital
expenditures during 1996 are expected to total approximately $60 million to $80
million. The Company currently expects to finance such capital expenditures
internally through continuing operations and asset sales.
The Company is able to operate with a substantial working capital
deficiency because (i) restaurant operations and most 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, 1995, the Company's working capital deficiency was $122.2 million as
compared with $128.3 million at the end of 1994. Such decrease is attributable
primarily to an increase in cash of approximately $130.2 million as a result of
the sale of the Company's distribution and concession and recreation services
businesses during 1995, net of the current assets and liabilities of the
distribution subsidiary and the net assets of the concession and recreation
services businesses which had been included in working capital.
On February 22, 1996, the Company entered into an agreement with Integrated
Systems Solutions Corporation (ISSC). The ten year agreement for $323 million
provides for ISSC to manage and operate the Company's information
18
<PAGE>
systems, as well as develop and implement new systems and applications to
enhance information technology for the Company's corporate headquarters,
restaurants, and field management. ISSC will oversee data center operations,
applications development and maintenance, voice and data networking, help desk
operations, and point-of-sale technology.
On March 1, 1995, the Company entered into an agreement to acquire the
Coco's and Carrows restaurant chains, consisting of approximately 350 units
operating in the family dining segment. The purchase is subject to the signing
of certain ancillary agreements and other customary terms and conditions. If
consummated, the purchase price (including estimated expenses) would consist of
$131 million of cash ($56 million of which will be financed by bank term loans),
the issuance of notes payable to the seller of $150 million, and the assumption
of certain capital lease obligations of approximately $31.5 million.
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 of
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is omitted pursuant to General
Instruction (J)(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is omitted pursuant to General
Instruction (J)(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is omitted pursuant to General
Instruction (J)(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The information required by this item is omitted pursuant to General
Instruction (J)(2)(c) of Form 10-K.
DESCRIPTION OF INDEBTEDNESS
The following summary of the principal terms of the current 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 on Form 10-K. 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
19
<PAGE>
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. The sale of PFC, TWRS, and VS during 1995 further
reduced the Revolving Credit Facility to $160 million at December 31, 1995.
Under the Restated Credit Agreement, the Revolving Credit Facility is scheduled
to terminate on June 17, 1996 (the "Termination Date"), the second anniversary
of the repayment of the Term Facility. The Company is currently negotiating the
terms of a new working capital and letter of credit facility. For additional
information concerning such New Facility see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
Flagstar has obtained the waivers and consents necessary under the Restated
Credit Agreement to permit it to enter into and perform its obligations under
the Coco's and Carrows transactions described elsewhere herein. See
"Management's Discussion and Analysis of Financial Condition -- Liquidity and
Capital Resources."
The Restated Credit Agreement as currently in effect 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 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 the sale and leaseback transactions, and certain exchanges of real
property, fixtures and improvements for other real property, fixtures and
improvements; (vi) investments, other than certain intercompany indebtedness,
certain investments made in connection with joint venture or franchise
arrangements, certain loans to employees, investments in new operations,
properties or franchises subject to certain limitations and certain other
exceptions; (vii) payment of dividends or other distributions with respect to
capital stock of Flagstar, other than dividends from Flagstar to FCI to enable
FCI to repurchase Common Stock and FCI stock options from employees in certain
circumstances, payments to FCI with respect to fees and expenses incurred in the
ordinary course of business by FCI in its capacity as a holding company for
Flagstar, payments under a tax sharing agreement among FCI, Flagstar and its
subsidiaries and certain other exceptions; (viii) sales or dispositions of the
capital stock of subsidiaries other than sales by certain subsidiaries of
Flagstar to Flagstar or certain other subsidiaries and certain other exceptions;
(ix) the conduct by Flagstar or certain of its subsidiaries of business
inconsistent with its status as a holding company or single purpose subsidiary,
as the case may be, or entering into transactions inconsistent with such status;
and (x) the prepayment of Debt, other than certain payments of Debt in existence
on the date of the Restated Credit Agreement, certain payments to retire Debt in
connection with permitted dispositions of assets, certain prepayments of
advances under the Restated Credit Agreement and certain other exceptions.
20
<PAGE>
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 6.50:1.00
applicable on or after December 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).
CAPITAL EXPENDITURES TEST. Flagstar and its subsidiaries are prohibited
from making capital expenditures in excess of $195,000,000, $210,000,000, and
$200,000,000 in the aggregate for the fiscal years ending December 31, 1992
through 1994, respectively. For the fiscal year ending December 31, 1995
Flagstar and its subsidiaries are prohibited from making capital expenditures in
excess of the sum of $175,000,000 plus the available cash proceeds received
during such period from the PFC and TWRS sales transactions, subject to certain
restrictions, including, without limitation, a reduction equal to the amount of
certain prepayments of funded debt during such period. Subsequent to 1995,
capital expenditures in excess of $275,000,000 in the aggregate are prohibited
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 September 30,
1995 through March 31, 1996, an amount equal to the sum of (i) a specified
amount, ranging from $125,000,000 for the Rolling Period ending September 30,
1995 to $65,000,000 for the Rolling Period ending March 31, 1996, plus (ii) the
available cash proceeds received during such rolling period from the PFC and
TWRS sales transactions, subject to certain restrictions, including, without
limitation, a reduction equal to the amount of certain prepayments of funded
debt during such period.
"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
21
<PAGE>
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 and (e) extraordinary or unusual
losses included in net income (net of taxes to the extent not already deducted
in determining such losses) 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 period of more than one year from such
date, including, without limitation, all amounts of Funded Debt required to be
paid or prepaid within one year from the date of determination.
"Rolling Period" is defined in the Restated Credit Agreement to mean, for
any fiscal quarter, such quarter and the three preceding fiscal quarters.
"Total Debt" outstanding on any date is defined in the Restated Credit
Agreement to mean the sum, without duplication, of (a) the aggregate principal
amount of all Debt of Flagstar and its subsidiaries, on a consolidated basis,
outstanding on such date to the extent such Debt constitutes indebtedness for
borrowed money, obligations evidenced by notes, bonds, debentures or other
similar instruments, obligations created or arising under any conditional sale
or other title retention agreement with respect to property acquired or
obligations as lessee under leases that have been or should be, in accordance
with generally accepted accounting principles, recorded as capital leases, (b)
the aggregate principal amount of all Debt of Flagstar and its subsidiaries , on
a consolidated basis, outstanding on such date constituting direct or indirect
guarantees of certain Debt of others and (c) the aggregate principal amount of
all Funded Debt of Flagstar and its subsidiaries on a consolidated basis
consisting of obligations, contingent or otherwise, under acceptance, letter of
credit or similar facilities; PROVIDED that advances under the Revolving Credit
Facility shall be included in Total Debt only to the extent of the average
outstanding principal amount thereof outstanding during the 12-month period
ending on the date of determination.
Under the Restated Credit Agreement, an event of default will occur if,
among other thing, (i) any person or group of two or more persons acting in
concert (other than KKR, Gollust Tierney & Oliver 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 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"). 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
22
<PAGE>
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 thereof at 100% of the principal amount thereof, together in each case
with accrued interest.
Interest on the 10 3/4% Notes is payable semi-annually in arrears on each
March 15 and September 15. They will mature on September 15, 2001. The 10 3/4%
Notes may not be redeemed prior to maturity, except that prior to September 15,
1996, the Company may redeem up to 35% of the original aggregate principal
amount of the 10 3/4% Notes, at 110% of their principal amount, plus accrued
interest, with that portion, if any, of the net proceeds of any public offering
for cash of the Common Stock that is used by FCI to acquire from the Company
shares of common stock of the Company.
THE SENIOR SUBORDINATED DEBENTURES. Interest on the 11.25% Debentures is
payable semi-annually in arrears on each May 1 and November 1. They will mature
on November 1, 2004. The 11.25% Debentures will be redeemable, in whole or in
part, at the option of Flagstar, at any time on or after November 1, 1997,
initially at a redemption price equal to 105.625% of the principal amount
thereof to and including October 31, 1998, at decreasing prices thereafter to
and including October 31, 2002 and thereafter at 100% of the principal amount
thereof, together in each case with accrued interest.
Interest on the 11 3/8% Debentures is payable semi-annually in arrears on
each March 15 and September 15. They will mature on September 15, 2003. The
11 3/8% Debentures will be redeemable, in whole or in part, at the option of the
Flagstar, at any time on or after September 15, 1998, initially at a redemption
price equal to 105.688% of the principal amount thereof to and including
September 14, 1999, at 102.844% of the principal amount thereof to and including
September 14, 2000 and thereafter at 100% of the principal amount thereof,
together in each case with accrued interest.
THE 10% DEBENTURES. Interest on the 10% Debentures is payable semi-annually
in arrears on each May 1 and November 1. The 10% Debentures mature on November
1, 2014. Unless previously redeemed, the 10% Debentures are convertible at any
time at the option of the holders thereof by exchange into shares of Common
Stock at a conversion price of $24.00 per share, subject to adjustment. The 10%
Debentures are redeemable, in whole or in part, at the option of the Company
upon payment of a premium. The Company is required to call for redemption on
November 1, 2002 and on November 1 of each year thereafter, through and
including November 1, 2013, $7,000,000 principal amount of the 10% Debentures. A
"Change of Control" having occurred on November 16, 1992, holders of the 10%
Debentures had the right, under the indenture relating thereto, to require the
Company, subject to certain conditions, to repurchase such securities at 101% of
their principal amount together with interest accrued to the date of purchase.
On February 19, 1993, FCI made such an offer to repurchase the $100 million of
10% Debentures then outstanding. 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, 1995,
$202.7 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 $12.5 million
annually for the years 1996 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 had 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.
23
<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 (incorporated by reference to Exhibit 3.5 to Flagstar's 1994
Form 10-K, File No. 1-9364).
* 4.1 Indenture between Flagstar and United States Trust Company of New York, as Trustee, relating to the 10% Debentures
(including the form of security) (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form
S-4 (No. 33-48923) of Flagstar (the "11.25% Debentures S-4")).
* 4.2 Supplemental Indenture, dated as of August 7, 1992, between Flagstar and United States Trust Company of New York,
as Trustee, relating to the 10% Debentures (incorporated by reference to Exhibit 4.9A to the 11.25% Debentures
S-4).
* 4.3 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and Assignment of
Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company, dated July 12, 1990
(incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to the Registration Statement on Form
S-1 (No. 33-29769) of FCI (the "Form S-1 Amendment")).
* 4.4 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended and restated as of
July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-1 Amendment).
* 4.5 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust Company relating
to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-1 Amendment).
* 4.6 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.15 to the 11.25% Debentures S-4).
* 4.7 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.16 to the 11.25% Debentures S-4).
* 4.8 Mortgage Note in the amount of $98,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.17 to the 11.25% Debentures S-4).
* 4.9 Indenture between Secured Restaurants Trust and The Citizens and Southern National Bank of South Carolina, dated as
of November 1, 1990, relating to certain Secured Bonds (incorporated by reference to Exhibit 4.18 to the 11.25%
Debentures S-4).
* 4.10 Amended and Restated Trust Agreement between Spartan Holdings, Inc., as Depositor for Secured Restaurants Trust,
and Wilmington Trust Company, dated as of October 15, 1990 (incorporated by reference to Exhibit 3.3 to the
Registration Statement on Form S-11 (No. 33-36345) of Secured Restaurants Trust (the "Form S-11")).
* 4.11 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8% Notes
(incorporated by reference to Exhibit 4.13 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992 Form 10-K")).
* 4.12 Supplemental Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8%
Notes (incorporated by reference to Exhibit 4.14 to the 1992 Form 10-K).
* 4.13 Form of 10 7/8% Note (incorporated by reference to Exhibit 4.15 to the 1992 Form 10-K).
* 4.14 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11.25%
Debentures (incorporated by reference to Exhibit 4.16 to the 1992 Form 10-K).
* 4.15 Form of 11.25% Debenture (incorporated by reference to Exhibit 4.17 to the 1992 Form 10-K).
</TABLE>
24
<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).
* 4.28 Eighth Amendment to the Amended and Restated Credit Agreement dated as of January 6, 1995 (incorporated by
reference to FCI's 1995 Form 10-K, File No. 0-18051 (the "1995 Form 10-K").
* 4.29 Ninth Amendment to the Amended and Restated Credit Agreement dated as of August 24, 1995 (incorporated by reference
to the 1995 Form 10-K).
* 4.30 Tenth Amendment to the Amended and Restated Credit Agreement dated as of November 21, 1995 (incorporated by
reference to the 1995 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).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.11 Form of Non-Qualified Stock Option Award Agreement pursuant to FCI 1990 Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Form S-1 Amendment).
*10.12 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.1 to the
Form S-11).
*10.13 Mortgage Note in the amount of $521,993,982, made by Flagstar Enterprises, Inc. in favor of Spartan Holdings, Inc.,
dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.12
to the 11.25% Debentures S-4).
*10.14 Mortgage Note in the amount of $210,077,402, made by Quincy's Restaurants, Inc. in favor of Spartan Holdings, Inc.,
dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.13
to the 11.25% Debentures S-4).
*10.15 Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of November 1, 1990
(incorporated by reference to Exhibit 10.14 to the 11.25% Debentures S-4).
*10.16 Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of November 1, 1990
(incorporated by reference to Exhibit 10.15 to the 11.25% Debentures S-4).
*10.17 Insurance and Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.16 to the 11.25% Debentures S-4).
*10.18 Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.17 to the 11.25% Debentures S-4).
*10.19 Bank Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.18 to the 11.25% Debentures S-4).
*10.20 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4).
*10.21 Liquidity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated
by reference to Exhibit 10.20 to the 11.25% Debentures S-4).
*10.22 Financial Guaranty Insurance Policy, issued November 15, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.21 to the 11.25% Debentures S-4).
*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).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.38 Technical Amendment to the Stockholders' Agreement dated as of September 30, 1992, among FCI, GTO and certain
affiliated partnerships, DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit
10.39A to the 11.25% Debentures S-4).
*10.39 Richardson Shareholder Agreement, dated as of August 11, 1992, between FCI and Jerome J. Richardson (incorporated
by reference to Exhibit 10.40 to the 11.25% Debentures S-4).
*10.40 Employment Agreement, dated as of August 11, 1992, between Flagstar and Jerome J. Richardson (incorporated by
reference to Exhibit 10.41 to the 11.25% Debentures S-4).
*10.41 Amended and Restated Employment Agreement, dated as of January 1, 1996, between Flagstar and Jerome J. Richardson
(incorporated by reference to Exhibit 10.41 to the 1995 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 1995 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) The Company filed a report of Form 8-K on December 28, 1995 providing
certain information in Item 2. Acquisition or Disposition of Assets of such
report. This filing reported the consummation of sales of the Company's
subsidiaries engaged in the recreation services business and in the
concessions business. An unaudited pro forma condensed consolidated balance
sheet for September 30, 1995 and unaudited pro forma condensed consolidated
statements of operations for the year ended December 31, 1994 and the nine
months ended September 30, 1995 were included in such filing.
27
<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, 1993, 1994 and 1995....................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995........................................................... F-4
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1993, 1994 and 1995....................... 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, 1994 and 1995, and
the related statements of consolidated operations and consolidated cash flows
for each of the three years in the period ended December 31, 1995. 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,
1994 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995
the Company changed its method of accounting for the impairment of long-lived
assets.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 14, 1996
F-2
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Operating revenue.............................................................. $ 2,615,169 $ 2,665,966 $2,571,487
Operating expenses:
Product cost................................................................. 899,145 919,087 864,505
Payroll & benefits........................................................... 905,231 919,928 916,951
Depreciation & amortization expense.......................................... 170,231 129,633 132,872
Utilities expenses........................................................... 99,767 99,021 98,212
Other........................................................................ 379,992 394,012 393,482
Write-off of goodwill and certain other intangible assets (Note 3)........... 1,104,553 -- --
Provision for (recovery of) restructuring charges (Note 2)................... 158,620 (7,207 ) 15,873
Charge for impaired assets (Note 2).......................................... -- -- 51,358
3,717,539 2,454,474 2,473,253
Operating income (loss)........................................................ (1,102,370 ) 211,492 98,234
Other charges (credits):
Interest and debt expense (Note 4)........................................... 214,513 232,501 232,855
Interest expense on Note Payable to FCI (Note 4)............................. 14,175 14,175 14,175
Interest income.............................................................. (1,416 ) (5,077 ) (3,725)
Other -- net................................................................. 2,434 3,110 2,044
229,706 244,709 245,349
Loss before income taxes....................................................... (1,332,076 ) (33,217 ) (147,115)
Benefit from income taxes (Note 6)............................................. (79,328 ) (2,213 ) (14)
Loss from continuing operations................................................ (1,252,748 ) (31,004 ) (147,101)
Gain on sale of discontinued operation, net of income tax provision of: 1994 --
$9,999; 1995 -- $10,092 (Note 13)............................................ -- 399,188 77,877
Loss from discontinued operations, net of income tax provision (benefit) of:
1993 -- $(1,821); 1994 -- $471; 1995 -- $(1,361) (Note 13)................... (409,671 ) (6,518 ) (636)
Income (loss) before extraordinary items and cumulative effect of change in
accounting principle......................................................... (1,662,419 ) 361,666 (69,860)
Extraordinary items, net of income tax provision (benefit) of: 1993 -- $(196);
1994 -- $(174); 1995 -- $25 (Note 11)........................................ (26,405 ) (11,757 ) 466
Cumulative effect of change in accounting principles, net of income tax benefit
of: 1993 -- $90 (Note 1)..................................................... (12,010 ) -- --
Net income (loss).............................................................. $(1,700,834 ) $ 349,909 $ (69,394)
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FLAGSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 66,720 $ 196,966
Receivables, less allowance for doubtful accounts of: 1994 -- $4,561;
1995 -- $2,506............................................................................... 37,392 29,855
Merchandise and supply inventories............................................................. 62,293 32,445
Net assets held for sale (Note 13)............................................................. 77,320 --
Other.......................................................................................... 19,676 26,087
263,401 285,353
Property:
Property owned (at cost) (Notes 2 and 4):
Land......................................................................................... 273,085 255,393
Buildings and improvements................................................................... 813,305 838,956
Other property and equipment................................................................. 462,421 484,684
Total property owned............................................................................. 1,548,811 1,579,033
Less accumulated depreciation.................................................................... 477,176 569,079
Property owned -- net............................................................................ 1,071,635 1,009,954
Buildings and improvements, vehicles, and other equipment held under capital leases (Note 5)..... 194,348 170,859
Less accumulated amortization.................................................................... 69,958 76,778
Property held under capital leases -- net........................................................ 124,390 94,081
1,196,025 1,104,035
Other Assets:
Other intangible assets, net of accumulated amortization: 1994 -- $14,646; 1995 --
$17,051...................................................................................... 25,009 22,380
Deferred financing costs -- net (Note 11)...................................................... 71,955 63,482
Other (including loan receivable from former officer of: 1994 -- $15,657; 1995 -- $16,454)
(Note 12).................................................................................... 37,574 38,578
134,538 124,440
$ 1,593,964 $ 1,513,828
LIABILITIES
Current Liabilities:
Current maturities of long-term debt (Note 4).................................................. $ 31,408 $ 38,835
Accounts payable............................................................................... 127,769 125,467
Accrued salaries and vacations................................................................. 48,680 41,102
Accrued insurance.............................................................................. 44,675 48,060
Accrued taxes.................................................................................. 21,795 30,705
Accrued interest............................................................................... 47,568 42,916
Other.......................................................................................... 69,753 80,445
391,648 407,530
Long-Term Liabilities:
Debt, less current maturities (Note 4)......................................................... 2,067,648 1,996,111
Deferred income taxes (Note 6)................................................................. 21,679 18,175
Liability for self-insured claims.............................................................. 58,128 53,709
Other non-current liabilities and deferred credits............................................. 110,864 163,203
2,258,319 2,231,198
Notes Payable to FCI (Note 4).................................................................... 150,000 150,000
Commitments and Contingencies (Notes 5 and 8)
Shareholder's Equity (Deficit) (Note 9):
Common stock:
$0..01 par value; 1994 and 1995 -- 10,000 shares authorized, 440 issued and authorized....... -- --
Paid-in capital................................................................................ 602,896 602,896
Deficit........................................................................................ (1,807,939 ) (1,877,333 )
Minimum pension liability adjustment........................................................... (960 ) (463 )
(1,206,003 ) (1,274,900 )
$ 1,593,964 $ 1,513,828
</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,
1993 1994 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................................................... $(1,700,834 ) $ 349,909 $ (69,394 )
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 ) 15,873
Charge for impaired assets............................................... -- -- 51,358
Depreciation and amortization of property................................ 129,222 122,870 126,488
Amortization of goodwill................................................. 27,449 -- --
Amortization of other intangible assets.................................. 13,560 6,763 6,384
Amortization of deferred financing costs................................. 9,416 6,453 7,504
Deferred income tax benefit.............................................. (84,413 ) (2,793 ) (3,451 )
Other.................................................................... 5,675 (7,354 ) (20,008 )
Loss from discontinued operations, net................................... 409,671 6,518 636
Gain on sale of discontinued operation, net.............................. -- (399,188 ) (77,877 )
Extraordinary items, net................................................. 26,405 11,757 (466 )
Cumulative effect of change in accounting principle, net................. 12,010 -- --
Changes in Assets and Liabilities Net of Effects from
Dispositions and Restructurings:
Decrease (increase) in assets:
Receivables.............................................................. (10,105 ) (4,452 ) (4,713 )
Inventories.............................................................. (5,159 ) 340 (848 )
Other current assets..................................................... (864 ) (11,849 ) (7,086 )
Other assets............................................................. 2,873 2,241 (2,622 )
Increase (decrease) in liabilities:
Accounts payable......................................................... 10,105 9,029 16,496
Accrued salaries and vacations........................................... 612 8,821 (5,551 )
Accrued taxes............................................................ 10,878 (9,582 ) (429 )
Other accrued liabilities................................................ 60,796 (16,696 ) (4,014 )
Other noncurrent liabilities and deferred credits........................ (65,737 ) (25,198 ) (28,364 )
Net cash flows from (used in) operating activities............................ 114,733 40,382 (84 )
Cash Flows from Investing Activities:
Purchase of property........................................................ (99,007 ) (154,480 ) (123,739 )
Proceeds from dispositions of property...................................... 33,678 20,135 25,693
Advances to discontinued operations, net.................................... (51,607 ) (9,670 ) (6,952 )
Proceeds from sale of discontinued operations............................... -- 447,073 172,080
Proceeds from sale of subsidiary............................................ -- -- 122,500
Purchase of other long-term assets.......................................... (19,070 ) (6,205 ) (3,217 )
Net cash flows provided by (used in) investing activities..................... (136,006 ) 296,853 186,365
</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,
1993 1994 1995
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net working capital advances (repayments) under credit agreements........... $ 54,000 $(93,000) $ --
Long-term debt issued in connection with refinancings....................... 400,778 -- --
Other long-term borrowings.................................................. 22,146 -- --
Deferred financing costs.................................................... (11,388 ) (25) --
Long-term debt payments..................................................... (440,750 ) (201,664) (56,035)
Net cash flows provided by (used in) financing activities................... 24,786 (294,689) (56,035)
Increase in cash and cash equivalents....................................... 3,513 42,546 130,246
Cash and Cash Equivalents at:
Beginning of period......................................................... 20,661 24,174 66,720
End of period............................................................... $ 24,174 $ 66,720 $196,966
Supplemental Cash Flow Information:
Income taxes paid........................................................... $ 4,917 $ 8,035 $ 3,591
Interest paid............................................................... $ 247,846 $258,653 $253,007
Non-cash financing activities:
Capital lease obligations................................................ $ 64,029 $ 18,800 $ 5,505
Other financings......................................................... $ 1,278 $ -- --
Non Cash investing activities:
Other investing.......................................................... $ -- $ -- $ 8,185
</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 Holdngs, Inc.
The acquisition 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 3, 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.
The Company conducts business through its Denny's, Hardee's, Quincy's, and
El Pollo Loco restaurant concepts. Denny's, a full service family restaurant
chain, operates in forty-nine states, Puerto Rico, and four foreign countries,
with principal concentrations in California, Florida, Texas, Washington,
Arizona, Pennsylvania, Illinois, and Ohio. Hardee's competes in the
quick-service sandwich segment and Quincy's operates in the steakhouse segment.
The Company's Hardee's and Quincy's restaurant chains are located primarily in
the southeastern United States; El Pollo Loco is a quick-service flame-broiled
chicken concept which operates primarily in southern California.
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 Consolidated Financial
Statements include the accounts of the Company, and its subsidiaries.
See also Note 13, related to subsidiaries held for sale as of December
31, 1994. Certain 1993 and 1994 amounts have been reclassified to
conform to the 1995 presentation.
(b) FINANCIAL STATEMENT ESTIMATES. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) 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.
(d) INVENTORIES. Merchandise and supply inventories are valued primarily at
the lower of average cost or market.
(e) 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.
(f) 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 agreements were amortized over periods up
to 40 years on the straight-line basis prior to being written-off at
F-7
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 intangible assets, over the remaining
amortization period of such assets. Management believes that the
projected future results are the most likely scenario assuming
historical trends continue. See Note 3 for further discussion of the
write-off of goodwill and certain other intangible assets.
(g) IMPAIRMENT OF LONG-LIVED ASSETS. During 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121 (SFAS
No. 121) "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ". Pursuant to this statement, the
Company reviews long-lived assets and certain identifiable intangibles
to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. In addition, long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying
amount or estimated fair value less costs to sell. See Note 2 for
further discussion of the impairment of long-lived assets.
(h) 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.
(i) PREOPENING COSTS. The Company capitalizes certain costs incurred in
conjunction with the opening of restaurants and amortizes such costs
over a twelve month period from the date of opening.
(j) INCOME TAXES. Income taxes are accounted for under the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes."
(k) 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 pre-tax charge of $12,100,000. 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. The
total discounted self-insurance liabilities recorded at December 31,
1994 and 1995 were $90,800,000 and $91,000,000 respectively, reflecting
a 4% discount rate. The related undiscounted amounts at such dates were
$98,800,000 and $98,000,000, respectively.
(l) 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.
(m) ADVERTISING COSTS. The Company expenses advertising costs as incurred.
Advertising expense for the years ended December 31, 1993, 1994 and
1995 was $89,365,000, $85,799,000, and $93,012,000, respectively.
(n) 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, 1993, 1994, and 1995 was $53.0 million,
$37.4 million, and $18.9 million, respectively.
F-8
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(o) 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 consolidated operations for 1994 and 1995 is
not material.
(p) DEFERRED GAIN. In September 1995, the Company sold its distribution
subsidiary, Proficient Food Company (PFC), for approximately $128.0
million including receipt of cash of approximately $122.5 million. In
conjunction with the sale, the Company entered into an eight year
distribution contract with the acquirer of PFC. This transaction
resulted in a deferred gain of approximately $72.0 million that is
being amortized over the life of the distribution contract as a
reduction of product cost. The portion of the deferred gain recognized
as a reduction in product costs in 1995 was approximately $2.8 million.
(q) CASH OVERDRAFTS. The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totalling
$59.8 million and $54.4 million at December 31, 1994 and 1995,
respectively.
NOTE 2 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan. The
plan generally involved the reduction in personnel and a decision to outsource
the Company's information systems function.
In addition, the Company adopted SFAS No. 121 during 1995 (see Note 1(g)).
In connection with such adoption, 99 restaurant units, which will continue to be
operated, were identified as impaired as the future undiscounted cash flows of
each of these units is estimated to be insufficient to recover the related
carrying value. As such, the carrying values of these units were written down to
the Company's estimate of fair value based on sales of similar units or other
estimates of selling price.
During 1995, the Company also identified 36 underperforming units for sale
or closure generally during 1996. The carrying value of these units have been
written-down to estimated fair value, based on sales of similar units or other
estimates of selling price, less costs to sell.
Charges attributable to the restructuring plan and the adoption of SFAS No.
121 during the year ended December 31, 1995 are comprised of the following:
<TABLE>
<S> <C>
Restructuring:
Severance................................................................................ $ 5,376
Write-down of computer hardware and software and other assets............................ 7,617
Other.................................................................................... 2,880
$15,873
Impairment of Long-lived Assets:
Write-down attributable to the restaurant units the Company
will continue to operate.............................................................. $41,670
Write-down attributable to the restaurant units to be disposed........................... 9,688
$51,358
</TABLE>
Approximately $7.5 million of the restructuring charges represent cash
charges of which approximately $600,000 was incurred and paid in 1995. Unpaid
amounts are included in other current liabilities on the accompanying
consolidated balance sheet. The Company anticipates completion of its
restructuring plan generally in 1996.
F-9
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS -- Continued
The 36 units identified in 1995 for disposal had aggregate operating
revenues of approximately $26.1 million and negative operating income of
approximately $2.9 million during 1995, and an aggregate carrying value of
approximately $5.8 million as of December 31, 1995.
Effective in the fourth quarter of 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 plan resulted in a restructuring charge during 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. As of December
31, 1995, 69 units had been sold, closed or converted to another concept and 17
are intended to be disposed of generally during 1996, with an additional charge
of approximately $744,000 recorded in 1995 for such units. Management intends to
operate the remaining units. The 17 units to be disposed generally during 1996
had aggregate operating revenues of approximately $11.8 million and negative
operating income of approximately $1.3 million during 1995 and an aggregate
carrying value of approximately $1.0 million as of December 31, 1995.
NOTE 3 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 detailed 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
F-10
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLE ASSETS -- Continued
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 previous 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 13) 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 depreciation expense; however, operating
income before depreciation would be 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 4 DEBT
At December 31, 1995, the Restated Credit Agreement includes a working
capital and letter of credit facility of up to a total of $160.1 million which
includes a working capital sublimit of $78.6 million and a letter of credit
sublimit of $125.0 million. At such date, the Company had no working capital
borrowings; however, letters of credit outstanding were $93.4 million. All
outstanding amounts under the Restated Credit Agreement must be repaid by June
17, 1996. See also discussion below.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
<S> <C> <C>
(IN THOUSANDS)
Notes and Debentures:
10.75% Senior Notes due September 15, 2001, interest payable semi-annually...................... $ 275,000 $ 270,000
10.875% Senior Notes due December 1, 2002, interest payable semi-annually....................... 300,000 280,025
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........................................................ 205,612 202,715
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 7.5% to 13.25% (a)............................. 23,129 17,415
Capital lease obligations (see Note 5)............................................................ 170,697 144,573
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).................................. 17,948 13,548
Total............................................................................................. 2,099,056 2,034,946
Less current maturities (c)....................................................................... 31,408 38,835
$2,067,648 $1,996,111
</TABLE>
F-11
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
(a) Collateralized by restaurant and other properties with a net book value of
$22.8 million at December 31, 1995.
(b) Collateralized by equipment with a net book value of $14.7 million at
December 31, 1995.
(c) Aggregate annual maturities during the next five years of long-term debt are
as follows (in thousands): 1996 -- $38,835; 1997 -- $38,470;
1998 -- $32,660; 1999 -- $26,267, and 2000 -- $322,188.
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.
The Company was in compliance with the terms of the Restated Credit
Agreement at December 31, 1995. Under the most restrictive provision of the
Restated Credit Agreement (ratio of senior debt to EBITDA, as defined), at
December 31, 1995, the Company could incur approximately $31 million of
additional indebtedness.
The Company is currently in the process of renewing its bank credit
agreement. It is anticipated that the new agreement will consist of a $150
million working capital and letter of credit facility secured by a pledge of the
stock of the Company's operating subsidiaries and all of its and their
respective trademarks, tradenames, copyrights, hedge agreements, tax sharing
agreements and bank accounts. The new agreement, as presently contemplated,
would terminate March 31, 1999, subject to mandatory prepayments and commitment
reductions under certain circumstances upon the Company's sale of assets or
incurrence of additional debt. The new agreement would also include certain
financial and other operating covenants generally consistent with those provided
in the Restated Credit Agreement currently in effect.
At December 31, 1995, 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, 1995, the restaurant properties and
equipment had a net book value of $327.2 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 $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 $18.1 million in 1996 and increasing each year to $23.7
million in 2000.
In 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).
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, 1995 of
$225.5 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.
F-12
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
At December 31, 1995, the Company has $775 million aggregate notional
amount in effect of reverse interest rate exchange agreements with maturities
ranging from twelve to forty-eight 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 expense from such agreements is reflected in interest and debt
expense and totalled $12.2 million, $9.2 million, and $3.1 million for the years
ended December 31, 1993, 1994, and 1995, respectively. Subsequent to year end,
the Company terminated interest rate exchange agreements with notional aggregate
amounts totalling $200 million that were scheduled to mature in 1997. Management
intends to maintain its remaining 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.
Information regarding the Company's reverse interest rate exchange
agreements at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
AMOUNT OF WEIGHTED AVERAGE
YEAR OF NOTIONAL INTEREST RATE
MATURITY PAYMENT RECEIVED PAID
<S> <C> <C> <C>
1997 $475,000 5.21% 5.61%
1998 200,000 5.57% 5.66%
1999 100,000 5.82% 5.66%
$775,000 5.38% 5.63%
</TABLE>
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is approximately $1.90 billion at December 31, 1995. 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, 1995,
the estimated fair value of the $775 million notional amount of reverse interest
rate swaps was a net payable of approximately $2.7 million and represents the
estimated amount that the Company would be required to pay to terminate the swap
agreements at December 31, 1995. 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, 1995, 899 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.
F-13
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 LEASES AND RELATED GUARANTEES -- Continued
Information regarding the Company's leasing activities at December 31, 1995
is as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
MINIMUM MINIMUM MINIMUM MINIMUM
LEASE SUBLEASE LEASE SUBLEASE
PAYMENTS PAYMENTS PAYMENTS PAYMENTS
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Year:
1996....................................................................... $ 33,943 $ 2,106 $ 44,586 $9,372
1997....................................................................... 30,998 2,010 42,148 9,006
1998....................................................................... 25,248 1,776 38,940 8,291
1999....................................................................... 20,424 1,404 35,403 6,208
2000....................................................................... 15,977 1,031 31,550 5,448
Subsequent years........................................................... 129,168 5,643 175,578 23,932
Total................................................................... 255,758 $13,970 $368,205 $62,257
Less imputed interest........................................................ 111,185
Present value of capital lease obligations................................... $144,573
</TABLE>
The total rental expense included in the determination of operating income
for the years ended December 31, 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
(IN THOUSANDS)
Basic rents................................................................... $ 48,870 $ 49,234 $ 48,269
Contingent rents.............................................................. 12,306 12,178 11,274
Total......................................................................... $ 61,176 $ 61,412 $ 59,543
</TABLE>
Total rental expense does not reflect sublease rental income of $8,998,000,
$9,975,000, and $14,426,000 for the years ended December 31, 1993, 1994, and
1995, respectively.
F-14
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to
the loss before discontinued operations, extraordinary items, and cumulative
effect of change in accounting principles is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal..................................................................... $ 1,323 $ 365 $ 1,940
State, Foreign and Other.................................................... 3,762 215 1,497
5,085 580 3,437
Deferred:
Federal..................................................................... (74,606) -- --
State, Foreign and Other.................................................... (9,807) (2,793) (3,451)
(84,413) (2,793) (3,451)
Benefit from income taxes..................................................... $ (79,328) $ (2,213) $ (14)
The total provision for (benefit from) income taxes related to:
Loss before discontinued operations, extraordinary items, and cumulative
effect of change in accounting principles................................ $ (79,328) $ (2,213) $ (14)
Discontinued operations..................................................... (1,821) 10,470 8,731
Extraordinary items......................................................... (196) (174) 25
Cumulative effect of change in accounting principles........................ (90) -- --
Total provision for (benefit from) income taxes............................... $ (81,435) $ 8,083 $ 8,742
</TABLE>
For the year ended December 31, 1993, the Company utilized regular tax net
operating loss carryforwards of approximately $9.5 million. For the years ended
December 31, 1994 and 1995, 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 1994 and $75
million in 1995. 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-15
<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,
1994 1995
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Deferred income....................................................................................... $ -- $ 24,326
Self-insurance reserves............................................................................... 40,269 33,522
Capitalized leases.................................................................................... 18,539 15,823
Assets held for sale.................................................................................. 7,343 --
Other accruals and reserves........................................................................... 38,246 6,924
Alternative minimum tax credit carryforwards.......................................................... 14,125 18,444
General business credit carryforwards................................................................. 13,225 21,623
Net operating loss carryforwards...................................................................... 44,450 9,764
Less: valuation allowance............................................................................. (28,767) (54,452)
Total deferred tax assets............................................................................. 147,430 75,974
Deferred tax liabilities:
Depreciation of fixed assets.......................................................................... 164,465 89,787
Amortization of intangible assets..................................................................... 4,644 4,362
Total deferred tax liabilities........................................................................ 169,109 94,149
Total deferred income tax liability................................................................... $ 21,679 $ 18,175
</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,
1993 1994 1995
<S> <C> <C> <C>
Statutory rate................................................................ 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit.......... -- 12 --
Amortization and write-off of goodwill...................................... (26) -- --
Portion of losses not benefited as a result of the establishment of
valuation allowance...................................................... (3) (35) (35)
Other....................................................................... -- (5) --
Effective tax rate............................................................ 6% 7% --%
</TABLE>
At December 31, 1995, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $22 million, most of which expire in 2002 through 2007, and
alternative minimum tax (AMT) credits of approximately $18 million. The AMT
credits may be carried forward indefinitely. In addition, the Company has
available regular income tax net operating loss carryforwards of approximately
$28 million which expire 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 approximately $28 million is
presently not subject to any annual limitation.
F-16
<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, 1993, 1994, and 1995 amounted to $3,724,000, $3,995,000 and
$5,594,000, respectively, of which $2,802,000, $3,270,000 and $3,260,000 related
to funded defined benefit plans and $922,000, $725,000 and $2,334,000 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, 1993, 1994, and 1995 determined
under SFAS No. 87 follow:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost-benefits earned during the year.................................. $ 2,625 $ 3,076 $ 2,829
Interest cost on projected benefit obligations................................ 2,281 2,427 2,651
Actual return on plan assets.................................................. (1,284) 761 (3,722)
Net amortization and deferral................................................. 102 (2,269) 2,074
Curtailment/settlement losses (due to early retirements of certain
participants)............................................................... -- -- 1,762
Net pension cost.............................................................. $ 3,724 $ 3,995 $ 5,594
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Company's balance sheet for its funded defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits....................................................................................... $19,887 $23,993
Non-vested benefits................................................................................... 1,412 1,466
Accumulated benefit obligations......................................................................... $21,299 $25,459
Plan assets at fair value............................................................................... $21,859 $26,513
Projected benefit obligation............................................................................ 27,556 32,059
Funded status........................................................................................... (5,697) (5,546)
Unrecognized net loss from past experience different from that assumed.................................. 7,270 6,301
Unrecognized prior service cost......................................................................... 137 69
Prepaid pension costs................................................................................... $ 1,710 $ 824
</TABLE>
Assets held by the Company's plans are invested in money market and other
fixed income funds as well as equity funds.
F-17
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
The following sets forth the funded status and amounts recognized in the
Company's balance sheet for its unfunded defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits........................................................................................ $ 3,888 $ 4,080
Non-vested benefits.................................................................................... 343 12
Accumulated benefit obligations.......................................................................... $ 4,231 $ 4,092
Plan assets at fair value................................................................................ $ -- $ --
Projected benefit obligation............................................................................. (4,623) (4,188)
Funded status............................................................................................ (4,623) (4,188)
Unrecognized net (gain) loss from past experience different from that assumed............................ 468 (112)
Unrecognized prior service cost.......................................................................... 738 109
Unrecognized net asset at January 1, 1987 being amortized over 15 years.................................. (123) (49)
Additional liability..................................................................................... (1,163) (543)
Other -- 24
Accrued pension costs.................................................................................... $(4,703) $$(4,759)
</TABLE>
Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Discount rate.................................................................... 8.25 % 8.0 %
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 $3,767,000, $3,932,000, and $3,911,000 for the
years ended December 31, 1993, 1994, and 1995, 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,
1993, 1994, and 1995 were as follows: zero, $4,212,000, and $610,000. In
addition to these incentive compensation plans, certain operations have
incentive plans in place under which regional, divisional and local management
participate.
NOTE 8 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, 1995, 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 totalling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by the Company and Flagstar for the seven fiscal periods ended December
31, 1992. 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.
F-18
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 COMMITMENTS AND CONTINGENCIES -- Continued
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.
The Company is guarantor on capital lease obligations of approximately $5.7
million at December 31, 1995 from the sale of PFC. See Note 1(p).
NOTE 9 SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
TOTAL SHAREHOLDERS'
OTHER EQUITY DEFICIT EQUITY (DEFICIT)
<S> <C> <C> <C>
(IN THOUSANDS)
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)
Activity:
Net Loss.................................................................. -- (69,394) (69,394)
Minimum pension liability adjustment...................................... 497 -- 497
Balance December 31, 1995...................................................... $602,433 $(1,877,333) $ (1,274,900)
</TABLE>
NOTE 10 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 omited for
all years.
F-19
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 EXTRAORDINARY ITEMS
The Company recorded losses from extraordinary items as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
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................. $26,469 $ (179) $26,290
Recapitalization:
Premiums and costs to repurchase 10% Convertible Debentures............................... 90 (12) 78
Write-off of unamortized deferred financing costs 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>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
INCOME GAIN
TAX (LOSS),
GAIN PROVISION NET OF
(LOSS) (BENEFITS) TAXES
<S> <C> <C> <C>
(IN THOUSANDS)
Repurchase of Senior Indebtness:
Gain on repurchase of senior indebtedness................................................ $ 1,461 $ 74 $ 1,387
Write-off of deferred financing costs on repurchase of senior indebtedness............... (970) (49) (921)
Total...................................................................................... $ 491 $ 25 $ 466
</TABLE>
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.
During the third quarter of 1995, the Company recognized an extraordinary
gain totaling $0.5 million, net of income taxes, which represents the repurchase
of $24,975,000 principal amount of certain senior indebtedness, net of the
charge-off of the related unamortized deferred financing costs of $0.9 million.
NOTE 12 RELATED PARTY TRANSACTIONS
The Company expensed annual advisory fees of $250,000 for the years ended
December 31, 1993 and 1994, respectively, for Gollust, Tierney & Oliver,
Incorporated (GTO), a stockholder of the Company.
F-20
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 RELATED PARTY TRANSACTIONS -- Continued
Donaldson, Lufkin & Jenrette Securities Corporation (DLJ), a stockholder of
the Company, received $4,059,000 during the year ended December 31, 1993 for
investment banking services related to the issuance of indebtedness by the
Company.
KKR received annual financial advisory fees of $1,250,000 for the years
ended December 31, 1993, 1994, and 1995.
The Company has a loan receivable at December 31, 1995 from its former
chairman totaling $16,454,000. The proceeds of the loan were used during 1992 by
the former chairman to repay a 1989 loan obtained for the purchase of Company
common stock. The loan is due in November 1997 and is secured by 812,000 shares
of common stock and certain other collateral. The Company earned for the years
ended December 31, 1993, 1994, and 1995 $789,000, $842,000, and $886,000,
respectively, on such loan which accrues interest at 5.6% per annum and is
payable at maturity.
NOTE 13 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.
During December 1995, the Company sold TW Recreational Services, Inc., a
concession and recreation services subsidiary, for $98.7 million and Volume
Services, Inc., a stadium concession services subsidiary for $73.4 million, both
subject to certain adjustments, and recognized gains totaling $77.9 million, net
of income taxes.
The financial statements and related notes presented herein classify
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, 1993, 1994, and 1995 were $1.37 billion, $859.7 million, and $322.3
million and $(313.3) million, $32.6 million, and $17.1 million, respectively.
F-21
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 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 1994
and 1995 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, 1994:
Operating Revenue......................................................... $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 31,767 32,866 33,287
Utilities expense....................................................... 24,438 24,003 27,370 23,210
Other................................................................... 86,445 102,168 100,684 104,715
Recovery of restructuring charges....................................... -- -- -- (7,207)
Operating income.......................................................... $ 38,752 $ 45,436 $ 62,115 $ 65,189
Income (loss) before extraordinary item................................... $(26,625) $358,079 $ 19,971 $ 10,241
Net income (loss)......................................................... $(26,625) $347,257 $ 19,971 $ 9,306
Year Ended December 31, 1995:
Operating Revenue......................................................... $636,464 $681,464 $676,899 $ 576,660
Operating expenses:
Product costs........................................................... 218,246 238,514 229,446 178,299
Payroll & benefits...................................................... 228,809 238,889 229,368 219,885
Depreciation & amortization expense..................................... 33,249 33,748 32,802 33,073
Utilities expense....................................................... 23,261 23,708 27,361 23,882
Other................................................................... 95,561 96,471 101,634 99,816
Provision for restructuring charges..................................... -- -- -- 15,873
Charge for impaired assets.............................................. -- -- -- 51,358
Operating income (loss)................................................... $ 37,338 $ 50,134 $ 56,288 $ (45,526)
Income (loss) before extraordinary item................................... $(34,607) $(17,101) $ 10,211 $ (28,363)
Net income (loss)......................................................... $(34,607) $(17,101) $ 10,677 $ (28,363)
</TABLE>
During the second quarter of 1994, the Company sold its food and vending
subsidiary (see Note 13) 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.
During the fourth quarter of 1995, the Company sold its concession and
recreation services subsidiaries and recorded a $77.9 million net gain on the
sales of such discontinued operations.
NOTE 15 SUBSEQUENT EVENTS (UNAUDITED)
On February 22, 1996, the Company entered into an agreement with Integrated
Systems Solutions Corporation (ISSC). The ten year agreement for $323 million
provides for ISSC to manage and operate the Company's information systems, as
well as, develop and implement new systems and applications to enhance
information technology for the Company's corporate headquarters, restaurants,
and field management. ISSC will oversee data center operations, applications
development and maintenance, voice and data networking, help desk operations and
point-of-sale technology.
F-22
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 SUBSEQUENT EVENTS (UNAUDITED) -- Continued
On March 1, 1996, the Company entered into an agreement to acquire the
Coco's and Carrows restaurant chains, consisting of approximately 350 units
operating in the family dining segment. The purchase is subject to the signing
of certain ancillary agreements and other customary terms and conditions. If
consummated, the purchase price (including estimated expenses) would consist of
$131 million of cash ($56 million of which will be financed by bank term loans),
the issuance of notes payable to the seller of $150 million, and the assumption
of certain capital lease obligations of approximately $31.5 million.
F-23
<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 29, 1996
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, Chairman, President and Chief Executive March 29, 1996
Officer (Principal Executive Officer)
(James B. Adamson)
/s/ C. ROBERT CAMPBELL Senior Vice President and Chief Financial Officer March 29, 1996
(Principal Financial Officer)
(C. Robert Campbell)
/s/ DONNA M. MASCOLO Vice President and Controller (Principal March 29, 1996
Accounting Officer)
(Donna M. Mascolo)
/s/ MICHAEL CHU Director March 29, 1996
(Michael Chu)
/s/ VERA KING FARRIS Director March 29, 1996
(Vera King Farris)
/s/ HENRY R. KRAVIS Director March 29, 1996
(Henry R. Kravis)
/s/ ANDREW A. LEVISON Director March 29, 1996
(Andrew A. Levison)
/s/ PAUL E. RAETHER Director March 29, 1996
(Paul E. Raether)
/s/ CLIFTON S. ROBBINS Director March 29, 1996
(Clifton S. Robbins)
/s/ GEORGE R. ROBERTS Director March 29, 1996
(George R. Roberts)
/s/ ELIZABETH A. SANDERS Director March 29, 1996
(Elizabeth A. Sanders)
/s/ L. EDWIN SMART Director March 29, 1996
(L. Edwin Smart)
/s/ MICHAEL T. TOKARZ Director March 29, 1996
(Michael T. Tokarz)
</TABLE>
<PAGE>
EXHIBIT 12
FLAGSTAR CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
Loss from continuing operations before income taxes.......... $(69,596) $(51,554) $(1,332,076) $(33,217) $(147,115)
Add:
Net interest expense excluding capitalized interest........ 236,372 238,103 217,856 235,146 235,801
Amortization of debt expense............................... 11,249 9,362 9,416 6,453 7,504
Interest factor in rents................................... 13,450 14,814 16,290 16,411 16,090
Total earnings (losses)............................... $191,475 $210,725 $(1,088,514) $224,793 $ 112,280
Fixed charges:
Gross interest expense including capitalized
interest................................................ $236,602 $238,393 $ 218,134 $235,406 $ 235,882
Amortization of debt expense............................... 11,249 9,362 9,416 6,453 7,504
Interest factor in rents................................... 13,450 14,814 16,290 16,411 16,090
Total fixed charges................................... $261,301 $262,569 $ 243,840 $258,270 $ 259,476
Ratio of earnings (losses) to fixed charges.................. -- -- -- -- --
Deficiency in the coverage of fixed charges by earnings
(losses) before fixed charges.............................. $ 69,826 $ 51,844 $ 1,332,354 $ 33,477 $ 147,196
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL INFORMATION INCLUDED HEREIN AS OF DECEMBER 31, 1994 AND FOR
THE YEAR ENDED DECEMBER 31, 1994 HAS BEEN RECLASSIFIED TO CONFORM TO THE
1995 PRESENTATION.
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, 1995 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-31-1995
<PERIOD-END> DEC-31-1994 DEC-31-1995
<CASH> 66,720 196,966
<SECURITIES> 0 0
<RECEIVABLES> 41,953 32,361
<ALLOWANCES> 4,561 2,506
<INVENTORY> 62,293 32,445
<CURRENT-ASSETS> 263,401 285,353
<PP&E> 1,743,159 1,749,892
<DEPRECIATION> 547,134 645,857
<TOTAL-ASSETS> 1,593,964 1,513,828
<CURRENT-LIABILITIES> 391,648 407,530
<BONDS> 2,217,648 2,146,111
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (1,206,003) (1,274,900)
<TOTAL-LIABILITY-AND-EQUITY> 1,593,964 1,513,828
<SALES> 0 0
<TOTAL-REVENUES> 2,665,966 2,571,487
<CGS> 2,454,474 2,473,253
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,110 2,044
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 241,599 243,305
<INCOME-PRETAX> (33,217) (147,115)
<INCOME-TAX> (2,213) (14)
<INCOME-CONTINUING> (31,004) (147,101)
<DISCONTINUED> 392,670 77,241
<EXTRAORDINARY> (11,757) 466
<CHANGES> 0 0
<NET-INCOME> 349,909 (69,394)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
