<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended April 2, 1997
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
Commission file number 1-9364
FLAGSTAR CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3027522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
203 EAST MAIN STREET
SPARTANBURG, SOUTH CAROLINA 29319-9966
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of May 8, 1997, 440 shares of the registrant's Common Stock, par value
$0.01 per share, were outstanding, all of which are owned by the registrant's
parent, Flagstar Companies, Inc.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
(IN THOUSANDS) APRIL 2, 1997 MARCH 31, 1996
<S> <C> <C>
Operating Revenue....................................................................... $ 675,775 $550,425
Operating Expenses:
Product costs......................................................................... 197,692 160,028
Payroll and benefits.................................................................. 256,787 214,531
Depreciation and amortization expense................................................. 34,682 29,047
Utilities expense..................................................................... 27,480 22,754
Other................................................................................. 136,107 96,579
652,748 522,939
Operating Income........................................................................ 23,027 27,486
Other Charges:
Interest and debt expense -- net...................................................... 72,128 61,249
Other -- net.......................................................................... 1,553 (16)
Loss Before Reorganization Expenses and Taxes........................................... (50,654) (33,747)
Reorganization Expenses................................................................. 4,007 --
Loss Before Taxes....................................................................... (54,661) (33,747)
Provision For (Benefit From) Income Taxes............................................... 624 (2,890)
Net Loss................................................................................ $ (55,285) $(30,857)
</TABLE>
See accompanying notes
2
<PAGE>
FLAGSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 2, DECEMBER 31,
(In thousands) 1997 1996
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents..................................................................... $ 31,774 $ 92,358
Receivables, less allowance for doubtful accounts of: 1997 -- $2,563; 1996 -- $2,405.......... 10,500 17,823
Loan receivable from former officer........................................................... -- 13,922
Merchandise and supply inventories............................................................ 30,579 31,543
Net assets held for sale...................................................................... 2 5,114
Other......................................................................................... 41,959 29,895
114,814 190,655
Property:
Property owned (at cost):
Land....................................................................................... 252,463 252,741
Buildings and improvements................................................................. 895,081 891,512
Other property and equipment............................................................... 541,738 536,886
Total property owned.......................................................................... 1,689,282 1,681,139
Less accumulated depreciation................................................................. 655,012 629,676
Property owned -- net......................................................................... 1,034,270 1,051,463
Buildings and improvements, vehicles, and other
equipment held under capital leases........................................................ 218,410 210,533
Less accumulated amortization................................................................. 99,635 93,740
Property held under capital leases -- net..................................................... 118,775 116,793
1,153,045 1,168,256
Other Assets:
Goodwill, net of accumulated amortization of: 1997 -- $4,380; 1996 -- $3,077.................. 204,153 205,389
Other intangible assets -- net................................................................ 26,810 27,595
Deferred financing costs -- net............................................................... 61,553 64,153
Other......................................................................................... 37,508 37,385
330,024 334,522
Total Assets.................................................................................... $ 1,597,883 $ 1,693,433
Liabilities
Current Liabilities:
Current maturities of long-term debt.......................................................... $ 1,001,013 $ 62,885
Accounts payable.............................................................................. 108,353 160,444
Accrued payroll and related................................................................... 58,792 58,838
Accrued insurance............................................................................. 56,087 52,244
Accrued taxes................................................................................. 22,682 25,060
Accrued interest.............................................................................. 80,998 51,220
Other......................................................................................... 82,810 76,114
1,410,735 486,805
Long-term Liabilities:
Debt, less current maturities................................................................. 1,226,707 2,179,393
Deferred income taxes......................................................................... 15,993 16,361
Liability for self-insured claims............................................................. 57,515 57,665
Other non-current liabilities and deferred credits............................................ 167,212 178,203
1,467,427 2,431,622
Notes Payable to FCI............................................................................ 150,000 150,000
Total Liabilities............................................................................. 3,028,162 3,068,427
Shareholder's Deficit........................................................................... (1,430,279) (1,374,994)
Total Liabilities & Shareholder's Deficit....................................................... $ 1,597,883 $ 1,693,433
</TABLE>
See accompanying notes
3
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
(IN THOUSANDS) APRIL 2, 1997 MARCH 31, 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss...................................................................................... $ (55,285) $(30,857)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization of property................................................... 31,706 27,646
Amortization of other intangible assets..................................................... 2,976 1,400
Amortization of deferred financing costs.................................................... 2,663 1,847
Amortization of deferred gains.............................................................. (4,109) (2,259)
Deferred income tax benefit................................................................. (317) (118)
Other....................................................................................... 1,238 1,907
Decrease (increase) in assets:
Receivables................................................................................. 6,922 3,178
Inventories................................................................................. 963 768
Other current assets........................................................................ 1,790 (8,212)
Other assets................................................................................ (2,899) (4,352)
Increase (decrease) in liabilities:
Accounts payable............................................................................ (53,035) (39,583)
Accrued payroll and related................................................................. 3,433 6,055
Accrued taxes............................................................................... (2,397) (5,978)
Other accrued liabilities................................................................... 31,022 24,475
Other non-current liabilities and deferred credits.......................................... (1,684) (1,484)
Net cash flows used in operating activities................................................... (37,013) (25,567)
Cash Flows from Investing Activities:
Purchase of property........................................................................ (8,869) (2,818)
Proceeds from disposition of property....................................................... 6,986 461
Other -- net................................................................................ (31) 51
Net cash flows used in investing activities................................................... (1,914) (2,306)
Cash Flows from Financing Activities:
Long-term debt payments..................................................................... (21,657) (6,914)
Net cash flows used in financing activities................................................... (21,657) (6,914)
Decrease in cash and cash equivalents......................................................... (60,584) (34,787)
Cash and Cash Equivalents at:
Beginning of period......................................................................... 92,358 196,966
End of period............................................................................... $ 31,774 $162,179
</TABLE>
See accompanying notes
4
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 2, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Flagstar Corporation ("Flagstar" or, together with its subsidiaries, the
"Company") is a wholly-owned subsidiary of Flagstar Companies, Inc. ("FCI").
Flagstar, through its wholly-owned subsidiaries, Denny's Holdings, Inc., Spartan
Holdings, Inc. and FRD Acquisition Co. (and their respective subsidiaries), owns
and operates the Carrows, Coco's, Denny's, El Pollo Loco and Quincy's Family
Steakhouse restaurant brands, and is the largest franchisee of Hardee's.
The consolidated financial statements of Flagstar and its subsidiaries for
the quarters ended April 2, 1997 and March 31, 1996, are unaudited
and include all adjustments management believes are necessary for a fair
presentation of the results of operations for such interim periods. All such
adjustments are of a normal and recurring nature. The interim consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto for the year ended December 31, 1996 and
the related Management's Discussion and Analysis of Financial Condition and
Results of Operations, both of which are contained in the Flagstar 1996 Annual
Report on Form 10-K (the "Flagstar 10-K"). The results of operations for the
quarter ended April 2, 1997 are not necessarily indicative of the results for
the entire fiscal year ending December 31, 1997.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2. CHANGE IN FISCAL YEAR
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to the last Wednesday of the calendar year. Concurrent with this
change, the Company changed to a four-four-five week quarterly closing calendar
which is the restaurant industry standard, and generally results in four
thirteen-week quarters during the year with each quarter ending on a Wednesday.
Due to the timing of this change, the first quarter of 1997 includes more than
thirteen weeks of operations. Carrows and Coco's include an additional six days,
Denny's includes an additional five days, El Pollo Loco includes an additional
week and Hardee's and Quincy's include an additional day. The prior year
comparable quarter consisted of thirteen weeks.
NOTE 3. DEBT IN DEFAULT
On March 17, 1997, in connection with the financial restructuring plan
described in Note 4, Flagstar elected not to make the $7.1 million interest
payment due and payable as of that date to holders of its 11 3/8% Senior
Subordinated Debentures. As a result, and as a result of a continuation of such
nonpayment for 30 days past the due date, Flagstar is in default under the terms
of the indenture governing such debentures, and the holders of 25% of such
debentures or the trustee therefor may declare such debt to be due and payable.
Accordingly, such debt is reflected as a current liability in the accompanying
consolidated balance sheet. If such debt is declared to be due and payable, this
will create an event of default relative to Flagstar's 10 3/4% Senior Notes due
2001 and the 10 7/8% Senior Notes due 2002, entitling 30% of the holders of such
indebtedness or the trustee therefor to declare such indebtedness also to be due
and payable. See Note 6.
NOTE 4. FINANCIAL RESTRUCTURING
On March 17, 1997, FCI and Flagstar reached an agreement in principle on
the terms of a financial restructuring plan with an ad hoc committee
representing holders of both the 11 3/8% Senior Subordinated Debentures due 2003
and the 11.25% Senior Subordinated Debentures due 2004. In conjunction with such
plan, FCI and Flagstar have decided to pursue a restructuring of their debt and
equity through "prepackaged" bankruptcy filings to be made under Chapter 11 of
Title 11 of the United States Code (the "Bankruptcy Code") by FCI and Flagstar.
Flagstar's operating subsidiaries would not be a party to any such filings under
the Bankruptcy Code. Pursuant to such restructuring, FCI intends to offer 100%
of the common shares of the reorganized company to holders of the senior
subordinated debentures, the 10% Convertible Junior Subordinated Debentures due
2014 and the $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock,
in exchange for such securities. The existing common equity holders would
receive five-year out-of-the-money warrants to purchase 7% of the common stock
of the reorganized company on a fully diluted basis. The plan provides, among
other things, for the merger of Flagstar with and
5
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
APRIL 2, 1997
(UNAUDITED)
NOTE 4. FINANCIAL RESTRUCTURING -- Continued
into FCI. Consummation of the plan is subject to certain conditions, including,
without limitation, confirmation of the plan by the United States Bankruptcy
Court. Professional fees and other expenditures incurred by the Company in
conjunction with the financial restructuring are reflected as reorganization
expenses in the statements of consolidated operations.
In addition, on March 6, 1997, the Company's credit agreement was amended
to provide for less restrictive financial covenants for measurement periods
ending on April 2, 1997 and July 2, 1997, as well as to provide the Company
flexibility to forego scheduled interest payments due in March, May and June
1997 under the 10 3/4% Senior Notes, the 10 7/8% Senior Notes, the 11 3/8%
Senior Subordinated Debentures, the 11.25% Senior Subordinated Debentures, and
the 10% Junior Subordinated Debentures without triggering a default under the
agreement, unless any such debt is declared to be due and payable as a result of
the failure to pay any such interest.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). The Company does not believe HFS has
satisfied its contractual obligations to support the Hardee's franchise and on
March 19, 1997, the Company notified HFS, pursuant to its various license
agreements, that its subsidiary was seeking to arbitrate certain claims of the
subsidiary against HFS. In its demand for arbitration, the Company's subsidiary
alleges (i) breach by HFS of its license agreements with the Company's
subsidiary, (ii) breach of fiduciary duty and negligence by HFS in mishandling
and misapplying funds of the Company's subsidiary held for advertising, and
(iii) unfair trade practices. No assurances can be given as to the outcome of
such arbitration proceeding or its impact on the Company's Hardee's operations.
NOTE 6. SUBSEQUENT EVENT
On May 1, 1997, in connection with the financial restructuring plan
described in Note 4, Flagstar elected not to make the $40.6 million and $5.0
million interest payments due and payable as of that date to holders of its
11.25% Senior Subordinated Debentures and its 10% Convertible Junior
Subordinated Debentures, respectively. If Flagstar does not make such payments
within 30 days following the due date, Flagstar will be in default under the
indentures governing such debentures and, in either such case, the holders of
25% of such debentures or the trustee therefor may declare such debt to be due
and payable. Such debt is reflected as current in the accompanying consolidated
balance sheet. If such debt is declared to be due and payable, this will
create an event of default relative to the 10 3/4% Senior Notes and
the 10 7/8% Senior Notes entitling 30% of the holders of such indebtedness or
the trustee therefor to declare such indebtedness also to
be due and payable.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of April 2, 1997 and the results of operations for the
quarter ended April 2, 1997 as compared to the quarter ended March 31, 1996.
The forward-looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which reflect
management's best judgment based on factors currently known, involve risks,
uncertainties, and other factors which may cause the actual performance of
Flagstar, its subsidiaries, and underlying concepts to be materially different
from the performance indicated or implied by such statements. Such factors
include, among others: uncertainties related to the financial restructuring plan
referred to in Note 4 and the arbitration proceeding referred to in Note 5 in
the consolidated financial statements included herein; competitive pressures
from within the restaurant industry; the level of success of the Company's
operating initiatives and advertising and promotional efforts, including the
initiatives and efforts specifically mentioned herein; adverse publicity;
changes in business strategy or development plans; terms and availability of
capital; regional weather conditions; overall changes in the general economy,
particularly at the retail level; and other factors included in the discussion
below, or in the Management's Discussion and Analysis and in Exhibit 99 to the
Company's Annual Report on Form 10-K for the period ended December 31, 1996.
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 2, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996
FLAGSTAR CONSOLIDATED
The Company's CONSOLIDATED REVENUE for the first quarter of 1997 increased
by $125.4 million (22.8%) as compared with the 1996 comparable quarter. The
revenue increase is primarily attributable to two factors: the estimated $24.0
million impact due to the additional days in the first quarter of 1997 in
comparison to the prior year quarter for Denny's and El Pollo Loco and the
operations of Coco's and Carrows (with revenue in the first quarter of 1997 of
$71.5 million and $55.6 million, respectively) which were not included in the
prior year quarter. Excluding the impact of the extra days and the Coco's and
Carrows acquisition, revenue for the 1997 quarter decreased $25.7 million in
comparison to the prior year quarter. This decrease reflects decreases in
comparable store sales at all of the Company's concepts as well as a 33-unit
decrease in Company-owned units (excluding Coco's and Carrows). Such decreases
are slightly offset by a $2.7 million increase in franchise revenue due to a
103-unit increase in franchise units at Denny's and El Pollo Loco.
CONSOLIDATED OPERATING EXPENSES for the first quarter of 1997 increased by
$129.8 million (24.8%) as compared with the 1996 comparable quarter. The expense
increase is primarily attributable to two factors: the estimated $20.3 million
impact due to the additional days in the first quarter of 1997 in comparison to
the prior year quarter for Denny's and El Pollo Loco and the operations of
Coco's and Carrows (with operating expenses in the first quarter of 1997 of
$67.2 million and $52.8 million, respectively) which were not included in the
prior year quarter. Excluding the impact of the extra days and the Coco's and
Carrows acquisition, operating expenses for the 1997 quarter decreased $10.5
million in comparison to the prior year quarter. This decrease primarily
reflects a decline in costs associated with the decline in revenue, the positive
impact of cost cutting measures (reflected in improved operating margins at
Denny's and El Pollo Loco), and a 33-unit decrease in Company-owned units
(excluding Coco's and Carrows). Such decreases are somewhat offset by an
increase in general and administrative expenses related to retention and other
bonuses totaling $3.0 million, company contributions to the profit sharing plan
of $0.7 million (no contributions were made in the prior year) and an increase
in the costs to monitor the consent decree over the prior year of $0.5 million.
CONSOLIDATED OPERATING INCOME for the first quarter of 1997 decreased by
$4.5 million (16.2%) as compared with the 1996 comparable quarter as a result of
the factors noted above.
NET CONSOLIDATED INTEREST AND DEBT EXPENSE totaled $72.1 million during the
first quarter of 1997 as compared with $61.2 million during the comparable 1996
period. The increase is due principally to the addition of $7.5 million of
interest and debt expense associated with the Coco's and Carrows acquisition in
May 1996 and a $2.0 million decrease in interest income during 1997 due to
decreased cash and cash equivalents subsequent to the purchase of Coco's and
Carrows.
REORGANIZATION EXPENSES include professional fees and other expenditures
incurred by the Company in conjunction with the planned reorganization under
Chapter 11 of the Bankruptcy Code as further discussed in Note 4 to the
consolidated financial statements included herein.
THE PROVISION (BENEFIT) FOR INCOME TAXES from continuing operations for the
quarter has been computed based on management's estimate of the annual effective
income tax rate applied to loss before taxes. The Company recorded an
7
<PAGE>
income tax provision reflecting an effective income tax rate of approximately
1.1% for the 1997 quarter compared to a benefit for the comparable 1996 quarter
reflecting an approximate rate of (8.6%). The change in the effective income tax
rate from the prior year can be attributed to the recognition in the prior year
of anticipated refunds due to the carryback of prior year tax losses.
THE NET LOSS was $55.3 million in the first quarter of 1997 as compared to
$30.9 million for the prior year quarter. The increase in the net loss is due to
the factors noted above.
RESTAURANT OPERATIONS:
The table below summarizes restaurant unit activity for the quarter ended
April 2, 1997.
<TABLE>
<CAPTION>
UNITS CONVERTED
FROM COMPANY
ENDING UNITS UNITS UNITS TO FRANCHISE ENDING UNITS
12/31/96 OPENED CLOSED (TURNKEYS) 4/2/97
<S> <C> <C> <C> <C> <C>
Denny's
Company owned............................. 894 -- (1) (2) 891
Franchised units.......................... 677 21 (6) 2 694
International licensees................... 25 -- -- -- 25
1,596 21 (7) -- 1,610
Hardee's....................................... 580(a) -- -- -- 580(a)
Quincy's....................................... 199 -- -- -- 199
El Pollo Loco
Company owned............................. 96 -- -- (1) 95
Franchised units.......................... 135(a) 3 -- 1 139(a)
International licensees................... 10 -- -- -- 10
241 3 -- -- 244
Coco's
Company owned............................. 183 1 -- -- 184
Franchised units.......................... 5 -- -- -- 5
International licenses.................... 278 4 (1) -- 281
466 5 (1) -- 470
Carrows
Company owned............................. 160 -- (2) -- 158
Franchised Units.......................... -- 1 -- -- 1
160 1 (2) -- 159
3,242 30 (10) -- 3,262
<CAPTION>
ENDING UNITS
3/31/96 (b)
<S> <C>
Denny's
Company owned............................. 919
Franchised units.......................... 610
International licensees................... 25
1,554
Hardee's....................................... 580
Quincy's....................................... 199
El Pollo Loco
Company owned............................. 100
Franchised units.......................... 120
International licensees................... 5
225
Coco's
Company owned............................. 186
Franchised units.......................... 6
International licenses.................... 255
447
Carrows
Company owned............................. 162
Franchised Units.......................... --
162
3,167
</TABLE>
(a) Unit count includes one Hardee's and El Pollo Loco dual unit.
(b) Coco's and Carrows were acquired on May 23, 1996. Prior year data is
provided for informational purposes only.
8
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DENNY'S:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 300.1 $ 292.6 2.6
Franchise revenue......................................................................... 14.9 12.6 18.2
Total revenue........................................................................... 315.0 305.2 3.2
Operating expenses........................................................................ 291.0 284.3 2.4
Operating income.......................................................................... $ 24.0 $ 20.9 14.8
Average unit sales
Company-operated........................................................................ $336,300 $316,000 6.4
Franchise............................................................................... $276,300 $260,100 6.2
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase (decrease)................................................ (2.4%) 3.2%
Average guest check....................................................................... $5.39 $4.85 11.1
</TABLE>
Denny's NET COMPANY SALES increased by $7.5 million (2.6%) during the 1997
quarter as compared with the prior year comparable quarter. This increase
reflects an estimated $21.7 million impact due to an additional five days in the
first quarter of 1997 in comparison to the prior year quarter due to the change
in the fiscal year end, somewhat offset by the impact of a 28-unit decrease in
Company-owned units and a decrease in comparable store sales. The decrease in
Company-owned units, the majority of which were converted to franchise units, is
consistent with the Company's strategy of focusing on growth through franchising
and the sale of Company-owned restaurants to franchisees, along with selected
closures where continued operation is considered uneconomical. The decline in
comparable store sales was driven by lower guest counts, partially offset by an
increase in average guest check, both changes reflecting the impact of the
September 1996 price increase which eliminated certain value pricing. FRANCHISE
REVENUE for the quarter increased by $2.3 million (18.2%), reflecting 84 more
franchised units at the 1997 quarter-end than at the 1996 quarter-end.
Denny's OPERATING EXPENSES for the 1997 quarter as compared with the 1996
quarter increased by $6.7 million (2.4%) reflecting an estimated $18.5 million
impact due to five additional days in the first quarter of 1997 in comparison to
the prior year quarter. This increase is somewhat offset by the impact of the
28-unit decrease in Company-owned units; an improvement in food cost as a
percent of revenue due to a shift to higher margin items in the 1997 quarter;
and a $1.4 million increase in the current quarter amortization of the deferred
gain attributable to the sales of Proficient Food Company and Portion-Trol
Foods, Inc. and Mother Butler Pies over the prior quarter amounts.
Denny's OPERATING INCOME for the 1997 quarter improved by $3.1 million
(14.8%) as compared to the prior year quarter as a result of the factors noted
above.
HARDEE'S:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Revenue................................................................................... $ 137.5 $ 145.1 (5.2)
Operating expenses........................................................................ 134.7 140.5 (4.1)
Operating income.......................................................................... $ 2.8 $ 4.6 (39.1)
Average unit sales........................................................................ $237,200 $250,400 (5.3)
COMPARABLE STORE DATA:
Comparable store sales increase (decrease)................................................ (6.5%) (7.5%)
Average guest check....................................................................... $3.21 $3.13 2.6
</TABLE>
9
<PAGE>
Hardee's REVENUE decreased by $7.6 million (5.2%) during the 1997 quarter
as compared with the 1996 quarter, reflecting a 6.5% decline in comparable store
sales. The decrease in comparable store sales reflects an 8.4% decline in
traffic which was partially offset by a 2.6% increase in average guest check.
The decrease in traffic count reflects the impact of continuing aggressive
promotions by competitors within the quick-service category compounded by the
persistent weakness of Hardee's brand positioning and advertising programs.
Hardee's OPERATING EXPENSES in the 1997 quarter decreased by $5.8 million
(4.1%) due to the flow through impact of the lower comparable store sales noted
above as well as the impact of the cost reduction program implemented in the
second half of 1996.
Hardee's OPERATING INCOME for the 1997 quarter decreased by $1.8 million
(39.1%) as compared to the prior year quarter as a result of the factors noted
above.
QUINCY'S:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Revenue................................................................................... $ 64.2 $ 68.5 (6.3)
Operating expense......................................................................... 63.9 63.3 0.9
Operating income.......................................................................... $ 0.3 $ 5.2 (94.2)
Average unit sales........................................................................ $322,500 $342,900 (6.0)
COMPARABLE STORE DATA:
Comparable store sales increase (decrease)................................................ (6.8%) (4.2%)
Average guest check....................................................................... $6.30 $6.08 3.6
</TABLE>
Quincy's REVENUE decreased by $4.3 million (6.3%) during the 1997 quarter
as compared with the 1996 quarter, reflecting a 6.8% decline in comparable store
sales. The decrease in comparable store sales resulted from a 10.0% decrease in
traffic which was partially offset by a 3.6% increase in average guest check.
The decline in customer traffic reflects, among other things, continuing traffic
declines in the family-steak category in general, and the difficulty of "winning
back" customers that have been lost as a result of problems at Quincy's relative
to a lack of focus and consistency of service and products over the past two
years.
Despite the decrease in revenue, Quincy's OPERATING EXPENSES in the 1997
quarter increased by $0.6 million (0.9%) over the prior year quarter. This
reflects an increase in product costs as a percent of revenue due to the higher
quality food items offered in connection with the "Relaunch" program; increased
labor costs due to the Federal minimum wage increase; and the fact that certain
labor and other fixed costs cannot be reduced in proportion to the significant
decrease in sales.
Quincy's OPERATING INCOME for the 1997 quarter decreased by $4.9 million
(94.2%) as compared to the prior year quarter as a result of the factors noted
above.
10
<PAGE>
EL POLLO LOCO:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 28.6 $ 28.1 1.8
Franchise revenues........................................................................ 3.4 3.0 13.3
Total revenue........................................................................... 32.0 31.1 2.9
Operating expense......................................................................... 29.1 28.2 3.2
Operating income.......................................................................... $ 2.9 $ 2.9 --
Average unit sales
Company-operated........................................................................ $301,000 $276,000 9.1
Franchise............................................................................... $220,900 $208,800 5.8
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase (decrease)................................................ (3.6%) 7.9%
Average guest check....................................................................... $6.58 $6.64 (0.9)
</TABLE>
El Pollo Loco's NET COMPANY SALES increased $0.5 million (1.8%) during the
1997 quarter as compared with the 1996 quarter. This increase reflects an
estimated $2.3 million impact due to the additional week in the first quarter of
1997 in comparison to the prior year quarter due to the change in the fiscal
year end, somewhat offset by the impact of a five-unit decrease in Company-owned
units and a decrease in comparable store sales. The decrease in Company-owned
units, all of which were converted to franchise units, is consistent with the
Company's strategy of focusing on growth through franchising and the sale of
Company-owned restaurants to franchisees. The decline in comparable store sales
was primarily a result of a difficult comparison versus the introduction of the
extremely successful Pollo Bowl during the first quarter last year. FRANCHISE
REVENUE for the quarter increased by $0.4 million (13.3%), primarily due to 19
more franchise units at the 1997 quarter-end as compared with the 1996
quarter-end and an increase in franchise average unit sales.
El Pollo Loco's OPERATING EXPENSES for the 1997 quarter as compared with
the 1996 quarter increased by $0.9 million (3.2%) reflecting an estimated $1.8
million impact due to the additional week in the first quarter of 1997 in
comparison to the prior year quarter. This increase is somewhat offset by the
impact of the five-unit decrease in Company-owned units; lower product costs
associated with the Pollo Bowl and other new "Bowl" products; a decrease in
direct labor costs due to improved labor scheduling and staffing initiatives;
and food cost control measures.
El Pollo Loco's OPERATING INCOME for the 1997 quarter, excluding the impact
on the prior year of gains on the sale of restaurants, improved by $0.3 million
(11.5%) as compared to the prior year quarter as a result of the factors noted
above.
11
<PAGE>
COCO'S AND CARROWS:
The following information is provided for analysis purposes only as it
includes information for periods prior to the acquisition of Coco's and Carrows
by the Company on May 23, 1996:
COCO'S
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 70.8 $ 66.8 6.0
Franchise revenue......................................................................... 0.7 0.8 (12.5)
Total revenue........................................................................... 71.5 67.6 5.8
Operating expenses........................................................................ 67.2 64.5 4.2
Operating income.......................................................................... $ 4.3 $ 3.1 38.7
Average unit sales
Company-operated........................................................................ $385,600 $357,200 7.9
Franchise............................................................................... $441,700 $409,600 7.8
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales decrease........................................................... (0.8%) (0.5%)
Average guest check (a)................................................................... $6.60 $6.76 (2.4)
</TABLE>
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to better conform to Flagstar's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Coco's, the new method will generally result in higher
weekly traffic counts and lower average guest checks than calculated under
the previous method.
Coco's NET COMPANY SALES for the first quarter ended April 2, 1997
increased $4.0 million (6.0%) as compared to the prior year comparable quarter.
This increase reflects an estimated $4.8 million impact due to six additional
days in the first quarter of 1997 in comparison to the prior year quarter due to
the change in the fiscal year end, somewhat offset by a decrease in comparable
store sales. The decrease in comparable store sales was driven by a decrease in
average check, slightly offset by an increase in customer counts. In addition,
the Company experienced a two-unit decrease in the number of Company-operated
restaurants.
FRANCHISE AND FOREIGN LICENSING REVENUE decreased by $0.1 million (12.5%)
for the first quarter of 1997 as compared to the first quarter of 1996. The
decrease is the result of a stronger dollar versus the yen in 1997 as compared
to 1996 and is partially offset by an increase in the number of franchisees and
foreign licensees from 261 at March 31, 1996 to 286 at April 2, 1997.
Coco's OPERATING EXPENSES for the first quarter of 1997 increased by $2.7
million (4.2%), as compared to the prior year quarter. This increase is
primarily due to six additional days in the first quarter of 1997 as compared to
the prior year quarter. The increase is somewhat offset by a decrease in product
cost and labor of approximately $1.4 million due to an increased operations
focus on cost controls, waste reduction and labor initiatives. Such cost savings
were achieved despite a general increase in commodity prices and the impact of
the Federal and state minimum wage increases.
12
<PAGE>
CARROWS
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 55.6 $ 52.2 6.5
Franchise revenue......................................................................... -- -- --
Total revenue........................................................................... 55.6 52.2 6.5
Operating expenses........................................................................ 52.8 50.2 5.2
Operating income.......................................................................... $ 2.8 $ 2.0 40.0
Average unit sales
Company-operated........................................................................ $349,300 $323,600 7.9
Franchise............................................................................... NM -- --
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase (decrease)................................................ (0.8%) 2.0%
Average guest check (a)................................................................... $ 6.37 $ 6.13 3.9
NM = Not Meaningful
</TABLE>
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to better conform to Flagstar's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Carrows, the new method will generally result in lower
weekly traffic counts and higher average guest checks than calculated under
the previous method.
Carrows' NET COMPANY SALES for the first quarter ended April 2, 1997
increased $3.4 million (6.5%) as compared to the prior year comparable quarter.
This increase reflects an estimated $3.8 million impact due to six additional
days in the first quarter of 1997 in comparison to the prior year quarter due to
the change in the fiscal year end, somewhat offset by a decrease in comparable
store sales. The decrease in comparable store sales was driven by a decrease in
customer counts, slightly offset by an increase in average guest check. In
addition, the Company experienced a four-unit decrease in the number of
Company-operated restaurants.
Carrows opened its first domestic franchise location in the first quarter
of 1997, recording $16,000 in franchise revenue.
Carrows' OPERATING EXPENSES for the first quarter of 1997 increased by $2.6
million (5.2%), as compared to the prior year quarter. This increase is
primarily due to the six additional days in the first quarter of 1997 as
compared to the prior year quarter. The increase is somewhat offset by a
decrease in product cost and labor of approximately $1.2 million due to an
increased operations focus on cost controls, waste reduction and labor
initiatives. Such cost savings were achieved despite a general increase in
commodity prices and the impact of the Federal and state minimum wage increases.
LIQUIDITY AND CAPITAL RESOURCES
Since the leveraged buyout of Flagstar in 1989, the Company has not
achieved the revenue and earnings projections prepared at the time of the
transaction, due in large part to increased competition, intensive pressure on
pricing due to discounting, adverse economic conditions and relatively limited
capital resources to respond to these changes. Such trends have generally
continued into 1997. The Company's cash flows have been sufficient to fund its
operations and make interest payments when due (although in anticipation of the
Plan (as defined below) the Company did not make the March 15, 1997 interest
payment on its 11 3/8% Senior Subordinated Debentures or the May 1, 1997
interest payments on its 11.25% Senior Subordinated Debentures or 10%
Convertible Junior Subordinated Debentures). However, the Company's core
businesses have not experienced cash flow growth sufficient to provide adequate
funds to invest for future growth.
These conditions present both short-term and long-term financial challenges
to the Company. To address these matters, management has developed and is
continuing to develop plans to maintain its liquidity and improve its capital
structure. Specifically, the Board of Directors elected not to declare the
January 15, 1997 and April 15, 1997 quarterly dividends on FCI's $2.25 Series A
Cumulative Convertible Exchangeable Preferred Stock, par value $0.10 per share
(the "Preferred Stock"). In addition, on March 6, 1997, the Credit Agreement was
amended to provide for less restrictive financial covenants for measurement
periods ending on April 2, 1997 and July 2, 1997, as well as to provide Flagstar
flexibility to forego scheduled interest payments due in March, May and June
1997 under the 10 3/4% Senior Notes, the 10 7/8% Senior Notes, the
13
<PAGE>
11 3/8% Debentures, the 11.25% Debentures and the 10% Convertible Junior
Subordinated Debentures without triggering a default under the Credit Agreement,
unless any such debt is declared to be due and payable as a result of the
failure to pay any such interest. On March 17, 1997, Flagstar elected not to
make an interest payment due and payable as of that date with respect to the
11 3/8% Debentures. As a result, and as a result of a continuation of such
non-payment for 30 days following the due date, Flagstar is in default under the
indenture governing the 11 3/8% Debentures and the holders of 25% of such
debentures or the trustee therefor may declare such debt to be due and payable.
If such debt is declared to be due and payable this will create an event of
default relative to the 10 3/4% Senior Notes and the 10 7/8% Senior Notes
entitling 30% of the holders of such indebtedness or the trustee therefor to
declare such indebtedness also to be due and payable. In addition, on May 1,
1997, Flagstar elected not to make interest payments due and payable as of that
date with respect to the 11.25% Debentures and the 10% Convertible Junior
Subordinated Debentures. If Flagstar does not make such payments within 30 days
following the due date, Flagstar will be in default under the indentures
governing such debentures and, in either such case, the holders of 25% of such
debentures or the trustee therefor may declare such debt to be due and payable
(with similar cross-acceleration rights accruing under the 10 3/4% Senior Notes
and the 10 7/8% Senior Notes as described above).
Management has concluded that, over the long-term, a substantial
restructuring or refinancing of the Company's debt will be required to allow the
Company to meet its long-term debt obligations and will be a prerequisite to
future growth through additional investment in its restaurants. In this regard,
FCI and Flagstar have developed a financial restructuring plan which was agreed
to in principle on March 17, 1997 by an ad hoc committee of holders of
Flagstar's 11 3/8% and 11.25% Senior Subordinated Debentures. Based thereon, FCI
and Flagstar have decided to pursue a restructuring of their debt and equity
through a prepackaged plan pursuant to Chapter 11 of the Bankruptcy Code (the
"Plan"). The Company's operating subsidiaries would not be a party to any such
filings under the Bankruptcy Code.
With respect to short-term liquidity, management believes that through a
combination of cash generated from operations, funds available through the
Credit Agreement, various cash management measures and other sources, adequate
liquidity exists to meet the Company's working capital, debt service and capital
expenditure requirements through the filing of the case under Chapter 11
(before taking into account the reclassification of indebtedness under the
Company's 11 3/8% and 11.25% Senior Subordinated Debentures and 10% Convertible
Junior Subordinated Debentures from long-term to current as a result of the
interest payment defaults described above). Although no assurances can be given
in this regard, management believes, based on the Company's historical
relationship with its banks, that it will be able, as necessary, to maintain
access to funds available under the Credit Agreement.
For the period covering the pendency of the case under Chapter 11 and for
the period thereafter, the Company has entered into written commitment letters
pursuant to which it has received commitments from The Chase Manhattan Bank
("Chase") for (i) a $200 million debtor-in-possession revolving credit facility
(the "DIP Facility"), which facility will be used to refinance the Credit
Agreement and otherwise be available during the pendency of the Chapter 11 case
until the earlier to occur of (x) the date that is one year after the
commencement of the Chapter 11 case and (y) the substantial consummation of the
Plan, for working capital advances and letters of credit, and (ii) a $200
million senior secured revolving credit facility (the "Exit Facility") for the
benefit of the Company's operating subsidiaries, which facility will refinance
the DIP Facility upon the emergence of the Company from Chapter 11 and be used
thereafter for working capital advances and letters of credit. The Company
believes the DIP Facility and Exit Facility, together with cash generated from
operations, various cash management measures and other sources, will provide the
Company with adequate liquidity to meet its working capital, debt service and
capital expenditure requirements for at least the next twelve months.
The DIP Facility will be guaranteed by the Company's operating subsidiaries
and generally be secured by liens on the same collateral that currently
secures the Company's obligations under the Credit Agreement. The Exit Facility
will have the benefit of similar guarantees and collateral security (and the
Company's guarantee and additional liens on the Company's corporate headquarters
in Spartanburg, South Carolina and accounts receivable). The Exit Facility will
have a maturity five (5) years from the date of the Company's emergence from
Chapter 11 (subject to earlier termination of commitments in certain events).
The DIP Facility and the Exit Facility will each contain certain financial and
negative covenants, conditions precedent, events of default and other terms,
conditions and provisions customarily found in credit agreements for companies
in Chapter 11 proceedings and for companies emerging from Chapter 11,
respectively. The closing of each of the DIP Facility and the Exit Facility is
subject, among other conditions, to negotiation of definitive agreements with
Chase and in the case of the Exit Facility the initial borrowing thereunder
having been made on or before the earlier of July 31, 1998 and the date that
is twelve months after the date on which the Company commences its Chapter 11
case in the event that the initial borrowing under the Exit Facility does not
occur on or before that date.
With respect to the long-term liquidity of the Company, the Company's
management believes that, based on its forecasts, after giving effect to the
Plan, the Company will have sufficient operating cash flow from operations
(together with funds available under the Exit Facility) to pay interest and
scheduled amortization on all of its outstanding indebtedness and to fund
anticipated capital expenditures through 1999. However, even if the
reorganization is completed, the Company's ability to meets its debt service
obligations will depend on a number of factors, including management's ability
to maintain operating cash flow.
14
<PAGE>
At April 2, 1997 and December 31, 1996, the Company had working capital
deficits, exclusive of net assets held for sale, of $1,295.9 million and $301.3
million, respectively. The increase in the deficit is attributable primarily to
an increase in current liabilities related to the reclassification to current of
the long-term debt which is in default or for which the Company has failed to
make interest payments when due and to a reduction in cash and cash equivalents
which has been used for Company operations. The Company is able to operate with
a substantial working capital deficiency because: (i) restaurant 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 related sales.
15
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. The Company does not believe HFS has satisfied its
contractual obligations to support the Hardee's franchise and on March 19, 1997,
the Company notified HFS, pursuant to its various license agreements, that its
subsidiary was seeking to arbitrate certain claims of the subsidiary against
HFS. In its demand for arbitration, the Company's subsidiary alleges (i) breach
by HFS of its license agreements with the Company's subsidiary, (ii) breach of
fiduciary duty and negligence by HFS in mishandling and misapplying funds of the
Company's subsidiary held for advertising, and (iii) unfair trade practices. No
assurances can be given as to the outcome of such arbitration proceeding or its
impact on the Company's Hardee's operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On March 17, 1997, Flagstar elected not to make the $7.1 million interest
payment due and payable as of that date to holders of its 11 3/8% Senior
Subordinated Debentures. As a result, and as a result of continuation of such
non-payment for 30 days following the due date, Flagstar is in default under the
indenture governing such debentures, and the holders of 25% of such debentures
or the trustee therefor may declare such debt to be due and payable.
Accordingly, such debt is reflected as a current liability in the accompanying
Consolidated Balance Sheets. If such debt is declared to be due and payable this
will create an event of default relative to the 10 3/4% Senior Notes due 2001
and the 10 7/8% Senior Notes due 2002, entitling 30% of the holders of such
indebtedness or the trustee therefor to declare such indebtedness also to be due
and payable.
On May 1, 1997, Flagstar elected not to make the $40.6 million and $5.0
million interest payments due and payable as of that date to holders of its
11.25% Senior Subordinated Debentures and its 10% Convertible Junior
Subordinated Debentures, respectively. If Flagstar does not make such payments
within 30 days following the due date, Flagstar will be in default under the
indentures governing such debentures, and the holders of 25% of such debentures
or the trustee therefor may declare such debt to be due and payable (with
similar cross-acceleration rights accruing under the 10 3/4% Senior Notes and
the 10 7/8% Senior Notes as described above).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
a. The following are included as exhibits to this report:
EXHIBIT NO. DESCRIPTION
<C> <S>
*4.1 Fourth Amendment, dated as of March 6, 1997, to the Second Amended and Restated Credit Agreement dated as
of April 10, 1996 among TWS Funding, Inc. as borrower, Flagstar Corporation, certain lenders and co-agents
named therein, and Citibank, N.A., as funding agent (incorporated by reference by Exhibit 4.1 to FCI's
quarterly report on Form 10-Q for the period ending April 2, 1997, File No. 0-18051 (the "1997 first
quarter FCI 10-Q")).
*4.2 Third Amendment, dated as of March 7, 1997, to the Credit Agreement, dated as of May 23, 1996, by and
among FRD Acquisition Co., FRI-M Corporation, certain lenders and co-agents named therein, and Credit
Lyonnais New York Branch as administrative agent (incorporated by reference to Exhibit 4.2 to the 1997
first quarter FCI 10-Q).
*10.1 Guaranty and Security Agreement, dated as of January 16, 1997, by and among Denny's, Inc., El Pollo Loco,
Inc., DFO, Inc., Flagstar Enterprises, Inc., Quincy's Restaurants, Inc. and James B. Adamson (incorporated
by reference to exhibit 10.1 to the 1997 first quarter FCI 10-Q).
27 Financial Data Schedule
</TABLE>
* Certain of the exhibits to this Quarterly Report on Form 10-Q, indicated by an
asterisk, are hereby incorporated by reference to other documents physically
on File with the Commission.
<TABLE>
<C> <S>
b. No reports on Form 8K were filed during the quarter ended April 2, 1997.
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAGSTAR CORPORATION
Date: May 19, 1997 By: /s/ RHONDA J. PARISH
RHONDA J. PARISH
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
Date: May 19, 1997 By: /s/ C. ROBERT CAMPBELL
C. ROBERT CAMPBELL
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FLAGSTAR CORPORATION AS CONTAINED IN ITS FORM
10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 2, 1997 AND IS QUALIFIED IN
ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> APR-02-1997
<CASH> 31,774
<SECURITIES> 0
<RECEIVABLES> 13,063
<ALLOWANCES> 2,563
<INVENTORY> 30,579
<CURRENT-ASSETS> 114,814
<PP&E> 1,907,692
<DEPRECIATION> 754,647
<TOTAL-ASSETS> 1,597,883
<CURRENT-LIABILITIES> 1,410,735
<BONDS> 1,226,707
0
0
<COMMON> 0
<OTHER-SE> (1,430,279)
<TOTAL-LIABILITY-AND-EQUITY> 1,597,883
<SALES> 0
<TOTAL-REVENUES> 675,775
<CGS> 0
<TOTAL-COSTS> 652,748
<OTHER-EXPENSES> 1,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,128
<INCOME-PRETAX> (54,661)
<INCOME-TAX> 624
<INCOME-CONTINUING> (55,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,285)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
