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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
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)
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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. [ ]
As of February 19, 1997, 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 INSTRUCTIONS
(I)(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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PART I
Item 1. Business................................................................................................... 1
Item 2. Properties................................................................................................. 10
Item 3. Legal Proceedings.......................................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........................................................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................... 13
Item 6. Selected Financial Data.................................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 14
Item 8. Financial Statements and Supplementary Data................................................................ 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................... 26
Item 11. Executive Compensation..................................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 26
Item 13. Certain Relationships and Related Transactions............................................................. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 32
INDEX TO FINANCIAL STATEMENTS.......................................................................................... F-1
SIGNATURES.............................................................................................................
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FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business", "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections, which reflect management's best judgment
based on factors currently known, involve risks and uncertainties. Words such as
"expects", "anticipates", "believes", "intends", and "hopes", variations of such
words and similar expressions are intended to identify such forward-looking
statements. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
but not limited to, the factors discussed in such sections and those set forth
in the cautionary statements contained in Exhibit 99 to this Form 10-K. (See
Exhibit 99 -- Safe Harbor Under the Private Securities Litigation Reform Act of
1995.) Forward-looking information provided by the Company in such sections
pursuant to the safe harbor established under the Private Securities Litigation
Reform Act of 1995 should be evaluated in the context of these factors.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Flagstar Corporation ("Flagstar" or, together with its subsidiaries, the
"Company"), is one of the largest restaurant companies in the United States,
operating (directly and through franchisees) more than 3,200 moderately priced
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 leveraged buyout 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 a result of the 1989 leveraged buyout of Flagstar, the Company became
and remains very highly leveraged. While the Company's cash flows have been
sufficient to cover interest costs, operating results since the buyout in 1989
have fallen short of expectations. Such shortfalls have resulted from negative
operating trends 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. These
operating trends have generally continued through 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for additional information.
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly
formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 Company-owned units within the mid-scale
family-style dining category in order to capitalize on the Company's experience
in the restaurant industry and the California market and to maximize the
synergies among the Company's restaurant chains, including increased purchasing
power. The ultimate acquisition price of $313.4 million was paid in
consideration for all of the outstanding stock of FRI-M Corporation ("FRI-M"),
the subsidiary of Family Restaurants, Inc. ("FRI") which owns the Coco's and
Carrows chains. The acquisition was accounted for using the purchase method of
accounting and is reflected in the Company's Consolidated Financial Statements
and Notes thereto included herein as of the acquisition date.
During the third quarter of 1996, the Company sold its two food processing
operations, Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, Inc., a subsidiary of Flagstar (Portion-Trol Foods, Inc. and the Mother
Butler Pies division are hereinafter referred to collectively as "PTF"). These
transactions mark the last in a series of non-restaurant divestitures which
began with the sale of Canteen Corporation, the Company's food and vending
business, in 1994 and also included the 1995 sales of TW Recreational Services,
Inc., a concession and recreation services subsidiary; Volume Services, Inc., a
stadium concession services subsidiary; and Proficient Food Company ("PFC"), the
Company's food distribution subsidiary.
On January 21, 1997, FCI hired Donaldson, Lufkin & Jenrette Securities
Corporation as a financial advisor to assist in exploring alternatives to
improve the Company's capital structure. The Company intends to explore all
alternatives to reduce its debt service requirements, which may include a
negotiated restructuring or other exchange transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for additional information.
RESTAURANTS
Flagstar's operations are conducted through six restaurant chains or
concepts, four chains in the full-service mid-scale dining segment and two in
the quick-service segment. Denny's, Flagstar's largest concept, is the nation's
largest chain of family-style full-service restaurants, with almost 1,600 units
in 49 states, two U.S. territories, and six foreign countries. Denny's largest
concentration domestically is in California and Florida with 531 units in these
two states. According to an independent survey conducted in 1996, Denny's has
the leading share of the national market in the family-style category. Quincy's,
with 199 locations, is one of the largest chains of family-steak restaurants in
the southeastern United States, offering steak, chicken and seafood entrees as
well as a buffet bar, called "America's Home Plate." A weekend breakfast buffet
is also available at most Quincy's locations. Flagstar also operates El Pollo
Loco, a chain of 241 quick-service restaurants featuring flame-broiled chicken
and steak products and related Mexican food items, with a strong regional
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presence in California. As indicated above, Flagstar acquired the Coco's and
Carrows chains in 1996. Coco's is a regional bakery restaurant chain operating
466 units in seven western states and two foreign countries. Coco's offers a
wide variety of fresh-baked goods and value priced meals that capitalize on
emerging food trends in the western United States. The Carrows chain, consisting
of 160 units in seven western states, specializes in traditional American food,
with an emphasis on quality, homestyle fare at an excellent value. Hardee's is a
chain of quick-service restaurants of which Flagstar, with 580 units located
primarily in the Southeast, is the largest franchisee. Although specializing in
sandwiches, Flagstar's Hardee's restaurants serve fried chicken and offer a
breakfast menu that accounts for approximately 44% of total sales and features
the chain's famous "made-from-scratch" biscuits. For a breakdown of the total
revenues contributed by each referenced concept for the last three years, see
the corresponding section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
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 1996, the
Company continued its strategy of growth through franchising, adding a net 66
total units to the system (excluding the impact of the additional 610 units
acquired through the Coco's and Carrows acquisition), representing an increase
of 133 franchise units, offset by a decline of 67 Company-operated units. The
increase in franchise units and the decrease in Company-operated units includes
27 units which were sold to franchisees (turnkeyed). The Company intends to
continue focusing on growth in the franchise arena in 1997.
The Company believes its restaurant operations benefit from the diversity
of the restaurant concepts represented by its six chains, the generally strong
market positions and consumer recognition enjoyed by 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. Denny's, Quincy's, Coco's
and Carrows may benefit from the demographic trend of aging baby boomers and the
growing population of elderly persons. The largest percentage of "mid-scale"
customers comes from the 35 and up age group. In the quick-service segment, the
Company is making efforts to recapture Hardee's restaurants' traditionally
strong market position in the Southeast, and expects El Pollo Loco to increase
its strong position in the Southwest.
During the fourth quarter of 1993, the Company approved a restructuring
plan for its restaurant concepts which included, among other things, the
identification of units for sale, closure or conversion to another concept. At
December 31, 1996 four units remain relative to the 1993 restructuring plan, of
which two are scheduled for disposal in 1997. Management has decided to continue
to operate the remaining two units.
During 1995, the Company identified 36 additional underperforming units for
sale or closure of which 29 units were disposed of through 1996 and two are
scheduled for disposal in 1997. Management has decided to continue to operate
the remaining five units.
See Note 3 to the Consolidated Financial Statements for additional
information concerning these identified units.
DENNY'S
Denny's is the largest full-service family-style restaurant chain in the
mid-scale segment in the United States in terms of both number of units and
total revenues. Denny's restaurants currently operate in 49 states, two U.S.
territories, and six foreign countries, with principal concentrations in
California, Florida, Texas, Arizona, Washington, Illinois, Ohio, 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
items, steaks, seafood, hamburgers, chicken and sandwiches) and provide both
counter and table service. In 1996, Denny's sales were evenly distributed across
each of its dayparts, with breakfast and lunch representing approximately 60% of
total traffic. Denny's restaurants had a 1996 average guest check of $5.03 and
average annual unit sales of $1.3 million. Denny's currently employs
approximately 41,000 people.
In 1994, the Company began a "reimaging" strategy designed to enhance the
competitive positioning of Denny's. This reimaging strategy involved all
restaurants within a market area and included an updated exterior, new signage,
an improved interior layout with more comfortable seating and enhanced lighting.
The Company completed the reimaging of 306 restaurants through 1995. During
1995, management curtailed this reimaging program in order to focus its
attention and resources on programs specifically designed to enhance the
customer's experience at Denny's by improving service and value positioning. In
1996, the Company started limited exterior refurbishments on 588 units primarily
focusing on
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exterior improvements, such as landscaping, exterior lighting, sign replacement
and parking lot repairs to enhance the curb appeal of the restaurants. At
December 31, 1996 approximately three-quarters of the 588 units scheduled to
receive this limited refurbishment have been completed.
Historically, Denny's has had the lowest average guest check within the
family-style category. In January 1996, Denny's rolled out a value menu that
featured value priced items for breakfast, lunch and dinner with tiered pricing
starting at $1.99, $2.99 and $3.99, respectively. At the same time, the Company
launched several initiatives (including a more operationally focused
organizational structure, modern information systems and reengineered restaurant
processes) designed to deliver better service and more consistent product
quality. The Company expects to refine and accelerate these efforts in 1997.
During 1997, the Company intends to continue its focus on opening new
franchise units, and to capitalize on its status as a leading franchisor
(according to a 1996 Arthur Andersen study published in Success Magazine). For
the last three years, Denny's has opened more new units than any competitor in
the mid-scale segment. Furthermore, Denny's has supplemented its franchise
development efforts by selectively selling Company-owned units to franchisees.
During 1996, the Company added a net 82 new Denny's franchise units,
including the sale of 19 Company-owned units to franchisees, bringing the total
franchised units to 702, or 44% of all Denny's restaurants. The initial fee for
a single Denny's franchise is $35,000, and the current royalty payment is
approximately 4% of gross sales.
HARDEE'S
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). The Company is HFS' largest franchisee,
operating 16% of Hardee's restaurants nationwide. HFS is the seventh largest
chain in the United States based on national systemwide sales. Of the 580
Hardee's restaurants operated by the Company at December 31, 1996, 557 were
located in nine southeastern states. Flagstar's Hardee's currently employ
approximately 22,000 people. The Company's Hardee's restaurants provide uniform
menus in a quick-service format targeted to a broad spectrum of customers. The
restaurants offer hamburgers, chicken, roast beef and fish sandwiches, hot dogs
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
completed the rollout of fresh fried chicken as a menu item in 1993.
Substantially all of the Company's Hardee's restaurants have drive-thru
facilities, which provided 51% of the chain's revenues in 1996. Most of the
restaurants are open 16-17 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 44% of total sales at the Company's
Hardee's restaurants. The average guest check at the Company's Hardee's was
$3.17 in 1996, and average annual unit sales for the Company's Hardee's
restaurants was $1.0 million.
Management implemented several action plans in the second half of 1996 to
focus on customer satisfaction. These initiatives included new menu boards in
all 580 units and a "touch-up" project in 276 units. The "touch-up" project
included new roofs, paint, trim and wallpaper as well as minor landscaping and
parking lot repairs and is substantially complete. Hardee's has also installed
new microwaves in all units and implemented procedures to provide customers with
a hot product. Additionally, management costs have been reduced by the
elimination of two layers of management and the streamlining of management
reporting relationships. During 1996, the Company closed 14 under-performing
Hardee's units. Management continues to review under-performing units and may in
the future decide to close additional units.
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. Each year, 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
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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, HFS and other Hardee's franchisees along
with the Company are permitted to open Hardee's restaurants in such territory.
In 1997, the focus of the Company will be to better position its Hardee's
restaurants in the marketplace through a variety of means, including dual
branding, refurbishment, and in appropriate circumstances, subject to legal
obligations and restrictions, conversion to another concept.
QUINCY'S
Ranked by 1996 sales, Quincy's is the sixth largest family-steak (grill
buffet) chain in the country and is one of the largest such chains in the
southeastern United States. The Quincy's chain, employing approximately 11,000
people, currently consists of 199 Company-operated limited service restaurants,
which are designed to provide value conscious customers with a varied menu,
abundant portions and great steaks at moderate prices. The average guest check
at Quincy's in 1996 was $6.06. All Quincy's are open seven days a week for lunch
and dinner. The dinner daypart is Quincy's strongest, representing 63% of total
sales in 1996. The average annual unit sales for a Quincy's restaurant was
approximately $1.3 million in 1996. The restaurants serve steak, chicken and
seafood entrees along with a buffet-style food bar, called "America's Home
Plate," offering hot foods, soups, salads and desserts. In addition, weekend
breakfast service, which is available at most locations, allows Quincy's to
utilize its base assets more efficiently.
After experimenting with a number of formats at Quincy's from 1993 through
1995, including enhancements to the scatter bar buffet and a few buffet only
restaurants, management has determined that a repositioning of Quincy's with
better quality food and the "No Mistake Steak" would provide a more effective
marketing strategy. In that regard, Quincy's initiated a "Relaunch" program in
October 1996 designed to improve service basics, food quality and the marketing
effectiveness of Quincy's, and to differentiate Quincy's from other family-steak
restaurants. While the initial results have been positive, the program is still
in its early stages and additional time will be required to measure its full
impact on results.
EL POLLO LOCO
El Pollo Loco is the leading chain specializing in flame-broiled chicken in
the quick-service segment of the restaurant industry. Of the total 241 El Pollo
Loco restaurants, which are located in five southwestern states and two foreign
countries, 86% are located in Southern California. El Pollo Loco currently
employs approximately 2,500 people.
El Pollo Loco restaurants are generally open 12 hours a day, seven days a
week for lunch and dinner. A majority of the Company's El Pollo Loco restaurants
have drive-thru facilities, which provided 33% of the chain's revenues in 1996.
The dinner daypart for El Pollo Loco is the strongest, representing 54% of total
sales.
El Pollo Loco directs its marketing at customers desiring an alternative to
traditional fast food products, offering unique tasting and high quality
products which help position the brand as high quality fast food at a
competitive price. The restaurants are designed to facilitate customer viewing
of the preparation of the flame-broiled chicken, and the food is served quickly,
but prepared slowly, using fresh ingredients. Much of the brand's recent growth
can be attributed to successful menu positioning, new product offerings, dual
branding with the complementary Fosters Freeze dessert line, which commenced in
late 1995, and restaurant remodeling. The average guest check at El Pollo Loco
in 1996 was $6.63 and average annual Company-owned restaurant sales reached
record levels of approximately $1.2 million in 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 1997, the
Company intends to open relatively few Company-owned El Pollo Loco restaurants
and focus instead on its franchising efforts. To accelerate the franchise
expansion, in 1996 the Company sold eight units to franchisees which were not
part of the growth strategy for Company-owned El Pollo Loco 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.
In 1996 the chain had a net increase of 24 units, representing a net 31
franchise unit increase, offset by a Company-operated decrease of seven units.
The initial fee for a single El Pollo Loco franchise is $35,000 and the current
royalty payment rate is 4% of gross sales.
El Pollo Loco recently launched a co-branding effort with Flagstar's
Hardee's restaurants in South Carolina. This partnership, which is intended to
take advantage of Hardee's exceptional breakfast business and El Pollo Loco's
strong
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lunch and dinner dayparts, will serve as an initial test of the appeal of El
Pollo Loco to consumers in the eastern United States.
COCO'S
Coco's is a regional bakery restaurant chain operating primarily in
California, Arizona, and Texas, as well as Japan and Korea. Coco's currently
consists of 183 Company-operated, five domestic franchised and 278 international
licensed restaurants, and employs approximately 9,000 people. Coco's offers a
variety of fresh-baked goods such as pies, muffins and cookies and value-priced,
innovative menu items that capitalize on emerging food trends in the western
United States. The chain has positioned itself at the upper end of the mid-scale
family-style category, offering a variety of great food, great service, and a
pleasant atmosphere at fair prices, to answer the needs of quality conscious
family diners. The restaurants are generally open 18 hours a day, with several
units opened 24 hours a day on weekends. Coco's restaurants have uniform menus
and serve breakfast, lunch and dinner, as well as a "late night" menu in those
restaurants open around the clock.
Lunch and dinner dayparts are Coco's strongest, comprising 37% and 39% of
1996 sales, respectively. In 1996, the average guest check was $6.79, with
average annual unit sales of approximately $1.5 million.
With a foreign presence that is among the largest of any U.S. based,
non-fast food restaurant chain, Coco's has laid the foundation to aggressively
expand its international operations. Internationally, 21 units have been added
to the system since the Company acquired the chain in May 1996. Additionally,
Coco's is placing new emphasis on domestic franchising as an opportunity to
achieve further growth of the brand. The initial fee for a single Coco's
franchise is $35,000 and the current royalty payment rate is 4% of net sales.
CARROWS
Carrows is a regional mid-scale family-style restaurant chain operating
primarily in seven western states. Carrows currently consists of 160
Company-operated units and employs approximately 7,000 people. Carrows
specializes in traditional American food, with an emphasis on quality, homestyle
fare at an excellent value. The concept appeals strongly to families with
children as well as to mature adults -- two groups expected to grow rapidly into
the next century. The menu is always current, but not trendy, and is revised
regularly to reflect the most appealing foods that guests demand. The
restaurants are generally open 18 hours a day, with 25% open 24 hours a day.
Carrows restaurants have uniform menus and serve breakfast, lunch and dinner, as
well as a "late night" menu in those restaurants open 24 hours a day.
Lunch and dinner dayparts are Carrows' strongest, comprising 30% and 44% of
1996 sales, respectively. In 1996, the average guest check was $6.26, with
average annual unit sales of approximately $1.3 million.
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, region, district
and restaurant level managers or leaders, the Company standardizes
specifications for the preparation and efficient service of quality food, the
maintenance and repair of its premises and the appearance and conduct of its
employees. Major emphasis is placed on the proper preparation and delivery of
the product to the consumer and on the cost-effective procurement and
distribution of quality products.
A principal feature of the Company's restaurant operations is the constant
focus on improving operations at the unit level. Unit managers are especially
hands-on and versatile in their supervisory activities. Region and district
leaders have no offices and spend substantially all of their time in the
restaurants. A significant majority of restaurant management personnel began as
hourly employees in the restaurants and therefore perform restaurant functions
and train by example. The Company benefits from an experienced management team.
Each of the Company's restaurant chains maintains training programs for
employees and restaurant managers. Restaurant managers and assistant managers
receive training at specially designated training units. Areas of training for
managers include customer interaction, kitchen management and food preparation,
data processing and cost control techniques, equipment and building maintenance
and leadership skills. Video training tapes demonstrating various restaurant job
functions are located at each restaurant location and are viewed by employees
prior to a change in job function or using new equipment or procedures.
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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 with HFS.
Financial and management control is facilitated by the use of point-of-sale
("POS") systems in all of the Company's restaurants which transmit detailed
sales reports, payroll data and periodic inventory information for management
review. During the fourth quarter of 1996, the Company began rolling out new POS
systems in its Company-owned Denny's restaurants. These systems are expected to
help the restaurants improve customer service by providing more accurate and
faster turnaround of customer orders and better inventory control. In addition,
the new POS systems will aid in decision-making by providing sales information
on a more timely basis, with a higher level of detail for better data analysis.
Over the next two years, management intends to install new POS systems in all of
Flagstar's Company-owned restaurants pursuant to its information services
agreement with Integrated Systems Solution Corporation ("ISSC") as more fully
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ADVERTISING
The Company uses an integrated process to promote its concepts, including
media, menu strategy, interior/exterior building design, style of service and
specialized promotions to help differentiate itself in the marketplace. Media
advertising is primarily product oriented, generally featuring high margin,
special entrees or meal combinations presented and priced to convey high value.
Such advertising is conducted through national, regional and local television
advertising as well as radio, outdoor and print advertising depending on the
target market. Sophisticated consumer marketing research techniques are utilized
to measure customer satisfaction and customers' evolving expectations. During
1996, the Company spent from 3% to 7% of its concepts' gross sales on
advertising.
In accordance with the HFS licensing agreements, the Company spent
approximately 7.1% of its Hardee's units' total gross sales on marketing and
advertising during 1996. Of this amount, approximately 3.0% of total gross sales
is contributed to media cooperatives and HFS' national advertising fund. The
balance was directed by the Company at local levels.
SITE SELECTION
The success of any restaurant is influenced significantly by 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.
RAW MATERIALS SOURCES AND AVAILABILITY
The Company has a centralized purchasing program which is designed to
ensure uniform product quality as well as reduced food, beverage and supply
costs. The Company's size provides it with significant purchasing power which
often enables it to obtain products at more favorable prices from several
nationally recognized manufacturers.
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, PFC, to MBM, the
Company entered into an eight year distribution agreement, subsequently extended
to ten years, with MBM under which PFC/MBM will continue to distribute and
supply certain products and supplies to the Company's Denny's, Hardee's,
Quincy's and El Pollo Loco restaurants. Beginning in November 1997, Coco's and
Carrows will become subject to similar agreements. There are no volume
requirements relative to these agreements; however, the products named therein
must be purchased through PFC/MBM unless they are unable to make delivery within
a reasonable period. During the third quarter of 1996, the Company sold
Portion-Trol Foods, Inc. and the Mother Butler Pies division of Denny's, its two
food processing operations. In conjunction with each of these sales, the Company
entered into a five year purchasing agreement with the acquirer under which the
Company is required to
6
<PAGE>
purchase certain minimum annual volumes. If such volumes are not purchased, the
agreements provide for the payment of penalties.
The Company believes that satisfactory sources of supply are generally
available for all the items regularly used by its restaurants and has not
experienced any material shortages of food, equipment, or other products which
are necessary to its restaurant operations.
SEASONALITY
The Company's business is moderately seasonal. Restaurant sales are
generally greater in the second and third calendar quarters (April through
September) than in the first and fourth calendar quarters (October through
March). Occupancy and other operating costs, which remain relatively constant,
have a disproportionately negative effect on operating results during quarters
with lower restaurant sales. The Company's working capital requirements also
fluctuate seasonally, with its greatest needs occurring during its first and
fourth quarters.
TRADEMARKS AND SERVICE MARKS
The Company, either directly or through wholly-owned subsidiaries, has
registered certain trademarks and service marks with the United States Patent
and Trademark office and in international jurisdictions, some of which include
Denny's(Register mark), El Pollo Loco(Register mark), Quincy's(Register mark),
Coco's(Register mark), Carrows(Register mark), and Grand Slam
Breakfast(Register mark). The Company regards its trademarks and service marks
as important to the identification of its restaurants and believes they are of
material importance to the conduct of its business. Domestic trademark and
service mark registrations are renewable at various intervals from 10 to 20
years, while international trademark and service mark registrations have various
durations from five to 20 years. The Company generally intends to renew
trademarks and service marks which come up for renewal. The Company owns or has
rights to all trademarks it believes are material to its restaurant operations.
RESEARCH AND DEVELOPMENT
The Company engages in research and development on an ongoing basis,
testing new products and procedures for possible introduction into the Company's
systems. The Company has also frequently helped HFS develop and test-market new
products. While research and development activities are important to the
Company's business, amounts expended for these activities are not material.
COMPETITION
The restaurant industry can be divided into three main segments:
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 Coco's, Carrows, Denny's
and Quincy's, is characterized by complete meals, menu variety and moderate
prices ($5-$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 (generally, $3-$5
average check), finger foods, fast service, and convenience. A small number of
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.
Management believes the Company's principal competitive strengths include
its restaurants' brand name recognition; the value, variety and quality of food
products served; the quality and training of its employees; and the Company's
market penetration, which has resulted in economies of scale in a variety of
areas, including advertising, distribution and field supervision.
7
<PAGE>
GOVERNMENT REGULATIONS
The Company and its franchisees are subject to various local, state and
Federal laws and regulations governing various aspects of the restaurant
business, including, but not limited to, health, sanitation, environmental
matters, safety, disabled persons' access to its restaurant facilities, the sale
of alcoholic beverages and regulations regarding hiring and employment
practices. The operation of the Company's franchise system is also subject to
regulations enacted by a number of states and rules promulgated by the Federal
Trade Commission. The Company believes that it is in material compliance with
applicable laws and regulations, but it cannot predict the effect on operations
of the enactment of additional requirements in the future.
The Company is subject to Federal and state laws governing matters such as
minimum wage, overtime and other working conditions. At December 31, 1996, a
substantial number of the Company's employees were paid the minimum wage.
Accordingly, increases in the minimum wage or decreases in the allowable tip
credit (which reduces the minimum wage that must be paid to tipped employees in
certain states) increase the Company's labor costs. This is especially the case
in California, where there is no tip credit. In November, 1996, an initiative in
California was passed raising the minimum wage in California from $4.25 to $5.00
per hour, effective March 1, 1997, and to $5.75 per hour effective March 1,
1998. Also the Federal minimum wage increased from $4.25 per hour to $4.75 per
hour on October 1, 1996 and will increase again to $5.15 per hour on September
1, 1997. Employers must pay the higher of the Federal or state minimum wage. The
Company will attempt to offset increases in the minimum wage through pricing and
other cost control efforts; however, there can be no assurance that the Company
or its franchisees will be able to pass such additional costs on to its
customers.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each executive
officer of FCI, along with senior level executive officers of Flagstar.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL OCCUPATION OR
NAME AGE EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
<S> <C> <C>
James B. Adamson 49 Chairman, President and Chief Executive Officer of FCI and Flagstar (1995-present);
Chief Executive Officer of Burger King Corporation (1993-1995); 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).
Craig S. Bushey 41 Senior Vice President of Flagstar and President of Hardee's Division (May
1996-present); Managing Director, Vice President (Western Europe) of Burger King
(1995-May 1996); Region Vice President (Central Region) of Burger King (1994-1995);
Burger King Reengineering Team (1993-1994); Region Vice President (Midwest Retail) of
Burger King (1992-1993); Region Vice President (Atlanta Retail) of Burger King
(1990-1992).
C. Robert Campbell 52 Vice President and Chief Financial Officer of FCI and Executive Vice President and
Chief Financial Officer of Flagstar (1995-present); Executive Vice President of Human
Resources and Administration for Ryder System, Inc. (1991-1995); Executive Vice
President -- Finance of Vehicle Leasing and Services Division of Ryder System, Inc.
(1981-1991).
Ronald B. Hutchison 47 Vice President and Treasurer of Flagstar (1995 to present); Vice President and
Treasurer of Leaseway Transportation Corp. (1988-1995).
Donna M. Mascolo 42 Vice President and Corporate 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).
Edna K. Morris 45 Executive Vice President of Flagstar and President of Quincy's Division (April
1996-present); Executive Vice President, Human Resources and Corporate Affairs of
Flagstar (1995-April 1996); Senior Vice President, Human Resources of Flagstar
(1993-1995); Vice President, Education and Development of Flagstar (1992-1993); Senior
Vice President/Human Resources of HFS (1987-1992).
Rhonda J. Parish 40 Vice President and General Counsel of FCI and Senior Vice President and General
Counsel of Flagstar (1995-present); Secretary of FCI and Flagstar (1995-present);
Assistant General Counsel of Wal-Mart Stores, Inc. (1990-1994); Corporate Counsel of
Wal-Mart Stores, Inc. (1983-1990).
John A. Romandetti 46 Senior Vice President of Flagstar and President, Denny's Division (January
1997-present); Senior Vice President of Flagstar and President of El Pollo Loco
(1995-present); Vice President of Operations for Burger King Corporation (1989-1995).
Mark L. Shipman 47 Senior Vice President of Flagstar and President of Coco's/Carrows Division (May
1996-present); Vice President of Acquisitions and Development of Flagstar (1995-May
1996); Vice President of Administration of Denny's Division (1993-1995); Vice
President of Operations (West) of Denny's Division (1991-1993).
Paul R. Wexler 53 Senior Vice President, Procurement and Distribution of Flagstar (1995-present); Vice
President, Procurement and Quality Assurance -- Marriott International (1991-1995).
Stephen W. Wood 38 Senior Vice President, Human Resources and Corporate Affairs of Flagstar (April
1996-present); Vice President, Compensation, Benefits, and Employee Information
Systems and Corporate Office Human Resources of Flagstar (1993-April 1996); Senior
Director, Compensation, Benefits and Employee Information Systems of Flagstar (1993);
Director, Benefits and Executive Compensation of Hardee's Food System (1991-1993).
</TABLE>
EMPLOYEES
At December 31, 1996, the Company had approximately 93,000 employees. 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.
9
<PAGE>
ITEM 2. PROPERTIES
Most of the Company's restaurants are free-standing facilities. Presented
below is a schedule of the average property and building square footage, as well
as average seating capacity for each of the Company's concepts:
<TABLE>
<CAPTION>
AVERAGE AVERAGE AVERAGE
PROPERTY BUILDING SEATING
CONCEPT SIZE IN SQ. FT. SIZE IN SQ. FT. CAPACITY
<S> <C> <C> <C>
Carrows.................................................... 35,000 5,400 160
Coco's..................................................... 35,000 5,000 160
Denny's.................................................... 42,000 4,750 150
El Pollo Loco.............................................. 20,000 2,100 60
Hardee's................................................... 52,000 3,400 95
Quincy's................................................... 64,000 7,100 250
</TABLE>
The following table sets forth certain additional information regarding the
Company's restaurant properties as of December 31, 1996:
<TABLE>
<CAPTION>
LAND LEASED
LAND AND AND LAND AND
BUILDING BUILDING BUILDING
CONCEPT OWNED OWNED LEASED TOTAL
<S> <C> <C> <C> <C>
Carrows................................................ 3 10 147 160
Coco's................................................. 2 39 142 183
Denny's................................................ 254 36 604 894
El Pollo Loco.......................................... 9 33 54 96
Hardee's............................................... 288 100 192 580
Quincy's............................................... 152 41 6 199
Total................................................ 708 259 1,145 2,112
</TABLE>
10
<PAGE>
The number and location of the Company's restaurants in each chain as of
December 31, 1996 are presented below:
<TABLE>
<CAPTION>
DENNY'S EL POLLO LOCO COCO'S
FRANCHISED FRANCHISED FRANCHISED
STATE OWNED LICENSED HARDEE'S QUINCY'S OWNED LICENSED OWNED LICENSED CARROWS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama.................. 1 8 156 45 -- -- -- -- --
Alaska................... -- 8 -- -- -- -- -- -- --
Arizona.................. 27 47 -- -- 1 1 17 1 9
Arkansas................. 1 5 3 -- -- -- -- -- --
California............... 223 129 -- -- 95 123 135 4 120
Colorado................. 25 13 -- -- -- -- 6 -- --
Connecticut.............. 5 3 -- -- -- -- -- -- --
Delaware................. 3 -- -- -- -- -- -- -- --
District of Columbia..... -- -- -- -- -- -- -- -- --
Florida.................. 102 77 56 41 -- -- -- -- --
Georgia.................. -- 24 10 11 -- -- -- -- --
Hawaii................... 4 2 -- -- -- -- -- -- --
Idaho.................... -- 7 -- -- -- -- -- -- --
Illinois................. 47 10 -- -- -- -- -- -- --
Indiana.................. 14 9 -- -- -- -- 3 -- --
Iowa..................... -- 5 -- -- -- -- -- -- --
Kansas................... 9 4 -- -- -- -- -- -- --
Kentucky................. -- 20 -- -- -- -- -- -- --
Louisiana................ 7 2 1 -- -- -- -- -- --
Maine.................... -- 4 -- -- -- -- -- -- --
Maryland................. 14 16 -- -- -- -- -- -- --
Massachusetts............ 9 -- -- -- -- -- -- -- --
Michigan................. 38 2 -- -- -- -- -- -- --
Minnesota................ 13 4 -- -- -- -- -- -- --
Mississippi.............. 2 2 40 8 -- -- -- -- --
Missouri................. 29 6 -- -- -- -- 2 -- --
Montana.................. -- 5 -- -- -- -- -- -- --
Nebraska................. -- 4 -- -- -- -- -- -- --
Nevada................... 12 6 -- -- -- 6 -- -- 7
New Hampshire............ 2 1 -- -- -- -- -- -- --
New Jersey............... 11 2 -- -- -- -- -- -- --
New Mexico............... 2 12 -- -- -- -- -- -- 4
New York................. 17 18 -- -- -- -- -- -- --
North Carolina........... 7 12 58 39 -- -- -- -- --
North Dakota............. -- 3 -- -- -- -- -- -- --
Ohio..................... 33 22 18 1 -- -- -- -- --
Oklahoma................. 9 13 -- -- -- -- -- -- --
Oregon................... 5 18 -- -- -- -- -- -- 9
Pennsylvania............. 51 3 2 -- -- -- -- -- --
Rhode Island............. -- -- -- -- -- -- -- -- --
South Carolina........... 9 5 123 42 -- 1 -- -- --
South Dakota............. -- 1 -- -- -- -- -- -- --
Tennessee................ 3 11 110 9 -- -- -- -- --
Texas.................... 62 57 -- -- -- 4 14 -- 10
Utah..................... 7 12 -- -- -- -- -- -- --
Vermont.................. -- 2 -- -- -- -- -- -- --
Virginia................. 19 8 3 3 -- -- -- -- --
Washington............... 50 19 -- -- -- -- 6 -- 1
West Virginia............ -- 3 -- -- -- -- -- -- --
Wisconsin................ 12 7 -- -- -- -- -- -- --
Wyoming.................. -- 6 -- -- -- -- -- -- --
Canada................... 10 20 -- -- -- -- -- -- --
International............ -- 25 -- -- -- 10 -- 278 --
Total.................. 894 702 580 199 96 145 183 283 160
</TABLE>
In addition to the restaurant locations set forth above, the Company also
owns a nineteen 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 sixteen floors of the tower,
with the balance leased to others. The Company also owns a 107,000 square foot
building located in Irvine, California. The Irvine facility, which was acquired
in 1996 in the Coco's and Carrows acquisition, is used as a commissary, which
manufactures soups, salad dressings and sauces for Coco's and Carrows, and as
warehouse and office space (currently leased to FRI). This facility is
currently in the process of being sold. The completion of such sale is
expected in the first quarter of 1997.
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
11
<PAGE>
remaining plaintiffs, who are 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. 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 six of the plaintiffs leaving two plaintiff
franchisees remaining in the lawsuit. With respect to the remaining plaintiffs,
discovery has been completed, and a trial date to hear the outstanding issues in
the case is anticipated sometime during 1997.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for Federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by FCI and Flagstar for the seven taxable periods ended December 31, 1992.
In the third quarter of 1996 this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act ("the Act") in August 1996. This Act includes a
provision that clarified Internal Revenue Code Section 162(k) to allow for
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. The Company believes the remaining proposed
deficiencies relating to the proposed disallowance of certain costs incurred in
connection with the 1989 leveraged buyout of Flagstar are substantially
incorrect, and it intends to continue to contest such proposed deficiencies.
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. The defendants
deny any wrongdoing. There has been limited discovery in this action to date
with the parties having reached an agreement in principle as to a settlement of
the action. Such settlement is contingent upon the approval of the special
litigation committee of the Company's Board and the approval of the Court.
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 the ultimate
disposition of these matters will not materially affect the financial position
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<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 February 19, 1997, 440 shares of common stock of
Flagstar were outstanding, all of which are owned by FCI.
Dividends were not paid by Flagstar during 1995 or 1996. 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, 1996. 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,
(IN MILLIONS, EXCEPT RATIOS) 1992 (A) 1993 (A) 1994 (A) 1995 (A) 1996 (I)
<S> <C> <C> <C> <C> <C>
Income Statement data:
Operating revenue.................................. $2,443.0 $2,615.2 $2,666.0 $2,571.5 $2,542.3
Operating income (loss)............................ 196.7 (1,102.4)(b) 211.5(c) 98.2(d) 156.4
Loss from continuing operations (e)................ (45.3) (1,252.7) (31.0) (147.1) (99.6)
Ratio of earnings to fixed charges (f)............. -- -- -- -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (f)................ 51.8 1,332.4 33.5 147.2 116.1
Balance Sheet data (at end of period):
Current assets (g)................................. 98.4 122.2 186.1 285.4 185.5
Working capital (deficiency) (g)(h)................ (256.3) (273.0) (205.6) (122.2) (301.3)
Net property and equipment......................... 1,269.9 1,166.8 1,196.0 1,104.0 1,168.3
Total assets....................................... 3,177.4 1,545.4 1,594.0 1,513.8 1,693.4
Long-term debt..................................... 2,321.3 2,491.2 2,217.6 2,146.1 2,329.4
</TABLE>
(a) Certain amounts for the four years ended December 31, 1995 have been
reclassified to conform to the 1996 presentation.
(b) 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.
(c) Operating income for the year ended December 31, 1994 reflects a recovery of
restructuring charges of $7.2 million.
(d) 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.
(e) The Company has classified as discontinued operations, Canteen Corporation,
a food and vending subsidiary, sold in 1994, TW Recreational Services, Inc.
("TWRS"), a recreation services subsidiary, and Volume Services, Inc.
("VS"), a stadium concessions subsidiary. TWRS and VS were sold during 1995.
(f) 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.
(g) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $480.8 million, $103.2 million, and $77.3 million as
of December 31, 1992 through 1994, respectively and $5.1 million as of
December 31, 1996. Such assets held for sale relate primarily to the
Company's food and vending and concessions and recreation services
subsidiaries.
(h) A negative working capital position is not unusual for a restaurant
operating company. 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. 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
13
<PAGE>
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, PFC, net of current
assets and liabilities of such subsidiary, and (ii) the concession and
recreation services subsidiaries. The increase in the working capital
deficiency from December 31, 1995 to December 31, 1996 reflects the use of
the proceeds from the 1995 sales noted above and the proceeds of the sale of
both Portion-Trol Foods, Inc. and Mother Butler Pies for operating needs and
for the acquisition of Coco's and Carrows. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
(i) Reflects the acquisition in May 1996 of Coco's and Carrows.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Flagstar's Management's Discussion and Analysis is divided into two
sections. The first section analyzes the results of operations; first on a
consolidated basis, then for each of Flagstar's six restaurant concepts. The
second section addresses Flagstar's liquidity and capital resources. This
discussion should be read in conjunction with "Selected Financial Data" and the
Consolidated Financial Statements and other more detailed financial information
appearing elsewhere herein.
RESULTS OF OPERATIONS
FLAGSTAR CONSOLIDATED
<TABLE>
<CAPTION>
($ IN MILLIONS) 1994 1995 1996
<S> <C> <C> <C>
Net Company Sales........................................................ $2,620 $2,512 $2,471
Franchise Revenue........................................................ 46 59 71
Total Revenue............................................................ 2,666 2,571 2,542
Operating Expenses....................................................... 2,455 2,473 2,386
Operating Income......................................................... 211 98 156
Depreciation/Amortization................................................ 130 133 130
Net Interest Expense From Continuing Operations.......................... 242 243 269
Income Tax (Benefit)..................................................... (2) 0 (16)
Net Income (Loss)........................................................ $ 350 $ (70) $(100)
</TABLE>
14
<PAGE>
1996 RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
UNITS
CONVERTED
FROM
ENDING COMPANY TO ENDING
UNITS UNITS UNITS FRANCHISE UNITS
12/31/95 OPENED CLOSED (TURNKEY) 12/31/96
<S> <C> <C> <C> <C> <C>
Denny's
Company Owned 933 -- (20) (19) 894
Franchised Units 596 72 (10) 19 677
Int'l Licensees 24 1 -- -- 25
1,553 73 (30) -- 1,596
Hardee's 593 1(b) (14) -- 580(c)
Quincy's 203 -- (4) -- 199
El Pollo Loco
Company Owned 103 1 -- (8) 96
Franchised Units 112 15 -- 8 135(c)
Int'l Licensees 2 8 -- -- 10
217 24 -- -- 241
Subtotal 2,566 98 (48) -- 2,616
Coco's (a)
Company Owned 188 -- (5) -- 183
Franchised Units 6 -- (1) -- 5
Int'l Licensees 252 26 -- -- 278
446 26 (6) -- 466
Carrows (a) 161 2 (3) -- 160
Subtotal 607 28 (9) -- 626
3,173 126 (57) -- 3,242
</TABLE>
(a) Coco's and Carrows were acquired by Flagstar in May of 1996. Year-to-date
data is provided for comparison purposes only. Coco's and Carrows restaurant
unit activity since acquisition date is as follows:
<TABLE>
<CAPTION>
UNITS
CONVERTED
FROM
COMPANY
UNITS AT TO ENDING
ACQUISITION UNITS UNITS FRANCHISE UNITS
DATE OPENED CLOSED (TURNKEY) 12/31/96
<S> <C> <C> <C> <C> <C>
Coco's
Company Owned 184 -- (1) -- 183
Franchised Units 6 -- (1) -- 5
Int'l Licensees 257 21 -- -- 278
Carrows 163 -- (3) -- 160
610 21 (5) -- 626
</TABLE>
(b) Represents the re-opening of a unit that was temporarily closed at December
31, 1995.
(c) Unit count includes one Hardee's and El Pollo Loco dual brand unit.
15
<PAGE>
FLAGSTAR CONSOLIDATED
1996 VS. 1995
OPERATING TRENDS: During 1996, the Company experienced comparable store
sales increases at Denny's and El Pollo Loco, due to the continued success of
Denny's value menu strategy, El Pollo Loco's successful menu positioning and new
product introduction efforts, dual branding at El Pollo Loco with Foster's
Freeze, and favorable results from remodeled restaurants. However, the Company
continued to experience significant declines in comparable store sales at
Hardee's due to continued competitive promotions by quick-service competitors.
Quincy's also showed comparable store sales declines reflecting the general
trend in the mid-scale family-steak category as well as operational issues
relative to training, food quality, service and facilities. During the third
quarter management began to address these operational issues. New products were
developed and tested, training was implemented at all levels, facilities were
improved and management made plans to relaunch the Quincy's brand. This program
is still in its early stages and it will take time to measure its full impact on
results. Primarily as a result of the lower revenues at Quincy's, the Company
experienced a reduction in operating income of $7.3 million (after removing the
impact on 1995 results of the restructuring and impairment charges taken in 1995
and removing the impact on 1996 results of the operating income decrease in 1996
resulting from the dispositions of PFC and PTF and the increases in operating
income in 1996 attributable to the acquisition of Coco's and Carrows). Overall,
the trends experienced by the Company since the 1989 leveraged buyout generally
have continued through 1996; operating income has been insufficient to cover the
interest and debt expense resulting in continued losses from continuing
operations. The external factors that have contributed to these trends,
including increased competition and intensive pressure on pricing due to
discounting, are expected to continue.
In recognition of these matters, in addition to addressing the negative
trends at Hardee's and Quincy's, management has taken steps to address the
Company's debt burden and its impact on operations. For further information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Flagstar CONSOLIDATED REVENUE for 1996 was $2,542.3 million, a decrease of
$29.2 million, or 1.1%, compared to 1995. The impact on revenues of the Coco's
and Carrows acquisition ($163.7 million and $131.4 million, respectively in
revenue was contributed by Coco's and Carrows in 1996), was somewhat offset by
the loss of revenue attributable to the dispositions of the Company's food
distribution and processing operations, PFC and PTF, in September 1995 and 1996,
respectively (the decrease in revenue in 1996 as compared to 1995 as a result of
these dispositions totaled $218.2 million). Excluding the effects of such
acquisition and dispositions, revenue, on a comparable basis, was $2,245.9
million in 1996, a decrease of $106.0 million (4.5%) compared to 1995. The
revenue decrease primarily reflects the impact of lower comparable store sales
at Hardee's and Quincy's and 63 fewer Company-operated restaurants as compared
with the prior year (excluding the impact of the Coco's and Carrows
acquisition), somewhat offset by an increase in franchise revenue of $11.7
million, reflecting 133 additional franchised units in 1996. At Hardee's and
Quincy's, comparable store sales decreased 7.2% and 10.8%, respectively.
Comparable store sales at Denny's and El Pollo Loco increased 1.7% and 7.2%,
respectively; however due to decreases in the number of Company-operated
restaurants in comparison to 1995, neither concept reported increases in revenue
from Company-operated units.
OPERATING EXPENSES decreased by $87.3 million (3.5%) in 1996 to $2,385.9
million as compared to 1995. This decrease reflects the impact of several
significant events which affect the comparability of 1996 and 1995 results,
including: a restructuring charge and charge for impaired assets totaling $67.2
million in 1995; a decrease in depreciation expense in 1996 of $5.4 million due
to the impairment write-down in 1995; and a decrease in expenses in 1996 of
$201.6 million due to the sales of PTF and PFC. These items are offset, in part,
by the impact of the operating expenses of Coco's and Carrows which were
acquired in 1996 and total $280.2 million.
Excluding the effect of the items noted above, operating expenses decreased
$93.3 million in 1996 in comparison to 1995. This decrease is primarily
attributable to a decline in costs associated with the decline in operating
revenue, the positive impact of cost cutting measures (reflected in improved
margins at Denny's, Hardee's and El Pollo Loco), and the increase of $8.2
million of the current year amortization of the deferred gains attributable to
the sales of PFC and PTF over the prior year amount. This amortization is
recorded as a reduction of product costs. These decreases in operating expense
are somewhat offset by a decrease in gains from the sales of restaurants to
franchisees reflected in operating expenses from $24.5 million in 1995 to $8.4
million in 1996 and an increase in the cost to administer the consent decree
entered into in 1993 of $5.9 million over the prior year to $11.3 million.
OPERATING INCOME for 1996 increased by $58.2 million to $156.4 million in
comparison to 1995 as a result of the factors noted in the preceding paragraphs.
16
<PAGE>
INTEREST AND DEBT EXPENSE, NET, from continuing operations and discontinued
operations totaled $268.9 million for the year ended December 31, 1996 as
compared to $262.2 million for the prior year. The net increase is due
principally to the addition of $17.6 million in interest and debt expense
associated with the Coco's and Carrows acquisition. This increase is partially
offset by the following: a decrease in interest expense of approximately $5.3
million due to a lower level of principal outstanding during the 1996 period
(excluding the impact of the Coco's and Carrows acquisition) resulting primarily
from the repurchase of approximately $25.0 million of senior indebtedness on
September 30, 1995 and the scheduled repayments of long-term debt during 1996;
an increase in interest income of $3.2 million during 1996 due to increased cash
and cash equivalents prior to the acquisition of Coco's and Carrows; a decline
of $1.6 million in interest expense during the 1996 period associated with lower
interest rates related to interest rate exchange agreements; and the elimination
of $0.8 million in interest expense associated with various operations that were
sold in 1995.
THE BENEFIT FROM INCOME TAXES from continuing operations for the year ended
December 31, 1996 reflects an effective income tax rate of 16% compared with 0%
for 1995. The change from the prior year can be attributed to the recognition of
refunds in the current period due to the carryback of current year tax losses
and the reversal of certain reserves established in prior years in connection
with proposed deficiencies from the Internal Revenue Service (See Note 6 to the
accompanying Consolidated Financial Statements for additional information).
THE LOSS FROM CONTINUING OPERATIONS was $99.6 million for the year ended
December 31, 1996 as compared with $147.1 million for the prior year. The net
loss for the 1996 year end was $99.6 million compared to a net loss for the
prior year of $69.4 million. The prior year included $77.2 million of income
from discontinued operations reflecting gains of $77.9 million on the related
sales of the discontinued operations in the fourth quarter of 1995.
ACCOUNTING CHANGE
In 1996, the Company adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement 123, "Accounting for Stock Based
Compensation" (SFAS 123) while continuing to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The adoption of SFAS 123 did not impact the
Statements of Consolidated Operations or the Consolidated Balance Sheets
included herein.
1995 VS. 1994
Flagstar's CONSOLIDATED REVENUE for 1995 decreased by approximately $94.5
million (3.5%) as compared with 1994 primarily reflecting the sale of PFC in
September 1995 coupled with the continued weakness of the Company's Hardee's
operations.
The Company's OPERATING EXPENSES, 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. Such
decrease is principally due to a decrease of approximately $43.6 million
attributable to the sale of Denny's distribution subsidiary, PFC, which was sold
in September 1995 and an increase in gains on sales of restaurants from $8.8
million in 1994 to $24.5 million in 1995.
TOTAL INTEREST AND DEBT EXPENSE from continuing and discontinued operations
decreased by $18.1 million in 1995 as compared to 1994 (an $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 facility of the
Company's 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 related to other
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 resulting in a net gain of $77.9 million. These businesses have been
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
17
<PAGE>
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.
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 involved a 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.
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 reflected the write-down of 99 units which the Company planned to
continue to operate and an additional 36 units which were to be closed or sold
in 1996. Of the 36 units, the Company had closed 29 units through 1996. It
intends to dispose of two of the remaining units in 1997 and continue to operate
the other five.
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 $25.0
million 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 totalling $11.7 million, net of income tax
benefits of $0.2 million representing the charge-off of unamortized deferred
financing costs associated with the prepayment in June 1994 of senior bank debt.
RESTAURANT OPERATIONS
DENNY'S
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Net Company Sales (a).................................................... $1,508 $1,442 $1,202
Franchise Revenue........................................................ 40 49 55
Total Revenue (a)........................................................ 1,548 1,491 1,257
Operating Expenses (a)................................................... 1,425 1,394 1,135
Operating Income (a)(b).................................................. 123 97 122
Depreciation/Amortization (a)............................................ $ 68 $ 70 $ 53
Comparable Store Sales Increase.......................................... 0.3% 2.4% 1.7%
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands):
Company Operated....................................................... $1,248 $1,283 $1,313
Franchised............................................................. 1,060 1,086 1,090
Average Guest Check...................................................... $ 4.75 $ 4.86 $ 5.03
Average Weekly Traffic Count............................................. 5,047 5,071 5,025
Operated Units
Company Operated....................................................... 978 933 894
Franchise.............................................................. 512 596 677
International.......................................................... 58 24 25
Total............................................................. 1,548 1,553 1,596
</TABLE>
18
<PAGE>
(a) Includes the operating results of the Company's food processing (PTF) and
distribution (PFC) operations.
(b) 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 Notes 1 and 3 to the Consolidated Financial Statements.
1996 VS. 1995
REVENUE from Company-owned units for 1996 decreased by $240.1 million
(16.7%) from 1995 to $1,201.6 million. $218.2 million of this decrease can be
attributed to the dispositions of PFC and PTF in 1995 and 1996, respectively.
The remaining decrease of $52.2 million primarily results from operating 39
fewer Company-owned restaurants, partially offset by gains in comparable store
sales of $30.3 million.
Average unit sales in 1996 increased by 2.4% versus 1995. This increase is
comprised of a 0.7% gain resulting from the impact of closed restaurants and
those sold to franchisees, and a 1.7% gain in comparable store sales. The gains
in comparable store sales were driven by an increase in average guest check,
which was somewhat offset by a decrease in customer traffic. The full year gains
in average check were aided by a September price increase that eliminated the
$1.99 tier from the value menu. This price increase was triggered by commodity
cost increases, minimum wage legislation and labor rate pressures. While the
price increase had a positive impact on guest check averages, this increase was
somewhat offset by a decline in customer counts.
FRANCHISE REVENUE in 1996 increased by $6.2 million (12.7%) over 1995, to
$55.1 million. The increase in franchise revenue is primarily attributable to 82
additional franchised units in 1996. $2.2 million of the increase was generated
from initial fees from new franchise openings while the balance reflects an
increase in royalties from units added in 1995 and 1996. Nineteen Company-owned
units were sold to franchisees during 1996, generating $7.7 million in gains
which are reflected as a reduction in operating expense.
OPERATING EXPENSES for 1996 compared to 1995 decreased by $258.9 million
(18.6%) to $1,134.9 million. This decrease is partially due to the restructuring
charge and charge for impaired assets included in the 1995 results ($5.4 million
and $23.9 million, respectively), a $2.8 million decrease in 1996 depreciation
expense related to the 1995 impairment write-down, a $4.7 million increase in
the current year amortization of the deferred gain attributable to the sales of
PFC and PTF over the prior year amounts and a decrease of $201.6 million due to
the dispositions of PFC and PTF. The effect of these items is somewhat offset by
a decrease in the gains from restaurants sold to franchisees ($20.7 million in
1995 versus $7.7 million in 1996). Excluding these items, operating expenses
decreased $33.5 million from the prior year. This decrease reflects several
factors. Food costs and restaurant labor were favorable in comparison to 1995 by
$14.0 million and $8.8 million, respectively, reflecting the decline in the
number of Company-owned restaurants as well as the positive impact of cost
control measures in the restaurants. These decreases were offset, in part, by
higher commodity prices (particularly for pork, dairy, eggs and bread) over the
prior year and increases in the Federal and state minimum wages.
OPERATING INCOME for 1996 improved by $25.1 million (25.8%), as compared to
1995, to $121.9 million as a result of the factors noted above.
1995 VS. 1994
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.
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
19
<PAGE>
by gains on the sale of restaurants to franchisees of $20.7 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 $6.0 million.
HARDEE'S
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Revenue.................................................................. $ 701 $ 660 $ 603
Operating Expenses....................................................... 625 656 562
Operating Income (a)..................................................... 76 4 41
Depreciation/Amortization................................................ $ 41 $ 42 $ 37
Comparable Store Sales (Decrease)........................................ (3.6%) (8.6%) (7.2%)
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands)............................... $1,206 $1,104 $1,041
Average Guest Check...................................................... $ 3.11 $ 3.16 $ 3.17
Average Weekly Traffic Count............................................. 7,459 6,713 6,320
Operated Units........................................................... 595 593 580
</TABLE>
(a) 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 Notes 1 and 3 to the Consolidated Financial Statements.
1996 VS. 1995
REVENUE for Hardee's for 1996 decreased by $56.9 million (8.6%) from 1995,
to $602.9 million. The revenue decrease was primarily driven by 13 fewer
restaurants in the Company's chain and a decrease in average unit sales in
comparison to 1995. Comparable store sales decreased by 7.2% primarily due to
decreased customer traffic in the face of continued aggressive
"value/discounting" promotions by competitors within the quick-service segment
and inclement weather during the first quarter. In the second half of the year,
Flagstar's Hardee's began focusing less on discounting and more on overall
value, introducing items which are somewhat higher priced but which management
believes still offer good value for the money. The latest such promotion
introduces the "Monster" line of items, featuring a large burger and a large
omelet biscuit. This strategy has helped drive guest check averages; however,
the increased average guest check has only marginally offset the decrease in
traffic.
OPERATING EXPENSES in 1996 decreased $93.4 million (14.2%), to $562.2
million, as compared to 1995. This decrease is partially driven by the
restructuring charge and charge for impaired assets included in the 1995 results
($7.8 million and $23.7 million, respectively), a $2.3 million decrease in 1996
depreciation and amortization expense resulting from the impairment write-down
in 1995 and a $1.9 million increase in the current year amortization of the
deferred gain attributable to the sales of PFC and PTF over the prior year
amount. This decrease also reflects the impact of lower comparable store sales,
a decrease in the number of restaurants and management's increased focus on
achieving improvement in operating efficiencies. The success of such cost
control efforts is reflected by the fact that even after removing the impact on
1995 of the restructuring and impairment charges and the related reduction in
depreciation in 1996, operating income would have increased $2.7 million over
1995, despite a decrease in revenue of $56.9 million. Labor savings had the most
significant impact in reducing operating expenses. Labor as a percent of sales
was 1% lower than in 1995. This was accomplished primarily by reducing in-store
labor to become more competitive and more in line with quick-service industry
standards, allowing management to reduce costs despite the impact of an
increased Federal minimum wage.
OPERATING INCOME for 1996 improved by $36.5 million, to $40.7 million, in
comparison to 1995 as a result of the factors described above.
1995 VS. 1994
Hardee's REVENUE 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. The decline in traffic was impacted by continued aggressive promotions
and discounting by quick-service competitors. During 1995, the Company remodeled
59 Hardee's restaurants.
20
<PAGE>
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 $13.6 million decrease in
product costs directly associated with decreased revenues in 1995.
QUINCY'S
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Revenue.................................................................. $ 284 $ 294 $ 259
Operating Expenses....................................................... 261 272 252
Operating Income (a)..................................................... 23 22 7
Depreciation/Amortization................................................ $ 11 $ 12 $ 11
Comparable Store Sales Increase (Decrease)............................... 2.9% 4.8% (10.8%)
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands)............................... $1,350 $1,438 $1,301
Average Guest Check...................................................... $ 5.79 $ 5.88 $ 6.06
Average Weekly Traffic Count............................................. 4,486 4,703 4,132
Operated Units........................................................... 207 203 199
</TABLE>
(a) Operating income reflects a restructuring charge and charge for impaired
assets of $0.6 million for the year ended December 31, 1995. For a
discussion of the provision for restructuring and charge for impaired assets
see Notes 1 and 3 to the Consolidated Financial Statements.
1996 VS. 1995
REVENUE for Quincy's in 1996 decreased by $35.1 million (11.9%) from 1995,
to $259.2 million. The revenue decrease was primarily driven by a decrease in
customer traffic, as well as four fewer restaurants, offset somewhat by an
increase in the average guest check. Customer traffic, which decreased by 12%
versus 1995, was primarily responsible for the 10.8% decrease in comparable
store sales. The significant decline in customer traffic reflects, among other
things, continued traffic declines in the family-steak category, in general, as
well as a difficult comparison to the prior year (which benefited from several
newly remodeled units), in addition to the unsuccessful introduction of a new
steak product earlier in the year. Also, over the last two years management has
experimented with various formats at Quincy's, which has led to some customer
confusion and a lack of focus for the concept.
To address this issue, in October, management initiated a "Relaunch"
program to re-establish the brand and give customers a consistent experience. In
this regard, during the third quarter of 1996, new products were developed and
tested, training was implemented at all levels, facilities were improved, and
management rolled out a new value steak promotion, the "No Mistake Steak", which
also introduced a number of new products accompanied by increased media
advertising. Although the "Relaunch" results to date have been positive,
management notes that the program is still in its early stages and that it will
take time to measure its full impact on results.
OPERATING EXPENSES in 1996 as compared to 1995 decreased by $19.4 million
(7.1%), to $252.5 million. This decrease was driven by the decline in sales and
a $1.2 million increase in the current year amortization of the deferred gain
attributable to the sales of PFC and PTF over the prior year amount. These
decreases were partially offset by the additional costs in product, labor and
advertising to institute the "Relaunch" program. Primarily due to the training
efforts related to re-launching the brand, labor costs increased $3.0 million
(1.2%) over 1995. Also, after a period of no advertising for Quincy's in August
and September as the Relaunch plan was formulated, advertising was increased
significantly in the fourth quarter to support the reintroduction of the brand,
resulting in an overall increase in advertising expense of approximately $3.0
million in 1996 over the prior year.
OPERATING INCOME in 1996 as compared to 1995 declined by $15.7 million, to
$6.6 million, as a result of the factors described above.
1995 VS. 1994
Quincy's REVENUES increased by $9.9 million (3.5%) during 1995 as compared
to 1994 despite a four-unit decrease in the number of restaurants operated at
December 31, 1995 as compared to December 31, 1994. Such increase in revenues
21
<PAGE>
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
restaurants.
An increase in OPERATING EXPENSES is principally attributable to increases
in payroll and benefits expense of $4.4 million, product costs of $3.3 million
associated primarily with the increase in revenues during 1995, and advertising
expense of $2.7 million.
EL POLLO LOCO
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Net Company Sales........................................................ $ 127 $ 117 $ 114
Franchise Revenue........................................................ 6 10 14
Total Revenue............................................................ 133 127 128
Operating Expenses....................................................... 124 114 114
Operating Income......................................................... 9 13 14
Depreciation/Amortization................................................ $ 6 $ 5 $ 6
Comparable Store Sales Increase.......................................... 6.5% 2.0% 7.2%
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands):
Company Operated....................................................... $ 932 $1,019 $1,155
Franchised............................................................. 893 858 852
Average Guest Check...................................................... $ 6.59 $ 6.76 $ 6.63
Average Weekly Traffic Count............................................. 2,720 2,894 3,350
Operated Units:
Company Operated....................................................... 127 103 96
Franchise.............................................................. 78 112 135
International.......................................................... 4 2 10
Total............................................................. 209 217 241
</TABLE>
1996 VS. 1995
REVENUE from Company-owned El Pollo Loco units for 1996 decreased by $1.6
million (1.4%) from 1995 to $114.7 million. The revenue decrease was primarily
driven by a net decrease of seven restaurants (eight units sold to franchisees,
one Company-owned unit opened), partially offset by gains in comparable store
sales.
Comparable store sales increased 7.2%, driven by increased guest traffic,
which on a comparable store basis, increased 9.9%. The increased traffic was
principally attributable to the highly successful "Pollo Bowl," rolled out in
late 1995, which currently accounts for 11% of the menu mix, as well as other
key promotions. Comparable store sales also benefited from the Foster's Freeze
rollout. The decrease in average guest check was driven by a change in value
focus in 1996. During 1995, most of the value offerings featured very large
amounts of food (such as the $14.99 Holiday Feast), whereas in 1996, value was
approached on a quantity and price basis (such as the Pollo Bowl and $9.99 for
12 pieces of chicken).
FRANCHISE REVENUE in 1996 increased $3.3 million (31.7%) over 1995 to $13.7
million. The increase in revenue is primarily due to 31 additional franchise
units in 1996. Of the increase in revenue, $0.8 million was generated from
initial fees collected as new franchised units were opened, with the remainder
coming from the ongoing royalty stream of the additional units. Eight units were
sold to franchisees during 1996, generating $0.7 million in gains which are
reflected as a reduction of operating expenses.
OPERATING EXPENSES increased $0.5 million in 1996 over the prior year, to
$114.6 million, due to a decrease in gains recognized on the sale of restaurants
to franchisees, from $3.8 million in 1995 to $0.7 million in 1996. Removing the
impact of the decrease in restaurant sales to franchisees, El Pollo Loco
experienced a net decrease in operating expenses of $2.6 million reflecting,
among other things, lower product costs associated with the Pollo Bowl and other
new products, a decrease in direct labor costs due to improved labor scheduling
and staffing initiatives, food cost control measures and a $0.4 million increase
in the current year amortization of the deferred gain attributable to the sales
of PFC and PTF over
22
<PAGE>
the prior year amount. These improvements were attained despite an increase in
chicken prices versus 1995, and the increased Federal and state minimum wages.
OPERATING INCOME for 1996 in comparison to 1995, improved by $1.2 million
(9.5%) to $13.8 million as a result of the factors discussed above.
1995 VS. 1994
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 sale 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 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 during
1995 included gains on the sale of restaurants of $3.8 million as compared with
$1.2 million during 1994.
COCO'S AND CARROWS
The Company's operating results for the year ended December 31, 1996
include 31 weeks of Coco's and Carrows operations subsequent to their
acquisition in May. Coco's and Carrows revenues for the period were $163.7
million and $131.4 million, respectively. Operating expenses for Coco's and
Carrows were $155.5 million and $124.7 million, respectively.
The following information is provided for analysis purposes only as it
includes information for periods prior to the acquisition of Coco's and Carrows
by the Company on May 23, 1996:
COCO'S AND CARROWS
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Net Company Sales....................................................................................... $ 502 $ 487
Franchise Revenue....................................................................................... 4 4
Total Revenue........................................................................................... 506 491
Operating Expenses...................................................................................... 474 477
Operating Income........................................................................................ 32 14
Depreciation/Amortization............................................................................... $ 28 $ 31
COCO'S
Comparable Store Sales (Decrease)....................................................................... (5.0%) (1.6%)
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands).............................................................. $1,506 $1,462
Average Guest Check..................................................................................... $ 6.72 $ 6.79
Average Weekly Traffic Count............................................................................ 4,271 4,159
Operated Units:
Company Operated...................................................................................... 188 183
Franchise............................................................................................. 6 5
International......................................................................................... 252 278
Total............................................................................................ 446 466
CARROWS
Comparable Store Sales (Decrease) Increase.............................................................. (0.2%) 0.1%
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands).............................................................. $1,372 $1,343
Average Guest Check..................................................................................... $ 6.09 $ 6.26
Average Weekly Traffic Count............................................................................ 4,363 4,252
Operated Units.......................................................................................... 161 160
</TABLE>
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has met its liquidity requirements with
internally generated funds, external borrowings, and in recent years, proceeds
from asset sales. The Company expects to continue to rely on internally
generated funds, supplemented by available working capital advances under its
Second Amended and Restated Credit Agreement, dated as of April 10, 1996, among
TWS Funding, Inc., as borrower, Flagstar, certain lenders and co-administrative
agents named therein, and Citibank, N.A., as funding agent (as amended, from
time to time, the "Credit Agreement"), and other external borrowings, as its
primary sources of liquidity.
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,
($ IN MILLIONS) 1995 1996
<S> <C> <C>
Net loss.............................................................. $(69.4) $(99.6)
Charge for impaired assets............................................ 51.4 --
Provision for restructuring charges................................... 15.9 --
Non-cash charges (credits)............................................ 120.3 119.9
Deferred income tax benefit........................................... (3.5) (9.0)
Discontinued operations............................................... (77.2) --
Extraordinary items, net.............................................. (0.5) --
Change in certain working capital items............................... (6.1) 7.4
Change in other assets and other liabilities, net..................... (31.0) (16.1)
Cash from operations available for debt repayment and capital
expenditures........................................................ $ (0.1) $ 2.6
</TABLE>
The cash flows generated by Coco's and Carrows, which was acquired in May
1996, are required by the instruments governing the indebtedness incurred to
finance such acquisition, to service the debt issued by FRD, Flagstar's
acquisition subsidiary and, therefore, other than for the payment of certain
management fees and tax reimbursements payable to Flagstar under certain
conditions, are currently unavailable to be used to service the debt of Flagstar
and its other subsidiaries. Coco's and Carrows' cash flows from operations
included in the Company's total cash flow from operations, was $21.2 million in
1996.
The Credit Agreement, which expires on April 10, 1999, provides Flagstar
with a $150 million revolving credit facility. It is available for working
capital advances and letters of credit, with a working capital advance sublimit
of $75 million. As of December 31, 1996, there were no working capital advances
outstanding under this credit facility, although approximately $79.7 million
letters of credit were outstanding; accordingly, $70.3 million was available for
additional letters of credit or working capital borrowings. The 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 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.
In connection with the acquisition of Coco's and Carrows, FRI-M, which
became thereby a wholly-owned subsidiary of the Company, obtained a new credit
facility consisting of a $56 million term loan, which matures on August 31,
1999, and a $35 million revolving credit facility, which is available until
August 31, 1999 for Coco's and Carrows general working capital advances and
letters of credit. Such facility is unavailable to Flagstar and its other
subsidiaries.
24
<PAGE>
As of December 31, 1996, scheduled debt maturities of long-term debt
relative to Flagstar and its subsidiaries for the years 1997 and thereafter are
as follows:
<TABLE>
<CAPTION>
FLAGSTAR
($ IN MILLIONS) EXCLUDING FRD FRD
<S> <C> <C>
1997............................................................ $ 43.3 $ 19.6
1998............................................................ 34.2 23.6
1999............................................................ 27.5 23.7
2000............................................................ 323.3 3.4
2001............................................................ 277.9 3.1
Thereafter...................................................... 1,448.0 164.7
</TABLE>
In addition to scheduled maturities of principal, on a consolidated basis,
approximately $269 million of cash will be required in 1997 to meet interest
payments on long-term debt.
Since the leveraged buyout of Flagstar by FCI 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 through 1996. The Company's cash flows have been sufficient to fund
its operations and make interest payments when due. 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 is developing plans to
maintain its liquidity and improve its capital structure. Specifically, FCI's
Board of Directors elected not to declare the January 15, 1997 quarterly
dividend on FCI's preferred stock. In addition, the new management team that has
been put in place during the last 18 months is identifying cost reduction and
revenue enhancement strategies intended to improve operations. While these
actions may enhance the short-term financial position of the Company, over the
long-term management has concluded that a substantial restructuring or
refinancing of the Company's debt, which may include a negotiated restructuring
or other exchange transaction, 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. Accordingly, on January 21, 1997, the
Company hired Donaldson, Lufkin & Jenrette Securities Corporation as a financial
advisor to assist in exploring alternatives to improve the Company's capital
structure. Management intends to explore all alternatives to reduce the
Company's debt service requirements and allow the Company to reinvest in its
core businesses and grow the restaurant concepts over the long-term. There can
be no assurance, however, that management will be successful in this regard.
With respect to short-term liquidity, management believes that through a
combination of cash generated from operations, funds available through the bank
credit facility, various cash management measures and other sources, adequate
liquidity exists to meet the Company's working capital, debt service and capital
expenditure requirements for at least the next twelve months. 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.
The Company's principal capital requirements are those associated with
opening new restaurants and remodeling and maintaining its existing restaurants
and facilities. During 1996, total capital expenditures were approximately $67.3
million, of which approximately $1.3 million was used to remodel existing
restaurants, $21.8 million was used to refurbish existing restaurants, $7.5
million was used for POS systems and other information technology assets, $0.8
million was used to open new restaurants, and $35.9 million was used to maintain
existing facilities and equipment. Of the total capital expenditures,
approximately $12.3 million were financed through capital leases. Capital
expenditures during 1997 are expected to total approximately $90 million;
however, the Company is not committed to spending this amount and could spend
less if circumstances warrant.
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,
1996, the Company's working capital deficiency, exclusive of net assets held for
sale, was $301.3 million as compared with $122.2 million at the end of 1995.
Such increase reflects the use of the Company's excess cash at December 31,
1995, which resulted from the
25
<PAGE>
sales of the Company's non-restaurant business in 1995, to acquire the Coco's
and Carrows restaurant chains and to fund the Company's 1996 operations.
On February 22, 1996, the Company entered into an agreement with Integrated
Systems Solutions Corporation (ISSC). The ten year agreement for $340.6 million
(including $17.6 million for FRD), which requires annual payments by the Company
ranging from $24.0 million to $47.5 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 POS technology.
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 401(k) Plan and the Denny's 401(k) 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 (I)(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is omitted pursuant to General
Instruction (I)(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 (I)(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 (I)(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 FLAGSTAR CREDIT AGREEMENT
On April 10, 1996 Flagstar entered into the Credit Agreement which
established a $150 million senior secured working capital and letter of credit
facility, with a $75 million sublimit for working capital advances.
Under the Credit Agreement, Flagstar is required to permanently reduce the
facility by the aggregate amount of Net Cash Proceeds (as defined therein)
received from (i) the sale, lease, transfer or other disposition of certain
assets of Flagstar or any of its Restricted Subsidiaries (as defined therein)
and (ii) the sale or issuance by FCI or any of its
26
<PAGE>
Restricted Subsidiaries of any Debt (as defined therein) (other than Debt
permitted by the terms of the Credit Agreement and to the extent the Net Cash
Proceeds are applied to refinance certain existing Subordinated Debt (as defined
therein)).
The Credit Agreement contains covenants customarily found in credit
agreements for leveraged financings that restrict, among other things, the
ability of Flagstar and its Restricted Subsidiaries to make, engage in or incur
(i) liens and security interests other than liens securing the obligations under
the Credit Agreement, certain liens existing as of the date of effectiveness of
the 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) Debt, other than Debt under the Loan Documents (as
defined therein), certain capital lease obligations, certain Debt in existence
on the date of the 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 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 Credit Agreement; (v) sales of assets, other than
certain dispositions of inventory and obsolete or surplus equipment in the
ordinary course of business, certain dispositions in the ordinary course of
business of properties no longer used or useful to the business of the Company,
certain intercompany transactions, certain dispositions in connection with sale
and leaseback transactions, certain exchanges of real property, fixtures and
improvements for other real property, fixtures and improvements, certain
dispositions of a portion of certain restaurant assets of Denny's Holdings,
Inc., certain dispositions in connection with the sale of PTF and its
subsidiaries, and dispositions of certain underperforming restaurants; (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) payments of dividends or
other distributions with respect to capital stock of Flagstar, other than
dividends from Flagstar to FCI to enable FCI to repurchase FCI 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 enabling Flagstar
and its Restricted Subsidiaries to pay their tax liabilities and certain other
exceptions; (viii) sales or dispositions of the capital stock of subsidiaries
other than sales by Restricted Subsidiaries of Flagstar to Flagstar or certain
other subsidiaries and certain other exceptions; (ix) 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) prepayments of Debt,
other than certain payments of Debt in existence on the date of the Credit
Agreement, certain payments to retire Debt in connection with permitted
dispositions of assets, certain prepayments of advances under the Credit
Agreement and certain other exceptions.
The Credit Agreement also contains covenants that require Flagstar to meet
certain financial ratios and tests described below:
TOTAL DEBT TO EBITDA RATIO. Flagstar is required not to permit the ratio of
(a) Total Debt (as defined below) outstanding on the last day of any fiscal
quarter less surplus cash to (b) EBITDA (as defined below) of Flagstar and its
Restricted Subsidiaries on a consolidated basis for the Rolling Period (as
defined below) then ended to be more than a specified ratio, ranging from a
ratio of 8.40:1.00 applicable on December 31, 1996, to a ratio of 8.70:1.00
applicable March 31, 1997, to a ratio of 6.00:1.00 applicable on or after
December 31, 1998.
SENIOR DEBT TO EBITDA RATIO. Flagstar is required not to permit the ratio
of (a) Senior Debt (as defined therein) outstanding on the last day of any
fiscal quarter less surplus cash to (b) EBITDA of Flagstar and its Restricted
Subsidiaries on a consolidated basis for the Rolling Period then ended to be
more than a specified ratio, ranging from a ratio of 4.05:1.00 applicable on
December 31, 1996, to a ratio of 4.25:1.00 on March 31, 1997, to a ratio of
2.90:1.00 on or after December 31, 1998.
INTEREST COVERAGE RATIO. Flagstar is required not to permit the ratio,
determined on the last day of each fiscal quarter for the Rolling Period then
ended, of (a) EBITDA of Flagstar and its Restricted Subsidiaries on a
consolidated basis to (b) Cash Interest Expense (as defined below) of Flagstar
and its Restricted Subsidiaries on a consolidated basis to be less than a
specified ratio, ranging from a ratio of 1.05:1.00 applicable on December 31,
1996, to a ratio of 1.00:1:00 on March 31, 1997, to a ratio of 1.50:1.00 on or
after December 31, 1998.
27
<PAGE>
CAPITAL EXPENDITURES TEST. Flagstar and its Restricted Subsidiaries on a
consolidated basis are prohibited from making capital expenditures in excess of
$80.0 million, $115.0 million and $115.0 million in the aggregate for the fiscal
years ending December 31, 1996 through 1998, respectively. For the fiscal
quarter ending March 31, 1999 Flagstar and its Restricted Subsidiaries are
prohibited from making capital expenditures in excess of the sum of $30.0
million.
CERTAIN DEFINED TERMS. As used in the Credit Agreement, the following terms
shall have the following meanings.
"Advance" means a working capital advance or a swing line advance or a
letter of credit advance.
"Cash Interest Expense" means, 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 (as defined above), the Senior Notes (as defined therein)
and the Subordinated Debt (as defined therein), (b) commissions and other fees
and charges payable in connection with letters of credit, (c) the net payment,
if any, payable in connection with all interest rate protection contracts and
(d) interest capitalized during construction, but EXCLUDING, in each case,
interest not paid in cash (including amortization of discount and deferred debt
expenses), all as determined in accordance with generally accepted accounting
principles.
"EBITDA" of any person means, 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.
"Funded Debt" means the principal amount of Debt in respect of Advances (as
defined above) and the principal amount of all Debt that should, in accordance
with generally accepted accounting principles, be recorded as a liability on a
balance sheet and matures more than one year from the date of creation or
matures within one year from such date but is renewable or extendible, at the
option of the debtor, to a date more than one year from such date or arises
under a revolving credit or similar agreement that obligates the lender or
lenders to extend credit during a period of more than one year from such date,
including, without limitation, all amounts of Funded Debt required to be paid or
prepaid within one year from the date of determination.
"Restricted Subsidiaries" means all subsidiaries of Flagstar other than the
Unrestricted Subsidiaries (as defined below).
"Rolling Period" means, for any fiscal quarter, such quarter and the three
preceding fiscal quarters.
"Surplus Cash" means, as of any date, the lesser of (a) cash reflected on
consolidated balance sheet of Flagstar and its Restricted Subsidiaries in excess
of $13.0 million and (b) the aggregate of amounts on deposit in the Borrower
Cash Collateral Account (as defined therein) and in Collateral Investment
Accounts (as defined therein).
"Total Debt" outstanding on any date means the sum, without duplication, of
(a) the aggregate principal amount of all Debt of Flagstar and its Restricted
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 Restricted 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 (as defined
above) of Flagstar and its Restricted Subsidiaries on a consolidated basis
consisting of obligations, contingent or otherwise, under acceptance, letter of
credit or similar facilities.
"Unrestricted Subsidiary" means FRD Acquisition Co., a wholly-owned
subsidiary of Flagstar, formed as a vehicle for the acquisition of the Family
Restaurant Division of Family Restaurants, Inc. (Coco's and Carrows) and such
other subsidiaries of Flagstar as Flagstar shall designate as an Unrestricted
Subsidiary in writing to the agents and the lenders under the Credit Agreement
in accordance with the terms of the Credit Agreement, and any subsidiaries
thereof.
Under the Credit Agreement, an event of default will occur if, among other
things, (i) any person or group of two or more persons acting in concert (other
than KKR, 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
28
<PAGE>
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 Credit Agreement would be entitled to exercise a
number of remedies, including acceleration of all amounts owed under the Credit
Agreement.
FLAGSTAR 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 (of which $280 million remains outstanding) (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
(of which $270 million remains outstanding) (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 Credit Agreement. The 11.25%
Debentures are general unsecured obligations of Flagstar and are subordinate in
right of payment to the obligations of Flagstar under the Restated Credit
Agreement, the 10 7/8% Notes and the 10 3/4% Notes. The 11.25% Debentures rank
PARI PASSU in right of payment with the 11 3/8% Debentures. All such debt is
senior in right of payment to the 10% Debentures.
THE SENIOR NOTES. Interest on the 10 7/8% Notes is payable semi-annually in
arrears on each June 1 and December 1. They will mature on December 1, 2002. The
10 7/8% Notes will be redeemable, in whole or in part, at the option of
Flagstar, at any time on or after December 1, 1997, initially at a redemption
price equal to 105.4375% of the principal amount thereof to and including
November 30, 1998, at a decreased price thereafter to and including November 30,
1999 and thereafter at 100% of the principal amount thereof, together in each
case with accrued interest.
Interest on the 10 3/4% Notes is payable semi-annually in arrears on each
March 15 and September 15. They will mature on September 15, 2001. The 10 3/4%
Notes may not be redeemed prior to maturity.
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
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 of FCI 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.
29
<PAGE>
MORTGAGE FINANCINGS
A subsidiary of Flagstar had issued and outstanding, at December 31, 1996,
$190.2 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 1997 through 1999; and $152.7 million in 2000. The bonds
are secured by a financial guaranty insurance policy issued by Financial
Security Assurance, Inc. and by collateral assignment of mortgage loans on 238
Hardee's and 148 Quincy's restaurants.
Another subsidiary of Flagstar has outstanding $160 million aggregate
principal amount of 11.03% Notes due 2000. Interest is payable quarterly in
arrears, with the principal maturing in a single installment payable in July
2000. These notes are redeemable, in whole, at the subsidiary's option, upon
payment of a premium. They are secured by a pool of cross-collateralized
mortgages on approximately 240 Denny's restaurant properties.
THE FRI-M CREDIT FACILITY
In connection with the acquisition by FRD of Coco's and Carrows on May 23,
1996, FRI-M (the "Borrower"), a wholly-owned subsidiary of FRD, obtained a new
credit facility (the "FRI-M Credit Facility") consisting of a $56 million term
loan (the "FRI-M Term Loan") and a $35 million working capital facility (the
"FRI-M Revolver"). Proceeds from the FRI-M Term Loan were used to fund the
Coco's and Carrows acquisition and to pay the transactions costs associated
therewith. Proceeds from the FRI-M Revolver are to be used for working capital
requirements and other general corporate purposes, which may include the making
of intercompany loans to any of the Borrower's wholly-owned subsidiaries for
their own working capital and other general corporate purposes. Letters of
credit may be issued under the FRI-M Revolver for the purpose of supporting (i)
workers' compensation liabilities of the Borrower or any of its subsidiaries;
(ii) the obligations of third party insurers of the Borrower or any of its
subsidiaries; and (iii) certain other obligations of the Borrower and its
subsidiaries.
The FRI-M Term Loan matures on August 31, 1999. Principal installments of
the FRI-M Term Loan are payable quarterly as follows: $4 million per quarter for
four consecutive quarters beginning February 28, 1997; $5 million for four
consecutive quarters beginning February 28, 1998; $6 million on February 28,
1999; and $7 million for two consecutive quarters beginning May 31, 1999. All
amounts owing under the FRI-M Term Loan are required to be repaid on August 31,
1999. The commitment to make loans or issue letters of credit pursuant to the
FRI-M Revolver expires, and all amounts outstanding under the FRI-M Revolver
must be repaid, on August 31, 1999. All borrowings under the FRI-M Credit
Facility accrue interest at a variable rate based on a base rate (as defined
therein) or an adjusted Eurodollar rate. The rate at year end 1996 was 8.125%.
The FRI-M Credit Facility requires the Borrower to make mandatory
prepayments in certain circumstances out of its Consolidated Excess Cash Flow
(as defined therein), out of cash proceeds of certain asset sales, out of assets
distributed to FRD, the Borrower or any of Borrower's direct or indirect
subsidiaries (each, a "Loan Party") in connection with an employee benefit plan
termination and out of net cash proceeds received by a Loan Party from certain
other sources. Any mandatory partial prepayment of the FRI-M Term Loan shall be
applied to installments scheduled to be paid during the twelve months
immediately following the date of such prepayment, with any excess being applied
ratably to the scheduled installments of the FRI-M Term Loan.
The FRI-M Credit Facility contains certain restrictive covenants which,
among other things, limit (subject to certain exceptions) the Borrower and its
subsidiaries with respect to (a) incurrence of debt; (b) the existence of liens;
(c) investments and joint ventures; (d) the declaration or payment of dividends;
(e) the making of guarantees and other contingent obligations; (f) the amendment
or waiver of certain related agreements; (g) mergers, consolidations,
liquidations and sales of assets (including sale and leaseback transactions);
(h) payment obligations under leases; (i) transactions with shareholders and
affiliates; (j) the sale, assignment, pledge or other disposition of shares of
Borrower or its subsidiaries by Borrower or its subsidiaries; (k) capital
expenditures; and (l) material changes in their business.
The FRI-M Credit Facility also imposes on FRD, the Borrower and its
subsidiaries certain financial tests and minimum ratios which, among other
things, require that Borrower (a) shall not permit the ratio determined on the
last day of each fiscal quarter for such quarter and three preceding quarters
("Rolling Period") then ended of Consolidated Adjusted EBITDA (as defined
therein) to Consolidated Interest Expense (as defined therein) to be less than
levels increasing from 1.50:1.00 on September 26, 1996 to 2.10:1.00 on September
23, 1999 and each fiscal quarter end thereafter; (b) permit the ratio determined
on the last day of each fiscal quarter for the Rolling Period then ended of
Consolidated Total Debt
30
<PAGE>
(as defined therein) to Consolidated Adjusted EBITDA (as defined) to exceed a
level varying from 5.65:1.00 on September 26, 1996 to 3.65:1.00 on September 23,
1999 and each fiscal quarter end thereafter; and (c) shall not permit
Consolidated Adjusted EBITDA determined on the last day of each fiscal quarter
for the Rolling Period then ended to be less than an amount increasing from
$11.2 million for the Rolling Period ending September 26, 1996 to $49.5 million
for the Rolling Period ending June 25, 1998 and each Rolling Period thereafter.
FRD and all of the Borrower's subsidiaries have guaranteed the obligations
of the Borrower under the FRI-M Credit Facility and the other Loan Documents (as
defined therein). All of the issued and outstanding common stock of the Borrower
and its subsidiaries has been pledged as security for the obligations of FRD
under the FRI-M Credit Facility and the other Loan Documents. The obligations of
the Borrower under the FRI-M Credit Facility and the other Loan Documents are
secured by substantially all assets of the Borrower and its subsidiaries.
THE FRD SENIOR NOTES
In connection with the May 23, 1996 acquisition of FRI-M, FRD issued $156.9
million principal amount of 12 1/2% FRD Senior Notes due 2004 (the "FRD Notes").
Interest on the FRD Notes accrues at the rate of 12 1/2% per annum and is
payable semi-annually in arrears on January 15 and July 15, commencing on July
15, 1996. They will mature on July 15, 2004. The FRD Notes are senior unsecured,
general obligations of FRD and rank senior in right of payment to all existing
and future subordinated indebtedness of FRD and rank PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of FRD. The FRD
Notes are effectively subordinated to secured indebtedness of FRD, including
borrowings under the FRI-M Credit Facility to the extent of the value of FRD's
assets securing such indebtedness. Borrowings under the FRI-M Credit Facility
are secured by substantially all of FRD's assets. (The FRD Notes are
structurally subordinated to all indebtedness of the Borrower (as defined
above), including its indebtedness under the FRI-M Credit Facility).
31
<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 3.1 to the Form S-2).
3.3 By-Laws of Flagstar as amended through July 24, 1996.
* 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 the 1992 Form 10-K).
* 4.12 Supplemental Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8%
Notes (incorporated by reference to Exhibit 4.14 to the 1992 Form 10-K).
* 4.13 Form of 10 7/8% Note (incorporated by reference to Exhibit 4.15 to the 1992 Form 10-K).
* 4.14 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11.25%
Debentures (incorporated by reference to Exhibit 4.16 to the 1992 Form 10-K).
* 4.15 Form of 11.25% Debenture (incorporated by reference to Exhibit 4.17 to the 1992 Form 10-K).
* 4.16 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 Citibanks, N.A., as funding agent
(incorporated by reference to Exhibit 10.2 to FCI's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 (the "1996 Second Quarter 10-Q").
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
* 4.17 First Amendment 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 agents. (Incorporated by reference to Exhibit 10.2.1 to FCI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (the "1996 Third Quarter 10-Q").
* 4.18 Second Amendment to the Second Amended and Restated Credit Agreement, dated as of August 6, 1996 (incorporated by
reference to Exhibit 10.2.2 to the 1996 Third Quarter 10-Q).
* 4.19 Third Amendment to the Second Amended and Restated Credit Agreement, dated as of September 30, 1996 (incorporated
by reference to Exhibit 10.2.3 to the 1996 Third Quarter 10-Q).
* 4.20 Credit Agreement, dated as of May 23, 1996, among FRD, FRI-M, certain lenders and co-agents named therein, and
Credit Lyonnais New York Branch as administrative agent (the "FRI-M Credit Agreement") (incorporated by reference
to Exhibit 10.1 of the Registration Statement on Forms S-1 and S-4 (333-07601) of FRD (the "FRD Form S-1/S-4").
* 4.21 First Amendment to the FRI-M Credit Agreement, dated July 1, 1996 (incorporated by reference to Exhibit 10.3.1 to
the 1996 Third Quarter 10-Q).
* 4.22 Second Amendment to the FRI-M Credit Agreement, dated November 19, 1996 (incorporated by reference to Exhibit 4.24
to FCI's 1996 Form 10-K, File No. 0-18051 (the "1996 Form 10-K")).
* 4.23 Indenture dated as of May 23, 1996 between FRD and the Bank of New York, as Trustee (the "FRD Indenture")
(incorporated by reference to Exhibit 4.1 to the FRD Form S-1/S-4).
* 4.24 Form of First Supplemental Indenture to the FRD Indenture dated as of August 23, 1996 (incorporated by reference to
Exhibit 4.1.1 to the FRD Form S-1/S-4).
* 4.25 Stock Purchase Agreement dated as of March 1, 1996 by and among Flagstar, Flagstar Companies, Inc., the Company,
and Family Restaurants, Inc. (incorporated by reference to Exhibit 4.2 to the FRD Form S-1/S-4).
* 4.26 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).
* 4.27 Form of 10 3/4% Note (incorporated by reference to Exhibit 4.24 to the 1993 Form 10-K).
* 4.28 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).
* 4.29 Form of 11 3/8% Debenture (incorporated by reference to Exhibit 4.26 to the 1993 Form 10-K).
*10.1 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).
*10.2 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 Registration Statement on Form S-2 (No. 33-49843) of Flagstar (the "Form
S-2")).
*10.3 Fair Share Agreement dated July 1, 1993 between FCI and the NAACP (incorporated by reference to Exhibit 10.43 to
the Form S-2).
*10.4 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).
*10.5 Amendment (No. 3) to Stockholders' Agreement, dated as of January 1, 1995, among FCI, Gollust Tierney & Oliver
("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).
*10.6 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to Exhibit 10.7 to
the 1992 Form 10-K).
*10.7 Form of Supplemental Executive Retirement Plan Trust of Flagstar (incorporated by reference to Exhibit 10.8 to the
1992 Form 10-K).
*10.8 FCI 1989 Non-Qualified Stock Option Plan, as adopted December 1, 1989 and amended through December 13, 1996
(incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K).
*10.9 FCI 1990 Non-Qualified Stock Option Plan, as adopted July 31, 1990 and amended through April 28, 1992 (incorporated
by reference to Exhibit 10.10 to the 1994 Form 10-K).
*10.10 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).
*10.11 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.1 to the
Form S-11).
*10.12 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).
*10.13 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).
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.14 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).
*10.15 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).
*10.16 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).
*10.17 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).
*10.18 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).
*10.19 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).
*10.20 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).
*10.21 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).
*10.22 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).
*10.23 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).
*10.24 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).
*10.25 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).
*10.26 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).
*10.27 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.14 to the Form S-11).
*10.28 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).
*10.29 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).
*10.30 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).
*10.31 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).
*10.32 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).
*10.33 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).
*10.34 Development Agreement between the Company and Hardee's Food Systems, Inc., dated January 1992 (incorporated by
reference to Exhibit 10.33 to the Preferred Stock S-1).
*10.35 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).
*10.36 Stockholders' Agreement, dated as of August 11, 1992, among FCI, GTO (on behalf of itself and certain affiliated
partnerships), DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit 10.39 to
the 11.25% Debentures S-4).
*10.37 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).
*10.38 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).
*10.39 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).
*10.40 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 FCI's 1995 Form 10-K, File No. 0-18051).
*10.41 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).
*10.42 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).
*10.43 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).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.44 Form of Agreement providing certain severance benefits (incorporated by reference to Exhibit 10.48 to the 1994 Form
10-K).
*10.45 Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994 Form 10-K).
*10.46 Consent Decree dated May 24, 1994 among certain named claimants, individually and on behalf of all others similarly
situated, Flagstar and Denny's, Inc. (incorporated by reference to Exhbit 10.51 to the 1994 Form 10-K).
*10.47 Second Amendment to Employment Agreement, dated December 31, 1996, between FCI and James B. Adamson (incorporated
by reference to Exhibit 10.47 to the 1996 Form 10-K).
*10.48 Form of Agreement providing certain retention incentives, severance and change of control benefits for Company
management (incorporated by reference to Exhibit 10.48 to the 1996 Form 10-K).
*10.49 Information Systems Management Agreement, dated February 22, 1996 between Flagstar and Integrated Systems Solutions
Corporation (incorporated by reference to Exhibit 10.49 to the 1996 Form 10-K).
*10.50 Employment Agreement, dated as of April 24, 1995, between Flagstar and C. Robert Campbell (incorporated by
reference to Exhibit 10.50 to the 1996 Form 10-K).
*10.51 Employment Agreement, dated as of April 22, 1996, between Flagstar and Craig S. Bushey (incorporated by reference
to Exhibit 10.51 to the 1996 Form 10-K).
*10.52 Employment Agreement, dated as of November 21, 1995, between Flagstar and John A. Romandetti (incorporated by
reference to Exhibit 10.52 to the 1996 Form 10-K).
*10.53 Employment Agreement, dated as of May 24, 1996, between Flagstar and Mark L. Shipman (incorporated by reference to
Exhibit 10.53 to the 1996 Form 10-K).
12 Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of Flagstar (incorporated by reference to Exhibit 21 to the 1996 Form 10-K).
27 Financial Data Schedule.
99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
</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 on Form 8-K on December 23, 1996 providing
certain information in Item 8. Change in Fiscal Year of such report. That
filing reported a resolution adopted by the Company's Board of Directors to
change its fiscal year. Beginning in 1997, the Company will move to a 4-4-5
week closing calendar pursuant to which each fiscal year shall end on the
last Wednesday of the calendar year. No financial statements were included
in the filing.
35
<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, 1994, 1995 and 1996....................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996........................................................... F-4
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1994, 1995 and 1996....................... F-5
Notes to Consolidated Financial Statements............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
FLAGSTAR CORPORATION
We have audited the accompanying consolidated balance sheets of Flagstar
Corporation and subsidiaries (the Company) as of December 31, 1995 and 1996, and
the related statements of consolidated operations and consolidated cash flows
for each of the three years in the period ended December 31, 1996. 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,
1995 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, 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 13, 1997
F-2
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Operating revenue.............................................................. $2,665,966 $2,571,487 $2,542,302
Operating expenses:
Product cost................................................................. 919,087 864,505 744,072
Payroll & benefits........................................................... 919,928 916,951 945,772
Depreciation & amortization expense.......................................... 129,633 132,872 129,948
Utilities expenses........................................................... 99,021 98,212 104,477
Other........................................................................ 394,012 393,482 461,641
Provision for (recovery of) restructuring charges (Note 3)................... (7,207) 15,873 --
Charge for impaired assets (Note 3).......................................... -- 51,358 --
2,454,474 2,473,253 2,385,910
Operating income............................................................... 211,492 98,234 156,392
Other charges (credits):
Interest and debt expense (Note 4)........................................... 232,501 232,855 261,622
Interest expense on note payable to FCI (Note 4)............................. 14,175 14,175 14,175
Interest income (Note 12).................................................... (5,077) (3,725) (6,946)
Other -- net (Note 12)....................................................... 3,110 2,044 3,568
244,709 245,349 272,419
Loss before income taxes....................................................... (33,217) (147,115) (116,027)
Benefit from income taxes (Note 6)............................................. (2,213) (14) (16,392)
Loss from continuing operations................................................ (31,004) (147,101) (99,635)
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:
1994 -- $471; 1995 -- $(1,361) (Note 13)..................................... (6,518) (636) --
Income (loss) before extraordinary items....................................... 361,666 (69,860) (99,635)
Extraordinary items, net of income tax provision (benefit) of: 1994 -- $(174);
1995 -- $25 (Note 11)........................................................ (11,757) 466 --
Net income (loss).............................................................. $ 349,909 $ (69,394) $ (99,635)
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FLAGSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 196,966 $ 92,358
Receivables, less allowance for doubtful accounts of: 1995 -- $2,506;
1996 -- $2,405............................................................................... 29,855 17,823
Loan receivable from former officer (Note 12).................................................. -- 13,922
Merchandise and supply inventories............................................................. 32,445 31,543
Net assets held for sale....................................................................... -- 5,114
Other.......................................................................................... 26,087 29,895
285,353 190,655
Property:
Property owned (at cost) (Notes 2, 3 and 4):
Land......................................................................................... 255,393 252,741
Buildings and improvements................................................................... 838,956 891,512
Other property and equipment................................................................. 484,684 536,886
Total property owned............................................................................. 1,579,033 1,681,139
Less accumulated depreciation.................................................................... 569,079 629,676
Property owned -- net............................................................................ 1,009,954 1,051,463
Buildings and improvements, vehicles, and other equipment held under capital leases (Note 5)..... 170,859 210,533
Less accumulated amortization.................................................................... 76,778 93,740
Property held under capital leases -- net........................................................ 94,081 116,793
1,104,035 1,168,256
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077 (Note 2)........................... -- 205,389
Other intangible assets, net of accumulated amortization: 1995 --
$17,051; 1996 -- $20,611..................................................................... 22,380 27,595
Deferred financing costs -- net (Note 11)...................................................... 63,482 64,153
Other (including loan receivable from former officer of: 1995 -- $16,454) (Note 12)............ 38,578 37,385
124,440 334,522
$ 1,513,828 $ 1,693,433
LIABILITIES
Current Liabilities:
Current maturities of long-term debt (Note 4).................................................. $ 38,835 $ 62,885
Accounts payable............................................................................... 125,467 160,444
Accrued salaries and vacations................................................................. 41,102 58,838
Accrued insurance.............................................................................. 48,060 52,244
Accrued taxes.................................................................................. 30,705 25,060
Accrued interest and dividends................................................................. 42,916 51,220
Other.......................................................................................... 80,445 76,114
407,530 486,805
Long-Term Liabilities:
Debt, less current maturities (Note 4)......................................................... 1,996,111 2,179,393
Deferred income taxes (Note 6)................................................................. 18,175 16,361
Liability for self-insured claims.............................................................. 53,709 57,665
Other non-current liabilities and deferred credits............................................. 163,203 178,203
2,231,198 2,431,622
Note Payable to FCI (Note 4)..................................................................... 150,000 150,000
Commitments and Contingencies (Notes 4, 5 and 8)
Shareholder's Equity (Deficit) (Note 7):
Common stock:
$0.01 par value; 1995 and 1996 -- 10,000 shares authorized, 440 issued and outstanding.......
Paid-in capital................................................................................ 602,896 602,896
Deficit........................................................................................ (1,877,333 ) (1,976,968 )
Minimum pension liability adjustment........................................................... (463 ) (922 )
(1,274,900 ) (1,374,994 )
$ 1,513,828 $ 1,693,433
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Cash Flows from Operating Activities:
Net income (loss)........................................................... $ 349,909 $ (69,394 ) $ (99,635)
Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating
Activities:
Provision for (recovery of) restructuring charges........................ (7,207 ) 15,873 --
Charge for impaired assets............................................... -- 51,358 --
Depreciation and amortization of property................................ 122,870 126,488 120,059
Amortization of goodwill................................................. -- -- 3,077
Amortization of other intangible assets.................................. 6,763 6,384 6,812
Amortization of deferred financing costs................................. 6,453 7,504 8,920
Deferred income tax benefit.............................................. (2,793 ) (3,451 ) (9,031)
Other.................................................................... (7,354 ) (20,008 ) (19,004)
Loss from discontinued operations, net................................... 6,518 636 --
Gain on sale of discontinued operation, net.............................. (399,188 ) (77,877 ) --
Extraordinary items, net................................................. 11,757 (466 ) --
Changes in Assets and Liabilities Net of Effects of Acquisition,
Dispositions and Restructurings:
Decrease (increase) in assets:
Receivables.............................................................. (4,452 ) (4,713 ) 327
Inventories.............................................................. 340 (848 ) (833)
Other current assets..................................................... (11,849 ) (7,086 ) (3,964)
Other assets............................................................. 2,241 (2,622 ) (5,456)
Increase (decrease) in liabilities:
Accounts payable......................................................... 9,029 16,496 19,132
Accrued salaries and vacations........................................... 8,821 (5,551 ) 4,560
Accrued taxes............................................................ (9,582 ) (429 ) (5,502)
Other accrued liabilities................................................ (16,696 ) (4,014 ) (6,283)
Other noncurrent liabilities and deferred credits........................ (25,198 ) (28,364 ) (10,628)
Net cash flows provided by (used in) operating activities..................... 40,382 (84 ) 2,551
Cash Flows from Investing Activities:
Purchase of property........................................................ (154,480 ) (123,739 ) (55,026)
Proceeds from dispositions of property...................................... 20,135 25,693 14,323
Advances to discontinued operations, net.................................... (9,670 ) (6,952 ) --
Proceeds from sale of discontinued operations............................... 447,073 172,080 --
Proceeds from sales of subsidiaries......................................... -- 122,500 62,992
Acquisition of business, net of cash acquired............................... -- -- (127,068)
Other long-term assets, net................................................. (6,205 ) (3,217 ) (4,670)
Net cash flows provided by (used in) investing activities..................... 296,853 186,365 (109,449)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FLAGSTAR CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Cash Flows from Financing Activities:
Net borrowings (repayments) under credit agreements......................... $ (93,000 ) $ -- $ 56,000
Deferred financing costs.................................................... (25 ) -- (9,591)
Long-term debt payments..................................................... (201,664 ) (56,035) (44,108)
Net cash flows provided by (used in) financing activities................... (294,689 ) (56,035) 2,301
Increase (decrease) in cash and cash equivalents............................ 42,546 130,246 (104,597)
Cash and Cash Equivalents at:
Beginning of period......................................................... 24,174 66,720 196,966
End of period............................................................... $ 66,720 $196,966 $ 92,369
Supplemental Cash Flow Information:
Income taxes paid........................................................... $ 8,035 $ 3,591 $ 2,196
Interest paid............................................................... $ 258,653 $253,007 $253,459
Non-cash financing activities:
Capital lease obligations................................................ $ 18,800 $ 5,505 $ 12,310
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 (Flagstar or the Company) was acquired by Flagstar
Companies, Inc. (FCI) as of July 20, 1989. Prior to June 16, 1993 the Company
and FCI had been known, respectively, as TW Services, Inc. and TW Holdings, Inc.
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 Denny's, El Pollo Loco, Quincy's Family
Steakhouse, Coco's and Carrows restaurant brands and is the largest franchisee
of Hardee's. Denny's, a family-style restaurant chain, operates in forty-nine
states, two U.S. territories, and six foreign countries, with principal
concentrations in California, Florida, Texas, Washington, Arizona,
Pennsylvania, Illinois, and Ohio. Hardee's competes in the quick-service
hamburger category and Quincy's operates in the family-steak restaurant
category. 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.
Coco's and Carrows restaurant chains, acquired by Flagstar in May 1996,
compete in the family-style category and are located primarily in the western
United States.
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.
Certain prior year amounts have been reclassified to conform to the
1996 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 revenues
and expenses during the period reported. Actual results could differ
from those estimates.
(c) CASH AND CASH EQUIVALENTS. 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. Owned property is stated at cost and is
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 the net assets acquired of FRI-M Corporation (see Note 2 for
further details) is being amortized over a 40-year period on the
straight-line method. Other intangible assets consist primarily of
costs allocated 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. The Company assesses the recoverability of
goodwill and other intangible assets by projecting future net income
related to the acquired business, before the effect of amortization of
intangible assets, over the remaining amortization period of such
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
F-7
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 3 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 direct incremental
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. The total discounted self-insurance liabilities recorded
at December 31, 1995 and 1996 were $91.0 million and $100.1 million
respectively, reflecting a 4% discount rate. The related undiscounted
amounts at such dates were $98.0 million and $111.1 million,
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. Production costs for radio and television
advertising are expensed as of the date the commercials are initially
aired. Advertising expense for the years ended December 31, 1994, 1995
and 1996 was $85.8 million, $93.0 million, and $114.3 million,
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, 1994 and 1995 was $37.4 million and $18.9
million, respectively.
(o) DEFERRED GAINS. In September 1995, the Company sold its distribution
subsidiary, Proficient Food Company (PFC), for 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. During the third quarter of 1996, the
Company sold Portion-Trol Foods, Inc. and the Mother Butler Pies
division of Denny's, its two food processing operations. The sales were
finalized in the fourth quarter of 1996 pursuant to the purchase price
adjustment provisions of the related agreements. Consideration from the
sales totaled approximately $72.1 million, including the receipt of
approximately $60.6 million in cash. In conjunction with each of the
sales, the Company entered into five year purchasing agreements with
the acquirers. These transactions resulted in deferred gains totaling
approximately $41.5 million that are being amortized over the lives of
the respective purchasing agreements as a reduction of product cost.
The portion of the deferred gains recognized as a reduction in product
costs in 1995 and 1996 was approximately $2.8 million and $11.1
million, respectively.
(p) CASH OVERDRAFTS. The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totalling
$54.4 million and $51.6 million at December 31, 1995 and 1996,
respectively.
(q) FRANCHISE AND LICENSE FEES. Initial franchise and license fees are
recognized when all material services have been performed and
conditions have been satisfied. Initial fees for all periods presented
are insignificant. Monthly fees
F-8
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
are accrued as earned based on the respective monthly sales. Such fees
totaled $46.4 million, $59.3 million, and $71.1 million for the years
ended December 31, 1994, 1995 and 1996, respectively.
NOTE 2 ACQUISITION
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly
formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 company-owned units within the family-style
category. The acquisition price of $313.4 million plus acquisition costs (which
was paid in exchange for all of the outstanding stock of FRI-M Corporation
("FRI-M"), the subsidiary of Family Restaurants Inc. ("FRI") which owns the
Coco's and Carrows chains) was financed with $125.0 million in cash ($75.0
million of which was provided from the Company's cash balances and the remaining
$50.0 million pursuant to bank term loans which totaled $56.0 million with the
remaining $6.0 million being used to pay transaction fees), the issuance of
$156.9 million in senior notes of FRD to the seller, including an additional
$6.9 million principal amount of notes issued by FRD to FRI pursuant to the
purchase price adjustment provisions of the Stock Purchase Agreement on
September 4, 1996 and the assumption of certain capital lease obligations of
approximately $31.5 million. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the assets and liabilities and
results of operations of Coco's and Carrows are included in the Company's
consolidated financial statements for the period subsequent to the acquisition.
In accordance with the purchase method of accounting, the purchase price
has been allocated to the underlying assets and liabilities of FRI-M based on
their estimated respective fair values at the date of acquisition. The purchase
price exceeded the fair value of the net assets acquired by approximately $209
million. The resulting goodwill is being amortized on a straight line basis over
40 years. This amount reflects a decrease from the original estimate of
approximately $12 million. The revision, which was recorded during the fourth
quarter of 1996, is primarily due to the completion of certain valuations and
other studies which were prepared in order to estimate the fair value of the net
assets acquired. No further revisions to the purchase price allocation are
expected except for the potential impact of adjustments related to deferred
income taxes, which are expected to be resolved in early 1997.
The following unaudited pro forma financial information shows the results
of operations of the Company as though the acquisition occurred as of January 1,
1995. These results include the straight-line amortization of the excess of
purchase price over the net assets acquired over a 40-year period, a reduction
of overhead expenses due to anticipated cost savings and efficiencies from
combining the operations of the Company and FRI-M, an increase in interest
expense as a result of the debt issued to finance the acquisition, and a
reduction in FRI-M's income tax expense to reflect the fact that the Company's
net operating losses will offset FRI-M's separate income tax provision (except
for current foreign and state income taxes) when calculated on a consolidated
basis.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Revenue............................................................ $3,077.1 $2,738.2
Loss from continuing operations.................................... (140.8) (97.6)
Net Loss........................................................... (63.1) (97.6)
</TABLE>
The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations had the acquisition taken
place on January 1, 1995 or (ii) future results of operations of the combined
businesses.
NOTE 3 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.
F-9
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS -- Continued
In addition, the Company adopted SFAS No. 121 during 1995 (see Note 1(g)).
In connection with such adoption, 99 restaurant units, which the Company
intended to continue to operate were identified as impaired as the future
undiscounted cash flows of each of these units was 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 was written
down to estimated fair value, based on sales of similar units or other estimates
of selling price, less costs to sell. The 36 units identified in 1995 for
disposal had aggregate operating revenues of approximately $26.1 million, an
operating loss of approximately $2.9 million during 1995, and an aggregate
carrying value of approximately $5.8 million as of December 31, 1995. As of
December 31, 1996, 29 units have been closed or sold. Management intends to
dispose of two of the remaining units in 1997 and continue to operate the other
five. The two units to be disposed of in 1997 had aggregate operating revenues
of approximately $1.6 million and operating income of $0.04 million during 1996
and an aggregate carrying amount of $0.3 million at December 31, 1996.
Charges attributable to the restructuring plan and the adoption of SFAS No.
121 during the year ended December 31, 1995 are comprised of the following:
<TABLE>
<S> <C>
($ in thousands)
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>
The 1995 restructuring plan was substantially completed in 1996 except for
certain asset replacement projects (where the assets to be replaced were written
down as part of the restructuring) which were postponed in 1996 due to the
Company's capital constraints. Such projects are expected to be completed in
1997. Pursuant to the restructuring plan, approximately 74 employees, primarily
corporate and field management, have been terminated as of December 31, 1996,
resulting in payments of approximately $4.5 million as of that date.
Effective in the fourth quarter of 1993, the Company approved a
restructuring plan, which, among other things, resulted in the identification
for sale, conversion to another concept or closure of 240 restaurants. As of
December 31, 1996, four units remain relative to the 1993 restructuring plan, of
which two are scheduled for disposal in 1997. Management has decided to continue
to operate the remaining two units. The two units to be disposed of in 1997 had
operating revenues of approximately $1.3 million and operating income of $0.03
million during 1996 and an aggregate carrying amount that was immaterial at
December 31, 1996.
NOTE 4 DEBT
At December 31, 1996, the Flagstar Second Amended and Restated Credit
Agreement (the "Credit Agreement") includes a working capital and letter of
credit facility of up to a total of $150.0 million which includes a working
capital advance sublimit of $75.0 million. At such date, the Company had no
working capital advances outstanding; however, letters of credit outstanding
were $79.7 million. The Credit Agreement terminates on April 10, 1999 and is
subject to
F-10
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
mandatory prepayments and commitment reductions under certain circumstances upon
the Company's sale of assets or incurrence of additional debt. See also the
discussion below.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Notes and Debentures:
10.75% Senior Notes due September 15, 2001, interest payable semi-annually...................... $ 270,000 $ 270,000
10.875% Senior Notes due December 1, 2002, interest payable semi-annually....................... 280,025 280,025
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
12.5% Senior Notes of FRD due July 15, 2004, interest payable semi-annually..................... -- 156,897
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000........................................................ 202,715 190,164
11.03% Notes due 2000........................................................................... 160,000 160,000
Term loan of FRI-M, principal payable in quarterly installments................................. -- 56,000
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)............................. 17,415 13,561
Capital lease obligations (see Note 5)............................................................ 144,573 160,226
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).................................. 13,548 8,740
Total............................................................................................. 2,034,946 2,242,283
Less current maturities (c)....................................................................... 38,835 62,890
$1,996,111 $2,179,393
</TABLE>
(a) Collateralized by restaurant and other properties with a net book value of
$20.9 million at December 31, 1996.
(b) Collateralized by equipment with a net book value of $13.2 million at
December 31, 1996.
(c) Aggregate annual maturities during the next five years of long-term debt are
as follows ($ in thousands): 1997 -- $62,890; 1998 -- $57,830;
1999 -- $51,169; 2000 -- $326,666; and 2001 -- $280,999.
The borrowings under the Credit Agreement are secured by the stock of
certain operating subsidiaries and certain of 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 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 restricted 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 Credit Agreement contains 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 Credit Agreement at
December 31, 1996. Under the most restrictive provision of the Credit Agreement
(ratio of senior debt to EBITDA, as defined), at December 31, 1996, the Company
could incur approximately $28.4 million of additional indebtedness.
With respect to short-term liquidity, management believes that through a
combination of cash generated from operations, funds available through the bank
credit facility, various cash management measures and other sources, adequate
F-11
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
liquidity exists to meet the Company's working capital, debt service and capital
expenditure requirements for at least the next twelve months. 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.
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).
At December 31, 1996, 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, 1996, the restaurant properties and
equipment had a net book value of $317.6 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 are
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 (or on a five
year average basis) to maintain the properties at least $19.3 million in 1997
and increasing each year to $23.7 million in 2000.
The 11.03% mortgage notes are secured by a pool of cross collateralized
mortgages on 240 restaurants with a net book value at December 31, 1996 of
$220.9 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, upon payment
of a premium. 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.
In connection with the acquisition by FRD of Coco's and Carrows on May 23,
1996, FRI-M (the "Borrower"), a wholly-owned subsidiary of FRD, obtained a new
credit facility (the "FRI-M Credit Facility") consisting of a $56 million,
39-month term loan (the "FRI-M Term Loan") and a $35 million working capital
facility (the "FRI-M Revolver"). Proceeds from the FRI-M Term Loan were used to
fund the Coco's and Carrows acquisition, and to pay the transactions costs
associated therewith. Proceeds from the FRI-M Revolver are to be used for
working capital requirements and other general corporate purposes, which may
include the making of intercompany loans to any of the Borrower's wholly owned
subsidiaries for their own working capital and other general corporate purposes.
Letters of credit may be issued under the FRI-M Revolver for the purpose of
supporting (i) workers' compensation liabilities of the Borrower or any of its
subsidiaries; (ii) the obligations of third party insurers of the Borrower or
any of its subsidiaries; and (iii) certain other obligations of the Borrower and
its subsidiaries. At December 31, 1996, there were no working capital borrowings
outstanding; however, letters of credit outstanding were $20.8 million.
Principal installments of the FRI-M Term Loan are payable quarterly as follows:
$4.0 million per quarter for four consecutive quarters beginning February 28,
1997; $5.0 million for four consecutive quarters beginning February 28, 1998; $6
million on February 28, 1998; and $7 million for two consecutive quarters
beginning May 31, 1999. The FRI-M Credit Facility expires, and all amounts under
the Facility must be repaid, on August 31, 1999. All borrowings under the FRI-M
Credit Facility accrue interest at a variable rate based on a base rate or an
adjusted Eurodollar rate (8.125% at year end 1996) and are secured by the issued
and outstanding stock, as well as substantially all the assets, of FRD and its
subsidiaries.
The FRI-M Credit Facility and the indenture under which the 12.5% senior
notes have been issued contain a number of restrictive covenants which, among
other things, limit (subject to certain exceptions) FRD and its subsidiaries
with respect to the incurrence of debt, existence of liens, investments and
joint ventures, the declaration or payment of dividends, the making of
guarantees and other contingent obligations, mergers, the sale of assets,
capital expenditures and material change in their business. In addition, the
FRI-M Credit Facility contains certain financial covenants including
F-12
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
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), maintenance of a
minimum level of EBITDA, and limitations on annual capital expenditures. The
cash flows from FRD are required to be used to service the debt issued in the
Coco's and Carrows acquisition (the FRI-M Credit Facility and the 12.5% Senior
Notes), and, therefore, other than for the payment of certain management fees
and tax reimbursements payable to Flagstar under certain conditions, are
currently unavailable to service the debt of Flagstar and its other
subsidiaries. FRD's cash flows from operating activities, included in the
Company's total cash flow from operating activities, were $21.2 million in 1996.
FRD and its subsidiaries were in compliance with the terms of the FRI-M
Credit Facility at December 31, 1996. Under the most restrictive provision of
the FRI-M Credit Facility (ratio of Consolidated Adjusted EBITDA to interest
expense), at December 31, 1996, FRD's consolidated EBITDA for the six months
ended December 31, 1996 could be $5.6 million less and the Company would still
be in compliance.
At December 31, 1996, the Company has $575 million aggregate notional
amount in effect of reverse interest rate exchange agreements with maturities
ranging from one to thirty-six 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 $9.2 million, $3.1 million, and $1.4 million for the years ended
December 31, 1994, 1995, and 1996, respectively. Management intends to maintain
its exchange agreements until maturity, unless there is a material change in the
underlying hedged instruments of the Company.
The counterparties to the Company's interest rate exchange agreements are
major financial institutions who participate in the Company's senior bank credit
facility. Such financial institutions are leading market-makers in the financial
derivatives markets, are well capitalized, and are expected to fully perform
under the terms of such exchange agreements, thereby mitigating the credit risk
to the Company.
The Company is exposed to market risk for such exchange agreements due to
the interest rate differentials described above. The Company monitors its market
risk by periodically preparing sensitivity analyses of various interest rate
fluctuation scenarios and the results of such scenarios on the Company's cash
flows on a nominal and discounted basis. In addition, the Company obtains
portfolio mark-to-market valuations from market-makers of financial derivatives
products.
Information regarding the Company's reverse interest rate exchange
agreements at December 31, 1996 is as follows ($ in millions):
<TABLE>
<CAPTION>
AMOUNT OF WEIGHTED AVERAGE
YEAR OF NOTIONAL INTEREST RATE
MATURITY PAYMENT RECEIVED PAID
<S> <C> <C> <C>
1997 $ 275 5.22% 5.74%
1998 200 5.58% 5.72%
1999 100 5.82% 5.72%
$ 575 5.45% 5.73%
</TABLE>
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is approximately $1.7 billion at December 31, 1996. 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, 1996,
the estimated fair value of the $575 million notional amount of reverse interest
rate swaps was a net payable of approximately $3.7 million and represents the
estimated amount that the Company would be required to pay to terminate the swap
agreements at December 31, 1996. This estimate is based upon a mark-to-market
valuation of the Company's swap portfolio obtained from a major financial
institution which is one of the counterparties to the exchange agreements.
F-13
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
On January 21, 1997, the Company hired Donaldson, Lufkin & Jenrette
Securities Corporation as a financial advisor to assist in exploring
alternatives to improve the Company's capital structure. Management intends to
explore all alternatives to reduce the Company's debt service requirements,
which may include a negotiated restructuring or other exchange transaction.
NOTE 5 LEASES AND RELATED GUARANTEES
The Company's operations utilize property, facilities, equipment and
vehicles leased from others. In addition, certain owned and leased property,
facilities and equipment are leased to others.
Buildings and facilities leased from others primarily are for restaurants
and support facilities. At December 31, 1996, restaurants were operated under
lease arrangements which generally provide for a fixed basic rent, and, in some
instances, contingent rental based on a percentage of gross operating profit or
gross revenues. Initial terms of land and restaurant building leases generally
are not less than twenty years exclusive of options to renew. Leases of other
equipment primarily consist of merchandising equipment, computer systems and
vehicles, etc.
Information regarding the Company's leasing activities at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
MINIMUM MINIMUM MINIMUM MINIMUM
LEASE SUBLEASE LEASE SUBLEASE
PAYMENTS RECEIPTS PAYMENTS RECEIPTS
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
Year:
1997....................................................................... $ 41,517 $ 6,865 $ 61,395 $7,589
1998....................................................................... 35,321 6,363 58,514 7,422
1999....................................................................... 29,221 5,753 54,997 7,067
2000....................................................................... 23,380 4,938 51,173 6,749
2001....................................................................... 20,257 4,285 44,655 6,402
Subsequent years........................................................... 124,917 21,353 238,326 45,957
Total................................................................... 274,613 $49,557 $509,060 $81,186
Less imputed interest........................................................ 114,387
Present value of capital lease obligations................................... $160,226
</TABLE>
Payments for certain FRD operating leases are being made by FRI in
accordance with the provisions of the Stock Purchase Agreement. As such, these
payments have been excluded from the amount of minimum lease payments and
minimum sublease receipts reported above.
The total rental expense included in the determination of operating income
for the years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Base rents.................................................................... $ 49,234 $ 48,269 $ 59,322
Contingent rents.............................................................. 12,178 11,274 10,929
Total......................................................................... $ 61,412 $ 59,543 $ 70,251
</TABLE>
Total rental expense does not reflect sublease rental income of $9,975,000,
$14,426,000, and $16,282,000 for the years ended December 31, 1994, 1995, and
1996, respectively.
F-14
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to
the loss before discontinued operations and extraordinary items is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Current:
Federal..................................................................... $ 365 $ 1,940 $ (6,074)
State, Foreign and Other.................................................... 215 1,497 (1,287)
580 3,437 (7,361)
Deferred:
Federal..................................................................... -- -- (6,797)
State, Foreign and Other.................................................... (2,793) (3,451) (2,234)
(2,793) (3,451) (9,031)
Benefit from income taxes..................................................... $ (2,213) $ (14) $(16,392)
The total provision for (benefit from) income taxes related to:
Loss before discontinued operations and extraordinary items................. $ (2,213) $ (14) $(16,392)
Discontinued operations..................................................... 10,470 8,731 --
Extraordinary items......................................................... (174) 25 --
Total provision for (benefit from) income taxes............................... $ 8,083 $ 8,742 $(16,392)
</TABLE>
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, for the year ended December 31, 1996,
the Company recorded a $7.3 million deferred Federal tax benefit related to the
reversal of certain reserves established in connection with the proposed
deficiencies from the Internal Revenue Service.
F-15
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES -- Continued
The following represents the approximate tax effect of each significant
type of temporary difference and carryforward giving rise to deferred income tax
liabilities or assets:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Deferred tax assets:
Deferred income......................................................................................... $24,326 $39,953
Self-insurance reserves................................................................................. 33,522 43,006
Capitalized leases...................................................................................... 15,823 19,869
Amortization of intangible assets....................................................................... -- 2,949
Other accruals and reserves............................................................................. 6,924 18,054
Alternative minimum tax credit carryforwards............................................................ 18,444 10,459
General business credit carryforwards................................................................... 21,623 19,232
Net operating loss carryforwards........................................................................ 9,764 32,135
Less: valuation allowance............................................................................... (54,452) (83,828)
Total deferred tax assets............................................................................... 75,974 101,829
Deferred tax liabilities:
Depreciation of fixed assets............................................................................ 89,787 118,190
Amortization of intangible assets....................................................................... 4,362 --
Total deferred tax liabilities.......................................................................... 94,149 118,190
Total deferred income tax liability..................................................................... $18,175 $16,361
</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 and extraordinary items is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Statutory rate................................................................ 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit.......... 12 -- 2
Amortization of goodwill.................................................... -- -- 1
Reversal of certain reserves established in connection with proposed
Internal Revenue Service deficiencies.................................... -- -- 7
Portion of losses not benefited as a result of the establishment of
valuation allowance...................................................... (35) (35) (29)
Other....................................................................... (5) -- (2)
Effective tax rate............................................................ 7% --% 14%
</TABLE>
At December 31, 1996, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $19 million, most of which expire in 2002 through 2007; and
alternative minimum tax (AMT) credits of approximately $10 million. The AMT
credits may be carried forward indefinitely. In addition, the Company has
available regular income tax net operating loss carryforwards of approximately
$92 million which expire in 2007 through 2011. 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 the recapitalization will
be limited to a specified annual amount. The annual limitation for the
utilization of the tax credit carryforwards is approximately $8
F-16
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES -- Continued
million. The net operating loss carryforward arose subsequent to the
recapitalization and is presently not subject to any annual limitation.
NOTE 7 EMPLOYEE BENEFIT PLANS
The Company maintains several defined benefit plans which cover a
substantial number of employees. Benefits are based upon each employee's years
of service and average salary. The Company's funding policy is based on the
minimum amount required under the Employee Retirement Income Security Act of
1974. The Company also maintains defined contribution plans.
Total net pension cost of defined benefit plans for the years ended
December 31, 1994, 1995, and 1996 amounted to $4.0 million, $5.6 million and
$3.5 million, respectively, of which $3.3 million related to funded defined
benefit plans for all three years and $0.7 million, $2.3 million and $0.2
million related to nonqualified unfunded supplemental defined benefit plans for
executives.
The components of net pension cost of the funded and unfunded defined
benefit plans for the years ended December 31, 1994, 1995, and 1996 determined
under SFAS No. 87 follow:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Service cost.................................................................. $ 3,076 $ 2,829 $ 3,151
Interest cost on projected benefit obligations................................ 2,427 2,651 2,895
Actual return on plan assets.................................................. 761 (3,722) (2,277)
Net amortization and deferral................................................. (2,269) 2,074 (242)
Curtailment/settlement losses (due to early retirements of certain
participants)............................................................... -- 1,762 --
Net pension cost.............................................................. $ 3,995 $ 5,594 $ 3,527
</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,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits....................................................................................... $23,993 $27,661
Non-vested benefits................................................................................... 1,466 1,488
Accumulated benefit obligations......................................................................... $25,459 $29,149
Plan assets at fair value............................................................................... $26,513 $31,109
Projected benefit obligation............................................................................ (32,059) (36,416)
Funded status........................................................................................... (5,546) (5,307)
Unrecognized net loss from past experience different from that assumed.................................. 6,301 6,890
Unrecognized prior service cost......................................................................... 69 --
Prepaid pension costs................................................................................... $ 824 $ 1,583
</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,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits........................................................................................ $ 4,080 $ 4,924
Non-vested benefits.................................................................................... 12 33
Accumulated benefit obligations.......................................................................... $ 4,092 $ 4,957
Plan assets at fair value................................................................................ $ -- $ --
Projected benefit obligation............................................................................. (4,188) (5,051)
Funded status............................................................................................ (4,188) (5,051)
Unrecognized net (gain) loss from past experience different from that assumed............................ (112) 616
Unrecognized prior service cost.......................................................................... 109 68
Unrecognized net asset at January 1, 1987 being amortized over 15 years.................................. (49) (9)
Additional liability..................................................................................... (543) (974)
Other 24 --
Accrued pension costs.................................................................................... $(4,759) $(5,350)
</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 1996
<S> <C> <C> <C>
Discount rate......................................................... 8.3 % 8.0 % 8.0 %
Rates of salary progression........................................... 4.0 % 4.0 % 4.0 %
Long-term rates of return on assets................................... 10.0 % 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 $3.9 million for the years ended December 31,
1994 and 1995 respectively. The Company made no matching contributions for the
year ended December 31, 1996.
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,
1994, 1995, and 1996 were as follows: $4.2 million, $0.6 million, and $1.9
million. In addition to these incentive compensation plans, certain operations
have incentive plans in place under which regional, divisional and local
management participate.
At December 31, 1996, FCI has two stock-based compensation plans, which are
described below. FCI and the Company have adopted the disclosure-only provisions
of Financial Accounting Standards Board Statement 123, "Accounting for Stock
Based Compensation" (SFAS 123) while continuing to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for their stock-based compensation plans.
Under APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The 1989 Stock Option Plan (the 1989 Plan) permits a Committee of the Board
of Directors to grant options to key employees of the Company and its
subsidiaries to purchase shares of common stock of FCI at a stated price
established by the Committee. The 1989 Plan authorizes grants of up to 6.5
million common shares. The exercise price of each option equals or exceeds the
market price of FCI's stock on the date of grant. Options granted to officer
level employees vest at a
F-18
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
rate of 20% per annum beginning on the first anniversary date of the grant.
Options granted to non-officer level employees prior to August 13, 1996 vest at
a rate of 25% per annum. Those granted on August 13, 1996 or subsequent thereto,
vest at a rate of 20% per annum. If not exercised, all options expire ten years
from the date of grant.
During January 1995, FCI issued 65,306 shares of common stock and granted
an option under the 1989 Stock Option Plan to purchase 800,000 shares of FCI's
common stock to an executive officer, at market value at date of grant, for a
ten year period. Such grant becomes exercisable at a rate of 20% per year
beginning on January 9, 1996 and each anniversary thereafter.
On June 21, 1995, generally all of the outstanding options held by the then
current employees of the Company under the 1989 Plan were repriced to $6.00 per
share, the market value of the common stock on that date. All officer level
employees were given the choice of either retaining their current options at
their existing exercise prices and vesting schedule or surrendering their
existing options in exchange for an option to purchase the same number of shares
exercisable at a rate of 20% per annum beginning on the first anniversary date
of the new grant. All non-officer employees received the new exercise price of
$6.00 per share and retained their original vesting schedules for all of their
outstanding options previously granted.
Options of 4.3 million were outstanding at December 31, 1995, of which
728,221 were exercisable. Such options had exercise prices of between $5.13 and
$17.50 per share. During 1995 no options were exercised.
On December 13, 1996, the outstanding options of certain officers and
senior staff, representing approximately 2.2 million outstanding options, were
repriced to $1.25 per share, the closing price of the common stock on December
12, 1996. The repricing did not impact the option vesting schedules.
In 1990, the Board of directors adopted a 1990 Non-qualified Stock Option
Plan (the 1990 Plan) for its directors who do not participate in management and
are not affiliated with GTO (See Note 12). Such plan authorizes the issuance of
up to 110,000 shares of common stock. The plan is substantially similar in all
respects to the 1989 Plan described above. At both December 31, 1995 and 1996,
options outstanding under the 1990 Option Plan totaled 10,000 shares.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted or repriced during 1995 and 1996 under
the fair value method of that statement. The fair value of these options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1995 and 1996,
respectively: dividend yield of 0.0% for both years; expected volatility of
0.438 for both years; risk-free interest rates of 5.6% and 5.7%; and a weighted
average expected life of the options of 8.3 years and 8.9 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
($ IN THOUSANDS) 1995 1996
<S> <C> <C>
Pro forma net loss........................................................... $(71,914) $(101,299)
</TABLE>
Due to the fact that the pro forma amounts above include only the impact of
the application of fair value accounting to options issued in 1995 and 1996 as
prescribed by Statement 123, they are not, and will not be, indicative of future
pro forma amounts until fair value accounting is applied to all outstanding
nonvested awards.
F-19
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
A summary of FCI's stock option plans as of December 31, 1996 and changes
during the year ended December 31, 1996 is presented below:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE
<S> <C> <C>
Outstanding at beginning of year........................................ 4,338 $ 8.02
Granted
Exercise price equals fair value at grant date........................ 687 2.75
Exercise price exceeds fair value at grant date....................... 3,167 2.68
Exercised...............................................................
Forfeited/Expired....................................................... (3,873 ) 6.05
Outstanding at end of year.............................................. 4,319 $ 5.04
Exercisable at year-end................................................. 1,154 $ 9.84
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$ 1.25-$1.25 2,210,895 9.06 $ 1.25 191,358 $ 1.25
$ 2.75-$2.75 126,700 9.62 2.75 -- --
$ 6.00-$6.13 1,381,280 7.71 6.07 482,475 6.04
$15.00-$17.50 600,000 1.88 17.08 480,000 17.08
4,318,875 7.64 $ 5.04 1,153,833 $ 9.84
</TABLE>
The weighted average fair value per option of options granted during the
years ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Exercise price equals fair value at grant date....................................... $3.06 $1.65
Exercise price exceeds fair value at grant date...................................... 2.97 .78
</TABLE>
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 businesses, 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, 1996, over and above any
insurance coverage in respect to certain of them, are not specifically
determinable at this time.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by the Company and FCI for the seven taxable periods ended December 31,
1992. In the third quarter of 1996, this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act ("the Act") in August 1996. The Act included a
provision that clarified Internal Revenue Code Section 162(k) to allow for the
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. As the Company believes the remaining proposed
deficiencies are substantially incorrect, it intends to continue to contest such
proposed deficiencies.
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
F-20
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 COMMITMENTS AND CONTINGENCIES -- Continued
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 $4.5
million at December 31, 1996 from the sale of PFC. See Note 1(o).
On February 22, 1996, the Company entered into an agreement with Integrated
Systems Solutions Corporation (ISSC). The ten year agreement for $340.6 million
(including an additional $17.6 million for FRD), which requires annual payments
ranging from $24.0 million to $47.5 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. Under the agreement,
ISSC has full oversight responsibilities for the data center operations,
applications development and maintenance, voice and data networking, help desk
operations, and point-of-sale technology.
In conjunction with the sales of Portion-Trol Foods, Inc. and the Mother
Butler Pies division of Denny's, the Company entered into five year purchasing
agreements with the acquirers under which the Company is required to make
minimum annual purchases over the contract terms. The aggregate estimated
commitments remaining at December 31, 1996 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $450 million and $54
million.
NOTE 9 SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
TOTAL SHAREHOLDER'S
OTHER EQUITY DEFICIT EQUITY (DEFICIT)
<S> <C> <C> <C>
($ IN THOUSANDS)
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)
Activity:
Net Loss.................................................................. -- (99,635) (99,635)
Minimum pension liability adjustment...................................... (459) (459)
Balance December 31, 1996...................................................... $601,974 $(1,976,968) $ (1,374,994)
</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 omitted for
all years.
F-21
<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, 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 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 loans 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 $25.0 million 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 year ended
December 31, 1994 for Gollust Tierney & Oliver, Incorporated (GTO), a
stockholder of FCI.
KKR received annual financial advisory fees of approximately $1.3 million
for the years ended December 31, 1994, 1995, and 1996.
During January 1997, the Company settled its employment and benefits
arrangements with, and loan receivable from, a former officer previously
scheduled to mature in November 1997. The Company received net proceeds of $8.2
million and recorded a net charge of approximately $3.5 million which has been
included in other non-operating expenses in the accompanying 1996 Statement of
Consolidated Operations.
Interest income for the loan receivable from the former officer for the
years ended December 31, 1994, 1995 and 1996 totaled $842,000, $886,000, and
$935,000, respectively.
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.
F-22
<PAGE>
FLAGSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 DISCONTINUED OPERATIONS -- Continued
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 $75.8 million, 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, 1994, and 1995 were $859.7 million, and $322.3 million and $32.6
million, and $17.1 million, respectively.
NOTE 14 QUARTERLY DATA (UNAUDITED)
The results for each quarter include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
interim periods. The consolidated financial results on an interim basis are not
necessarily indicative of future financial results on either an interim or an
annual basis. Selected consolidated financial data for each quarter within 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
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)
Year Ended December 31, 1996:
Operating Revenue............................................................ $550,425 $626,570 $703,838 $661,469
Operating expenses:
Product costs.............................................................. 160,028 184,842 206,777 192,425
Payroll & benefits......................................................... 214,531 235,605 258,613 237,023
Depreciation & amortization expense........................................ 29,047 30,006 33,555 37,340
Utilities expense.......................................................... 22,754 24,329 30,698 26,696
Other...................................................................... 96,579 108,428 125,868 130,766
Operating income............................................................. $ 27,486 $ 43,360 $ 48,327 $ 37,219
Loss before extraordinary item............................................... $(30,857) $(20,981) $(16,057) $(31,740)
Net loss..................................................................... $(30,857) $(20,981) $(16,057) $(31,740)
</TABLE>
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.
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: February 25, 1997
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 February 25, 1997
Executive Officer (Principal Executive
(James B. Adamson) Officer)
/s/ C. ROBERT CAMPBELL Senior Vice President and Chief Financial February 25, 1997
Officer (Principal Financial Officer)
(C. Robert Campbell)
/s/ DONNA M. MASCOLO Vice President and Controller (Principal February 25, 1997
Accounting Officer)
(Donna M. Mascolo)
/s/ MICHAEL CHU Director February 25, 1997
(Michael Chu)
/s/ VERA KING FARRIS Director February 25, 1997
(Vera King Farris)
/s/ NICHOLAS deB. KATZENBACH Director February 25, 1997
(Nicholas deB. Katzenbach)
/s/ HENRY R. KRAVIS Director February 25, 1997
(Henry R. Kravis)
/s/ PAUL E. RAETHER Director February 25, 1997
(Paul E. Raether)
Director
(Clifton S. Robbins)
Director
(George R. Roberts)
Director
(Elizabeth A. Sanders)
/s/ MICHAEL T. TOKARZ Director February 25, 1997
(Michael T. Tokarz)
</TABLE>
EXHIBIT 3.3
BY-LAWS(1)
OF
FLAGSTAR CORPORATION
A Delaware Corporation
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be in the City of Wilmington.
SECTION 2. OTHER OFFICES. The Corporation may have other offices,
either within or without the state of Delaware, at such place or places as the
Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting shall be held at such place, either within or without the state
of Delaware, and at such time and date, commencing in the year 1989, as the
Board of Directors, by resolution, shall determine and as set forth in the
notice of the meeting.
If the date of the annual meeting shall fall upon a
legal holiday, the meeting shall be held on the next business day. At each
annual meeting, the stockholders entitled to vote shall elect a Board of
Directors and they may transact such other corporate business as shall be stated
in the notice of the meeting.
SECTION 2. OTHER MEETINGS. Special meetings of stockholders for any
purpose may be held at such time and place, within or without the state of
Delaware, as may be fixed by the Board of Directors and shall be stated in the
notice of meeting.
(1) As amended through July 24, 1996
<PAGE>
SECTION 3. INSPECTOR OF ELECTION. At each meeting of stockholders at
which an election of directors is to be held, the chairman of the meeting may,
but shall not be required to, appoint one person, who need not be a stockholder,
to act as inspector of election at such meeting. The inspector so appointed,
before entering on the discharge of his duties, shall take and subscribe to an
oath or affirmation to faithfully execute the duties of inspector at such
meeting with strict impartiality and according to the best of his ability, and
thereupon the inspector shall take charge of the polls and after the balloting
shall canvas the votes and make a certificate of the results of the vote taken.
No director or candidate for the office of director shall be appointed
inspector.
SECTION 4. VOTING. At each meeting of the stockholders, each
stockholder entitled to vote at such meeting in accordance with the terms of the
Certificate of Incorporation and in accordance with the provisions of these
By-laws shall be entitled to one vote, in person or by proxy, for each share of
stock entitled to vote held by such stockholder, but no proxy shall be voted
after three years from its date unless such proxy provides for a longer period.
Every proxy must be executed in writing by the stockholder or by the
stockholder's duly authorized attorney. Upon the demand of any stockholder, the
vote for directors and the vote upon any question before the meeting, shall be
by ballot. All elections for directors and all other questions shall be decided
by majority vote except as otherwise provided by the Certificate of
Incorporation or the laws of the state of Delaware.
A complete list of the stockholders entitled to vote
at the ensuing election, arranged in alphabetical order, with the address of
each, and the number of shares held by each, shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
SECTION 5. QUORUM. At all meetings of the stockholders, except as
otherwise required by law, by the Certificate of Incorporation or by these
By-laws, the presence, in person or by proxy, of stockholders of record holding
a majority of the shares of stock of the Corporation issued, outstanding and
entitled to vote thereat shall constitute a quorum for the transaction of
business. In case a quorum shall not be present at any meeting, the holders of
record of a majority of the shares of stock entitled to vote thereat, present in
person or by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until the requisite
amount of stock entitled to vote shall be present. At any such adjourned meeting
at which the requisite amount of stock entitled to vote shall be represented,
any business may be transacted which might have been transacted at the meeting
as originally called; but only those stockholders entitled to vote at the
meeting as originally called shall be entitled to vote at any adjournment or
adjournments thereof.
<PAGE>
SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose or purposes may be called by the Chairman of the Board of Directors,
the President or the Secretary, or by resolution of the Board of Directors.
SECTION 7. NOTICE OF MEETINGS. Written notice, stating the place, date
and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at his
address as it appears on the records of the Corporation, not less than ten nor
more than sixty days before the date of the meeting. No business other than that
stated in the notice shall be transacted at any meeting without the unanimous
consent of all the stockholders entitled to vote thereat.
SECTION 8. ACTION WITHOUT MEETING. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Such written consent shall be filed in the minute
book of the Corporation.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. The number of directors of the Corporation
shall be not less than one nor more than fifteen. Within the limits above
specified, the number of directors shall be determined from time to time by the
stockholders or by the Board of Directors at any meeting thereof. The directors
shall be elected at the annual meeting of the stockholders. Each director shall
be elected to serve until his successor shall be elected and shall qualify or
until his earlier death, resignation or removal as provided in these By-laws.
Directors need not be stockholders. No person who has attained the age of 70
shall be eligible to stand for election or re-election by the stockholders or
otherwise to be appointed to serve as a director of the Corporation unless
pursuant to a special finding of the Board of Directors of the necessity for
such an individual to serve as a director.
SECTION 2. RESIGNATION. Any director, member of a committee or other
officer may resign at any time. Such resignation shall be made in writing to the
Board of Directors, the Chairman of the Board of Directors, the President or the
Secretary. Unless otherwise specified therein, such resignation shall take
effect on receipt thereof. The acceptance of a resignation shall not be
necessary to make it effective.
<PAGE>
SECTION 3. VACANCIES. If the office of any director, member of a
committee or other officer becomes vacant, the remaining directors in office,
though less than a quorum, by a majority vote, may appoint any qualified person
to fill such vacancy, who shall hold office for the unexpired term and until his
successor shall be duly chosen or until his earlier death, resignation or
removal. In the event that the resignation of any director shall specify that it
shall take effect at a future date, the vacancy resulting from such resignation
may be filled prospectively in the same manner as provided in this paragraph.
SECTION 4. REMOVAL. Except as hereinafter provided, any director or
directors may be removed either for or without cause at any time by the
affirmative vote of the holders of a majority of all the shares of stock
outstanding and entitled to vote, at a special meeting of the stockholders
called for the purpose, and the vacancies thus created may be filled, at the
meeting held for the purpose of removal, by the affirmative vote of a majority
in interest of the stockholders entitled to vote.
Any director may be removed at any time for cause by
the action of the directors, at a special meeting called for that purpose, by
the vote in favor of removal of a majority of the total number of directors.
SECTION 5. INCREASE OF NUMBER. The maximum number of directors may be
increased by amendment of these By-laws by the affirmative vote of a majority of
the directors, though less than a quorum, or, by the affirmative vote of a
majority interest of the stockholders, at the annual meeting or at a special
meeting called for that purpose, and by like vote the additional directors may
be chosen at such meeting to hold office until the next annual election and
until their successors are elected and qualify or until their earlier death,
resignation or removal.
SECTION 6. POWERS. The Board of Directors shall exercise all of the
powers of the Corporation except such as are by law, by the Certificate of
Incorporation of the Corporation or by these By-laws conferred upon or reserved
to the stockholders.
SECTION 7. COMMITTEES. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole board, designate one or more
committees, each committee to consist of two or more directors of the
Corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the
resolution of the Board of Directors, or in these By-laws, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
<PAGE>
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the By-laws of the Corporation; and, unless the resolution, these
By-laws, or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
SECTION 8. MEETINGS. The newly elected directors may hold their first
meeting for the purpose of organization and the transaction of business, if a
quorum be present, immediately after the annual meeting of the stockholders; or
the time and place of such meeting may be fixed by consent in writing of all the
directors.
Regular meetings of the directors may be held without
notice at such places and times as shall be determined from time to time by
resolution of the directors.
Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors, the President or the Secretary
on the written request of any two directors on at least two days' notice to each
director and shall be held at such place or places as may be determined by the
directors, or shall be stated in the call of the meeting.
Unless otherwise restricted by the Certificate of
Incorporation or by these By-laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
SECTION 9. QUORUM. A majority of the total number of directors shall
constitute a quorum for the transaction of business. If a quorum shall be
present, the act of a majority of the directors present shall be the act of the
Board of Directors, except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws. If at any meeting of the Board of Directors
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need be given other than by announcement at the meeting which
shall be so adjourned.
SECTION 10. COMPENSATION. Directors shall not receive any stated salary
for their services as directors or as members of committees, but by resolution
of the Board of Directors a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
<PAGE>
SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting, if prior to such action a written consent
thereto is signed by all members of the Board of Directors, or of such committee
as the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
SECTION 12. RULES AND REGULATIONS. The Board of Directors may adopt
such rules and regulations for the conduct of its meetings and for the
management of the property, affairs and business of the Corporation as it may
deem proper, except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a
Chairman of the Board of Directors, if any shall have been elected, a President,
a Treasurer, and a Secretary, all of whom shall be elected by the Board of
Directors and who shall hold office until their successors are elected and
qualified or until their earlier death, resignation or removal. In addition, the
Board of Directors may elect one or more Vice Presidents and such Assistant
Secretaries and Assistant Treasurers as they may deem proper. None of the
officers of the Corporation need be directors (except for the Chairman of the
Board of Directors, if any) or stockholders. The officers shall be elected at
the first meeting of the Board of Directors after each annual meeting. Any
person may hold one or more offices. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors. The
Board of Directors may delegate to any officer or officers the power to appoint
any such officer, to fix their respective terms of office, to prescribe their
respective powers and duties, to remove them and to fill vacancies in any such
offices.
SECTION 3. CHAIRMAN. The Chairman of the Board of Directors, if one be
elected, shall preside at all meetings of the Board of Directors and of the
stockholders, and absent instructions to the contrary by the Board of Directors,
shall exercise general supervision over the property, affairs and business of
the Corporation, shall authorize the other officers of the Corporation to
exercise such powers as he may deem to be in the best interests of the
Corporation and shall have and perform such other duties as from time to time
may be assigned to him by the Board of Directors.
<PAGE>
SECTION 4. PRESIDENT. The President shall have such duties as may from
time to time be delegated to him by the Board of Directors. In the event there
shall be no Chairman, the President shall exercise all powers conferred on the
Chairman by Section 3 of this Article. In the event a Chairman is elected, the
President shall be the Chief Executive Officer of the Corporation and, in the
absence or disability of the Chairman, shall have the powers of the Chairman.
SECTION 5. VICE PRESIDENTS. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him by the directors. The
Board of Directors may further designate the area or areas of responsibility
assigned to a Vice President by appropriate words, such as Senior Vice President
or Group Vice President added to the title of the office or offices held by such
Vice President.
SECTION 6. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the
Corporation in such manner as may be ordered by the Board of Directors, the
Chairman or the President, taking proper vouchers for such disbursements. He
shall render to the Chairman, the President and the Board of Directors at the
regular meetings of the Board of Directors, or whenever they may request it, an
account of all his transactions as Treasurer and of the financial condition of
the Corporation.
SECTION 7. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by law or by these By-laws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman, the President, or the directors, or stockholders, upon whose
requisition the meeting is called as provided in these By-laws. He shall record
all the proceedings of the meetings of the Corporation and of the directors, in
a book to be kept for that purpose, and shall perform such other duties as may
be assigned to him by the directors, the Chairman or the President. He shall
have the custody of the seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the directors or the President, and
attest the same.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
SECTION 9. RESIGNATION. Any officer may resign at any time, unless
otherwise provided in any contract with the Corporation, by giving written
notice to the Chairman, if any, or the President or the Secretary. Unless
otherwise specified therein, such resignation shall take effect upon receipt
thereof.
<PAGE>
SECTION 10. REMOVAL. Any officer may be removed at any time by an
affirmative vote of a majority of the Board of Directors, with or without cause.
Any officer not elected by the Board of Directors may be removed in such manner
as may be determined by, or pursuant to delegation from the Board of Directors.
SECTION 11. VACANCIES. If a vacancy shall occur in any office, such
vacancy may be filled for the unexpired portion of the term by the Board of
Directors.
SECTION 12. SURETY BONDS. In the event the Board of Directors shall so
require, any officer or agent of the Corporation shall execute to the
Corporation a bond in such sum and with such surety or sureties as the Board of
Directors may direct, conditioned on the faithful performance of the officer's
duties to the Corporation.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK. A certificate or certificates of
stock, signed by the Chairman of the Board of Directors, if one be elected, the
President or a Vice President, and the Treasurer or an Assistant Treasurer, or
Secretary or an Assistant Secretary, and sealed with the seal of the
Corporation, shall be issued to each stockholder certifying the number of shares
owned by him in the Corporation. Any of or all of the signatures may be
facsimiles. The certificate or certificates of stock shall be in such form as
the Board of Directors may from time to time adopt and shall be countersigned
and registered in such manner, if any, as the Board of Directors may prescribe.
In case any officer who shall have signed, or whose facsimile signature shall
have been used on any such certificate, shall cease to be such officer of the
Corporation before such certificate shall have been issued by the Corporation,
such certificate may nevertheless be adopted by the Corporation and be issued
and delivered as though the person who signed such certificate, or whose
facsimile signature shall have been used thereon, had not ceased to be such
officer; and such issuance and delivery shall constitute adoption of such
certificate by the Corporation.
There shall be entered on the books of the
Corporation the number of each certificate issued, the number (and class or
series, if any) of shares represented thereby, the name and address of the
person to whom such certificate was issued and the date of issuance thereof.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. A new certificate of
stock may be issued in the place of any certificate theretofore issued by the
Corporation, alleged to have been lost, stolen or destroyed, and the directors
may, in their discretion, require the owner of the lost, stolen or destroyed
certificate, or his legal representatives, to give the Corporation a bond, in
<PAGE>
such sum as they may direct, not exceeding double the value of the stock, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss of any such certificate, or the issuance of any such
new certificate and to provide such evidence of loss, theft or destruction as
the Board of Directors may require.
SECTION 3. TRANSFER OF SHARES. The shares of stock of the Corporation
shall be transferable only upon its books by the holders of record thereof in
person or by their duly authorized attorneys or legal representatives, and upon
such transfer the old certificates shall be surrendered, along with such
evidence of the authenticity of such transfer, authorization and other matters
as the Corporation or its agents may reasonably require, to the Corporation by
the delivery thereof to the person in charge of the stock and transfer books, or
to such other person as the directors may designate, by whom they shall be
cancelled, and new certificates shall thereupon be issued. A record shall be
made of each transfer and whenever a transfer shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer.
SECTION 4. REGULATIONS, TRANSFER AGENTS AND REGISTRARS. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issuance and transfer of certificates for shares of the stock of
the Corporation, may appoint transfer agents or registrars, or both, and may
require all certificates of stock to bear the signature of either or both.
Nothing herein shall be construed to prohibit the Corporation from acting as its
own transfer agent at any of its offices.
SECTION 5. STOCKHOLDERS RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 6. SHAREHOLDERS RECORD OWNERSHIP. The Corporation shall be
entitled to recognize the exclusive right of a person registered as such on the
books of the Corporation as the owner of shares of the Corporation's stock to
receive dividends and to vote as such owner. The Corporation shall not be bound
to recognize any equitable or other claim to or interest in such shares on the
part of any other person, regardless of whether the Corporation shall have
express or other notice thereof, except as otherwise provided by law.
<PAGE>
SECTION 7. DIVIDENDS AND RESERVES. Subject to the applicable provisions
of law or of the Certificate of Incorporation, the Board of Directors may, out
of funds legally available therefor, at any regular or special meeting, declare
dividends upon the capital stock of the Corporation as and when they deem
expedient. Before declaring any dividend there may be set apart out of any funds
of the Corporation available for dividends, such sum or sums as the directors
from time to time in their discretion deem proper for working capital, or as a
reserve fund to meet contingencies, or for equalizing dividends, or for the
purpose of repairing, maintaining or increasing the property or business of the
Corporation or for such other purposes as the directors shall deem conducive to
the interests of the Corporation. The Board of Directors may, in its discretion,
modify or abolish any such reserve at any time.
SECTION 8. SEAL. The corporate seal shall be circular in form and shall
contain the name of the Corporation, the year of its creation and the words
"CORPORATE SEAL, DELAWARE." Said seal may be used by causing it or a facsimile
thereof to be impressed, affixed, reproduced, engraved, printed or otherwise
represented.
SECTION 9. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION 10. EXECUTION OF INSTRUMENTS. All agreements, deeds, contracts,
proxies, covenants, bonds, checks, drafts or other orders for the payment of
money, bills of exchange, notes, acceptances and endorsements, and all evidences
of indebtedness and other documents, instruments or writings of any nature
whatsoever, issued in the name of the Corporation, shall be signed by such
officers, agents or employees of the Corporation, or by any one of them, and in
such manner, as from time to time may be determined, either generally or in
specific instances, by the Board of Directors or by such officer or officers to
whom the Board of Directors may delegate the power to so determine.
SECTION 11. STOCK OF OTHER CORPORATIONS. Subject to such limitations as
the Board of Directors may from time to time prescribe, any officer of the
Corporation shall have full power and authority on behalf of the Corporation to
attend, to act and vote at, and to waive notice of, any meeting of stockholders
of any corporations, shares of stock of which are owned by or stand in the name
of the Corporation, and to execute and deliver proxies and actions in writing
for the voting of any such shares, and at any such meeting or by action in
writing may exercise on behalf of the Corporation any and all rights and powers
incident to the ownership of such shares.
SECTION 12. NOTICE AND WAIVER OF NOTICE. Whenever any notice is
required by these By-laws to be given, personal notice is not meant unless
expressly so stated, and any notice so required shall be deemed to be sufficient
if given by depositing the same in the United States mail, postage prepaid,
addressed to the person entitled thereto at his address as it appears on the
records of the Corporation, and such notice shall be deemed to have been given
on the day of such mailing. Stockholders not entitled to vote shall not be
entitled to receive notice of any meetings except as otherwise provided by
statute.
<PAGE>
Whenever any notice whatever is required to be given
under the provisions of any law, or under the provisions of the Certificate of
Incorporation of the Corporation or these By-laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
Attendance of a person at a meeting, whether of
stockholders (in person or by proxy) or of directors or of any committee of the
Board of Directors, shall constitute a waiver of notice of such meeting, except
when such person attends such meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business on the ground
that the meeting is not legally called or convened.
SECTION 13. BOOKS, ACCOUNTS AND OTHER RECORDS. Except as otherwise
provided by law, the books, accounts and other records of the Corporation shall
be kept at such place or places (within or without the state of Delaware) as the
Board of Directors, the Chairman or the President may from time to time
designate.
SECTION 14. INDEMNIFICATION. The Corporation shall, to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law, as the
same exists or may hereafter be amended, indemnify all persons whom it may
indemnify pursuant thereto.
ARTICLE VI
AMENDMENTS
These By-laws may be altered, amended or repealed and By-laws may be
made at any annual meeting of the stockholders or at any special meeting thereof
if notice of the proposed alteration or repeal or By-law or By-laws to be made
be contained in the notice of such special meeting, by the affirmative vote of a
majority of the stock issued and outstanding and entitled to vote thereat, or by
the affirmative vote of a majority of the Board of Directors, at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors, if notice of the proposed alteration or repeal, or By-law or By-laws
to be made, be contained in the notice of such special meeting.
<PAGE>
EXHIBIT 12
FLAGSTAR CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Loss from continuing operations before income
taxes................................................... $(51,554) $(1,332,076) $ (33,217) $ (147,115) $(116,027)
Add:
Net interest expense excluding capitalized interest..... 238,103 217,856 235,146 235,801 259,930
Amortization of debt expense............................ 9,362 9,416 6,453 7,504 8,921
Interest factor in rents................................ 14,814 16,290 16,411 16,090 19,774
Total earnings (losses)............................ $210,725 $(1,088,514) $ 224,793 $ 112,280 $ 172,598
Fixed charges:
Net interest expense including capitalized
interest............................................. $238,393 $ 218,134 $ 235,406 $ 235,882 $ 259,930
Amortization of debt expense............................ 9,362 9,416 6,453 7,504 8,921
Interest factor in rents................................ 14,814 16,290 16,411 16,090 19,774
Total fixed charges................................ $262,569 $ 243,840 $ 258,270 $ 259,476 $ 288,625
Ratio of earnings (losses) to fixed charges............... -- -- -- -- --
Deficiency in the coverage of fixed charges by earnings
(losses) before fixed charges........................... $ 51,844 $ 1,332,354 $ 33,477 $ 147,196 $ 116,027
</TABLE>
For purposes of these computations, the ratio of earnings to fixed charges
has been calculated by dividing pretax earnings by fixed charges. Earnings, as
used to compute the ratio, equals the sum of income before income taxes and
fixed charges excluding capitalized interest. Fixed charges are the total
interest expenses including capitalized interest, amortization of debt expenses
and a rental factor that is representative of an interest factor (estimated to
be one third) on operating leases.
<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 196,966 92,358
<SECURITIES> 0 0
<RECEIVABLES> 32,361 20,228
<ALLOWANCES> 2,506 2,405
<INVENTORY> 32,445 31,543
<CURRENT-ASSETS> 285,353 190,655
<PP&E> 1,749,892 1,891,672
<DEPRECIATION> 645,857 723,416
<TOTAL-ASSETS> 1,513,828 1,693,433
<CURRENT-LIABILITIES> 407,530 486,805
<BONDS> 2,146,111 2,329,393
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (1,274,900) (1,374,994)
<TOTAL-LIABILITY-AND-EQUITY> 1,513,828 1,693,433
<SALES> 2,571,487 2,542,302
<TOTAL-REVENUES> 2,571,487 2,542,302
<CGS> 0 0
<TOTAL-COSTS> 2,473,253 2,385,910
<OTHER-EXPENSES> 2,044 3,568
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 243,305 268,851
<INCOME-PRETAX> (147,115) (116,027)
<INCOME-TAX> (14) (16,392)
<INCOME-CONTINUING> (147,101) (99,635)
<DISCONTINUED> 77,241 0
<EXTRAORDINARY> 466 0
<CHANGES> 0 0
<NET-INCOME> (69,394) (99,635)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
EXHIBIT 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance, finances and
management's plans and objectives, including the development of plans to
maintain the Company's liquidity and improve its capital structure over the
short and long-terms, contained or incorporated by reference in the Company's
1996 Annual Report on Form 10-K is forward-looking. In some cases information
regarding certain important factors that could cause actual results to differ
materially from any such forward-looking statement appear together with such
statement. Also, the following factors, in addition to other possible factors
not listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements:
LIQUIDITY AND CAPITAL RESOURCES. Management has indicated in the Company's
1996 Annual Report on Form 10-K its intent to develop plans to maintain the
Company's liquidity and improve its capital structure over the short and long
terms. There can be no assurance, however, that management will be successful in
this regard. Such success will be dependent upon numerous factors including, but
not limited to, the ability of the Company to: (1) reverse negative operating
trends experienced by the Company in recent years due to increased competition,
intensive pressure on price due to discounting, declining customer traffic, and
adverse economic conditions, (2) maintain access to funds available through the
Company's bank credit facility, and (3) reduce its debt service requirements.
COMPETITION. The Company's future performance will be subject to a number
of factors that affect the restaurant industry generally, including competition.
The restaurant business is highly competitive and the competition can be
expected to increase. Price, restaurant location, food quality, quality and
speed of service and attractiveness of facilities are important aspects of
competition as are the effectiveness of marketing and advertising programs. The
competitive environment is also often affected by factors beyond the Company's
or a particular restaurant's control. The Company's restaurants compete with a
wide variety of restaurants ranging from national and regional restaurant chains
(some of which have substantially greater financial resources than the Company)
to locally-owned restaurants. There is also active competition for advantageous
commercial real estate sites suitable for restaurants.
ECONOMIC, MARKET AND OTHER CONDITIONS. Food service businesses are often
affected by changes in consumer tastes, national, regional and local economic
conditions and demographic trends. The performance of individual restaurants may
be adversely affected by factors such as traffic patterns, demographic
considerations and the type, number and location of competing restaurants.
Multi-unit food service chains such as the Company's can also be materially and
adversely affected by publicity resulting from food quality, illness, injury or
other health concerns or operating issues stemming from one restaurant or a
limited number of restaurants. Dependence on frequent deliveries of fresh
produce and groceries subjects food service businesses to the risk that
shortages or interruptions in supply, caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, increased food, labor and employee benefit costs (including
increases in hourly wage and minimum unemployment tax rates), regional weather
conditions and the availability of experienced management and hourly employees
may also adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular.
IMPORTANCE OF LOCATIONS. The success of Company and franchised restaurants
is significantly influenced by location. There can be no assurance that current
locations will continue to be attractive, as demographic patterns change. It is
possible the neighborhood or economic conditions where restaurants are located
could decline in the future, resulting in potentially reduced sales in those
locations.
GOVERNMENT REGULATIONS. The Company and its franchisees are subject to
Federal, state and local laws and regulations governing health, sanitation,
environmental matters, safety, the sale of alcoholic beverages and hiring and
employment practices. Restaurant operations are also subject to Federal and
state laws that prohibit discrimination and laws regulating the design and
operation of facilities, such as the Americans With Disabilities Act of 1990.
The operation of the Company's franchisee system is also subject to regulations
enacted by a number of states and rules promulgated by the Federal Trade
Commission. The Company cannot predict the effect on its operations,
particularly on its relationship with franchisees, caused by the future
enactment of additional legislation regulating the franchise relationship.
<PAGE>
<PAGE>
