<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended April 2, 1997
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
Commission file number 0-18051
FLAGSTAR COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3487402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
203 EAST MAIN STREET
SPARTANBURG, SOUTH CAROLINA 29319-9966
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of May 8, 1997, 42,434,668 shares of the registrant's Common Stock, par
value $.50 per share, were outstanding.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLAGSTAR COMPANIES, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, QUARTER ENDED QUARTER ENDED
EXCEPT PER SHARE AMOUNTS) APRIL 2, 1997 MARCH 31, 1996
<S> <C> <C>
Operating Revenue....................................................................... $ 675,775 $550,425
Operating Expenses:
Product costs......................................................................... 197,692 160,028
Payroll and benefits.................................................................. 256,787 214,531
Depreciation and amortization expense................................................. 34,682 29,047
Utilities expense..................................................................... 27,480 22,754
Other................................................................................. 136,107 96,579
652,748 522,939
Operating Income........................................................................ 23,027 27,486
Other Charges:
Interest and debt expense -- net...................................................... 68,591 57,712
Other -- net.......................................................................... 1,533 (26)
Loss Before Reorganization Expenses and Taxes........................................... (47,097) (30,200)
Reorganization Expenses................................................................. 4,007 --
Loss Before Taxes....................................................................... (51,104) (30,200)
Provision For (Benefit From) Income Taxes............................................... 624 (2,890)
Net Loss................................................................................ (51,728) (27,310)
Dividends on Preferred Stock............................................................ (3,544) (3,544)
Net Loss Applicable to Common Shareholders.............................................. $ (55,272) $(30,854)
Loss Per Share Applicable to Common Shareholders........................................ $ (1.30) $ (0.73)
Average Outstanding and Equivalent Common Shares........................................ 42,434 42,434
</TABLE>
See accompanying notes
2
<PAGE>
FLAGSTAR COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 2, DECEMBER 31,
(In thousands) 1997 1996
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents..................................................................... $ 31,775 $ 92,369
Receivables, less allowance for doubtful accounts of: 1997 -- $2,563; 1996 -- $2,405.......... 10,482 17,812
Loan receivable from former officer........................................................... -- 13,922
Merchandise and supply inventories............................................................ 30,579 31,543
Net assets held for sale...................................................................... 2 5,114
Other......................................................................................... 41,959 29,895
114,797 190,655
Property:
Property owned (at cost):
Land....................................................................................... 252,789 253,067
Buildings and improvements................................................................. 895,081 891,512
Other property and equipment............................................................... 541,738 536,886
Total property owned.......................................................................... 1,689,608 1,681,465
Less accumulated depreciation................................................................. 655,012 629,676
Property owned -- net......................................................................... 1,034,596 1,051,789
Buildings and improvements, vehicles, and other
equipment held under capital leases........................................................ 218,410 210,533
Less accumulated amortization................................................................. 99,635 93,740
Property held under capital leases -- net..................................................... 118,775 116,793
1,153,371 1,168,582
Other Assets:
Goodwill, net of accumulated amortization of: 1997 -- $4,380; 1996 -- $3,077.................. 204,153 205,389
Other intangible assets -- net................................................................ 26,810 27,595
Deferred financing costs -- net............................................................... 61,553 64,153
Other......................................................................................... 31,136 30,996
323,652 328,133
Total Assets.................................................................................... $ 1,591,820 $ 1,687,370
Liabilities
Current Liabilities:
Current maturities of long-term debt.......................................................... $ 1,001,013 $ 62,890
Accounts payable.............................................................................. 108,353 160,444
Accrued payroll and related................................................................... 58,792 58,838
Accrued insurance............................................................................. 56,087 52,244
Accrued taxes................................................................................. 22,682 25,060
Accrued interest.............................................................................. 73,910 47,676
Other......................................................................................... 82,811 76,123
1,403,648 483,275
Long-term Liabilities:
Debt, less current maturities................................................................. 1,226,707 2,179,393
Deferred income taxes......................................................................... 15,993 16,361
Liability for self-insured claims............................................................. 57,515 57,665
Other non-current liabilities and deferred credits............................................ 167,212 178,203
1,467,427 2,431,622
Total Liabilities............................................................................. 2,871,075 2,914,897
Shareholders' Deficit........................................................................... (1,279,255) (1,227,527)
Total Liabilities & Shareholders' Deficit....................................................... $ 1,591,820 $ 1,687,370
</TABLE>
See accompanying notes
3
<PAGE>
FLAGSTAR COMPANIES, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
(IN THOUSANDS) APRIL 2, 1997 MARCH 31, 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss...................................................................................... $ (51,728) $(27,310)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization of property................................................... 31,706 27,646
Amortization of other intangible assets..................................................... 2,976 1,400
Amortization of deferred financing costs.................................................... 2,663 1,847
Amortization of deferred gains.............................................................. (4,109) (2,259)
Deferred income tax benefit................................................................. (317) (118)
Other....................................................................................... 1,238 1,907
Decrease (increase) in assets:
Receivables................................................................................. 3,378 3,178
Inventories................................................................................. 963 768
Other current assets........................................................................ 1,790 (8,212)
Other assets................................................................................ (2,899) (4,352)
Increase (decrease) in liabilities:
Accounts payable............................................................................ (52,085) (39,583)
Accrued payroll and related................................................................. 2,482 6,055
Accrued taxes............................................................................... (2,397) (5,978)
Other accrued liabilities................................................................... 31,012 24,475
Other non-current liabilities and deferred credits.......................................... (1,696) (1,476)
Net cash flows used in operating activities................................................... (37,023) (22,012)
Cash Flows from Investing Activities:
Purchase of property........................................................................ (8,869) (2,818)
Proceeds from disposition of property....................................................... 6,986 461
Other -- net................................................................................ (31) 51
Net cash flows used in investing activities................................................... (1,914) (2,306)
Cash Flows from Financing Activities:
Long-term debt payments..................................................................... (21,657) (6,914)
Cash dividends on preferred stock........................................................... -- (3,544)
Net cash flows used in financing activities................................................... (21,657) (10,458)
Decrease in cash and cash equivalents......................................................... (60,594) (34,776)
Cash and Cash Equivalents at:
Beginning of period......................................................................... 92,369 196,966
End of period............................................................................... $ 31,775 $162,190
</TABLE>
See accompanying notes
4
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 2, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Flagstar Companies, Inc. ("FCI" or, together with its subsidiaries, the
"Company") is the parent holding company of Flagstar Corporation ("Flagstar").
Flagstar, through its wholly-owned subsidiaries, Denny's Holdings, Inc., Spartan
Holdings, Inc. and FRD Acquisition Co. (and their respective subsidiaries), owns
and operates the Carrows, Coco's, Denny's, El Pollo Loco and Quincy's Family
Steakhouse restaurant brands, and is the largest franchisee of Hardee's.
The consolidated financial statements of FCI and its subsidiaries for the
quarters ended April 2, 1997 and March 31, 1996 are unaudited and include all
adjustments management believes are necessary for a fair presentation of the
results of operations for such interim periods. All such adjustments are of a
normal and recurring nature. The interim consolidated financial statements
should be read in conjunction with the Consolidated Financial Statements and
notes thereto for the year ended December 31, 1996 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the Flagstar Companies, Inc. 1996 Annual Report on
Form 10-K (the "FCI 10-K"). The results of operations for the quarter ended
April 2, 1997 are not necessarily indicative of the results for the entire
fiscal year ending December 31, 1997.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2. CHANGE IN FISCAL YEAR
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to the last Wednesday of the calendar year. Concurrent with this
change, the Company changed to a four-four-five week quarterly closing calendar
which is the restaurant industry standard, and generally results in four
thirteen-week quarters during the year with each quarter ending on a Wednesday.
Due to the timing of this change, the first quarter of 1997 includes more than
thirteen weeks of operations. Carrows and Coco's include an additional six days,
Denny's includes an additional five days, El Pollo Loco includes an additional
week and Hardee's and Quincy's include an additional day. The prior year
comparable quarter consisted of thirteen weeks.
NOTE 3. DEBT IN DEFAULT
On March 17, 1997, in connection with the financial restructuring plan
described in Note 4, Flagstar elected not to make the $7.1 million interest
payment due and payable as of that date to holders of its 11 3/8% Senior
Subordinated Debentures. As a result, and as a result of a continuation of such
nonpayment for 30 days past the due date, Flagstar is in default under the terms
of the indenture governing such debentures, and the holders of 25% of such
debentures or the trustee therefor may declare such debt to be due and payable.
Accordingly, such debt is reflected as a current liability in the accompanying
consolidated balance sheet. If such debt is declared to be due and payable, this
will create an event of default relative to Flagstar's 10 3/4% Senior Notes due
2001 and the 10 7/8% Senior Notes due 2002, entitling 30% of the holders of such
indebtedness or the trustee therefor to declare such indebtedness also to be due
and payable. See Note 7.
NOTE 4. FINANCIAL RESTRUCTURING
On March 17, 1997, the Company reached an agreement in principle on the
terms of a financial restructuring plan with an ad hoc committee representing
holders of both the 11 3/8% Senior Subordinated Debentures due 2003 and the
11.25% Senior Subordinated Debentures due 2004. In conjunction with such plan,
the Company has decided to pursue a restructuring of its debt and equity through
"prepackaged" bankruptcy filings to be made under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") by FCI and Flagstar. FCI's operating
subsidiaries would not be a party to any such filings under the Bankruptcy Code.
Pursuant to such restructuring, the Company intends to offer 100% of the common
shares of the reorganized company to holders of the senior subordinated
debentures, the 10% Convertible Junior Subordinated Debentures due 2014 and the
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock, in exchange
for such securities. The existing common equity holders would receive five-year
out-of-the-money warrants to purchase 7% of the common stock of the reorganized
company on a fully diluted basis. The plan provides, among other things, for the
merger of Flagstar with and
5
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. FINANCIAL RESTRUCTURING -- Continued
into FCI. Consummation of the plan is subject to certain conditions, including,
without limitation, confirmation of the plan by the United States Bankruptcy
Court. Professional fees and other expenditures incurred by the Company in
conjunction with the financial restructuring are reflected as reorganization
expenses in the statements of consolidated operations.
In addition, on March 6, 1997, the Company's credit agreement was amended
to provide for less restrictive financial covenants for measurement periods
ending on April 2, 1997 and July 2, 1997, as well as to provide the Company
flexibility to forego scheduled interest payments due in March, May and June
1997 under the 10 3/4% Senior Notes, the 10 7/8% Senior Notes, the 11 3/8%
Senior Subordinated Debentures, the 11.25% Senior Subordinated Debentures, and
the 10% Junior Subordinated Debentures without triggering a default under the
agreement, unless any such debt is declared to be due and payable as a result of
the failure to pay any such interest.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). The Company does not believe HFS has
satisfied its contractual obligations to support the Hardee's franchise and on
March 19, 1997, the Company notified HFS, pursuant to its various license
agreements, that its subsidiary was seeking to arbitrate certain claims of the
subsidiary against HFS. In its demand for arbitration, the Company's subsidiary
alleges (i) breach by HFS of its license agreements with the Company's
subsidiary, (ii) breach of fiduciary duty and negligence by HFS in mishandling
and misapplying funds of the Company's subsidiary held for advertising, and
(iii) unfair trade practices. No assurances can be given as to the outcome of
such arbitration proceeding or its impact on the Company's Hardee's operations.
NOTE 6. PRO FORMA EARNINGS PER SHARE
The Company will adopt Statement of Financial Accounting Standards
Statement No. 128, "Earnings per Share" in the quarter ended December 31, 1997.
In conjunction with such adoption, per share computations for prior interim and
annual periods will be restated. This standard will require the presentation of
"basic" and "diluted" earnings (loss) per share. For the quarters ended April 2,
1997 and March 31, 1996, basic loss per share under the new standard will not
differ from loss per share as presented in the consolidated financial
statements. For such periods, under the new standard, diluted per share amounts
will not differ from basic per share amounts since the Company's options,
warrants and convertible debt and preferred stock will have an antidilutive
impact on per share amounts due to the losses in those periods.
NOTE 7. SUBSEQUENT EVENT
On May 1, 1997, in connection with the financial restructuring plan
described in Note 4, Flagstar elected not to make the $40.6 million and $5.0
million interest payments due and payable as of that date to holders of its
11.25% Senior Subordinated Debentures and its 10% Convertible Junior
Subordinated Debentures, respectively. If Flagstar does not make such payments
within 30 days following the due date, Flagstar will be in default under the
indentures governing such debentures and, in either such case, the holders of
25% of such debentures or the trustee therefor may declare such debt to be due
and payable. Such debt is reflected as current in the accompanying consolidated
balance sheet. If such debt is declared to be due and payable, this will create
an event of default relative to the 10 3/4% Senior Notes and the 10 7/8% Senior
Notes entitling 30% of the holders of such indebtedness or the trustee therefor
to declare such indebtedness also to be due and payable.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of April 2, 1997 and the results of operations for the
quarter ended April 2, 1997 as compared to the quarter ended March 31, 1996.
The forward-looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which reflect
management's best judgment based on factors currently known, involve risks,
uncertainties, and other factors which may cause the actual performance of
Flagstar Companies, Inc., its subsidiaries, and underlying concepts to be
materially different from the performance indicated or implied by such
statements. Such factors include, among others: uncertainties related to the
financial restructuring plan referred to in Note 4 and the arbitration
proceeding referred to in Note 5 in the consolidated financial statements
included herein; competitive pressures from within the restaurant industry; the
level of success of the Company's operating initiatives and advertising and
promotional efforts, including the initiatives and efforts specifically
mentioned herein; adverse publicity; changes in business strategy or development
plans; terms and availability of capital; regional weather conditions; overall
changes in the general economy, particularly at the retail level; and other
factors included in the discussion below, or in the Management's Discussion and
Analysis and in Exhibit 99 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1996.
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 2, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996
COMPANY CONSOLIDATED
The Company's CONSOLIDATED REVENUE for the first quarter of 1997 increased
by $125.4 million (22.8%) as compared with the 1996 comparable quarter. The
revenue increase is primarily attributable to two factors: the estimated $24.0
million impact due to the additional days in the first quarter of 1997 in
comparison to the prior year quarter for Denny's and El Pollo Loco and the
operations of Coco's and Carrows (with revenue in the first quarter of 1997 of
$71.5 million and $55.6 million, respectively) which were not included in the
prior year quarter. Excluding the impact of the extra days and the Coco's and
Carrows acquisition, revenue for the 1997 quarter decreased $25.7 million in
comparison to the prior year quarter. This decrease reflects decreases in
comparable store sales at all of the Company's concepts as well as a 33-unit
decrease in Company-owned units (excluding Coco's and Carrows). Such decreases
are slightly offset by a $2.7 million increase in franchise revenue due to a
103-unit increase in franchise units at Denny's and El Pollo Loco.
CONSOLIDATED OPERATING EXPENSES for the first quarter of 1997 increased by
$129.8 million (24.8%) as compared with the 1996 comparable quarter. The expense
increase is primarily attributable to two factors: the estimated $20.3 million
impact due to the additional days in the first quarter of 1997 in comparison to
the prior year quarter for Denny's and El Pollo Loco and the operations of
Coco's and Carrows (with operating expenses in the first quarter of 1997 of
$67.2 million and $52.8 million, respectively) which were not included in the
prior year quarter. Excluding the impact of the extra days and the Coco's and
Carrows acquisition, operating expenses for the 1997 quarter decreased $10.5
million in comparison to the prior year quarter. This decrease primarily
reflects a decline in costs associated with the decline in revenue, the positive
impact of cost cutting measures (reflected in improved operating margins at
Denny's and El Pollo Loco), and a 33-unit decrease in Company-owned units
(excluding Coco's and Carrows). Such decreases are somewhat offset by an
increase in general and administrative expenses related to retention and other
bonuses totaling $3.0 million, company contributions to the profit sharing plan
of $0.7 million (no contributions were made in the prior year) and an increase
in the costs to monitor the consent decree over the prior year of $0.5 million.
CONSOLIDATED OPERATING INCOME for the first quarter of 1997 decreased by
$4.5 million (16.2%) as compared with the 1996 comparable quarter as a result of
the factors noted above.
NET CONSOLIDATED INTEREST AND DEBT EXPENSE totaled $68.6 million during the
first quarter of 1997 as compared with $57.7 million during the comparable 1996
period. The increase is due principally to the addition of $7.5 million of
interest and debt expense associated with the Coco's and Carrows acquisition in
May 1996 and a $2.0 million decrease in interest income during 1997 due to
decreased cash and cash equivalents subsequent to the purchase of Coco's and
Carrows.
REORGANIZATION EXPENSES include professional fees and other expenditures
incurred by the Company in conjunction with the planned reorganization under
Chapter 11 of the Bankruptcy Code as further discussed in Note 4 to the
consolidated financial statements included herein.
THE PROVISION (BENEFIT) FOR INCOME TAXES from continuing operations for the
quarter has been computed based on management's estimate of the annual effective
income tax rate applied to loss before taxes. The Company recorded an
7
<PAGE>
income tax provision reflecting an effective income tax rate of approximately
1.2% for the 1997 quarter compared to a benefit for the comparable 1996 quarter
reflecting an approximate rate of (9.6%). The change in the effective income tax
rate from the prior year can be attributed to the recognition in the prior year
of anticipated refunds due to the carryback of prior year tax losses.
THE NET LOSS was $51.7 million in the first quarter of 1997 as compared to
$27.3 million for the prior year quarter. The increase in the net loss is due to
the factors noted above.
RESTAURANT OPERATIONS:
The table below summarizes restaurant unit activity for the quarter ended
April 2, 1997.
<TABLE>
<CAPTION>
UNITS CONVERTED
FROM COMPANY
ENDING UNITS UNITS UNITS TO FRANCHISE ENDING UNITS
12/31/96 OPENED CLOSED (TURNKEYS) 4/2/97
<S> <C> <C> <C> <C> <C>
Denny's
Company owned............................. 894 -- (1) (2) 891
Franchised units.......................... 677 21 (6) 2 694
International licensees................... 25 -- -- -- 25
1,596 21 (7) -- 1,610
Hardee's....................................... 580(a) -- -- -- 580(a)
Quincy's....................................... 199 -- -- -- 199
El Pollo Loco
Company owned............................. 96 -- -- (1) 95
Franchised units.......................... 135(a) 3 -- 1 139(a)
International licensees................... 10 -- -- -- 10
241 3 -- -- 244
Coco's
Company owned............................. 183 1 -- -- 184
Franchised units.......................... 5 -- -- -- 5
International licenses.................... 278 4 (1) -- 281
466 5 (1) -- 470
Carrows
Company owned............................. 160 -- (2) -- 158
Franchised Units.......................... -- 1 -- -- 1
160 1 (2) -- 159
3,242 30 (10) -- 3,262
<CAPTION>
ENDING UNITS
3/31/96 (b)
<S> <C>
Denny's
Company owned............................. 919
Franchised units.......................... 610
International licensees................... 25
1,554
Hardee's....................................... 580
Quincy's....................................... 199
El Pollo Loco
Company owned............................. 100
Franchised units.......................... 120
International licensees................... 5
225
Coco's
Company owned............................. 186
Franchised units.......................... 6
International licenses.................... 255
447
Carrows
Company owned............................. 162
Franchised Units.......................... --
162
3,167
</TABLE>
(a) Unit count includes one Hardee's and El Pollo Loco dual unit.
(b) Coco's and Carrows were acquired on May 23, 1996. Prior year data is
provided for informational purposes only.
8
<PAGE>
DENNY'S:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 300.1 $ 292.6 2.6
Franchise revenue......................................................................... 14.9 12.6 18.2
Total revenue........................................................................... 315.0 305.2 3.2
Operating expenses........................................................................ 291.0 284.3 2.4
Operating income.......................................................................... $ 24.0 $ 20.9 14.8
Average unit sales
Company-operated........................................................................ $336,300 $316,000 6.4
Franchise............................................................................... $276,300 $260,100 6.2
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase (decrease)................................................ (2.4%) 3.2%
Average guest check....................................................................... $5.39 $4.85 11.1
</TABLE>
Denny's NET COMPANY SALES increased by $7.5 million (2.6%) during the 1997
quarter as compared with the prior year comparable quarter. This increase
reflects an estimated $21.7 million impact due to an additional five days in the
first quarter of 1997 in comparison to the prior year quarter due to the change
in the fiscal year end, somewhat offset by the impact of a 28-unit decrease in
Company-owned units and a decrease in comparable store sales. The decrease in
Company-owned units, the majority of which were converted to franchise units, is
consistent with the Company's strategy of focusing on growth through franchising
and the sale of Company-owned restaurants to franchisees, along with selected
closures where continued operation is considered uneconomical. The decline in
comparable store sales was driven by lower guest counts, partially offset by an
increase in average guest check, both changes reflecting the impact of the
September 1996 price increase which eliminated certain value pricing. FRANCHISE
REVENUE for the quarter increased by $2.3 million (18.2%), reflecting 84 more
franchised units at the 1997 quarter-end than at the 1996 quarter-end.
Denny's OPERATING EXPENSES for the 1997 quarter as compared with the 1996
quarter increased by $6.7 million (2.4%) reflecting an estimated $18.5 million
impact due to five additional days in the first quarter of 1997 in comparison to
the prior year quarter. This increase is somewhat offset by the impact of the
28-unit decrease in Company-owned units; an improvement in food cost as a
percent of revenue due to a shift to higher margin items in the 1997 quarter;
and a $1.4 million increase in the current quarter amortization of the deferred
gain attributable to the sales of Proficient Food Company and Portion-Trol
Foods, Inc. and Mother Butler Pies over the prior quarter amounts.
Denny's OPERATING INCOME for the 1997 quarter improved by $3.1 million
(14.8%) as compared to the prior year quarter as a result of the factors noted
above.
HARDEE'S:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Revenue................................................................................... $ 137.5 $ 145.1 (5.2)
Operating expenses........................................................................ 134.7 140.5 (4.1)
Operating income.......................................................................... $ 2.8 $ 4.6 (39.1)
Average unit sales........................................................................ $237,200 $250,400 (5.3)
COMPARABLE STORE DATA:
Comparable store sales increase (decrease)................................................ (6.5%) (7.5%)
Average guest check....................................................................... $3.21 $3.13 2.6
</TABLE>
9
<PAGE>
Hardee's REVENUE decreased by $7.6 million (5.2%) during the 1997 quarter
as compared with the 1996 quarter, reflecting a 6.5% decline in comparable store
sales. The decrease in comparable store sales reflects an 8.4% decline in
traffic which was partially offset by a 2.6% increase in average guest check.
The decrease in traffic count reflects the impact of continuing aggressive
promotions by competitors within the quick-service category compounded by the
persistent weakness of Hardee's brand positioning and advertising programs.
Hardee's OPERATING EXPENSES in the 1997 quarter decreased by $5.8 million
(4.1%) due to the flow through impact of the lower comparable store sales noted
above as well as the impact of the cost reduction program implemented in the
second half of 1996.
Hardee's OPERATING INCOME for the 1997 quarter decreased by $1.8 million
(39.1%) as compared to the prior year quarter as a result of the factors noted
above.
QUINCY'S:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Revenue................................................................................... $ 64.2 $ 68.5 (6.3)
Operating expense......................................................................... 63.9 63.3 0.9
Operating income.......................................................................... $ 0.3 $ 5.2 (94.2)
Average unit sales........................................................................ $322,500 $342,900 (6.0)
COMPARABLE STORE DATA:
Comparable store sales increase (decrease)................................................ (6.8%) (4.2%)
Average guest check....................................................................... $6.30 $6.08 3.6
</TABLE>
Quincy's REVENUE decreased by $4.3 million (6.3%) during the 1997 quarter
as compared with the 1996 quarter, reflecting a 6.8% decline in comparable store
sales. The decrease in comparable store sales resulted from a 10.0% decrease in
traffic which was partially offset by a 3.6% increase in average guest check.
The decline in customer traffic reflects, among other things, continuing traffic
declines in the family-steak category in general, and the difficulty of "winning
back" customers that have been lost as a result of problems at Quincy's relative
to a lack of focus and consistency of service and products over the past two
years.
Despite the decrease in revenue, Quincy's OPERATING EXPENSES in the 1997
quarter increased by $0.6 million (0.9%) over the prior year quarter. This
reflects an increase in product costs as a percent of revenue due to the higher
quality food items offered in connection with the "Relaunch" program; increased
labor costs due to the Federal minimum wage increase; and the fact that certain
labor and other fixed costs cannot be reduced in proportion to the significant
decrease in sales.
Quincy's OPERATING INCOME for the 1997 quarter decreased by $4.9 million
(94.2%) as compared to the prior year quarter as a result of the factors noted
above.
10
<PAGE>
EL POLLO LOCO:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 28.6 $ 28.1 1.8
Franchise revenues........................................................................ 3.4 3.0 13.3
Total revenue........................................................................... 32.0 31.1 2.9
Operating expense......................................................................... 29.1 28.2 3.2
Operating income.......................................................................... $ 2.9 $ 2.9 --
Average unit sales
Company-operated........................................................................ $301,000 $276,000 9.1
Franchise............................................................................... $220,900 $208,800 5.8
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase (decrease)................................................ (3.6%) 7.9%
Average guest check....................................................................... $6.58 $6.64 (0.9)
</TABLE>
El Pollo Loco's NET COMPANY SALES increased $0.5 million (1.8%) during the
1997 quarter as compared with the 1996 quarter. This increase reflects an
estimated $2.3 million impact due to the additional week in the first quarter of
1997 in comparison to the prior year quarter due to the change in the fiscal
year end, somewhat offset by the impact of a five-unit decrease in Company-owned
units and a decrease in comparable store sales. The decrease in Company-owned
units, all of which were converted to franchise units, is consistent with the
Company's strategy of focusing on growth through franchising and the sale of
Company-owned restaurants to franchisees. The decline in comparable store sales
was primarily a result of a difficult comparison versus the introduction of the
extremely successful Pollo Bowl during the first quarter last year. FRANCHISE
REVENUE for the quarter increased by $0.4 million (13.3%), primarily due to 19
more franchise units at the 1997 quarter-end as compared with the 1996
quarter-end and an increase in franchise average unit sales.
El Pollo Loco's OPERATING EXPENSES for the 1997 quarter as compared with
the 1996 quarter increased by $0.9 million (3.2%) reflecting an estimated $1.8
million impact due to the additional week in the first quarter of 1997 in
comparison to the prior year quarter. This increase is somewhat offset by the
impact of the five-unit decrease in Company-owned units; lower product costs
associated with the Pollo Bowl and other new "Bowl" products; a decrease in
direct labor costs due to improved labor scheduling and staffing initiatives;
and food cost control measures.
El Pollo Loco's OPERATING INCOME for the 1997 quarter, excluding the impact
on the prior year of gains on the sale of restaurants, improved by $0.3 million
(11.5%) as compared to the prior year quarter as a result of the factors noted
above.
11
<PAGE>
COCO'S AND CARROWS:
The following information is provided for analysis purposes only as it
includes information for periods prior to the acquisition of Coco's and Carrows
by the Company on May 23, 1996:
COCO'S
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 70.8 $ 66.8 6.0
Franchise revenue......................................................................... 0.7 0.8 (12.5)
Total revenue........................................................................... 71.5 67.6 5.8
Operating expenses........................................................................ 67.2 64.5 4.2
Operating income.......................................................................... $ 4.3 $ 3.1 38.7
Average unit sales
Company-operated........................................................................ $385,600 $357,200 7.9
Franchise............................................................................... $441,700 $409,600 7.8
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales decrease........................................................... (0.8%) (0.5%)
Average guest check (a)................................................................... $6.60 $6.76 (2.4)
</TABLE>
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to better conform to Flagstar's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Coco's, the new method will generally result in higher
weekly traffic counts and lower average guest checks than calculated under
the previous method.
Coco's NET COMPANY SALES for the first quarter ended April 2, 1997
increased $4.0 million (6.0%) as compared to the prior year comparable quarter.
This increase reflects an estimated $4.8 million impact due to six additional
days in the first quarter of 1997 in comparison to the prior year quarter due to
the change in the fiscal year end, somewhat offset by a decrease in comparable
store sales. The decrease in comparable store sales was driven by a decrease in
average check, slightly offset by an increase in customer counts. In addition,
the Company experienced a two-unit decrease in the number of Company-operated
restaurants.
FRANCHISE AND FOREIGN LICENSING REVENUE decreased by $0.1 million (12.5%)
for the first quarter of 1997 as compared to the first quarter of 1996. The
decrease is the result of a stronger dollar versus the yen in 1997 as compared
to 1996 and is partially offset by an increase in the number of franchisees and
foreign licensees from 261 at March 31, 1996 to 286 at April 2, 1997.
Coco's OPERATING EXPENSES for the first quarter of 1997 increased by $2.7
million (4.2%), as compared to the prior year quarter. This increase is
primarily due to six additional days in the first quarter of 1997 as compared to
the prior year quarter. The increase is somewhat offset by a decrease in product
cost and labor of approximately $1.4 million due to an increased operations
focus on cost controls, waste reduction and labor initiatives. Such cost savings
were achieved despite a general increase in commodity prices and the impact of
the Federal and state minimum wage increases.
12
<PAGE>
CARROWS
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH %
APRIL 2, 31, INCREASE/
($ IN MILLIONS, EXCEPT AVERAGE UNIT AND COMP. STORE DATA) 1997 1996 (DECREASE)
<S> <C> <C> <C>
Net company sales......................................................................... $ 55.6 $ 52.2 6.5
Franchise revenue......................................................................... -- -- --
Total revenue........................................................................... 55.6 52.2 6.5
Operating expenses........................................................................ 52.8 50.2 5.2
Operating income.......................................................................... $ 2.8 $ 2.0 40.0
Average unit sales
Company-operated........................................................................ $349,300 $323,600 7.9
Franchise............................................................................... NM -- --
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase (decrease)................................................ (0.8%) 2.0%
Average guest check (a)................................................................... $ 6.37 $ 6.13 3.9
NM = Not Meaningful
</TABLE>
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to better conform to Flagstar's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Carrows, the new method will generally result in lower
weekly traffic counts and higher average guest checks than calculated under
the previous method.
Carrows' NET COMPANY SALES for the first quarter ended April 2, 1997
increased $3.4 million (6.5%) as compared to the prior year comparable quarter.
This increase reflects an estimated $3.8 million impact due to six additional
days in the first quarter of 1997 in comparison to the prior year quarter due to
the change in the fiscal year end, somewhat offset by a decrease in comparable
store sales. The decrease in comparable store sales was driven by a decrease in
customer counts, slightly offset by an increase in average guest check. In
addition, the Company experienced a four-unit decrease in the number of
Company-operated restaurants.
Carrows opened its first domestic franchise location in the first quarter
of 1997, recording $16,000 in franchise revenue.
Carrows' OPERATING EXPENSES for the first quarter of 1997 increased by $2.6
million (5.2%), as compared to the prior year quarter. This increase is
primarily due to the six additional days in the first quarter of 1997 as
compared to the prior year quarter. The increase is somewhat offset by a
decrease in product cost and labor of approximately $1.2 million due to an
increased operations focus on cost controls, waste reduction and labor
initiatives. Such cost savings were achieved despite a general increase in
commodity prices and the impact of the Federal and state minimum wage increases.
LIQUIDITY AND CAPITAL RESOURCES
Since the leveraged buyout of Flagstar in 1989, the Company has not
achieved the revenue and earnings projections prepared at the time of the
transaction, due in large part to increased competition, intensive pressure on
pricing due to discounting, adverse economic conditions and relatively limited
capital resources to respond to these changes. Such trends have generally
continued into 1997. The Company's cash flows have been sufficient to fund its
operations and make interest payments when due (although in anticipation of the
Plan (as defined below) the Company did not make the March 15, 1997 interest
payment on its 11 3/8% Senior Subordinated Debentures or the May 1, 1997
interest payments on its 11.25% Senior Subordinated Debentures or 10%
Convertible Junior Subordinated Debentures). However, the Company's core
businesses have not experienced cash flow growth sufficient to provide adequate
funds to invest for future growth.
These conditions present both short-term and long-term financial challenges
to the Company. To address these matters, management has developed and is
continuing to develop plans to maintain its liquidity and improve its capital
structure. Specifically, the Board of Directors elected not to declare the
January 15, 1997 and April 15, 1997 quarterly dividends on FCI's $2.25 Series A
Cumulative Convertible Exchangeable Preferred Stock, par value $0.10 per share
(the "Preferred Stock"). In addition, on March 6, 1997, the Credit Agreement was
amended to provide for less restrictive financial covenants for measurement
periods ending on April 2, 1997 and July 2, 1997, as well as to provide Flagstar
flexibility to forego scheduled interest payments due in March, May and June
1997 under the 10 3/4% Senior Notes, the 10 7/8% Senior Notes, the
13
<PAGE>
11 3/8% Debentures, the 11.25% Debentures and the 10% Convertible Junior
Subordinated Debentures without triggering a default under the Credit Agreement,
unless any such debt is declared to be due and payable as a result of the
failure to pay any such interest. On March 17, 1997, Flagstar elected not to
make an interest payment due and payable as of that date with respect to the
11 3/8% Debentures. As a result, and as a result of a continuation of such
non-payment for 30 days following the due date, Flagstar is in default under the
indenture governing the 11 3/8% Debentures and the holders of 25% of such
debentures or the trustee therefor may declare such debt to be due and payable.
If such debt is declared to be due and payable this will create an event of
default relative to the 10 3/4% Senior Notes and the 10 7/8% Senior Notes
entitling 30% of the holders of such indebtedness or the trustee therefor to
declare such indebtedness also to be due and payable. In addition, on May 1,
1997, Flagstar elected not to make interest payments due and payable as of that
date with respect to the 11.25% Debentures and the 10% Convertible Junior
Subordinated Debentures. If Flagstar does not make such payments within 30 days
following the due date, Flagstar will be in default under the indentures
governing such debentures and, in either such case, the holders of 25% of such
debentures or the trustee therefor may declare such debt to be due and payable
(with similar cross-acceleration rights accruing under the 10 3/4% Senior Notes
and the 10 7/8% Senior Notes as described above).
Management has concluded that, over the long-term, a substantial
restructuring or refinancing of the Company's debt will be required to allow the
Company to meet its long-term debt obligations and will be a prerequisite to
future growth through additional investment in its restaurants. In this regard,
FCI and Flagstar have developed a financial restructuring plan which was agreed
to in principle on March 17, 1997 by an ad hoc committee of holders of
Flagstar's 11 3/8% and 11.25% Senior Subordinated Debentures. Based thereon, FCI
and Flagstar have decided to pursue a restructuring of their debt and equity
through a prepackaged plan pursuant to Chapter 11 of the Bankruptcy Code (the
"Plan"). The Company's operating subsidiaries would not be a party to any such
filings under the Bankruptcy Code.
With respect to short-term liquidity, management believes that through a
combination of cash generated from operations, funds available through the
Credit Agreement, various cash management measures and other sources, adequate
liquidity exists to meet the Company's working capital, debt service and capital
expenditure requirements through the filing of the case under Chapter 11
(before taking into account the reclassification of indebtedness under the
Company's 11 3/8% and 11.25% Senior Subordinated Debentures and 10% Convertible
Junior Subordinated Debentures from long-term to current as a result of the
interest payment defaults described above). Although no assurances can be given
in this regard, management believes, based on the Company's historical
relationship with its banks, that it will be able, as necessary, to maintain
access to funds available under the Credit Agreement.
For the period covering the pendency of the case under Chapter 11 and for
the period thereafter, the Company has entered into written commitment letters
pursuant to which it has received commitments from the Chase Manhattan Bank
("Chase") for (i) a $200 million debtor-in-possession revolving credit facility
(the "DIP Facility"), which facility will be used to refinance the Credit
Agreement and otherwise be available during the pendency of the Chapter 11 case
until the earlier to occur of (x) the date that is one year after the
commencement of the Chapter 11 case and (y) the substantial consummation of the
Plan for working capital advances and letters of credit, and (ii) a
$200 million senior secured revolving credit facility (the "Exit Facility")
for the benefit of the Company's operating subsidiaries, which facility will
refinance the DIP Facility upon the emergence of the Company from Chapter 11
and be used thereafter for working capital advances and letters of credit. The
Company believes the DIP Facility and Exit Facility, together with cash
generated from operations, various cash management measures and other sources,
will provide the Company with adequate liquidity to meet its working capital,
debt service and capital expenditure requirements for at least the next twelve
months.
The DIP Facility will be guaranteed by the Company's operating subsidiaries
and generally be secured by liens on the same collateral that currently secures
the Company's obligations under the Credit Agreement. The Exit Facility will
have the benefit of similar guarantees and collateral security (and the
Company's guarantee and additional liens on the Company's corporate headquarters
in Spartanburg, South Carolina and accounts receivable). The Exit Facility will
have a maturity five (5) years from the date of the Company's emergence from
Chapter 11 (subject to earlier termination of commitments in certain events).
The DIP Facility and the Exit Facility will each contain certain financial and
negative covenants, conditions precedent, events of default and other terms,
conditions and provisions customarily found in credit agreements for companies
in Chapter 11 proceedings and for companies emerging from Chapter 11,
respectively. The closing of each of the DIP Facility and the Exit Facility is
subject, among other conditions, to negotiation of definitive agreements with
Chase and in the case of the Exit Facility the initial borrowing thereunder
having been made on or before the earlier of July 31, 1998 and the date that is
twelve months after the date on which the Company commences its Chapter 11 case
in the event that the initial borrowing under the Exit Facility does not occur
on or before that date.
With respect to the long-term liquidity of the Company, the Company's
management believes that, based on its forecasts, after giving effect to the
Plan, the Company will have sufficient operating cash flow from operations
(together with funds available under the Exit Facility) to pay interest and
scheduled amortization on all of its outstanding indebtedness and to fund
anticipated capital expenditures through 1999. However, even if the
reorganization is completed, the Company's ability to meets its debt service
obligations will depend on a number of factors, including management's ability
to maintain operating cash flow.
At April 2, 1997 and December 31, 1996, the Company had working capital
deficits, exclusive of net assets held for sale, of $1,288.9 million and $297.7
million, respectively. The increase in the deficit is attributable primarily to
an increase in
14
<PAGE>
current liabilities related to the reclassification to current of the long-term
debt which is in default or for which the Company has failed to make interest
payments when due and to a reduction in cash and cash equivalents which has been
used for Company operations. The Company is able to operate with a substantial
working capital deficiency because: (i) restaurant operations are conducted
primarily on a cash (and cash equivalent) basis with a low level of accounts
receivable, (ii) rapid turnover allows a limited investment in inventories and
(iii) accounts payable for food, beverages, and supplies usually become due
after the receipt of cash from related sales.
15
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. The Company does not believe HFS has satisfied its
contractual obligations to support the Hardee's franchise and on March 19, 1997,
the Company notified HFS, pursuant to its various license agreements, that its
subsidiary was seeking to arbitrate certain claims of the subsidiary against
HFS. In its demand for arbitration, the Company's subsidiary alleges (i) breach
by HFS of its license agreements with the Company's subsidiary, (ii) breach of
fiduciary duty and negligence by HFS in mishandling and misapplying funds of the
Company's subsidiary held for advertising, and (iii) unfair trade practices. No
assurances can be given as to the outcome of such arbitration proceeding or its
impact on the Company's Hardee's operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On March 17, 1997, Flagstar elected not to make the $7.1 million interest
payment due and payable as of that date to holders of its 11 3/8% Senior
Subordinated Debentures. As a result, and as a result of continuation of such
non-payment for 30 days following the due date, Flagstar is in default under the
indenture governing such debentures, and the holders of 25% of such debentures
or the trustee therefor may declare such debt to be due and payable.
Accordingly, such debt is reflected as a current liability in the accompanying
Consolidated Balance Sheets. If such debt is declared to be due and payable this
will create an event of default relative to the 10 3/4% Senior Notes due 2001
and the 10 7/8% Senior Notes due 2002, entitling 30% of the holders of such
indebtedness or the trustee therefor to declare such indebtedness also to be due
and payable.
On May 1, 1997, Flagstar elected not to make the $40.6 million and $5.0
million interest payments due and payable as of that date to holders of its
11.25% Senior Subordinated Debentures and its 10% Convertible Junior
Subordinated Debentures, respectively. If Flagstar does not make such payments
within 30 days following the due date, Flagstar will be in default under the
indentures governing such debentures, and the holders of 25% of such debentures
or the trustee therefor may declare such debt to be due and payable (with
similar cross-acceleration rights accruing under the 10 3/4% Senior Notes and
the 10 7/8% Senior Notes as described above).
The Company did not make the fourth quarter 1996 or first quarter 1997
dividend payments on its Preferred Stock. Such cumulative dividends that have
not been declared or paid total $7.1 million or $.17 per common share at April
2, 1997.
ITEM 5. OTHER INFORMATION.
FCI Common Stock and Preferred Stock, through May 16, 1997, were traded on
the NASDAQ National Market System under the symbol "FLST" and "FLSTP",
respectively. As of the close of business on May 16, 1997, the Common Stock and
the Preferred Stock were delisted for trading on the NASDAQ National Market. As
a consequence, it is anticipated that, although such securities will continue to
be traded in the over-the-counter market, such trading activity will be limited
and sporadic.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
a. The following are included as exhibits to this report:
EXHIBIT NO. DESCRIPTION
<C> <S>
4.1 Fourth Amendment, dated as of March 6, 1997, to the Second Amended and Restated Credit Agreement dated as
of April 10, 1996 among TWS Funding, Inc. as borrower, Flagstar Corporation, certain lenders and co-agents
named therein, and Citibank, N.A., as funding agent.
4.2 Third Amendment, dated as of March 7, 1997, to the Credit Agreement, dated as of May 23, 1996, by and
among FRD Acquisition Co., FRI-M Corporation, certain lenders and co-agents named therein, and Credit
Lyonnais New York Branch as administrative agent.
10.1 Guaranty and Security Agreement, dated as of January 16, 1997, by and among Denny's, Inc., El Pollo Loco,
Inc., DFO, Inc., Flagstar Enterprises, Inc., Quincy's Restaurants, Inc. and James B. Adamson.
27 Financial Data Schedule
b. No reports on Form 8K were filed during the quarter ended April 2, 1997.
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAGSTAR COMPANIES, INC.
Date: May 19, 1997 By: /s/ RHONDA J. PARISH
RHONDA J. PARISH
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Date: May 19, 1997 By: /s/ C. ROBERT CAMPBELL
C. ROBERT CAMPBELL
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
17
EXECUTION COPY
FOURTH AMENDMENT
FOURTH AMENDMENT dated as of March 6, 1997 (this "Amendment"),
among TWS FUNDING, INC., a Delaware corporation (the "Borrower"), FLAGSTAR
CORPORATION, a Delaware corporation ("Flagstar"), and each financial institution
executing this Amendment as a "Lender" (each, a "Lender").
PRELIMINARY STATEMENTS:
1. The Borrower, Flagstar and the Lender Parties, the
Co-Administrative Agents and the Funding Agent referred to therein have entered
into a Second Amended and Restated Credit Agreement dated as of April 10, 1996
(as amended to date, the "Credit Agreement"; the terms defined therein being
used herein as therein defined unless otherwise defined herein).
2. The Borrower and Flagstar have requested that the Lenders
agree to amend certain provisions of the Credit Agreement, the Security
Agreement and the Subordination Agreement as herein provided.
3. The Lenders have expressed their willingness to grant the
Borrower's and Flagstar's request as set forth above on the terms and conditions
set forth below.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements contained herein, the parties hereto hereby
agree as follows:
SECTION 1. Amendments to the Credit Agreement. The Credit
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 4 hereof, hereby amended as
follows:
(a) The definition of "Subsidiary Intercompany Debt" in
Section 1.01 of the Credit Agreement is amended by inserting the phrase
"consistent with past practice" immediately after the phrase "in the
ordinary course" in subparagraph (b) of such definition.
(b) Section 5.01(j) is amended by inserting the phrase
"consistent with past practice" immediately after the phrase "in the
exercise of its prudent business judgment" in clause (ii) and in clause
(iii) of such Section.
(c) Section 5.02(b) is amended by deleting the word "and" at
the end of clause (iv) thereof, replacing the period at the end thereof
with the word "; and" and adding to the end thereof a new clause (vi)
to read as follows:
<PAGE>
2
"(vi) in the case of Flagstar and its Restricted
Subsidiaries, Debt owed to NationsBank, N.A. or any of its
banking Affiliates in respect of any overdrafts and related
liabilities arising from treasury, depository and cash
management services or in connection with any automated
clearing house transfers of funds, provided that the aggregate
principal amount of such Debt shall not exceed $15,000,000 at
any time outstanding."
(d) Section 5.04(a) is amended by deleting therefrom the ratio
set opposite each of the Rolling Periods set forth below and
substituting therefor the ratio set forth below opposite each such
Rolling Period:
Rolling Periods Ending Ratio
March 31, 1997 9.50 : 1.00
June 30, 1997 9.95 : 1.00
(e) Section 5.04(b) is amended by deleting therefrom the ratio
set opposite each of the Rolling Periods set forth below and
substituting therefor the ratio set forth below opposite each such
Rolling Period:
Rolling Periods Ending Ratio
March 31, 1997 4.70 : 1.00
June 30, 1997 5.00 : 1.00
(f) Section 5.04(c) is amended by deleting therefrom the ratio
set opposite each of the Rolling Periods set forth below and
substituting therefor the ratio set forth below opposite each such
Rolling Period:
Rolling Periods Ending Ratio
March 31, 1997 0.95 : 1.00
June 30, 1997 0.92 : 1.00
(g) Section 6.01(f) is amended by inserting immediately before
the first semicolon the following proviso:
", provided, that the failure to pay interest payable on March
17, 1997 under Flagstar's 11.375% Senior Subordinated
Debentures due 2003, the failure to pay interest payable on
March 17, 1997 under Flagstar's 10.75% Senior Notes due 2001,
the failure to pay interest payable on May 1, 1997 under
Flagstar's 11.25% Senior Subordinated Debentures due 2004, the
failure to pay interest payable on May 1, 1997 under
Flagstar's 10% Junior Subordinated Debentures due 2014 and the
failure to pay interest payable on June 1, 1997 under
<PAGE>
3
Flagstar's 10.875% Senior Notes due 2002 shall not be an Event
of Default unless any such Debt is declared to be due and
payable as a result of the failure to pay any such interest"
SECTION 2. Amendments to the Security Agreement. The Security
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 4 hereof, hereby amended as
follows:
(a) Section 2 is amended by inserting after the Section
reference "5.02(b)(i)(F)" contained therein the Section reference "or
5.02(b)(vi)".
(b) Section 6(b)(ii) is amended by inserting the phrase
"consistent with past practice" immediately after the phrase "in the
exercise of its prudent business judgment".
(c) Section 6(d)(ii) is amended by inserting the phrase
"consistent with past practice" immediately after the phrase "in the
exercise of its prudent business judgment".
(d) Section 6(e) is amended by inserting the phrase
"consistent with past practice" immediately after the phrase "in the
exercise of its prudent business judgment" in clause (i) and in clause
(ii)(y) of such Section.
(e) Section 8(a) is amended by inserting after the Section
reference "5.02(b)(i)(F)" contained therein the Section reference "or
5.02(b)(vi)".
SECTION 3. Amendment to the Subordination Agreement. The
Subordination Agreement is, effective as of the date hereof and subject to the
satisfaction of the conditions precedent set forth in Section 4 hereof, hereby
amended by deleting from Section 3(c) thereof the reference to "Section 6.01"
and substituting therefor a reference to "Section 6.01(a)".
SECTION 4. Conditions of Effectiveness. This Amendment shall
become effective when, and only when (a) the Funding Agent shall have received
counterparts of this Amendment executed by the Borrower, Flagstar and the
Required Lenders or, as to any of the Lenders, advice satisfactory to the
Funding Agent that such Lenders have executed this Amendment, (b) the Funding
Agent shall have received the Consent attached hereto, signed by each Guarantor
and Grantor (as such term is defined in the Security Agreement), (c) the Funding
Agent shall have received a certificate, dated the date of receipt thereof by
the Funding Agent, in form and substance satisfactory to the Funding Agent,
signed by a duly authorized officer of Flagstar, to the effect that (i) the
representations and warranties set forth in Section 5 hereof are correct on and
as of the date of such certificate as though made
<PAGE>
4
on and as of such date and (ii) no event has occurred and is continuing that
constitutes a Default and (d) Flagstar shall have paid all accrued and unpaid
fees and out-of-pocket expenses of Shearman & Sterling, counsel to the Agents.
SECTION 5. Representations and Warranties. Flagstar represents and
warrants as follows:
(a) The execution, delivery and performance by each Loan Party
of this Amendment and the Credit Agreement, the Security Agreement and
the Subordination Agreement, each as amended hereby, and the
consummation of the transactions contemplated hereby and thereby, are
within such Loan Party's corporate powers, have been duly authorized by
all necessary corporate action on the part of such Loan Party, and do
not (i) contravene such Loan Party's charter or by-laws, (ii) violate
any law (including, without limitation, the Securities Exchange Act of
1934, as amended), rule, regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System,
as in effect from time to time), order, writ, judgment, injunction,
decree, determination or award applicable to any Loan Party, (iii)
conflict with or result in the breach of, or constitute a default
under, any contract, loan agreement, indenture, mortgage, deed of
trust, lease or other instrument binding on or affecting any Loan
Party, any of its Subsidiaries or any of their properties or (iv)
result in or require the creation or imposition of any Lien (other than
Liens created by or permitted under the Loan Documents) upon or with
respect to any of the properties of any Loan Party or any of its
Subsidiaries except, as to (ii) and (iii) above, as would not, and
would not be reasonably likely to, have a Material Adverse Effect.
(b) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
or any other third party is required for the due execution, delivery,
recordation, filing or performance by any Loan Party of this Amendment,
the Credit Agreement, as amended hereby, the Security Agreement, as
amended hereby, or the Subordination Agreement, as amended hereby,
except those authorizations, approvals, actions, notices and filings
which have been duly obtained, take, given, or made and are in full
force and effect.
(c) This Amendment and the Consent have been duly executed and
delivered by each Loan Party party thereto. The Credit Agreement, the
Security Agreement and the Subordination Agreement, each as amended
hereby, are the legal, valid and binding obligation of each Loan Party
party thereto, enforceable against such Loan Party in accordance with
its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization or other similar
laws affecting creditors' rights generally and subject to general
principles of equity (regardless of whether considered in a proceeding
in equity or at law).
<PAGE>
5
SECTION 6. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness hereof, on and after the date hereof each reference in
the Credit Agreement, the Security Agreement or the Subordination Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement, the Security Agreement or the Subordination Agreement, as the
case may be, and each reference in the other Loan Documents to the Credit
Agreement, the Security Agreement or the Subordination Agreement, "thereunder",
"thereof" or words of like import referring to the Credit Agreement, the
Security Agreement or the Subordination Agreement, as the case may be, shall
mean and be a reference to the Credit Agreement, the Security Agreement or the
Subordination Agreement, respectively, as amended hereby.
(b) Except as specifically provided, each of the Credit
Agreement, the Security Agreement and the Subordination Agreement is and shall
continue to be in full force and effect and is hereby in all respects ratified
and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or Co-Administrative Agent or the
Funding Agent under any of the Loan Documents, nor constitute a waiver of any
provision of any of the Loan Documents.
SECTION 7. Governing Law. This Amendment shall be governed by,
and construed in accordance with, the laws of the State of New York.
SECTION 8. Execution in Counterparts. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement. Delivery of an executed counterpart of a signature
page to this Amendment by telecopier shall be effective as delivery of a
manually executed counterpart of this Amendment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Borrowers
TWS FUNDING, INC.
By: Ronald B. Hutchison
___________________________
Title: Vice President and Treasurer
FLAGSTAR CORPORATION
By: Ronald B. Hutchison
___________________________
Title: Vice President and Treasurer
Lenders
------------------------------
[Print or type name of institution]
By:___________________________
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Borrowers
TWS FUNDING, INC.
By:___________________________
Title: Vice President and Treasurer
FLAGSTAR CORPORATION
By:___________________________
Title: Vice President and Treasurer
Lenders
NationsBank, N.A.
------------------------------
[Print or type name of institution]
By:___/s/ Charles A. Ke _________________
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Borrowers
TWS FUNDING, INC.
By:___________________________
Title: Vice President and Treasurer
FLAGSTAR CORPORATION
By:___________________________
Title: Vice President and Treasurer
Lenders
Citibank, N.A.
------------------------------
[Print or type name of institution]
By:___________________________
Title: Attorney-in-fact
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Borrowers
TWS FUNDING, INC.
By:___________________________
Title: Vice President and Treasurer
FLAGSTAR CORPORATION
By:___________________________
Title: Vice President and Treasurer
Lenders
Bankers Trust Company
------------------------------
[Print or type name of institution]
By:__/s/ Mary Jo Jolly______________________
Title: Assistant Vice President
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Borrowers
TWS FUNDING, INC.
By:___________________________
Title: Vice President and Treasurer
FLAGSTAR CORPORATION
By:___________________________
Title: Vice President and Treasurer
Lenders
THE BANK OF NOVA SCOTIA
------------------------------
[Print or type name of institution]
By:__/s/ J. Alan Edwards_________________
Title: Authorized Signatory
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Borrowers
TWS FUNDING, INC.
By:___________________________
Title: Vice President and Treasurer
FLAGSTAR CORPORATION
By:___________________________
Title: Vice President and Treasurer
Lenders
The Chase Manhattan Bank
------------------------------
[Print or type name of institution]
By:_/s/ William Rindfuss_________________
Title: Vice President
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Borrowers
TWS FUNDING, INC.
By:___________________________
Title: Vice President and Treasurer
FLAGSTAR CORPORATION
By:___________________________
Title: Vice President and Treasurer
Lenders
The Long-Term Credit Bank of Japan,
Limited, New York Branch
------------------------------
[Print or type name of institution]
By:___________________________
Title: Deputy General Manager
<PAGE>
CONSENT
Dated as of March 6, 1997
The undersigned, each a Guarantor under the Second Amended and
Restated Guaranty dated as of April 10, 1996 (the "Guaranty") and a Grantor
under the Second Amended and Restated Security Agreement dated as of April 10,
1996 (as amended to date, the "Security Agreement") in favor of the Funding
Agent for the Lender Parties party to the Credit Agreement referred to in the
foregoing Fourth Amendment, hereby consents to said Fourth Amendment and hereby
confirms and agrees that (i) each of the Guaranty and the Security Agreement is,
and shall continue to be, except as otherwise specifically provided in said
Fourth Amendment, in full force and effect and is hereby ratified and confirmed
in all respects except that, upon the effectiveness of, and on and after the
date of, the Fourth Amendment, each reference in each of the Guaranty and the
Security Agreement to the Credit Agreement, "thereunder", "thereof" or words of
like import shall mean and be a reference to the Credit Agreement as amended
through the date hereof and each reference in the Security Agreement to "this
Agreement", "hereunder", "hereof" or words of like import shall mean and be a
reference to the Security Agreement as amended through the date hereof and (ii)
the Security Agreement and all of the Collateral described therein do, and shall
continue to, secure the payment of all of the Secured Obligations (as defined
therein).
FLAGSTAR CORPORATION
By Ronald B. Hutchison
_____________________
Vice President
SIGNIFICANT SUBSIDIARIES
DENNY'S HOLDINGS, INC.
SPARTAN HOLDINGS, INC.
By ______________________________
Attorney-in-fact of each of
the corporations listed above
<PAGE>
2
DENNY'S SUBSIDIARY GROUP
C-B-R DEVELOPMENT CO., INC.
DENNY'S, INC.
DFO, INC.
EL POLLO LOCO, INC.
By Ronald B. Hutchison
______________________________
President or Vice President of each of
the corporations listed above
HAROLD BUTLER ENTERPRISES #607, INC.
HAROLD BUTLER ENTERPRISES #611, INC.
HAROLD BUTLER ENTERPRISES #718, INC.
LA MIRADA ENTERPRISES NO. 5, INC.
LA MIRADA ENTERPRISES NO. 6, INC.
LA MIRADA ENTERPRISES NO. 7, INC.
LA MIRADA ENTERPRISES NO. 8, INC.
LA MIRADA ENTERPRISES NO. 9, INC.
By Ronald B. Hutchison
______________________________
President or Vice President of each of
the corporations listed above
TWS 300 CORP.
TWS 500 CORP.
TWS 600 CORP.
TWS 700 CORP.
TWS 800 CORP.
By Ronald B. Hutchison
_______________________________
President or Vice President of each of
the corporations listed above
<PAGE>
3
DENNY'S OF CANADA LTD.
DENNY'S RESTAURANTS OF CANADA, LTD.
By Ronald B. Hutchison
______________________________
President or Vice President
of each of the corporations listed above
SPARTAN SUBSIDIARY GROUP
QUINCY'S RESTAURANTS, INC.
FLAGSTAR ENTERPRISES, INC.
FLAGSTAR SYSTEMS, INC.
SPARTAN REALTY, INC.
By Ronald B. Hutchison
______________________________
Treasurer of each of the
corporations listed above
SPARTAN MANAGEMENT, INC.
By Ronald B. Hutchison
______________________________
Treasurer
ADDITIONAL GUARANTOR:
CANTEEN HOLDINGS, INC.
By ______________________________
President or Vice-President
of each of the corporations
listed above
<PAGE>
FRI-M CORPORATION
THIRD AMENDMENT
TO CREDIT AGREEMENT
This THIRD AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is
dated as of March 7, 1997 and entered into by and among FRD ACQUISITION CO., a
Delaware corporation ("HOLDINGS"), FRI-M CORPORATION, a Delaware corporation
("COMPANY"), the other Credit Support Parties (as defined in Section 4 hereof),
THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each
individually referred to herein as a "LENDER" and collectively as "LENDERS"),
BANKERS TRUST COMPANY, THE CHASE MANHATTAN BANK (FORMERLY KNOWN AS CHEMICAL
BANK) and CITICORP USA, INC., as co-syndication agents for Lenders (in such
capacity, each individually referred to herein as a "CO- SYNDICATION AGENT" and
collectively as "CO-SYNDICATION AGENTS"), and CREDIT LYONNAIS NEW YORK BRANCH,
as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"),
and is made with reference to that certain Credit Agreement dated as of May 23,
1996, by and among Holdings, Company, Lenders, Co- Syndication Agents and
Administrative Agent, as amended by that First Amendment to Credit Agreement,
Guaranties and Certain Collateral Documents dated as of July 1, 1996 and the
Second Amendment to Credit Agreement, Guaranties and Certain Collateral
Documents dated as of November 19, 1996 (as so amended, the "CREDIT AGREEMENT"),
and to the other Loan Documents. Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Credit
Agreement.
RECITALS
WHEREAS, Loan Parties and Lenders desire to further amend the
Credit Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO SECTION 1.1: DEFINITIONS
A. Subsection 1.1 of the Credit Agreement is hereby amended by
deleting therefrom the definition of "Consolidated Excess Cash Flow" in its
entirety and substituting therefor the following definition:
1
<PAGE>
"CONSOLIDATED EXCESS CASH FLOW" means, for any
period, an amount (if positive) equal to (i) the sum, without
duplication, of the amounts for such period of (a) Consolidated
Adjusted EBITDA and (b) the Consolidated Working Capital Adjustment
(other than any Consolidated Working Capital Adjustment arising from
(AA) with respect to the period ended December 31, 1996 only, changes
in the accrued interest account (it being understood that the
Consolidated Excess Cash Flow for all other periods shall include the
Consolidated Working Capital Adjustment arising from any changes in the
accrued interest account) or (BB) changes in the net assets held for
sale) minus (ii) the sum, without duplication, of the amounts for such
period of (a) voluntary and scheduled repayments of Consolidated Total
Debt (excluding repayments of Revolving Loans except to the extent the
Revolving Loan Commitments are permanently reduced in connection with
such repayments), (b) Consolidated Capital Expenditures (net of any
proceeds of any related financings with respect to such expenditures),
(c) Consolidated Cash Interest Expense, and (d) the provision for
current taxes based on income of Holdings and its Subsidiaries and paid
or payable in cash with respect to such period."
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon
the prior or concurrent satisfaction of all of the following conditions
precedent (the date of satisfaction of such conditions being referred to herein
as the "THIRD AMENDMENT EFFECTIVE DATE"):
A. On or before the Third Amendment Effective Date, Company
shall deliver to Lenders (or to Administrative Agent for Lenders) counterparts
of this Amendment executed by Lenders and each of the other parties hereto.
B. On or before the Third Amendment Effective Date, all
corporate and other proceedings taken or to be taken in connection with the
transactions contemplated hereby and all documents incidental thereto not
previously found acceptable by Administrative Agent, acting on behalf of
Lenders, and its counsel shall be satisfactory in form and substance to
Administrative Agent and such counsel, and Administrative Agent and such counsel
shall have received all such counterpart originals or certified copies of such
documents as Administrative Agent may reasonably request.
SECTION 3. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, each of Holdings,
Company and each other Loan Party party hereto represents and warrants to each
Lender that the following statements are true, correct and complete:
2
<PAGE>
A. CORPORATE POWER AND AUTHORITY. Each Loan Party party hereto
has all requisite corporate power and authority to enter into this Amendment and
to carry out the transactions contemplated hereby and each of Holdings, Company
and each other Loan Party party hereto has all requisite corporate power and
authority to carry out the transactions contemplated by, and perform its
obligations under, the Credit Agreement as further amended by this Amendment
(the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of Holdings, Company
and each of the other Loan Parties party hereto, as the case may be.
C. NO CONFLICT. The execution and delivery by each Loan Party
party hereto of this Amendment and the performance by such Loan Party of this
Amendment and the performance by Holdings and Company of the Amended Agreement
do not and will not (i) violate any provision of any law or any governmental
rule or regulation applicable to Holdings or any of its Subsidiaries, the
Certificate or Articles of Incorporation or Bylaws of Holdings or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on Holdings or any of its Subsidiaries, (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) a
default under any Contractual Obligation of Holdings or any of its Subsidiaries,
(iii) result in or require the creation or imposition of any Lien upon any of
the properties or assets of Holdings or any of its Subsidiaries (other than any
Liens created under any of the Loan Documents in favor of Administrative Agent
on behalf of Lenders), or (iv) require any approval of stockholders or any
approval or consent of any Person under any Contractual Obligation of Holdings
or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by each
Loan Party party hereto of this Amendment and the performance by such Loan Party
of this Amendment and the performance by Holdings and Company of the Amended
Agreement do not and will not require any registration with, consent or approval
of, or notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment has been duly executed
and delivered by each Loan Party party hereto and this Amendment and the Amended
Agreement are the legally valid and binding obligations of such Loan Party,
enforceable against such Loan Party in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to or limiting creditors' rights generally or by
equitable principles relating to enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Section 5 of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the Third Amendment Effective Date to the same extent as
though made on and as of
3
<PAGE>
that date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete in
all material respects on and as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing
or will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
SECTION 4. ACKNOWLEDGEMENT AND CONSENT
Company is a party to certain Collateral Documents, in each
case as amended through the Third Amendment Effective Date, pursuant to which
Company has created Liens in favor of Administrative Agent on certain Collateral
to secure the Obligations. Each of the other Loan Parties party hereto is a
party to certain Collateral Documents, the Subsidiary Guaranty or the Holdings
Guaranty, in each case as amended through the Third Amendment Effective Date,
pursuant to which each such Loan Party has (i) guarantied the Obligations and
(ii) created Liens in favor of Administrative Agent on certain Collateral to
secure the obligations of such Loan Party under the Subsidiary Guaranty or the
Holdings Guaranty, as the case may be. The Loan Parties party hereto are
collectively referred to herein as the "CREDIT SUPPORT PARTIES", and the
Collateral Documents, the Subsidiary Guaranty and the Holdings Guaranty are
collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS".
Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement, the Collateral
Documents and Guaranties and this Amendment and consents to the further
amendment of the Credit Agreement effected pursuant to this Amendment. Each
Credit Support Party hereby confirms that each Credit Support Document to which
it is a party or otherwise bound and all Collateral encumbered thereby will
continue to guaranty or secure, as the case may be, to the fullest extent
possible the payment and performance of all "Obligations," "Guarantied
Obligations" and "Secured Obligations," as the case may be (in each case as such
terms are defined in the applicable Credit Support Document), including without
limitation the payment and performance of all such "Obligations," "Guarantied
Obligations" or "Secured Obligations," as the case may be, in respect of the
Obligations of Company now or hereafter existing under or in respect of the
Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of
the Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties contained in the
Amended Agreement and the other Credit Support Documents to which it is a party
or otherwise bound are true, correct and complete in
4
<PAGE>
all material respects on and as of the Third Amendment Effective Date to the
same extent as though made on and as of that date, except to the extent such
representations and warranties specifically relate to an earlier date, in which
case they were true, correct and complete in all material respects on and as of
such earlier date.
Each Credit Support Party (other than Holdings and Company)
acknowledges and agrees that (i) notwithstanding the conditions to effectiveness
set forth in this Amendment, such Credit Support Party is not required by the
terms of the Credit Agreement or any other Loan Document to consent to the
amendments to the Credit Agreement effected pursuant to this Amendment and (ii)
nothing in the Credit Agreement, this Amendment or any other Loan Document shall
be deemed to require the consent of such Credit Support Party to any future
amendments to the Credit Agreement.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS.
(i) On and after the Third Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Loan Documents to the
"Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of Agent or any Lender under, the Credit Agreement or any of
the other Loan Documents.
B. FEES AND EXPENSES. Company acknowledges that all reasonable
costs, fees and expenses as described in subsection 11.2 of the Credit Agreement
incurred by Administrative Agent and its counsel with respect to this Amendment
and the documents and transactions contemplated hereby shall be for the account
of Company.
C. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
5
<PAGE>
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW
YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW
OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment (other than the
provisions of Section 1, which shall become effective upon the satisfaction of
each of the conditions set forth in Section 2) shall become effective upon the
execution of a counterpart hereof by all Lenders and each of the other parties
hereto and receipt by Company and Administrative Agent of written or telephonic
notification of such execution and authorization of delivery thereof.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
FRD ACQUISITION CO.
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
FRI-M CORPORATION
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
FRI-FRD CORPORATION
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
CFC FRANCHISING COMPANY
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
FRI-J CORPORATION
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
JOJOS RESTAURANTS, INC.
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
S-1
<PAGE>
JOJOS CALIFORNIA FAMILY RESTAURANTS,
INC.
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
COCO'S RESTAURANTS, INC.
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
FRI-C CORPORATION
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
CARROWS RESTAURANTS, INC.
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
CARROWS CALIFORNIA FAMILY
RESTAURANTS, INC.
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
FRI-DHD CORPORATION
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
S-2
<PAGE>
FAR WEST CONCEPTS, INC.
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
FRI-NA CORPORATION
By: /s/ Ronald B. Hutchison
Title: Vice President and Treasurer
LENDERS: CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Administrative Agent
By:
Title:
BANKERS TRUST COMPANY, individually and
as Co-Syndication Agent
By:
Title:
THE CHASE MANHATTAN BANK (FORMERLY
KNOWN AS CHEMICAL BANK), individually and as
Co-Syndication Agent
By:
Title:
CITICORP USA, INC., individually and as Co-
Syndication Agent
By:
Title:
S-3
<PAGE>
FAR WEST CONCEPTS, INC.
By:
Title:
FRI-NA CORPORATION
By:
Title:
LENDERS: CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Administrative Agent
By:
Title: Senior Vice President
BANKERS TRUST COMPANY, individually and
as Co-Syndication Agent
By:
Title:
THE CHASE MANHATTAN BANK (FORMERLY
KNOWN AS CHEMICAL BANK), individually and as
Co-Syndication Agent
By:
Title:
CITICORP USA, INC., individually and as Co-
Syndication Agent
By:
Title:
S-3
<PAGE>
FAR WEST CONCEPTS, INC.
By:
Title:
FRI-NA CORPORATION
By:
Title:
LENDERS: CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Administrative Agent
By:
Title:
BANKERS TRUST COMPANY, individually and
as Co-Syndication Agent
By: /s/ Mary Jo Jolly
Title: Assistant Vice President
THE CHASE MANHATTAN BANK (FORMERLY
KNOWN AS CHEMICAL BANK), individually and as
Co-Syndication Agent
By:
Title:
CITICORP USA, INC., individually and as Co-
Syndication Agent
By:
Title:
S-3
<PAGE>
FAR WEST CONCEPTS, INC.
By:
Title:
FRI-NA CORPORATION
By:
Title:
LENDERS: CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Administrative Agent
By:
Title:
BANKERS TRUST COMPANY, individually and
as Co-Syndication Agent
By:
Title:
THE CHASE MANHATTAN BANK (FORMERLY
KNOWN AS CHEMICAL BANK), individually and as
Co-Syndication Agent
By: /s/
Title:
CITICORP USA, INC., individually and as Co-
Syndication Agent
By:
Title:
S-3
<PAGE>
FAR WEST CONCEPTS, INC.
By:
Title:
FRI-NA CORPORATION
By:
Title:
LENDERS: CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Administrative Agent
By:
Title:
BANKERS TRUST COMPANY, individually and
as Co-Syndication Agent
By:
Title:
THE CHASE MANHATTAN BANK (FORMERLY
KNOWN AS CHEMICAL BANK), individually and as
Co-Syndication Agent
By:
Title:
CITICORP USA, INC., individually and as Co-
Syndication Agent
By: /s/ Charles Foster
Title: Attorney-in-Fact
S-3
<PAGE>
GUARANTY AND SECURITY AGREEMENT
This Guaranty and Security Agreement (this "Agreement") is
entered into as of January 16, 1997, by and among Denny's, Inc., a Delaware
corporation ("Denny's"), El Pollo Loco, Inc., a Delaware corporation, DFO, Inc.,
a Delaware corporation, Flagstar Enterprises, Inc., an Alabama corporation, and
Quincy's Restaurants, Inc., an Alabama corporation (collectively, the
"Guarantors"), and James B. Adamson (the "Executive").
Recitals
A. The Executive has entered into that certain Employment
Agreement with Flagstar Companies, Inc., a Delaware corporation (the "Company")
dated as of January 10, 1995 as amended by that certain First Amendment to
Employment Agreement dated as of February 27, 1995 and by that certain Second
Amendment to Employment Agreement dated as of December 31, 1996, (as amended,
the "Employment Agreement").
B. It is a requirement of the Employment Agreement that
Denny's execute and deliver this Agreement.
C. Each Guarantor is an indirect wholly-owned subsidiary of
the Company. The Executive, as the chairman, president and chief executive
officer of the Company, provides substantial and meaningful services and
guidance to the Guarantors, and it is to the advantage of the Guarantors that
the Company continue to employ the Executive.
D. Denny's has opened an interest bearing deposit account
(such account, and any successor or replacement account from time to time, being
the "Security Account") with Bank of America National Trust and Savings
Association, (the "Bank") at its office at Concord, California Account No.
12338-62163, in the amount of $5,000,000. The account shall bear interest
payable at such time as Denny's and the Bank shall agree and after an Event of
Default (as hereinafter defined) at such time as Executive and Bank shall agree.
Agreement
NOW, THEREFORE, in consideration of the above recitals and the
mutual covenants hereinafter set forth, the parties hereto agree as follows:
1. Definitions. Unless otherwise defined herein, terms defined
in the Employment Agreement and used herein shall have the meanings given them
in the Employment Agreement. Unless otherwise defined herein or in the
Employment Agreement, terms defined in Division 9 of the Uniform Commercial Code
in effect in the State of California (the "Code") are used herein as therein
defined.
<PAGE>
"Obligations": any and all monetary obligations of the Company
in respect of (i) retention bonuses, direct or indirect, absolute or contingent,
due or to become due, now existing or hereafter arising, which may arise under,
out of, or in connection with Section 3(k) of the Employment Agreement and (ii)
payments which may become due under Section 5(b) of the Employment Agreement.
2. Guaranty. (a) The Guarantors hereby unconditionally and
irrevocably jointly and severally guarantee the full and prompt payment and the
punctual performance, when due and in accordance with the terms and conditions
of the Employment Agreement, of the Obligations, whether or not from time to
time reduced or extinguished or hereafter increased or incurred, whether or not
recovery may be or hereafter may become barred by any statute of limitations,
whether enforceable or unenforceable as against the Company, and whether or not
such action is taken against the Company, now or hereafter existing, or due or
to become due (all such Obligations being hereafter referred to as the
"Guarantied Obligations"). This is a guaranty of payment and performance and not
of collection only.
(b) The Guarantors further agree, jointly and severally, to
pay to the Executive upon written demand all reasonable out-of-pocket costs and
expenses and reasonable attorneys' fees and expenses paid or incurred by the
Executive in endeavoring to collect all or any part of the Guarantied
Obligations after the same become due and owing from, or in prosecuting any
action against, any Guarantor, or in connection with the failure by any
Guarantor to perform or observe any of the provisions hereof. Such costs, fees
and expenses shall also be Guarantied Obligations hereunder.
3. Waivers. Each Guarantor hereby absolutely, unconditionally
and irrevocably waives and agrees not to assert or take advantage of:
(a) any right to require the Executive to proceed against or
exhaust his recourse against the Company or any other person or any security or
collateral securing the Guarantied Obligations at any time or to pursue any
other remedy in his power against any person before being entitled to payment
from or performance by such Guarantor of the Guarantied Obligations or before
proceeding against such Guarantor or any other person;
(b) the defense of the statute of limitations in any action
hereunder or for the collection or performance of any Guarantied Obligation;
(c) any defense that may arise by reason of (i) the
incapacity, lack of authority, death or disability, as applicable, of the
Company, such Guarantor or any other or others, (ii) the revocation or
repudiation hereof by such Guarantor or the revocation or repudiation of the
Employment Agreement by the Company or any other or others, (iii) the failure of
the Executive to file or enforce a claim against the estate (either in
administration, bankruptcy or any other proceeding) of the Company or any other
or others, (iv) the unenforceability in whole or in part of the Employment
Agreement or any other instrument, document or agreement, (v) the Executive's
election, in any proceeding by or against the Company or any other party under
the federal Bankruptcy Code, of the application of Section 1111(b)(2) of the
federal Bankruptcy
2
<PAGE>
Code, or (vi) any borrowing or grant of a security interest under Section 364 of
the federal Bankruptcy Code;
(d) presentment, demand for payment, protest, notice of
discharge, notice of acceptance of this Agreement or incurrence of, or any
default in connection with, the indebtedness guarantied hereunder, and
indulgences and notices of any other kind whatsoever, including without
limitation notice of the disposition of any collateral for the Guarantied
Obligations;
(e) any defense based upon an election of remedies (including,
if available, an election to proceed by non-judicial foreclosure) or other
action or omission by the Executive or any other person or entity which destroys
or otherwise impairs any indemnification, contribution or subrogation rights of
such Guarantor or the right of such Guarantor, if any, to proceed against the
Company for reimbursement, or any combination thereof;
(f) any defense based upon any taking, modification or release
of any collateral or guarantees for the Guarantied Obligations, or any failure
to create or perfect any security interest in, or the taking of or failure to
take any other action with respect to, any collateral securing payment or
performance of the Guarantied Obligations;
(g) any right to assert any counter-claim or cross-claim or to
assert any rights or defenses based upon any right to offset or claimed offset
by such Guarantor with respect to this Agreement against any indebtedness or
obligation including, without limitation, the Guarantied Obligations now or
hereafter owed to such Guarantor by the Company, the Executive or any other
person; or
(h) any rights or defenses based upon any rights or defenses
of the Company to the Guarantied Obligations, or any of them (including, without
limitation, the failure or value of consideration, any statute of limitations,
accord and satisfaction, and the insolvency of the Company); it being intended
that such Guarantor shall remain liable as principal, to the extent set forth
herein, until the full and final payment and performance of all of the
Guarantied Obligations notwithstanding any act, omission or thing which might
otherwise operate as a legal or equitable discharge of such Guarantor, the
Company or any other person; or
(i) any other action, event or precondition to the enforcement
of this Agreement or the performance by such Guarantor of the obligations
hereunder (other than the occurrence of an Event of Default (as defined in
Section 14 below)).
4. Creation of Security Interest. Denny's hereby assigns,
pledges and grants to the Executive a security interest in and lien on all of
Denny's right, title and interest in and to the following collateral (the
"Collateral"): (i) the Security Account, all funds held therein and all
certificates and instruments, if any, from time to time representing or
evidencing the Security Account, (ii) all interest payable with respect to the
Security Account from time to time, and all certificates and instruments, if
any, from time to time representing or evidencing the Security Account, (iii)
all notes, certificates of deposit, deposit accounts, checks and other
instruments from time to time hereafter delivered to or otherwise possessed by
the Bank in substitution for
3
<PAGE>
or in addition to any or all of the then existing Collateral, (iv) all interest,
dividends, cash, instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the then existing Collateral, and (v) all proceeds of any and all of the
foregoing Collateral whether the same arise or are acquired before or after the
commencement of a case under Title 11 of the Bankruptcy Code, in order to secure
the payment and performance of the Guarantied Obligations.
5. Non-Payment. If any Guarantied Obligation is not paid when
due, a late charge shall accrue upon such Obligation, commencing on such due
date, at the prime rate established by Citibank, N.A. plus 3% per annum from the
due date until paid, as liquidated damages for such nonpayment. The imposition
of this late charge does not imply or constitute any agreement by the Executive
to forbear collection of the delinquent Guarantied Obligation. The amount of
such late charge shall also be a Guarantied Obligation.
6. Delivery of Collateral. All certificates or instruments, if
any, representing or evidencing the Collateral shall be delivered to and held by
or on behalf of the Executive pursuant hereto and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to the
Executive. The Executive shall have the right, at any time in his discretion and
without notice to Denny's or any other Guarantor, to transfer to or register in
the name of the Executive or any of his nominees any or all of the Collateral.
In addition, the Executive shall have the right at any time to exchange
certificates or instruments representing or evidencing Collateral for
certificates or instruments of smaller or larger denominations.
7. Maintaining the Security Account. So long as any Obligation
shall remain unpaid, Denny's shall maintain the Security Account with the Bank.
The Security Account shall be subject to such applicable laws, and such
applicable regulations of the Board of Governors of the Federal Reserve System
and of any other appropriate banking or governmental authority, as may now or
hereafter be in effect. Denny's shall pay the Bank (i) for all returned checks,
service charges and other fees and charges associated with the Blocked Account
Agreement attached hereto as Exhibit 2 (the "Blocked Account Agreement"), and
the Account agreement referred to therein, and (ii) all amounts required to be
paid in respect of the Company's indemnification obligations to the Bank under
the Blocked Account Agreement.
8. Representation and Warranties. (a) Denny's represents and
warrants as follows:
(i) Ownership of Collateral. Denny's is and at all times will
be the legal and beneficial owner of the Collateral free and clear of any lien,
security interest, option or other charge or encumbrance except for the security
interest created by this Agreement.
(ii) Perfected Security Interest. The pledge and assignment of
the Collateral pursuant to this Agreement creates a valid and legal security
interest in the Collateral, securing payment of the Guarantied Obligations and,
upon the execution and delivery by Denny's and the Executive of the Notice
attached as Exhibit 1 hereto (the "Notice"), and upon the giving of such
4
<PAGE>
Notice to the Bank in accordance with Section 9302(1)(g)(ii) of the Code, will
create a perfected first priority lien thereon.
(b) Each Guarantor represents and warrants as follows:
(i) No Conflict. The execution, delivery and performance of
this Agreement by such Guarantor and the consummation of the transactions
contemplated hereby will not conflict with or result in a breach of any of the
terms and provisions of, or constitute a default under, any agreement,
indenture, mortgage, deed of trust, equipment lease, instrument or other
document to which the Company or such Guarantor is a party.
(ii) Effectiveness. There are no conditions precedent to the
effectiveness of this Agreement that have not been satisfied or waived.
(iii) Authorization. Such Guarantor has the authorization,
power and right to deliver, execute and fully perform its obligations under this
Agreement in accordance with its terms.
9. Covenants. (a) Denny's covenants and agrees as follows:
(i) No Transfer. Denny's shall not sell, assign (by operation
of law or otherwise), exchange or otherwise voluntarily or involuntarily
transfer or dispose of the Collateral or any portion thereof or encumber, or
hypothecate, or create or permit to exist any lien, security interest, charge or
encumbrance or adverse claim upon or other interest in the Collateral without
the prior written consent of the Executive.
(ii) Acknowledgement and Consent. On or prior to the date
hereof, Denny's shall cause the Bank to execute and deliver the Blocked Account
Agreement by and among Denny's, the Executive and the Bank attached hereto as
Exhibit 2.
(iii) Notice. On or prior to the date hereof, Denny's shall
execute and deliver to the Bank the Notice.
(iv) Legal Opinion. On or prior to January 20, 1997, Denny's
shall deliver to the Executive the executed legal opinion of Latham & Watkins,
counsel to Denny's, in form and substance reasonably satisfactory to the
Executive.
(b) The Executive covenants and agrees that on or prior to the
date hereof, the Executive shall execute and deliver to the Bank the Notice.
10. Further Assurances. Denny's agrees that at any time and
from time to time, at the expense of Denny's, Denny's will promptly execute and
deliver all further instruments and documents, and take all further action, that
may be necessary or desirable, or that the Executive may reasonably request, in
order to perfect and protect any security interest granted or purported to be
granted hereby or to enable the Executive to exercise and enforce his rights and
remedies hereunder with respect to any Collateral.
5
<PAGE>
11. Executive Appointed Attorney-in-Fact. Denny's hereby
appoints the Executive as Denny's attorney-in-fact, with full authority in the
place and stead of Denny's and in the name of Denny's or otherwise, from time to
time in the Executive's discretion to take any action and to execute any
instrument which the Executive may deem necessary or advisable to accomplish the
purposes of this Agreement, including, without limitation, to receive, indorse
and collect all instruments made payable to the Company's representing any
interest payment, dividend or other distribution in respect of the Collateral or
any part thereof and to give full discharge for the same.
12. Executive May Perform. If any Guarantor fails to perform
any agreement contained herein, the Executive may himself perform, or cause
performance of, such agreement, and the expenses of the Executive incurred in
connection therewith shall be payable by the Guarantors under Section 2(b).
13. Executive's Duties. The powers conferred on the Executive
hereunder are solely to protect his interest in the Collateral and shall not
impose any duty upon him to exercise any such powers. Except for the safe
custody of any Collateral in his possession and the accounting for moneys
actually received by him hereunder, the Executive shall have no duty as to any
collateral, as to ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to the
Collateral, whether or not the Executive has or is deemed to have knowledge of
such matters, or as to the taking of any necessary steps to preserve his rights
against any parties or any other rights pertaining to the Collateral. The
Executive shall be deemed to have exercised reasonable care in the custody and
preservation of any Collateral in his possession if such Collateral is accorded
treatment substantially equal to that which Denny's accords its own property.
14. Events of Defaults. The Guarantors shall be in default
under this Agreement upon the happening of any one or more of the following
events (each, an "Event of Default"):
(a) Failure to Pay. The Guarantors fail to pay any Guarantied
Obligation in accordance with the terms of this Agreement;
(b) Collateral. All or any portion of the Collateral is
seized, sold, assigned, transferred or otherwise disposed of in violation of
Section 9(b) hereof or is levied upon by writ of attachment, garnishment,
execution or otherwise, and such seizure or levy is not released within thirty
(30) days thereof;
(c) Insolvency. The Company or any Guarantor executes a
general assignment for the benefit of its creditors, ceases to conduct its
business in the ordinary course as it is now conducted, convenes any meeting of
its creditors, becomes insolvent, admits in writing its insolvency or inability
to pay its debts, or is unable to pay or is generally not paying its debts as
they become due or any case or proceeding is voluntarily commenced by the
Company or any Guarantor under any provision of the federal Bankruptcy Code or
any other federal or state law relating to debtor rehabilitation, insolvency,
bankruptcy, liquidation or reorganization, or any such case or proceeding is
involuntarily commenced against the Company or any Guarantor;
6
<PAGE>
(d) Receiver. A receiver, liquidator, sequestrator, trustee,
custodian or other officer having similar powers over the Company or any
Guarantor is appointed to take possession of all or any portion of the
Collateral or all or any substantial portion of the Company's or any Guarantor's
assets;
(e) Breach of Employment Agreement. The Company or Denny's
defaults in its obligations under Section 3(k) of the Employment Agreement.
15. Remedies Upon Default. If any Event of Default shall have
occurred and be continuing:
(a) The Executive may declare all Guarantied Obligations to be
immediately due and payable. Thereupon, the Executive without any action
whatsoever on the part of the Guarantors may instruct the Bank to wire all cash
in the Account to such account as the Executive shall designate, and the
Executive shall have the rights and remedies of a secured party under the Code
(whether or not the Code applies to the affected Collateral), and may also,
without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any location, for
cash, on credit or for future delivery, and upon such other terms as the
Executive may deem commercially reasonable. Denny's agrees that, to the extent
notice of sale shall be required by law, at least ten day's notice to the
Guarantors of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. The
Executive shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Executive may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. The Bank shall be entitled to rely upon and
shall be fully protected in relying upon a certification under penalty of
perjury of the Executive that an Event of Default has occurred.
(b) Any cash held by the Executive as Collateral and all cash
proceeds received by the Executive in respect of any sale of, collection from,
or other realization upon all or any part of the Collateral shall be applied
(after payment of any amounts payable to the Executive pursuant to Section 2(b))
in whole by the Executive against the Guarantied Obligations in the order that
such Obligations become due. Any surplus of such cash or cash proceeds held by
the Executive and remaining after payment in full of all the Guarantied
Obligations (and after payment of expenses pursuant to Section 2(b)) shall be
paid over to Denny's or to whomsoever may be lawfully entitled to receive such
surplus.
(c) Denny's hereby expressly waives and releases all rights to
have any of the Collateral marshalled upon the exercise of any remedies under
this Agreement.
16. Right of Set Off. In addition to and not in limitation of
any other right or remedy hereunder, the Executive shall have, at any time, the
right, but not the obligation, to set off any indebtedness or Guarantied
Obligation of any Guarantor against any indebtedness or obligation of the
Executive to the Company or such Guarantor, without notice to or demand upon the
Company or such Guarantor, any guarantor of any such indebtedness or obligation
or
7
<PAGE>
any other person, whether or not such Guarantied Obligation or indebtedness is
liquidated, contingent or mature at the time of such offset and however such
indebtedness or obligations were created or incurred.
17. Continuing Security Interest. This Agreement shall be
absolute and irrevocable and remain in effect as to any and all of the
Guarantied Obligations until all Guarantied Obligations then outstanding have
been indefeasibly paid in full in cash whereupon this Agreement shall
automatically terminate without any further action on the part of any party
hereto.
18. Notices. All notices required or permitted to be made
hereunder shall be in writing and may be delivered personally or sent by
telegram, telecopy, facsimile, telex, first class mail or overnight courier,
postage prepaid, to the parties at the addresses set forth below. Such notices
sent as provided hereinabove shall be effective when received by the addressee
thereof, unless sent by registered or certified mail, postage prepaid, in which
case they shall be effective exactly three (3) business days after being
deposited in the United States mail. The parties hereto may change their
addresses by giving notice thereof to the other parties hereto in conformity
with this paragraph.
If to any Guarantor: c/o Flagstar Corporation
203 East Main Street
Spartanburg, South Carolina 29319
Attention: General Counsel
Telephone: (864) 597-8242
Facsimile: (864) 597-8327
If to the Executive: James B. Adamson
c/o Flagstar Companies, Inc.
203 East Main Street
Spartanburg, South Carolina 29319
Telephone: (864) 597-7780
Facsimile: (864) 597-7005
with a copy to:
John Turitzin, Esq.
Battle Fowler LLP
Park Avenue Tower
75 East 55th Street
New York, New York 10022
Telephone: (212) 856-7000
Facsimile: (212) 856-7813
8
<PAGE>
If to the Bank: Bank of America
1850 Gateway Boulevard
Concord, California 94520
Attention: Account Administrator
Telephone: (800) 262-2726
Facsimile: (510) 885-7531
19. Headings. The various headings in this Agreement are
inserted for convenience only and shall not affect the meaning or interpretation
of this Agreement or any provision hereof.
20. Amendments. This Agreement or any provision hereof may be
changed, waived, or terminated only by a statement in writing signed by the
party against which such change, waiver or termination is sought to be enforced,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
21. Incorporation by Reference. The parties hereby agree that
Section 3 of the Blocked Account Agreement is incorporated by reference herein,
with the same effect as if such Section had been set forth herein, and shall
remain a part of this Agreement notwithstanding the termination of the Blocked
Account Agreement.
22. Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and is intended as a complete
and exclusive statement of the terms and conditions thereof. Acceptance of or
acquiescence in a course of performance rendered under this Agreement shall not
be relevant to determine the meaning of this Agreement even though the accepting
or acquiescing party had knowledge of the nature of the performance and
opportunity for objection.
23. Severability. If any provision or obligation of this
Agreement should be found to be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions and obligations or any other agreement executed in connection
herewith, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby and shall nonetheless remain in
full force and effect to the maximum extent permitted by law.
24. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
regard to conflicts of law principles, except that perfection of the security
interest hereunder, or remedies hereunder, in respect of any particular
Collateral shall be governed by the internal laws of the State of California,
without regard to conflicts of law principles (except that the provisions of the
California Civil Code validating the choice of California law shall be
applicable).
25. Submission to Jurisdiction; Waivers. Each of the
Guarantors and the Executive hereby irrevocably and unconditionally:
9
<PAGE>
(a) submits for itself and himself and its and his property in
any legal action or proceeding relating to arising out of this Agreement, or the
conduct of any party with respect thereto, or for recognition and enforcement of
any judgment in respect thereof, to the nonexclusive general jurisdiction of the
Courts of the State of New York, the courts of the United States of America for
the Southern District of New York, the Courts of the State of California, the
courts of the United States of America for the Central District of California,
the Courts of the State of South Carolina, the courts of the United States of
America for the State of South Carolina, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought
in such courts and waives to the fullest extent permitted by law any objection
that it or he may now or hereafter have to the venue of any such action or
proceeding in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to such
Guarantor or the Executive, as applicable, at its or his address set forth in
Section 18, or at such other address of which such Guarantor or the Executive,
as applicable, shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it or he may have to claim or recover in any legal action or proceeding
referred to in this Section any special, exemplary, punitive or consequential
damages.
26. Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed an
original, but all of which shall together constitute one and the same agreement.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Guaranty and Security Agreement as of the date first above
written.
DENNY'S, INC.
By: ______________________________
Name: ______________________________
Title: ______________________________
EL POLLO LOCO, INC.
By: ______________________________
Name: ______________________________
Title: ______________________________
DFO, INC.
By: ______________________________
Name: ______________________________
Title: ______________________________
FLAGSTAR ENTERPRISES, INC.
By: ______________________________
Name: ______________________________
Title: ______________________________
11
<PAGE>
QUINCY'S RESTAURANTS, INC.
By: ______________________________
Name: ______________________________
Title: ______________________________
----------------------------------------
James B. Adamson
12
<PAGE>
EXHIBIT 1
NOTICE
The undersigned hereby notify Bank of America National Trust
and Savings Association (the "Bank"), in accordance with Section 9302(1)(g)(ii)
of the Uniform Commercial Code in effect in the State of California:
(a) of, the terms and provisions of, the foregoing Guaranty
and Security Agreement (the "Agreement", the terms defined therein being used
herein as therein defined) by and among Denny's, Inc., a Delaware corporation,
El Pollo Loco, Inc., a Delaware corporation, DFO, Inc., a Delaware corporation,
Flagstar Enterprises, Inc., an Alabama corporation, and Quincy's Restaurants,
Inc., an Alabama corporation (collectively, the "Guarantors"), and James B.
Adamson (the "Executive"), c/o Flagstar Companies, Inc., 203 East Main Street,
Spartanburg, South Carolina 29319.
(b) that notwithstanding anything to the contrary in any other
agreement relating to the Security Account or other Collateral, the Security
Account, and all amounts now or hereafter deposited into, evidenced by or
constituting the Security Account, are and will be subject to the terms and
conditions of the Agreement and are and will be subject to the security interest
of the Executive.
This Notice shall be binding upon each undersigned and its
successors and assigns, and shall inure to the benefit of the Bank. This Notice
shall be governed by and construed in accordance with the internal laws of the
State of California, without regard to conflicts of law principles (except that
the provisions of the California Civil Code validating the choice of California
law shall be applicable).
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this
Notice as of the date set opposite its name below.
Dated: as of January 16, 1997
DENNY'S, INC.
By: ______________________________
Name: ______________________________
Title: ______________________________
----------------------------------------
James B. Adamson
<PAGE>
EXHIBIT 2
BLOCKED ACCOUNT AGREEMENT
See following pages
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FLAGSTAR COMPANIES, INC. AS CONTAINED IN ITS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 2, 1997 AND IS QUALIFIED
IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> APR-02-1997
<CASH> 31,775
<SECURITIES> 0
<RECEIVABLES> 13,045
<ALLOWANCES> 2,563
<INVENTORY> 30,579
<CURRENT-ASSETS> 114,797
<PP&E> 1,908,018
<DEPRECIATION> 754,647
<TOTAL-ASSETS> 1,591,820
<CURRENT-LIABILITIES> 1,403,648
<BONDS> 1,226,707
0
630
<COMMON> 21,218
<OTHER-SE> (1,301,103)
<TOTAL-LIABILITY-AND-EQUITY> 1,591,280
<SALES> 0
<TOTAL-REVENUES> 675,775
<CGS> 0
<TOTAL-COSTS> 652,748
<OTHER-EXPENSES> 1,533
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,591
<INCOME-PRETAX> (51,104)
<INCOME-TAX> 624
<INCOME-CONTINUING> (51,728)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,272)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
