<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-18051
FLAGSTAR COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3487402
(State or other jurisdiction (I.R.S. employer
of incorporation or identification no.)
organization)
203 EAST MAIN STREET 29319-9966
SPARTANBURG, SOUTH CAROLINA (Zip code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: (864) 597-8000.
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
$.50 Par Value, Common Stock
TITLE OF CLASS
$.10 Par Value, $2.25 Series A Cumulative Convertible Exchangeable Preferred
Stock
TITLE OF CLASS
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $19,893,592 based upon the closing sales price of
registrant's Common Stock on February 19, 1997 of $1.03 per share.
As of February 19, 1997, 42,434,669 shares of registrant's Common Stock,
$.50 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Information required by Part III of
this Form 10-K shall be incorporated by reference to the registrant's Proxy
Statement for the 1997 Annual Meeting of Stockholders or shall be included as an
amendment to this Form 10-K to be filed no later than April 30, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I
Item 1. Business................................................................................................... 1
Item 2. Properties................................................................................................. 10
Item 3. Legal Proceedings.......................................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........................................................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................... 13
Item 6. Selected Financial Data.................................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 14
Item 8. Financial Statements and Supplementary Data................................................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................... 27
Item 11. Executive Compensation..................................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 27
Item 13. Certain Relationships and Related Transactions............................................................. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 33
INDEX TO FINANCIAL STATEMENTS.......................................................................................... F-1
SIGNATURES.............................................................................................................
</TABLE>
FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business", "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections, which reflect management's best judgment
based on factors currently known, involve risks and uncertainties. Words such as
"expects", "anticipates", "believes", "intends", and "hopes", variations of such
words and similar expressions are intended to identify such forward-looking
statements. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
but not limited to, the factors discussed in such sections and those set forth
in the cautionary statements contained in Exhibit 99 to this Form 10-K. (See
Exhibit 99 -- Safe Harbor Under the Private Securities Litigation Reform Act of
1995.) Forward-looking information provided by the Company in such sections
pursuant to the safe harbor established under the Private Securities Litigation
Reform Act of 1995 should be evaluated in the context of these factors.
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Flagstar Companies, Inc. ("FCI" or, together with its subsidiaries, the
"Company"), through its wholly-owned subsidiary Flagstar Corporation
("Flagstar"), is one of the largest restaurant companies in the United States,
operating (directly and through franchisees) more than 3,200 moderately priced
restaurants.
FCI is a holding company that was organized in Delaware in 1988 in order to
effect the leveraged buyout of Flagstar in 1989. On November 16, 1992, FCI and
Flagstar consummated the principal elements of a recapitalization (the
"Recapitalization"), which included, among other things, an equity investment by
TW Associates, L.P. ("TW Associates") and KKR Partners II, L.P. ("KKR Partners
II") (collectively, "Associates"), partnerships affiliated with Kohlberg Kravis
Roberts & Co. ("KKR"). As a result of such transactions, Associates acquired
control of FCI and Flagstar. Prior to June 16, 1993, FCI and Flagstar had been
known, respectively, as TW Holdings, Inc. and TW Services, Inc.
As a result of the 1989 leveraged buyout of Flagstar, the Company became
and remains very highly leveraged. While the Company's cash flows have been
sufficient to cover interest costs, operating results since the buyout in 1989
have fallen short of expectations. Such shortfalls have resulted from negative
operating trends due to increased competition, intensive pressure on pricing due
to discounting, declining customer traffic, adverse economic conditions, and
relatively limited capital resources to respond to these changes. These
operating trends have generally continued through 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for additional information.
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly
formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 Company-owned units within the mid-scale
family-style dining category in order to capitalize on the Company's experience
in the restaurant industry and the California market and to maximize the
synergies among the Company's restaurant chains, including increased purchasing
power. The ultimate acquisition price of $313.4 million was paid in
consideration for all of the outstanding stock of FRI-M Corporation ("FRI-M"),
the subsidiary of Family Restaurants, Inc. ("FRI") which owns the Coco's and
Carrows chains. The acquisition was accounted for using the purchase method of
accounting and is reflected in the Company's Consolidated Financial Statements
and Notes thereto included herein as of the acquisition date.
During the third quarter of 1996, the Company sold its two food processing
operations, Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, Inc., a subsidiary of Flagstar (Portion-Trol Foods, Inc. and the Mother
Butler Pies division are hereinafter referred to collectively as "PTF"). These
transactions mark the last in a series of non-restaurant divestitures which
began with the sale of Canteen Corporation, the Company's food and vending
business, in 1994 and also included the 1995 sales of TW Recreational Services,
Inc., a concession and recreation services subsidiary; Volume Services, Inc., a
stadium concession services subsidiary; and Proficient Food Company ("PFC"), the
Company's food distribution subsidiary.
On January 21, 1997, the Company hired Donaldson, Lufkin & Jenrette
Securities Corporation as a financial advisor to assist in exploring
alternatives to improve the Company's capital structure. The Company intends to
explore all alternatives to reduce its debt service requirements, which may
include a negotiated restructuring or other exchange transaction. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for additional information.
RESTAURANTS
Flagstar's operations are conducted through six restaurant chains or
concepts, four chains in the full-service mid-scale dining segment and two in
the quick-service segment. Denny's, Flagstar's largest concept, is the nation's
largest chain of family-style full-service restaurants, with almost 1,600 units
in 49 states, two U.S. territories, and six foreign countries. Denny's largest
concentration domestically is in California and Florida with 531 units in these
two states. According to an independent survey conducted in 1996, Denny's has
the leading share of the national market in the family-style category. Quincy's,
with 199 locations, is one of the largest chains of family-steak restaurants in
the southeastern United States, offering steak, chicken and seafood entrees as
well as a buffet bar, called "America's Home Plate." A weekend breakfast buffet
is also available at most Quincy's locations. Flagstar also operates El Pollo
Loco, a chain of 241 quick-service restaurants featuring flame-broiled chicken
and steak products and related Mexican food items, with a strong regional
presence in California. As indicated above, Flagstar acquired the Coco's and
Carrows chains in 1996. Coco's is a regional
1
<PAGE>
bakery restaurant chain operating 466 units in seven western states and two
foreign countries. Coco's offers a wide variety of fresh-baked goods and value
priced meals that capitalize on emerging food trends in the western United
States. The Carrows chain, consisting of 160 units in seven western states,
specializes in traditional American food, with an emphasis on quality, homestyle
fare at an excellent value. Hardee's is a chain of quick-service restaurants of
which Flagstar, with 580 units located primarily in the Southeast, is the
largest franchisee. Although specializing in sandwiches, Flagstar's Hardee's
restaurants serve fried chicken and offer a breakfast menu that accounts for
approximately 44% of total sales and features the chain's famous
"made-from-scratch" biscuits. For a breakdown of the total revenues contributed
by each referenced concept for the last three years, see the corresponding
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Although operating in two distinct segments of the restaurant
industry -- full-service and quick-service -- the Company's restaurants benefit
from a single management strategy that emphasizes superior value and quality,
friendly and attentive service and appealing facilities. During 1996, the
Company continued its strategy of growth through franchising, adding a net 66
total units to the system (excluding the impact of the additional 610 units
acquired through the Coco's and Carrows acquisition), representing an increase
of 133 franchise units, offset by a decline of 67 Company-operated units. The
increase in franchise units and the decrease in Company-operated units includes
27 units which were sold to franchisees (turnkeyed). The Company intends to
continue focusing on growth in the franchise arena in 1997.
The Company believes its restaurant operations benefit from the diversity
of the restaurant concepts represented by its six chains, the generally strong
market positions and consumer recognition enjoyed by these chains, the benefits
of a centralized support system for purchasing, menu development, human
resources, management information systems, site selection, restaurant design and
construction, and an aggressive new management team. Denny's, Quincy's, Coco's
and Carrows may benefit from the demographic trend of aging baby boomers and the
growing population of elderly persons. The largest percentage of "mid-scale"
customers comes from the 35 and up age group. In the quick-service segment, the
Company is making efforts to recapture Hardee's restaurants' traditionally
strong market position in the Southeast, and expects El Pollo Loco to increase
its strong position in the Southwest.
During the fourth quarter of 1993, the Company approved a restructuring
plan for its restaurant concepts which included, among other things, the
identification of units for sale, closure or conversion to another concept. At
December 31, 1996 four units remain relative to the 1993 restructuring plan, of
which two are scheduled for disposal in 1997. Management has decided to continue
to operate the remaining two units.
During 1995, the Company identified 36 additional underperforming units for
sale or closure of which 29 units were disposed of through 1996 and two are
scheduled for disposal in 1997. Management has decided to continue to operate
the remaining five units.
See Note 3 to the Consolidated Financial Statements for additional
information concerning these identified units.
DENNY'S
Denny's is the largest full-service family-style restaurant chain in the
mid-scale segment in the United States in terms of both number of units and
total revenues. Denny's restaurants currently operate in 49 states, two U.S.
territories, and six foreign countries, with principal concentrations in
California, Florida, Texas, Arizona, Washington, Illinois, Ohio, and
Pennsylvania. Denny's restaurants are designed to provide a casual dining
atmosphere with moderately priced food and quick, efficient service to a broad
spectrum of customers. The restaurants generally are open 24 hours a day, seven
days a week. All Denny's restaurants have uniform menus (with some regional and
seasonal variations) offering traditional family fare (including breakfast
items, steaks, seafood, hamburgers, chicken and sandwiches) and provide both
counter and table service. In 1996, Denny's sales were evenly distributed across
each of its dayparts, with breakfast and lunch representing approximately 60% of
total traffic. Denny's restaurants had a 1996 average guest check of $5.03 and
average annual unit sales of $1.3 million. Denny's currently employs
approximately 41,000 people.
In 1994, the Company began a "reimaging" strategy designed to enhance the
competitive positioning of Denny's. This reimaging strategy involved all
restaurants within a market area and included an updated exterior, new signage,
an improved interior layout with more comfortable seating and enhanced lighting.
The Company completed the reimaging of 306 restaurants through 1995. During
1995, management curtailed this reimaging program in order to focus its
attention and resources on programs specifically designed to enhance the
customer's experience at Denny's by improving service and value positioning. In
1996, the Company started limited exterior refurbishments on 588 units primarily
focusing on exterior improvements, such as landscaping, exterior lighting, sign
replacement and parking lot repairs to enhance the
2
<PAGE>
curb appeal of the restaurants. At December 31, 1996 approximately
three-quarters of the 588 units scheduled to receive this limited refurbishment
have been completed.
Historically, Denny's has had the lowest average guest check within the
family-style category. In January 1996, Denny's rolled out a value menu that
featured value priced items for breakfast, lunch and dinner with tiered pricing
starting at $1.99, $2.99 and $3.99, respectively. At the same time, the Company
launched several initiatives (including a more operationally focused
organizational structure, modern information systems and reengineered restaurant
processes) designed to deliver better service and more consistent product
quality. The Company expects to refine and accelerate these efforts in 1997.
During 1997, the Company intends to continue its focus on opening new
franchise units, and to capitalize on its status as a leading franchisor
(according to a 1996 Arthur Andersen study published in Success Magazine). For
the last three years, Denny's has opened more new units than any competitor in
the mid-scale segment. Furthermore, Denny's has supplemented its franchise
development efforts by selectively selling Company-owned units to franchisees.
During 1996, the Company added a net 82 new Denny's franchise units,
including the sale of 19 Company-owned units to franchisees, bringing the total
franchised units to 702, or 44% of all Denny's restaurants. The initial fee for
a single Denny's franchise is $35,000, and the current royalty payment is
approximately 4% of gross sales.
HARDEE'S
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). The Company is HFS' largest franchisee,
operating 16% of Hardee's restaurants nationwide. HFS is the seventh largest
chain in the United States based on national systemwide sales. Of the 580
Hardee's restaurants operated by the Company at December 31, 1996, 557 were
located in nine southeastern states. Flagstar's Hardee's currently employ
approximately 22,000 people. The Company's Hardee's restaurants provide uniform
menus in a quick-service format targeted to a broad spectrum of customers. The
restaurants offer hamburgers, chicken, roast beef and fish sandwiches, hot dogs
and low-fat yogurt, as well as a breakfast menu featuring Hardee's popular
"made-from-scratch" biscuits. To add variety to its menu, further differentiate
its restaurants from those of its major competitors and increase customer
traffic during the traditionally slower late afternoon and evening periods, HFS
completed the rollout of fresh fried chicken as a menu item in 1993.
Substantially all of the Company's Hardee's restaurants have drive-thru
facilities, which provided 51% of the chain's revenues in 1996. Most of the
restaurants are open 16-17 hours a day, seven days a week. Operating hours of
selected units have been extended to 24 hours a day, primarily on weekends.
Hardee's breakfast menu, featuring the chain's signature "made-from-scratch"
biscuits, accounts for approximately 44% of total sales at the Company's
Hardee's restaurants. The average guest check at the Company's Hardee's was
$3.17 in 1996, and average annual unit sales for the Company's Hardee's
restaurants was $1.0 million.
Management implemented several action plans in the second half of 1996 to
focus on customer satisfaction. These initiatives included new menu boards in
all 580 units and a "touch-up" project in 276 units. The "touch-up" project
included new roofs, paint, trim and wallpaper as well as minor landscaping and
parking lot repairs and is substantially complete. Hardee's has also installed
new microwaves in all units and implemented procedures to provide customers with
a hot product. Additionally, management costs have been reduced by the
elimination of two layers of management and the streamlining of management
reporting relationships. During 1996, the Company closed 14 under-performing
Hardee's units. Management continues to review under-performing units and may in
the future decide to close additional units.
Each Hardee's restaurant is operated under a separate license from HFS.
Each license grants the exclusive right, in exchange for a franchise fee,
royalty payments and certain covenants, to operate a Hardee's restaurant in a
described territory, generally a town or an area measured by a radius from the
restaurant site. Each license has a term of 20 years from the date the
restaurant is first opened for business and is non-cancellable by HFS, except
for the Company's failure to abide by its covenants. Earlier issued license
agreements are renewable under HFS' renewal policy; more recent license
agreements provide for successive five-year renewals upon expiration, generally
at rates then in effect for new licenses. Each year, a number of the Company's
licenses are scheduled for renewal. The Company has historically experienced no
difficulty in obtaining such renewals and does not anticipate any problems in
the future.
The Company's territorial development agreement with HFS which called for
the Company to open a specified number of Hardee's restaurants in a development
territory in the Southeast (and certain adjacent areas) by the end of
3
<PAGE>
1996 was terminated during the fourth quarter of 1995. Termination of such
agreement makes the Company's development rights non-exclusive in the
development territory. As a result, HFS and other Hardee's franchisees along
with the Company are permitted to open Hardee's restaurants in such territory.
In 1997, the focus of the Company will be to better position its Hardee's
restaurants in the marketplace through a variety of means, including dual
branding, refurbishment, and in appropriate circumstances, subject to legal
obligations and restrictions, conversion to another concept.
QUINCY'S
Ranked by 1996 sales, Quincy's is the sixth largest family-steak (grill
buffet) chain in the country and is one of the largest such chains in the
southeastern United States. The Quincy's chain, employing approximately 11,000
people, currently consists of 199 Company-operated limited service restaurants,
which are designed to provide value conscious customers with a varied menu,
abundant portions and great steaks at moderate prices. The average guest check
at Quincy's in 1996 was $6.06. All Quincy's are open seven days a week for lunch
and dinner. The dinner daypart is Quincy's strongest, representing 63% of total
sales in 1996. The average annual unit sales for a Quincy's restaurant was
approximately $1.3 million in 1996. The restaurants serve steak, chicken and
seafood entrees along with a buffet-style food bar, called "America's Home
Plate," offering hot foods, soups, salads and desserts. In addition, weekend
breakfast service, which is available at most locations, allows Quincy's to
utilize its base assets more efficiently.
After experimenting with a number of formats at Quincy's from 1993 through
1995, including enhancements to the scatter bar buffet and a few buffet only
restaurants, management has determined that a repositioning of Quincy's with
better quality food and the "No Mistake Steak" would provide a more effective
marketing strategy. In that regard, Quincy's initiated a "Relaunch" program in
October 1996 designed to improve service basics, food quality and the marketing
effectiveness of Quincy's, and to differentiate Quincy's from other family-steak
restaurants. While the initial results have been positive, the program is still
in its early stages and additional time will be required to measure its full
impact on results.
EL POLLO LOCO
El Pollo Loco is the leading chain specializing in flame-broiled chicken in
the quick-service segment of the restaurant industry. Of the total 241 El Pollo
Loco restaurants, which are located in five southwestern states and two foreign
countries, 86% are located in Southern California. El Pollo Loco currently
employs approximately 2,500 people.
El Pollo Loco restaurants are generally open 12 hours a day, seven days a
week for lunch and dinner. A majority of the Company's El Pollo Loco restaurants
have drive-thru facilities, which provided 33% of the chain's revenues in 1996.
The dinner daypart for El Pollo Loco is the strongest, representing 54% of total
sales.
El Pollo Loco directs its marketing at customers desiring an alternative to
traditional fast food products, offering unique tasting and high quality
products which help position the brand as high quality fast food at a
competitive price. The restaurants are designed to facilitate customer viewing
of the preparation of the flame-broiled chicken, and the food is served quickly,
but prepared slowly, using fresh ingredients. Much of the brand's recent growth
can be attributed to successful menu positioning, new product offerings, dual
branding with the complementary Fosters Freeze dessert line, which commenced in
late 1995, and restaurant remodeling. The average guest check at El Pollo Loco
in 1996 was $6.63 and average annual Company-owned restaurant sales reached
record levels of approximately $1.2 million in 1996.
Based on El Pollo Loco's recent success, the Company is optimistic about
future expansion of the El Pollo Loco concept, principally through franchising
in Texas and in other California markets. By the year 2000, the Company hopes to
add as many as 250 additional El Pollo Loco restaurant units. In 1997, the
Company intends to open relatively few Company-owned El Pollo Loco restaurants
and focus instead on its franchising efforts. To accelerate the franchise
expansion, in 1996 the Company sold eight units to franchisees which were not
part of the growth strategy for Company-owned El Pollo Loco units. In the first
quarter of 1996, the Company secured the international rights to the El Pollo
Loco brand to facilitate expansion opportunities in Mexico and other countries.
In 1996 the chain had a net increase of 24 units, representing a net 31
franchise unit increase, offset by a Company-operated decrease of seven units.
The initial fee for a single El Pollo Loco franchise is $35,000 and the current
royalty payment rate is 4% of gross sales.
El Pollo Loco recently launched a co-branding effort with Flagstar's
Hardee's restaurants in South Carolina. This partnership, which is intended to
take advantage of Hardee's exceptional breakfast business and El Pollo Loco's
strong
4
<PAGE>
lunch and dinner dayparts, will serve as an initial test of the appeal of El
Pollo Loco to consumers in the eastern United States.
COCO'S
Coco's is a regional bakery restaurant chain operating primarily in
California, Arizona, and Texas, as well as Japan and Korea. Coco's currently
consists of 183 Company-operated, five domestic franchised and 278 international
licensed restaurants, and employs approximately 9,000 people. Coco's offers a
variety of fresh-baked goods such as pies, muffins and cookies and value-priced,
innovative menu items that capitalize on emerging food trends in the western
United States. The chain has positioned itself at the upper end of the mid-scale
family-style category, offering a variety of great food, great service, and a
pleasant atmosphere at fair prices, to answer the needs of quality conscious
family diners. The restaurants are generally open 18 hours a day, with several
units opened 24 hours a day on weekends. Coco's restaurants have uniform menus
and serve breakfast, lunch and dinner, as well as a "late night" menu in those
restaurants open around the clock.
Lunch and dinner dayparts are Coco's strongest, comprising 37% and 39% of
1996 sales, respectively. In 1996, the average guest check was $6.79, with
average annual unit sales of approximately $1.5 million.
With a foreign presence that is among the largest of any U.S. based,
non-fast food restaurant chain, Coco's has laid the foundation to aggressively
expand its international operations. Internationally, 21 units have been added
to the system since the Company acquired the chain in May 1996. Additionally,
Coco's is placing new emphasis on domestic franchising as an opportunity to
achieve further growth of the brand. The initial fee for a single Coco's
franchise is $35,000 and the current royalty payment rate is 4% of net sales.
CARROWS
Carrows is a regional mid-scale family-style restaurant chain operating
primarily in seven western states. Carrows currently consists of 160
Company-operated units and employs approximately 7,000 people. Carrows
specializes in traditional American food, with an emphasis on quality, homestyle
fare at an excellent value. The concept appeals strongly to families with
children as well as to mature adults -- two groups expected to grow rapidly into
the next century. The menu is always current, but not trendy, and is revised
regularly to reflect the most appealing foods that guests demand. The
restaurants are generally open 18 hours a day, with 25% open 24 hours a day.
Carrows restaurants have uniform menus and serve breakfast, lunch and dinner, as
well as a "late night" menu in those restaurants open 24 hours a day.
Lunch and dinner dayparts are Carrows' strongest, comprising 30% and 44% of
1996 sales, respectively. In 1996, the average guest check was $6.26, with
average annual unit sales of approximately $1.3 million.
OPERATIONS
The Company believes that successful execution of basic restaurant
operations in each of its restaurant chains is critical to its success.
Accordingly, significant effort is devoted to ensuring that all restaurants
offer quality food and service. Through a network of division, region, district
and restaurant level managers or leaders, the Company standardizes
specifications for the preparation and efficient service of quality food, the
maintenance and repair of its premises and the appearance and conduct of its
employees. Major emphasis is placed on the proper preparation and delivery of
the product to the consumer and on the cost-effective procurement and
distribution of quality products.
A principal feature of the Company's restaurant operations is the constant
focus on improving operations at the unit level. Unit managers are especially
hands-on and versatile in their supervisory activities. Region and district
leaders have no offices and spend substantially all of their time in the
restaurants. A significant majority of restaurant management personnel began as
hourly employees in the restaurants and therefore perform restaurant functions
and train by example. The Company benefits from an experienced management team.
Each of the Company's restaurant chains maintains training programs for
employees and restaurant managers. Restaurant managers and assistant managers
receive training at specially designated training units. Areas of training for
managers include customer interaction, kitchen management and food preparation,
data processing and cost control techniques, equipment and building maintenance
and leadership skills. Video training tapes demonstrating various restaurant job
functions are located at each restaurant location and are viewed by employees
prior to a change in job function or using new equipment or procedures.
5
<PAGE>
Each of the Company's restaurant chains continuously evaluates its menu.
New products are developed in Company test kitchens and then introduced in
selected restaurants to determine customer response and to ensure that
consistency, quality standards and profitability are maintained. If a new item
proves successful at the research and development level, it is usually tested in
selected markets, both with and without market support. A successful menu item
is then incorporated into the restaurant system. In the case of the Hardee's
restaurants, menu development is coordinated with HFS.
Financial and management control is facilitated by the use of point-of-sale
("POS") systems in all of the Company's restaurants which transmit detailed
sales reports, payroll data and periodic inventory information for management
review. During the fourth quarter of 1996, the Company began rolling out new POS
systems in its Company-owned Denny's restaurants. These systems are expected to
help the restaurants improve customer service by providing more accurate and
faster turnaround of customer orders and better inventory control. In addition,
the new POS systems will aid in decision-making by providing sales information
on a more timely basis, with a higher level of detail for better data analysis.
Over the next two years, management intends to install new POS systems in all of
Flagstar's Company-owned restaurants pursuant to its information services
agreement with Integrated Systems Solution Corporation ("ISSC") as more fully
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ADVERTISING
The Company uses an integrated process to promote its concepts, including
media, menu strategy, interior/exterior building design, style of service and
specialized promotions to help differentiate itself in the marketplace. Media
advertising is primarily product oriented, generally featuring high margin,
special entrees or meal combinations presented and priced to convey high value.
Such advertising is conducted through national, regional and local television
advertising as well as radio, outdoor and print advertising depending on the
target market. Sophisticated consumer marketing research techniques are utilized
to measure customer satisfaction and customers' evolving expectations. During
1996, the Company spent from 3% to 7% of its concepts' gross sales on
advertising.
In accordance with the HFS licensing agreements, the Company spent
approximately 7.1% of its Hardee's units' total gross sales on marketing and
advertising during 1996. Of this amount, approximately 3.0% of total gross sales
is contributed to media cooperatives and HFS' national advertising fund. The
balance was directed by the Company at local levels.
SITE SELECTION
The success of any restaurant is influenced significantly by its location.
The site selection process for Company-owned restaurants consists of three main
phases: strategic planning, site identification and detailed site review. The
planning phase ensures that restaurants are located in strategic markets. In the
site identification phase, the major trade areas within a market area are
analyzed and a potential site identified. The final and most time consuming
phase is the detailed site review. In this phase, the site's demographics,
traffic and pedestrian counts, visibility, building constraints and competition
are studied in detail. A detailed budget and return on investment analysis are
also completed. The Company considers its site selection standards and
procedures to be rigorous and will not compromise those standards or procedures
in order to achieve accelerated growth.
RAW MATERIALS SOURCES AND AVAILABILITY
The Company has a centralized purchasing program which is designed to
ensure uniform product quality as well as reduced food, beverage and supply
costs. The Company's size provides it with significant purchasing power which
often enables it to obtain products at more favorable prices from several
nationally recognized manufacturers.
Food and packaging products for the Company's Hardee's restaurants are
purchased from HFS and independent suppliers approved by HFS. A substantial
portion of the products for the Company's Hardee's and Quincy's restaurants is
obtained from MBM Corporation ("MBM"), an independent supplier/distributor. In
connection with the 1995 sale of its distribution subsidiary, PFC, to MBM, the
Company entered into an eight year distribution agreement, subsequently extended
to ten years, with MBM under which PFC/MBM will continue to distribute and
supply certain products and supplies to the Company's Denny's, Hardee's,
Quincy's and El Pollo Loco restaurants. Beginning in November 1997, Coco's and
Carrows will become subject to similar agreements. There are no volume
requirements relative to these agreements; however, the products named therein
must be purchased through PFC/MBM unless they are unable to make delivery within
a reasonable period. During the third quarter of 1996, the Company sold
Portion-Trol Foods, Inc. and the Mother Butler Pies division of Denny's, its two
food processing operations. In conjunction with each of these sales, the Company
entered into a five year purchasing agreement with the acquirer under which the
Company is required to
6
<PAGE>
purchase certain minimum annual volumes. If such volumes are not purchased, the
agreements provide for the payment of penalties.
The Company believes that satisfactory sources of supply are generally
available for all the items regularly used by its restaurants and has not
experienced any material shortages of food, equipment, or other products which
are necessary to its restaurant operations.
SEASONALITY
The Company's business is moderately seasonal. Restaurant sales are
generally greater in the second and third calendar quarters (April through
September) than in the first and fourth calendar quarters (October through
March). Occupancy and other operating costs, which remain relatively constant,
have a disproportionately negative effect on operating results during quarters
with lower restaurant sales. The Company's working capital requirements also
fluctuate seasonally, with its greatest needs occurring during its first and
fourth quarters.
TRADEMARKS AND SERVICE MARKS
The Company, either directly or through wholly-owned subsidiaries, has
registered certain trademarks and service marks with the United States Patent
and Trademark office and in international jurisdictions, some of which include
Denny's(Register mark), El Pollo Loco(Register mark), Quincy's(Register mark),
Coco's(Register mark), Carrows(Register mark), and Grand Slam
Breakfast(Register mark). The Company regards its trademarks and service marks
as important to the identification of its restaurants and believes they are of
material importance to the conduct of its business. Domestic trademark and
service mark registrations are renewable at various intervals from 10 to 20
years, while international trademark and service mark registrations have various
durations from five to 20 years. The Company generally intends to renew
trademarks and service marks which come up for renewal. The Company owns or has
rights to all trademarks it believes are material to its restaurant operations.
RESEARCH AND DEVELOPMENT
The Company engages in research and development on an ongoing basis,
testing new products and procedures for possible introduction into the Company's
systems. The Company has also frequently helped HFS develop and test-market new
products. While research and development activities are important to the
Company's business, amounts expended for these activities are not material.
COMPETITION
The restaurant industry can be divided into three main segments:
full-service restaurants, quick-service restaurants, and other miscellaneous
establishments. Since the early 1970s, growth in eating places has been driven
primarily by quick-service restaurants. On a segment-wide basis, the
full-service and quick-service restaurants currently have approximately the same
revenues and an equal share of the market. Full-service restaurants include the
mid-scale (family-style and family-steak), casual dining and upscale (fine
dining) segments. The mid-scale segment, which includes Coco's, Carrows, Denny's
and Quincy's, is characterized by complete meals, menu variety and moderate
prices ($5-$7 average check), and includes a small number of national chains,
many local and regional chains, and thousands of independent operators. The
casual dining segment, which typically has higher menu prices ($8-$16 average
check) and availability of alcoholic beverages, primarily consists of regional
chains and small independents. The quick-service segment, which includes
Hardee's and El Pollo Loco, is characterized by low prices (generally, $3-$5
average check), finger foods, fast service, and convenience. A small number of
large sandwich, pizza, and chicken chains overwhelmingly dominate the
quick-service segment.
The restaurant industry is highly competitive and affected by many factors,
including changes in economic conditions affecting consumer spending, changes in
socio-demographic characteristics of areas in which restaurants are located,
changes in customer tastes and preferences and increases in the number of
restaurants generally and in particular areas. Competition among a few major
companies that own or operate quick-service restaurant chains is especially
intense. Restaurants, particularly those in the quick-service segment, compete
on the basis of name recognition and advertising, the quality and perceived
value of their food offerings, the quality and speed of their service, the
attractiveness of their facilities and, to a large degree in a recessionary
environment, price and perceived value.
Management believes the Company's principal competitive strengths include
its restaurants' brand name recognition; the value, variety and quality of food
products served; the quality and training of its employees; and the Company's
market penetration, which has resulted in economies of scale in a variety of
areas, including advertising, distribution and field supervision.
7
<PAGE>
GOVERNMENT REGULATIONS
The Company and its franchisees are subject to various local, state and
Federal laws and regulations governing various aspects of the restaurant
business, including, but not limited to, health, sanitation, environmental
matters, safety, disabled persons' access to its restaurant facilities, the sale
of alcoholic beverages and regulations regarding hiring and employment
practices. The operation of the Company's franchise system is also subject to
regulations enacted by a number of states and rules promulgated by the Federal
Trade Commission. The Company believes that it is in material compliance with
applicable laws and regulations, but it cannot predict the effect on operations
of the enactment of additional requirements in the future.
The Company is subject to Federal and state laws governing matters such as
minimum wage, overtime and other working conditions. At December 31, 1996, a
substantial number of the Company's employees were paid the minimum wage.
Accordingly, increases in the minimum wage or decreases in the allowable tip
credit (which reduces the minimum wage that must be paid to tipped employees in
certain states) increase the Company's labor costs. This is especially the case
in California, where there is no tip credit. In November, 1996, an initiative in
California was passed raising the minimum wage in California from $4.25 to $5.00
per hour, effective March 1, 1997, and to $5.75 per hour effective March 1,
1998. Also the Federal minimum wage increased from $4.25 per hour to $4.75 per
hour on October 1, 1996 and will increase again to $5.15 per hour on September
1, 1997. Employers must pay the higher of the Federal or state minimum wage. The
Company will attempt to offset increases in the minimum wage through pricing and
other cost control efforts; however, there can be no assurance that the Company
or its franchisees will be able to pass such additional costs on to its
customers.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each executive
officer of FCI, along with senior level executive officers of Flagstar.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL OCCUPATION OR
NAME AGE EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
<S> <C> <C>
James B. Adamson 49 Chairman, President and Chief Executive Officer of FCI and Flagstar (1995-present);
Chief Executive Officer of Burger King Corporation (1993-1995); Chief Operating
Officer of Burger King Corporation (1991-1993); President of Burger King U.S.A. Retail
Division (1991); Executive Vice President, Marketing of Revco, Inc. (1988-1991).
Craig S. Bushey 41 Senior Vice President of Flagstar and President of Hardee's Division (May
1996-present); Managing Director, Vice President (Western Europe) of Burger King
(1995-May 1996); Region Vice President (Central Region) of Burger King (1994-1995);
Burger King Reengineering Team (1993-1994); Region Vice President (Midwest Retail) of
Burger King (1992-1993); Region Vice President (Atlanta Retail) of Burger King
(1990-1992).
C. Robert Campbell 52 Vice President and Chief Financial Officer of FCI and Executive Vice President and
Chief Financial Officer of Flagstar (1995-present); Executive Vice President of Human
Resources and Administration for Ryder System, Inc. (1991-1995); Executive Vice
President -- Finance of Vehicle Leasing and Services Division of Ryder System, Inc.
(1981-1991).
Ronald B. Hutchison 47 Vice President and Treasurer of Flagstar (1995 to present); Vice President and
Treasurer of Leaseway Transportation Corp. (1988-1995).
Donna M. Mascolo 42 Vice President and Corporate Controller of Flagstar (February 1996-present); Vice
President and Broker Associate, Transworld Business Brokers, Inc., (1995-present);
President, DonMar Global Business Services (1995-present); Regional Vice President and
Chief Financial Officer, Kentucky Fried Chicken International Latin
American/Carribbean Region (1990-1994).
Edna K. Morris 45 Executive Vice President of Flagstar and President of Quincy's Division (April
1996-present); Executive Vice President, Human Resources and Corporate Affairs of
Flagstar (1995-April 1996); Senior Vice President, Human Resources of Flagstar
(1993-1995); Vice President, Education and Development of Flagstar (1992-1993); Senior
Vice President/Human Resources of HFS (1987-1992).
Rhonda J. Parish 40 Vice President and General Counsel of FCI and Senior Vice President and General
Counsel of Flagstar (1995-present); Secretary of FCI and Flagstar (1995-present);
Assistant General Counsel of Wal-Mart Stores, Inc. (1990-1994); Corporate Counsel of
Wal-Mart Stores, Inc. (1983-1990).
John A. Romandetti 46 Senior Vice President of Flagstar and President, Denny's Division (January
1997-present); Senior Vice President of Flagstar and President of El Pollo Loco
(1995-present); Vice President of Operations for Burger King Corporation (1989-1995).
Mark L. Shipman 47 Senior Vice President of Flagstar and President of Coco's/Carrows Division (May
1996-present); Vice President of Acquisitions and Development of Flagstar (1995-May
1996); Vice President of Administration of Denny's Division (1993-1995); Vice
President of Operations (West) of Denny's Division (1991-1993).
Paul R. Wexler 53 Senior Vice President, Procurement and Distribution of Flagstar (1995-present); Vice
President, Procurement and Quality Assurance -- Marriott International (1991-1995).
Stephen W. Wood 38 Senior Vice President, Human Resources and Corporate Affairs of Flagstar (April
1996-present); Vice President, Compensation, Benefits, and Employee Information
Systems and Corporate Office Human Resources of Flagstar (1993-April 1996); Senior
Director, Compensation, Benefits and Employee Information Systems of Flagstar (1993);
Director, Benefits and Executive Compensation of Hardee's Food System (1991-1993).
</TABLE>
EMPLOYEES
At December 31, 1996, the Company had approximately 93,000 employees. Many
of the Company's restaurant employees work part-time, and many are paid at or
slightly above minimum wage levels. The Company has experienced no significant
work stoppages and considers its relations with its employees to be
satisfactory.
9
<PAGE>
ITEM 2. PROPERTIES
Most of the Company's restaurants are free-standing facilities. Presented
below is a schedule of the average property and building square footage, as well
as average seating capacity for each of the Company's concepts:
<TABLE>
<CAPTION>
AVERAGE AVERAGE AVERAGE
PROPERTY BUILDING SEATING
CONCEPT SIZE IN SQ. FT. SIZE IN SQ. FT. CAPACITY
<S> <C> <C> <C>
Carrows.................................................... 35,000 5,400 160
Coco's..................................................... 35,000 5,000 160
Denny's.................................................... 42,000 4,750 150
El Pollo Loco.............................................. 20,000 2,100 60
Hardee's................................................... 52,000 3,400 95
Quincy's................................................... 64,000 7,100 250
</TABLE>
The following table sets forth certain additional information regarding the
Company's restaurant properties as of December 31, 1996:
<TABLE>
<CAPTION>
LAND LEASED
LAND AND AND LAND AND
BUILDING BUILDING BUILDING
CONCEPT OWNED OWNED LEASED TOTAL
<S> <C> <C> <C> <C>
Carrows................................................ 3 10 147 160
Coco's................................................. 2 39 142 183
Denny's................................................ 254 36 604 894
El Pollo Loco.......................................... 9 33 54 96
Hardee's............................................... 288 100 192 580
Quincy's............................................... 152 41 6 199
Total................................................ 708 259 1,145 2,112
</TABLE>
10
<PAGE>
The number and location of the Company's restaurants in each chain as of
December 31, 1996 are presented below:
<TABLE>
<CAPTION>
DENNY'S EL POLLO LOCO COCO'S
FRANCHISED FRANCHISED FRANCHISED
STATE OWNED LICENSED HARDEE'S QUINCY'S OWNED LICENSED OWNED LICENSED CARROWS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama.................. 1 8 156 45 -- -- -- -- --
Alaska................... -- 8 -- -- -- -- -- -- --
Arizona.................. 27 47 -- -- 1 1 17 1 9
Arkansas................. 1 5 3 -- -- -- -- -- --
California............... 223 129 -- -- 95 123 135 4 120
Colorado................. 25 13 -- -- -- -- 6 -- --
Connecticut.............. 5 3 -- -- -- -- -- -- --
Delaware................. 3 -- -- -- -- -- -- -- --
District of Columbia..... -- -- -- -- -- -- -- -- --
Florida.................. 102 77 56 41 -- -- -- -- --
Georgia.................. -- 24 10 11 -- -- -- -- --
Hawaii................... 4 2 -- -- -- -- -- -- --
Idaho.................... -- 7 -- -- -- -- -- -- --
Illinois................. 47 10 -- -- -- -- -- -- --
Indiana.................. 14 9 -- -- -- -- 3 -- --
Iowa..................... -- 5 -- -- -- -- -- -- --
Kansas................... 9 4 -- -- -- -- -- -- --
Kentucky................. -- 20 -- -- -- -- -- -- --
Louisiana................ 7 2 1 -- -- -- -- -- --
Maine.................... -- 4 -- -- -- -- -- -- --
Maryland................. 14 16 -- -- -- -- -- -- --
Massachusetts............ 9 -- -- -- -- -- -- -- --
Michigan................. 38 2 -- -- -- -- -- -- --
Minnesota................ 13 4 -- -- -- -- -- -- --
Mississippi.............. 2 2 40 8 -- -- -- -- --
Missouri................. 29 6 -- -- -- -- 2 -- --
Montana.................. -- 5 -- -- -- -- -- -- --
Nebraska................. -- 4 -- -- -- -- -- -- --
Nevada................... 12 6 -- -- -- 6 -- -- 7
New Hampshire............ 2 1 -- -- -- -- -- -- --
New Jersey............... 11 2 -- -- -- -- -- -- --
New Mexico............... 2 12 -- -- -- -- -- -- 4
New York................. 17 18 -- -- -- -- -- -- --
North Carolina........... 7 12 58 39 -- -- -- -- --
North Dakota............. -- 3 -- -- -- -- -- -- --
Ohio..................... 33 22 18 1 -- -- -- -- --
Oklahoma................. 9 13 -- -- -- -- -- -- --
Oregon................... 5 18 -- -- -- -- -- -- 9
Pennsylvania............. 51 3 2 -- -- -- -- -- --
Rhode Island............. -- -- -- -- -- -- -- -- --
South Carolina........... 9 5 123 42 -- 1 -- -- --
South Dakota............. -- 1 -- -- -- -- -- -- --
Tennessee................ 3 11 110 9 -- -- -- -- --
Texas.................... 62 57 -- -- -- 4 14 -- 10
Utah..................... 7 12 -- -- -- -- -- -- --
Vermont.................. -- 2 -- -- -- -- -- -- --
Virginia................. 19 8 3 3 -- -- -- -- --
Washington............... 50 19 -- -- -- -- 6 -- 1
West Virginia............ -- 3 -- -- -- -- -- -- --
Wisconsin................ 12 7 -- -- -- -- -- -- --
Wyoming.................. -- 6 -- -- -- -- -- -- --
Canada................... 10 20 -- -- -- -- -- -- --
International............ -- 25 -- -- -- 10 -- 278 --
Total.................. 894 702 580 199 96 145 183 283 160
</TABLE>
In addition to the restaurant locations set forth above, the Company also
owns a nineteen story, 187,000 square foot office tower, which serves as its
corporate headquarters, located in Spartanburg, South Carolina. The Company's
corporate offices currently occupy approximately sixteen floors of the tower,
with the balance leased to others. The Company also owns a 107,000 square foot
building located in Irvine, California. The Irvine facility, which was acquired
in 1996 in the Coco's and Carrows acquisition, is used as a commissary, which
manufactures soups, salad dressings and sauces for Coco's and Carrows, and as
warehouse and office space (currently leased to FRI). This facility is currently
in the process of being sold. The completion of such sale is expected in the
first quarter of 1997.
See "Certain Relationships and Related Transactions -- Description of
Indebtedness" and Note 4 to the accompanying Consolidated Financial Statements
for information concerning encumbrances on certain properties of the Company.
ITEM 3. LEGAL PROCEEDINGS
FCI, Flagstar, El Pollo Loco and Denny's, along with several former
officers and directors of those companies, are named as defendants in an action
filed on August 28, 1991 in the Superior Court of Orange County, California. The
11
<PAGE>
remaining plaintiffs, who are former El Pollo Loco franchisees, allege that the
defendants, among other things, failed or caused a failure to promote, develop
and expand the El Pollo Loco franchise system in breach of contractual
obligations to the plaintiff franchisees and made certain misrepresentations to
the plaintiffs concerning the El Pollo Loco system. Asserting various legal
theories, the plaintiffs seek actual and punitive damages in excess of $90
million, together with declaratory and certain other equitable relief. The
defendants have denied all material allegations, and certain defendants have
filed cross-complaints against various plaintiffs in the action for breach of
contract and other claims. Since the filing of the action the defendants have
entered into settlements with six of the plaintiffs leaving two plaintiff
franchisees remaining in the lawsuit. With respect to the remaining plaintiffs,
discovery has been completed, and a trial date to hear the outstanding issues in
the case is anticipated sometime during 1997.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for Federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by the Company for the seven taxable periods ended December 31, 1992. In
the third quarter of 1996 this proposed deficiency was reduced by approximately
$7.0 million as a direct result of the passage of the Small Business Jobs
Protection Act ("the Act") in August 1996. This Act includes a provision that
clarified Internal Revenue Code Section 162(k) to allow for amortization of
borrowing costs incurred by a corporation in connection with a redemption of its
stock. The Company believes the remaining proposed deficiencies relating to the
proposed disallowance of certain costs incurred in connection with the 1989
leveraged buyout of Flagstar are substantially incorrect, and it intends to
continue to contest such proposed deficiencies.
On June 15, 1994, a derivative action was filed in the Alameda County
Superior Court for the State of California by Mr. Adam Lazar, purporting to act
on behalf of the Company, against the Company's directors and certain of its
current and former officers alleging breach of fiduciary duty and waste of
corporate assets by the defendants relating to alleged acts of mismanagement or
the alleged failure to act with due care, resulting in policies and practices at
Denny's that allegedly gave rise to certain public accommodations class action
lawsuits against the Company that were settled in 1994. The action seeks
unspecified damages against the defendants on behalf of the Company and its
stockholders, including punitive damages, and injunctive relief. The defendants
deny any wrongdoing. There has been limited discovery in this action to date
with the parties having reached an agreement in principle as to a settlement of
the action. Such settlement is contingent upon the approval of the special
litigation committee of the Company's Board and the approval of the Court.
Other proceedings are pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company, and in
others presenting allegations that are nonroutine and include compensatory or
punitive damage claims. The ultimate legal and financial liability of the
Company with respect to the matters mentioned above and these other proceedings
cannot be estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not materially affect the financial position
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of FCI, $.50 par value per share (the "Common Stock"), is
currently traded on the NASDAQ National Market tier of the NASDAQ Stock Market
under the symbol "FLST." As of February 19, 1997, 42,434,669 shares of Common
Stock were outstanding, and there were approximately 12,000 record and
beneficial stockholders. FCI has not paid and does not expect to pay dividends
on its outstanding Common Stock. Restrictions contained in the instruments
governing the outstanding indebtedness of Flagstar restrict its ability to
provide funds that might otherwise be used by FCI for the payment of dividends
on its Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and Note
4 to the accompanying Consolidated Financial Statements of the Company. The
following table lists the high and low closing sales prices for the Common Stock
for each quarter in the last two fiscal years. The sales prices were obtained
from the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1995
First quarter...................................................................... 7 7/8 5 1/2
Second quarter..................................................................... 6 1/2 4 1/4
Third quarter...................................................................... 6 1/8 4 5/8
Fourth quarter..................................................................... 5 1/2 2 7/8
1996
First quarter...................................................................... 5 2 7/8
Second quarter..................................................................... 4 1/4 2 7/8
Third quarter...................................................................... 3 5/16 1 15/16
Fourth quarter..................................................................... 2 1/8 29/32
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain selected financial data concerning the Company
for each of the five years ended December 31, 1996. Such data generally have
been derived from the Consolidated Financial Statements of the Company for such
periods which have been audited. The following information should be read in
conjunction with the Consolidated Financial Statements of the Company and Notes
thereto presented elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
(IN MILLIONS, EXCEPT RATIOS) (A) (A) (A) (A) (K)
<S> <C> <C> <C> <C> <C>
Income Statement data:
Operating revenue.................................. $2,443.0 $2,615.2 $2,666.0 $2,571.5 $2,542.3
Operating income (loss)............................ 196.7 (1,102.4)(b) 211.5(c) 98.2(d) 156.4
Loss from continuing operations (e)................ (39.2) (1,238.6) (16.8) (132.9) (85.5)
Primary earnings (loss) per share applicable to
common shareholders:
Continuing operations............................ (1.82) (29.56) (0.14) (3.47) (2.35)
Discontinued operations (e)...................... (0.50) (9.67) 7.52 1.82 --
Net income (loss)(f)............................. (9.29) (40.14) 7.16 (1.64) (2.35)
Fully diluted earnings (loss) per share applicable
to common shareholders:
Continuing operations............................ (1.82) (29.56) 0.26 (3.47) (2.35)
Discontinued operations (e)...................... (0.50) (9.67) 6.05 1.82 --
Net income (loss) (f)............................ (9.29) (40.14) 6.13 (1.64) (2.35)
Cash dividends per common share (g)................ -- -- -- -- --
Ratio of earnings to fixed charges (h)............. -- -- -- -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (h)................ 45.8 1,318.2 19.3 133.0 101.9
Balance Sheet data (at end of period):
Current assets (i)................................. 98.4 122.2 186.1 285.3 185.5
Working capital (deficiency) (i)(j)................ (256.3) (273.0) (205.6) (122.2) (297.7)
Net property and equipment......................... 1,269.9 1,167.2 1,196.4 1,104.4 1,168.6
Total assets....................................... 3,170.9 1,538.9 1,587.5 1,507.8 1,687.4
Long-term debt..................................... 2,171.3 2,341.2 2,067.6 1,996.1 2,179.4
</TABLE>
(a) Certain amounts for the four years ended December 31, 1995 have been
reclassified to conform to the 1996 presentation.
(b) Operating loss for the year ended December 31, 1993 reflects charges for the
write-off of goodwill and certain other intangible assets of $1,104.6
million and the provision for restructuring charges of $158.6 million.
13
<PAGE>
(c) Operating income for the year ended December 31, 1994 reflects a recovery of
restructuring charges of $7.2 million.
(d) Operating income for the year ended December 31, 1995 reflects a provision
for restructuring charges of $15.9 million and a charge for impaired assets
of $51.4 million.
(e) The Company has classified as discontinued operations, Canteen Corporation,
a food and vending subsidiary, sold in 1994, TW Recreational Services, Inc.
("TWRS"), a recreation services subsidiary, and Volume Services, Inc.
("VS"), a stadium concessions subsidiary. TWRS and VS were sold during 1995.
(f) For the year ended December 31, 1992, net loss includes extraordinary losses
of $6.25 per share related to premiums paid to retire certain indebtedness
and to charge-off the related unamortized deferred financing costs and
losses of $0.72 per share for the cumulative effect of a change in
accounting principle related to implementation of Statement of Financial
Accounting Standards No. 106. For the year ended December 31, 1993, net loss
includes extraordinary losses of $0.62 per share related to the repurchase
of Flagstar's 10% Convertible Junior Subordinated Debentures Due 2014 (the
"10% Debentures") and to the charge off of unamortized deferred financing
costs related to a prepayment of Flagstar's senior term loan; net loss for
1993 also includes a charge of $0.29 per share due to a change of accounting
method relating to the discount rate applied to the Company's liability for
self insurance claims pursuant to Staff Accounting Bulletin No. 92. For the
year ended December 31, 1994, net income includes an extraordinary loss of
$0.22 per share, as calculated for primary earnings per share, and $0.18 per
share, as calculated for fully diluted earnings per share, relating to the
charge off of unamortized deferred financing costs associated with the
Company's prepayment of its senior term loan and working capital facility
during the second quarter of 1994. For the year ended December 31, 1995, net
loss includes a $0.01 per share extraordinary gain relating to the
repurchase of $25.0 million of senior indebtedness net of the charge off of
unamortized deferred financing costs.
(g) Flagstar's bank credit agreement prohibits, and its public debt indentures
significantly limit, distribution to FCI of funds that might otherwise be
used by it to pay Common Stock dividends. See Note 4 to the accompanying
Consolidated Financial Statements appearing elsewhere herein.
(h) The ratio of earnings to fixed charges has been calculated by dividing
pre-tax earnings by fixed charges. Earnings, as used to compute the ratio,
equal the sum of income from continuing operations before income taxes and
fixed charges excluding capitalized interest. Fixed charges are the total
interest expense including capitalized interest, amortization of debt
expenses and a rental factor that is representative of an interest factor
(estimated to be one third) on operating leases.
(i) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $480.8 million, $103.2 million, and $77.3 million as
of December 31, 1992 through 1994, respectively and $5.1 million as of
December 31, 1996. Such assets held for sale relate primarily to the
Company's food and vending and concessions and recreation services
subsidiaries.
(j) A negative working capital position is not unusual for a restaurant
operating company. The increase in the working capital deficiency from
December 31, 1992 to December 31, 1993 is attributable primarily to an
increase in restructuring and other liabilities. The decrease in the working
capital deficiency from December 31, 1993 to December 31, 1994 is due
primarily to an increase in cash following the sale of the Company's food
and vending subsidiary during 1994. The decrease in the working capital
deficiency from December 31, 1994 to December 31, 1995 is due primarily to
an increase in cash following the 1995 sales of the Company's (i)
distribution subsidiary, PFC, net of current assets and liabilities of such
subsidiary, and (ii) the concession and recreation services subsidiaries.
The increase in the working capital deficiency from December 31, 1995 to
December 31, 1996 reflects the use of the proceeds from the 1995 sales noted
above and the proceeds of the sale of both Portion-Trol Foods, Inc. and
Mother Butler Pies for operating needs and for the acquisition of Coco's and
Carrows. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
(k) Reflects the acquisition in May 1996 of Coco's and Carrows.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company's Management's Discussion and Analysis is divided into two
sections. The first section analyzes the results of operations; first on a
consolidated basis, then for each of Flagstar's six restaurant concepts. The
second section addresses the Company's liquidity and capital resources. This
discussion should be read in conjunction with "Selected Financial Data" and the
Consolidated Financial Statements and other more detailed financial information
appearing elsewhere herein.
14
<PAGE>
RESULTS OF OPERATIONS
COMPANY CONSOLIDATED
<TABLE>
<CAPTION>
($ IN MILLIONS) 1994 1995 1996
<S> <C> <C> <C>
Net Company Sales........................................................ $2,620 $2,512 $2,471
Franchise Revenue........................................................ 46 59 71
Total Revenue............................................................ 2,666 2,571 2,542
Operating Expenses....................................................... 2,455 2,473 2,386
Operating Income......................................................... 211 98 156
Depreciation/Amortization................................................ 130 133 130
Net Interest Expense From Continuing Operations.......................... 227 229 255
Income Tax (Benefit)..................................................... (2) 0 (16)
Net Income (Loss)........................................................ $ 364 $ (55) $ (85)
</TABLE>
15
<PAGE>
1996 RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
UNITS
CONVERTED
FROM
COMPANY
ENDING TO ENDING
UNITS UNITS UNITS FRANCHISE UNITS
12/31/95 OPENED CLOSED (TURNKEY) 12/31/96
<S> <C> <C> <C> <C> <C>
Denny's
Company Owned 933 -- (20) (19) 894
Franchised Units 596 72 (10) 19 677
Int'l Licensees 24 1 -- -- 25
1,553 73 (30) -- 1,596
Hardee's 593 1 (b) (14) -- 580(c)
Quincy's 203 -- (4) -- 199
El Pollo Loco
Company Owned 103 1 -- (8) 96
Franchised Units 112 15 -- 8 135(c)
Int'l Licensees 2 8 -- -- 10
217 24 -- -- 241
Subtotal 2,566 98 (48) -- 2,616
Coco's (a)
Company Owned 188 -- (5) -- 183
Franchised Units 6 -- (1) -- 5
Int'l Licensees 252 26 -- -- 278
446 26 (6) -- 466
Carrows (a) 161 2 (3) -- 160
Subtotal 607 28 (9) -- 626
3,173 126 (57) -- 3,242
</TABLE>
(a) Coco's and Carrows were acquired by Flagstar in May of 1996. Year-to-date
data is provided for comparison purposes only. Coco's and Carrows restaurant
unit activity since acquisition date is as follows:
<TABLE>
<CAPTION>
UNITS
CONVERTED
FROM
UNITS COMPANY
AT TO ENDING
ACQUISITION UNITS UNITS FRANCHISE UNITS
DATE OPENED CLOSED (TURNKEY) 12/31/96
<S> <C> <C> <C> <C> <C>
Coco's
Company Owned 184 -- (1) -- 183
Franchised Units 6 -- (1) -- 5
Int'l Licensees 257 21 -- -- 278
Carrows 163 -- (3) -- 160
610 21 (5) -- 626
</TABLE>
(b) Represents the re-opening of a unit that was temporarily closed at December
31, 1995.
(c) Unit count includes one Hardee's and El Pollo Loco dual brand unit.
16
<PAGE>
COMPANY CONSOLIDATED
1996 VS. 1995
OPERATING TRENDS: During 1996, the Company experienced comparable store
sales increases at Denny's and El Pollo Loco, due to the continued success of
Denny's value menu strategy, El Pollo Loco's successful menu positioning and new
product introduction efforts, dual branding at El Pollo Loco with Foster's
Freeze, and favorable results from remodeled restaurants. However, the Company
continued to experience significant declines in comparable store sales at
Hardee's due to continued competitive promotions by quick-service competitors.
Quincy's also showed comparable store sales declines reflecting the general
trend in the mid-scale family-steak category as well as operational issues
relative to training, food quality, service and facilities. During the third
quarter management began to address these operational issues. New products were
developed and tested, training was implemented at all levels, facilities were
improved and management made plans to relaunch the Quincy's brand. This program
is still in its early stages and it will take time to measure its full impact on
results. Primarily as a result of the lower revenues at Quincy's, the Company
experienced a reduction in operating income of $7.3 million (after removing the
impact on 1995 results of the restructuring and impairment charges taken in 1995
and removing the impact on 1996 results of the operating income decrease in 1996
resulting from the dispositions of PFC and PTF and the increases in operating
income in 1996 attributable to the acquisition of Coco's and Carrows). Overall,
the trends experienced by the Company since the 1989 leveraged buyout generally
have continued through 1996; operating income has been insufficient to cover the
interest and debt expense resulting in continued losses from continuing
operations. The external factors that have contributed to these trends,
including increased competition and intensive pressure on pricing due to
discounting, are expected to continue.
In recognition of these matters, in addition to addressing the negative
trends at Hardee's and Quincy's, management has taken steps to address the
Company's debt burden and its impact on operations. For further information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company's CONSOLIDATED REVENUE for 1996 was $2,542.3 million, a
decrease of $29.2 million, or 1.1%, compared to 1995. The impact on revenues of
the Coco's and Carrows acquisition ($163.7 million and $131.4 million,
respectively in revenue was contributed by Coco's and Carrows in 1996), was
somewhat offset by the loss of revenue attributable to the dispositions of the
Company's food distribution and processing operations, PFC and PTF, in September
1995 and 1996, respectively (the decrease in revenue in 1996 as compared to 1995
as a result of these dispositions totaled $218.2 million). Excluding the effects
of such acquisition and dispositions, revenue, on a comparable basis, was
$2,245.9 million in 1996, a decrease of $106.0 million (4.5%) compared to 1995.
The revenue decrease primarily reflects the impact of lower comparable store
sales at Hardee's and Quincy's and 63 fewer Company-operated restaurants as
compared with the prior year (excluding the impact of the Coco's and Carrows
acquisition), somewhat offset by an increase in franchise revenue of $11.7
million, reflecting 133 additional franchised units in 1996. At Hardee's and
Quincy's, comparable store sales decreased 7.2% and 10.8%, respectively.
Comparable store sales at Denny's and El Pollo Loco increased 1.7% and 7.2%,
respectively; however due to decreases in the number of Company-operated
restaurants in comparison to 1995, neither concept reported increases in revenue
from Company-operated units.
OPERATING EXPENSES decreased by $87.3 million (3.5%) in 1996 to $2,385.9
million as compared to 1995. This decrease reflects the impact of several
significant events which affect the comparability of 1996 and 1995 results,
including: a restructuring charge and charge for impaired assets totaling $67.2
million in 1995; a decrease in depreciation expense in 1996 of $5.4 million due
to the impairment write-down in 1995; and a decrease in expenses in 1996 of
$201.6 million due to the sales of PTF and PFC. These items are offset, in part,
by the impact of the operating expenses of Coco's and Carrows which were
acquired in 1996 and total $280.2 million.
Excluding the effect of the items noted above, operating expenses decreased
$93.3 million in 1996 in comparison to 1995. This decrease is primarily
attributable to a decline in costs associated with the decline in operating
revenue, the positive impact of cost cutting measures (reflected in improved
margins at Denny's, Hardee's and El Pollo Loco), and the increase of $8.2
million of the current year amortization of the deferred gains attributable to
the sales of PFC and PTF over the prior year amount. This amortization is
recorded as a reduction of product costs. These decreases in operating expense
are somewhat offset by a decrease in gains from the sales of restaurants to
franchisees reflected in operating expenses from $24.5 million in 1995 to $8.4
million in 1996 and an increase in the cost to administer the consent decree
entered into in 1993 of $5.9 million over the prior year to $11.3 million.
OPERATING INCOME for 1996 increased by $58.2 million to $156.4 million in
comparison to 1995 as a result of the factors noted in the preceding paragraphs.
17
<PAGE>
INTEREST AND DEBT EXPENSE, NET, from continuing operations and discontinued
operations totaled $254.7 million for the year ended December 31, 1996 as
compared to $248.0 million for the prior year. The net increase is due
principally to the addition of $17.6 million in interest and debt expense
associated with the Coco's and Carrows acquisition. This increase is partially
offset by the following: a decrease in interest expense of approximately $5.3
million due to a lower level of principal outstanding during the 1996 period
(excluding the impact of the Coco's and Carrows acquisition) resulting primarily
from the repurchase of approximately $25.0 million of senior indebtedness on
September 30, 1995 and the scheduled repayments of long-term debt during 1996;
an increase in interest income of $3.2 million during 1996 due to increased cash
and cash equivalents prior to the acquisition of Coco's and Carrows; a decline
of $1.6 million in interest expense during the 1996 period associated with lower
interest rates related to interest rate exchange agreements; and the elimination
of $0.8 million in interest expense associated with various operations that were
sold in 1995.
THE BENEFIT FROM INCOME TAXES from continuing operations for the year ended
December 31, 1996 reflects an effective income tax rate of 16% compared with 0%
for 1995. The change from the prior year can be attributed to the recognition of
refunds in the current period due to the carryback of current year tax losses
and the reversal of certain reserves established in prior years in connection
with proposed deficiencies from the Internal Revenue Service (See Note 6 to the
accompanying Consolidated Financial Statements for additional information).
THE LOSS FROM CONTINUING OPERATIONS was $85.5 million for the year ended
December 31, 1996 as compared with $132.9 million for the prior year. The net
loss for the 1996 year end was $85.5 million compared to a net loss for the
prior year of $55.2 million. The prior year included $77.2 million of income
from discontinued operations reflecting gains of $77.9 million on the related
sales of the discontinued operations in the fourth quarter of 1995.
ACCOUNTING CHANGE
In 1996, the Company adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement 123, "Accounting for Stock Based
Compensation" (SFAS 123) while continuing to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The adoption of SFAS 123 did not impact the
Statements of Consolidated Operations or the Consolidated Balance Sheets
included herein.
1995 VS. 1994
The Company's CONSOLIDATED REVENUE for 1995 decreased by approximately
$94.5 million (3.5%) as compared with 1994 primarily reflecting the sale of PFC
in September 1995 coupled with the continued weakness of the Company's Hardee's
operations.
The Company's OPERATING EXPENSES, before considering the effects of the
provision for (recovery of) restructuring charges and charge for impaired
assets, decreased by $55.7 million (2.3%) in 1995 as compared with 1994. Such
decrease is principally due to a decrease of approximately $43.6 million
attributable to the sale of Denny's distribution subsidiary, PFC, which was sold
in September 1995 and an increase in gains on sales of restaurants from $8.8
million in 1994 to $24.5 million in 1995.
TOTAL INTEREST AND DEBT EXPENSE from continuing and discontinued operations
decreased by $18.1 million in 1995 as compared to 1994 (an $18.5 million
decrease attributable to discontinued operations offset by a $0.4 million
increase in continuing operations) principally as a result of a reduction in
interest expense of $7.0 million following the payment during June 1994 of the
principal amount ($170.2 million) outstanding under the term facility of the
Company's credit agreement then outstanding and certain other indebtedness upon
the sale of the Company's food and vending subsidiary, a reduction in interest
expense of $4.0 million during 1995 for other indebtedness related to other
subsidiaries which have been sold, and a decrease in interest expense of $6.1
million during 1995 related to interest rate exchange agreements.
DISCONTINUED OPERATIONS
The Company's concession and recreation services businesses were sold
during 1995 resulting in a net gain of $77.9 million. These businesses have been
accounted for as discontinued operations and recorded operating revenues of
$322.3 million during 1995, a decrease of $3.1 million (0.9%) from 1994.
Revenues related to the stadium concession subsidiary increased $9.2 million
during 1995 to $190.8 million from $181.6 million in 1994. Operating income and
depreciation and amortization expense of the concession subsidiary were $2.4
million and $10.9 million, respectively, during
18
<PAGE>
1995 as compared with $6.5 million and $9.8 million, respectively, in 1994. Such
decrease in operating income during 1995 is due principally to a decrease in
average attendance at major league baseball games during the 1995 season.
Revenues related to the recreation services subsidiary decreased by $12.3
million during 1995 to $131.5 million from $143.8 million during 1994. Operating
income and depreciation and amortization expense of the recreation services
subsidiary for 1995 were $14.7 million and $3.8 million, respectively, as
compared with $16.3 million and $4.7 million, respectively, during 1994. Such
decrease in revenues and operating income of the recreation services subsidiary
is due principally to the loss of the service contract at the Kennedy Space
Center during 1995.
RESTRUCTURING
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan. The
plan generally involved a reduction in personnel and a decision to outsource the
Company's information systems function. Operating expenses for 1995 reflect a
provision for restructuring of $15.9 million including charges for severance of
$5.4 million, $7.6 million for the write-down of computer hardware and other
assets, and $2.9 million for various other charges.
ACCOUNTING CHANGE
During 1995 the Company adopted Statement of Financial Accounting Standards
No. 121 which resulted in a charge to operating expenses of $51.4 million for
the write-down of Denny's, Hardee's and Quincy's restaurant properties. This
charge reflected the write-down of 99 units which the Company planned to
continue to operate and an additional 36 units which were to be closed or sold
in 1996. Of the 36 units, the Company had closed 29 units through 1996. It
intends to dispose of two of the remaining units in 1997 and continue to operate
the other five.
EXTRAORDINARY ITEMS
The Company recognized an extraordinary gain totaling $0.5 million, net of
income taxes, during 1995 which represents a gain on the repurchase of $25.0
million principal amount of certain indebtedness, net of the charge-off of the
related unamortized deferred financing costs. During 1994, the Company also
recognized an extraordinary loss totalling $11.7 million, net of income tax
benefits of $0.2 million representing the charge-off of unamortized deferred
financing costs associated with the prepayment in June 1994 of senior bank debt.
RESTAURANT OPERATIONS
DENNY'S
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Net Company Sales (a).................................................... $1,508 $1,442 $1,202
Franchise Revenue........................................................ 40 49 55
Total Revenue (a)........................................................ 1,548 1,491 1,257
Operating Expenses (a)................................................... 1,425 1,394 1,135
Operating Income (a)(b).................................................. 123 97 122
Depreciation/Amortization (a)............................................ $ 68 $ 70 $ 53
Comparable Store Sales Increase.......................................... 0.3% 2.4% 1.7%
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands):
Company Operated....................................................... $1,248 $1,283 $1,313
Franchised............................................................. 1,060 1,086 1,090
Average Guest Check...................................................... $ 4.75 $ 4.86 $ 5.03
Average Weekly Traffic Count............................................. 5,047 5,071 5,025
Operated Units
Company Operated....................................................... 978 933 894
Franchise.............................................................. 512 596 677
International.......................................................... 58 24 25
Total............................................................. 1,548 1,553 1,596
</TABLE>
19
<PAGE>
(a) Includes the operating results of the Company's food processing (PTF) and
distribution (PFC) operations.
(b) Operating income reflects a provision for restructuring of $5 million and a
charge for impaired assets of $24 million for the year ended December 31,
1995. For a discussion of the provision for restructuring and charge for
impaired assets see Notes 1 and 3 to the Consolidated Financial Statements.
1996 VS. 1995
REVENUE from Company-owned units for 1996 decreased by $240.1 million
(16.7%) from 1995 to $1,201.6 million. $218.2 million of this decrease can be
attributed to the dispositions of PFC and PTF in 1995 and 1996, respectively.
The remaining decrease of $52.2 million primarily results from operating 39
fewer Company-owned restaurants, partially offset by gains in comparable store
sales of $30.3 million.
Average unit sales in 1996 increased by 2.4% versus 1995. This increase is
comprised of a 0.7% gain resulting from the impact of closed restaurants and
those sold to franchisees, and a 1.7% gain in comparable store sales. The gains
in comparable store sales were driven by an increase in average guest check,
which was somewhat offset by a decrease in customer traffic. The full year gains
in average check were aided by a September price increase that eliminated the
$1.99 tier from the value menu. This price increase was triggered by commodity
cost increases, minimum wage legislation and labor rate pressures. While the
price increase had a positive impact on guest check averages, this increase was
somewhat offset by a decline in customer counts.
FRANCHISE REVENUE in 1996 increased by $6.2 million (12.7%) over 1995, to
$55.1 million. The increase in franchise revenue is primarily attributable to 82
additional franchised units in 1996. $2.2 million of the increase was generated
from initial fees from new franchise openings while the balance reflects an
increase in royalties from units added in 1995 and 1996. Nineteen Company-owned
units were sold to franchisees during 1996, generating $7.7 million in gains
which are reflected as a reduction in operating expense.
OPERATING EXPENSES for 1996 compared to 1995 decreased by $258.9 million
(18.6%) to $1,134.9 million. This decrease is partially due to the restructuring
charge and charge for impaired assets included in the 1995 results ($5.4 million
and $23.9 million, respectively), a $2.8 million decrease in 1996 depreciation
expense related to the 1995 impairment write-down, a $4.7 million increase in
the current year amortization of the deferred gain attributable to the sales of
PFC and PTF over the prior year amounts and a decrease of $201.6 million due to
the dispositions of PFC and PTF. The effect of these items is somewhat offset by
a decrease in the gains from restaurants sold to franchisees ($20.7 million in
1995 versus $7.7 million in 1996). Excluding these items, operating expenses
decreased $33.5 million from the prior year. This decrease reflects several
factors. Food costs and restaurant labor were favorable in comparison to 1995 by
$14.0 million and $8.8 million, respectively, reflecting the decline in the
number of Company-owned restaurants as well as the positive impact of cost
control measures in the restaurants. These decreases were offset, in part, by
higher commodity prices (particularly for pork, dairy, eggs and bread) over the
prior year and increases in the Federal and state minimum wages.
OPERATING INCOME for 1996 improved by $25.1 million (25.8%), as compared to
1995, to $121.9 million as a result of the factors noted above.
1995 VS. 1994
Denny's REVENUES decreased by $57.3 million (3.7%), of which $53.0 million
was attributable to a decrease in outside revenues at the Company's food
processing and distribution subsidiaries. Such revenue decrease reflects the
sale of the Company's distribution subsidiary during the third quarter of 1995.
The remaining decrease of $4.3 million is primarily due to a 45-unit net
decrease in the number of Company-owned restaurants at December 31, 1995 as
compared to December 31, 1994, which was partially offset by an 84-unit increase
in the number of franchised restaurants. Comparable store sales at Denny's
increased 2.4% during 1995 as compared with 1994, reflecting increases in
average check of 2.3% and 0.2% in traffic. During 1995, Denny's completed
remodels on 182 Company-owned restaurants.
OPERATING EXPENSES before the provision for restructuring charges and
charge for impaired assets at Denny's decreased $59.9 million principally due to
decreases in product costs including $43.6 million attributable to Denny's
distribution subsidiary which was sold in September 1995. Operating expenses for
1994 include twelve months of charges for the food distribution subsidiary;
whereas, 1995 includes approximately nine months of such charges. Denny's
operating expenses before the provision for restructuring charges and charge for
impaired assets were also reduced during 1995
20
<PAGE>
by gains on the sale of restaurants to franchisees of $20.7 million. This
compares to gains in 1994 of $8.8 million. Such decreases in operating expenses
were offset, in part, by an increase in advertising expense of $6.0 million.
HARDEE'S
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Revenue.................................................................. $ 701 $ 660 $ 603
Operating Expenses....................................................... 625 656 562
Operating Income (a)..................................................... 76 4 41
Depreciation/Amortization................................................ $ 41 $ 42 $ 37
Comparable Store Sales (Decrease)........................................ (3.6%) (8.6%) (7.2%)
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands)............................... $1,206 $1,104 $1,041
Average Guest Check...................................................... $ 3.11 $ 3.16 $ 3.17
Average Weekly Traffic Count............................................. 7,459 6,713 6,320
Operated Units........................................................... 595 593 580
</TABLE>
(a) Operating income reflects a provision for restructuring of $8 million and a
charge for impaired assets of $24 million for the year ended December 31,
1995. For a discussion of the provision for restructuring and charge for
impaired assets, see Notes 1 and 3 to the Consolidated Financial Statements.
1996 VS. 1995
REVENUE for Hardee's for 1996 decreased by $56.9 million (8.6%) from 1995,
to $602.9 million. The revenue decrease was primarily driven by 13 fewer
restaurants in the Company's chain and a decrease in average unit sales in
comparison to 1995. Comparable store sales decreased by 7.2% primarily due to
decreased customer traffic in the face of continued aggressive
"value/discounting" promotions by competitors within the quick-service segment
and inclement weather during the first quarter. In the second half of the year,
Flagstar's Hardee's began focusing less on discounting and more on overall
value, introducing items which are somewhat higher priced but which management
believes still offer good value for the money. The latest such promotion
introduces the "Monster" line of items, featuring a large burger and a large
omelet biscuit. This strategy has helped drive guest check averages; however,
the increased average guest check has only marginally offset the decrease in
traffic.
OPERATING EXPENSES in 1996 decreased $93.4 million (14.2%), to $562.2
million, as compared to 1995. This decrease is partially driven by the
restructuring charge and charge for impaired assets included in the 1995 results
($7.8 million and $23.7 million, respectively), a $2.3 million decrease in 1996
depreciation and amortization expense resulting from the impairment write-down
in 1995 and a $1.9 million increase in the current year amortization of the
deferred gain attributable to the sales of PFC and PTF over the prior year
amount. This decrease also reflects the impact of lower comparable store sales,
a decrease in the number of restaurants and management's increased focus on
achieving improvement in operating efficiencies. The success of such cost
control efforts is reflected by the fact that even after removing the impact on
1995 of the restructuring and impairment charges and the related reduction in
depreciation in 1996, operating income would have increased $2.7 million over
1995, despite a decrease in revenue of $56.9 million. Labor savings had the most
significant impact in reducing operating expenses. Labor as a percent of sales
was 1% lower than in 1995. This was accomplished primarily by reducing in-store
labor to become more competitive and more in line with quick-service industry
standards, allowing management to reduce costs despite the impact of an
increased Federal minimum wage.
OPERATING INCOME for 1996 improved by $36.5 million, to $40.7 million, in
comparison to 1995 as a result of the factors described above.
1995 VS. 1994
Hardee's REVENUE decreased during 1995 by $40.6 million, to $659.9 million,
from $700.5 million during 1994, principally due to a decline of 8.6% in
comparable store sales. The decrease in comparable store sales resulted from a
10.0% decline in traffic which was mitigated by a 1.6% increase in average
check. The decline in traffic was impacted by continued aggressive promotions
and discounting by quick-service competitors. During 1995, the Company remodeled
59 Hardee's restaurants.
21
<PAGE>
At Hardee's, OPERATING EXPENSES before considering the effects of the
provision for restructuring charges and charge for impaired assets decreased by
$0.8 million. This reflects increased expenses during 1995 of $12.8 million for
general and administrative, payroll and benefits, restructuring of field
management, workers' compensation charges, and expenses related to promotional
programs. Such increases were more than offset by a $13.6 million decrease in
product costs directly associated with decreased revenues in 1995.
QUINCY'S
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Revenue.................................................................. $ 284 $ 294 $ 259
Operating Expenses....................................................... 261 272 252
Operating Income (a)..................................................... 23 22 7
Depreciation/Amortization................................................ $ 11 $ 12 $ 11
Comparable Store Sales Increase (Decrease)............................... 2.9% 4.8% (10.8%)
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands)............................... $1,350 $1,438 $1,301
Average Guest Check...................................................... $ 5.79 $ 5.88 $ 6.06
Average Weekly Traffic Count............................................. 4,486 4,703 4,132
Operated Units........................................................... 207 203 199
</TABLE>
(a) Operating income reflects a restructuring charge and charge for impaired
assets of $0.6 million for the year ended December 31, 1995. For a
discussion of the provision for restructuring and charge for impaired assets
see Notes 1 and 3 to the Consolidated Financial Statements.
1996 VS. 1995
REVENUE for Quincy's in 1996 decreased by $35.1 million (11.9%) from 1995,
to $259.2 million. The revenue decrease was primarily driven by a decrease in
customer traffic, as well as four fewer restaurants, offset somewhat by an
increase in the average guest check. Customer traffic, which decreased by 12%
versus 1995, was primarily responsible for the 10.8% decrease in comparable
store sales. The significant decline in customer traffic reflects, among other
things, continued traffic declines in the family-steak category, in general, as
well as a difficult comparison to the prior year (which benefited from several
newly remodeled units), in addition to the unsuccessful introduction of a new
steak product earlier in the year. Also, over the last two years management has
experimented with various formats at Quincy's, which has led to some customer
confusion and a lack of focus for the concept.
To address this issue, in October, management initiated a "Relaunch"
program to re-establish the brand and give customers a consistent experience. In
this regard, during the third quarter of 1996, new products were developed and
tested, training was implemented at all levels, facilities were improved, and
management rolled out a new value steak promotion, the "No Mistake Steak", which
also introduced a number of new products accompanied by increased media
advertising. Although the "Relaunch" results to date have been positive,
management notes that the program is still in its early stages and that it will
take time to measure its full impact on results.
OPERATING EXPENSES in 1996 as compared to 1995 decreased by $19.4 million
(7.1%), to $252.5 million. This decrease was driven by the decline in sales and
a $1.2 million increase in the current year amortization of the deferred gain
attributable to the sales of PFC and PTF over the prior year amount. These
decreases were partially offset by the additional costs in product, labor and
advertising to institute the "Relaunch" program. Primarily due to the training
efforts related to re-launching the brand, labor costs increased $3.0 million
(1.2%) over 1995. Also, after a period of no advertising for Quincy's in August
and September as the Relaunch plan was formulated, advertising was increased
significantly in the fourth quarter to support the reintroduction of the brand,
resulting in an overall increase in advertising expense of approximately $3.0
million in 1996 over the prior year.
OPERATING INCOME in 1996 as compared to 1995 declined by $15.7 million, to
$6.6 million, as a result of the factors described above.
1995 VS. 1994
Quincy's REVENUES increased by $9.9 million (3.5%) during 1995 as compared
to 1994 despite a four-unit decrease in the number of restaurants operated at
December 31, 1995 as compared to December 31, 1994. Such increase in revenues
22
<PAGE>
is primarily due to a 4.8% increase in comparable store sales as a result of
increases of 3.3% in traffic and 1.5% in average check. During 1995, the
increased traffic is partially attributable to the remodeling of 35 of its
restaurants.
An increase in OPERATING EXPENSES is principally attributable to increases
in payroll and benefits expense of $4.4 million, product costs of $3.3 million
associated primarily with the increase in revenues during 1995, and advertising
expense of $2.7 million.
EL POLLO LOCO
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Net Company Sales........................................................ $ 127 $ 117 $ 114
Franchise Revenue........................................................ 6 10 14
Total Revenue............................................................ 133 127 128
Operating Expenses....................................................... 124 114 114
Operating Income......................................................... 9 13 14
Depreciation/Amortization................................................ $ 6 $ 5 $ 6
Comparable Store Sales Increase.......................................... 6.5% 2.0% 7.2%
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands):
Company Operated....................................................... $ 932 $1,019 $1,155
Franchised............................................................. 893 858 852
Average Guest Check...................................................... $ 6.59 $ 6.76 $ 6.63
Average Weekly Traffic Count............................................. 2,720 2,894 3,350
Operated Units:
Company Operated....................................................... 127 103 96
Franchise.............................................................. 78 112 135
International.......................................................... 4 2 10
Total............................................................. 209 217 241
</TABLE>
1996 VS. 1995
REVENUE from Company-owned El Pollo Loco units for 1996 decreased by $1.6
million (1.4%) from 1995 to $114.7 million. The revenue decrease was primarily
driven by a net decrease of seven restaurants (eight units sold to franchisees,
one Company-owned unit opened), partially offset by gains in comparable store
sales.
Comparable store sales increased 7.2%, driven by increased guest traffic,
which on a comparable store basis, increased 9.9%. The increased traffic was
principally attributable to the highly successful "Pollo Bowl," rolled out in
late 1995, which currently accounts for 11% of the menu mix, as well as other
key promotions. Comparable store sales also benefited from the Foster's Freeze
rollout. The decrease in average guest check was driven by a change in value
focus in 1996. During 1995, most of the value offerings featured very large
amounts of food (such as the $14.99 Holiday Feast), whereas in 1996, value was
approached on a quantity and price basis (such as the Pollo Bowl and $9.99 for
12 pieces of chicken).
FRANCHISE REVENUE in 1996 increased $3.3 million (31.7%) over 1995 to $13.7
million. The increase in revenue is primarily due to 31 additional franchise
units in 1996. Of the increase in revenue, $0.8 million was generated from
initial fees collected as new franchised units were opened, with the remainder
coming from the ongoing royalty stream of the additional units. Eight units were
sold to franchisees during 1996, generating $0.7 million in gains which are
reflected as a reduction of operating expenses.
OPERATING EXPENSES increased $0.5 million in 1996 over the prior year, to
$114.6 million, due to a decrease in gains recognized on the sale of restaurants
to franchisees, from $3.8 million in 1995 to $0.7 million in 1996. Removing the
impact of the decrease in restaurant sales to franchisees, El Pollo Loco
experienced a net decrease in operating expenses of $2.6 million reflecting,
among other things, lower product costs associated with the Pollo Bowl and other
new products, a decrease in direct labor costs due to improved labor scheduling
and staffing initiatives, food cost control measures and a $0.4 million increase
in the current year amortization of the deferred gain attributable to the sales
of PFC and PTF over
23
<PAGE>
the prior year amount. These improvements were attained despite an increase in
chicken prices versus 1995, and the increased Federal and state minimum wages.
OPERATING INCOME for 1996 in comparison to 1995, improved by $1.2 million
(9.5%) to $13.8 million as a result of the factors discussed above.
1995 VS. 1994
REVENUES at El Pollo Loco decreased $6.4 million (4.8%) to $126.7 million
during 1995, from $133.1 million during 1994, primarily due to a 24-unit net
decrease in the number of Company-owned restaurants following the sale of units
to franchisees. Comparable store sales at Company-owned El Pollo Loco units
increased by 2.0% reflecting an increase in average check of 2.4% which was
partially offset by a 0.4% decrease in traffic. During 1995, El Pollo Loco
completed remodels on 57 of its Company-owned restaurants.
OPERATING EXPENSES at El Pollo Loco decreased by $9.6 million during 1995
due primarily to a 24-unit net decrease at December 31, 1995 as compared with
December 31, 1994 in the number of Company-operated restaurants following the
sale of restaurants to franchisees. El Pollo Loco's operating expenses during
1995 included gains on the sale of restaurants of $3.8 million as compared with
$1.2 million during 1994.
COCO'S AND CARROWS
The Company's operating results for the year ended December 31, 1996
include 31 weeks of Coco's and Carrows operations subsequent to their
acquisition in May. Coco's and Carrows revenues for the period were $163.7
million and $131.4 million, respectively. Operating expenses for Coco's and
Carrows were $155.5 million and $124.7 million, respectively.
The following information is provided for analysis purposes only as it
includes information for periods prior to the acquisition of Coco's and Carrows
by the Company on May 23, 1996:
COCO'S AND CARROWS
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
($ IN MILLIONS, EXCEPT AVG. UNIT DATA)
Net Company Sales....................................................................................... $ 502 $ 487
Franchise Revenue....................................................................................... 4 4
Total Revenue........................................................................................... 506 491
Operating Expenses...................................................................................... 474 477
Operating Income........................................................................................ 32 14
Depreciation/Amortization............................................................................... $ 28 $ 31
COCO'S
Comparable Store Sales (Decrease)....................................................................... (5.0%) (1.6%)
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands).............................................................. $1,506 $1,462
Average Guest Check..................................................................................... $ 6.72 $ 6.79
Average Weekly Traffic Count............................................................................ 4,271 4,159
Operated Units:
Company Operated...................................................................................... 188 183
Franchise............................................................................................. 6 5
International......................................................................................... 252 278
Total............................................................................................ 446 466
CARROWS
Comparable Store Sales (Decrease) Increase.............................................................. (0.2%) 0.1%
AVERAGE UNIT DATA:
Average Annual Unit Sales ($ in thousands).............................................................. $1,372 $1,343
Average Guest Check..................................................................................... $ 6.09 $ 6.26
Average Weekly Traffic Count............................................................................ 4,363 4,252
Operated Units.......................................................................................... 161 160
</TABLE>
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has met its liquidity requirements with
internally generated funds, external borrowings, and in recent years, proceeds
from asset sales. The Company expects to continue to rely on internally
generated funds, supplemented by available working capital advances under its
Second Amended and Restated Credit Agreement, dated as of April 10, 1996, among
TWS Funding, Inc., as borrower, Flagstar, certain lenders and co-administrative
agents named therein, and Citibank, N.A., as funding agent (as amended, from
time to time, the "Credit Agreement"), and other external borrowings, as its
primary sources of liquidity.
The following table sets forth, for each of the years indicated, a
calculation of the Company's cash from operations available for debt repayment,
dividends on the Preferred Stock (as defined below), and capital expenditures:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
DECEMBER DECEMBER
31, 31,
($ IN MILLIONS) 1995 1996
<S> <C> <C>
Net loss.............................................................. $(55.2) $(85.5)
Charge for impaired assets............................................ 51.4 --
Provision for restructuring charges................................... 15.9 --
Non-cash charges (credits)............................................ 120.3 119.9
Deferred income tax benefit........................................... (3.5) (9.0)
Discontinued operations............................................... (77.2) --
Extraordinary items, net.............................................. (0.5) --
Change in certain working capital items............................... (6.1) 7.4
Change in other assets and other liabilities, net..................... (31.0) (16.1)
Cash from operations available for debt repayment, dividends on
Preferred Stock, and capital expenditures........................... $14.1 $16.7
</TABLE>
The cash flows generated by Coco's and Carrows, which was acquired in May
1996, are required by the instruments governing the indebtedness incurred to
finance such acquisition, to service the debt issued by FRD, Flagstar's
acquisition subsidiary and, therefore, other than for the payment of certain
management fees and tax reimbursements payable to Flagstar under certain
conditions, are currently unavailable to be used to service the debt of Flagstar
and its other subsidiaries. Coco's and Carrows' cash flows from operations
included in the Company's total cash flow from operations, was $21.2 million in
1996.
The Credit Agreement, which expires on April 10, 1999, provides Flagstar
with a $150 million revolving credit facility. It is available for working
capital advances and letters of credit, with a working capital advance sublimit
of $75 million. As of December 31, 1996, there were no working capital advances
outstanding under this credit facility, although approximately $79.7 million
letters of credit were outstanding; accordingly, $70.3 million was available for
additional letters of credit or working capital borrowings. The Credit Agreement
and the indentures governing the Company's outstanding public debt contain
negative covenants that restrict, among other things, the Company's ability to
pay dividends, incur additional indebtedness, further encumber its assets and
purchase or sell assets. In addition, the Credit Agreement includes provisions
for the maintenance of a minimum level of interest coverage, limitations on
ratios of indebtedness to earnings before interest, taxes, depreciation and
amortization (EBITDA) and limitations on annual capital expenditures.
In connection with the acquisition of Coco's and Carrows, FRI-M, which
became thereby a wholly-owned subsidiary of the Company, obtained a new credit
facility consisting of a $56 million term loan, which matures on August 31,
1999, and a $35 million revolving credit facility, which is available until
August 31, 1999 for Coco's and Carrows general working capital advances and
letters of credit. Such facility is unavailable to Flagstar and its other
subsidiaries.
25
<PAGE>
As of December 31, 1996, scheduled debt maturities of long-term debt
relative to Flagstar and its subsidiaries for the years 1997 and thereafter are
as follows:
<TABLE>
<CAPTION>
FLAGSTAR
EXCLUDING
($ IN MILLIONS) FRD FRD
<S> <C> <C>
1997............................................................ 43$.3 $ 19.6
1998............................................................ 34.2 23.6
1999............................................................ 27.5 23.7
2000............................................................ 323.3 3.4
2001............................................................ 277.9 3.1
Thereafter...................................................... 1,298.0 164.7
</TABLE>
In addition to scheduled maturities of principal, on a consolidated basis,
approximately $255 million of cash will be required in 1997 to meet interest
payments on long-term debt and $14 million will be required for dividends on
FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock, par
value $0.10 per share (the "Preferred Stock") should FCI's Board of Directors
declare such dividends.
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 through 1996. The Company's cash flows have been sufficient to fund
its operations and make interest payments when due. However, the Company's core
businesses have not experienced cash flow growth sufficient to provide adequate
funds to invest for future growth.
These conditions present both short-term and long-term financial challenges
to the Company. To address these matters, management is developing plans to
maintain its liquidity and improve its capital structure. Specifically, the
Board of Directors elected not to declare the January 15, 1997 quarterly
dividend on the Preferred Stock. In addition, the new management team that has
been put in place during the last 18 months is identifying cost reduction and
revenue enhancement strategies intended to improve operations. While these
actions may enhance the short-term financial position of the Company, over the
long-term management has concluded that a substantial restructuring or
refinancing of the Company's debt, which may include a negotiated restructuring
or other exchange transaction, will be required to allow the Company to meet its
long-term debt obligations and will be a prerequisite to future growth through
additional investment in its restaurants. Accordingly, on January 21, 1997, the
Company hired Donaldson, Lufkin & Jenrette Securities Corporation as a financial
advisor to assist in exploring alternatives to improve the Company's capital
structure. Management intends to explore all alternatives to reduce the
Company's debt service requirements and allow the Company to reinvest in its
core businesses and grow the restaurant concepts over the long-term. There can
be no assurance, however, that management will be successful in this regard.
With respect to short-term liquidity, management believes that through a
combination of cash generated from operations, funds available through the bank
credit facility, various cash management measures and other sources, adequate
liquidity exists to meet the Company's working capital, debt service and capital
expenditure requirements for at least the next twelve months. Although no
assurances can be given in this regard, management believes, based on the
Company's historical relationship with its banks, that it will be able, as
necessary, to maintain access to funds available under the Credit Agreement.
The Company's principal capital requirements are those associated with
opening new restaurants and remodeling and maintaining its existing restaurants
and facilities. During 1996, total capital expenditures were approximately $67.3
million, of which approximately $1.3 million was used to remodel existing
restaurants, $21.8 million was used to refurbish existing restaurants, $7.5
million was used for POS systems and other information technology assets, $0.8
million was used to open new restaurants, and $35.9 million was used to maintain
existing facilities and equipment. Of the total capital expenditures,
approximately $12.3 million were financed through capital leases. Capital
expenditures during 1997 are expected to total approximately $90 million;
however, the Company is not committed to spending this amount and could spend
less if circumstances warrant.
The Company is able to operate with a substantial working capital
deficiency because (i) restaurant operations and most food service operations
are conducted primarily on a cash (and cash equivalent) basis with a low level
of accounts receivable, (ii) rapid turnover allows a limited investment in
inventories, and (iii) accounts payable for food, beverages and supplies usually
become due after the receipt of cash from the related sales. At December 31,
1996, the Company's
26
<PAGE>
working capital deficiency, exclusive of net assets held for sale, was $297.7
million as compared with $122.2 million at the end of 1995. Such increase
reflects the use of the Company's excess cash at December 31, 1995, which
resulted from the sales of the Company's non-restaurant business in 1995, to
acquire the Coco's and Carrows restaurant chains and to fund the Company's 1996
operations.
On February 22, 1996, the Company entered into an agreement with Integrated
Systems Solutions Corporation (ISSC). The ten year agreement for $340.6 million
(including $17.6 million for FRD), which requires annual payments by the Company
ranging from $24.0 million to $47.5 million, provides for ISSC to manage and
operate the Company's information systems, as well as develop and implement new
systems and applications to enhance information technology for the Company's
corporate headquarters, restaurants, and field management. ISSC will oversee
data center operations, applications development and maintenance, voice and data
networking, help desk operations, and POS technology.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements which appears on page F-1 herein.
FORM 11-K INFORMATION
FCI, pursuant to Rule 15d-21 promulgated under the Securities Exchange Act
of 1934, as applicable, will file as an amendment to this Annual Report of Form
10-K the information, financial statements and exhibits required by Form 11-K
with respect to the Flagstar 401(k) Plan and the Denny's 401(k) Plan.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to the Company's directors
and compliance by the Company's directors, executive officers and certain
beneficial owners of the Company's Common Stock with Section 16(a) of the
Securities Exchange Act of 1934 shall be furnished by incorporation by reference
of all information under the captions entitled "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for its 1997 Annual Meeting of the Stockholders (the "Proxy
Statement") or included as an amendment to this Form 10-K to be filed no later
than April 30, 1997. The information required by this item with respect to the
Company's executive officers appears in Item I of Part I of this Annual Report
on Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item shall be furnished by incorporation
by reference of all information under the caption entitled "Executive
Compensation" in the Company's Proxy Statement or included as an amendment to
this Form 10-K to be filed no later than April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item shall be furnished by incorporation
by reference of all information under the caption "General -- Ownership of
Capital Securities" in the Company's Proxy Statement or included as an amendment
to this Form 10-K to be filed no later than April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The information required by this item shall be furnished by incorporation
by reference of all information under the caption "Certain Transactions" in the
Company's Proxy Statement or included as an amendment to this Form 10-K to be
filed no later than April 30, 1997.
27
<PAGE>
DESCRIPTION OF INDEBTEDNESS
The following summary of the principal terms of the current indebtedness of
the Company does not purport to be complete and is qualified in its entirety by
reference to the documents governing such indebtedness, including the
definitions of certain terms therein, copies of which have been filed as
exhibits to this Annual Report on Form 10-K. Whenever particular provisions of
such documents are referred to herein, such provisions are incorporated herein
by reference, and the statements are qualified in their entirety by such
reference.
THE FLAGSTAR CREDIT AGREEMENT
On April 10, 1996 Flagstar entered into the Credit Agreement which
established a $150 million senior secured working capital and letter of credit
facility, with a $75 million sublimit for working capital advances.
Under the Credit Agreement, Flagstar is required to permanently reduce the
facility by the aggregate amount of Net Cash Proceeds (as defined therein)
received from (i) the sale, lease, transfer or other disposition of certain
assets of Flagstar or any of its Restricted Subsidiaries (as defined therein)
and (ii) the sale or issuance by FCI or any of its Restricted Subsidiaries of
any Debt (as defined therein) (other than Debt permitted by the terms of the
Credit Agreement and to the extent the Net Cash Proceeds are applied to
refinance certain existing Subordinated Debt (as defined therein)).
The Credit Agreement contains covenants customarily found in credit
agreements for leveraged financings that restrict, among other things, the
ability of Flagstar and its Restricted Subsidiaries to make, engage in or incur
(i) liens and security interests other than liens securing the obligations under
the Credit Agreement, certain liens existing as of the date of effectiveness of
the Credit Agreement, certain liens in connection with the financing of capital
expenditures, certain liens arising in the ordinary course of business,
including certain liens in connection with intercompany transactions and certain
other exceptions; (ii) Debt, other than Debt under the Loan Documents (as
defined therein), certain capital lease obligations, certain Debt in existence
on the date of the Credit Agreement, certain Debt in connection with the
financing of capital expenditures, certain Debt in connection with Investments
(as defined therein) in new operations, properties and franchises, certain trade
letters of credit, certain unsecured borrowings in the ordinary course of
business, certain intercompany indebtedness and certain other exceptions; (iii)
lease obligations, other than obligations in existence as of the effectiveness
of the Credit Agreement, certain leases entered into in the ordinary course of
business, certain capital leases, certain intercompany leases and certain other
exceptions; (iv) mergers or consolidations, except for certain intercompany
mergers or consolidations and certain mergers to effect certain transactions
otherwise permitted under the Credit Agreement; (v) sales of assets, other than
certain dispositions of inventory and obsolete or surplus equipment in the
ordinary course of business, certain dispositions in the ordinary course of
business of properties no longer used or useful to the business of the Company,
certain intercompany transactions, certain dispositions in connection with sale
and leaseback transactions, certain exchanges of real property, fixtures and
improvements for other real property, fixtures and improvements, certain
dispositions of a portion of certain restaurant assets of Denny's Holdings,
Inc., certain dispositions in connection with the sale of PTF and its
subsidiaries, and dispositions of certain underperforming restaurants; (vi)
Investments, other than certain intercompany indebtedness, certain investments
made in connection with joint venture or franchise arrangements, certain loans
to employees, investments in new operations, properties or franchises subject to
certain limitations and certain other exceptions; (vii) payments of dividends or
other distributions with respect to capital stock of Flagstar, other than
dividends from Flagstar to FCI to enable FCI to repurchase Common Stock and FCI
stock options from employees in certain circumstances, payments to FCI with
respect to fees and expenses incurred in the ordinary course of business by FCI
in its capacity as a holding company for Flagstar, payments enabling Flagstar
and its Restricted Subsidiaries to pay their tax liabilities and certain other
exceptions; (viii) sales or dispositions of the capital stock of subsidiaries
other than sales by Restricted Subsidiaries of Flagstar to Flagstar or certain
other subsidiaries and certain other exceptions; (ix) conduct by Flagstar or
certain of its subsidiaries of business inconsistent with its status as a
holding company or single purpose subsidiary, as the case may be, or entering
into transactions inconsistent with such status; and (x) prepayments of Debt,
other than certain payments of Debt in existence on the date of the Credit
Agreement, certain payments to retire Debt in connection with permitted
dispositions of assets, certain prepayments of advances under the Credit
Agreement and certain other exceptions.
The Credit Agreement also contains covenants that require Flagstar to meet
certain financial ratios and tests described below:
TOTAL DEBT TO EBITDA RATIO. Flagstar is required not to permit the ratio of
(a) Total Debt (as defined below) outstanding on the last day of any fiscal
quarter less surplus cash to (b) EBITDA (as defined below) of Flagstar and its
28
<PAGE>
Restricted Subsidiaries on a consolidated basis for the Rolling Period (as
defined below) then ended to be more than a specified ratio, ranging from a
ratio of 8.40:1.00 applicable on December 31, 1996, to a ratio of 8.70:1.00
applicable on March 31, 1997, to a ratio of 6.00:1.00 applicable on or after
December 31, 1998.
SENIOR DEBT TO EBITDA RATIO. Flagstar is required not to permit the ratio
of (a) Senior Debt (as defined therein) outstanding on the last day of any
fiscal quarter less surplus cash to (b) EBITDA of Flagstar and its Restricted
Subsidiaries on a consolidated basis for the Rolling Period then ended to be
more than a specified ratio, ranging from a ratio of 4.05:1.00 applicable on
December 31, 1996, to a ratio of 4.25:1.00 on March 31, 1997, to a ratio of
2.90:1.00 on or after December 31, 1998.
INTEREST COVERAGE RATIO. Flagstar is required not to permit the ratio,
determined on the last day of each fiscal quarter for the Rolling Period then
ended, of (a) EBITDA of Flagstar and its Restricted Subsidiaries on a
consolidated basis to (b) Cash Interest Expense (as defined below) of Flagstar
and its Restricted Subsidiaries on a consolidated basis to be less than a
specified ratio, ranging from a ratio of 1.05:1.00 applicable on December 31,
1996, to a ratio of 1.00:1:00 on March 31, 1997, to a ratio of 1.50:1.00 on or
after December 31, 1998.
CAPITAL EXPENDITURES TEST. Flagstar and its Restricted Subsidiaries on a
consolidated basis are prohibited from making capital expenditures in excess of
$80.0 million, $115.0 million and $115.0 million in the aggregate for the fiscal
years ending December 31, 1996 through 1998, respectively. For the fiscal
quarter ending March 31, 1999 Flagstar and its Restricted Subsidiaries are
prohibited from making capital expenditures in excess of the sum of $30.0
million.
CERTAIN DEFINED TERMS. As used in the Credit Agreement, the following terms
shall have the following meanings.
"Advance" means a working capital advance or a swing line advance or a
letter of credit advance.
"Cash Interest Expense" means, for any Rolling Period, without duplication,
interest expense net of interest income, whether paid or accrued during such
Rolling Period (including the interest component of capitalized lease
obligations) on all Debt, INCLUDING, without limitation, (a) interest expense in
respect of Advances (as defined above), the Senior Notes (as defined therein)
and the Subordinated Debt (as defined therein), (b) commissions and other fees
and charges payable in connection with letters of credit, (c) the net payment,
if any, payable in connection with all interest rate protection contracts and
(d) interest capitalized during construction, but EXCLUDING, in each case,
interest not paid in cash (including amortization of discount and deferred debt
expenses), all as determined in accordance with generally accepted accounting
principles.
"EBITDA" of any person means, for any period, on a consolidated basis, net
income (or net loss) PLUS the sum of (a) interest expense net of interest
income, (b) income tax expense, (c) depreciation expense, (d) amortization
expense and (e) extraordinary or unusual losses included in net income (net of
taxes to the extent not already deducted in determining such losses) LESS
extraordinary or unusual gains included in net income (net of taxes to the
extent not already deducted in determining such gains), in each case determined
in accordance with generally accepted accounting principles.
"Funded Debt" means the principal amount of Debt in respect of Advances (as
defined above) and the principal amount of all Debt that should, in accordance
with generally accepted accounting principles, be recorded as a liability on a
balance sheet and matures more than one year from the date of creation or
matures within one year from such date but is renewable or extendible, at the
option of the debtor, to a date more than one year from such date or arises
under a revolving credit or similar agreement that obligates the lender or
lenders to extend credit during a period of more than one year from such date,
including, without limitation, all amounts of Funded Debt required to be paid or
prepaid within one year from the date of determination.
"Restricted Subsidiaries" means all subsidiaries of Flagstar other than the
Unrestricted Subsidiaries (as defined below).
"Rolling Period" means, for any fiscal quarter, such quarter and the three
preceding fiscal quarters.
"Surplus Cash" means, as of any date, the lesser of (a) cash reflected on
consolidated balance sheet of Flagstar and its Restricted Subsidiaries in excess
of $13.0 million and (b) the aggregate of amounts on deposit in the Borrower
Cash Collateral Account (as defined therein) and in Collateral Investment
Accounts (as defined therein).
"Total Debt" outstanding on any date means the sum, without duplication, of
(a) the aggregate principal amount of all Debt of Flagstar and its Restricted
Subsidiaries, on a consolidated basis, outstanding on such date to the extent
such Debt constitutes indebtedness for borrowed money, obligations evidenced by
notes, bonds, debentures or other similar instruments, obligations created or
arising under any conditional sale or other title retention agreement with
respect to property
29
<PAGE>
acquired or obligations as lessee under leases that have been or should be, in
accordance with generally accepted accounting principles, recorded as capital
leases, (b) the aggregate principal amount of all Debt of Flagstar and its
Restricted Subsidiaries, on a consolidated basis, outstanding on such date
constituting direct or indirect guarantees of certain Debt of others and (c) the
aggregate principal amount of all Funded Debt (as defined above) of Flagstar and
its Restricted Subsidiaries on a consolidated basis consisting of obligations,
contingent or otherwise, under acceptance, letter of credit or similar
facilities.
"Unrestricted Subsidiary" means FRD Acquisition Co., a wholly-owned
subsidiary of Flagstar, formed as a vehicle for the acquisition of the Family
Restaurant Division of Family Restaurants, Inc. (Coco's and Carrows) and such
other subsidiaries of Flagstar as Flagstar shall designate as an Unrestricted
Subsidiary in writing to the agents and the lenders under the Credit Agreement
in accordance with the terms of the Credit Agreement, and any subsidiaries
thereof.
Under the Credit Agreement, an event of default will occur if, among other
things, (i) any person or group of two or more persons acting in concert (other
than KKR, Gollust Tierney & Oliver and their respective affiliates) acquires,
directly or indirectly, beneficial ownership of securities of FCI representing,
in the aggregate, more of the votes entitled to be cast by all voting stock of
FCI than the votes entitled to be cast by all voting stock of FCI beneficially
owned, directly or indirectly, by KKR and its affiliates, (ii) any person or
group of two or more persons acting in concert (other than KKR and its
affiliates) acquires by contract or otherwise, or enters into a contract or
arrangement that results in its or their acquisition of the power to exercise,
directly or indirectly, a controlling influence over the management or policies
of Flagstar or FCI or (iii) Flagstar shall cease at any time to be a
wholly-owned subsidiary of FCI. If such an event of default were to occur, the
lenders under the Credit Agreement would be entitled to exercise a number of
remedies, including acceleration of all amounts owed under the Credit Agreement.
FLAGSTAR PUBLIC DEBT
As part of the Recapitalization, Flagstar consummated on November 16, 1992
the sale of $300 million aggregate principal amount of 10 7/8% Senior Notes Due
2002 (of which $280 million remains outstanding) (the "10 7/8% Notes") and
issued pursuant to an exchange offer for previously outstanding debt issues
$722.4 million principal amount of 11.25% Senior Subordinated Debentures Due
2004 (the "11.25% Debentures"). On September 23, 1993, Flagstar consummated the
sale of $275 million aggregate principal amount of 10 3/4% Senior Notes Due 2001
(of which $270 million remains outstanding) (the "10 3/4% Notes") and $125
million aggregate principal amount of 11 3/8% Senior Subordinated Debentures Due
2003 (the "11 3/8% Debentures"). The 10 7/8% Notes and the 10 3/4% Notes are
general unsecured obligations of Flagstar and rank PARI PASSU in right of
payment with Flagstar's obligations under the Credit Agreement. The 11.25%
Debentures are general unsecured obligations of Flagstar and are subordinate in
right of payment to the obligations of Flagstar under the Restated Credit
Agreement, the 10 7/8% Notes and the 10 3/4% Notes. The 11.25% Debentures rank
PARI PASSU in right of payment with the 11 3/8% Debentures. All such debt is
senior in right of payment to the 10% Debentures.
THE SENIOR NOTES. Interest on the 10 7/8% Notes is payable semi-annually in
arrears on each June 1 and December 1. They will mature on December 1, 2002. The
10 7/8% Notes will be redeemable, in whole or in part, at the option of
Flagstar, at any time on or after December 1, 1997, initially at a redemption
price equal to 105.4375% of the principal amount thereof to and including
November 30, 1998, at a decreased price thereafter to and including November 30,
1999 and thereafter at 100% of the principal amount thereof, together in each
case with accrued interest.
Interest on the 10 3/4% Notes is payable semi-annually in arrears on each
March 15 and September 15. They will mature on September 15, 2001. The 10 3/4%
Notes may not be redeemed prior to maturity.
THE SENIOR SUBORDINATED DEBENTURES. Interest on the 11.25% Debentures is
payable semi-annually in arrears on each May 1 and November 1. They will mature
on November 1, 2004. The 11.25% Debentures will be redeemable, in whole or in
part, at the option of Flagstar, at any time on or after November 1, 1997,
initially at a redemption price equal to 105.625% of the principal amount
thereof to and including October 31, 1998, at decreasing prices thereafter to
and including October 31, 2002 and thereafter at 100% of the principal amount
thereof, together in each case with accrued interest.
Interest on the 11 3/8% Debentures is payable semi-annually in arrears on
each March 15 and September 15. They will mature on September 15, 2003. The
11 3/8% Debentures will be redeemable, in whole or in part, at the option of
Flagstar, at any time on or after September 15, 1998, initially at a redemption
price equal to 105.688% of the principal amount thereof to and including
September 14, 1999, at 102.844% of the principal amount thereof to and including
September 14, 2000 and thereafter at 100% of the principal amount thereof,
together in each case with accrued interest.
30
<PAGE>
THE 10% DEBENTURES. Interest on the 10% Debentures is payable semi-annually
in arrears on each May 1 and November 1. The 10% Debentures mature on November
1, 2014. Unless previously redeemed, the 10% Debentures are convertible at any
time at the option of the holders thereof by exchange into shares of Common
Stock at a conversion price of $24.00 per share, subject to adjustment. The 10%
Debentures are redeemable, in whole or in part, at the option of the Company
upon payment of a premium. The Company is required to call for redemption on
November 1, 2002 and on November 1 of each year thereafter, through and
including November 1, 2013, $7,000,000 principal amount of the 10% Debentures. A
"Change of Control" having occurred on November 16, 1992, holders of the 10%
Debentures had the right, under the indenture relating thereto, to require the
Company, subject to certain conditions, to repurchase such securities at 101% of
their principal amount together with interest accrued to the date of purchase.
On February 19, 1993, the Company made such an offer to repurchase the $100
million of 10% Debentures then outstanding. On March 24, 1993 the Company
repurchased $741,000 principal amount of the 10% Debentures validly tendered and
accepted pursuant to such offer.
MORTGAGE FINANCINGS
A subsidiary of Flagstar had issued and outstanding, at December 31, 1996,
$190.2 million in aggregate principal amount of 10 1/4% Guaranteed Secured Bonds
due 2000. Interest is payable semi-annually in arrears on each November 15 and
May 15. As a result of the downgrade of Flagstar's outstanding debt securities
during 1994, certain payments by the Company which fund such interest payments
are due and payable on a monthly basis. Principal payments total $12.5 million
annually for the years 1997 through 1999; and $152.7 million in 2000. The bonds
are secured by a financial guaranty insurance policy issued by Financial
Security Assurance, Inc. and by collateral assignment of mortgage loans on 238
Hardee's and 148 Quincy's restaurants.
Another subsidiary of Flagstar has outstanding $160 million aggregate
principal amount of 11.03% Notes due 2000. Interest is payable quarterly in
arrears, with the principal maturing in a single installment payable in July
2000. These notes are redeemable, in whole, at the subsidiary's option, upon
payment of a premium. They are secured by a pool of cross-collateralized
mortgages on approximately 240 Denny's restaurant properties.
THE FRI-M CREDIT FACILITY
In connection with the acquisition by FRD of Coco's and Carrows on May 23,
1996, FRI-M (the "Borrower"), a wholly-owned subsidiary of FRD, obtained a new
credit facility (the "FRI-M Credit Facility") consisting of a $56 million term
loan (the "FRI-M Term Loan") and a $35 million working capital facility (the
"FRI-M Revolver"). Proceeds from the FRI-M Term Loan were used to fund the
Coco's and Carrows acquisition and to pay the transactions costs associated
therewith. Proceeds from the FRI-M Revolver are to be used for working capital
requirements and other general corporate purposes, which may include the making
of intercompany loans to any of the Borrower's wholly-owned subsidiaries for
their own working capital and other general corporate purposes. Letters of
credit may be issued under the FRI-M Revolver for the purpose of supporting (i)
workers' compensation liabilities of the Borrower or any of its subsidiaries;
(ii) the obligations of third party insurers of the Borrower or any of its
subsidiaries; and (iii) certain other obligations of the Borrower and its
subsidiaries.
The FRI-M Term Loan matures on August 31, 1999. Principal installments of
the FRI-M Term Loan are payable quarterly as follows: $4 million per quarter for
four consecutive quarters beginning February 28, 1997; $5 million for four
consecutive quarters beginning February 28, 1998; $6 million on February 28,
1999; and $7 million for two consecutive quarters beginning May 31, 1999. All
amounts owing under the FRI-M Term Loan are required to be repaid on August 31,
1999. The commitment to make loans or issue letters of credit pursuant to the
FRI-M Revolver expires, and all amounts outstanding under the FRI-M Revolver
must be repaid, on August 31, 1999. All borrowings under the FRI-M Credit
Facility accrue interest at a variable rate based on a base rate (as defined
therein) or an adjusted Eurodollar rate. The rate at year end 1996 was 8.125%.
The FRI-M Credit Facility requires the Borrower to make mandatory
prepayments in certain circumstances out of its Consolidated Excess Cash Flow
(as defined therein), out of cash proceeds of certain asset sales, out of assets
distributed to FRD, the Borrower or any of Borrower's direct or indirect
subsidiaries (each, a "Loan Party") in connection with an employee benefit plan
termination and out of net cash proceeds received by a Loan Party from certain
other sources. Any mandatory partial prepayment of the FRI-M Term Loan shall be
applied to installments scheduled to be paid during the twelve months
immediately following the date of such prepayment, with any excess being applied
ratably to the scheduled installments of the FRI-M Term Loan.
31
<PAGE>
The FRI-M Credit Facility contains certain restrictive covenants which,
among other things, limit (subject to certain exceptions) the Borrower and its
subsidiaries with respect to (a) incurrence of debt; (b) the existence of liens;
(c) investments and joint ventures; (d) the declaration or payment of dividends;
(e) the making of guarantees and other contingent obligations; (f) the amendment
or waiver of certain related agreements; (g) mergers, consolidations,
liquidations and sales of assets (including sale and leaseback transactions);
(h) payment obligations under leases; (i) transactions with shareholders and
affiliates; (j) the sale, assignment, pledge or other disposition of shares of
Borrower or its subsidiaries by Borrower or its subsidiaries; (k) capital
expenditures; and (l) material changes in their business.
The FRI-M Credit Facility also imposes on FRD, the Borrower and its
subsidiaries certain financial tests and minimum ratios which, among other
things, require that Borrower (a) shall not permit the ratio determined on the
last day of each fiscal quarter for such quarter and the three preceding
quarters ("Rolling Period") then ended of Consolidated Adjusted EBITDA (as
defined therein) to Consolidated Interest Expense (as defined therein) to be
less than levels increasing from 1.50:1.00 on September 26, 1996 to 2.10:1.00 on
September 23, 1999 and each fiscal quarter end thereafter; (b) permit the ratio
determined on the last day of each fiscal quarter for the Rolling Period then
ended of Consolidated Total Debt (as defined therein) to Consolidated Adjusted
EBITDA (as defined) to exceed a level varying from 5.65:1.00 on September 26,
1996 to 3.65:1.00 on September 23, 1999 and each fiscal quarter end thereafter;
and (c) shall not permit Consolidated Adjusted EBITDA determined on the last day
of each fiscal quarter for the Rolling Period then ended to be less than an
amount increasing from $11.2 million for the Rolling Period ending September 26,
1996 to $49.5 million for the Rolling Period ending June 25, 1998 and each
Rolling Period thereafter.
FRD and all of the Borrower's subsidiaries have guaranteed the obligations
of the Borrower under the FRI-M Credit Facility and the other Loan Documents (as
defined therein). All of the issued and outstanding common stock of the Borrower
and its subsidiaries has been pledged as security for the obligations of FRD
under the FRI-M Credit Facility and the other Loan Documents. The obligations of
the Borrower under the FRI-M Credit Facility and the other Loan Documents are
secured by substantially all assets of the Borrower and its subsidiaries.
THE FRD SENIOR NOTES
In connection with the May 23, 1996 acquisition of FRI-M, FRD issued $156.9
million principal amount of 12 1/2% FRD Senior Notes due 2004 (the "FRD Notes").
Interest on the FRD Notes accrues at the rate of 12 1/2% per annum and is
payable semi-annually in arrears on January 15 and July 15, commencing on July
15, 1996. They will mature on July 15, 2004. The FRD Notes are senior unsecured,
general obligations of FRD and rank senior in right of payment to all existing
and future subordinated indebtedness of FRD and rank PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of FRD. The FRD
Notes are effectively subordinated to secured indebtedness of FRD, including
borrowings under the FRI-M Credit Facility to the extent of the value of FRD's
assets securing such indebtedness. Borrowings under the FRI-M Credit Facility
are secured by substantially all of FRD's assets (The FRD Notes are structurally
subordinated to all indebtedness of the Borrower (as defined above), including
its indebtedness under the FRI-M Credit Facility).
32
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) -- Financial Statements:
See the Index to Financial Statements which appears on page F-1
hereof.
(2) -- Financial Statement Schedules:
No schedules are filed herewith because of the absence of
conditions under which they are required or because the
information called for is in the Consolidated Financial
Statements or Notes thereto.
(3) -- Exhibits:
Certain of the exhibits to this Report, indicated by an
asterisk, are hereby incorporated by reference to other
documents on file with the Commission with which they
are physically filed, to be a part hereof as of their
respective dates.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
* 3.1 Restated Certificate of Incorporation of FCI and amendment thereto dated November 16, 1992 (incorporated by
reference to Exhibit 3.1 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992 Form 10-K")).
* 3.2 Certificate of Designations for the $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock of FCI
(incorporated by reference to Exhibit 3.2 to the 1992 Form 10-K).
* 3.3 Certificate of Ownership and Merger of FCI dated June 16, 1993 (incorporated by reference to Exhibit 3.3 to FCI's
1993 Form 10-K, File No. 0-18051 (the "1993 Form 10-K")).
* 3.4 Certificate of Amendment to the Restated Certificate of Incorporation of FCI dated June 16, 1993 (incorporated by
reference to Exhibit 3.4 to the 1993 Form 10-K).
3.5 By-Laws of FCI as amended through July 24, 1996.
* 4.1 Specimen certificate of Common Stock of FCI (incorporated by reference to Exhibit 4.5 to the Registration Statement
on Form S-1 (No. 33-29769) of FCI (the "Form S-1")).
* 4.2 Specimen certificate of $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock of FCI (incorporated by
reference to Exhibit 4.25 to the Registration Statement on Form S-1 (No. 33-47339) of FCI (the "Preferred Stock
S-1")).
* 4.3 Indenture between Flagstar and United States Trust Company of New York, as Trustee, relating to the 10% Debentures
(including the form of security) (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form
S-4 (No. 33-48923) of Flagstar (the "11.25% Debentures S-4")).
* 4.4 Supplemental Indenture, dated as of August 7, 1992, between Flagstar and United States Trust Company of New York,
as Trustee, relating to the 10% Debentures (incorporated by reference to Exhibit 4.9A to the 11.25% Debentures
S-4).
* 4.5 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and Assignment of
Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company, dated July 12, 1990
(incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to the Registration Statement on Form
S-1 (No. 33-29769) of FCI (the "Form S-1 Amendment")).
* 4.6 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended and restated as of
July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-1 Amendment).
* 4.7 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust Company relating
to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-1 Amendment).
* 4.8 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.15 to the 11.25% Debentures S-4).
* 4.9 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.16 to the 11.25% Debentures S-4).
* 4.10 Mortgage Note in the amount of $98,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.17 to the 11.25% Debentures S-4).
* 4.11 Indenture between Secured Restaurants Trust and The Citizens and Southern National Bank of South Carolina, dated as
of November 1, 1990, relating to certain Secured Bonds (incorporated by reference to Exhibit 4.18 to the 11.25%
Debentures S-4).
* 4.12 Amended and Restated Trust Agreement between Spartan Holdings, Inc., as Depositor for Secured Restaurants Trust,
and Wilmington Trust Company, dated as of October 15, 1990 (incorporated by reference to Exhibit 3.3 to the
Registration Statement on Form S-11 (No. 33-36345) of Secured Restaurants Trust (the "Form S-11")).
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
* 4.13 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8% Notes
(incorporated by reference to Exhibit 4.13 to the 1992 Form 10-K).
* 4.14 Supplemental Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8%
Notes (incorporated by reference to Exhibit 4.14 to the 1992 Form 10-K).
* 4.15 Form of 10 7/8% Note (incorporated by reference to Exhibit 4.15 to the 1992 Form 10-K).
* 4.16 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11.25%
Debentures (incorporated by reference to Exhibit 4.16 to the 1992 Form 10-K).
* 4.17 Form of 11.25% Debenture (incorporated by reference to Exhibit 4.17 to the 1992 Form 10-K).
* 4.18 Second Amended and Restated Credit Agreement, dated as of April 10, 1996 among TWS Funding, Inc., as borrower,
Flagstar Corporation, certain lenders and co-agents named therein, and Citibanks, N.A., as funding agent
(incorporated by reference to Exhibit 10.2 to FCI's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 (the "1996 Second Quarter 10-Q").
* 4.19 Amendment and Consent to the Second Amended and Restated Credit Agreement dated as of July 18, 1996 among TWS Funding,
Inc., as borrower, Flagstar Corporation, certain lenders and co-agents named therein, and Citibank, N.A., as
funding agents. (incorporated by reference to Exhibit 10.2.1 to FCI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (the "1996 Third Quarter 10-Q").
* 4.20 Second Amendment to the Second Amended and Restated Credit Agreement, dated as of August 6, 1996 (incorporated by
reference to Exhibit 10.2.2 to the 1996 Third Quarter 10-Q).
* 4.21 Third Amendment and Consent to the Second Amended and Restated Credit Agreement, dated as of September 30, 1996
(incorporated by reference to Exhibit 10.2.3 to the 1996 Third Quarter 10-Q).
* 4.22 Credit Agreement, dated as of May 23, 1996, among FRD, FRI-M, certain lenders and co-agents named therein, and
Credit Lyonnais New York Branch as administrative agent (the "FRI-M Credit Agreement") (incorporated by reference
to Exhibit 10.1 of the Registration Statement on Forms S-1 and S-4 (333-07601) of FRD (the "FRD Form S-1/S-4").
* 4.23 First Amendment to the FRI-M Credit Agreement, dated July 1, 1996 (incorporated by reference to Exhibit 10.3.1 to
the 1996 Third Quarter 10-Q).
4.24 Second Amendment to the FRI-M Credit Agreement, dated November 19, 1996.
* 4.25 Indenture dated as of May 23, 1996 between FRD and the Bank of New York, as Trustee (the "FRD Indenture")
(incorporated by reference to Exhibit 4.1 to the FRD Form S-1/S-4).
* 4.26 Form of First Supplemental Indenture to the FRD Indenture dated as of August 23, 1996 (incorporated by reference to
Exhibit 4.1.1 to the FRD Form S-1/S-4).
* 4.27 Stock Purchase Agreement dated as of March 1, 1996 by and among Flagstar, Flagstar Companies, Inc., the Company,
and Family Restaurants, Inc. (incorporated by reference to Exhibit 4.2 to the FRD Form S-1/S-4).
* 4.28 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 3/4% Notes
(incorporated by reference to Exhibit 4.23 to the 1993 Form 10-K).
* 4.29 Form of 10 3/4% Note (incorporated by reference to Exhibit 4.24 to the 1993 Form 10-K).
* 4.30 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11 3/8%
Debentures (incorporated by reference to Exhibit 4.25 to the 1993 Form 10-K).
* 4.31 Form of 11 3/8% Debenture (incorporated by reference to Exhibit 4.26 to the 1993 Form 10-K).
*10.1 Warrant Agreement, dated November 16, 1992, among FCI, TW Associates and KKR Partners II (incorporated by reference
to Exhibit 10.41 to the 1992 Form 10-K).
*10.2 Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's, Inc. (incorporated
by reference to Exhibit 10.42 to the Registration Statement on Form S-2 (No. 33-49843) of Flagstar (the "Form
S-2")).
*10.3 Fair Share Agreement dated July 1, 1993 between FCI and the NAACP (incorporated by reference to Exhibit 10.43 to
the Form S-2).
*10.4 Amendment No. 2 to Stockholders' Agreement, dated as of April 6, 1993, among FCI, Gollust Tierney & Oliver ("GTO")
and certain affiliated partnerships, DLJ Capital, Jerome J. Richardson and Associates (incorporated by reference to
Exhibit 10 to Flagstar's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-9364).
*10.5 Amendment (No. 3) to Stockholders' Agreement, dated as of January 1, 1995, among FCI, GTO and certain affiliated
partnerships, DLJ Capital, Jerome J. Richardson and Associates (incorporated by reference to Exhibit 10.6 to the
1994 Form 10-K).
*10.6 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to Exhibit 10.7 to
the 1992 Form 10-K).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.7 Form of Supplemental Executive Retirement Plan Trust of Flagstar (incorporated by reference to Exhibit 10.8 to the
1992 Form 10-K).
10.8 FCI 1989 Non-Qualified Stock Option Plan, as adopted December 1, 1989 and amended through December 13, 1996.
*10.9 FCI 1990 Non-Qualified Stock Option Plan, as adopted July 31, 1990 and amended through April 28, 1992 (incorporated
by reference to Exhibit 10.10 to the 1994 Form 10-K).
*10.10 Form of Non-Qualified Stock Option Award Agreement pursuant to FCI 1990 Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Form S-1 Amendment).
*10.11 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.1 to the
Form S-11).
*10.12 Mortgage Note in the amount of $521,993,982, made by Flagstar Enterprises, Inc. in favor of Spartan Holdings, Inc.,
dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.12
to the 11.25% Debentures S-4).
*10.13 Mortgage Note in the amount of $210,077,402, made by Quincy's Restaurants, Inc. in favor of Spartan Holdings, Inc.,
dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.13
to the 11.25% Debentures S-4).
*10.14 Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of November 1, 1990
(incorporated by reference to Exhibit 10.14 to the 11.25% Debentures S-4).
*10.15 Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of November 1, 1990
(incorporated by reference to Exhibit 10.15 to the 11.25% Debentures S-4).
*10.16 Insurance and Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.16 to the 11.25% Debentures S-4).
*10.17 Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.17 to the 11.25% Debentures S-4).
*10.18 Bank Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.18 to the 11.25% Debentures S-4).
*10.19 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4).
*10.20 Liquidity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated
by reference to Exhibit 10.20 to the 11.25% Debentures S-4).
*10.21 Financial Guaranty Insurance Policy, issued November 15, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.21 to the 11.25% Debentures S-4).
*10.22 Amended and Restated Lease between Quincy's Realty, Inc. and Quincy's Restaurants, Inc., dated as of November 1,
1990 (incorporated by reference to Exhibit 10.22 to the 11.25% Debentures S-4).
*10.23 Amended and Restated Lease between Spardee's Realty, Inc. and Spardee's Restaurants, Inc., dated as of November 1,
1990 (incorporated by reference to Exhibit 10.23 to the 11.25% Debentures S-4).
*10.24 Collateral Assignment Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.24 to the 11.25% Debentures S-4).
*10.25 Form of Assignment of Leases and Rents related to Secured Restaurants Trust transaction (incorporated by reference
to Exhibit 10.12 to the Form S-11).
*10.26 Spartan Guaranty, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.26 to the 11.25% Debentures S-4).
*10.27 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.14 to the Form S-11).
*10.28 Stock Pledge Agreement among Flagstar Enterprises, Inc. and Secured Restaurants Trust, dated as of November 1, 1990
(incorporated by reference to Exhibit 10.28 to the 11.25% Debentures S-4).
*10.29 Stock Pledge Agreement among Quincy's Restaurants, Inc. and Secured Restaurants Trust, dated as of November 1, 1990
(incorporated by reference to Exhibit 10.29 to the 11.25% Debentures S-4).
*10.30 Management Agreement, dated as of November 1, 1990, related to the Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.30 to the 11.25% Debentures S-4).
*10.31 Form of Collateral Assignment of Security Documents related to Secured Restaurants Trust transaction (incorporated
by reference to Exhibit 10.17 to the Form S-11).
*10.32 Flagstar Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.32 to the 11.25% Debentures S-4).
*10.33 Subordinated Promissory Note, dated July 28, 1992, from Flagstar to FCI (incorporated by reference to Exhibit 10.33
to the 11.25% Debentures S-4).
*10.34 Development Agreement between the Company and Hardee's Food Systems, Inc., dated January 1992 (incorporated by
reference to Exhibit 10.33 to the Preferred Stock S-1).
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
*10.35 Stock and Warrant Purchase Agreement, dated as of August 11, 1992, between FCI and TW Associates (incorporated by
reference to Exhibit 10.38 to the 11.25% Debentures S-4).
*10.36 Stockholders' Agreement, dated as of August 11, 1992, among FCI, GTO (on behalf of itself and certain affiliated
partnerships), DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit 10.39 to
the 11.25% Debentures S-4).
*10.37 Technical Amendment to the Stockholders' Agreement dated as of September 30, 1992, among FCI, GTO and certain
affiliated partnerships, DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit
10.39A to the 11.25% Debentures S-4).
*10.38 Richardson Shareholder Agreement, dated as of August 11, 1992, between FCI and Jerome J. Richardson (incorporated
by reference to Exhibit 10.40 to the 11.25% Debentures S-4).
*10.39 Employment Agreement, dated as of August 11, 1992, between Flagstar and Jerome J. Richardson (incorporated by
reference to Exhibit 10.41 to the 11.25% Debentures S-4).
*10.40 Amended and Restated Employment Agreement, dated as of January 1, 1996, between Flagstar and Jerome J. Richardson
(incorporated by reference to Exhibit 10.41 to FCI's 1995 Form 10-K, File No. 0-18051).
*10.41 Employment Agreement, dated as of January 10, 1995, between FCI and James B. Adamson (incorporated by reference to
Exhibit 10.42 to the 1994 Form 10-K).
*10.42 Adamson Shareholder Agreement, dated as of January 10, 1995, between Associates and James B. Adamson (incorporated
by reference to Exhibit 10.43 to the 1994 Form 10-K.)
*10.43 Amendment to Employment Agreement, dated as of February 27, 1995, between FCI and James B. Adamson (incorporated by
reference to Exhibit 10.44 to the 1994 Form 10-K).
*10.44 Form of Agreement providing certain severance benefits (incorporated by reference to Exhibit 10.48 to the 1994 Form
10-K)
*10.45 Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994 Form 10-K).
*10.46 Consent Decree dated May 24, 1994 among certain named claimants, individually and on behalf of all others similarly
situated, Flagstar and Denny's, Inc. (incorporated by reference to Exhbit 10.51 to the 1994 Form 10-K).
10.47 Second Amendment to Employment Agreement, dated December 31, 1996, between FCI and James B. Adamson.
10.48 Form of Agreement providing certain retention incentives, severance and change of control benefits for Company
management.
10.49 Information Systems Management Agreement, dated February 22, 1996 between Flagstar and Integrated Systems Solutions
Corporation.
10.50 Employment Agreement, dated as of April 24, 1995, between Flagstar and C. Robert Campbell.
10.51 Employment Agreement, dated as of April 22, 1996, between Flagstar and Craig S. Bushey.
10.52 Employment Agreement, dated as of November 21, 1995, between Flagstar and John A. Romandetti.
10.53 Employment Agreement, dated as of May 24, 1996, between Flagstar and Mark L. Shipman.
11 Computation of Earnings (Loss) Per Share.
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of Flagstar.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
</TABLE>
* Certain of the exhibits to this Annual Report on Form 10-K, indicated by an
asterisk, are hereby incorporated by reference to other documents on file with
the Commission with which they are physically filed, to be part hereof as of
their respective dates.
(b) The Company filed a report on Form 8-K on December 23, 1996 providing
certain information in Item 8. Change in Fiscal Year of such report. That
filing reported a resolution adopted by the Company's Board of Directors to
change its fiscal year. Beginning in 1997, the Registrant will move to a
4-4-5 week closing calendar pursuant to which each fiscal year shall end on
the last Wednesday of the calendar year. No financial statements were
included in the filing.
36
<PAGE>
FLAGSTAR COMPANIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report........................................................................................... F-2
Statements of Consolidated Operations for the Three Years Ended December 31, 1994, 1995 and 1996....................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996........................................................... F-4
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1994, 1995 and 1996....................... F-5
Notes to Consolidated Financial Statements............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
FLAGSTAR COMPANIES, INC.
We have audited the accompanying consolidated balance sheets of Flagstar
Companies, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1996,
and the related statements of consolidated operations and consolidated cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1995 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995
the Company changed its method of accounting for the impairment of long-lived
assets.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 13, 1997
F-2
<PAGE>
FLAGSTAR COMPANIES, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Operating revenue.............................................................. $2,665,966 $2,571,487 $2,542,302
Operating expenses:
Product cost................................................................. 919,087 864,505 744,072
Payroll & benefits........................................................... 919,928 916,951 945,772
Depreciation & amortization expense.......................................... 129,633 132,872 129,948
Utilities expenses........................................................... 99,021 98,212 104,477
Other........................................................................ 394,012 393,482 461,641
Provision for (recovery of) restructuring charges (Note 3)................... (7,207) 15,873 --
Charge for impaired assets (Note 3).......................................... -- 51,358 --
2,454,474 2,473,253 2,385,910
Operating income............................................................... 211,492 98,234 156,392
Other charges (credits):
Interest and debt expense (Note 4)........................................... 232,515 232,874 261,633
Interest income (Note 12).................................................... (5,077) (3,725) (6,926)
Other -- net (Note 12)....................................................... 3,087 2,005 3,537
230,525 231,154 258,244
Loss before income taxes....................................................... (19,033) (132,920) (101,852)
Benefit from income taxes (Note 6)............................................. (2,213) (14) (16,392)
Loss from continuing operations................................................ (16,820) (132,906) (85,460)
Gain on sale of discontinued operation, net of income tax provision of: 1994 --
$9,999; 1995 -- $10,092 (Note 13)............................................ 399,188 77,877 --
Loss from discontinued operations, net of income tax provision (benefit) of:
1994 -- $471; 1995 -- $(1,361) (Note 13)..................................... (6,518) (636) --
Income (loss) before extraordinary items....................................... 375,850 (55,665) (85,460)
Extraordinary items, net of income tax provision (benefit) of: 1994 -- $(174);
1995 -- $25 (Note 11)........................................................ (11,757) 466 --
Net income (loss).............................................................. 364,093 (55,199) (85,460)
Dividends on preferred stock................................................... (14,175) (14,175) (14,175)
Net income (loss) applicable to common shareholders............................ $ 349,918 $ (69,374) $ (99,635)
Per share amounts applicable to common shareholders (Note 10):
Primary
Loss from continuing operations.............................................. $ (0.14) $ (3.47) $ (2.35)
Income from discontinued operations, net..................................... 7.52 1.82 --
Income (loss) before extraordinary items..................................... 7.38 (1.65) (2.35)
Extraordinary items, net..................................................... (0.22) 0.01 --
Net income (loss)............................................................ $ 7.16 $ (1.64) $ (2.35)
Average outstanding and equivalent common shares............................. 52,223 42,431 42,434
Fully diluted
Income (loss) from continuing operations..................................... $ 0.26 $ (3.47) $ (2.35)
Income from discontinued operations, net..................................... 6.05 1.82 --
Income (loss) before extraordinary items..................................... 6.31 (1.65) (2.35)
Extraordinary items, net..................................................... (0.18) 0.01 --
Net income (loss)............................................................ $ 6.13 $ (1.64) $ (2.35)
Average outstanding and equivalent shares.................................... 64,921 42,431 42,434
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FLAGSTAR COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................................................................... $ 196,966 $ 92,369
Receivables, less allowance for doubtful accounts of: 1995 -- $2,506;
1996 -- $2,405............................................................................... 29,844 17,812
Loan receivable from former officer (Note 12).................................................. -- 13,922
Merchandise and supply inventories............................................................. 32,445 31,543
Net assets held for sale....................................................................... -- 5,114
Other.......................................................................................... 26,087 29,895
285,342 190,655
Property:
Property owned (at cost) (Notes 2, 3 and 4):
Land......................................................................................... 255,719 253,067
Buildings and improvements................................................................... 838,956 891,512
Other property and equipment................................................................. 484,684 536,886
Total property owned............................................................................. 1,579,359 1,681,465
Less accumulated depreciation.................................................................... 569,079 629,676
Property owned -- net............................................................................ 1,010,280 1,051,789
Buildings and improvements, vehicles, and other equipment held under capital leases (Note 5)..... 170,859 210,533
Less accumulated amortization.................................................................... 76,778 93,740
Property held under capital leases -- net........................................................ 94,081 116,793
1,104,361 1,168,582
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077 (Note 2)........................... -- 205,389
Other intangible assets, net of accumulated amortization: 1995 --
$17,051; 1996 -- $20,611..................................................................... 22,380 27,595
Deferred financing costs -- net (Note 11)...................................................... 63,482 64,153
Other (including loan receivable from former officer of: 1995 -- $16,454) (Note 12)............ 32,186 30,996
118,048 328,133
$ 1,507,751 $ 1,687,370
LIABILITIES
Current Liabilities:
Current maturities of long-term debt (Note 4).................................................. $ 38,835 $ 62,890
Accounts payable............................................................................... 125,467 160,444
Accrued salaries and vacations................................................................. 41,102 58,838
Accrued insurance.............................................................................. 48,060 52,244
Accrued taxes.................................................................................. 30,705 25,060
Accrued interest and dividends................................................................. 42,916 47,676
Other.......................................................................................... 80,445 76,123
407,530 483,275
Long-Term Liabilities:
Debt, less current maturities (Note 4)......................................................... 1,996,111 2,179,393
Deferred income taxes (Note 6)................................................................. 18,175 16,361
Liability for self-insured claims.............................................................. 53,709 57,665
Other non-current liabilities and deferred credits............................................. 163,203 178,203
2,231,198 2,431,622
Commitments and Contingencies (Notes 4, 5 and 8)
Shareholders' Equity (Deficit) (Notes 7 and 9):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995 and 1996, 25,000 shares authorized; 6,300 shares issued and
outstanding; liquidation preference $157,500, excluding dividends in arrears................ 630 630
Common stock:
$0.50 par value; shares authorized -- 200,000; issued and outstanding 1995 -- 42,434
1996 -- 42,434............................................................................. 21,218 21,218
Paid-in capital................................................................................ 724,912 724,912
Deficit........................................................................................ (1,877,274 ) (1,973,365 )
Minimum pension liability adjustment........................................................... (463 ) (922 )
(1,130,977 ) (1,227,527 )
$ 1,507,751 $ 1,687,370
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FLAGSTAR COMPANIES, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Cash Flows from Operating Activities:
Net income (loss)........................................................... $ 364,093 $ (55,199 ) $ (85,460)
Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating
Activities:
Provision for (recovery of) restructuring charges........................ (7,207 ) 15,873 --
Charge for impaired assets............................................... -- 51,358 --
Depreciation and amortization of property................................ 122,870 126,488 120,059
Amortization of goodwill................................................. -- -- 3,077
Amortization of other intangible assets.................................. 6,763 6,384 6,812
Amortization of deferred financing costs................................. 6,453 7,504 8,920
Deferred income tax benefit.............................................. (2,793 ) (3,451 ) (9,031)
Other.................................................................... (7,363 ) (20,028 ) (19,004)
Loss from discontinued operations, net................................... 6,518 636 --
Gain on sale of discontinued operation, net.............................. (399,188 ) (77,877 ) --
Extraordinary items, net................................................. 11,757 (466 ) --
Changes in Assets and Liabilities Net of Effects of Acquisition,
Dispositions and Restructurings:
Decrease (increase) in assets:
Receivables.............................................................. (4,452 ) (4,713 ) 327
Inventories.............................................................. 340 (848 ) (833)
Other current assets..................................................... (11,849 ) (7,086 ) (3,964)
Other assets............................................................. 2,241 (2,622 ) (5,456)
Increase (decrease) in liabilities:
Accounts payable......................................................... 9,029 16,496 19,132
Accrued salaries and vacations........................................... 8,821 (5,551 ) 4,560
Accrued taxes............................................................ (9,582 ) (429 ) (5,502)
Other accrued liabilities................................................ (16,696 ) (4,014 ) (6,283)
Other noncurrent liabilities and deferred credits........................ (25,198 ) (28,364 ) (10,628)
Net cash flows from operating activities...................................... 54,557 14,091 16,726
Cash Flows from Investing Activities:
Purchase of property........................................................ (154,480 ) (123,739 ) (55,026)
Proceeds from dispositions of property...................................... 20,135 25,693 14,323
Advances to discontinued operations, net.................................... (9,670 ) (6,952 ) --
Proceeds from sale of discontinued operations............................... 447,073 172,080 --
Proceeds from sales of subsidiaries......................................... -- 122,500 62,992
Acquisition of business, net of cash acquired............................... -- -- (127,068)
Other long-term assets, net................................................. (6,205 ) (3,217 ) (4,670)
Net cash flows provided by (used in) investing activities..................... 296,853 186,365 (109,449)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FLAGSTAR COMPANIES, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Cash Flows from Financing Activities:
Net borrowings (repayments) under credit agreements......................... $ (93,000 ) $ -- $ 56,000
Deferred financing costs.................................................... (25 ) -- (9,591)
Long-term debt payments..................................................... (201,664 ) (56,035) (44,108)
Cash dividends on preferred stock........................................... (14,175 ) (14,175) (14,175)
Net cash flows used in financing activities................................. (308,864 ) (70,210) (11,874)
Increase (decrease) in cash and cash equivalents............................ 42,546 130,246 (104,597)
Cash and Cash Equivalents at:
Beginning of period......................................................... 24,174 66,720 196,966
End of period............................................................... $ 66,720 $196,966 $ 92,369
Supplemental Cash Flow Information:
Income taxes paid........................................................... $ 8,035 $ 3,591 $ 2,196
Interest paid............................................................... $ 244,478 $238,832 $239,284
Non-cash financing activities:
Capital lease obligations................................................ $ 18,800 $ 5,505 $ 12,310
Dividends declared but not paid.......................................... $ 3,544 $ 3,544 $ --
Non Cash investing activities:
Other investing.......................................................... $ -- $ 8,185 $ --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
Flagstar Companies, Inc. (Company) was incorporated under the laws of the
State of Delaware on September 24, 1988 to effect the acquisition of Flagstar
Corporation (Flagstar). Prior to June 16, 1993 the Company and Flagstar had been
known, respectively, as TW Holdings, Inc. and TW Services, Inc.
Flagstar, through its wholly-owned subsidiaries, Denny's Holdings, Inc.,
Spartan Holdings, Inc. and FRD Acquisition Co. (and their respective
subsidiaries), owns and operates the Denny's, El Pollo Loco, Quincy's Family
Steakhouse, Coco's and Carrows restaurant brands and is the largest franchisee
of Hardee's. Denny's, a family-style restaurant chain, operates in forty-nine
states, two U.S. territories, and six foreign countries, with principal
concentrations in California, Florida, Texas, Washington, Arizona,
Pennsylvania, Illinois, and Ohio. Hardee's competes in the quick-service
hamburger category and Quincy's operates in the family-steak restaurant
category. The Company's Hardee's and Quincy's restaurant chains are located
primarily in the southeastern United States; El Pollo Loco is a quick-service
flame-broiled chicken concept which operates primarily in southern California.
Coco's and Carrows restaurant chains, acquired by Flagstar in May 1996,
compete in the family-style category and are located primarily in the western
United States.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows and results of
operations are as follows:
(a) CONSOLIDATED FINANCIAL STATEMENTS. The Consolidated Financial
Statements include the accounts of the Company, and its subsidiaries.
Certain prior year amounts have been reclassified to conform to the
1996 presentation.
(b) FINANCIAL STATEMENT ESTIMATES. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and revenues
and expenses during the period reported. Actual results could differ
from those estimates.
(c) CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
(d) INVENTORIES. Merchandise and supply inventories are valued primarily at
the lower of average cost or market.
(e) PROPERTY AND DEPRECIATION. Owned property is stated at cost and is
depreciated on the straight-line method over its estimated useful life.
Property held under capital leases (at capitalized value) is amortized
over its estimated useful life, limited generally by the lease period.
The following estimated useful service lives were in effect during all
periods presented in the financial statements:
Merchandising equipment -- Principally five to ten years
Buildings -- Fifteen to forty years
Other equipment -- Two to ten years
Leasehold improvements -- Estimated useful life limited by the lease
period.
(f) GOODWILL AND OTHER INTANGIBLE ASSETS. The excess of cost over the fair
value of the net assets acquired of FRI-M Corporation (see Note 2 for
further details) is being amortized over a 40-year period on the
straight-line method. Other intangible assets consist primarily of
costs allocated to tradenames, franchise and other operating
agreements. Such assets are being amortized on the straight-line basis
over the useful lives of the franchise or the contract period of the
operating agreements. The Company assesses the recoverability of
goodwill and other intangible assets by projecting future net income
related to the acquired business, before the effect of amortization of
intangible assets, over the remaining amortization period of such
assets.
(g) IMPAIRMENT OF LONG-LIVED ASSETS. During 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121 (SFAS
No. 121) "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ". Pursuant to this statement, the
Company reviews long-lived assets and
F-7
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
certain identifiable intangibles to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. In addition, long-lived
assets and certain identifiable intangibles to be disposed of are
reported at the lower of carrying amount or estimated fair value less
costs to sell. See Note 3 for further discussion of the impairment of
long-lived assets.
(h) DEFERRED FINANCING COSTS. Costs related to the issuance of debt are
deferred and amortized as a component of interest and debt expense over
the terms of the respective debt issues using the interest method.
(i) PREOPENING COSTS. The Company capitalizes certain direct incremental
costs incurred in conjunction with the opening of restaurants and
amortizes such costs over a twelve month period from the date of
opening.
(j) INCOME TAXES. Income taxes are accounted for under the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes."
(k) INSURANCE. The Company is primarily self insured for workers
compensation, general liability, and automobile risks which are
supplemented by stop loss type insurance policies. The liabilities for
estimated incurred losses are discounted to their present value based
on expected loss payment patterns determined by independent actuaries
or experience. The total discounted self-insurance liabilities recorded
at December 31, 1995 and 1996 were $91.0 million and $100.1 million
respectively, reflecting a 4% discount rate. The related undiscounted
amounts at such dates were $98.0 million and $111.1 million,
respectively.
(l) INTEREST RATE EXCHANGE AGREEMENTS. As a hedge against fluctuations in
interest rates, the Company has entered into interest rate exchange
agreements to swap a portion of its fixed rate interest payment
obligations for floating rates without the exchange of the underlying
principal amounts. The Company does not speculate on the future
direction of interest rates nor does the Company use these derivative
financial instruments for trading purposes. Since such agreements are
not entered into on a speculative basis, the Company uses the
settlement basis of accounting. See Note 4 for further discussion of
the interest rate exchange agreements.
(m) ADVERTISING COSTS. Production costs for radio and television
advertising are expensed as of the date the commercials are initially
aired. Advertising expense for the years ended December 31, 1994, 1995
and 1996 was $85.8 million, $93.0 million, and $114.3 million,
respectively.
(n) DISCONTINUED OPERATIONS. The Company has allocated to discontinued
operations a pro-rata portion of interest and debt expense related to
its acquisition debt based on a ratio of the net assets of its
discontinued operations to its total consolidated net assets as of the
1989 acquisition date. Interest included in discontinued operations for
the years ended December 31, 1994 and 1995 was $37.4 million and $18.9
million, respectively.
(o) DEFERRED GAINS. In September 1995, the Company sold its distribution
subsidiary, Proficient Food Company (PFC), for approximately $122.5
million. In conjunction with the sale, the Company entered into an
eight year distribution contract with the acquirer of PFC. This
transaction resulted in a deferred gain of approximately $72.0 million
that is being amortized over the life of the distribution contract as a
reduction of product cost. During the third quarter of 1996, the
Company sold Portion-Trol Foods, Inc. and the Mother Butler Pies
division of Denny's, its two food processing operations. The sales were
finalized in the fourth quarter of 1996 pursuant to the purchase price
adjustment provisions of the related agreements. Consideration from the
sales totaled approximately $72.1 million, including the receipt of
approximately $60.6 million in cash. In conjunction with each of the
sales, the Company entered into five year purchasing agreements with
the acquirers. These transactions resulted in deferred gains totaling
approximately $41.5 million that are being amortized over the lives of
the respective purchasing agreements as a reduction of product cost.
The portion of the deferred gains recognized as a reduction in product
costs in 1995 and 1996 was approximately $2.8 million and $11.1
million, respectively.
(p) CASH OVERDRAFTS. The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totalling
$54.4 million and $51.6 million at December 31, 1995 and 1996,
respectively.
F-8
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(q) FRANCHISE AND LICENSE FEES. Initial franchise and license fees are
recognized when all material services have been performed and
conditions have been satisfied. Initial fees for all periods presented
are insignificant. Monthly fees are accrued as earned based on the
respective monthly sales. Such fees totaled $46.4 million, $59.3
million, and $71.1 million for the years ended December 31, 1994, 1995
and 1996, respectively.
NOTE 2 ACQUISITION
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly
formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 company-owned units within the family-style
category. The acquisition price of $313.4 million plus acquisition costs (which
was paid in exchange for all of the outstanding stock of FRI-M Corporation
("FRI-M"), the subsidiary of Family Restaurants Inc. ("FRI") which owns the
Coco's and Carrows chains) was financed with $125.0 million in cash ($75.0
million of which was provided from the Company's cash balances and the remaining
$50.0 million pursuant to bank term loans which totaled $56.0 million with the
remaining $6.0 million being used to pay transaction fees), the issuance of
$156.9 million in senior notes of FRD to the seller, including an additional
$6.9 million principal amount of notes issued by FRD to FRI pursuant to the
purchase price adjustment provisions of the Stock Purchase Agreement on
September 4, 1996 and the assumption of certain capital lease obligations of
approximately $31.5 million. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the assets and liabilities and
results of operations of Coco's and Carrows are included in the Company's
consolidated financial statements for the period subsequent to the acquisition.
In accordance with the purchase method of accounting, the purchase price
has been allocated to the underlying assets and liabilities of FRI-M based on
their estimated respective fair values at the date of acquisition. The purchase
price exceeded the fair value of the net assets acquired by approximately $209
million. The resulting goodwill is being amortized on a straight line basis over
40 years. This amount reflects a decrease from the original estimate of
approximately $12 million. The revision, which was recorded during the fourth
quarter of 1996, is primarily due to the completion of certain valuations and
other studies which were prepared in order to estimate the fair value of the net
assets acquired. No further revisions to the purchase price allocation are
expected except for the potential impact of adjustments related to deferred
income taxes, which are expected to be resolved in early 1997.
The following unaudited pro forma financial information shows the results
of operations of the Company as though the acquisition occurred as of January 1,
1995. These results include the straight-line amortization of the excess of
purchase price over the net assets acquired over a 40-year period, a reduction
of overhead expenses due to anticipated cost savings and efficiencies from
combining the operations of the Company and FRI-M, an increase in interest
expense as a result of the debt issued to finance the acquisition, and a
reduction in FRI-M's income tax expense to reflect the fact that the Company's
net operating losses will offset FRI-M's separate income tax provision (except
for current foreign and state income taxes) when calculated on a consolidated
basis.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue............................................................ $3,077.1 $2,738.2
Loss from continuing operations.................................... (126.6) (83.4)
Net Loss........................................................... (48.9) (83.4)
Loss per common share:
Loss from continuing operations.................................. (3.32) (2.30)
Net loss......................................................... (1.49) (2.30)
</TABLE>
The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations had the acquisition taken
place on January 1, 1995 or (ii) future results of operations of the combined
businesses.
F-9
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan. The
plan generally involved the reduction in personnel and a decision to outsource
the Company's information systems function.
In addition, the Company adopted SFAS No. 121 during 1995 (see Note 1(g)).
In connection with such adoption, 99 restaurant units, which the Company
intended to continue to operate were identified as impaired as the future
undiscounted cash flows of each of these units was estimated to be insufficient
to recover the related carrying value. As such, the carrying values of these
units were written down to the Company's estimate of fair value based on sales
of similar units or other estimates of selling price.
During 1995, the Company also identified 36 underperforming units for sale
or closure generally during 1996. The carrying value of these units was written
down to estimated fair value, based on sales of similar units or other estimates
of selling price, less costs to sell. The 36 units identified in 1995 for
disposal had aggregate operating revenues of approximately $26.1 million, an
operating loss of approximately $2.9 million during 1995, and an aggregate
carrying value of approximately $5.8 million as of December 31, 1995. As of
December 31, 1996, 29 units have been closed or sold. Management intends to
dispose of two of the remaining units in 1997 and continue to operate the other
five. The two units to be disposed of in 1997 had aggregate operating revenues
of approximately $1.6 million and operating income of $0.04 million during 1996
and an aggregate carrying amount of $0.3 million at December 31, 1996.
Charges attributable to the restructuring plan and the adoption of SFAS No.
121 during the year ended December 31, 1995 are comprised of the following:
<TABLE>
<S> <C>
($ in thousands)
Restructuring:
Severance................................................................................ $ 5,376
Write-down of computer hardware and software and other assets............................ 7,617
Other.................................................................................... 2,880
$15,873
Impairment of Long-lived Assets:
Write-down attributable to the restaurant units the Company
will continue to operate.............................................................. $41,670
Write-down attributable to the restaurant units to be disposed........................... 9,688
$51,358
</TABLE>
The 1995 restructuring plan was substantially completed in 1996 except for
certain asset replacement projects (where the assets to be replaced were written
down as part of the restructuring) which were postponed in 1996 due to the
Company's capital constraints. Such projects are expected to be completed in
1997. Pursuant to the restructuring plan, approximately 74 employees, primarily
corporate and field management, have been terminated as of December 31, 1996,
resulting in payments of approximately $4.5 million as of that date.
Effective in the fourth quarter of 1993, the Company approved a
restructuring plan, which, among other things, resulted in the identification
for sale, conversion to another concept or closure of 240 restaurants. As of
December 31, 1996, four units remain relative to the 1993 restructuring plan, of
which two are scheduled for disposal in 1997. Management has decided to continue
to operate the remaining two units. The two units to be disposed of in 1997 had
operating revenues of approximately $1.3 million and operating income of $0.03
million during 1996 and an aggregate carrying amount that was immaterial at
December 31, 1996.
F-10
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT
At December 31, 1996, the Flagstar Second Amended and Restated Credit
Agreement (the "Credit Agreement") includes a working capital and letter of
credit facility of up to a total of $150.0 million which includes a working
capital advance sublimit of $75.0 million. At such date, the Company had no
working capital advances outstanding; however, letters of credit outstanding
were $79.7 million. The Credit Agreement terminates on April 10, 1999 and is
subject to mandatory prepayments and commitment reductions under certain
circumstances upon the Company's sale of assets or incurrence of additional
debt. See also the discussion below.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Notes and Debentures:
10.75% Senior Notes due September 15, 2001, interest payable semi-annually...................... $ 270,000 $ 270,000
10.875% Senior Notes due December 1, 2002, interest payable semi-annually....................... 280,025 280,025
11.25% Senior Subordinated Debentures due November 1, 2004, interest payable
semi-annually................................................................................ 722,411 722,411
11.375% Senior Subordinated Debentures due September 15, 2003, interest payable semi-annually... 125,000 125,000
10% Convertible Junior Subordinated Debentures due 2014 (10% Convertible Debentures), interest
payable semi-annually; convertible into Company common stock any time prior to maturity at
$24.00 per share............................................................................. 99,259 99,259
12.5% Senior Notes of FRD due July 15, 2004, interest payable semi-annually..................... -- 156,897
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000........................................................ 202,715 190,164
11.03% Notes due 2000........................................................................... 160,000 160,000
Term loan of FRI-M, principal payable in quarterly installments................................. -- 56,000
Other notes payable, mature over various terms to 20 years, payable in monthly or quarterly
installments with interest rates ranging from 7.5% to 13.25% (a)............................. 17,415 13,561
Capital lease obligations (see Note 5)............................................................ 144,573 160,226
Notes payable secured by equipment, mature over various terms up to 7 years, payable in monthly
installments with interest rates ranging from 8.5% to 9.64%(b).................................. 13,548 8,740
Total............................................................................................. 2,034,946 2,242,283
Less current maturities (c)....................................................................... 38,835 62,890
$1,996,111 $2,179,393
</TABLE>
(a) Collateralized by restaurant and other properties with a net book value of
$20.9 million at December 31, 1996.
(b) Collateralized by equipment with a net book value of $13.2 million at
December 31, 1996.
(c) Aggregate annual maturities during the next five years of long-term debt are
as follows ($ in thousands): 1997 -- $62,890; 1998 -- $57,830;
1999 -- $51,169; 2000 -- $326,666; and 2001 -- $280,999.
The borrowings under the Credit Agreement are secured by the stock of
certain operating subsidiaries and certain of the Company's trade and service
marks and are guaranteed by certain operating subsidiaries. Such guarantees are
further secured by certain operating subsidiary assets.
The Credit Agreement and indentures under which the debt securities have
been issued contain a number of restrictive covenants. Such covenants restrict,
among other things, the ability of Flagstar and its restricted subsidiaries to
incur indebtedness, create liens, engage in business activities which are not in
the same field as that in which the Company currently operates, mergers and
acquisitions, sales of assets, transactions with affiliates and the payment of
dividends. In addition, the Credit Agreement contains financial covenants
including provisions for the maintenance of a minimum level of interest coverage
(as defined), limitations on ratios of indebtedness (as defined) to earnings
before interest, taxes, depreciation and amortization (EBITDA), and limitations
on annual capital expenditures.
F-11
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
The Company was in compliance with the terms of the Credit Agreement at
December 31, 1996. Under the most restrictive provision of the Credit Agreement
(ratio of senior debt to EBITDA, as defined), at December 31, 1996, the Company
could incur approximately $28.4 million of additional indebtedness.
With respect to short-term liquidity, management believes that through a
combination of cash generated from operations, funds available through the bank
credit facility, various cash management measures and other sources, adequate
liquidity exists to meet the Company's working capital, debt service and capital
expenditure requirements for at least the next twelve months. Although no
assurances can be given in this regard, management believes, based on the
Company's historical relationship with its banks, that it will be able, as
necessary, to maintain access to funds available under the credit agreement.
At December 31, 1996, the 10.25% guaranteed bonds were secured by, among
other things, mortgage loans on 386 restaurants, a lien on the related
restaurant equipment, assignment of intercompany lease agreements, and the stock
of the issuing subsidiaries. At December 31, 1996, the restaurant properties and
equipment had a net book value of $317.6 million. In addition, the bonds are
insured with a financial guaranty insurance policy written by a company that
engages exclusively in such coverage. Principal and interest on the bonds are
payable semiannually; certain payments are made by the Company on a monthly
basis. Principal payments total $12.5 million annually through 1999 and $152.7
million in 2000. The Company through its operating subsidiaries covenants that
it will maintain the properties in good repair and expend annually (or on a five
year average basis) to maintain the properties at least $19.3 million in 1997
and increasing each year to $23.7 million in 2000.
The 11.03% mortgage notes are secured by a pool of cross collateralized
mortgages on 240 restaurants with a net book value at December 31, 1996 of
$220.9 million. In addition, the notes are collateralized by, among other
things, a security interest in the restaurant equipment, the assignment of
intercompany lease agreements and the stock of the issuing subsidiary. Interest
on the notes is payable quarterly with the entire principal due at maturity in
2000. The notes are redeemable, in whole, at the issuer's option, upon payment
of a premium. The Company through its operating subsidiary covenants that it
will use each property as a food service facility, maintain the properties in
good repair and expend at least $5.3 million per annum and not less than $33
million, in the aggregate, in any five year period to maintain the properties.
In connection with the acquisition by FRD of Coco's and Carrows on May 23,
1996, FRI-M (the "Borrower"), a wholly-owned subsidiary of FRD, obtained a new
credit facility (the "FRI-M Credit Facility") consisting of a $56 million,
39-month term loan (the "FRI-M Term Loan") and a $35 million working capital
facility (the "FRI-M Revolver"). Proceeds from the FRI-M Term Loan were used to
fund the Coco's and Carrows acquisition, and to pay the transactions costs
associated therewith. Proceeds from the FRI-M Revolver are to be used for
working capital requirements and other general corporate purposes, which may
include the making of intercompany loans to any of the Borrower's wholly owned
subsidiaries for their own working capital and other general corporate purposes.
Letters of credit may be issued under the FRI-M Revolver for the purpose of
supporting (i) workers' compensation liabilities of the Borrower or any of its
subsidiaries; (ii) the obligations of third party insurers of the Borrower or
any of its subsidiaries; and (iii) certain other obligations of the Borrower and
its subsidiaries. At December 31, 1996, there were no working capital borrowings
outstanding; however, letters of credit outstanding were $20.8 million.
Principal installments of the FRI-M Term Loan are payable quarterly as follows:
$4.0 million per quarter for four consecutive quarters beginning February 28,
1997; $5.0 million for four consecutive quarters beginning February 28, 1998; $6
million on February 28, 1998; and $7 million for two consecutive quarters
beginning May 31, 1999. The FRI-M Credit Facility expires, and all amounts under
the Facility must be repaid, on August 31, 1999. All borrowings under the FRI-M
Credit Facility accrue interest at a variable rate based on a base rate or an
adjusted Eurodollar rate (8.125% at year end 1996) and are secured by the issued
and outstanding stock, as well as substantially all the assets, of FRD and its
subsidiaries.
The FRI-M Credit Facility and the indenture under which the 12.5% senior
notes have been issued contain a number of restrictive covenants which, among
other things, limit (subject to certain exceptions) FRD and its subsidiaries
with respect to the incurrence of debt, existence of liens, investments and
joint ventures, the declaration or payment of dividends, the making of
guarantees and other contingent obligations, mergers, the sale of assets,
capital expenditures and
F-12
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
material change in their business. In addition, the FRI-M Credit Facility
contains certain financial covenants including provisions for the maintenance of
a minimum level of interest coverage (as defined), limitations on ratios of
indebtedness (as defined) to earnings before interest, taxes, depreciation and
amortization (EBITDA), maintenance of a minimum level of EBITDA, and limitations
on annual capital expenditures. The cash flows from FRD are required to be used
to service the debt issued in the Coco's and Carrows acquisition (the FRI-M
Credit Facility and the 12.5% Senior Notes), and, therefore, other than for the
payment of certain management fees and tax reimbursements payable to Flagstar
under certain conditions, are currently unavailable to service the debt of
Flagstar and its other subsidiaries. FRD's cash flows from operating activities,
included in the Company's total cash flow from operating activities, were $21.2
million in 1996.
FRD and its subsidiaries were in compliance with the terms of the FRI-M
Credit Facility at December 31, 1996. Under the most restrictive provision of
the FRI-M Credit Facility (ratio of Consolidated Adjusted EBITDA to interest
expense), at December 31, 1996, FRD's consolidated EBITDA for the six months
ended December 31, 1996 could be $5.6 million less and the Company would still
be in compliance.
At December 31, 1996, the Company has $575 million aggregate notional
amount in effect of reverse interest rate exchange agreements with maturities
ranging from one to thirty-six months. These notional amounts reflect only the
extent of the Company's involvement in these financial instruments and do not
represent the Company's exposure to market risk. The Company receives interest
at fixed rates calculated on such notional amounts and pays interest at floating
rates based on six months LIBOR in arrears calculated on like notional amounts.
The net expense from such agreements is reflected in interest and debt expense
and totalled $9.2 million, $3.1 million, and $1.4 million for the years ended
December 31, 1994, 1995, and 1996, respectively. Management intends to maintain
its exchange agreements until maturity, unless there is a material change in the
underlying hedged instruments of the Company.
The counterparties to the Company's interest rate exchange agreements are
major financial institutions who participate in the Company's senior bank credit
facility. Such financial institutions are leading market-makers in the financial
derivatives markets, are well capitalized, and are expected to fully perform
under the terms of such exchange agreements, thereby mitigating the credit risk
to the Company.
The Company is exposed to market risk for such exchange agreements due to
the interest rate differentials described above. The Company monitors its market
risk by periodically preparing sensitivity analyses of various interest rate
fluctuation scenarios and the results of such scenarios on the Company's cash
flows on a nominal and discounted basis. In addition, the Company obtains
portfolio mark-to-market valuations from market-makers of financial derivatives
products.
Information regarding the Company's reverse interest rate exchange
agreements at December 31, 1996 is as follows ($ in millions):
<TABLE>
<CAPTION>
AMOUNT OF WEIGHTED AVERAGE
YEAR OF NOTIONAL INTEREST RATE
MATURITY PAYMENT RECEIVED PAID
<S> <C> <C> <C>
1997 $ 275 5.22% 5.74%
1998 200 5.58% 5.72%
1999 100 5.82% 5.72%
$ 575 5.45% 5.73%
</TABLE>
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is approximately $1.7 billion at December 31, 1996. Such
computations are based on market quotations for the same or similar debt issues
or the estimated borrowing rates available to the Company. At December 31, 1996,
the estimated fair value of the $575 million notional amount of reverse interest
rate swaps was a net payable of approximately $3.7 million and represents the
estimated amount that the Company would be required to pay to terminate the swap
agreements at December 31, 1996. This estimate is based upon a mark-to-market
valuation of the Company's swap portfolio obtained from a major financial
institution which is one of the counterparties to the exchange agreements.
F-13
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 DEBT -- Continued
On January 21, 1997, the Company hired Donaldson, Lufkin & Jenrette
Securities Corporation as a financial advisor to assist in exploring
alternatives to improve the Company's capital structure. Management intends to
explore all alternatives to reduce the Company's debt service requirements,
which may include a negotiated restructuring or other exchange transaction.
NOTE 5 LEASES AND RELATED GUARANTEES
The Company's operations utilize property, facilities, equipment and
vehicles leased from others. In addition, certain owned and leased property,
facilities and equipment are leased to others.
Buildings and facilities leased from others primarily are for restaurants
and support facilities. At December 31, 1996, restaurants were operated under
lease arrangements which generally provide for a fixed basic rent, and, in some
instances, contingent rental based on a percentage of gross operating profit or
gross revenues. Initial terms of land and restaurant building leases generally
are not less than twenty years exclusive of options to renew. Leases of other
equipment primarily consist of merchandising equipment, computer systems and
vehicles, etc.
Information regarding the Company's leasing activities at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
MINIMUM MINIMUM MINIMUM MINIMUM
LEASE SUBLEASE LEASE SUBLEASE
PAYMENTS RECEIPTS PAYMENTS RECEIPTS
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
Year:
1997....................................................................... $ 41,517 $ 6,865 $ 61,395 $7,589
1998....................................................................... 35,321 6,363 58,514 7,422
1999....................................................................... 29,221 5,753 54,997 7,067
2000....................................................................... 23,380 4,938 51,173 6,749
2001....................................................................... 20,257 4,285 44,655 6,402
Subsequent years........................................................... 124,917 21,353 238,326 45,957
Total................................................................... 274,613 $49,557 $509,060 $81,186
Less imputed interest........................................................ 114,387
Present value of capital lease obligations................................... $160,226
</TABLE>
Payments for certain FRD operating leases are being made by FRI in
accordance with the provisions of the Stock Purchase Agreement. As such, these
payments have been excluded from the amount of minimum lease payments and
minimum sublease receipts reported above.
The total rental expense included in the determination of operating income
for the years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Base rents.................................................................... $ 49,234 $ 48,269 $ 59,322
Contingent rents.............................................................. 12,178 11,274 10,929
Total......................................................................... $ 61,412 $ 59,543 $ 70,251
</TABLE>
Total rental expense does not reflect sublease rental income of $9,975,000,
$14,426,000, and $16,282,000 for the years ended December 31, 1994, 1995, and
1996, respectively.
F-14
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to
the loss before discontinued operations and extraordinary items is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Current:
Federal..................................................................... $ 365 $ 1,940 $ (6,074)
State, Foreign and Other.................................................... 215 1,497 (1,287)
580 3,437 (7,361)
Deferred:
Federal..................................................................... -- -- (6,797)
State, Foreign and Other.................................................... (2,793) (3,451) (2,234)
(2,793) (3,451) (9,031)
Benefit from income taxes..................................................... $ (2,213) $ (14) $(16,392)
The total provision for (benefit from) income taxes related to:
Loss before discontinued operations and extraordinary items................. $ (2,213) $ (14) $(16,392)
Discontinued operations..................................................... 10,470 8,731 --
Extraordinary items......................................................... (174) 25 --
Total provision for (benefit from) income taxes............................... $ 8,083 $ 8,742 $(16,392)
</TABLE>
For the years ended December 31, 1994 and 1995, the provision for income
taxes relating to discontinued operations was reduced due to the utilization of
regular tax net operating loss carryforwards of approximately $89 million in
1994 and $75 million in 1995. In addition, for the year ended December 31, 1996,
the Company recorded a $7.3 million deferred Federal tax benefit related to the
reversal of certain reserves established in connection with the proposed
deficiencies from the Internal Revenue Service.
F-15
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 INCOME TAXES -- Continued
The following represents the approximate tax effect of each significant
type of temporary difference and carryforward giving rise to deferred income tax
liabilities or assets:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Deferred tax assets:
Deferred income......................................................................................... $24,326 $39,953
Self-insurance reserves................................................................................. 33,522 43,006
Capitalized leases...................................................................................... 15,823 19,869
Amortization of intangible assets....................................................................... -- 2,949
Other accruals and reserves............................................................................. 6,924 18,054
Alternative minimum tax credit carryforwards............................................................ 18,444 10,459
General business credit carryforwards................................................................... 21,623 19,232
Net operating loss carryforwards........................................................................ 9,764 32,135
Less: valuation allowance............................................................................... (54,452) (83,828)
Total deferred tax assets............................................................................... 75,974 101,829
Deferred tax liabilities:
Depreciation of fixed assets............................................................................ 89,787 118,190
Amortization of intangible assets....................................................................... 4,362 --
Total deferred tax liabilities.......................................................................... 94,149 118,190
Total deferred income tax liability..................................................................... $18,175 $16,361
</TABLE>
The Company has provided a valuation allowance for the portion of the
deferred tax asset for which it is more likely than not that a tax benefit will
not be realized.
The difference between the statutory federal income tax rate and the
effective tax rate on loss from continuing operations before discontinued
operations and extraordinary items is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Statutory rate................................................................ 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit.......... 12 -- 2
Amortization of goodwill.................................................... -- -- 1
Reversal of certain reserves established in connection with proposed
Internal Revenue Service deficiencies.................................... -- -- 7
Portion of losses not benefited as a result of the establishment of
valuation allowance...................................................... (35) (35) (29)
Effective tax rate............................................................ 12% --% 16%
</TABLE>
At December 31, 1996, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $19 million, most of which expire in 2002 through 2007; and
alternative minimum tax (AMT) credits of approximately $10 million. The AMT
credits may be carried forward indefinitely. In addition, the Company has
available regular income tax net operating loss carryforwards of approximately
$92 million which expire in 2007 through 2011. Due to the recapitalization of
the Company which occurred during 1992, the Company's ability to utilize general
business credits and AMT credits which arose prior to the recapitalization will
be limited to a specified annual amount. The annual limitation for the
utilization of the tax credit carryforwards is approximately $8 million. The net
operating loss carryforward arose subsequent to the recapitalization and is
presently not subject to any annual limitation.
F-16
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS
The Company maintains several defined benefit plans which cover a
substantial number of employees. Benefits are based upon each employee's years
of service and average salary. The Company's funding policy is based on the
minimum amount required under the Employee Retirement Income Security Act of
1974. The Company also maintains defined contribution plans.
Total net pension cost of defined benefit plans for the years ended
December 31, 1994, 1995, and 1996 amounted to $4.0 million, $5.6 million and
$3.5 million, respectively, of which $3.3 million related to funded defined
benefit plans for all three years and $0.7 million, $2.3 million and $0.2
million related to nonqualified unfunded supplemental defined benefit plans for
executives.
The components of net pension cost of the funded and unfunded defined
benefit plans for the years ended December 31, 1994, 1995, and 1996 determined
under SFAS No. 87 follow:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
($ IN THOUSANDS)
Service cost.................................................................. $ 3,076 $ 2,829 $ 3,151
Interest cost on projected benefit obligations................................ 2,427 2,651 2,895
Actual return on plan assets.................................................. 761 (3,722) (2,277)
Net amortization and deferral................................................. (2,269) 2,074 (242)
Curtailment/settlement losses (due to early retirements of certain
participants)............................................................... -- 1,762 --
Net pension cost.............................................................. $ 3,995 $ 5,594 $ 3,527
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Company's balance sheet for its funded defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits....................................................................................... $23,993 $27,661
Non-vested benefits................................................................................... 1,466 1,488
Accumulated benefit obligations......................................................................... $25,459 $29,149
Plan assets at fair value............................................................................... $26,513 $31,109
Projected benefit obligation............................................................................ (32,059) (36,416)
Funded status........................................................................................... (5,546) (5,307)
Unrecognized net loss from past experience different from that assumed.................................. 6,301 6,890
Unrecognized prior service cost......................................................................... 69 --
Prepaid pension costs................................................................................... $ 824 $ 1,583
</TABLE>
Assets held by the Company's plans are invested in money market and other
fixed income funds as well as equity funds.
F-17
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
The following sets forth the funded status and amounts recognized in the
Company's balance sheet for its unfunded defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
($ IN THOUSANDS)
Actuarial present value of accumulated benefit obligations:
Vested benefits........................................................................................ $ 4,080 $ 4,924
Non-vested benefits.................................................................................... 12 33
Accumulated benefit obligations.......................................................................... $ 4,092 $ 4,957
Plan assets at fair value................................................................................ $ -- $ --
Projected benefit obligation............................................................................. (4,188) (5,051)
Funded status............................................................................................ (4,188) (5,051)
Unrecognized net (gain) loss from past experience different from that assumed............................ (112) 616
Unrecognized prior service cost.......................................................................... 109 68
Unrecognized net asset at January 1, 1987 being amortized over 15 years.................................. (49) (9)
Additional liability..................................................................................... (543) (974)
Other 24 --
Accrued pension costs.................................................................................... $(4,759) $(5,350)
</TABLE>
Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Discount rate......................................................... 8.3 % 8.0 % 8.0 %
Rates of salary progression........................................... 4.0 % 4.0 % 4.0 %
Long-term rates of return on assets................................... 10.0 % 10.0 % 10.0 %
</TABLE>
In addition, the Company has defined contribution plans whereby eligible
employees can elect to contribute from 1%-15% of their compensation to the
plans. These plans include profit sharing and savings plans under which the
Company makes matching contributions, with certain limitations. Amounts charged
to income under these plans were $3.9 million for the years ended December 31,
1994 and 1995 respectively. The Company made no matching contributions for the
year ended December 31, 1996.
Incentive compensation plans provide for awards to management employees
based on meeting or exceeding certain levels of income as defined by such plans
The amounts charged to income under the plans for the years ended December 31,
1994, 1995, and 1996 were as follows: $4.2 million, $0.6 million, and $1.9
million. In addition to these incentive compensation plans, certain operations
have incentive plans in place under which regional, divisional and local
management participate.
At December 31, 1996, the Company has two stock-based compensation plans,
which are described below. The company has adopted the disclosure-only
provisions of Financial Accounting Standards Board Statement 123, "Accounting
for Stock Based Compensation" (SFAS 123) while continuing to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its stock-based compensation
plans. Under APB 25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
The 1989 Stock Option Plan (the 1989 Plan) permits a Committee of the Board
of Directors to grant options to key employees of the Company and its
subsidiaries to purchase shares of common stock of the Company at a stated price
established by the Committee. Such options are exercisable at such time or times
either in whole or part, as determined by the Committee. The 1989 Plan
authorizes grants of up to 6.5 million common shares. The exercise price of each
option equals or exceeds the market price of the Company's stock on the date of
grant. Options granted to officer level employees vest at a rate of 20% per
annum beginning on the first anniversary date of the grant. Options granted to
non-officer
F-18
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
level employees prior to August 13, 1996 vest at a rate of 25% per annum. Those
granted on August 13, 1996 or subsequent thereto, vest at a rate of 20% per
annum If not exercised, all options expire ten years from the date of grant.
During January 1995, the Company issued 65,306 shares of common stock (Note
9) and granted an option under the 1989 Stock Option Plan to purchase 800,000
shares of the Company's common stock to an executive officer, at market value at
date of grant, for a ten year period. Such grant becomes exercisable at a rate
of 20% per year beginning on January 9, 1996 and each anniversary thereafter.
On June 21, 1995, generally all of the outstanding options held by the then
current employees of the Company under the 1989 Plan were repriced to $6.00 per
share, the market value of the common stock on that date. All officer level
employees were given the choice of either retaining their current options at
their existing exercise prices and vesting schedule or surrendering their
existing options in exchange for an option to purchase the same number of shares
exercisable at a rate of 20% per annum beginning on the first anniversary date
of the new grant. All non-officer employees received the new exercise price of
$6.00 per share and retained their original vesting schedules for all of their
outstanding options previously granted.
Options of 4.3 million were outstanding at December 31, 1995, of which
728,221 were exercisable. Such options had exercise prices of between $5.13 and
$17.50 per share. During 1995 no options were exercised.
On December 13, 1996, the outstanding options of certain officers and
senior staff, representing approximately 2.2 million outstanding options, were
repriced to $1.25 per share, the closing price of the common stock on December
12, 1996. The repricing did not impact the option vesting schedules.
In 1990, the Board of directors adopted a 1990 Non-qualified Stock Option
Plan (the 1990 Plan) for its directors who do not participate in management and
are not affiliated with GTO (See Note 12). Such plan authorizes the issuance of
up to 110,000 shares of common stock. The plan is substantially similar in all
respects to the 1989 Plan described above. At both December 31, 1995 and 1996,
options outstanding under the 1990 Option Plan totaled 10,000 shares.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted or repriced during 1995 and 1996 under
the fair value method of that statement. The fair value of these options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1995 and 1996,
respectively: dividend yield of 0.0% for both years; expected volatility of
0.438 for both years; risk-free interest rates of 5.6% and 5.7%; and a weighted
average expected life of the options of 8.3 years and 8.9 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
($ IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE) 1995 1996
<S> <C> <C>
Pro forma net loss............................................................. $(57,719) $(87,124)
Pro forma loss per share:
Primary...................................................................... (1.68) (2.39)
Fully diluted................................................................ (1.68) (2.39)
</TABLE>
Due to the fact that the pro forma amounts above include only the impact of
the application of fair value accounting to options issued in 1995 and 1996 as
prescribed by Statement 123, they are not, and will not be, indicative of future
pro forma amounts until fair value accounting is applied to all outstanding
nonvested awards.
F-19
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
A summary of the Company's stock option plans as of December 31, 1996 and
changes during the year ended December 31, 1996 is presented below:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE
<S> <C> <C>
Outstanding at beginning of year........................................ 4,338 $ 8.02
Granted
Exercise price equals fair value at grant date........................ 687 2.75
Exercise price exceeds fair value at grant date....................... 3,167 2.68
Exercised...............................................................
Forfeited/Expired....................................................... (3,873 ) 6.05
Outstanding at end of year.............................................. 4,319 $ 5.04
Exercisable at year-end................................................. 1,154 $ 9.84
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$ 1.25-$1.25 2,210,895 9.06 $ 1.25 191,358 $ 1.25
$ 2.75-$2.75 126,700 9.62 2.75 -- --
$ 6.00-$6.13 1,381,280 7.71 6.07 482,475 6.04
$15.00-$17.50 600,000 1.88 17.08 480,000 17.08
4,318,875 7.64 $ 5.04 1,153,833 $ 9.84
</TABLE>
The weighted average fair value per option of options granted during the
years ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Exercise price equals fair value at grant date....................................... $3.06 $1.65
Exercise price exceeds fair value at grant date...................................... 2.97 .78
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or indirectly
involving the Company, including actions concerned with civil rights of
employees and customers, other employment related matters, taxes, sales of
franchise rights and businesses, and other matters. Certain of these are seeking
damages in substantial amounts. The amounts of liability, if any, on these
direct or indirect claims and actions at December 31, 1996, over and above any
insurance coverage in respect to certain of them, are not specifically
determinable at this time.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by the Company and Flagstar for the seven taxable periods ended December
31, 1992. In the third quarter of 1996, this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act ("the Act") in August 1996. The Act included a
provision that clarified Internal Revenue Code Section 162(k) to allow for the
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. As the Company believes the remaining proposed
deficiencies are substantially incorrect, it intends to continue to contest such
proposed deficiencies.
It is the opinion of Management (including General Counsel), after
considering a number of factors, including but not limited to the current status
of the litigation (including any settlement discussions), the views of retained
counsel, the nature of the litigation or proposed tax deficiencies, the prior
experience of the consolidated companies, and the amounts
F-20
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 COMMITMENTS AND CONTINGENCIES -- Continued
which the Company has accrued for known contingencies that the ultimate
disposition of these matters will not materially affect the consolidated
financial position or results of operations of the Company.
The Company is guarantor on capital lease obligations of approximately $4.5
million at December 31, 1996 from the sale of PFC. See Note 1(o).
On February 22, 1996, the Company entered into an agreement with Integrated
Systems Solutions Corporation (ISSC). The ten year agreement for $340.6 million
(including an additional $17.6 million for FRD), which requires annual payments
ranging from $24.0 million to $47.5 million, provides for ISSC to manage and
operate the Company's information systems, as well as develop and implement new
systems and applications to enhance information technology for the Company's
corporate headquarters, restaurants and field management. Under the agreement,
ISSC has full oversight responsibilities for the data center operations,
applications development and maintenance, voice and data networking, help desk
operations, and point-of-sale technology.
In conjunction with the sales of Portion-Trol Foods, Inc. and the Mother
Butler Pies division of Denny's, the Company entered into five year purchasing
agreements with the acquirers under which the Company is required to make
minimum annual purchases over the contract terms. The aggregate estimated
commitments remaining at December 31, 1996 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $450 million and $54
million.
NOTE 9 SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
TOTAL SHAREHOLDERS'
OTHER EQUITY DEFICIT EQUITY (DEFICIT)
<S> <C> <C> <C>
($ IN THOUSANDS)
Balance December 31, 1993...................................................... $735,269 $(2,157,818) $ (1,422,549)
Activity:
Net Income................................................................ -- 364,093 364,093
Dividends declared on Preferred Stock..................................... -- (14,175) (14,175)
Minimum pension liability adjustment...................................... 10,131 -- 10,131
Balance December 31, 1994...................................................... 745,400 (1,807,900) (1,062,500)
Activity:
Net Loss.................................................................. -- (55,199) (55,199)
Dividends declared on Preferred Stock..................................... -- (14,175) (14,175)
Issuance of Common Stock (Note 7)......................................... 400 -- 400
Minimum pension liability adjustment...................................... 497 -- 497
Balance December 31, 1995...................................................... 746,297 (1,877,274) (1,130,977)
Activity:
Net Loss.................................................................. -- (85,460) (85,460)
Dividends declared on Preferred Stock..................................... -- (10,631) (10,631)
Minimum pension liability adjustment...................................... (459) (459)
Balance December 31, 1996...................................................... $745,838 $(1,973,365) $ (1,227,527)
</TABLE>
Each share of the $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock ($2.25 Preferred Stock) is convertible at the option of the
holder, unless previously redeemed, into 1.359 shares of common stock. The
Preferred Stock may be exchanged at the option of the Company, in up to two
parts, at any dividend payment date for the Company's 9% Convertible
Subordinated Debentures (Exchange Debentures) due July 15, 2017 in a principal
amount equal to $25.00 per share of $2.25 Preferred Stock. Each $25.00 principal
amount of Exchange Debenture, if issued, would be convertible at the option of
the holder into 1.359 shares of common stock of the Company. The $2.25 Preferred
Stock may be redeemed at the option of the Company, in whole or in part, on or
after July 15, 1994 at $26.80 per share if
F-21
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 SHAREHOLDERS' EQUITY (DEFICIT) -- Continued
redeemed during the twelve month-period beginning July 15, 1994, and thereafter
at prices declining annually to $25.00 per share on or after July 15, 2002.
The Company did not make the fourth quarter 1996 dividend payment on its
Preferred stock. Such cumulative dividends that have not been declared or paid
total $3.5 million, or $.08 per share, at December 31, 1996.
At December 31, 1996, there are warrants outstanding which entitle the
holder, an affiliate of Kohlberg, Kravis, Roberts & Co. (KKR), a shareholder of
the Company, to purchase 15 million shares of Company common stock at $17.50 per
share, subject to adjustment for certain events. Such warrants may be exercised
through November 16, 2000.
NOTE 10 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The outstanding warrants as well as the stock options issued to management
and directors are common stock equivalents. The $2.25 Preferred Stock and 10%
Convertible Debentures, which are convertible into the common stock of the
Company (see Note 4), are not common stock equivalents; however, such securities
are considered "other potentially dilutive securities" which may become dilutive
in the calculation of fully diluted per share amounts.
The calculations of primary and fully diluted loss per share amounts for
the years ended December 31, 1995 and 1996 have been based on the weighted
average number of Company shares outstanding. The warrants, options, $2.25
Preferred Stock, and 10% Convertible Debentures have been omitted from the
calculations for 1995 and 1996 because they have an antidilutive effect on loss
per share.
For the year ended December 31, 1994, the calculation of primary earnings
per share has been based on the weighted average number of outstanding shares as
adjusted by the assumed dilutive effect that would occur if the outstanding
warrants and stock options were exercised, using the modified treasury stock
method. The calculation of fully diluted earnings per share has been based on
additional adjustments to the primary earnings per share amount for the dilutive
effect of the assumed conversion of the $2.25 Preferred Stock and 10%
Convertible Debentures.
NOTE 11 EXTRAORDINARY ITEMS
The Company recorded losses from extraordinary items as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
INCOME LOSSES,
TAX NET OF
LOSSES BENEFITS TAXES
<S> <C> <C> <C>
($ IN THOUSANDS)
Prepayment of Term Loan:
Write-off of unamortized deferred financing costs on indebtedness retired............. $11,931 $ (174) $11,757
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
INCOME GAIN
TAX (LOSS),
GAIN PROVISION NET OF
(LOSS) (BENEFITS) TAXES
<S> <C> <C> <C>
($ IN THOUSANDS)
Repurchase of Senior Indebtness:
Gain on repurchase of senior indebtedness................................................ $ 1,461 $ 74 $ 1,387
Write-off of deferred financing costs on repurchase of senior indebtedness............... (970) (49) (921)
Total...................................................................................... $ 491 $ 25 $ 466
</TABLE>
During the second quarter of 1994, the Company sold Canteen Corporation, a
wholly-owned subsidiary. A portion of the proceeds from the sale was used to
prepay $170.2 million of term loans and $126.1 million of working capital
advances
F-22
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 EXTRAORDINARY ITEMS -- Continued
which were outstanding under the Company's Restated Credit Agreement resulting
in a charge-off of $11.9 million of unamortized deferred financing costs.
During the third quarter of 1995, the Company recognized an extraordinary
gain totaling $0.5 million, net of income taxes, which represents the repurchase
of $25.0 million principal amount of certain senior indebtedness, net of the
charge-off of the related unamortized deferred financing costs of $0.9 million.
NOTE 12 RELATED PARTY TRANSACTIONS
The Company expensed annual advisory fees of $250,000 for the year ended
December 31, 1994 for Gollust Tierney & Oliver, Incorporated (GTO), a
stockholder of the Company.
KKR received annual financial advisory fees of approximately $1.3 million
for the years ended December 31, 1994, 1995, and 1996.
During January 1997, the Company settled its employment and benefits
arrangments with, and loan receivable from, a former officer previously
scheduled to mature in November 1997. The Company received net proceeds of $8.2
million and recorded a net charge of approximately $3.5 million which has been
included in other non-operating expenses in the accompanying 1996 Statement of
Consolidated Operations.
Interest income for the loan receivable from the former officer for the
years ended December 31, 1994, 1995 and 1996 totaled $842,000, $886,000 and
$935,000, respectively.
NOTE 13 DISCONTINUED OPERATIONS
During April 1994, the Company announced the signing of a definitive
agreement to sell the food and vending business and its intent to dispose of the
remaining concession and recreation services businesses of its subsidiary,
Canteen Holdings, Inc. The Company sold Canteen Corporation, a food and vending
subsidiary, for $447.1 million during June 1994, and recognized a net gain of
approximately $399.2 million, net of income taxes, during the year ended
December 31, 1994.
During December 1995, the Company sold TW Recreational Services, Inc., a
concession and recreation services subsidiary, for $98.7 million and Volume
Services, Inc., a stadium concession services subsidiary for $75.8 million, and
recognized gains totaling $77.9 million, net of income taxes.
The financial statements and related notes presented herein classify
Canteen Holdings, Inc. and its subsidiaries as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. Revenues and
operating income (loss) of the discontinued operations for the years ended
December 31, 1994, and 1995 were $859.7 million, and $322.3 million and $32.6
million, and $17.1 million, respectively.
F-23
<PAGE>
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 QUARTERLY DATA (UNAUDITED)
The results for each quarter include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
interim periods. The consolidated financial results on an interim basis are not
necessarily indicative of future financial results on either an interim or an
annual basis. Selected consolidated financial data for each quarter within 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1995:
Operating Revenue............................................................ $636,464 $681,464 $676,899 $576,660
Operating expenses:
Product costs.............................................................. 218,246 238,514 229,446 178,299
Payroll & benefits......................................................... 228,809 238,889 229,368 219,885
Depreciation & amortization expense........................................ 33,249 33,748 32,802 33,073
Utilities expense.......................................................... 23,261 23,708 27,361 23,882
Other...................................................................... 95,561 96,471 101,634 99,816
Provision for restructuring charges........................................ -- -- -- 15,873
Charge for impaired assets................................................. -- -- -- 51,358
Operating income (loss)...................................................... $ 37,338 $ 50,134 $ 56,288 $(45,526)
Income (loss) before extraordinary item...................................... $(31,060) $(13,554) $ 13,765 $(24,816)
Net income (loss) applicable to common shareholders.......................... $(34,604) $(17,098) $ 10,688 $(28,360)
Primary and fully diluted per share amounts applicable to common
shareholders:
Income (loss) before extraordinary item.................................... $ (0.82) $ (0.40) $ 0.24 $ (0.67)
Net income (loss).......................................................... $ (0.82) $ (0.40) $ 0.25 $ (0.67)
Year Ended December 31, 1996:
Operating Revenue............................................................ $550,425 $626,570 $703,838 $661,469
Operating expenses:
Product costs.............................................................. 160,028 184,842 206,777 192,425
Payroll & benefits......................................................... 214,531 235,605 258,613 237,023
Depreciation & amortization expense........................................ 29,047 30,006 33,555 37,340
Utilities expense.......................................................... 22,754 24,329 30,698 26,696
Other...................................................................... 96,579 108,428 125,868 130,766
Operating income............................................................. $ 27,486 $ 43,360 $ 48,327 $ 37,219
Loss before extraordinary item............................................... $(27,310) $(17,435) $(12,519) $(28,196)
Net loss applicable to common shareholders................................... $(30,854) $(20,979) $(16,062) $(31,740)
Primary and fully diluted per share amounts applicable to common
shareholders:
Loss before extraordinary items............................................ $ (0.73) $ (0.49) $ (0.38) $ (0.75)
Net loss................................................................... $ (0.73) $ (0.49) $ (0.38) $ (0.75)
</TABLE>
During the fourth quarter of 1995, the Company sold its concession and
recreation services subsidiaries and recorded a $77.9 million net gain on the
sales of such discontinued operations.
The effect of the Company's other potentially dilutive securities (see Note
10) on the computations of fully diluted loss per share amounts for all of the
1995 and 1996 quarters were anti-dilutive. Accordingly, the primary and fully
diluted loss per share amounts for such quarters are equivalent.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FLAGSTAR COMPANIES, INC.
By: /s/ RHONDA J. PARISH
Rhonda J. Parish
(Vice President, General Counsel and
Secretary)
Date: February 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ JAMES B. ADAMSON Director, Chairman, President and Chief February 25, 1997
Executive Officer (Principal Executive
(James B. Adamson) Officer)
/s/ C. ROBERT CAMPBELL Vice President and Chief Financial Officer February 25, 1997
(Principal Financial and Accounting Officer)
(C. Robert Campbell)
/s/ MICHAEL CHU Director February 25, 1997
(Michael Chu)
/s/ VERA KING FARRIS Director February 25, 1997
(Vera King Farris)
/s/ NICHOLAS deB. KATZENBACH Director February 25, 1997
(Nicholas deB. Katzenbach)
/s/ HENRY R. KRAVIS Director February 25, 1997
(Henry R. Kravis)
/s/ PAUL E. RAETHER Director February 25, 1997
(Paul E. Raether)
(Clifton S. Robbins) Director
(George R. Roberts) Director
(Elizabeth A. Sanders) Director
/s/ MICHAEL T. TOKARZ Director February 25, 1997
(Michael T. Tokarz)
</TABLE>
EXHIBIT 3.5
BY-LAWS (1)
OF
FLAGSTAR COMPANIES, INC.
A Delaware Corporation
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be in the City of Wilmington.
SECTION 2. OTHER OFFICES. The Corporation may have other offices,
either within or without the state of Delaware, at such place or places as the
Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting shall be held at such place, either within or without the state
of Delaware, and at such time and date, commencing in the year 1989, as the
Board of Directors, by resolution, shall determine and as set forth in the
notice of the meeting. If the date of the annual meeting shall fall upon a legal
holiday, the meeting shall be held on the next business day.
At each annual meeting, the stockholders entitled to
vote shall elect a Board of Directors and they may transact such other corporate
business as shall be stated in the notice of the meeting. At an annual meeting
of the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
(1) As amended through December 13, 1996
<PAGE>
Corporation, not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (c) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section. The Chairman of the
annual meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting in accordance with the
provisions of this Section, and if he should so determine, he shall so declare
to the meeting, and any such business not properly brought before the meeting
shall not be transacted.
SECTION 2. OTHER MEETINGS. Special meetings of stockholders for any
purpose may be held at such time and place, within or without the state of
Delaware, as may be fixed by the Board of Directors and shall be stated in the
notice of meeting.
SECTION 3. INSPECTOR OF ELECTION. At each meeting of stockholders at
which an election of directors is to be held, the chairman of the meeting may,
but shall not be required to, appoint one person, who need not be a stockholder,
to act as inspector of election at such meeting. The inspector so appointed,
before entering on the discharge of his duties, shall take and subscribe to an
oath or affirmation to faithfully execute the duties of inspector at such
meeting with strict impartiality and according to the best of his ability, and
thereupon the inspector shall take charge of the polls and after the balloting
shall canvas the votes and make a certificate of the results of the vote taken.
No director or candidate for the office of director shall be appointed
inspector.
SECTION 4. VOTING. At each meeting of the stockholders, each
stockholder entitled to vote at such meeting in accordance with the terms of the
Certificate of Incorporation and in accordance with the provisions of these
By-laws shall be entitled to one vote, in person or by proxy, for each share of
stock entitled to vote held by such stockholder, but no proxy shall be voted
after three years from its date unless such proxy provides for a longer period.
Every proxy must be executed in writing by the stockholder or by the
stockholder's duly authorized attorney. Upon the demand of any stockholder, the
vote for directors and the vote upon any question before the meeting, shall be
by ballot. All elections for directors and all other questions shall be decided
by majority vote except as otherwise provided by the Certificate of
Incorporation or the laws of the state of Delaware.
<PAGE>
A complete list of the stockholders entitled to vote
at the ensuing election, arranged in alphabetical order, with the address of
each, and the number of shares held by each, shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
SECTION 5. QUORUM. At all meetings of the stockholders, except as
otherwise required by law, by the Certificate of Incorporation or by these
By-laws, the presence, in person or by proxy, of stockholders of record holding
a majority of the shares of stock of the Corporation issued, outstanding and
entitled to vote thereat shall constitute a quorum for the transaction of
business. In case a quorum shall not be present at any meeting, the holders of
record of a majority of the shares of stock entitled to vote thereat, present in
person or by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until the requisite
amount of stock entitled to vote shall be present. At any such adjourned meeting
at which the requisite amount of stock entitled to vote shall be represented,
any business may be transacted which might have been transacted at the meeting
as originally called; but only those stockholders entitled to vote at the
meeting as originally called shall be entitled to vote at any adjournment or
adjournments thereof.
SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose or purposes may be called by the Chairman of the Board of Directors,
the President or the Secretary, or by resolution of the Board of Directors.
SECTION 7. NOTICE OF MEETINGS. Written notice, stating the place, date
and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at his
address as it appears on the records of the Corporation, not less than ten nor
more than sixty days before the date of the meeting. No business other than that
stated in the notice shall be transacted at any meeting without the unanimous
consent of all the stockholders entitled to vote thereat.
SECTION 8. ACTION WITHOUT MEETING. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Such written consent shall be filed in the minute
book of the Corporation.
<PAGE>
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. The number of directors of the Corporation
shall be not less than one nor more than fifteen. Within the limits above
specified, the number of directors shall be determined from time to time by the
stockholders or by the Board of Directors at any meeting thereof. The directors
shall be elected at the annual meeting of the stockholders. Each director shall
be elected to serve until his successor shall be elected and shall qualify or
until his earlier death, resignation or removal as provided in these By-laws.
Directors need not be stockholders. No person who has attained the age of 70
shall be eligible to stand for election or re-election by the stockholders or
otherwise to be appointed to serve as a director of the Corporation unless
pursuant to a special finding of the Board of Directors of the necessity for
such an individual to serve as a director.
SECTION 2. RESIGNATION. Any director, member of a committee or other
officer may resign at any time. Such resignation shall be made in writing to the
Board of Directors, the Chairman of the Board of Directors, the President or the
Secretary. Unless otherwise specified therein, such resignation shall take
effect on receipt thereof. The acceptance of a resignation shall not be
necessary to make it effective.
SECTION 3. VACANCIES. If the office of any director, member of a
committee or other officer becomes vacant, the remaining directors in office,
though less than a quorum, by a majority vote, may appoint any qualified person
to fill such vacancy, who shall hold office for the unexpired term and until his
successor shall be duly chosen or until his earlier death, resignation or
removal. In the event that the resignation of any director shall specify that it
shall take effect at a future date, the vacancy resulting from such resignation
may be filled prospectively in the same manner as provided in this paragraph.
SECTION 4. REMOVAL. Except as hereinafter provided, any director or
directors may be removed either for or without cause at any time by the
affirmative vote of the holders of a majority of all the shares of stock
outstanding and entitled to vote, at a special meeting of the stockholders
called for the purpose, and the vacancies thus created may be filled, at the
meeting held for the purpose of removal, by the affirmative vote of a majority
in interest of the stockholders entitled to vote.
Any director may be removed at any time for cause by
the action of the directors, at a special meeting called for that purpose, by
the vote in favor of removal of a majority of the total number of directors.
SECTION 5. INCREASE OF NUMBER. The maximum number of directors may be
increased by amendment of these By-laws by the affirmative vote of a majority of
the directors, though less than a quorum, or, by the affirmative vote of a
majority interest of the stockholders, at the annual meeting or at a special
meeting called for that purpose, and by like vote the additional directors may
be chosen at such meeting to hold office until the next annual election and
<PAGE>
until their successors are elected and qualify or until their earlier death,
resignation or removal.
SECTION 6. POWERS. The Board of Directors shall exercise all of the
powers of the Corporation except such as are by law, by the Certificate of
Incorporation of the Corporation or by these By-laws conferred upon or reserved
to the stockholders.
SECTION 7. COMMITTEES. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole board, designate one or more
committees, each committee to consist of two or more directors of the
Corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the
resolution of the Board of Directors, or in these By-laws, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the By-laws of the Corporation; and, unless the resolution, these
By-laws, or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
SECTION 8. MEETINGS. The newly elected directors may hold their first
meeting for the purpose of organization and the transaction of business, if a
quorum be present, immediately after the annual meeting of the stockholders; or
the time and place of such meeting may be fixed by consent in writing of all the
directors.
Regular meetings of the directors may be held without
notice at such places and times as shall be determined from time to time by
resolution of the directors.
Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors, the President or the Secretary
on the written request of any two directors on at least two days' notice to each
director and shall be held at such place or places as may be determined by the
directors, or shall be stated in the call of the meeting.
Unless otherwise restricted by the Certificate of
Incorporation or by these By-laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
<PAGE>
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
SECTION 9. QUORUM. A majority of the total number of directors shall
constitute a quorum for the transaction of business. If a quorum shall be
present, the act of a majority of the directors present shall be the act of the
Board of Directors, except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws. If at any meeting of the Board of Directors
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need be given other than by announcement at the meeting which
shall be so adjourned.
SECTION 10. COMPENSATION. Directors shall not receive any stated salary
for their services as directors or as members of committees, but by resolution
of the Board of Directors a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting, if prior to such action a written consent
thereto is signed by all members of the Board of Directors, or of such committee
as the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
SECTION 12. RULES AND REGULATIONS. The Board of Directors may adopt
such rules and regulations for the conduct of its meetings and for the
management of the property, affairs and business of the Corporation as it may
deem proper, except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a
Chairman of the Board of Directors, if any shall have been elected, a President,
a Treasurer, and a Secretary, all of whom shall be elected by the Board of
Directors and who shall hold office until their successors are elected and
qualified or until their earlier death, resignation or removal. In addition, the
Board of Directors may elect one or more Vice Presidents and such Assistant
Secretaries and Assistant Treasurers as they may deem proper. None of the
officers of the Corporation need be directors (except for the Chairman of the
Board of Directors, if any) or stockholders. The officers shall be elected at
<PAGE>
the first meeting of the Board of Directors after each annual meeting. Any
person may hold one or more offices. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors. The
Board of Directors may delegate to any officer or officers the power to appoint
any such officer, to fix their respective terms of office, to prescribe their
respective powers and duties, to remove them and to fill vacancies in any such
offices.
SECTION 3. CHAIRMAN. The Chairman of the Board of Directors, if one be
elected, shall preside at all meetings of the Board of Directors and of the
stockholders, and absent instructions to the contrary by the Board of Directors,
shall exercise general supervision over the property, affairs and business of
the Corporation, shall authorize the other officers of the Corporation to
exercise such powers as he may deem to be in the best interests of the
Corporation and shall have and perform such other duties as from time to time
may be assigned to him by the Board of Directors.
SECTION 4. PRESIDENT. The President shall have such duties as may from
time to time be delegated to him by the Board of Directors. In the event there
shall be no Chairman, the President shall exercise all powers conferred on the
Chairman by Section 3 of this Article. In the event a Chairman is elected, the
President shall be the Chief Executive Officer of the Corporation and, in the
absence or disability of the Chairman, shall have the powers of the Chairman.
SECTION 5. VICE PRESIDENTS. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him by the directors. The
Board of Directors may further designate the area or areas of responsibility
assigned to a Vice President by appropriate words, such as Senior Vice President
or Group Vice President added to the title of the office or offices held by such
Vice President.
SECTION 6. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the
Corporation in such manner as may be ordered by the Board of Directors, the
Chairman or the President, taking proper vouchers for such disbursements. He
shall render to the Chairman, the President and the Board of Directors at the
regular meetings of the Board of Directors, or whenever they may request it, an
account of all his transactions as Treasurer and of the financial condition of
the Corporation.
<PAGE>
SECTION 7. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by law or by these By-laws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman, the President, or the directors, or stockholders, upon whose
requisition the meeting is called as provided in these By-laws. He shall record
all the proceedings of the meetings of the Corporation and of the directors, in
a book to be kept for that purpose, and shall perform such other duties as may
be assigned to him by the directors, the Chairman or the President. He shall
have the custody of the seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the directors or the President, and
attest the same.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
SECTION 9. RESIGNATION. Any officer may resign at any time, unless
otherwise provided in any contract with the Corporation, by giving written
notice to the Chairman, if any, or the President or the Secretary. Unless
otherwise specified therein, such resignation shall take effect upon receipt
thereof.
SECTION 10. REMOVAL. Any officer may be removed at any time by an
affirmative vote of a majority of the Board of Directors, with or without cause.
Any officer not elected by the Board of Directors may be removed in such manner
as may be determined by, or pursuant to delegation from the Board of Directors.
SECTION 11. VACANCIES. If a vacancy shall occur in any office, such
vacancy may be filled for the unexpired portion of the term by the Board of
Directors.
SECTION 12. SURETY BONDS. In the event the Board of Directors shall so
require, any officer or agent of the Corporation shall execute to the
Corporation a bond in such sum and with such surety or sureties as the Board of
Directors may direct, conditioned on the faithful performance of the officer's
duties to the Corporation.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK. A certificate or certificates of
stock, signed by the Chairman of the Board of Directors, if one be elected, the
President or a Vice President, and the Treasurer or an Assistant Treasurer, or
Secretary or an Assistant Secretary, and sealed with the seal of the
Corporation, shall be issued to each stockholder certifying the number of shares
owned by him in the Corporation. Any of or all of the signatures may be
facsimiles. The certificate or certificates of stock shall be in such form as
<PAGE>
the Board of Directors may from time to time adopt and shall be countersigned
and registered in such manner, if any, as the Board of Directors may prescribe.
In case any officer who shall have signed, or whose facsimile signature shall
have been used on any such certificate, shall cease to be such officer of the
Corporation before such certificate shall have been issued by the Corporation,
such certificate may nevertheless be adopted by the Corporation and be issued
and delivered as though the person who signed such certificate, or whose
facsimile signature shall have been used thereon, had not ceased to be such
officer; and such issuance and delivery shall constitute adoption of such
certificate by the Corporation.
There shall be entered on the books of the
Corporation the number of each certificate issued, the number (and class or
series, if any) of shares represented thereby, the name and address of the
person to whom such certificate was issued and the date of issuance thereof.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. A new certificate of
stock may be issued in the place of any certificate theretofore issued by the
Corporation, alleged to have been lost, stolen or destroyed, and the directors
may, in their discretion, require the owner of the lost, stolen or destroyed
certificate, or his legal representatives, to give the Corporation a bond, in
such sum as they may direct, not exceeding double the value of the stock, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss of any such certificate, or the issuance of any such
new certificate and to provide such evidence of loss, theft or destruction as
the Board of Directors may require.
SECTION 3. TRANSFER OF SHARES. The shares of stock of the Corporation
shall be transferable only upon its books by the holders of record thereof in
person or by their duly authorized attorneys or legal representatives, and upon
such transfer the old certificates shall be surrendered, along with such
evidence of the authenticity of such transfer, authorization and other matters
as the Corporation or its agents may reasonably require, to the Corporation by
the delivery thereof to the person in charge of the stock and transfer books, or
to such other person as the directors may designate, by whom they shall be
cancelled, and new certificates shall thereupon be issued. A record shall be
made of each transfer and whenever a transfer shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer.
SECTION 4. REGULATIONS, TRANSFER AGENTS AND REGISTRARS. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issuance and transfer of certificates for shares of the stock of
the Corporation, may appoint transfer agents or registrars, or both, and may
require all certificates of stock to bear the signature of either or both.
Nothing herein shall be construed to prohibit the Corporation from acting as its
own transfer agent at any of its offices.
SECTION 5. STOCKHOLDERS RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
<PAGE>
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 6. SHAREHOLDERS RECORD OWNERSHIP. The Corporation shall be
entitled to recognize the exclusive right of a person registered as such on the
books of the Corporation as the owner of shares of the Corporation's stock to
receive dividends and to vote as such owner. The Corporation shall not be bound
to recognize any equitable or other claim to or interest in such shares on the
part of any other person, regardless of whether the Corporation shall have
express or other notice thereof, except as otherwise provided by law.
SECTION 7. DIVIDENDS AND RESERVES. Subject to the applicable provisions
of law or of the Certificate of Incorporation, the Board of Directors may, out
of funds legally available therefor, at any regular or special meeting, declare
dividends upon the capital stock of the Corporation as and when they deem
expedient. Before declaring any dividend there may be set apart out of any funds
of the Corporation available for dividends, such sum or sums as the directors
from time to time in their discretion deem proper for working capital, or as a
reserve fund to meet contingencies, or for equalizing dividends, or for the
purpose of repairing, maintaining or increasing the property or business of the
Corporation or for such other purposes as the directors shall deem conducive to
the interests of the Corporation. The Board of Directors may, in its discretion,
modify or abolish any such reserve at any time.
SECTION 8. SEAL. The corporate seal shall be circular in form and shall
contain the name of the Corporation, the year of its creation and the words
"CORPORATE SEAL, DELAWARE." Said seal may be used by causing it or a facsimile
thereof to be impressed, affixed, reproduced, engraved, printed or otherwise
represented.
SECTION 9. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION 10. EXECUTION OF INSTRUMENTS. All agreements, deeds, contracts,
proxies, covenants, bonds, checks, drafts or other orders for the payment of
money, bills of exchange, notes, acceptances and endorsements, and all evidences
of indebtedness and other documents, instruments or writings of any nature
whatsoever, issued in the name of the Corporation, shall be signed by such
officers, agents or employees of the Corporation, or by any one of them, and in
such manner, as from time to time may be determined, either generally or in
specific instances, by the Board of Directors or by such officer or officers to
whom the Board of Directors may delegate the power to so determine.
<PAGE>
SECTION 11. STOCK OF OTHER CORPORATIONS. Subject to such limitations as
the Board of Directors may from time to time prescribe, any officer of the
Corporation shall have full power and authority on behalf of the Corporation to
attend, to act and vote at, and to waive notice of, any meeting of stockholders
of any corporations, shares of stock of which are owned by or stand in the name
of the Corporation, and to execute and deliver proxies and actions in writing
for the voting of any such shares, and at any such meeting or by action in
writing may exercise on behalf of the Corporation any and all rights and powers
incident to the ownership of such shares.
SECTION 12. NOTICE AND WAIVER OF NOTICE. Whenever any notice is
required by these By-laws to be given, personal notice is not meant unless
expressly so stated, and any notice so required shall be deemed to be sufficient
if given by depositing the same in the United States mail, postage prepaid,
addressed to the person entitled thereto at his address as it appears on the
records of the Corporation, and such notice shall be deemed to have been given
on the day of such mailing. Stockholders not entitled to vote shall not be
entitled to receive notice of any meetings except as otherwise provided by
statute.
Whenever any notice whatever is required to be given
under the provisions of any law, or under the provisions of the Certificate of
Incorporation of the Corporation or these By-laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
Attendance of a person at a meeting, whether of
stockholders (in person or by proxy) or of directors or of any committee of the
Board of Directors, shall constitute a waiver of notice of such meeting, except
when such person attends such meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business on the ground
that the meeting is not legally called or convened.
SECTION 13. BOOKS, ACCOUNTS AND OTHER RECORDS. Except as otherwise
provided by law, the books, accounts and other records of the Corporation shall
be kept at such place or places (within or without the state of Delaware) as the
Board of Directors, the Chairman or the President may from time to time
designate.
SECTION 14. INDEMNIFICATION. The Corporation shall, to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law, as the
same exists or may hereafter be amended, indemnify all persons whom it may
indemnify pursuant thereto.
ARTICLE VI
AMENDMENTS
<PAGE>
These By-laws may be altered, amended or repealed and By-laws may be
made at any annual meeting of the stockholders or at any special meeting thereof
if notice of the proposed alteration or repeal or By-law or By-laws to be made
be contained in the notice of such special meeting, by the affirmative vote of a
majority of the stock issued and outstanding and entitled to vote thereat, or by
the affirmative vote of a majority of the Board of Directors, at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors, if notice of the proposed alteration or repeal, or By-law or By-laws
to be made, be contained in the notice of such special meeting.
EXHIBIT 10.8
FLAGSTAR COMPANIES, INC.
1989 NON-QUALIFIED STOCK OPTION PLAN*
1. PURPOSE OF THE PLAN
This Flagstar Companies, Inc. (formerly, TW Holdings, Inc.) ("FCI")
1989 Non-Qualified Stock Plan (the "Plan") is intended to promote the interests
of FCI by providing the employees of and certain consultants to Flagstar
Corporation, a wholly-owned subsidiary of the Company, (referred to herein
collectively with FCI as the "Company"), who are largely responsible for the
management, growth and protection of the business of the Company, with
incentives and rewards to encourage them to continue in their employment or
consulting relationship with the Company.
2. DEFINITIONS
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Board of Directors" shall mean the Board of Directors of FCI.
(b) "Cause," when used in connection with the termination of a
Participant's employment or consulting relationship with the Company, shall mean
the termination of the Participant's employment by or consulting relationship
with the Company because of (A) an act or acts by him, or any omission by him,
constituting a felony, if the Participant has entered a guilty plea or
confession to, or has been convicted of, such felony, (B) any act of fraud or
dishonesty by the Participant which results in or is intended to result in any
material financial or economic harm to the Company as determined by the
Committee in its sole discretion or (C) a breach of a material provision of any
employment or consulting agreement between the Participant and the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(d) "Committee" shall mean the Committee designated by the Board of
Directors pursuant to Section 4 hereof from time to time.
(e) "Common Stock" shall mean FCI's common stock, $0.50 par value
per share.
(f) "Company" shall mean FCI, a Delaware corporation, and each of
its Subsidiaries.
(g) "Disability" shall mean any physical or mental condition which
would qualify a Participant for a disability benefit under the long-term
disability plan maintained by the Company and applicable to that particular
Participant.
<PAGE>
*As Adopted on 12/1/89, and amended on 11/16/92, 6/7/94,
5/2/95, 10/5/95, 8/12/96, and 12/13/96.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(i) "Fair Market Value" of a share of Common stock on any day shall
be (a) the closing sales price on the immediately preceding day of a share of
Common Stock as reported on the principal securities exchange on which shares of
Common Stock are then listed or admitted to trading or (B) if not so
reported, the average of the closing bid and ask prices on the immediately
preceding business day as reported on the National Association of Securities
Dealers Automated Quotation System or (C) if not so reported, as furnished by
any member of the National Association of Securities Dealers, Inc. selected by
the Committee. In the event that the price of a share of Common Stock shall not
be so reported, the Fair Market Value of a share of Common Stock shall be
determined by the Committee in its absolute discretion.
(j) "Option" shall mean an option to purchase shares of Common
Stock granted pursuant to Section 6 hereof. Each Option shall be identified as a
non-qualified stock option in the agreement by which it is evidenced.
(k) "Participant" shall mean an individual who is eligible to
participate in the Plan pursuant to Section 5 hereof and to whom an Option is
granted pursuant to the Plan, and, upon his death, his successors, heirs,
executors, and administrators, as the case may be.
(l) "Plan" shall mean this Flagstar Companies, Inc. 1989
Non-Qualified Stock Option Plan, as it may be amended from time to time.
(m) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(n) "Subsidiary" shall mean any corporation in which, at the time of
reference, FCI owns, directly or indirectly, stock comprising more than
fifty percent of the total combined voting power of all classes of stock of such
corporation.
(o) "Voluntary Termination" shall mean any voluntary termination by
the Participant of his employment or consulting relationship with the Company.
3. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7 hereof, the Committee
may grant Options under the Plan with respect to a number of shares of Common
Stock that, in the aggregate, does not exceed 6,500,000 shares and, with respect
to any individual participant, does not exceed 5,000,000 shares during any
calendar year. In the event that any outstanding Option expires, terminates or
is cancelled for any reason, the shares of Common Stock subject to the
unexercised portion of such Option shall again be available for grants under the
Plan for purposes of the 6,500,000 share limit stated above. Shares of Common
Stock issued under the Plan may be either newly issued shares or treasury
shares, at the discretion of the Committee.
<PAGE>
4. ADMINISTRATION OF THE PLAN
The plan shall be administered by a Committee of the Board of
Directors consisting of three or more persons as designated by the Board of
Directors. The Committee shall, from time to time, designate those individuals
who shall be granted Options and the number of shares of Common Stock covered by
such Options.
The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and the
terms of any Option issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.
The Committee may, in its absolute discretion, accelerate the date
on which any Option becomes exercisable or upon termination of employment,
permit the term of a terminated employee's options to continue for the remainder
of the term of such options or any portion thereof. In addition, the Committee
may, in its absolute discretion, grant Options to Participants on the condition
that such Participants surrender to the Committee for cancellation such other
Options (including, without limitation, options with higher exercise prices) as
the Committee specifies. Notwithstanding Section 3 herein, prior to the
surrender of such other Options, Options granted pursuant to the preceding
sentence of this Section 4 shall not count against the limits set forth in such
Section 3.
The Committee shall determine whether an authorized leave of absence
or absence in military or government service shall constitute termination of
employment.
The Committee shall have full authority to delegate to a
subcommittee of directors (the "Subcommittee") any and all authority granted to
the Committee with respect to the Plan, such subcommittee to be constituted and
to have such authority as may be necessary to satisfy any and all requirements
of Rule 16b-3 promulgated under Section 16 of the Exchange Act and/or Section
162(m) of the Code and the regulations thereunder with respect to any Option
granted or exercised pursuant to the terms of the Plan.
No member of the Committee or Subcommittee shall be liable for any
action, omission, or determination relating to the Plan, and FCI shall indemnify
and hold harmless each member of the Committee or Subcommittee and each other
director or employee of the Company to whom any duty or power relating to the
administration or interpretation of the Plan has been delegated against any cost
or expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of FCI) arising out of any action,
omission or determination relating to the Plan, unless, in either case, such
action, omission or determination was taken or made by such member, director or
employee in bad faith and without reasonable belief that it was in the best
interests of the Company.
<PAGE>
5. ELIGIBILITY
The persons who shall be eligible to receive Options pursuant to the
Plan shall be (1) such employees of the Company who are responsible for the
Management, growth and protection of the business of the Company (including
officers of FCI, whether or not they are directors of FCI) as the Committee in
its sole discretion shall select from time to time, and (2) those persons who
provide consulting services to the Company as the Committee in its sole
discretion shall select from time to time.
6. OPTIONS
Options granted pursuant to the Plan shall be evidenced by
agreements in such form as the Committee shall from time to time approve.
Options shall comply with and be subject to the following terms and conditions:
(a) Identification of Options
All Options granted under the Plan shall be identified in the
agreement evidencing such Options as non-qualified stock options that are not
intended to be incentive stock options within the meaning of Section 422 of the
Code.
(b) Exercise Price
The exercise price in respect of each share of Common Stock covered
by any Option granted under the Plan shall be such price as the Committee shall
determine on the date on which such Option is granted; provided, that in the
case of any Option granted prior to December 31, 1989 such exercise price shall
be Four Dollars ($4.00) per share of Common Stock covered by such Option; and
provided, further, that such exercise price may not be less than the minimum
price required by law.
(c) Term and Exercise of Options
(1) Each Option shall be exercisable on such date or dates, during
such period and for such number of shares of Common Stock as shall be determined
by the Committee on the day on which such Option is granted and set forth in the
Option agreement with respect to such Option; provided, however, that each
Option shall be subject to earlier termination, expiration or cancellation as
provided in this Plan.
(2) Each Option shall be exercisable in whole or in part; provided
that no partial exercise of an Option shall be (a) for an aggregate price of
less than $1,000 or (b) in respect of less than 100 shares of Common Stock. The
partial exercise of an Option shall not cause the expiration, termination or
cancellation of the remaining portion thereof. Upon the partial exercise of an
Option, the agreement evidencing such Option shall be returned to the
Participant exercising such Option together with the delivery of the
certificates described in Section 6(c)(5) hereof.
<PAGE>
(3) Subject to the provisions of Section 11 hereof, an Option shall
be exercised by delivering notice to FCI's principal office, to the attention of
its Secretary, no less than three business days in advance of the effective date
of the proposed exercise. Such notice shall be accompanied by the agreement
evidencing the Option, shall specify the number of shares of Common Stock with
respect to which the Option is being exercised and the effective date of the
proposed exercise, and shall be signed by the Participant. The Participant may
withdraw such notice at any time prior to the close of business on the business
day immediately preceding the effective date of the proposed exercise, in which
case such agreement shall be returned to him. Payment for shares of Common Stock
purchased upon the exercise of an option shall be made on the effective date of
such exercise either (i) in cash, by certified check, bank cashier's check or
wire transfer; (ii) subject to the prior written approval of the Committee, in
shares of Common Stock owned by the Participant and valued at their Fair Market
Value on the effective date of such exercise, or partly in shares of Common
Stock with the balance in cash, by certified check, bank cashier's check or wire
transfer, or (iii) subject to the approval of the Committee (which approval may
be withheld for any reason whatsoever or for no reason) and at the election of
the Participant, the Company shall withhold a number of such shares determined
by such Participant, the Fair Market Value of which at the exercise date the
Committee determines to be sufficient to pay the exercise price. Any payment in
shares of Common Stock shall be effected by the delivery of such shares to the
Secretary of FCI, duly endorsed in blank or accompanied by stock powers duly
endorsed in blank, together with any other documents and evidences as the
Secretary of FCI shall require from time to time.
(4) Any Option granted under the Plan may be exercised by a
broker-dealer acting on behalf of a Participant if (i) the broker-dealer has
received from the Participant or the Company a fully- and duly-endorsed
agreement evidencing such Option and instructions signed by the Participant
requesting FCI to deliver the shares of Common Stock subject to such Option to
the broker-dealer on behalf of the Participant and specifying the account into
which such shares should be deposited, (ii) adequate provision has been made
with respect to the payment of any withholding taxes due upon such exercise and
(iii) the broker-dealer and the Participant have otherwise complied with Section
220.3(e)(4) of Regulation T, 12 CFR Part 220.
(5) Certificates for shares of Common Stock purchased upon the
exercise of an Option shall be issued in the name of the Participant and
delivered to the Participant as soon as practicable following the effective date
on which the Option is exercised.
(6) During the lifetime of a Participant, each Option granted to him
shall be exercisable only by him. No option shall be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
(d) Effect of Termination of Employment
<PAGE>
Except as otherwise provided in the agreement evidencing the grant
of an Option and subject to the provisions of Section 4 hereof:
(1) In the event that the employment or consulting relationship of a
Participant with the Company shall terminate for any reason other than for Cause
or by reason of Voluntary Termination (i) Options granted to such Participant,
to the extent that they were exercisable at the time of such termination of the
employment or consulting relationship, shall remain exercisable until the
expiration of one year after such termination, on which date they shall expire
and terminate and (ii) Options granted to such Participant, to the extent that
they were not exercisable at the time of such termination, shall expire and
terminate at the close of business on the date of such termination; provided,
however, that no Option shall be exercisable after the expiration of its term.
(2) In the event of the Voluntary Termination of a Participant's
employment or consulting relationship, all outstanding Options, to the extent
that they were exercisable on the date of termination, shall continue to be
exercisable for a period of 60 days from the date of termination. After the
lapse of such 60 days, all Options, exercisable or not exercisable on the date
of termination, shall expire and be terminated; provided, however, that no
Option shall be exercisable after the expiration of its term.
(3) In the event of the termination of a Participant's employment or
consulting relationship for Cause, all outstanding Options granted to such
Participant, exercisable or not exercisable, shall expire and terminate at the
commencement of business on the date of such termination.
(e) Certain Restrictions
(1) Without limiting the provisions of Section 10 hereof, unless
otherwise specified in the agreement pursuant to which an Option is granted, in
the event a Participant's employment by the Company is terminated for Cause
prior to July 5, 1994, such Participant shall be required to offer to sell to
FCI or its designee all shares of Common Stock acquired by him pursuant to the
exercise of such Option and at the time of such termination of employment owned
by him, and FCI shall have the right to require such Participant to sell such
shares to it or its designee, at a price per share equal to the exercise price
with respect to each such share under such Option. Such offer and right shall be
on the basis that the purchase and sale shall occur on a business day selected
by FCI by written notice to the Participant, which business day shall be at
least five calendar days after FCI gives the Participant written notice of its
intent to purchase such shares and which business day shall be not more than
ninety (90) days following such termination of employment. At the time of such
purchase and sale, the Participant shall deliver to FCI the certificates
representing the shares of Common Stock to be so purchased against payment of
the purchase price therefor in cash or by certified check, wire transfer or bank
cashier's check, as selected by FCI or its designee.
(2) Without limiting the provisions of Section 10 hereof,
certificates representing shares of Common Stock issued pursuant to this Plan
shall bear such legends as the Committee, in its sole discretion, deems
necessary or desirable to reflect the restrictions described in this Section
6(e)
<PAGE>
7. ADJUSTMENT UPON CHANGES IN COMMON STOCK
(a) Shares Available for Grants
In the event of any change in the number of shares of Common Stock
outstanding by reason of any stock dividend or split, recapitalization, merger,
consolidation, combination or exchange of shares or similar corporate change,
the maximum aggregate number of shares of Common Stock with respect to which the
Committee may grant Options shall be appropriately adjusted by the Committee. In
the event of any change in the number of shares of Common Stock outstanding by
reason of any other event or transaction, the Committee may, but need not, make
such adjustments in the number and class of shares of Common Stock with respect
to which Options may be granted as the Committee may deem appropriate.
(b) Outstanding Options - Increase or Decrease in Issued Shares
Without Consideration
Subject to any required action by the shareholders of FCI, in the
event of any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of a stock dividend (but only on the shares of Common Stock), or any
other increase or decrease in the number of such shares effected without receipt
of consideration by FCI, the Committee shall proportionally adjust the number of
shares of Common Stock subject to each outstanding Option and the exercise price
per share of Common Stock in respect of each such Option.
(c) Outstanding Options - Certain Mergers
Subject to any required action by the shareholders of FCI, in the
event that FCI shall be the surviving corporation in any merger or consolidation
(except a merger or consolidation as a result of which the holders of shares of
Common Stock receive securities of another corporation), each Option outstanding
on the date of such merger or consolidation shall pertain to and apply to the
securities which a holder of the number of shares of Common Stock subject to
such Option would have received in such merger or consolidation.
(d) Outstanding Options - Certain Other Transactions
In the event of (i) a dissolution or liquidation of FCI, (ii) a sale
of all or substantially all of FCI's assets, (iii) a merger or consolidation
involving FCI in which FCI is not the surviving corporation or (iv) a merger or
<PAGE>
consolidation involving FCI in which FCI is the surviving corporation but the
holders of shares of Common Stock receive securities of another corporation
and/or other property, including cash, the Committee shall, in its absolute
discretion, have the power to:
(i) cancel, effective immediately prior to the occurrence
of such event, each Option outstanding immediately prior to
such event (whether or not then exercisable), and, in full
consideration of such cancellation, pay to the Participant
to whom such Option was granted an amount in cash, for each
share of Common Stock subject to such Option, equal to the
excess of (a) the value, as determined by the Committee in
its absolute discretion, of the property (including cash)
received or to be received by the holder of a share of
Common Stock as a result of such event over (b) the
exercise price in respect of each share of Common Stock
covered by such Option; or
(ii) provide for the exchange of each Option outstanding
immediately prior to such event (whether or not then
exercisable) for an option on some or all of the property
for which each share of Common Stock subject to such Option
is exchanged and, incident thereto, make an equitable
adjustment as determined by the Committee in its absolute
discretion in the exercise price of the option, or the
number of shares or amount of property subject to the
option or, if appropriate, provide for a cash payment to
the Participant to whom such Option was granted in partial
consideration for the exchange of the Option.
(e) Outstanding Options - Other Changes
In the event of any change in the capitalization of FCI or corporate
change other than those specifically referred to in Section 7(a), (b), (c), or
(d) hereof, the Committee may, in its absolute discretion, make such adjustments
in the number and class of shares subject to Options outstanding on the date on
which such change occurs and in the per share exercise price of each such Option
as the Committee may consider appropriate to prevent dilution or enlargement of
rights.
(f) No Other Rights
Except as expressly provided in the Plan, no Participant shall have
any rights by reason of any subdivision or consolidation of shares of stock of
any class, the payment of any dividend, any increase or decrease in the number
of shares of stock of any class or any dissolution, liquidation, merger or
consolidation of FCI or any other corporation. Except as expressly provided in
the Plan, no issuance by FCI of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number of shares of Common
Stock subject to an Option or the exercise price of any Option.
<PAGE>
8. RIGHTS AS A STOCKHOLDER
No person shall have any rights as a stockholder with respect to any
shares of Common Stock covered by or relating to any Option granted pursuant to
this Plan until the date of the issuance of a stock certificate with respect to
such shares. Except as otherwise expressly provided in Section 7 hereof, no
adjustment to any Option shall be made for dividends or other rights for which
the record date occurs prior to the date on which such stock certificate is
issued.
9. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO OPTION
Nothing contained in the Plan or any Option shall confer upon any
Participant any right with respect to the continuation of his employment or
consulting relationship with the Company or interfere in any way with the right
of the Company, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such relationship or to increase or decrease
the compensation of the Participant from the rate in existence at the time of
the grant of an Option.
No person shall have any claim or right to receive an Option
hereunder. The Committee's granting of an Option to a Participant at any time
shall neither require the Committee to grant an Option to such Participant or
any other Participant or other person at any time nor preclude the Committee
from making subsequent grants to such Participant or any other Participant or
other person.
10. SECURITIES MATTERS
(a) FCI shall be under no obligation to effect the registration
pursuant to the Securities Act of any shares of Common Stock to be issued
hereunder or to effect similar compliance under any state laws. Notwithstanding
anything herein to the contrary, FCI shall not be obligated to cause to be
issued or delivered any certificates evidencing shares of Common Stock pursuant
to the Plan unless and until FCI is advised by its counsel that the issuance and
delivery of such certificates is in compliance with all applicable laws,
regulations of governmental authority and the requirements of any securities
exchange on which shares of Common Stock are traded. The Committee may require,
as a condition of the issuance and delivery of certificates evidencing shares of
Common Stock pursuant to the terms hereof, that the recipient of such shares
make such covenants, agreements and representations, and that such certificates
bear such legends, as the Committee, in its sole discretion, deems necessary or
desirable.
(b) The exercise of any Option granted hereunder shall only be
effective at such time as counsel to FCI shall have determined that the issuance
and delivery of shares of Common Stock pursuant to such exercise is in
<PAGE>
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange on which shares of Common Stock are
traded. FCI may, in its sole discretion, defer the effectiveness of any exercise
of an Option granted hereunder in order to allow the issuance of shares of
Common Stock pursuant thereto to be made pursuant to an effective registration
statement or an exemption from such registration or other methods for compliance
available under federal or state securities laws. FCI shall inform the
Participant in writing of its decision to defer the effectiveness of the
exercise of an Option granted hereunder. During the period that the
effectiveness of the exercise of an Option has been deferred, the Participant
may, by written notice, withdraw such exercise and obtain the refund of any
amount paid or delivered with respect thereto.
11. WITHHOLDING TAXES
(a) Cash Remittance
Whenever shares of Common Stock are to be issued upon the exercise
of an Option, the Participant shall be required, as a condition to the exercise
of the related Option, to remit to the Company in cash an amount sufficient to
satisfy federal, state and local withholding tax requirements, if any,
attributable to such exercise prior to the delivery of any certificate or
certificates for such shares.
(b) Stock Remittance
At the election of the Participant, subject to the approval of the
Committee (which approval may be withheld for any reason whatsoever or for no
reason), when shares of Common Stock are to be issued upon the exercise of any
Option, in lieu of the cash remittance required by Section 11(a) hereof, the
Participant may tender to the Company a number of shares of Common Stock
determined by such Participant, the Fair Market Value of which at the tender
date the Committee determines, in its sole discretion, to be sufficient to
satisfy the federal, state and local withholding tax requirements, if any,
attributable to such exercise and not greater than the Participant's estimated
total federal, state and local tax obligations associated with such exercise.
(c) Stock Withholding
At the election of the Participant, subject to the approval of the
Committee (which approval may be withheld for any reason whatsoever or for no
reason), when shares of Common Stock are to be issued upon the exercise of an
Option, in lieu of the cash remittance required by Section 11(a) hereof, the
Company shall withhold a number of such shares determined by such Participant,
the Fair Market Value of which at the exercise date the Committee determines (in
its sole discretion) to be sufficient to satisfy the federal, state and local
withholding tax requirements, if any, attributable to such exercise and not
greater than the Participant's estimated total federal, state and local tax
obligations associated with such exercise.
<PAGE>
12. AMENDMENT OF THE PLAN
The Board of Directors or the Committee may at any time suspend or
discontinue the Plan. Additionally, the Board of Directors or the Committee may
revise or amend the Plan in any respect whatsoever
13. NO OBLIGATION TO EXERCISE
The grant to a Participant of an Option shall impose no obligation
upon such Participant to exercise such Option.
14. TRANSFERS UPON DEATH
Upon the death of a Participant, outstanding Options granted to such
Participant may be exercised only by the executors or administrators of the
Participant's estate or by any person or persons who shall have acquired such
right to exercise by will or by the laws of descent and distribution. No
transfer by will or the laws of descent and distribution of any Option, or the
right to exercise any Option, shall be effective to bind the Company unless the
Committee shall have been furnished with (a) written notice thereof and with a
copy of the will and/or such evidence as the Committee may deem necessary to
establish the validity of the transfer and (b) an agreement by the transferee to
comply with all the terms and conditions of the Option that are or would have
been applicable to the Participant and to be bound by the acknowledgements made
by the Participant in connection with the grant of the Option.
15. EXPENSES
The expenses of the Plan shall be paid by the Company.
16. FAILURE TO COMPLY
In addition to the remedies of the Company elsewhere provided for
herein, if a Participant shall fail to comply with any of the terms or
conditions of the Plan or the agreement executed by such Participant evidencing
an option, the Committee may cancel such Option and cause such Option to be
forfeited, in whole or in part, as the Committee, in its absolute discretion,
may determine, unless such failure is remedied by such Participant within ten
days after such Participant's receipt of written notice of such failure from the
Committee or the Company.
<PAGE>
17. EFFECTIVE DATE AND TERM OF THE PLAN
The Plan was adopted by the Board of Directors on December 1, 1989,
subject to approval by the shareholders of FCI in accordance with applicable
laws and the requirements of Rule 16b-3 promulgated under Section 16(b) of the
Exchange Act. Options may be granted under the Plan at any time prior to the
receipt of such shareholder approval; provided, however, that each such grant
shall be subject to such approval. Without limitation on the foregoing, no
Option may be exercised prior to the receipt of such approval. If the Plan is
not so approved prior to November 30, 1990, then the Plan and all Options then
outstanding hereunder shall forthwith automatically terminate and be of no force
and effect.
EXHIBIT 10.47
SECOND AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN FLAGSTAR COMPANIES, INC. AND JAMES B. ADAMSON
This Second Amendment to Employment Agreement ("Amendment") is made and
entered into as of December 31, 1996 between Flagstar Companies, Inc., a
Delaware corporation (the "Company"), and James B. Adamson (the "Executive").
WITNESSETH:
WHEREAS, the Company and the Executive entered into an Employment
Agreement dated as January 10, 1995 (the "Agreement");
WHEREAS, the Company and the Executive desire to extend the term of the
Executive's employment under the Agreement and the Company desires to provide
the Executive with additional incentives to continue in the employ of the
Company;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and obligations hereinafter set forth, the parties agree as follows:
1. The first two sentences of section 1 of the Agreement are
amended and restated in their entirety to provide as follows:
"The Company agrees to employ the Executive from the first day
following the Executive's termination of his employment with
his prior employer (the "Commencement Date") until the close
of business on January 31, 1999, unless his employment is
earlier terminated pursuant to section 5. (The Executive's
period of employment under this Agreement, whether ending on
January 31, 1999 or earlier pursuant to section 5 is
hereinafter referred to as the "Employment Term," and each
twelve consecutive month period or portion thereof beginning
on the Commencement
<PAGE>
Date and each anniversary thereof during the Employment Term
is hereinafter referred to as a "Contract Year.")"
2. Subsection (a) of section 3 of the Agreement is amended and
restated in its entirety to provide as follows:
"Base Compensation. During the Employment Term the Company
shall pay the Executive an annual base salary (the "Base
Salary") as compensation for his employment, in equal
installments and at least twice in each calendar month. The
Base Salary shall be at the annual rate of $950,000 for the
first Contract Year; $1,000,000 for the second Contract Year;
$1,050,000 for the third Contract Year; and $1,100,000 for the
fourth Contract Year."
3. New subsections (i), (j) and (k) are added to section 3 of the
Agreement after subsection (h) thereof, which new subsections shall provide as
follows:
"(i) 1996 Bonus. On January 7, 1997, the
Company shall pay the Executive an Annual Bonus for calendar
year 1996 in the amount of $100,000.
(j) Extension Bonus. Upon execution of this
Amendment, as a bonus for agreeing to extend the Employment
Term, the Company shall forgive in full its advance of
$325,000 of the Executive's 1996 Base Salary made on March 26,
1996.
(k) Retention Bonuses. On January 7, 1997, as a
retention bonus relating to services to be performed during
the year ending on December 31, 1997, the Company shall pay
the Executive $1,550,000. If the Executive is employed by the
Company on January 1, 1998 or if prior to January 1, 1998 (i)
the Executive's employment with the Company is terminated by
the Company without Cause or (ii) the Executive terminates his
employment with the Company under the circumstances described
in clause (A) of subsection (c)(iv) of section 5, on January
2, 1998 the Company shall pay the Executive a retention bonus,
relating to services to be
2
<PAGE>
performed during the year ending on December 31, 1998, in the
amount of $2,000,000; if the Executive's employment is
terminated during said period by reason of the Executive's
death or Permanent Disability, the amount of such retention
bonus shall be $1,000,000, which shall be paid on January 2,
1998. If the Executive is employed by the Company on January
1, 1999 or if after January 1, 1998 and prior to January 1,
1999 (i) the Executive's employment with the Company is
terminated by the Company without Cause or (ii) the Executive
terminates his employment with the Company under the
circumstances described in clause (A) of subsection (c)(iv) of
section 5, on January 2, 1999 the Company shall pay the
Executive a retention bonus, relating to services to be
performed during the year ending on December 31, 1999, in the
amount of $3,000,000; if the Executive's employment is
terminated during said period by reason of the Executive's
death or Permanent Disability, the amount of such retention
bonus shall be $1,500,000, which shall be paid on January 2,
1999. The Company's obligation to pay the Executive the
retention bonuses specified in this subsection (k) shall be
guaranteed by Denny's Restaurants, Inc. ("Denny's") pursuant
to the form of Guaranty and Security Agreement (the "Security
Agreement") attached hereto as Appendix "A". The Company shall
cause Denny's to execute and deliver the Security Agreement
and to establish and fund the Security Account referred to in
the Security Agreement with a bank reasonably acceptable to
the Executive by no later than January 20, 1997. On or before
January 20, 1997, Latham & Watkins shall deliver its opinion,
in a form which is reasonably satisfactory to the Executive,
with respect to the validity and perfection of the security
interest contemplated by the Security Agreement. None of the
retention bonuses provided for in this subsection (k) shall be
subject to forfeiture by the Executive for any reason after
the date the
3
<PAGE>
Executive has become entitled to receive each such bonus
pursuant to the provisions of this subsection (k)."
4. A new subsection (b)(v) is added to section 5 of the Agreement after
subsection (b)(iv) thereof, which new subsection shall provide as follows:
"(v) Notwithstanding subsection (b)(iv), in the event of a
Change in Control of the Company during the Employment Term,
during the period commencing on the effective date of the
Change in Control and ending six months thereafter, the
Executive may elect to tender his resignation to the Company
and upon the effective date of such termination of employment
the Company shall pay the Executive a lump sum payment equal
to 299% of the sum of (x) the Executive's Base Salary for the
twelve month period immediately preceding the date of
termination and (y) a targeted bonus amount equal to 75% of
such Base Salary. In addition, (A) the Executive and/or his
Family shall be entitled until the earlier of (x) the second
anniversary of the date of such termination of employment or
(y) the commencement of coverage of the Executive and/or his
Family by another group medical benefits plan providing
substantially comparable benefits to the Welfare Benefits and
which does not contain any pre-existing condition exclusions
or limitations, to receive and participate in the Welfare
Benefits in addition to any continuation coverage which the
Executive and/or his Family is entitled to elect under Section
4980B of the Code, (B) the Option shall be vested and
exercisable as of the effective date of such termination and
(C) the Restricted Stock shall be 100% vested on the effective
date of such termination. The foregoing payments and benefits
shall also be provided to the Executive if the Executive's
employment with the Company is terminated by the Company
without Cause or the Executive terminates his employment with
the Company under the circumstances described in clause (A) of
subsection (c)(iv) of section 5 during the
4
<PAGE>
period commencing on the effective date of such Change in
Control and ending six months thereafter."
5. Subsection (a)(iii) of section 5 is amended and restated in
its entirety to provide as follows:
"(iii) the close of business on the date on which the Company
gives the Executive written notice of the Company's
termination of his employment as a "Termination without Cause"
(as defined in subsection (c)) or the close of business on the
effective date of a termination of the Executive's employment
with the Company pursuant to clauses (A) through (D) of
subsection (c)(iv) of section 5;"
6. Clause (B) of subsection (b)(iii) of section 5 is amended by
inserting the following words at the beginning of such clause: "not later than
90 days after such termination,".
7. Subsection (c)(ii) of section 5 is amended and restated in its
entirety to provide as follows:
"(ii) A "Change in Control of the Company" shall occur on
the date on which designees of TW Associates, L.P. and KKR
Partners II, L.P. (collectively, "KKR") no longer constitute a
majority of the Board."
8. Clause (A) of subsection (c)(iv) of section 5 is amended and
restated in its entirety to provide as follows:
"(A) upon (i) the failure of Denny's to execute and deliver
the Security Agreement and to establish and fund the Security
Account referred to in the Security Agreement with a bank
reasonably acceptable to the Executive by no later than
January 20, 1997, (ii) the occurrence of an Event of Default
under the Security Agreement or (iii) 10 days' prior written
notice from the Executive of his voluntary termination of his
employment with the Company following a breach by the Company
of a material provision of this Agreement or of the Security
Agreement or a change by the
5
<PAGE>
Company of the Executive's title or duties as Chairman of the
Board and Chief Executive Officer of the Company without the
Executive's consent, which breach or change the Company does
not correct within 30 days or such longer reasonable amount of
time required to correct such breach or change, not to exceed
90 days, after the Executive notifies the Board in writing of
the action or omission which the Executive believes
constitutes such a breach or change;"
9. Subsection (e) of section 5 is amended and restated in its
entirety to provide as follows:
"(e) In the event of any termination of the Executive's
employment by the Company or by the Executive under the
circumstances described in clauses (A) through (D) of
subsection (c)(iv), the Executive shall not be required to
seek other employment to mitigate damages, and any income
earned by the Executive from other employment or
self-employment shall not be offset against any obligations of
the Company to the Executive under this Agreement."
10. The Executive and the Company each represent and warrant to the
other that he or it has the authorization, power and right to deliver, execute,
and fully perform his or its obligations under this Agreement in accordance with
its terms.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the date first written above.
Flagstar Companies, Inc.
By /s/ Rhonda J. Parish
________________________
Title:
/s/ James B. Adamson
-------------------------
James B. Adamson
6
EXHIBIT 10.48
January 15, 1997
PERSONAL AND CONFIDENTIAL
- -------------
- -------------
- -------------
- -------------
Dear _________:
This letter agreement supplements the existing employment agreement
dated as of between (the "Executive") and
Flagstar Corporation (the "Company"), as subsequently amended by letter
agreement dated as of (collectively, the "Employment
Agreement"), and is entered into as an inducement to the Executive to continue
in the employ of the Company.
1. RETENTION BONUS. Notwithstanding any provision to the contrary
set forth in the Employment Agreement and in addition to the payments and
benefits therein provided, the Executive shall be entitled to receive the
following payments (the "Retention Bonus") provided the Executive continues to
be employed by the Company (or a subsidiary thereof) as of the accrual date
indicated:
Accrual Date Payment Amount
------------ --------------
June 30, 1997 $ 50,000
December 31, 1997 $100,000
June 30, 1998 $ 50,000
December 31, 1998 $125,000
June 30, 1999 $ 50,000
December 31, 1999 $175,000
Each such payment shall be due and payable to the Executive on or before fifteen
(15) days following the corresponding accrual date. Any unaccrued portion of
such Retention Bonus shall be forfeited upon termination of the Executive's
employment for any reason.
<PAGE>
2. REPRICING OF STOCK OPTIONS. The Board has also "repriced" all of
your outstanding stock options to the price of $1.25. This means that any
options you now hold at either $6.00 or $2.75 may (when vested) be exercised at
the price of $1.25. Also, your vesting will remain unchanged, meaning you will
not have to start your vesting schedule over again.
3. CHANGE OF CONTROL BENEFIT. Notwithstanding any provision to the
contrary set forth in the Employment Agreement, in the event of a Change of
Control (as defined below) of the Company, the Executive shall be entitled,
during the Election Period (as defined below), to tender his/her resignation to
the Company, in which case the Executive shall receive the sum of (i) 200% of
the Executive's base salary as in effect on the date of such resignation, plus
(ii) 200% of the Executive's target performance bonus for the year in which such
resignation occurs (provided that the amount of such target performance bonus
shall not be less than 65% of the Executive's then current base salary), plus
(iii) an amount equal to 167% of the Company's actual subsidy (as in effect at
the time of such resignation) for the Executive's (and his/her family members')
medical coverage for an 18 month period following the date of such resignation
(collectively, the "Change of Control Benefit"). The Executive shall also be
entitled to receive the Change of Control Benefit in the event of his/her
termination by the Company following a Change of Control, unless such
termination is because of death or permanent disability of Executive (in
accordance with Company policy) or for Cause as defined below, if such
termination occurs prior to the end of the Election Period.
For purposes of this agreement:
(i) a Change of Control shall occur on the date on which
designees of TW Associates, L.P. and KKR Partners II,
L.P. (collectively, "KKR") no longer constitute a
majority of the Board of Directors of Flagstar
Companies, Inc.; and
(ii) "Election Period" shall mean the period commencing
upon the effective date of the Change of Control and
ending six months thereafter.
(iii) "Cause" shall mean (A) the Executive's habitual
neglect of his material duties, (B) an act or acts by
the Executive, or any omission by him, constituting a
felony, and the Executive has entered a guilty plea or
confession to, or has been convicted of, such felony,
(C) the Executive's failure to follow any lawful
directive of the Board or Chief Executive Officer
("CEO") consistent with the Executive's position and
duties, (D) an act or acts of fraud or dishonesty by the
Executive which results or is intended to result in
financial or economic harm to the Company, or (E) breach
of a material provision of this Agreement by the
Executive; provided that the Company shall provide the
Executive (x) written notice specifying the nature of
<PAGE>
the alleged Cause, and, with respect to Clauses (A), (C)
and (E), (y) a reasonable opportunity to appear before
the Board or CEO to discuss the matter, and (z) a
reasonable opportunity to cure any such alleged Cause.
The foregoing Change of Control Benefit shall be payable to the
Executive in a lump sum within five (5) business days following any such
triggering resignation or termination. In the event the Executive receives
payment of the Change of Control Benefit hereunder, the Executive shall not be
required to seek other employment to mitigate damages, and any income earned by
the Executive from other employment or self-employment shall not be offset
against any obligations of the Company to the Executive under this Agreement;
provided, however, such payment shall be in lieu of any severance benefits
otherwise payable to the Executive under the Employment Agreement of under any
severance plan or policy of the Company. If the Executive remains with the
Company after the expiration of the Election Period, the Executive's right to
receive the Change of Control Benefit shall terminate and his/her severance
benefits shall, subject to Sections 4 and 5 below, be governed exclusively by
the Employment Agreement.
Notwithstanding the foregoing, if the independent accountants acting
as auditors for the Company on the date of a Change of Control determine that
the Change of Control Benefit payments as provided above would constitute
"excess parachute payments" pursuant to Section 280G of the Internal Revenue
Code of 1986, as amended, and regulations thereunder, when added to any other
parachute payments made by the Company or any affiliate thereof, then the
Executive shall receive the greater of (i) the maximum amount which may be paid
without the payments being "excess parachute payments," and (ii) the full amount
of such Change of Control Benefit without reduction pursuant to (i) above, net
of all excise taxes levied on the Executive as a result of such "excess
parachute payments," in each case as determined by such auditors. In the event
that (ii) above results in the greater benefit to the Executive, the Company
shall pay to the Executive the full amount of the Change of Control Benefit as
provided herein, and the Executive shall be fully responsible (subject to
applicable withholding requirements) for the payment of all excise taxes levied
on the Executive as a result of such "excess parachute payments." Any Change of
Control Benefit payment made pursuant to this letter agreement shall not be
considered compensation for the purpose of any plan or policy of the Company
unless such plan or policy expressly so provides.
4. SEVERANCE PAYMENT. Notwithstanding any provision to the contrary
set forth in the Employment Agreement, upon the occurrence of an event resulting
in the termination of the Executive under circumstances that would entitle the
Executive to severance benefits under the Employment Agreement (but not when the
Change of Control Benefit is payable), such severance benefits shall be payable
to the Executive in a single lump sum payment (the "Severance Payment") within
five (5) business days following any such termination. Further, should such an
event of termination of the Executive's employment occur, the Executive shall
not be required to seek other employment to mitigate damages, and any income
<PAGE>
earned by the Executive from other employment or self-employment shall not be
offset against any obligations of the Company to the Executive under this
Agreement.
5. SUBSIDIARY GUARANTIES. The Company's payment obligations herein
in respect of the Retention Bonus, the Change of Control Benefit, and the
Severance Payment shall be unconditionally guaranteed by the Company's
subsidiaries, Denny's, Inc., DFO, Inc., El Pollo Loco, Inc., Quincy's
Restaurants, Inc., and Flagstar Enterprises, Inc., such subsidiaries being among
the principal operating subsidiaries receiving the benefits of the Executive's
continuing employment with the Company. Such subsidiary guaranties shall be
"guaranties of payment" and not "guaranties of collection."
Except as supplemented and modified hereby, the Employment Agreement
and the severance benefits therein contained shall remain in effect and binding
on the Executive and the Company. Nothing herein shall be deemed to modify in
any respect the right of the Company to terminate the services of the Executive
in accordance with the terms of the Employment Agreement and Company policies
now or hereafter in effect.
If you are in agreement with these terms, please sign one copy of
this letter and return it to Stephen Wood.
Sincerely,
James B. Adamson
Chairman, Chief Executive Officer
and President
cc: Rhonda J. Parish
Stephen W. Wood
Agreed and accepted:
________________________________ _________________ ___, 199__
<PAGE>
By authority duly obtained as of the date first above written, the
undersigned, Denny's, Inc., DFO, Inc., El Pollo Loco, Inc., Quincy's
Restaurants, Inc., and Flagstar Enterprises, Inc., indirect subsidiaries of the
Company, hereby jointly and severally guarantee the payment by the Company to
the Executive of the Retention Bonus, the Change of Control Benefit, and the
Severance Payment as provided above. In providing such guaranty, each such
guarantor acknowledges that it is receiving and will receive substantial and
meaningful benefits and services from the Executive's continued employment with
the Company. Each such guaranty shall be a guaranty of payment and not of
collection.
Denny's, Inc. Quincy's Restaurants, Inc.
By: By:
-------------------------------- -------------------------------
DFO, Inc. Flagstar Enterprises, Inc.
By: By:
-------------------------------- -------------------------------
El Pollo Loco, Inc.
By:
--------------------------------
EXHIBIT 10.49
INFORMATION SYSTEMS MANAGEMENT AGREEMENT
This Agreement is entered into as of February 22, 1996 (the "Effective
Date"), between
1. Integrated Systems Solutions Corporation, a Delaware
corporation and a wholly owned subsidiary of International
Business Machines Corporation ("ISSC")
AND
2. Flagstar Corporation, a Delaware corporation whose registered
office is at 203 E. Main Street, Spartanburg, South Carolina
("Flagstar").
The Parties agree to the terms and conditions set forth in this
Agreement including the Supplement and Schedules A through T referenced in this
Agreement.
Signed for and on behalf of INTEGRATED SYSTEMS SOLUTIONS CORPORATION:
By: /s/ George B. Richardson
----------------------------------------------
George B. Richardson, Director of Retail
By: /s/ Linda K. Topper
----------------------------------------------
Linda K. Topper, Project Executive
Signed for and on behalf of FLAGSTAR CORPORATION:
By: /s/ James B. Adamson
----------------------------------------------
James Adamson, Chairman, President and CEO
By: /s/ Rhonda J. Parish
----------------------------------------------
Rhonda J. Parish, Senior Vice President,
General Counsel & Secretary
By: /s/ Honorio J. Padron
----------------------------------------------
Honorio J. Padron, CIO and Vice President
<PAGE>
TABLE OF CONTENTS
PAGE
1. PURPOSE OF AGREEMENT...................................... 1
2. DEFINITIONS AND AGREEMENT AND RELATIONSHIP PROTOCOLS...... 2
2.1 General Definitions.............................. 2
2.2 Evolving Nature of Relationship.................. 10
2.3 Required Consents................................ 11
2.4 Agency........................................... 12
2.5 Conflicts of Interests........................... 13
2.6 Alternate Providers.............................. 13
2.7 Use of Subcontractors............................ 14
3. THE SERVICES.............................................. 15
3.1 Obligation to Provide Services................... 15
3.2 Performance...................................... 15
3.3 Business and Information Systems Plan............ 16
3.4 Disaster Recovery Services....................... 16
3.5 Audits........................................... 16
3.6 Data Center...................................... 17
3.7 Security......................................... 17
3.8 Technology Refresh............................... 18
3.9 Software Licenses................................ 18
3.10 Software Currency................................ 19
3.11 Viruses.......................................... 19
3.12 Applications Software - Substitutions and
Additions........................................ 20
4. TRANSITION................................................ 20
4.1 Transition Plan.................................. 20
4.2 Affected Employees............................... 21
4.3 Resources and Facilities......................... 21
5. SERVICES STAFFING AND MANAGEMENT AND ADMINISTRATION....... 22
5.1 Project Executives............................... 22
5.2 Replacement of Personnel......................... 22
5.3 Retention of Experienced Personnel............... 23
5.4 Efficient Use of Resources....................... 23
5.5 Flagstar Approvals and Notification.............. 23
6. CHARGES AND PAYMENTS...................................... 23
6.1 Disbursements.................................... 23
6.2 Annual Service Charge............................ 24
6.3 Additional Charges............................... 24
6.4 Cost of Living Adjustment........................ 24
6.5 Taxes............................................ 24
6.6 New Services..................................... 24
6.7 [Reserved]....................................... 25
6.8 Affiliates....................................... 25
<PAGE>
6.9 Reduction of Flagstar Requirements............... 26
6.10 [Reserved]....................................... 26
6.11 Service Credits.................................. 26
6.12 ISSC Standard Retail Services.................... 27
6.13 Most Favored Customer............................ 27
7. INVOICING AND PAYMENT..................................... 27
7.1 Annual Service Charge Invoices................... 27
7.2 Cost of Living Adjustment........................ 27
7.3 Other Charges.................................... 27
7.4 Invoice Payment.................................. 28
7.5 Proration........................................ 28
7.6 Disputed Charges/Credits......................... 28
7.7 Other Credits.................................... 28
8. INTELLECTUAL PROPERTY RIGHTS.............................. 29
8.1 Ownership of Materials........................... 29
8.2 Obligations Regarding Materials.................. 30
9. CONFIDENTIALITY/DATA SECURITY............................. 30
9.1 Confidential Information......................... 30
9.2 Obligations...................................... 30
9.3 Exclusions....................................... 31
9.4 Loss of Company Information...................... 31
9.5 Limitation....................................... 31
9.6 Data............................................. 32
10. TERM AND TERMINATION...................................... 32
10.1 Term............................................. 32
10.2 Renewal and Expiration........................... 32
10.3 Termination By Flagstar.......................... 32
10.4 Termination by ISSC.............................. 33
10.5 Termination Charges.............................. 33
10.6 Termination Proration............................ 34
10.7 Extension of Services............................ 34
10.8 Services Transfer Assistance..................... 34
10.9 Other Rights Upon Termination.................... 35
10.10 Effect of Termination............................ 37
11. LIABILITY................................................. 37
11.1 Liability Caps................................... 37
11.2 Exclusions....................................... 37
11.3 Direct Damages................................... 37
11.4 Dependencies..................................... 38
11.5 Remedies......................................... 38
12. WARRANTIES/REPRESENTATIONS/COVENANTS...................... 38
12.1 Work Standards................................... 38
12.2 Noninfringement.................................. 38
12.3 Disabling Code................................... 39
12.4 Authorization and Enforceability................. 39
<PAGE>
12.5 Disclaimer....................................... 39
12.6 Regulatory Proceedings........................... 39
13. INDEMNITIES............................................... 39
13.1 Indemnity by ISSC................................ 39
13.2 Indemnity by Flagstar............................ 41
13.3 Employment Actions............................... 42
13.4 Exclusive Remedy................................. 42
13.5 Indemnification Procedures....................... 42
14. INSURANCE AND RISK OF LOSS................................ 43
14.1 ISSC Insurance................................... 43
14.2 Flagstar Insurance............................... 44
14.3 Risk of Property Loss............................ 45
14.4 Mutual Waiver of Subrogation..................... 45
15. MANAGEMENT COMMITTEE/DISPUTE RESOLUTION/CHANGE CONTROL
PROCESS.............................................. 45
15.1 Flagstar/ISSC Management Committee............... 45
15.2 Dispute Resolution............................... 46
15.3 Continued Performance............................ 47
15.4 Change Control Process........................... 47
16. GENERAL................................................... 48
16.1 Control of Services.............................. 48
16.2 Entire Agreement, Updates, Amendments and
Modifications................................. 49
16.3 Force Majeure.................................... 49
16.4 Nonperformance................................... 50
16.5 Waiver........................................... 50
16.6 Severability..................................... 50
16.7 Limitations Period upon Termination.............. 50
16.8 Counterparts..................................... 50
16.9 Governing Law.................................... 50
16.10 Binding Nature and Assignment.................... 50
16.11 Notices.......................................... 51
16.12 No Third Party Beneficiaries..................... 51
16.13 Other Documents.................................. 51
16.14 Consents and Approvals........................... 52
16.15 Headings......................................... 52
16.16 Remarketing...................................... 52
TABLE OF SCHEDULES
SCHEDULE TITLE
A Applications Software
- Applications Software - ISSC
- Applications Software - Flagstar
B Systems Software
- ISSC Systems Software - IBM
- Systems Software - OEM
<PAGE>
- Flagstar Systems Software
C Flagstar Provided Hardware
- Data Center
- End User Machines
- Existing POS Systems
- Affected Employee Machines
- Flagstar Server Configurations listed in
Schedule I
D ISSC Machines
E Support Services, Performance Standards and
Operational Responsibilities
F Third Party Agreements
G Disaster Recovery Services
H Transition Plan
I Network Locations
- Flagstar LAN Software
- ISSC LAN Software
- Flagstar Server Configurations
J ISSC Charges, Measures of Utilization and Financial
Responsibilities
K Operating Environment
L Security Procedures
M Help Desk Services
N Projects
O Affected Employees
P Maintenance of End User and Existing POS Systems
Listed in Schedule C
Q Outstanding Employee Claims
R [Reserved]
S Services Transfer Assistance
T Flagstar Corporate Facilities
<PAGE>
1. PURPOSE OF AGREEMENT
a) ISSC is provider of a broad range of information technology, information
management, communications and related services and desires to provide
to Flagstar certain information technology and perform for Flagstar
certain of the information management and communications functions,
responsibilities and tasks that are currently performed by the Flagstar
Group for the Flagstar Business and Flagstar Group. Flagstar desires
that the Flagstar information technology and information management and
communications services functions, responsibilities and tasks be
migrated from the Flagstar Group to ISSC, and that such technology and
services be provided to the Flagstar Group by ISSC which is experienced
and skilled in the administration, management, provision and performance
of such functions, responsibilities and tasks. After consulting with
experts in the information technology field and evaluating other
alternative providers, Flagstar has determined that ISSC's service
offerings can meet Flagstar's business requirements and purposes, and
has, therefore, chosen ISSC as its information technology services
provider. This Agreement documents the terms and conditions under which
the Flagstar Group will obtain such migration, technology and
information management and communications services from ISSC, and ISSC
will administer, manage, provide and perform such functions,
responsibilities and tasks for the Flagstar Group.
b) In entering into this Agreement, the Parties have each identified
objectives and goals that each intends that ISSC's performance pursuant
to this Agreement will assist the Parties to achieve. Flagstar's
objectives and goals include the following: (1) engaging ISSC to
efficiently and timely operate and transition the existing Flagstar
Group information management and communications technologies and systems
to different information management and communications technologies and
systems provided and operated by ISSC, which are intended to fulfill the
support requirements for the Flagstar Group's administrative,
management, planning, financial reporting and operating activities, (2)
reducing the on-going monthly operating costs of the Flagstar Group; (3)
securing favorable rates for additional resource consumption; (4) taking
advantage of new technologies to improve performance and the cost to
performance ratios experienced by the Flagstar Group; (5) enhancing the
current functionality of the Flagstar Group's systems and levels of
service; (6) minimizing any potential operating and financial risks to
the Flagstar Group and (7) permitting ISSC to hire and provide career
opportunities for certain employees of Flagstar whose positions within
Flagstar will be eliminated. The parties intend to work cooperatively
together to (1) ensure the integrity and security of existing and future
hardware and software systems; (2) increase flexibility regarding
resource commitments and availability and evolve technologies to meet
the dynamic requirements of the Flagstar Group and Flagstar Business;
(3) provide an opportunity for Flagstar to migrate to the "ISSC Standard
Retail Services" proposal when and as developed by ISSC; (4) provide an
opportunity to transition the Services back to the Flagstar Group or to
another service provider from ISSC with minimal disruption; and (5)
attempt to ensure that ISSC receives a fair return on its investment in
providing the Services to the Flagstar Group.
c) ISSC recognizes that the Flagstar Group expects to be treated as a
valued customer and agrees that the definition of customer satisfaction
goes beyond ISSC's performance against established Performance Standards
and Minimum Service Levels and requires that ISSC exhibit customer
service attitude focused on assisting Flagstar where possible in
reducing its information technology operating costs and improving
service to the Flagstar Group and the Flagstar Group customers.
d) The provisions of this Section 1 are intended to be statement of the
purpose of this Agreement and are not intended to alter the plain
meaning of the terms and conditions of this Agreement or to require
either Party to undertake performance obligations not required by this
Agreement. To the extent that the terms and conditions of this Agreement
are unclear or ambiguous, such terms and conditions are to be
interpreted and construed consistent with the purposes set forth in this
Section 1.
Page 1 of 52
<PAGE>
2. DEFINITIONS AND AGREEMENT AND RELATIONSHIP PROTOCOLS
2.1 GENERAL DEFINITIONS
In this Agreement including the Supplement and Schedules A through T, the
following terms will have the following meanings:
Additional Resource Charge has the meaning given in Schedule J.
or ARC
AD/M means both Applications Development and
Software Maintenance.
AD/M Projects means the Applications Development and
Software Maintenance performed in connection
with the As Is Systems and To Be Systems
after the production cutover date for the
corresponding Schedule N Project and/or each
New Service added during the Term requiring
the performance of Applications Development
and Software Maintenance by ISSC.
Affiliates means, with respect to Party, any entity at
any time Controlling, Controlled by or under
common Control with such Party, excluding
franchisees of the Flagstar Group in which the
Flagstar Group does not own a greater than
fifty percent (50%) interest.
Affected Employees has the meaning set forth in Section 4.2.
Agreement means this Information Systems Management
Agreement, the Supplement, and Schedules A
through T referenced herein.
Annual Service Charge has the meaning given in Schedule J.
Applications Development means the programming of any
new applications software, and changes or
enhancements to existing Applications
Software requiring an FTE of 30 days or
greater, and/or review/approval by the Change
Control Process. Programming effort shall
include the pre and post development analysis,
planning, design, coding, testing,
installation, provision of a single set of
program and training documentation per
Applications Software program and training
necessary to complete the task.
Applications Development means the pre and post development analysis,
Methodology planning, design, coding, testing,
installation, provision of a single set of
program and training documentation per
Application Software program and training
necessary to complete the task.
Applications Software means those programs and programming,
including all supporting documentation and
media, that perform specific user related
data processing, data management and
telecommunications tasks, including updates,
enhancements, modifications, releases and
Derivative Works thereof. Applications
Software as of the Effective Date is listed in
Schedule A, which Schedule shall be updated
pursuant to Section 2.2 to reflect the
then-current Applications Software.
Applications Software - means the Applications Software listed on
Flagstar Schedule A under such heading provided or to
be provided by Flagstar.
Applications Software - means the Applications Software listed on
ISSC Schedule A under such heading provided or to
be provided by ISSC.
Page 2 of 52
<PAGE>
As Is Systems means the information processing services that
Flagstar provided to itself and the Flagstar
Restaurants immediately prior to the
Commencement Date.
Baseline has the meaning given in Schedule J.
Business and Information has the meaning given in Section 3.3.
Systems Plan
Cable or Cabling means the wires or cables that interconnect
Machines and/or connect a Machine to a
facility connection point.
Change Control Process has the meaning given in Section 15.4 of this
Schedule E.
Change of Control means the transfer of the Control of a
Party from the persons or persons who hold
such control on the Effective Date to
another person or persons, but shall not
include a transfer of the Control of a Party
to an Affiliate of such Party.
Change Request has the meaning given in Section 15.4.
Claim has the meaning given in Section 13.5(a).
Code has the meaning given in Section 8.
Commencement Date means March 1, 1996.
Confidential Information has the meaning given in Section 9.1.
Contract Year means each twelve (12) calendar month period
beginning January 1 of each calendar year
during the term.
Control, Controlling, or means possessing, directly or indirectly, the
Controlled power to direct or cause the direction of the
management and policies of an entity, whether
through ownership of voting securities, by
contract or otherwise.
Cost of Living has the meaning given in Schedule J.
Adjustment ("COLA")
CRF has the meaning given in Section 15.4.
Data Center means the data center owned and operated
by Flagstar located in the secured computer
operations area of Level B2 of the Flagstar
Plaza Building in Spartanburg, South Carolina,
as of the Commencement Date.
Data Network means all communication facilities and
components that are used to transmit voice,
image and data signals and which initially
consist of the communications facilities and
components used by Flagstar immediately prior
to the Commencement Date to provide
information communication services to the
Flagstar Group, including without limitation,
all Machines, Software, communications lines,
Cabling and Wiring used to connect and
transmit information among the Flagstar
Corporate Facilities and the Network
Locations, but does not include End User
Machines or POS Machines.
DBMS has the meaning given in paragraph III.F of
Section E-1 of Schedule E.
Deliverables has the meaning given in paragraph X.D of
Section E-1 of Schedule E.
Page 3 of 52
<PAGE>
Derivative Work means a work based on one or more
pre-existing works, including without
limitation, a condensation, transformation,
expansion or adaptation, which would
constitute a copyright infringement if
prepared without authorization of the owner of
the copyright of such pre-existing work.
Develop has the meaning given in Section 8.
Direct Damages has the meaning given in Section 11.3.
Direct Damages Cap has the meaning given in Section 11.2(a).
Disaster Recovery means the location designated by such name or
Center its equivalent in the Disaster Recovery plan.
Disaster Recovery means the Disaster Recovery services described
Services in Schedule G.
Effective Date means the date set forth on the initial page
of this Agreement.
End User Machines means all workstations, terminals, printers,
fax machines, and associated peripheral
equipment used by end users and described in
Schedule C, whether stationary or mobile
equipment used by end users, but does not
include POS Machines, equipment located within
a Flagstar Restaurant, or the workstations
being used by ISSC personnel in connection
with the Schedule N Projects or the Flagstar
Provided Hardware located in the Data Center.
Existing Network has the meaning given in Schedule I.
Existing POS System means the existing POS Machines as
of the Commencement Date, and the Software,
Cabling, Wiring and operations procedures
manuals used in the Flagstar Restaurants.
Flagstar Business means the business engaged in by the Flagstar
Group and its franchisees.
Flagstar Code means Code Developed by ISSC and/or its
subcontractors independently or jointly with
the Flagstar Group as part of the Services
Flagstar Corporate has the meaning given in Schedule T.
Facilities
Flagstar Derivative means Developed Code which constitutes
Code Derivative Work of software for which the
copyright is owned by the Flagstar Group
and/or their subcontractors.
Flagstar Executive has the meaning given in Section 2.5(b).
Technology Committee
Flagstar Group means individually and collectively Flagstar
and its existing and future Affiliates.
Flagstar LAN Software has the meaning given in Schedule I.
Flagstar/ISSC has the meaning given in Section 15.1.
Management Committee
Page 4 of 52
<PAGE>
Flagstar Provided means the computer equipment peripheral
Hardware devices, storage media, Cabling, connectors
and other equipment (however described)
provided from time to time by the Flagstar
Group for use by ISSC to perform and deliver
the Services and fulfill its obligations under
this Agreement. The Flagstar Provided Hardware
as of the Effective Date is listed on and/or
referred to in Schedule C (including the
Flagstar Server Configurations listed in
Schedule I), which schedule shall be updated
pursuant to Section 2.2 during the Term to
reflect the then-current Flagstar Provided
Hardware.
Flagstar Restaurants means the restaurants owned and/or operated by
Flagstar.
Flagstar Server shall have the meaning given in Schedule I.
Configurations
Flagstar Software means Applications Software-Flagstar, Flagstar
Systems Software and Flagstar LAN Software.
Flagstar Systems Software means the systems software and general
purpose software such as the database creation
and management software, utility software and
applications development tools software listed
in Schedule B under such heading provided or
to be provided by Flagstar.
Flagstar Works means literary works of authorship (other
than Code) Developed by ISSC and/or its
subcontractors independently or jointly with
the Flagstar Group, at Flagstar's expense, as
part of the Services that is specifically
related to the Flagstar Group or the Flagstar
Business, including without limitation user
manuals, charts, graphs and other written
documentation, and machine-readable text and
files.
Force Majeure Event has the meaning given in Section 16.3.
Help Desk means the ISSC help desk which is staffed by
ISSC to provide support to Flagstar as
described in Schedules E and M.
Indemnified Party has the meaning given in Section 13.5(a).
Indemnifying Party has the meaning given in Section 13.5(a).
Indemnities has the meaning given in Section 13.1.
ISSC Code means Code Developed by ISSC personnel at
ISSC's expense, and used to provide the
Services, which does not constitute a
Derivative Work of any software owned by the
Flagstar Group, ISSC, IBM or their respective
Affiliates or subcontractors.
ISSC Derivative Code means Code Developed under this Agreement,
which constitutes Derivative Works of software
for which the copyright is owned by ISSC, IBM,
their respective Affiliates or their
subcontractors.
ISSC LAN Software has the meaning given in Schedule I.
ISSC Indemnitees has the meaning given in Section 13.2.
Page 5 of 52
<PAGE>
ISSC Interfaces means Code and/or literary works of
authorship created at ISSC's expense and
used to interface or describe and instruct
regarding the interface, between and among
Applications Software and the Systems
Software which does not constitute a
Derivative Work of any software or literary
works of authorship owned by Flagstar, ISSC,
IBM or their respective Affiliates or
subcontractors, including without limitation,
user manuals, charts, graphs and other written
documentation, and machine-readable text and
files.
ISSC Machines means the computer equipment, peripheral
devices, storage media, cabling, connectors,
extenders and other equipment (however
described) including without limitation, the
New POS Machines, modems, routers and
termination boxes for the Network located in
the Data Center and at the Network Locations
(including the Flagstar headquarters and
offices) used from time to time by ISSC to
perform and deliver the Services and fulfill
its obligations under this Agreement. The
ISSC Machines as of the Effective Date are
listed on Schedule D, which schedule shall be
updated pursuant to Section 2.2 during the
Term to reflect the then-current ISSC
Machines.
ISSC Software means the Applications Software-ISSC, ISSC
Systems Software-IBM, Systems Software-OEM and
ISSC LAN Software.
ISSC Systems Software- means Systems Software listed on Schedule B
IBM under the heading "ISSC Systems Software-IBM",
provided or to be provided by ISSC.
ISSC Works means literary works of authorship (other
than Code) Developed at ISSC's expense, by
ISSC personnel and/or its contractors and used
to provide the Services, including without
limitation user manuals, charts, graphs and
other written documentation and
machine-readable text and files.
Level One Support has the meaning given in Schedule M.
Level Two Support has the meaning given in Schedule M.
Level Three Support has the meaning given in Schedule M.
Listed Subcontractors has the meaning given in Section 2.7(a).
Local Area Network (LAN) means all communications facilities and
components that are used to transmit data
signals within a local area network and
which initially consist of the communications
facilities and components in use by Flagstar
immediately prior to the Commencement Date to
provide local area network communications
facilities to the Flagstar Group as described
in Section of Schedule I, including without
limitation the associated attachments,
peripherals, features, software and
accessories, communications lines and Cabling,
including the wiring systems, at the
locations specified in Sections 1 through 5
of Schedule I.
Losses means all losses, liabilities, damages,
penalties and claims (including taxes), and
all related costs, expenses and other charges
(including any and all reasonable attorneys'
fees and reasonable costs of investigation,
litigation, settlement, judgment, interest and
penalties).
Machines means the ISSC Machines and Flagstar Provided
Hardware.
Maintenance Release means those Software fixes and updates
provided by the Software vendor as part of
normal maintenance service for the Software.
Page 6 of 52
<PAGE>
Materials means the Flagstar Code, the Flagstar
Derivative Code, the Flagstar Works, the
ISSC Code, the ISSC Derivative Code, the
ISSC Works and the ISSC Interfaces.
Minimum Service Levels has the meaning given in Schedule E.
Moves, Adds and Changes means the Cabling, relocation, replacement,
(MACs) addition or removal of features, model
changes and upgrades to End User Machines and
telephone equipment and the replacement,
addition or removal of Software on the LAN
servers and End User Machines located at the
Flagstar Corporate Facilities. MAC refers
only to such services and does not
include the provision of End User Machines,
telephone equipment, software or other
devices or functions necessary to effectuate
a MAC. MAC does not include "construction",
"fit up" or wiring activity for existing or
new Flagstar locations.
Network means the Data Network, Local Area Network and
Voice Services.
Network Locations has the meaning given in Sections 1 through 5
of Schedule I.
Network Vendors means any third parties providing information
communication services to Flagstar which
are accessed or will be accessed through the
Network.
New POS Machines means the POS Machines to be utilized in
connection with the Schedule N Project for
point-of-sale services and managers integrated
office systems, as described more specifically
in Schedule N.
New POS Systems means the point-of-sale and managers
integrated office systems, Software and
Machines as described in Schedule N.
New Services has the meaning given in Section 6.6.
Parties means ISSC and Flagstar as detailed on
the initial page of this Agreement.
Party means ISSC or Flagstar as detailed on the
initial page of this Agreement.
Performance Standards means the service levels and performance
responsibilities under which the Services will
be provided. The Performance Standards are
described in Schedule E.
Poll means to connect the Flagstar Corporate
Facilities to the Flagstar Restaurants to
retrieve restaurant data, perform menu
downloads/updates and/or execute remote
diagnostics.
POS Machines means all point-of-sale workstations,
terminals printers and associated peripheral
equipment.
Page 7 of 52
<PAGE>
Required Consents means any consents or approvals required to be
obtained (a) to allow ISSC to assume
financial and/or support, operational,
management and administrative responsibility
for the Flagstar Software and Flagstar
Provided Hardware in connection with the
Services; (b) for the licensing, transfer
and/or grant of the right to Flagstar to use
the ISSC Software and ISSC Machines as
contemplated by this Agreement; and (c) for
Flagstar and ISSC to have access to and use
of the space, equipment, software and/or
third party services provided under the Third
Party Agreements in connection with the
Services as contemplated by this Agreement.
Resource Unit ("RU") has the meaning given in Schedule J.
Schedule N Project means the Applications Development and
Software Maintenance projects set forth in
Schedule N.
Service Credits has the meaning set forth in Section 6.11.
Service Employees has the meaning given in Section 10.9(g).
Services means the administration, management,
operation, provision and performance of the
information technology services and systems
and information management and communications
services functions, responsibilities and tasks
required to support the administrative,
management, planning, financial reporting and
operating activities of the Flagstar Group,
and the migration and transition of (1) such
systems and services from the Flagstar Group
to ISSC, and (2) from the existing technology
and systems used to perform such services to
different technology and systems, all of the
preceding as described and defined in, and
required by, this Agreement.
Services Transfer has the meaning given in Section 10.8.
Assistance
Similarly Situated means ISSC customers with substantially the
Customers same mix and type of processing applications
and systems resources utilization at
similar or lesser volumes.
Software means ISSC Software and Flagstar Software.
Software Maintenance means defect identification and fixes; and
installation of those fixes and updates
provided by the software vendor as part of
normal maintenance service for which there is
no additional cost to ISSC for the Software:
1. regulatory/statutory changes;
2. version upgrades to Applications Software;
and
3. changes or enhancements to existing
Applications Software requiring an FTE of
not to exceed thirty (30) days and/or
review/approval by the Change Control
Process.
Special Funds has the meaning set forth in Schedule J.
Supplement means the Supplement to this Agreement
containing the charges and certain other
necessary information.
Page 8 of 52
<PAGE>
System means the Machines, Software and Network
provided under this Agreement and the
operating environment therefore.
Systems Software means those programs and programming
(including all supporting documentation and
media) that perform tasks related to the
functioning of the data processing, and
telecommunication equipment which is used to
operate the Applications Software or otherwise
to support the provision of the Services by
ISSC under this Agreement, whether or not
licensed to ISSC. Systems Software includes,
but is not limited to, operating systems,
software utilities, data security software,
data network software, communications monitors
and data base managers. Systems Software as
of the Effective Date is listed in Schedule B,
which schedule shall be updated pursuant to
Section 2.2 to reflect the then current
Systems Software.
Systems Software-OEM means Systems Software listed in Schedule B
under the heading "Systems Software-OEM",
provided or to be provided by ISSC.
Term has the meaning given in Section 10.1 and any
extension and renewal term described in this
Agreement.
Termination Charge means the amount that will reimburse
ISSC for the expenses incurred and investments
made by ISSC to provide the ISSC Machines and
ISSC Software and perform the functions,
responsibilities and tasks that collectively
comprise the Services, together with an ISSC
profit based on such expenses and
investments, that ISSC has not recovered as
of a termination date occurring prior to the
expiration of the Term, but such charge does
not include any element of profit allocable
to periods after the termination date or
any charge for lost opportunity or expectancy,
however described or denominated, before or
after such date.
Third Party Agreements means those contractual, leasing and licensing
arrangements for which ISSC has undertaken
financial, management and/or administrative
responsibility and Flagstar receives third
party products, software and/or services in
connection with the provision of the Services.
Third Party Agreements to which Flagstar is a
party are listed on Schedule F, which schedule
shall be updated pursuant to Section 2.2 to
reflect the then-current Third Party
Agreements.
Third Party Provider means a business or entity other than
Flagstar or ISSC that performs tasks by
providing products, software and/or service
under a Third Party Agreement, in support of
the provision of the Services by ISSC.
To Be Systems means, with respect to the Schedule N
Projects, the information processing services
to be provided to Flagstar by ISSC from
the date of production cutover of the first
Schedule N Project through the date of
production cutover of the last Schedule N
Project and with respect to information
processing services implemented as a result of
the Schedule N Projects, the information
processing services related thereto through
the expiration or earlier termination of the
Agreement.
Transition Plan has the meaning given in Section 4.1(a).
Transition Period has the meaning given in Section 4.1(a).
Transition Personnel has the meaning given in Section 4.1(b).
Page 9 of 52
<PAGE>
Version means those Software updates that
generally add function to the existing
Software and may be provided by the Software
vendor at a fee over and above the standard
software maintenance costs.
Virus or Viruses has the meaning given in Section 3.11.
Voice Services has the meaning given in Schedule E.
Wind-Down Expenses means the amount that will
reimburse ISSC for the actual costs that ISSC
incurs in the disposition and/or
reallocation of ISSC Machines, ISSC
Software and the portion of the Data Center
dedicated to the performance of the Services,
the placement of ISSC personnel allocated to
the delivery of the Services, and the
termination, if appropriate, of the Third
Party Agreements, in the event of a
termination occurring prior to the expiration
of the Term; provided, however, Flagstar
shall have the right to mitigate such costs
by purchase of, or assumption of the leases
for, the ISSC Machines, assumption of the
licenses and maintenance agreements for the
ISSC Software, hiring the ISSC
personnel delivering the Services, assuming
Third Party Agreements and taking similar
actions.
2.2 EVOLVING NATURE OF RELATIONSHIP
a) The Supplement and Schedules A through T to this Agreement will be
updated by the Parties as set forth in this Agreement as necessary or
appropriate during the Term to accurately reflect the evolution of the
Services and components and elements of the Services as described
therein.
b) For the one hundred-eighty (180) days following the Commencement Date,
ISSC and Flagstar reserve the right to inventory, validate and update
any information that is reflected in or omitted from the Agreement and
attached Supplement and/or Schedules. If discrepancies are detected,
the Agreement, Supplement and/or Schedules shall be promptly changed,
modified, updated and adjusted to correct such discrepancies upon mutual
agreement, so that the Agreement, Supplement and/or Schedules will be
correct and accurately reflect the Services and charges provided by ISSC
to Flagstar. If either Party disputes the existence of a discrepancy
identified by the other Party, the Parties will submit the matter to the
Flagstar/ISSC Management Committee for dispute resolution as specified
in Section 15.
c) Both Flagstar and ISSC agree that the Services provided may require
adjustments to reflect the evolving business and operations of the
Flagstar Group and ISSC, that the relationship memorialized by this
Agreement is dynamic in nature and will evolve as the operating and
business environment of the Flagstar Group changes and evolves, and that
the scope of the Services that will be provided by ISSC during the Term
may be changed and modified with the written agreement of the Parties
pursuant to the Change Control Process. Therefore, the Flagstar/ISSC
Management Committee will periodically evaluate the business and
operating strategies of each Party and recommend modifications to, and
evolution of, the Services (including the Performance Standards and
Minimum Service Levels) to optimize such strategies.
d) While the Parties will endeavor to update, modify and amend this
Agreement, the Supplement and the Schedules as necessary or appropriate
from time to time to reflect the parameters and changing nature of the
Services and the requirements of the Flagstar Group and Flagstar
Business, the Parties acknowledge that such activities may not always be
documented with specificity. Therefore, the Parties agree to deal with
each other in good faith to resolve all issues presented and any
disputes that may arise.
Page 10 of 52
<PAGE>
2.3 REQUIRED CONSENTS
a) The Flagstar Group shall remain the contracting party of record for the
Third Party Agreements to which the Flagstar Group is a party on the
Commencement Date. ISSC will provide Flagstar with advice and counsel
regarding ISSC's experience and agreements with the vendors under the
Third Party Agreements to which the Flagstar Group is a party on the
Commencement Date with regard to obtaining any Required Consents, and
the benefit of any relationship of ISSC with each such vendor to the
extent permitted under the ISSC-vendor arrangement to obtain any
Required Consent. ISSC and Flagstar will share management and
administrative responsibilities for obtaining all Required Consents
under the Third Party Agreements existing on the Commencement Date.
Flagstar shall have the responsibility for timely obtaining all Required
Consents under the Third Party Agreements entered into after the
Commencement Date and for which Flagstar bears financial responsibility
and pays the vendors directly thereunder, except Third Party Agreements
to which any Affiliate of ISSC is a party. ISSC shall have the
responsibility for timely obtaining all Required Consents under Third
Party Agreements entered into after the Commencement Date (i) with
affiliates of ISSC, and (ii) for which ISSC bears financial
responsibility and pays the vendors directly or indirectly through a
third party, thereunder. The provisions of this Section shall not be
applicable to New Services unless provided by the Parties in the
documentation governing New Services.
b) Flagstar shall bear the costs, if any, of obtaining all Required
Consents, including without limitation, all charges and fees related to
obtaining the Required Consents (i) for the Third Party Agreements
existing as of the Commencement Date, except Third Party Agreements to
which any Affiliate of ISSC is a party or to which the vendor will
charge for or not grant a Required Consent because ISSC is the
outsourcing services provider to Flagstar but such vendor does not
invoke such charge or refuse to grant a Required Consent as a standard
policy with other outsourcing services providers generally, and (ii) for
the Third Party Agreements entered into after the Commencement Date for
which Flagstar bears financial responsibility and pays the vendor
directly thereunder, except Third Party Agreements to which any
Affiliate of ISSC is a party. ISSC shall bear such costs of obtaining
all Required Consents (A) for the Third Party Agreements to which an
ISSC Affiliate is a party as of the Commencement Date or during the
Term, (B) for the Third Party Agreements to which the vendor will charge
for or not grant a Required Consent because ISSC is the outsourcing
services provider to Flagstar but such vendor does not invoke such
charge or refuse to grant a Required Consent as a standard policy with
other outsourcing services providers generally, and (C) for all Third
Party Agreements entered into after the Commencement Date for which ISSC
bears financial responsibility and pays the vendor directly or
indirectly through a third party, thereunder. All Required Consents
with regard to Third Party Agreements existing on the Commencement Date
shall be obtained within ninety (90) days after the Effective Date
unless otherwise agreed by the Parties in writing. In addition,
Flagstar shall bear the costs, if any, associated with the cancellation
and re-licensing of any Software licensed by Flagstar prior to the
Commencement Date if required for ISSC to provide the Services after the
Commencement Date, except Software licensed from ISSC or any Affiliate
of ISSC and/or licensed from a vendor that requires such cancellation
and re-licensing because ISSC is the outsourcing services provider but
does not require such actions as a standard policy with other
outsourcing services providers generally. ISSC shall bear the cost, if
any, associated with the cancellation and re-licensing of any Software
licensed by Flagstar prior to the Commencement Date licensed from ISSC
or any Affiliate of ISSC and/or licensed from a vendor that requires
such cancellation and re-licensing because ISSC is the outsourcing
services provider but does not require such actions as a standard policy
with other outsourcing services providers generally, if required for
ISSC to provide the Services after the Commencement Date. The
provisions of this Section shall not be applicable to New Services
unless provided by the Parties in the documentation governing New
Services.
c) Flagstar will publish a list each month setting forth the status of each
Required Consent until all Required Consents are obtained. ISSC shall
timely cooperate with Flagstar in order to facilitate the proper and
timely publication of such monthly Required Consents list. If any
Required Consent is not obtained with respect
Page 11 of 52
<PAGE>
to any of the Third Party Agreements existing as of the Commencement
Date, the Parties shall cooperate with each other in achieving a
reasonable alternative arrangement for Flagstar to continue to process
its work with minimum interference to its business operations unless and
until such Required Consents are obtained. The cost of achieving such
reasonable alternative arrangement shall be borne by ISSC if caused by
Required Consents needed from (i) ISSC or Affiliates of ISSC, (ii) from
the licensors of the ISSC Software, and/or (iii) from vendors under any
Third Party Agreements treating outsourcing arrangements involving ISSC
as the services provider differently than their standard policies
afforded to other outsourcing services providers generally as described
in Section 2.3(b), and in all other instances such cost shall be borne
by Flagstar.
2.4 AGENCY
a) Flagstar appoints ISSC as its agent for the limited purposes of
administering, managing, operating under and paying under the Third
Party Agreements to which Flagstar is a party in connection with the
Services as contemplated by this Agreement. Under this Agreement
Flagstar does not appoint ISSC as its agent for the purposes of entering
into oral or written agreements with any individual or business entity
for or in the name of Flagstar or its Affiliates, without the prior
express written approval of Flagstar. Flagstar agrees to promptly
notify all Third Party Providers under the Third Party Agreements to
which Flagstar is a party of such appointment. Subject to its
obligation to pay applicable penalties, damages, termination or other
charges under Section 13.1, ISSC may cancel, substitute, terminate,
change or add to the Third Party ------------ Providers under the Third
Party Agreements as it chooses so long as ISSC continues to perform the
Services in the manner required by this Agreement; provided however,
ISSC must submit written notification to Flagstar and obtain Flagstar'
written agreement prior to the termination, modification or addition of
any Third Party Agreement to which Flagstar is a party. If Flagstar
does not respond to such notice from ISSC within five (5) business days
of Flagstar's receipt of such notice, Flagstar shall be deemed to have
agreed to the termination, modification or addition described in the
ISSC notice. If such termination will have an impact on the operations
of users that are outside the scope of the Services, ISSC will provide
or cause to be provided the services that are the subject of such Third
Party Agreements to the users on terms no less favorable than the terms
of the applicable Third Party Agreement.
b) ISSC will perform its obligations and responsibilities as an agent
pursuant to Section 2.4(a) under all Third Party Agreements to which the
Flagstar Group is a party, subject to the provisions of Section 2.3,
this Section 2.4, Section 6.1 and Section 9. Upon Flagstar's request,
ISSC will provide to Flagstar all information and documentation related
to its activities as the Flagstar Group's agent with regard to such
Third Party Agreements. Flagstar may terminate or provide additional
restrictions on ISSC's agency appointment with respect to any Third
Party Agreement to which the Flagstar Group is a party if ISSC (i) fails
to pay any amount due in a timely manner; (ii) permits an actual default
to occur; or (iii) ISSC does not diligently pursue the service and
financial benefits available to the Flagstar Group under such Third
Party Agreement. If Flagstar terminates or provides additional
restrictions on ISSC's agency appointment with respect to any Third
Party Agreement to which the Flagstar Group is a party solely for the
reason set forth in Section 2.4(b)(iii), then Flagstar shall relieve
ISSC of the service level impact and/or reimburse ISSC for the
additional costs directly attributable to such termination or additional
restrictions to the extent Flagstar's action affects ISSC's ability to
provide the Services and/or increases ISSC's costs of providing the
Services.
c) Beginning on the earlier of the Commencement Date or the Effective Date
and for the Term, the Flagstar Group will not enter into any new,
terminate or amend any existing Third Party Agreement to which the
Flagstar Group is a party that adversely impacts ISSC's ability to
provide the Services or increases ISSC's cost of providing such Service
without the prior written consent of ISSC.
Page 12 of 52
<PAGE>
2.5 CONFLICTS OF INTERESTS
a) Each Party recognizes that ISSC personnel providing Services to Flagstar
under this Agreement may perform similar services for others and this
Agreement shall not prevent ISSC from performing similar services for
others subject to the restrictions set forth in Section 9; provided,
however, ISSC shall not use any of the Machines or Software as licensed
to perform such similar services for others, without the prior written
consent of Flagstar.
b) Neither Party shall knowingly solicit any employee of the other Party
during the Term of the Agreement unless otherwise agreed in writing by
the Parties and except as provided in Section 10.9(g). Flagstar or ISSC
employee's responses to or employment resulting from general
solicitations will be exempted from this provision. Notwithstanding the
foregoing, ISSC will not hire, employ or engage as a consultant or in
any other position, however described, any person who is a member of the
"Flagstar Executive Technology Committee" during the Term while such
person is engaged in any such capacity by any member of the Flagstar
Group and for a period of one (1) year thereafter, without the prior
written consent of Flagstar. Flagstar shall give ISSC written notice of
the members of the Flagstar Executive Technology Committee on the
Effective Date and from time to time during the Term as the membership
changes. The Flagstar Executive Technology Committee shall not exceed
twelve (12) members at any time.
2.6 ALTERNATE PROVIDERS
a) During the Term, Flagstar shall have the right to retain third party
suppliers to perform any service, function, responsibility or task that
is within the scope of the Services or would constitute a New Service
pursuant to Section 6.6, or to perform any such services, functions,
responsibilities or tasks (whether all or ----------- a part of the
Services or the New Services) internally. ISSC shall cooperate with any
such third party supplier and Flagstar. Such cooperation shall include,
without limitation, (1) providing reasonable physical and electronic
access to the Data Center; (2) use of any Machines used by ISSC to
perform services provided that such use of any Machines shall be for the
purpose of providing services to the Flagstar Group for the Flagstar
Business but may not be used by such third party supplier for the
purpose of providing data processing services directly to customers and
potential customers of the Flagstar Group; (3) use of any of the
Software (other than any Software where the underlying license agreement
does not authorize such access and consent permitting such access and
use has not been obtained); (4) providing such information regarding the
operating environment, System constraints, and other operating
parameters as is reasonably necessary for the work product of the third
party supplier or the Flagstar Group to be compatible with the Services
or New Services; and (5) such other reasonable cooperation as mutually
agreed by the Parties.
b) ISSC's obligations hereunder shall be subject to the third party
suppliers' compliance with reasonable Data Center data and physical
security and other applicable standards and procedures, execution of
appropriate confidentiality agreements, and reasonable scheduling of
computer time and access to other resources to be furnished by ISSC
pursuant to this Agreement.
c) If ISSC's cooperation with Flagstar or any third party supplier
performing work as described in Section 2.6(a), causes ISSC to expend
additional resources that ISSC would not otherwise have expended but
which fall within the scope of activities comprising the Services, such
additional resources will be charged to Flagstar under the established
charging mechanism and/or Resource Baseline therefor. The Parties
further agree that if in ISSC's reasonable, good faith determination, a
third party supplier's activities affect ISSC's ability to meet the
Performance Standards or otherwise provide the Services in accordance
with this Agreement, ISSC will provide written notice to Flagstar of
such determination. The Parties will cooperate to determine and verify
whether such effect is caused by a third party supplier, the extent of
such affect, and how to ameliorate any such effect. ISSC shall be
excused for any inability to meet the Performance Standards, Minimum
Service Levels or otherwise provide any of the Services to the extent,
and
Page 13 of 52
<PAGE>
only for the period, any such third party supplier's activities directly
affect and impact ISSC's ability to meet any Performance Standard or
Minimum Service Level or otherwise provide any of the Services in
accordance with this Agreement.
d) Flagstar's retention of third party suppliers pursuant to this Section
2.6 to perform services, functions, tasks or responsibilities within the
scope of the services shall not relieve Flagstar of its obligations set
forth in this Agreement to pay the ISSC applicable charges for such
services, functions, tasks or responsibilities unless Flagstar is
relieved from such charge pursuant to a provision of this Agreement or
by the agreement of ISSC.
2.7 USE OF SUBCONTRACTORS
a) Within thirty (30) days after the Effective Date, the Parties will
develop and prepare a list of approved subcontractors that the Parties
agree may be engaged by ISSC to perform and deliver the part or portion
of the Services indicated on such list as a subcontractor to ISSC (the
"Listed Subcontractors"). With respect to subcontractors which are not
Listed Subcontractors, ISSC shall notify Flagstar at least five (5)
business days prior to the proposed date of commencement by ISSC of any
subcontractor's activity with respect to Flagstar or the Services, in
writing of a decision to delegate or subcontract a function,
responsibility or task to a subcontractor, or to change subcontractors
for any function, responsibility or task, (i) that could have a material
affect on the quality, timing, cost, consistency or performance of the
Services or on the operations of the Flagstar Group or on the security
of the Flagstar Group user data, or on the Flagstar Business or (ii)
where the subcontractor will interface directly with the Flagstar Group.
Upon Flagstar's request, ISSC shall promptly provide to Flagstar
information regarding the proposed new or replacement subcontractors,
the scope of the Services to be delegated thereto, experience and
financial position of the proposed subcontractor, and ISSC's selection
criteria therefor and conclusions regarding its selection in order to
permit Flagstar to determine whether to grant its consent to such
delegation or subcontract. Subject to ISSC's timely provision of the
foregoing information to Flagstar, Flagstar shall be deemed to have
accepted such delegation or subcontract or change that is the subject of
the notification by ISSC to Flagstar, if Flagstar has not notified ISSC
in writing of its good faith objections to such delegation or
subcontract on or before the fifth (5th) day after receipt of such
notice from ISSC. ISSC shall not delegate or subcontract or change
subcontractors unless and until ISSC and Flagstar shall have resolved
any objection timely made by Flagstar to such proposed action by ISSC.
If Flagstar shall reject any subcontractor proposed by ISSC and no other
qualified subcontractor is available with similar skills and
capabilities, ISSC shall be relieved of the performance obligations
directly affected by the rejection of such subcontractors by Flagstar to
the extent ISSC cannot perform such obligations in the normal course of
its operations with its own resources. In addition, ISSC shall not
disclose any Confidential Information of the Flagstar Group to any
subcontractor unless and until such subcontractor has agreed in writing
to protect the confidentiality of such Confidential Information in a
manner equivalent to that required of ISSC by Section 9.
b) ISSC shall remain primarily liable and obligated to Flagstar for the
timely and proper performance of all of its obligations hereunder even
if such obligations are delegated to third party subcontractors, and the
proper and timely performance and actions of any person or entity to
which it delegates or subcontracts any such obligation.
Page 14 of 52
<PAGE>
3. THE SERVICES
3.1 OBLIGATION TO PROVIDE SERVICES
Starting on the Commencement Date and continuing during the Term, ISSC shall
provide and perform the Services to and for the Flagstar Group, as the Services
may evolve and be supplemented and enhanced during the Term as provided in this
Agreement, including the following:
a) The Services as described and defined in this Agreement (including the
Supplement and Schedules referenced in this Agreement); and
b) There may be services, functions, responsibilities or tasks not
specifically described in this Agreement which are required for the
proper performance and provision of the Services and are an inherent
part of, or a necessary sub-part included within, the Services described
above in this Section 3. If such services, functions,
responsibilities and tasks are determined to be required for the proper
performance and provisions of the services or are an inherent part, or a
necessary sub-part included within, the services, such functions,
responsibilities and tasks shall be deemed to be implied by and included
within the scope of the Services to the same extent and in the same
manner as if specifically described in this Agreement. Each such
determination shall be made by agreement of the parties or resolved
pursuant to the dispute resolution provisions of Section 15.
3.2 PERFORMANCE
a) ISSC agrees that its performance of the Services will meet or exceed
each of the applicable Performance Standards and Minimum Service Levels
set forth in Schedule E, subject to the limitations and in accordance
with the provisions set forth in this Agreement.
b) Concurrent with the annual Business and Information Systems Plan review
process described in Section 3.3 and more often if requested by
Flagstar, Flagstar and ISSC will review and agree to commercially
reasonable changes of, modifications of, additions to, deletions of and
replacements of the Performance Standards, the Minimum Service Levels
and the Service Credits for the purposes of better and more timely
reflecting, facilitating and supporting the continuing development of,
and evolving priorities of, the Flagstar Group and the Flagstar
Business. Any such changes will be implemented through the Change
Control Process. The Performance Standards and the Minimum Service
Levels shall not be changed, modified or adjusted downward or upward
without the prior written agreement of the Parties. The Parties intend
that the Performance Standards and the Minimum Service Levels will be
improved over time. The Parties agree to cooperate and deal with each
other in good faith to promptly resolve on a reasonable basis in
consonance with the purposes of the review process, any differences
between the Parties regarding appropriate changes to, modifications of,
additions to, deletions of and replacements of the Performance
Standards, the Minimum Service Levels and the Service Credits.
c) ISSC will continue to use only the existing measurement and monitoring
tools and procedures as required to set baseline measurements and to
measure and report ISSC's performance of the Services against the
Performance Standards and Minimum Service Levels in the As Is Systems
environment. Subject to Flagstar's prior approval (which approval shall
not be unreasonably withheld), ISSC shall implement the necessary
measurement and monitoring tools and procedures required to set baseline
measurements and to measure and report ISSC's performance of the
Services against the Performance Standards and Minimum Service Levels in
the To Be Systems environment. Such measurement and monitoring shall
permit reporting at a reasonable level of detail sufficient to verify
compliance with the Performance Standards and Minimum Service Levels and
application of any attendant Service Credits and shall be subject to
reasonable audit by
Page 15 of 52
<PAGE>
Flagstar. Upon request, ISSC shall provide Flagstar with information and
reasonable access to such tools and procedures for purposes of
verification of the reported performance levels.
3.3 BUSINESS AND INFORMATION SYSTEMS PLAN
The Business and Information Systems Plan will be composed of a short-term,
tactical plan and a long-range, strategic plan, both of which will be driven by
the Flagstar Group's business goals and objectives. The short-term plan will
include an identification of proposed operating software and hardware,
enhancements and changes, as appropriate, and a projected time schedule for
developing and implementing the proposed enhancements and changes. The
long-range plan will treat the strategic aspects of the support of the business
goals and objectives of the Flagstar Group, including, without limitation,
flexible use of the Data Center and other information management resources in
support of the Flagstar Group's business priorities and strategies.
Flagstar will draft the Business and Information Systems Plan with ISSC's active
participation, cooperation, and advice. The initial tactical plan will address
the status of the As Is Systems and the Schedule N Projects. ISSC will also
provide information regarding industry trends as input to the strategic plans.
The final Business and Information Systems Plan will be provided by Flagstar and
based on the mutual agreement of the Parties, with any disputed matters being
submitted to the dispute resolution process set forth in Section 15.
The first Business and Information Systems Plan under this Agreement will be
completed on or before September 30, 1996. The Business and Information Systems
Plan will be reviewed and updated at least annually thereafter. Any changes to
the Agreement or the Services required by the Business and Information Systems
Plan will be defined, approved and implemented in accordance with the Change
Control Process set forth in Section 15.4.
3.4 DISASTER RECOVERY SERVICES
ISSC will provide Disaster Recovery Services in accordance with Schedule G. If
ISSC fails to provide Disaster Recovery Services to the extent and in accordance
with the time table set forth in Schedule G for a period of seven (7) days,
Flagstar will be entitled, at its election to terminate this Agreement pursuant
to Section 10.3(a) (without giving the notices and observing the cure periods
set forth in Section 10.3(a)) upon written notice to ISSC. If Flagstar elects to
terminate this Agreement as described in this Section 3.4, Flagstar shall give
notice to ISSC of such election within thirty (30) days after the occurrence of
the event on which such termination is based. In the event of a termination
authorized under this Section 3.4, Flagstar shall not be required to pay any
Termination Charges or Wind-Down Expenses to ISSC; Flagstar shall receive the
rights that are provided for it under Section 10.9(a) in the event of a
termination of this Agreement pursuant to Section 10.3(a) Cause to receive title
to the servers and associated peripheral equipment which are a part of the ISSC
Machines; and such termination and rights pursuant to Section 10.3(a) shall
constitute the sole and exclusive remedy of Flagstar for such failure of
performance by ISSC.
3.5 AUDITS
a) ISSC will assist the Flagstar Group in meeting their respective audit
and regulatory requirements, including providing access to the Data
Center to enable the Flagstar Group and its auditors and examiners to
conduct appropriate audits and examinations of the Flagstar Group's
operations, and ISSC's operations relating to the performance of the
Services to verify the accuracy of ISSC's charges to Flagstar and that
the Services are being provided in accordance with this Agreement and
the Performance Standards and Minimum Service Levels. Such access will
require forty-eight (48) hour notice to ISSC and will be provided at
reasonable hours; provided, however, if any such audit activities
interfere with ISSC's ability to perform the Services in accordance with
the Performance Standards and Minimum Service Levels, ISSC shall be
relieved of such performance obligations to the extent caused by such
audit activity. If the assistance required of ISSC shall cause ISSC to
expend substantial resources and incur substantial additional costs to
provide such assistance,
Page 16 of 52
<PAGE>
Flagstar shall reimburse ISSC for such costs. ISSC will provide access
only to information reasonably necessary to perform the audit as
required by law, and by the standard financial reporting and planning
practices of Flagstar. ISSC shall only permit the auditors of Flagstar
and not Flagstar access to ISSC's proprietary data or other ISSC
customer's data to the extent reasonably necessary to perform the audits
described in this Section 3.5.
b) Subject to Section 12.6, ISSC agrees to make any changes and take other
actions which are necessary in order to maintain compliance with
applicable laws or regulations applicable to its performance and
provision of the Services. Flagstar may submit additional findings or
recommendations regarding compliance with applicable laws and
regulations to ISSC which ISSC will analyze and consider in good faith.
ISSC shall promptly respond to Flagstar regarding ISSC's evaluation and
activity plan for such findings and recommendations. If any audit or
examination reveals that ISSC's invoices for the audited period are not
correct other than amounts in dispute pursuant to Section 7.6, ISSC
shall promptly reimburse Flagstar for the amount of any overcharges, or
Flagstar shall promptly pay ISSC for the amount of any undercharges.
3.6 DATA CENTER
a) ISSC will not relocate the portion of the Services provided from the
Data Center without the prior written consent of Flagstar, which consent
will not be unreasonably withheld.
b) During the Term, ISSC will provide the Flagstar Group with reasonable
access upon reasonable prior notice to the Data Center in order for
Flagstar to provide tours of the Data Center in support of the Flagstar
Group and the Flagstar Business.
c) ISSC will provide reasonable access to the Data Center and attendant
Machines and Software (i) to the Flagstar Group's authorized employees,
agents and representatives as necessary or appropriate for the
performance, delivery and use of the Services by the Flagstar Group and
for the operation, maintenance, upgrade, support and use of any other
Flagstar hardware, software and other resources located in the Data
Center, and (ii) to Third Party Providers and third party vendors and
suppliers of installation, maintenance, support and upgrade services,
technology and hardware for the System and any other Flagstar hardware
and/or software located in the Data Center serviced thereby. To the
extent practical in light of such installation, maintenance, support and
upgrade requirements, Flagstar will provide twenty-four (24) hours
notice to ISSC prior to any visits by such Third Party Providers and
third party vendors and suppliers.
d) All access to the Data Center shall be subject to reasonable Data Center
data and physical security measures (including Flagstar physical
security requirements) and such Flagstar Group employees, agents and
representatives and Third Party Providers' and third party vendors'
suppliers' undertaking reasonable confidentiality requirements relating
to such visits.
3.7 SECURITY
Flagstar shall authorize all access to all Software operated by ISSC in support
of the Services through the data security procedures as described in Schedule L.
ISSC shall notify Flagstar of what entities and personnel are to be authorized
access to the Systems Software utilized in support of the Services and the level
of security access required by each. The Parties shall cooperate in
administering security procedures regarding such access, in accordance with
Schedule L. ISSC shall enable such access by persons as designated by Flagstar
and deny such access to all other persons, in accordance with Schedule L.
Page 17 of 52
<PAGE>
3.8 TECHNOLOGY REFRESH
As described in this Agreement, ISSC will refresh the information technologies
employed in providing the Services.
3.9 SOFTWARE LICENSES
a) Except as specifically relieved of such obligations in this Agreement,
ISSC will comply with all license obligations under all licenses for the
Software, including without limitation, the obligations of nondisclosure
and scope of use; provided, however, ISSC will only be obligated under
this Section 3.9(a) with regard to the licenses for Flagstar Software to
the extent the license obligations thereunder are disclosed to and
accepted by ISSC. ISSC shall be deemed to have reviewed and accepted the
obligations under the licenses for the Flagstar Software listed on
Schedule F on the Commencement Date, except as noted on Schedule F to
the contrary.
b) All Applications Software-ISSC and Systems Software-OEM provided by ISSC
in connection with the Services and any Flagstar Software licensed under
a Third Party Agreement shall be licensed (and the attendant maintenance
arrangements contracted) in Flagstar's name and as licensee with ISSC
having the right to access and use such Software in performing the
Services, unless ISSC can procure such Software (and/or attendant
maintenance arrangement) on a more cost effective basis in its own name.
ISSC shall negotiate with the applicable Software vendors to provide for
a right to assign or transfer any licenses (and attendant maintenance
arrangements) for the Software licensed and contracted in ISSC's name to
Flagstar upon termination or expiration of this Agreement, and ISSC
shall promptly provide written documentation to Flagstar describing in
detail, and attesting to the grant, of such rights by the vendors upon
request by Flagstar from time to time, for copies of such documentation.
c) Prior to (1) the addition to the ISSC Software of any software which is
not listed in Schedules A or B or (2) any upgrade, enhancement or
modification of any ISSC Software listed in Schedules A or B, ISSC shall
(i) obtain Flagstar's prior written consent for any such actions, (ii)
provide Flagstar with information regarding the amount of any fees and
other reasonable requirements Flagstar would be required to undertake in
order to obtain a license to and maintenance for such ISSC Software upon
the expiration or termination of this Agreement, and (iii) use
commercially reasonable efforts to obtain a firm commitment from the
providers of such ISSC Software to license and provide maintenance for
the ISSC Software to Flagstar upon the expiration or termination of this
Agreement upon the payment of such fees and satisfaction by Flagstar of
such requirements. If Flagstar does not respond to a request for
consent from ISSC within fourteen (14) business days of receipt of such
request together with the information and confirmation of the actions
required of ISSC in this Section 3.9(c), Flagstar shall be deemed to
have granted its consent to the actions for which ISSC requested
consent. ISSC shall consider and take into account in the negotiation
of its licensing arrangements with providers of the ISSC Software,
Flagstar's reasonable concerns regarding the terms and conditions of
such ISSC Software licenses and make such licenses and related
documentation, excluding pricing information, available to Flagstar upon
request.
d) ISSC shall not terminate, extend, replace, amend or add licenses for the
Software and/or the maintenance arrangements attendant therewith, in
Flagstar's name without Flagstar's prior written agreement, provided,
however, if Flagstar does not respond to such request for Flagstar's
agreement within fourteen (14) business days of its receipt of such
request from ISSC, Flagstar shall be deemed to have granted the
agreement requested. ISSC may terminate, replace, amend or add
licensees for the ISSC Software as it chooses so long as ISSC continues
to perform the Services in the manner required by this Agreement;
provided, however, ISSC agrees to provide fourteen (14) days written
notification to Flagstar prior to each such termination, replacement,
amendment or addition and concurrently with such notification, deliver
to Flagstar a written report of the impact and ramifications on the
Services of ISSC's proposed action. In addition, if such action
Page 18 of 52
<PAGE>
by ISSC with respect to a license and/or maintenance arrangement for the
ISSC Software will have an impact on the Services or the monitoring
and/or evaluation of the Services in a manner that in turn will have an
impact on the operations or costs of the Flagstar Group or the ability
of ISSC or Flagstar to monitor and/or evaluate the performance and
delivery of the Services, ISSC will provide or cause to be provided the
programs, services, rights and other benefits and resources that are the
subject of such licenses to the Flagstar Group on terms no less
favorable than the terms of such license and ensure that there shall be
no negative impact on the ability of ISSC or Flagstar to monitor and/or
evaluate the performance and delivery of the Services. If Flagstar in
connection with or resulting from ISSC's termination, replacement,
amendment or addition of any license for ISSC Software and/or
maintenance arrangement incurs additional expenses or other costs,
including but not limited to personnel costs, ISSC shall promptly
reimburse Flagstar for such costs.
3.10 SOFTWARE CURRENCY
The Parties agree to maintain reasonable currency for Maintenance
Releases and Versions of Software in the "To Be Systems" environment
(and the modules thereof as implemented pursuant to Schedule N), unless
Flagstar requests otherwise. For purposes of this Section, "reasonable
currency" shall mean that the next Maintenance Release or Version is
installed not later than the longer of (a) twelve (12) months after the
date the licensor makes such Maintenance Release or Version commercially
available, or (b) within one (1) month after the date the licensor makes
a subsequent Maintenance Release or Version commercially available which
causes Flagstar to be more than one Maintenance Release or Version
behind.
In the event Flagstar requests ISSC to expedite installation of a
Maintenance Release or Version or to delay upgrading of specific
Software beyond such period or requires operation and maintenance of
multiple versions of Software, ISSC shall do so, provided, that if ISSC
reasonably determines that it will incur any costs as a result of such
requests (e.g., Software support costs due to withdrawal of maintenance
by the licensor, multiple version charges, etc.) outside of the scope of
the Services, then ISSC will notify Flagstar of the amount of such costs
in writing and Flagstar, at its option, will either delay installation
of such Maintenance Release or Version or update the Software to the
current level (as applicable) or reimburse ISSC for any demonstrable
costs. The installation and promotion into production of each
Maintenance Release and Version shall be performed in accordance with
the Change Management Procedures.
In addition, Flagstar shall relieve ISSC from any failure to meet a
Performance Standard or Minimum Service Level to the extent directly
impacted by the delay or acceleration of the next Maintenance Release or
Version until such time as the affected Software is brought to
"reasonable currency" as defined in this Section 3.10.
3.11 VIRUSES
Each Party agrees to use diligent efforts to ensure that no viruses or
similar items ("Viruses") are coded or introduced into the System and
the operating environments used to provide the Services. ISSC will
continue to perform the Virus protection procedures in place at Flagstar
prior to the Commencement Date with the Affected Employees and As Is
Systems resources, and make a good faith effort to review, analyze and
implement, if feasible, ISSC's established virus prevention programs and
processes. Such effort will be limited to the As Is Systems located in
the Data Center. Once the migration from the As Is Systems located in
the Data Center to the To Be Systems located in the Data Center is
complete, ISSC will engage in and comply with ISSC's then current
established virus prevention programs and processes for the To Be
Systems located in the Data Center. If a Virus is found to have been
introduced into the System and the operating environments used to
provide the Services, ISSC shall use commercially reasonable efforts and
diligently work to eliminate the effects of the Virus; provided,
however, ISSC shall take immediate action if required due to the nature
or severity of the Virus' proliferation. The Party that introduced or
permitted a Virus shall
Page 19 of 52
<PAGE>
bear the costs associated with such efforts and the losses caused by
such a Virus. If Flagstar introduces or permits the introduction of a
Virus, ISSC shall be relieved of the Performance Standards to the extent
such Virus impacts ISSC's ability to satisfy such Performance Standards.
3.12 APPLICATIONS SOFTWARE - SUBSTITUTIONS AND ADDITIONS
a) If Flagstar requests a substitution of any Applications Software,
Flagstar shall pay the amount by which the periodic license or
maintenance fees attributable to the substituted Applications Software
exceeds the then-current license or maintenance fees being paid by ISSC
attributable to the Applications Software being replaced. If Flagstar
deletes any Applications Software from Schedules A or N and does not
immediately substitute any other new Applications Software therefor,
Flagstar may utilize an amount equal to the then- current applicable
license and/or maintenance fees attributable to such deleted
Applications Software to offset the fees attributable to any new
Applications Software. ISSC will provide Flagstar with the requisite
license and/or maintenance fees support documentation to assist Flagstar
in evaluating the decision to replace such Applications Software.
b) Flagstar may add Applications Software to, or delete Applications
Software from, Schedules A or N. ISSC agrees to promote into or remove
from production, use and operate any Applications Software from a Third
Party Provider selected by Flagstar, including without limitation,
non-IBM brand software selected by Flagstar; provided, however, that any
resources (software, hardware, personnel, etc.) required to install,
delete and/or operate such added Applications Software that are not
otherwise required to provide the Services hereunder, or covered under a
current Resource Baseline will be provided as New Services pursuant to
Sections 6.6. Flagstar shall be permitted by ISSC to audit, control and
approve all new Applications Software prior to its promotion into
production, and ISSC shall provide the cooperation, information and
access necessary or appropriate to permit Flagstar to perform such
functions.
4. TRANSITION
4.1 TRANSITION PLAN
a) Within thirty (30) days after the Effective Date, ISSC and Flagstar will
complete the development and preparation of, and will reach agreement
on, the remaining details of the "Transition Plan" set forth in Schedule
H, describing (i) the transition from Flagstar to ISSC of the Affected
Employees; (ii) the transition of the administration, management,
operation under and financial responsibility for the Third Party
Agreements from Flagstar to ISSC; and (iii) the transition of the
performance of the other functions, responsibilities and tasks currently
performed by Flagstar to ISSC which constitute a part of the Services.
The Transition Plan shall be implemented and completed over a mutually
agreed period as set forth in the Transition Plan starting on the
Commencement Date, which period shall in no event extend beyond
September 1, 1996, without the prior written agreement of the Parties
(the "Transition Period"). Notwithstanding the foregoing in this Section
4.1(a), ISSC's and Flagstar's responsibilities and obligations with
respect to the Affected Employees, the Third Party Agreements and the
other elements of the Services as set forth in this Agreement shall
commence on the dates set forth in this Agreement but in no event later
than the Commencement Date.
b) During the Transition Period, Flagstar will cooperate with ISSC in
implementing the Transition Plan by providing the personnel (or portions
of the time of the personnel) set forth in the Transition Plan
("Transition Personnel") and performing the tasks described for Flagstar
in the Transition Plan. During the Transition Period, ISSC will be
responsible for the provision of the Services (including within the
Services the implementation of the Transition Plan).
Page 20 of 52
<PAGE>
4.2 AFFECTED EMPLOYEES
Flagstar will be eliminating certain of the positions within Flagstar associated
with its information management and communications services functions commencing
on the Commencement Date and through the end of the Transition Period. ISSC has,
with Flagstar's consent, offered employment to each of the individuals listed on
Schedule O, in accordance with the employment guidelines set forth on Schedule O
(the "Affected Employees"). All costs and expenses incurred by ISSC in
connection with the offer to employ and the employment of the Affected Employees
shall be the responsibility of ISSC. ISSC will promptly reimburse Flagstar for
the amount of salary and benefit costs incurred by Flagstar, if any, with
respect to each Affected Employee after the Commencement Date for the period
until they receive offers and reject such offers or become ISSC employees.
4.3 RESOURCES AND FACILITIES
a) To enable ISSC to provide the Services, Flagstar agrees:
(i) To provide, at no charge to ISSC, the use of the Flagstar
Provided Hardware, the Data Center and such additional space
as may be reasonably necessary for the performance of that
portion of the Services performed with the Flagstar Provided
Hardware and the Flagstar Software. This obligation includes
the provision of reasonable office space, storage space,
analog telephone capability (but excluding long-distance
telephone charges, for which Flagstar will be reimbursed by
ISSC), office support services (e.g., janitorial and security)
office supplies and office furniture as agreed by the Parties.
Flagstar shall be responsible for ensuring such Flagstar
facilities provide for a safe working environment, including
compliance with applicable laws and regulations. ISSC shall
fully cooperate with Flagstar to ensure a safe working
environment is maintained and shall take no action that will
compromise such safety of such working environment or violate
such laws and regulations.
(ii) To provide at the Data Center and related Flagstar facilities
provided to ISSC as set forth in Section 4.3(a), all heat,
light, power, air conditioning, UPS and such other similar
utilities as may reasonably be necessary for ISSC to perform
the Services.
(iii) To provide access to Flagstar parking (if any) facilities for
ISSC employees.
The use by ISSC of the Flagstar Data Center and other Flagstar facilities and
resources described in this Section 4.3 does not constitute or create a
leasehold interest. When the Flagstar Provided Hardware, the Data Center and
other facilities and resources provided by Flagstar to ISSC to provide and
deliver the Services are no longer deemed necessary to perform the Services,
Flagstar's obligations set forth in this Section with respect to each such item
of resources shall terminate.
b) Except as provided in Section 4.3(a), ISSC will have the responsibility
and obligation to provide all resources (including, without limitation,
personnel, hardware, software, facilities, services and other items,
however described) necessary or appropriate for ISSC to provide, perform
and deliver the Services as described in this Agreement.
c) In addition to the Affected Employees, ISSC will provide and have on
site its Project Executive prior to the Commencement Date and for the
duration of the Term, and will timely provide additional trained and
qualified personnel as necessary or appropriate to facilitate and ensure
the timely and proper definition, provision, performance and delivery of
the Services in accordance with this Agreement.
d) Upon twelve (12) months prior written notice to ISSC, Flagstar may move
ISSC from the Data Center to an alternate Flagstar facility or terminate
the use by ISSC of Flagstar facilities for the location and operation
Page 21 of 52
<PAGE>
of the Data Center. In either of these events, ISSC and Flagstar shall
cooperate in good faith to adjust the fees paid by Flagstar for the
Services in a fair and equitable manner in order to reflect any
increased costs to ISSC, including, without limitation, costs of
relocation, new space fit-up and other increases in costs experienced by
ISSC as a result of the relocation, all based on relocation space of a
kind and quality comparable to the Data Center. If such change of
locations shall interfere with ISSC's ability to perform the Services in
accordance with the Performance Standards and Minimum Service Levels,
ISSC shall provide to Flagstar a report regarding the impact of such
change of location to Flagstar within three (3) months after receipt of
such notice from Flagstar. If such change of location shall interfere
with ISSC's ability to perform the Services in accordance with the
Performance Standards and Minimum Service Levels, ISSC shall be relieved
of such performance obligations to the extent caused by such change in
location.
e) ISSC will have the right to change the location of the ISSC activities
associated with the Services with the prior written consent of Flagstar,
which consent shall not be unreasonably withheld. Among the factors
Flagstar may consider in determining whether to grant any such consent,
Flagstar may consider whether any and all changes in the location of
such ISSC activities may result (i) in a reduction of ISSC's ability to
perform the Services and the Business and Information Systems Plan; (ii)
in any reduced accessibility to ISSC and/or the Services by the Flagstar
Group; (iii) in any deterioration of the Services; and (iv) in any
additional cost to Flagstar.
5. SERVICES STAFFING AND MANAGEMENT AND ADMINISTRATION
5.1 PROJECT EXECUTIVES
a) Prior to the Commencement Date, ISSC and Flagstar will each designate a
Project Executive to whom all the appointing Party's communications may
be addressed and who has the authority to act for the appointing Party
and its subcontractors in connection with all aspects of this Agreement.
b) ISSC shall cause the person assigned as the ISSC Project Executive to
devote his or her working time and effort in the employ of ISSC
primarily to his or her responsibilities for the provision of the
Services under this Agreement, subject to ISSC's reasonable holiday,
vacation and medical leave policies and subject to occasional,
short-term, non-recurring work on other assignments by ISSC related to
the Project Executive's areas of expertise. Before the initial or
subsequent assignment of an individual to such position, ISSC shall
notify Flagstar of the proposed assignment, introduce the individual to
appropriate Flagstar representatives, and consistent with ISSC's
personnel practices, provide Flagstar with a resume and any other
information about the individual reasonably requested by Flagstar. ISSC
agrees to discuss with Flagstar any objections Flagstar may have to such
assignment and the Parties will resolve such concerns on a mutually
agreed basis.
c) ISSC will give Flagstar at least ninety (90) days advance notice of a
change of the person appointed as the ISSC Project Executive, will
discuss with Flagstar any objections Flagstar may have to such change
and the Parties will resolve such concerns on a mutually agreed basis.
ISSC shall not reassign or replace any person assigned as the ISSC
Project Executive during the first year of his or her assignment to the
Flagstar service team, nor shall ISSC assign more than four (4)
different individuals to such position during the Term, unless Flagstar
consents to such reassignment or replacement, or the ISSC employee
voluntarily resigns from ISSC, is terminated by ISSC or is unable to
work due to his or her death or disability.
5.2 REPLACEMENT OF PERSONNEL
If Flagstar reasonably and in good faith determines that it is not in Flagstar's
best interests for any ISSC or subcontractor employee to be appointed to perform
or to continue performing any of the Services, Flagstar shall give ISSC written
notice specifying the reasons for its position and requesting that such employee
not be appointed
Page 22 of 52
<PAGE>
or be removed from the ISSC employee group servicing Flagstar and be replaced
with another ISSC employee or subcontractor. Promptly after its receipt of such
a notice, ISSC shall investigate the matters set forth in the notice, discuss
with Flagstar the results of the investigation, and resolve the matter on a
mutually agreed basis with Flagstar.
5.3 RETENTION OF EXPERIENCED PERSONNEL
If ISSC fails to meet the Performance Standards or Minimum Service Levels
persistently or continuously and if Flagstar reasonably believes such failure is
attributable in whole or in part to ISSC's reassignment, movement, or other
changes in the human resources allocated by ISSC to the performance and delivery
of the Services and/or to the ISSC subcontractors assigned to the Flagstar
service team, Flagstar will notify ISSC of such belief. Upon receipt of such
notice from Flagstar, ISSC (i) will promptly provide to Flagstar a report
setting forth ISSC's position regarding the matters raised by Flagstar in its
notice; (ii) will meet with Flagstar to discuss the matters raised by Flagstar
in its notice and ISSC's positions with regard to such matters; and (iii) will
diligently work to eliminate with respect to the Services any such ISSC human
resource practices and/or processes identified and agreed to by the Parties as
adversely impacting the performance and delivery of the Services by ISSC.
5.4 EFFICIENT USE OF RESOURCES
ISSC shall take commercially reasonable actions (i) to efficiently administer,
manage, operate and use the resources employed by ISSC to provide and perform
the Services that are chargeable to Flagstar under this Agreement, and (ii) to
diligently and continuously improve the performance and delivery of the Services
by ISSC and the elements of the System that are used by ISSC to perform and
deliver the Services, including, without limitation, tuning or optimizing the
systems used to perform the Services.
5.5 FLAGSTAR APPROVALS AND NOTIFICATION
For those areas of the Services where Flagstar (a) has reserved
right-of-approval, consent or agreement, (b) is required to provide
notification, and/or (c) is to perform a responsibility set forth in this
Agreement, and such approval, consent, notification or performance is delayed or
withheld beyond the period provided in this Agreement, Supplement or the
Schedules without authorization or right and, such delay or withholding is not
caused by ISSC and affects ISSC's ability to provide the Services under this
Agreement, Flagstar will relieve ISSC of the responsibility for meeting the
Minimum Service Levels for that portion of the Services to the extent, but only
to the extent, directly affected by such delay or withholding and only during
the period such approval, consent, notification or performance is delayed or
withheld beyond the period provided in this Agreement, Supplement or the
Schedules. Flagstar will reimburse ISSC in accordance with this Agreement for
additional resources, if any, incurred during such period as a direct result
thereof. If not specified otherwise in this Agreement, the period for such
approval or notification shall be ten (10) business days unless another time
period is otherwise agreed by the Parties.
6. CHARGES AND PAYMENTS
6.1 DISBURSEMENTS
Beginning on the Commencement Date, ISSC will pay the Third Party Providers
under the Third Party Agreements for the provision of the software, products and
services under such Third Party Agreements, including without limitation, the
Third Party Providers of Machines and Software, except as specifically set forth
in Schedule F as the responsibility of Flagstar. In addition, ISSC will
reimburse Flagstar in a timely manner for Flagstar's payments to such Third
Party Providers under the Third Party Agreements for which ISSC has financial
responsibility for amounts allocable to periods on and after the Commencement
Date or the date specified in Schedule F, as
Page 23 of 52
<PAGE>
applicable. Flagstar will promptly reimburse ISSC for all payments to Third
Party Providers made by ISSC for which Flagstar has financial responsibility if
such payments are allocable to the periods prior to the Commencement Date or the
date specified in Schedule F, as applicable, and are not otherwise the
responsibility of ISSC under this Agreement.
6.2 ANNUAL SERVICE CHARGE
For each Contract Year during the Term, Flagstar agrees to pay the Annual
Service Charge as specified in the Supplement and Schedule J, together with the
other amounts as described in this Section 6 and Schedule J.
6.3 ADDITIONAL CHARGES
Beginning at the end of the initial month following the Transition Period and at
the end of each month thereafter, Flagstar and ISSC will review the quantity of
Resource Units utilized by Flagstar during the preceding month and calculate
applicable net Additional Resource Charges (ARCs) for such month in accordance
with Schedule J. Flagstar will pay the amount of the result of such calculation
and netting in accordance with Section 7.4.
6.4 COST OF LIVING ADJUSTMENT
Beginning in the first January after the Commencement Date, Flagstar will pay
ISSC a Cost of Living Adjustment ("COLA"), in accordance with Section 7.2 and
Schedule J.
6.5 TAXES
a) The Annual Service Charges paid by Flagstar are inclusive of applicable
sales, use, excise, personal property or other similar taxes
attributable to the period on or after the Commencement Date based upon
or measured by (i) ISSC's cost in acquiring or providing equipment,
materials, supplies or third party services furnished to or used by ISSC
in performing the Services, (ii) the value or cost of the ISSC Machines
and ISSC Software; and (iii) all taxes payable by ISSC with respect to
its revenues, income and profit; provided, however, Flagstar will be
responsible for paying all personal property or use taxes due on or with
respect to Flagstar-Provided Hardware and Flagstar Software. Each Party
shall bear sole responsibility for all taxes, assessments and other real
property-related levies on its owned or leased real property.
b) The Parties agree to reasonably cooperate with each other in good faith
to more accurately determine each Party's tax liability and to minimize
such liability to the extent legally permissible. Each Party shall
provide and make available to the other any resale certificates, and
other exemption certificates or information reasonably requested by
either Party. The Parties will also work together to segregate the
Annual Service Charges and other charges, reimbursements and amounts
payable hereunder, into separate payment streams for Services and
components of the Services that are taxable, nontaxable, for which a
sales, use or similar tax has already been paid by ISSC, and for which
ISSC functions merely as a paying agent for Flagstar in receiving goods,
supplies or services (including licensing arrangements) that otherwise
are nontaxable or have previously been subjected to tax.
c) Notwithstanding any other provision of this Agreement, if a services tax
is assessed on ISSC's provision of the Services (or any New Services) to
Flagstar or on ISSC's charges to Flagstar under this Agreement, Flagstar
will be responsible for and pay the amount of any such tax.
6.6 NEW SERVICES
a) If Flagstar requests ISSC to perform an additional function,
responsibility or task that requires resources for which there is no
current Resource Baseline or charging methodology (i.e. such function,
responsibility or
Page 24 of 52
<PAGE>
task is not included in the Annual Service Charge or is not charged
separately under another methodology other than this New Services
provision), such additional function, responsibility or task will be
considered a "New Service."
b) If Flagstar's request for a New Service includes a request for ISSC to
correspondingly reduce or eliminate one or more existing elements of the
Services then being provided hereunder, ISSC shall determine the
resources and expenses related to the element or elements of the
Services being reduced or eliminated and to the services being added.
Prior to performing such New Services, ISSC will provide a written quote
to Flagstar setting forth the net increase or decrease in the Annual
Service Charge and/or other charging methodologies, and if applicable,
increases and decreases in resource baselines and additional resource
baselines, if any, that will be attributable to such New Services, and
concurrently deliver to Flagstar as a part of such quote a detailed
description of and proposal for the New Services together with a report
regarding the ramifications and impacts of such New Services on the
Services. All changes in the Annual Service Charge and other charging
methodologies will be based upon the required proportional increase in
System and other resources applicable to the New Services relative to
the Annual Service Charge and existing other charging methodologies.
Upon receipt of such quote and other documentation, Flagstar may then
elect to have ISSC perform the New Services, and the Annual Service
Charge and, if applicable, other charging methodologies and Resource
Baselines will be established and/or adjusted to reflect such New
Services. Notwithstanding the foregoing, nothing herein shall be
interpreted as obligating Flagstar to obtain New Services from ISSC.
c) The Parties acknowledge that changes during the Term in functions,
responsibilities and tasks that are within the scope of the Services
will not be deemed to be New Services, if such functions,
responsibilities and tasks evolved or were supplemented and enhanced
during the Term by ISSC in its sole discretion or pursuant to the
provisions of this Agreement.
d) If the Parties cannot agree either that a function, responsibility or
task falls within the definition of a New Service, ISSC shall
nevertheless perform the disputed function, responsibility or task if
requested by Flagstar. The determination of whether any function,
responsibility or task is a New Service to be paid by Flagstar will be
determined pursuant to the dispute resolution provisions in Section 15.
Flagstar shall pay fifty percent (50%) of any charges for the disputed
function, responsibility or task under this Section 6.6 to ISSC and
fifty percent (50%) of any charges for the disputed function,
responsibility or task under this Section 6.6 in accordance with Section
7.6, pending a resolution of the dispute in accordance with Section 15.
Any payment to Flagstar of any such disputed charge paid by Flagstar to
ISSC and into escrow pursuant to this Section 6.6(d) after resolution
of the applicable dispute, shall be paid first from the amount in escrow
with respect to such dispute and then by ISSC. All amounts paid by ISSC
to Flagstar shall be paid promptly upon resolution of the disputed
charge together with interest at the rate of two percent (2%) per month
from the date of payment by Flagstar to ISSC through the date of payment
by ISSC to Flagstar.
6.7 [RESERVED]
6.8 AFFILIATES
If Flagstar acquires any additional Affiliates or other operations or assets
during the Term and desires that ISSC provide the Services for such Affiliates
or other operations or assets, ISSC will provide such Affiliates or other
operations or assets with Services in accordance with this Agreement, subject to
additional charges if acceptance of such responsibilities would require New
Services as described in Section 6.6.
Page 25 of 52
<PAGE>
6.9 REDUCTION OF FLAGSTAR REQUIREMENTS
a) During the Term, if Flagstar experiences significant changes in the
scope or nature of the Flagstar Business, which have or are reasonably
expected to have the effect of causing sustained decreases in the amount
of any ISSC resources used in providing the Services (including, without
limitation, sustained decreases in the amount of ISSC resources used in
providing the Services due to and during the Services Transfer
Assistance period described in Section 10.8), such changes shall be
governed by this Section 6.9; provided, however, decreases in resources
required in the following circumstances shall not qualify under this
Section 6.9: (i) decreases in resources required due to Flagstar
performing such Services (excluding a change in the technology platform
used by Flagstar to perform such Services and decreases during the
Services Transfer Assistance Period); and (ii) decreases in resources
required due to Flagstar transferring the provision of such Services to
another vendor (excluding a change in the technology platform used by
Flagstar to perform such Services unless ISSC offers such technology
platforms and decreases during the Services Transfer Assistance Period).
b) Flagstar will notify ISSC of any event or discrete set of events which
Flagstar concludes qualifies under this Section 6.9. ISSC will promptly
identify the changes and the ISSC resource disposition and asset
reallocation schedule that will need to be implemented in order to
accommodate the decrease of resource requirements for the significant
change in a cost-effective manner without disruption to Flagstar's
ongoing operations. The disposition schedule and cost savings that will
result therefrom will be promptly submitted to Flagstar for review and
acceptance. Upon acceptance by Flagstar, ISSC will make the applicable
adjustments to the Annual Service Charge and the Resource Baselines in
accordance with such disposition schedule to reflect the foregoing in
accordance with Section 16.2 and distribute an amended Supplement and
Schedule J to Flagstar for acceptance.
c) In order to comply with its audit, reporting and planning requirements
and all laws and regulations applicable to the Flagstar Group, Flagstar
may, at its option and expense, employ an accredited and mutually agreed
upon independent auditor to verify that ISSC's methodology and cost and
expense elements for calculating the savings referenced in this Section
6.9 is accurate and conforms to generally accepted accounting
principles. ISSC will cooperate with such auditor and make such
information and records available to the auditor as the auditor may
request in order to effect the purpose of this Section 6.9(c); provided,
however, the independent auditor shall not disclose any of ISSC's
proprietary cost information elements to Flagstar.
6.10 [RESERVED]
6.11 SERVICE CREDITS
If ISSC fails to provide the Services in accordance with the Minimum Service
Levels, ISSC shall incur the charges set forth in Schedule E (each, a "Service
Credit"; collectively, the "Service Credits") against the amounts owed to ISSC
for the second month following the month in which the Service Credits were
incurred. Service Credits are deemed by the Parties to be a fair estimate of the
damages that the Flagstar Group will incur for each event for which a Service
Credit is granted in this Agreement, that the actual damages incurred by the
Flagstar Group in each such event would be difficult and costly to determine,
and that the Service Credits are liquidated damages awarded in lieu of actual
damages incurred by the Flagstar Group. The Parties agree that the Service
Credits are not penalties and are the sole and exclusive remedy of Flagstar with
respect to the incident or event with respect to which such Service Credits are
paid or credited by ISSC to Flagstar subject to and as limited by the provisions
of Sections 10 and 11.
Page 26 of 52
<PAGE>
6.12 ISSC STANDARD RETAIL SERVICES
If during the Term, ISSC shall offer an "ISSC Standard Retail Services" that
would satisfy a portion or all of the information management and communications
systems requirements of the Flagstar Group, ISSC will extend to Flagstar a
proposal to migrate and convert to such service upon the standard terms and
conditions and for the standard pricing that will be offered by ISSC to other
existing and potential ISSC customers and Flagstar may, at its election, accept
or reject such opportunity.
Notwithstanding the foregoing, if Flagstar accepts such offer and migrates to
the ISSC Standard Retail Services, ISSC shall adjust the Annual Services Charge
and applicable Baseline resources to reflect the charges for the ISSC Standard
Retail Services. ISSC will migrate and convert Flagstar to the ISSC Standard
Retail Services at a charge that will be the actual, direct, verified cost of
ISSC to transition and convert Flagstar to the ISSC Standard Retail Services.
6.13 MOST FAVORED CUSTOMER
In the event that ISSC offers revenue based discounts, or discounts based on an
aggregation of products and services, or offers better pricing on an aggregation
or any single product or service, to any ISSC customer that is purchasing a
similar mix of services as that purchased by Flagstar hereunder as or as part of
the Services or as a New Service, and such ISSC customer is purchasing similar
or lesser volumes of services than Flagstar and using similar systems as
provided by ISSC to Flagstar, ISSC will promptly notify Flagstar of such facts
and offer such discounts and pricing to Flagstar for the products and services
Flagstar acquired or proposes to acquire from ISSC, on substantially similar
terms and conditions extended to such ISSC customer, effective as of the date
such discounts and pricing were extended to such ISSC customer.
7. INVOICING AND PAYMENT
7.1 ANNUAL SERVICE CHARGE INVOICES
On a monthly basis ISSC will invoice Flagstar the proportional amount of the
Annual Service Charge for that month in advance, as specified in Schedule J. The
invoice will separately state applicable taxes owed by Flagstar by tax
jurisdiction.
7.2 COST OF LIVING ADJUSTMENT
ISSC will charge Flagstar a COLA adjustment in accordance with the procedures
set forth in Schedule J beginning in the first January after the Commencement
Date if actual cumulative inflation exceeds the Protection Index.
7.3 OTHER CHARGES
Any amount due under this Agreement including amounts described in Sections 7.1
and 7.2 shall be payable as described in Section 7.4. No invoice for any such
amount shall be delivered to Flagstar until after the Services which are the
subject of such invoice, have been provided to Flagstar; provided, however, any
Services that are expressly stated as prepaid or paid in advance in this
Agreement, shall be excluded from the limitation of this sentence to the extent,
but only to the extent, expressly set forth in this Agreement.
Page 27 of 52
<PAGE>
7.4 INVOICE PAYMENT
a) At its election, Flagstar will pay each invoice either by wire funds
transfer or other electronic means acceptable to ISSC to an account
specified by ISSC or by bank check within the calendar month in which
such invoice is received by Flagstar, provided Flagstar receives the
invoice on or before the tenth (10th) day of the month; otherwise such
payment shall be made within thirty (30) days after the date of
Flagstar's receipt of the invoice. In the event that any invoice
payment is not received by ISSC within ten (10) business days following
the date specified for such payment herein, a late payment fee of two
percent (2%) per month, or the maximum amount permissible by law,
whichever is less, of the unpaid, late invoice payment will be due and
payable by Flagstar to ISSC from the date such payment became overdue
through the date of payment to ISSC.
b) In the event that on two (2) occasions in any twelve (12) calendar
months of the first five (5) years of the Term, Flagstar fails to timely
pay any invoice issued by ISSC to Flagstar within ten (10) business days
of the payment date for such invoices as specified in Sections 7.1 and
7.2 hereof, Flagstar shall following the second such occurrence pay to
ISSC an amount equal to the Annual Service Charge for the one (1) month
immediately following such second occurrence as an advance payment of
the Annual Service Charge. ISSC shall hold such amount in escrow. If
Flagstar shall timely pay to ISSC all invoices issued to Flagstar
pursuant to Sections 7.1 and 7.2 for a period of six (6) consecutive
months thereafter, ISSC shall pay to Flagstar the amount of such escrow.
This Section 7.4(b) shall not be applicable to nonpayment or late
payment of disputed charges and credits described in Section 7.6.
7.5 PRORATION
All periodic charges under this Agreement are to be computed on a calendar month
basis, and will be prorated for any partial month, unless specifically stated
otherwise in this Agreement.
7.6 DISPUTED CHARGES/CREDITS
In the event Flagstar disputes the accuracy or applicability of a charge or
credit (i.e., Annual Service Charge, ARC, COLA, Service Credits, pass-through
billings, etc.), Flagstar shall notify ISSC of such dispute as soon as
practicable after the discrepancy has been discovered. The Parties will
investigate and resolve the dispute using the dispute resolution processes
provided under Section 15 of this Agreement. Any undisputed amounts contained in
an invoice containing a disputed charge, will be paid by Flagstar and any
undisputed credit amounts will be promptly credited by ISSC. Flagstar, in the
case of a disputed charge, or ISSC, in the case of a disputed credit, shall
place the disputed amount in an escrow account until such dispute is resolved.
Upon resolution of the dispute, the Parties shall be paid any interest having
accrued on the disputed amounts held in escrow in connection with such dispute
in proportion to the amount received by each Party with respect to such dispute,
and the Parties shall each pay a portion of the escrow fees attributable to the
disputed amount in an inverse proportion to the percentage of the disputed
amount paid to each Party. Unpaid monies that are in dispute and placed in
escrow will not be considered a basis for monetary default under this Agreement.
7.7 OTHER CREDITS
Except as otherwise set forth in this Agreement, with respect to any amount to
be paid or reimbursed to Flagstar by ISSC at the time any such amount is due and
payable to Flagstar, ISSC may pay that amount to Flagstar by applying a credit
for the month such amount is due and payable against the charges otherwise
payable to ISSC hereunder, at ISSC's option. Notwithstanding the foregoing, if
the amount to be so paid or reimbursed by ISSC in any specific month, exceeds
the charges to Flagstar for such month, ISSC shall promptly pay any difference
to Flagstar by check or wire transfer during such month. If ISSC fails to pay
any amount due and payable to Flagstar or fails to apply a credit during the
month such amount is due and payable, ISSC shall pay or credit such amount
Page 28 of 52
<PAGE>
together with interest thereon payable at a rate of two percent (2%) per month,
or the maximum amount permissible by law, whichever is less, of the unpaid, late
monies will be due and payable by ISSC to Flagstar from the date such monies
became due to Flagstar through the date of payment or credit to Flagstar.
8. INTELLECTUAL PROPERTY RIGHTS
ISSC, Flagstar and their subcontractors may develop, create, modify or
personalize (collectively, "Develop") certain computer programming code,
including source and object code ("Code") and documentation in order to perform
the Services.
8.1 OWNERSHIP OF MATERIALS
With respect to any Materials whether Developed solely by ISSC or its
subcontractors, or jointly by the Flagstar Group personnel and ISSC or its
subcontractors, ownership will be as follows:
a) Flagstar Derivative Code and Flagstar Works shall be owned by Flagstar
or another member of the Flagstar Group, as applicable. During the Term,
ISSC shall have an irrevocable, nonexclusive, worldwide, paid-up license
to use, execute, reproduce, display, perform, operate, distribute,
modify, develop, personalize and create Derivative Works from such
Materials internally, and the right to sublicense third parties to do
any of the foregoing, for the sole purpose of performing the Services.
b) ISSC Derivative Code, ISSC Code, ISSC Works, and Flagstar Code and ISSC
Interfaces, shall be owned by ISSC. During the Term, the Flagstar Group
shall have an irrevocable, nonexclusive, worldwide, paid-up license to
use in the Flagstar Business, execute, operate, reproduce, display,
perform, distribute, modify, Develop, personalize and create Derivative
Works from, such Materials internally, and the right to sublicense third
parties to do any of the foregoing for the Flagstar Group.
c) With respect to any Materials whether or not Developed under this
Agreement, which are or have been Developed solely by the Flagstar Group
personnel, such Materials shall be owned by Flagstar. At Flagstar's sole
option ISSC shall have an irrevocable, nonexclusive, worldwide, paid-up
license to use, execute, operate, reproduce, display, perform,
distribute, modify, Develop, personalize and create Derivative Works
from such Materials internally and the right to sublicense third parties
to do any of the foregoing, for the sole purpose of performing the
Services during the Term.
d) Any ownership or license rights herein granted to either Party or
another member of the Flagstar Group or any other Authorized Users are
limited by and subject to any patents and copyrights held by, and terms
and conditions of any license agreements with, applicable Third Party
Providers.
e) To the extent that by operation of law, any of the Materials may not be
owned by ISSC or the Flagstar Group to which ownership has been
allocated under this Section 8, each Party agrees to promptly assign, or
cause to be assigned, and take such actions and execute and deliver such
documents as shall be necessary or appropriate to effect such assignment
without further consideration. Each Party hereby assigns, without
further consideration, the ownership of all right, title and interest in
all U.S. and foreign copyrights, mask work rights (if any) and patents
in the Materials to the other Party as set forth in this Section 8.
Such assignee shall have the right to obtain and hold in its own name or
transfer patents and copyrights, applications, registrations, renewals
and all other rights relating or pertinent thereto.
Page 29 of 52
<PAGE>
8.2 OBLIGATIONS REGARDING MATERIALS
a) The Parties agree to reproduce copyright legends which appear on any
portion of the Materials which may be owned by the Parties and any and
all third parties.
b) Except as set forth in Section 9, this Agreement shall not preclude
either Party from Developing materials or providing services which are
competitive to the Materials or Services which might be delivered
pursuant to this Agreement, except to the extent any of same may
infringe any of the other Party's patent rights, copyrights or mask work
rights.
c) Neither this Agreement nor any disclosure made hereunder grants any
license to either Party under any patents or copyrights, mask work
rights of the other Party, except for the licenses expressly granted
under this Section 8.
9. CONFIDENTIALITY/DATA SECURITY
9.1 CONFIDENTIAL INFORMATION
ISSC and Flagstar each acknowledge that the other Party possesses and will
continue to possess information, which has commercial value in its business and
is not in the public domain, that has been created, discovered, developed by it
or provided to it by a third party, and in which property rights have been
assigned or otherwise conveyed to it. "Confidential Information" means any and
all proprietary business information of the disclosing Party treated as secret
by the disclosing party (that is, it is the subject of efforts by the disclosing
Party or its Affiliates that are reasonable under the circumstances to maintain
its secrecy) that does not constitute a Trade Secret (defined below), including,
without limitation, any and all proprietary information of such Party of which
the receiving Party becomes aware as a result of its access to and presence at
the other Party's facilities. "Trade Secrets" mean information related to the
services or business of the disclosing Party or its Affiliates which (a) derives
economic value, actual or potential, from not being generally known to or
readily ascertainable by other persons who can obtain economic value from its
disclosure or use; and (b) is the subject of efforts by the disclosing Party or
its Affiliates that are reasonable under the circumstances to maintain its
secrecy, including without limitation (1) marking any information reduced to
tangible form clearly and conspicuously with a legend identifying its
confidential or proprietary nature; (2) identifying any oral presentation or
communication as confidential immediately before, during or after such oral
presentation or communication; or (3) otherwise, treating such information as
confidential or secret. Assuming the criteria in sections (a) and (b) above are
met, Trade Secrets include, but are not limited to, technical and nontechnical
data, formulas, patterns, compilations, computer programs and software, devices,
drawings, processes, methods, techniques, designs, programs, financial plans,
product plans, and lists of actual or potential customers and suppliers.
"Company Information" means collectively the Confidential Information and Trade
Secrets. Company Information also includes information which has been disclosed
to either Party by a third party which such Party is obligated to treat as
confidential or secret.
9.2 OBLIGATIONS
a) Flagstar and ISSC will each refrain from disclosing, will hold as
confidential and will use the same level of care to prevent disclosing
to third parties, the Company Information of the other Party as it
employs to avoid disclosure, publication or dissemination of its own
information of a similar nature but in no event less than a reasonable
standard of care. Notwithstanding the foregoing, the Parties may
disclose Company Information to authorized subcontractors involved in
providing and using the Services under this Agreement where: (i) such
disclosure is necessary to permit the subcontractor to perform its
duties hereunder or use the Services; (ii) the subcontractor agrees in
writing to observe the confidentiality and restricted use and disclosure
covenants and standards of care set forth in this Section 9 and under
which the disclosing Party
Page 30 of 52
<PAGE>
is a third party beneficiary for all purposes; and (iii) the receiving
Party assumes full responsibility for the acts or omissions of its
subcontractor, no less than if the acts or omissions were those of the
receiving Party.
b) Neither Flagstar nor ISSC shall use the Company Information of the other
Party except in the case of ISSC and its subcontractors, in connection
with the performance of the Services, and as otherwise specifically
permitted in this Agreement, and in the case of Flagstar as specifically
permitted in this Agreement and in connection with the use of the
Services. ISSC shall be responsible to ensure that its subcontractors
comply with this Section 9.2(b) and Flagstar shall be responsible to
ensure that its subcontractors and contractors comply with this Section
9.2(b).
c) Without limiting the generality of the foregoing, neither Party will
publicly disclose the terms of this Agreement, except to the extent
permitted by Sections 9.3 and 14.1 without the prior written consent of
the other. Furthermore, neither ISSC nor Flagstar will make any use of
the Company Information of the other Party except as contemplated by
this Agreement; acquire any right in or assert any lien against the
other Party's Company Information except as contemplated by this
Agreement; or refuse to promptly return, provide a copy of or destroy
such Company Information upon the request of the disclosing Party.
d) Notwithstanding any other provision of the Agreement, neither Party will
be restricted in using, in the development, manufacturing and marketing
of its products and services and in its operations, any data processing,
system operations, applications development or network management ideas,
concepts, know-how and techniques which are retained in the minds of
employees who have had access to the other Party's Company Information
(without reference to any physical or electronic embodiment of such
information), unless such use shall infringe any of such Party's patent
rights, copyrights or mask works rights.
9.3 EXCLUSIONS
Notwithstanding the foregoing, this Section 9 will not apply to any information
which ISSC or Flagstar can demonstrate was: (a) at the time of disclosure to it,
in the public domain; (b) after disclosure to it, published or otherwise becomes
part of the public domain through no fault of the receiving Party; (c) without a
breach of duty owed to the disclosing Party, is in the possession of the
receiving Party at the time of disclosure to it; (d) received after disclosure
to it from a third party who had a lawful right to and, without a breach of duty
owed to the disclosing Party, did disclose such information to it; or (e)
independently developed by the receiving Party without reference to Company
Information of the disclosing Party. Further, either Party may disclose the
other Party's Company Information to the extent required by law or order of a
court or governmental agency. However, the recipient of such Company Information
must give the other Party prompt notice and make a reasonable effort to obtain a
protective order or otherwise protect the confidentiality of such information,
all at the discloser's cost and expense. It is understood that the receipt of
Company Information under this Agreement will not limit or restrict assignment
or reassignment of employees of ISSC and Flagstar within or between the
respective Parties and their Affiliates.
9.4 LOSS OF COMPANY INFORMATION
The receiving Party will immediately notify the disclosing Party, orally or in
writing in the event of any disclosure, loss, or use in violation of this
Agreement of a disclosing Party's Company Information known to the receiving
Party.
9.5 LIMITATION
The covenants of confidentiality set forth herein (a) will apply after the
Effective Date to any Company Information disclosed to the receiving Party
before and after the Effective Date and (b) will continue and must be maintained
from the Effective Date through the termination of the relationship between the
Parties and (i) with respect to Trade
Page 31 of 52
<PAGE>
Secrets, for a period of five (5) years after termination of the Parties'
relationship under this Agreement; and (ii) with respect to Confidential
Information for a period equal to the shorter of two (2) years after termination
of the Parties' relationship under this Agreement, or until such Confidential
Information no longer qualifies as confidential under applicable law. ISSC will
not be responsible for the security of data during transmission via public
communications facilities, except to the extent that such breach of security is
caused by the failure of ISSC to perform its obligations under this Agreement,
or the negligent acts or omissions of ISSC, its subcontractors or Affiliates.
9.6 DATA
All of Flagstar's Company Information (including, without limitation, Flagstar
Group data and related reports regarding the Flagstar Group, the Flagstar
Business and the Services) are the exclusive property of Flagstar and the
furnishing of such information, data and reports to, or access to such items by,
ISSC will not grant any express or implied license to ISSC relating to such
information, data and reports except as required to perform the Services
pursuant to this Agreement. Upon request by Flagstar at any time and without
regard to the default status of the Parties under this Agreement, ISSC shall
promptly deliver to Flagstar Flagstar's Company Information (including without
limitation Authorized User Data and related reports regarding the Flagstar
Group, the Flagstar Business and the Services) in electronic (tape) format and
in such hard copy as existing on the date of the request by Flagstar.
10. TERM AND TERMINATION
10.1 TERM
The term of this Agreement will begin as of 12:01 a.m. on the Effective Date and
will end as of 12:00 midnight on February 21, 2006, (the "Term"), unless earlier
terminated or extended in accordance with this Agreement.
10.2 RENEWAL AND EXPIRATION
ISSC shall notify Flagstar in writing, whether it desires to renew this
Agreement and of the proposed prices and terms to govern such renewal not less
than twenty-four (24) calendar months prior to the expiration of the Term. If
ISSC notifies Flagstar that it desires to renew this Agreement, Flagstar agrees
to inform ISSC in writing whether it desires to renew not less than fourteen
(14) calendar months prior to the expiration of the Term. If Flagstar notifies
ISSC that it desires to renew the Agreement, but the Parties are unable to agree
upon renewal prices, terms and conditions as of six (6) months prior to the
expiration of the Term, this Agreement will be extended for one (1) year at the
then-current prices, terms and conditions. If the Parties are unable to reach
agreement on renewal during such extension period, this Agreement will expire at
the end of such extension period.
10.3 TERMINATION BY FLAGSTAR
Flagstar may terminate this Agreement for the following reasons:
a) A material breach of this Agreement by ISSC that remains uncured for ten
(10) days after receipt of written notice thereof; provided, however, if
a material breach of this Agreement by ISSC occurs that cannot be cured
by ISSC in such ten (10) day period but ISSC submits a written plan to
Flagstar within such period to cure such breach after the ten (10) day
period (but in no event more than thirty (30) days after such notice of
breach) and the plan (including the timing of the cure set forth in the
plan) is accepted by Flagstar in writing, the cure period for such
breach shall be extended to the date set forth in the plan; or
b) As determined by Flagstar, there exists a series of non-material or
persistent breaches by ISSC that in the aggregate have a significant
adverse impact on the Services support of the administrative,
management,
Page 32 of 52
<PAGE>
planning, financial reporting or operations functions of the Flagstar
Group or on the management of the Services; or
c) After December 31, 1998, for convenience upon one hundred eighty (180)
days prior notice by Flagstar to ISSC; or
d) After December 31, 1996, upon a Change of Control of ISSC or Flagstar
with one hundred eighty (180) days notice given within ninety (90) days
after the later to occur of (i) the effective date of the Change of
Control, or (ii) the date on which the affected Party gives the other
Party written notice of the effective date of the Change of Control; or
e) ISSC becomes insolvent or is unable to pay its debts or enters into or
files (or has filed or commenced against it) a petition, arrangement,
application, action or other proceeding seeking relief or protection
under the bankruptcy laws of the United States or any similar laws of
the United States or any state of the United States or any other country
or transfers all or substantially all of its assets to another person or
entity other than an Affiliate of International Business Machines
Corporation; or
f) ISSC incurs Direct Damages to Flagstar in excess of the ISSC Direct
Damages Cap set forth in Section 11.1 (a) Per Event ISSC Direct Damages
Cap, under the circumstances and resulting from the events described in
Section 11.1(a) Per Event ISSC Direct Damages Cap.
10.4 TERMINATION BY ISSC
ISSC may terminate this Agreement for a material default by Flagstar that
remains uncured for a period of thirty (30) days after written notice thereof to
Flagstar from ISSC.
10.5 TERMINATION CHARGES
a) In the event of a termination by Flagstar pursuant to Sections 10.3(c)
Convenience or (d) Change of Control and notwithstanding any other
provision of this Agreement except Section 10.5(c), Flagstar shall only
be responsible for the following payment obligations (i) all fees due
and payable through the termination date, (ii) the Termination Charge,
and (iii) the Wind-Down Expenses. However, in the event of a termination
by Flagstar pursuant to Sections 10.3(a) Cause or (b) Persistent Failure
or (e) Bankruptcy or (f) Per Event ISSC Direct Damages Cap and
notwithstanding any other provision of this Agreement except Section
10.5(c), Flagstar shall only be responsible for the payment obligations
described in Section 10.5(a)(i) above, but not for the amounts set forth
in Sections 10.5(a)(ii) and (iii) above. Moreover, in the instances of a
termination by Flagstar pursuant to Sections 10.3(a) Cause or (e)
Bankruptcy, Flagstar may recover damages from ISSC for the defaults and
breaches by ISSC giving rise to the termination, except as set forth in
Section 10.5(c). In the instance of a termination by Flagstar pursuant
to Section 10.3(f) Per Event ISSC Direct Damages Cap, Flagstar may only
recover the damages from ISSC for the defaults and breaches by ISSC
giving rise to the termination up to the full amount of the twenty-four
(24) months of charges to Flagstar by ISSC for the Services as described
and listed in Section 11.1(a), except as set forth in Section 10.5(c).
Finally, in the instance of a termination by Flagstar pursuant to
Section 10.3(b) Persistent Failure, Flagstar may not recover any damages
from ISSC for the defaults and breaches by ISSC giving rise to the
termination, except as set forth in Section 10.5(c).
b) In the event of a termination by ISSC under Section 10.4 Cause and
notwithstanding any other provision of this Agreement except Section
10.5(c), (i) if such termination is effective at any time while Flagstar
is not permitted to terminate for Convenience under Section 10.3(c) or
Change of Control under Section 10.3(d), ISSC may recover only the
amount of its projected profits for the period between the effective
date of such termination and the first date on which a termination for
Convenience or Change of Control, as applicable,
Page 33 of 52
<PAGE>
by Flagstar could be effective under Sections 10.3(c) or (d), as
applicable, plus the amounts payable by Flagstar to ISSC in Section 10.5
for a termination by Flagstar pursuant to Section 10.3(c) Convenience or
Section 10.3(d) Change of Control, as applicable, on such date, and (ii)
if such termination is effective at any time during the Term other than
as described in item (i) above, ISSC may recover only the amounts
payable by Flagstar to ISSC in Section 10.5 for a termination by
Flagstar pursuant to Section 10.3(c) Convenience.
c) The limitations on damages and recoveries set forth in Sections 10.3 and
10.4 shall be effective in all instances except such limitations shall
not apply to the following: (i) monetary damages and recoveries covered
under the Parties' respective indemnification obligations pursuant to
Section 11; and monetary damages and recoveries arising out of or
resulting from breaches of the confidentiality provisions of Section 9.
10.6 TERMINATION PRORATION
Any Termination Charge will be prorated according to the following formula:
[((A-B) / 12 months) x C] + B = Prorated Termination charge.
where:
A = the Termination Charge specified in the Supplement for the
year in which termination is effective;
B = the Termination Charge specified in the Supplement for the
year after the year in which termination is effective; and
C = the number of months remaining during the year in which
termination is effective.
10.7 EXTENSION OF SERVICES
Flagstar may request and ISSC will once extend the expiration or earlier
termination date of the provision of Services and the Term for up to one (1)
year ("Extension Period") upon not less than sixty (60) days prior written
notice before the scheduled termination or expiration of this Agreement.
However, in the event of a material breach by Flagstar either prior to or after
the start of the Extension Period, ISSC will extend the provision of Services as
described in this Section 10.7, only if Flagstar prepays the Annual Service
Charges and a reasonable projection of other charges due under this Agreement
for the entire period Flagstar requests such extension.
10.8 SERVICES TRANSFER ASSISTANCE
a) It is the intent of the Parties that ISSC will cooperate with the
Flagstar Group to assist in the orderly transfer of the services,
functions, responsibilities, tasks and operations provided by ISSC
hereunder to Flagstar itself or another services provider in connection
with the expiration or earlier termination of this Agreement. Upon
Flagstar's request ISSC shall provide transfer assistance in connection
with migrating the work of the Flagstar Group to Flagstar itself or
another services provider ("Services Transfer Assistance") commencing up
to one (1) year prior to expiration or upon any notice of termination,
or of non-renewal of this Agreement. In the event Flagstar shall fail
to pay any amounts when due and payable under this Agreement with or
without an attendant termination for cause by ISSC, ISSC shall not be
required to provide Services Transfer Assistance unless Flagstar prepays
the Annual Service Charge, if any, and a reasonable projection of other
charges due under this Agreement for the entire period Flagstar requests
Services Transfer Assistance. In no event will Flagstar's escrow of
monies pursuant to Section 7.6 be considered a failure by Flagstar to
pay amounts due and payable hereunder. Further, ISSC shall provide the
Services Transfer
Page 34 of 52
<PAGE>
Assistance in accordance with this Section 10.8 even in the event of
Flagstar's material breach (other than a payment default) with or
without an attendant termination for cause by ISSC, if Flagstar prepays
a reasonable projection of the other charges due under this Agreement
(other than the Annual Services Charge which shall be paid monthly as
provided in the Supplement) for the Services Transfer Assistance for the
entire period Flagstar desires ISSC to provide such services to the
Flagstar Group or its designees. Services Transfer Assistance shall be
provided through the effective date of the expiration or termination of
the Services, and upon request by Flagstar, the effective date of such
expiration or termination shall be extended for up to one (1) year
thereafter pursuant to the terms and conditions of this Agreement and
such period shall be considered an extension of the Term. Services
Transfer Assistance shall include, but not be limited to, providing the
Flagstar Group and their respective agents, contractors and consultants,
as necessary, with services described in Schedule S.
b) If any Services Transfer Assistance provided by ISSC requires the
utilization of additional resources that ISSC would not otherwise use in
the performance of this Agreement but for which there is a current
Resource Baseline, Flagstar will pay ISSC for such usage at the
then-current Agreement charges and in the manner set forth in this
Agreement. If the Services Transfer Assistance requires ISSC to incur
costs that ISSC would not otherwise incur in the performance of the
Services under this Agreement, then ISSC shall notify Flagstar of the
identity and scope of the activities requiring that ISSC incur such
costs and the projected amount of the costs that will be passed through
to Flagstar for the performance of such assistance. Upon Flagstar's
authorization, ISSC shall perform the assistance and invoice Flagstar
for such costs. Within thirty (30) business days after the date of the
invoice, Flagstar shall pay ISSC for authorized, additional costs
incurred to provide such assistance to Flagstar.
c) If Flagstar exercises its option to prepay the Annual Service Charges
and other costs reasonably projected by ISSC for Services Transfer
Assistance and it is determined that such prepayment is in excess of the
actual costs associated with the Services Transfer Assistance, then ISSC
shall apply such overpayment to monies otherwise due ISSC or, if no
monies are due ISSC, promptly refund such overpayment to Flagstar at the
end of such Services Transfer Assistance. Conversely, if the amount
prepaid by Flagstar to ISSC for Services Transfer Assistance does not
fully reimburse ISSC for the actual Annual Service Charges due and costs
incurred by ISSC and chargeable to Flagstar hereunder for the provision
of Services Transfer Assistance to Flagstar, then ISSC shall invoice
Flagstar and Flagstar shall promptly pay ISSC for such additional
amounts as incurred and invoiced to Flagstar.
10.9 OTHER RIGHTS UPON TERMINATION
At the expiration or earlier termination of this Agreement for any reason,
however described, ISSC agrees:
a) Upon Flagstar's request, ISSC agrees to sell to Flagstar or its designee
for the depreciated value thereof as carried on the books of ISSC, the
ISSC Machines owned by ISSC then currently being used by ISSC on a
dedicated basis to perform the Services. The ISSC machines will be
expensed or fully depreciated by ISSC in accordance with either its
standard financial reporting practices or its standard tax accounting
practices for such assets, whichever is shorter, but in no event shall
such period exceed five (5) years. In the case of dedicated ISSC
Machines that ISSC is leasing, ISSC agrees to permit Flagstar or its
designee to either buy-out the lease on the ISSC Machines and purchase
the ISSC Machines from the lessor or assume the lease(s) and secure the
release of ISSC thereon. Flagstar shall be responsible for any sales,
use or similar taxes associated with such purchase of such ISSC Machines
or the assumption of such leases. Notwithstanding the foregoing or any
other provision of this Agreement (including without limitation Sections
10 and 11), if Flagstar terminates this Agreement pursuant to Sections
10.3(a) Cause or 10.3(f) Per Event ISSC Direct Damages Cap, ISSC will
promptly transfer good and marketable title to all of the ISSC Machines
to Flagstar free and clear of all liens and security interests, however
described, for and in consideration of the payment by Flagstar to ISSC
of one dollar ($1.00).
Page 35 of 52
<PAGE>
b) ISSC will grant to Flagstar and its Affiliates an irrevocable,
nonexclusive, worldwide, perpetual, paid-up source and object code
license to use, execute, operate, reproduce, display, perform,
distribute, modify, Develop and personalize, and create Derivative Works
from, the ISSC Derivative Code, ISSC Code, ISSC Works, Flagstar Code and
ISSC Interfaces as a part of and in connection with the Flagstar
Business, and the right to sublicense third parties to do any of the
foregoing for the Flagstar Group; provided, however, ISSC shall not be
required to grant to Flagstar a source code license for commercially
available software programs owned and marketed generally by IBM or its
affiliates.
c) ISSC will provide to the Flagstar Group a source code and object code
license for ISSC Software proprietary to ISSC and not otherwise owned by
or licensed to Flagstar in accordance with Section 10.9(b) and not
generally commercially available, with rights that are the same as those
granted to Flagstar and its Affiliates in Section 10.9(b) for use by the
Flagstar Group as a part of and in connection with the Flagstar
Business, upon terms and prices to be mutually agreed upon by the
Parties (which prices shall not be greater than those offered to other
Similarly Situated Customers or, in the case where no Similarly Situated
Customers exist, other third parties). At Flagstar's option, ISSC will
recommend a mutually agreeable commercially available substitute, if
available, to perform the same function.
d) If ISSC has licensed or purchased and is using any generally
commercially available ISSC Software to provide the Services to Flagstar
at the date of expiration or termination, Flagstar may elect to take a
transfer or an assignment of the license for such software (and any
attendant maintenance agreement) and reimburse ISSC for the initial
license or purchase charges for such ISSC Software in an amount equal to
the remaining unamortized cost of such ISSC Software, if any,
depreciated over a five (5) year life. Flagstar shall also pay any
transfer fee or charge imposed by the applicable vendor and subject to
Flagstar's acceptance of any applicable vendor terms and conditions,
such licensed Software shall be transferred or assigned to Flagstar.
e) If ISSC has licensed or purchased and is using any generally
commercially available ISSC Software to provide the Services to the
Flagstar Group and other ISSC customers in a shared environment at the
date of expiration or termination, ISSC, upon request by Flagstar, will
assist Flagstar in obtaining licenses for such software subject to
Flagstar's payment of any license fee or charge imposed by the
applicable vendor.
f) ISSC will use commercially reasonable efforts to negotiate license
arrangements with third parties that will minimize the amount of license
transfer and assignment fees to be paid by Flagstar. Flagstar may
participate in the negotiation of such license arrangements. ISSC shall
provide reasonable advance written notice to Flagstar of such
anticipated negotiations.
g) Upon the date of expiration or termination of this Agreement, the
Flagstar Group shall have the right to make offers of employment to any
or all ISSC employees performing Services for the Flagstar Group
hereunder ("Service Employees"). Promptly after either Party sends the
other Party written notice of termination or expiration with the prior
consent of each Services Employee (each of whom ISSC will notify of
Flagstar's interest), ISSC agrees to supply Flagstar with the names and
resumes requested by Flagstar for the purpose of exercising its rights
under this Section 10.9, at no charge. Flagstar's rights under this
Section 10.9 will take precedence over any ISSC/employee employment
contract or covenant that may otherwise limit an employee's right to
accept employment with the Flagstar Group.
h) Upon Flagstar's request, ISSC will transfer or assign to Flagstar or its
designee, on mutually acceptable terms and conditions, any Third Party
Agreements not otherwise treated in this Section 10.9, applicable solely
to services being provided to Flagstar, including, without limitation,
Third Party Agreements for maintenance, Disaster Recovery Services and
other necessary third party services then being used by ISSC to perform
the Services subject to the payment by Flagstar of any transfer fee or
charge imposed by the applicable vendors.
Page 36 of 52
<PAGE>
10.10 EFFECT OF TERMINATION/SURVIVAL OF SELECTED PROVISIONS
Notwithstanding the expiration or earlier termination of the Services or this
Agreement for any reason however described, the following Sections of this
Agreement shall survive any such expiration or termination: Section 8, Section
9, Section 10.8, Section 10.9, Section 10.10, Section 11, Section 13, Section 14
and Section 16.
11. LIABILITY
11.1 LIABILITY CAPS
The liability of ISSC to Flagstar arising out of or resulting from the
performance or non-performance of ISSC and its subcontractors of the Services
and its obligations under this Agreement shall be limited (a) to "Direct
Damages" incurred by Flagstar for each event which is the subject matter of a
claim or cause of action with a liability cap for each such event which is not
declared by Flagstar as the basis for its termination of this Agreement pursuant
to Section 10.3(a) Cause or (e) Bankruptcy, equal to the actual charges to
Flagstar for the Services during the three (3) calendar months immediately
following each such event, which damages in the aggregate shall not exceed the
charges to Flagstar for the Services set forth in the Supplement during the
twenty-four (24) months immediately following the first such event or if there
are not twenty-four (24) months left in the Term after the first such event, the
charges to Flagstar for the Services set forth in the Supplement during the last
twenty-four (24) months of the Term; and (b) to the "Direct Damages" incurred by
Flagstar for the event(s) which are the subject matter of claim(s) or cause(s)
of action which are declared by Flagstar as the basis for its termination of
this Agreement pursuant to Section 10.3(a) Cause or (e) Bankruptcy, with a
liability cap for such event(s) and termination equal to the actual charges to
Flagstar for the Services during the twelve (12) month period immediately
preceding such event(s) or if twelve (12) months of the Term have not elapsed,
the charges to Flagstar for the Services set forth in the Supplement for the
first twelve (12) months of the Term (the "ISSC Direct Damages Cap"). The
liability of Flagstar to ISSC arising out of or resulting from the performance
and non-performance of its obligations under this Agreement shall be limited in
all cases to Direct Damages which in the aggregate shall not exceed the amounts
payable by Flagstar upon a termination for Convenience under Section 10.5(b)
(the "Flagstar Direct Damages Cap"). The ISSC Direct Damages Cap and the
Flagstar Direct Damages Cap are herein collectively called the "Direct Damages
Caps".
11.2 EXCLUSIONS
The Direct Damages Caps will not apply to (a) failure to pay charges for the
Services that are due and payable hereunder up to the effective date of the
early termination of this Agreement (excluding from this exception any payments
due and payable by Flagstar upon a termination by Flagstar for Convenience or
upon a Change of Control pursuant to Section 10.3(c) and (d) or upon a
termination by ISSC pursuant to Section 10.4); (b) Losses covered under the
Party's indemnification obligations to others pursuant to Section 13; (c) Losses
arising from a violation of the confidentiality provisions of Section 9; (d)
amounts to be paid or credited to Flagstar as Service Credits; (e) Losses
incurred by either Party caused by or arising out of the inaccuracy or
untruthfulness of the representations and warranties of the other Party
contained in this Agreement; (f) amounts payable by ISSC under the force majeure
provision of Section 16.3 of this Agreement; (g) amounts payable to Flagstar
under Section 7.7 (Other Credits); and (h) ISSC's obligations to transfer title
to the ISSC Machines to Flagstar pursuant to Section 10.9(a).
11.3 DIRECT DAMAGES
Unless specifically provided to the contrary in this Agreement, neither party
shall have any liability whether based on contract, tort (including without
limitation, negligence), warranty, guarantee or any other legal or equitable
grounds to the other party for any damages other than Direct Damages. "Direct
Damages" mean actual, direct damages incurred by the claiming Party which
include, by way of example but without limitation, (i) the costs of
Page 37 of 52
<PAGE>
cover incurred by the Flagstar Group to obtain services which are the same as or
substantially similar to the Services, (ii) the costs to correct any
deficiencies in the Services rendered by ISSC, (iii) the costs incurred by the
Flagstar Group to transition to another provider of information management and
communication services and/or to take some or all of such functions and
responsibilities in-house, (iv) the difference in the amounts to be paid to ISSC
hereunder and the charges to be paid to such other provider and/or the costs of
providing such functions, responsibilities and tasks in-house, (v) the Service
Credits, and (vi) similar damages, but "Direct Damages" shall not include (A)
loss of interest, profit or revenue of the claiming Party or (B) incidental,
consequential, special or indirect damages suffered by the Claiming Party
(except as the damages described in (A) and (B) are included as a part of the
Termination Charge and the Service Credits or as otherwise provided for in this
Agreement) and shall not include punitive or exemplary damages suffered by the
claiming Party arising from or related to this Agreement, even if such Party has
been advised of the possibility of such losses or damages.
11.4 DEPENDENCIES
In no event will ISSC or its subcontractors be liable for any damages if and to
the extent caused by Flagstar's or its subcontractors' failure to perform its
responsibilities hereunder; provided, however, for the purposes of this Section
11.4, neither ISSC nor its affiliates nor the Third Party Providers shall be
considered a subcontractor of Flagstar. Neither Flagstar nor its subcontractors
shall be liable for any damages if and to the extent caused by any failure to
perform by ISSC or its subcontractors.
11.5 REMEDIES
At its option, Flagstar may seek all remedies available to it under law and in
equity or recover as liquidated damages the Service Credits, subject to the
limitations and provisions specified in this Section 11. If ISSC's provision of
the Services is such that ISSC would otherwise owe Flagstar a Service Credit and
Flagstar elects to recover Service Credits, Flagstar's recovery of Service
Credits shall constitute acknowledgement by Flagstar of full satisfaction and
release of any claim by Flagstar that ISSC has breached its obligations under
this Agreement with respect to any such event(s) giving rise to the Service
Credits. However, within nine (9) calendar months of the receipt of any Service
Credits Flagstar received with respect to any action or inaction by ISSC upon
which Flagstar is basing termination for cause under Section 10.3(a) or
termination for persistent breaches under Section 10.3(b), Flagstar may return,
such Service Credits and pursue a damage claim against ISSC, if any such claim
exists.
12. WARRANTIES/REPRESENTATIONS/COVENANTS
12.1 WORK STANDARDS
ISSC covenants that (a) it has, and each of the ISSC employees and
subcontractors that it will use to provide and perform the Services has, the
necessary knowledge, skills, experience, qualifications, rights and resources to
provide and perform the Services in accordance with the Agreement; (b) it has
successfully provided and performed the Services or services that are
substantially equivalent to the Services for other customers of ISSC; and (c)
the Services will be performed for Flagstar in a diligent, workmanlike manner in
accordance with industry standards applicable to the performance of such
services.
12.2 NONINFRINGEMENT
The Parties represent and warrant that they will perform their responsibilities
under this Agreement in a manner that does not infringe, or constitute an
infringement or misappropriation of, any patent, Trade Secret, copyright or
other proprietary right of any third party. Notwithstanding this provision or
any other provision in this Agreement, Flagstar makes no warranty or
representation with respect to any claims for such infringement or
misappropriation
Page 38 of 52
<PAGE>
by virtue of its compliance with obligations herein to provide ISSC access to,
use of or benefits of any Third Party Agreements prior to receiving the
necessary Required Consents.
12.3 DISABLING CODE
ISSC covenants that ISSC will take commercially reasonable steps to ensure that
no code in the Software which could have the effect of disabling or otherwise
shutting down all or any portion of the Services, will be permitted to be
invoked without the prior written consent of Flagstar. ISSC further represents
and warrants that with respect to any disabling code that may be part of the
Software, ISSC will not invoke disabling code at any time, including upon
expiration or termination of this Agreement for any reason, without Flagstar's
prior written consent.
12.4 AUTHORIZATION AND ENFORCEABILITY
Each Party hereby represents and warrants that:
a) it has all requisite corporate power and authority to enter, and fully
perform pursuant to, into this Agreement;
b) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
properly authorized by all requisite corporate action on the part of
each Party; and
c) this Agreement has been duly executed and delivered by such Party.
12.5 DISCLAIMER
a) ISSC does not warrant the accuracy of any advice, report, data or other
product delivered to Flagstar to the extent any inaccuracies are caused
by data and/or software provided by Flagstar. Such products are
delivered AS IS, and ISSC shall not be liable for any inaccuracy
thereof. ISSC will promptly notify Flagstar of any such inaccuracies of
which ISSC becomes aware and the cause therefore if known by ISSC. ISSC
will provide reasonable assistance to Flagstar to remedy any problems.
12.6 REGULATORY PROCEEDINGS
Each Party agrees at its cost and expense to obtain all necessary regulatory
approvals applicable to its business, obtain any necessary permits, and to
comply with all regulatory requirement applicable to the performance of its
services to its customers.
13. INDEMNITIES
13.1 INDEMNITY BY ISSC
ISSC will indemnify and hold the Flagstar Group and their respective officers,
directors, employees, agents, successors and assigns (each an "Indemnitee")
harmless from and against any and all Losses incurred by any of them arising
from or in connection with:
a) any Claims of infringement of any United States letters patent, or any
copyright, trademark, service mark, trade name, trade secret, or similar
property right conferred by contract or by common law or by any law of
the United States or any state alleged to have been incurred because of
any information technology and information management and communications
services, equipment, software or other resources provided by
Page 39 of 52
<PAGE>
ISSC or its subcontractors in its performance of the Services; provided,
however, ISSC will have no obligation with respect to any Losses to the
extent arising from or in connection with Claims for copyright
infringement and/or breach of software licenses related to the Services
committed by an Indemnitee or any employee of an Indemnitee that is not
the result of ISSC failing to perform its obligations under this
Agreement including, without limitation, obtaining any Required Consent
for which it has responsibility; provided, further, that ISSC will have
no obligation with respect to any Losses to the extent arising out of or
in connection with an Indemnitee's modification of a program or a
machine provided by ISSC or its subcontractors or an Indemnitee's
combination, operation or use of the services, equipment, software or
other resources provided by ISSC or its subcontractors with devices,
data or programs not furnished by ISSC or its subcontractors;
b) any Claims accruing on or after the Effective Date (i.e., not arising or
resulting from a breach by Flagstar before the Effective Date) regarding
any Third Party Agreements, however described (including without
limitation, failure to obtain Required Consents or arising from ISSC
exercise of its rights to terminate, modify or change the Third Party
Agreements pursuant to Section 2.4(a)); provided, however, ISSC will
have no obligation with respect to any Losses to the extent arising out
of or in connection with Claims for copyright infringement and/or breach
of software licenses related to the Services committed by any Indemnitee
or any employee of an Indemnitee that is not the result of ISSC failing
to perform its obligations under this Agreement including, without
limitation, obtaining any Required Consent for which it has
responsibility;
c) the untruthfulness or inaccuracy of any representation or warranty made
by ISSC in this Agreement;
d) any amounts, including without limitation, taxes, interest and penalties
assessed against Flagstar which are obligations of ISSC under this
Agreement;
e) personal injuries, death or damage to tangible personal or real property
of third parties including employees of ISSC, its contractors and
subcontractors caused by the negligence or wilful misconduct of ISSC;
provided that ISSC will have no obligation under this part, to the
extent the same arise out of or in connection with the negligence or
willful misconduct of the Flagstar Group;
f) any Claims for amounts, including but not limited to taxes, interest and
penalties, assessed against the Flagstar Group which are obligations of
ISSC pursuant to Section 6.5;
g) any Claims for a breach of software licenses related to the Services,
committed by ISSC or any of its subcontractors or any employee of ISSC
and its subcontractors that is not the result of Flagstar failing to
perform its obligations under this Agreement including obtaining any
Required Consent for which it has responsibility;
h) any environmental Claim arising out of this Agreement or as a result of
the Services performed at the Data Center or the other Flagstar
Corporate Facilities or Flagstar Restaurant locations to the extent ISSC
or its subcontractors has caused the environmental damage or violation
of the environmental laws or regulations from which the Claim arises;
i) any Claims directly attributable to ISSC's decision to request that
Flagstar cancel, substitute, terminate, change, add or breach any Third
Party Agreement and Flagstar' assent to and compliance with such
decision and any Losses incurred by Flagstar associated with such
decision by ISSC and compliance by Flagstar;
j) any Claims for penalties, interest and other charges imposed by a taxing
authority (except the actual taxes payable to Flagstar under the terms
of this Agreement) arising out of or resulting from ISSC issuing an
Page 40 of 52
<PAGE>
incorrect invoice or other information provided to Flagstar in writing
regarding its charges to Flagstar for the Services to Flagstar; and
k) any Claims by any Affected Employees arising out of or resulting from
their treatment by ISSC as employees of ISSC.
In the event and to the extent that a Claim is made against an Indemnitee by an
employee of ISSC, its contractors or subcontractors providing services, products
and/or software hereunder, the Parties agree that ISSC shall indemnify and hold
harmless the Indemnitee to the same extent as if the Claim was made by a
non-employee of ISSC, its contractors or subcontractors. ISSC's indemnification
hereunder shall be primary and immediate. Accordingly, in addition to other
provisions herein, and in order to render the Parties' intent and this
indemnification agreement fully enforceable, ISSC, in an indemnification claim
hereunder, expressly and without reservation waives any defense or immunity it
may have under any applicable workers' compensation law(s) or any other statute
or judicial decision disallowing or limiting such indemnification and consents
to a cause of action for indemnity. This waiver and consent to indemnification
is made irrespective of and specifically waiving any defense or immunity under
any statute or judicial decision.
13.2 INDEMNITY BY FLAGSTAR
Flagstar will indemnify and hold harmless ISSC and its officers, directors,
employees, agents, successors and assigns (each an "ISSC Indemnitee") harmless
from and against any and all Losses incurred by ISSC arising from or in
connection with
a) any Claims of infringement of any United States letters patent, or any
copyright, trademark, service mark, trade name, trade secret, or similar
property right conferred by contract or by common law or by any law of
the United States or any state alleged to have been incurred because of
any information technology and information management and communications
services equipment, software or other resources provided to ISSC by
Flagstar in connection with the performance of the Services; provided,
however, Flagstar will have no obligation with respect to any Losses to
the extent arising out of or in connection with Claims for copyright
infringement and/or breach of software licenses related to the Services,
committed by an ISSC Indemnitee or any employee of an ISSC Indemnitee
that is not the result of Flagstar failing to perform its obligations
under this Agreement including, without limitation, obtaining any
Required Consent for which it has responsibility; and provided, further,
that Flagstar will have no obligation with respect to any Losses to the
extent arising out of or in connection with an ISSC Indemnitee's
modification of a program or a machine or an ISSC Indemnitee's
combination, operation or use of the equipment, software or other
resources provided by Flagstar;
b) any Claims accruing before the Effective Date regarding any Third Party
Agreements between Flagstar and a third party, including without
limitation, failure to obtain Required Consents;
c) the untruthfulness or inaccuracy of any representation or warranty made
by Flagstar under this Agreement;
d) any amounts, including without limitation, taxes, interest and penalties
assessed against ISSC which are obligations of Flagstar under this
Agreement;
e) personal injuries, death or damage to tangible personal or real property
of third parties including employees of Flagstar, its contractors and
subcontractors caused by the negligence or wilful misconduct of
Flagstar; provided that Flagstar will have no obligation, under this
part, to the extent the same arise out of or in connection with the
negligence of ISSC, its Affiliates and subcontractors;
Page 41 of 52
<PAGE>
f) any Claims arising out of or resulting from the operations of the
Flagstar Group, including the remarketing of the Services by Flagstar,
if such Claims do not arise out of a breach of this Agreement by ISSC
and are not the subject of a specific indemnity provided to Flagstar by
ISSC in Section 13.1; provided, however, that Flagstar will have no
obligation under this item, to the extent the Claims arise out of or
result from the negligence or wilful misconduct of ISSC, its Affiliates
and subcontractors;
g) any Claims for a breach of software licenses related to the Services,
committed by the Flagstar Group or any employee of the Flagstar Group
that is not the result of ISSC failing to perform its obligations under
this Agreement including, without limitation, obtaining any Required
Consent for which it has responsibility;
h) any environmental Claim arising out of the Services performed at the
Data Center or the other Flagstar Corporate Facilities or Flagstar
Restaurant locations except to the extent that ISSC or its
subcontractors has caused the environmental damage or violation of the
environmental laws or regulations from which the Claim arises; and
i) any claims by any Affected Employees arising out of or resulting from
their employment with Flagstar.
In the event and to the extent that a Claim is made by an employee of Flagstar
against an ISSC Indemnitee, the Parties agree that Flagstar shall indemnify and
hold harmless the ISSC Indemnitee to the same extent as if the Claim was made by
a non-employee of Flagstar. Flagstar's indemnification hereunder shall be
primary and immediate. Accordingly, in addition to other provisions herein, and
in order to render' the Parties' intent and this indemnification agreement fully
enforceable, Flagstar, in an indemnification Claim hereunder, expressly and
without reservation waives any defense or immunity it may have under any
applicable workers' compensation law(s) or any other statute or judicial
decision disallowing or limiting such indemnification and consents to a cause of
action for indemnity. This waiver and consent to indemnification is made
irrespective of and specifically waiving any defense or immunity under any
statute or judicial decision.
13.3 EMPLOYMENT ACTIONS
It is understood and agreed that ISSC shall be solely and exclusively
responsible for personnel decisions affecting ISSC's employees, contractors and
agents (including without limitation, hiring, promotions, training,
compensation, evaluation, discipline, and discharge). Flagstar shall be solely
and exclusively responsible for personnel decisions affecting Flagstar's
employees, contractors, and agents (including without limitation, hiring,
promotion, training, compensation, evaluation, discipline and discharge).
13.4 EXCLUSIVE REMEDY
The indemnification rights of each Indemnitee and ISSC Indemnitee (individually
an "Indemnified Party") for third party Claims pursuant to Sections 13.1 and
13.2, shall be the sole and exclusive remedy of such Indemnified Party with
respect to each such third party Claim to which such indemnification relates.
13.5 INDEMNIFICATION PROCEDURES
a) Written notice shall be given to the Party that is obligated to provide
indemnification under Sections 13.1 and 13.2 (the "Indemnifying Party"),
if any civil, criminal, administrative or investigative action or
proceeding is commenced or threatened (any of the above being a "Claim")
against any Indemnified Party. Such notice shall be given as promptly as
practicable but in all events, within a period that will not prejudice
the rights of the Indemnified Party under this Agreement or to defend
the Claim. After such notice, if the Indemnifying Party acknowledges in
writing to the Indemnified Party that this Agreement applies with
respect to such Claim, then the Indemnifying Party shall be entitled to
take control of the defense and investigation of such Claim and to
employ and engage attorneys of its sole choice to handle and defend the
Page 42 of 52
<PAGE>
same, at the Indemnifying Party's sole cost and expense. The
Indemnifying Party must deliver written notice of its election of taking
such control of the claim to the Indemnified Party not fewer than ten
(10) days prior to the date on which a response to such Claim is due or
such lesser period as is reasonable given the nature of the Claim and
the notice and response time permitted by law or the facts and
circumstances. The Indemnified Party shall cooperate in all reasonable
respects with the Indemnifying Party and its attorneys in the
investigation, trial, defense and settlement of such Claim and any
appeal arising therefrom. The Indemnified Party may participate in such
investigation, trial, defense and settlement of such Claim and any
appeal arising therefrom, through its attorneys or otherwise, at its own
cost and expense. No settlement of a Claim that involves a remedy other
than the payment of money by the Indemnifying Party shall be entered
into without the consent of the Indemnified Party, which consent will
not be unreasonably withheld.
b) After notice to the Indemnified Party of the Indemnifying Party's
election to assume full control of the defense of any such Claim, the
Indemnifying Party shall not be liable for any legal expenses incurred
thereafter in connection with the defense of that Claim by the
Indemnified Party. If the Indemnifying Party does not promptly assume
full control over and diligently pursue the defense of a Claim as
provided in this Section 13.5, the Indemnified Party shall have the
right to defend, settle or otherwise resolve the Claim in ------------
such manner as it may deem appropriate, at the cost and expense of the
Indemnifying Party, and the Indemnifying Party may participate in such
defense, at its sole cost and expense. In no event shall any settlement
of the Claim require the consent of the Indemnifying Party which consent
shall not be unreasonably withheld.
14. INSURANCE AND RISK OF LOSS
14.1 ISSC INSURANCE
During the Term of this Agreement, ISSC and each ISSC contractor and
subcontractor shall maintain and keep in force, at its own expense, the
following minimum insurance coverages and minimum limits:
a) workers' compensation insurance, with statutory limits as required by
the various laws and regulations applicable to the employees of ISSC or
any ISSC contractor or subcontractor;
b) employer's liability insurance, for employee bodily injuries and deaths,
with a limit of $500,000 each accident;
c) comprehensive or commercial general liability insurance, covering claims
for bodily injury, death and property damage, including premises and
operations, independent contractors, products and completed operations,
personal injury, contractual, and broad-form property damage liability
coverages, with limits as follows: (1) occurrence/aggregate limit of
$1,000,000 for bodily injury, death and property damage each occurrence
of $2,000,000 general aggregate; or (2) split liability limits of (i)
$1,000,000 for bodily injury per person; (ii) $1,000,000 for bodily
injury per occurrence; and (iii) $500,000 for property damage;
d) comprehensive automobile liability insurance, covering owned, non-owned
and hired vehicles, with limits as follows (1) combined single limit of
$500,000 for bodily injury, death and property damage per occurrence; or
(2) split liability limits of (i) $500,000 for bodily injury per person;
(ii) $500,000 for bodily injury per occurrence; and (iii) $250,000 for
property damage; and
e) all-risk property insurance, on a replacement cost basis, covering the
real property of ISSC which ISSC is obligated to insure by this
Agreement. Such real property may include buildings, equipment,
furniture, fixtures and supply inventory.
Page 43 of 52
<PAGE>
All such policies of insurance of ISSC and its contractors and subcontractors
shall provide that the same shall not be canceled nor the coverage modified nor
the limits changed without first giving thirty (30) days prior written notice
thereof to Flagstar. No such cancellation, modification or change shall affect
ISSC's obligation to maintain the insurance coverages required by this
Agreement. Except for workers' compensation insurance, Flagstar shall be named
as an additional insured on all such required policies. All liability insurance
policies shall be written on an "occurrence" policy form. Flagstar shall be
named as loss payee as its interest may appear on the property insurance
policies of ISSC. ISSC shall be responsible for payment of any and all
deductibles from insured claims under its policies of insurance. The coverage
afforded under any insurance policy obtained by ISSC pursuant to this Agreement
shall be primary coverage regardless of whether or not Flagstar has similar
coverage. ISSC or its contractors and subcontractors shall not perform under
this Agreement without the prerequisite insurance and/or self-insurance in
effect. Upon Flagstar's request, ISSC shall provide Flagstar with certificates
of such insurance including renewals thereof. ISSC shall have the right to
self-insure any of the insurance coverages required by this Agreement upon prior
written notification to Flagstar. Unless previously agreed to in writing by
Flagstar, ISSC's contractors and subcontractors shall comply with the insurance
requirements herein. The minimum limits of coverage required by this Agreement
may be satisfied by a combination of primary and excess or umbrella insurance
policies. If ISSC or its contractors or subcontractors shall fail to comply with
any of the insurance requirements herein, upon written notice to ISSC by
Flagstar and a thirty (30) day cure period, Flagstar may, without any obligation
to do so, procure such insurance and ISSC shall pay Flagstar the cost thereof
plus a reasonable administrative fee as designated by Flagstar. The maintenance
of the insurance coverages required under this Agreement shall in no way operate
to limit the liability of ISSC to Flagstar under the provisions of this
Agreement.
14.2 FLAGSTAR INSURANCE
During the Term of this Agreement, Flagstar and each Flagstar contractor and
subcontractor shall maintain and keep in force, at its own expense, the
following minimum insurance coverages and minimum limits:
a) worker's compensation insurance, with statutory limits as required by
the various laws and regulations applicable to the employees of Flagstar
or any Flagstar contractor or subcontractor;
b) employer's liability insurance, for employee bodily injuries and deaths,
with a limit of $500,000 each accident;
c) comprehensive or commercial general liability insurance, covering claims
for bodily injury, death and property damage, including premises and
operations, independent contractors, products and completed operations,
personal injury, contractual, and broad-form property damage liability
coverages, with limits as follows: (1) occurrence/aggregate limit of
$1,000,000 for bodily injury, death and property damage each occurrence
of $2,000,000 general aggregate; or (2) split liability limits of (i)
$1,000,000 for bodily injury per person; (ii) $1,000,000 for bodily
injury per occurrence; and (iii) $500,000 for property damage;
d) comprehensive automobile liability insurance, covering owned, non-owned
and hired vehicles, with limits as follows (1) combined single limit of
$500,000 for bodily injury, death and property damage per occurrence; or
(2) split liability limits of (i) $500,000 for bodily injury per person;
(ii) $500,000 for bodily injury per occurrence; and (iii) $250,000 for
property damage; and
e) all-risk property insurance, on a replacement cost basis, covering the
real property of Flagstar which Flagstar is obligated to insure by this
Agreement. Such real property may include buildings, equipment,
furniture, fixtures and supply inventory.
All such policies of insurance of Flagstar and its contractors and
subcontractors shall provide that the same shall not be canceled nor the
coverage modified nor the limits changed without first giving thirty (30) days
prior written notice thereof to ISSC. No such cancellation, modification or
change shall affect Flagstar's obligation to maintain
Page 44 of 52
<PAGE>
the insurance coverages required by this Agreement. Except for workers'
compensation insurance, ISSC shall be named as an additional insured on all such
required policies. All liability insurance policies shall be written on an
"occurrence" policy form. Flagstar shall be named as loss payee as its interest
may appear on the property insurance policies of Flagstar. Flagstar shall be
responsible for payment of any and all deductible's from insured claims under
its policies of insurance. The coverage afforded under any insurance policy
obtained by Flagstar pursuant to this Agreement shall be primary coverage
regardless of whether or not ISSC has similar coverage. Flagstar or its
contractors and subcontractors shall not perform under this Agreement without
the prerequisite insurance or self insurance in effect. Flagstar shall have the
right to self-insure any of the insurance coverages required by this Agreement
upon prior written notification to ISSC. Unless previously agreed to in writing
by ISSC, Flagstar's contractors and subcontractors shall comply with the
insurance requirements herein. The minimum limits of coverage required by this
Agreement may be satisfied by a combination of primary and excess or umbrella
insurance policies. If Flagstar or its contractors or subcontractors shall fail
to comply with any of the insurance requirements herein, upon written notice to
Flagstar by ISSC and a thirty (30) day cure period, ISSC may, without any
obligation to do so, procure such insurance and Flagstar shall pay ISSC the cost
thereof plus a reasonable administrative fee as designated by ISSC. The
maintenance of the insurance coverages required under this Agreement shall in no
way operate to limit the liability of Flagstar to ISSC under the provisions of
this Agreement.
14.3 RISK OF PROPERTY LOSS
ISSC is responsible for risk of loss of, or damage to, the Software, Machines
and Flagstar Group data in its possession, and Flagstar is responsible for risk
of loss of, or damage to, the Software, Machines and Flagstar Group data in its
possession.
14.4 MUTUAL WAIVER OF SUBROGATION
a) To the extent permitted by law, ISSC, its contractors and subcontractors
hereby waive their rights of subrogation against the Flagstar Group and
their respective directors, officers, employees and agents for any loss
or damage to the ISSC Machines, ISSC Software, and other tangible and
intangible, real and personal property of ISSC, its contractors and
subcontractors resulting from operations in connection with this
Agreement. Each property insurance policy of ISSC, its contractors and
subcontractors shall be endorsed to provide a waiver of any and all
rights of subrogation against the Flagstar Group and their respective
directors, officers, employees and agents for loss resulting from
operations in connection with this Agreement.
b) To the extent permitted by law, Flagstar, its directors, officers,
employees and agents hereby waive their rights of subrogation against
ISSC, its contractors and subcontractors for any loss or damage to the
Flagstar- Provided Hardware, Flagstar Software and other tangible and
intangible, real and personal property of Flagstar, its directors,
officers, employees and agents resulting from operations in connection
with this Agreement. Each property insurance policy of Flagstar shall be
endorsed to provide a waiver of any and all rights of subrogation
against ISSC, its contractors and subcontractors for loss resulting from
operations in connection with this Agreement.
15. MANAGEMENT COMMITTEE/DISPUTE RESOLUTION/CHANGE CONTROL PROCESS
15.1 FLAGSTAR/ISSC MANAGEMENT COMMITTEE
a) The Flagstar and ISSC Project Executives will meet as often as
necessary, but at least monthly, to review the current status of the
Services provided under this Agreement. The topics to be addressed
include, but are not limited to:
Page 45 of 52
<PAGE>
- status of the AD/M Projects
- status of the Schedule N Projects
- review of Schedule J. Baseline utilization and projection of
potential Baseline overruns - review of Performance
Measurements
- identification and prioritization of new projects
- update on process improvements and operational
efficiencies
- other issues, concerns and topics proposed by each Project
Executive
b) A Flagstar/ISSC Management Committee will be established consisting of
two (2) or more representatives from each organization. Management
Committee meetings will be held at least quarterly to address the
specific topics raised by the requirements of the Parties, to include,
but not limited to:
- quarterly reviews of the progress of Schedule N
Projects/Milestones
- quarterly review of performance objectives and
measurements
- quarterly review of Business and Information Systems Plan
against the Services
- advice and direction on technology changes
- resolution of disputes between the Parties
15.2 DISPUTE RESOLUTION PROCEDURES
a) Any dispute between the Parties either with respect to the
interpretation of any provision of this Agreement or with respect to the
performance by ISSC or by Flagstar hereunder shall be resolved as
specified in this Section 15.2.
1) Upon the written request of either Party, each of the Parties
will appoint a designated representative who does not devote
substantially all of his or her time to performance under this
Agreement, whose task it will be to meet for the purpose of
endeavoring to resolve such dispute.
2) The designated representatives shall meet as often as
necessary to gather and furnish to the other Party all
information with respect to the matter in issue which is
appropriate and germane in connection with its resolution.
3) Such representatives shall discuss the problem and negotiate
in good faith in an effort to resolve the dispute without the
necessity of any formal proceeding relating thereto.
4) During the course of such negotiation, all reasonable requests
made by one Party to the other for nonprivileged information
reasonably related to this Agreement, will be honored in order
that each Party may be fully advised of the other Party's
position.
5) The specific format for such discussions will be left to the
discretion of the designated representatives, but may include
the preparation of agreed upon statements of fact or written
statements of position furnished to the other Party.
b) If the designated representatives do not resolve the dispute within
thirty (30) days after the date of receipt by the other Party of a
request to appoint a designated representative as described in Section
15.2(a)(1) (the "Notice"), then the dispute shall be escalated to the
Vice President of Technology of Flagstar and the ISSC Vice President of
Distribution Industry Services, for their review and resolution within
forty-five (45) days after receipt of the dispute for resolution.
Page 46 of 52
<PAGE>
c) If the vice presidents referred to in Section 15.2(b) do not resolve the
dispute within forty-five (45) days after the Notice, then the dispute
shall be escalated to the President of Flagstar and the President of
ISSC, for their review and resolution within sixty (60) days after the
Notice.
d) If the dispute is not resolved by the Parties' Presidents within ninety
(90) days after the Notice, the Parties agree to try in good faith to
resolve the dispute by mediation under the Commercial Mediation Rules of
the American Arbitration Association, before resorting to litigation or
some other dispute resolution procedure.
e) If the dispute is not resolved by mediation within one hundred twenty
(120) days after the Notice, then the Parties may initiate formal
proceedings; however, formal proceedings for the judicial resolution of
any such dispute may not be commenced until the earlier of:
1) the designated representatives concluding in good faith that
amicable resolution through continued negotiation of the
matter in issue does not appear likely; or
2) one hundred twenty (120) days after the Notice; or
3) thirty (30) days before the statute of limitations governing
any cause of action relating to such dispute would expire.
Notwithstanding anything to the contrary in this Section 15.2(e), the
Flagstar/ISSC Management Committee shall have the authority to stay the time
periods set forth in this Section 15.2 upon unanimous vote of its members to
take such action.
f) Notwithstanding any other provision of this Section 15.2, either Party
may resort to court action for injunctive relief at any time if the
dispute resolution processes set forth in this Section would permit or
cause irreparable injury due to delay to such Party or any third party
claiming against such Party.
15.3 CONTINUED PERFORMANCE
The Parties agree to continue performing their respective obligations under this
Agreement while the dispute is being resolved unless and until such obligations
are terminated or expire in accordance with the provisions of this Agreement.
15.4 CHANGE CONTROL PROCESS
This process encompasses the efforts required to establish and maintain a change
control process for activities, processes, provisions and operations under the
Agreement (the "Change Control Process"). The objectives of the Change Control
Process are (i) to review each request for a change to the Agreement to
determine whether such change is appropriate (a "Change Request"), (ii) to
determine whether such change constitutes in-scope Services or New Services,
(iii) to prioritize all Change Requests and (iv) to minimize the risk of
exceeding both time and cost estimates associated with the requested changes by
identifying, documenting, quantifying, controlling, managing and communicating
requested changes and their disposition.
The Change Control Process shall identify the different roles, responsibilities
and actions that shall be followed to implement the changes and the services to
the Agreement.
The Change Control Review Team, chaired by the Flagstar and ISSC Project
Executives or their respective designess, shall be the focal point for all
Change Requests, shall make the initial determination as to whether each Change
Request is "in-scope" or a New Service, shall be responsible for the assessment
of the impact of each Change Request, and shall be the source of direction for
the implementation of each Change Request.
Page 47 of 52
<PAGE>
The Change Control Process shall include, at a minimum:
a. Changes to the Agreement and Services may be requested by
either Party. Since a change may affect the price, schedule or
other terms, both the Flagstar and ISSC Project Executives
must review and approve, in writing, each Change Request
before any Change Request is implemented.
b. The Party proposing a Change Request will write a Change
Request Form ("CRF"), describing the change, the rationale for
the change and the effect that change will have, if completed,
or the impact it will have, if rejected, on the Agreement
and/or the Services.
c. Flagstar's or ISSC's representative, as appropriate, will
review the proposed Change Request. If accepted, the CRF will
be submitted to the other Party for review. If rejected, the
CRF will be returned to the originator along with the reason
for rejection.
d. Flagstar's and ISSC's representatives will weigh the merits of
the proposed Change Request and will decide whether further
study of the Change Request is in order. Approval of a CRF
proposed by Flagstar for further study constitutes
authorization by Flagstar for ISSC to proceed to investigate
the CRF and invoice Flagstar for such costs incurred by ISSC
for resources outside of the Annual Service Charge or beyond
an established Baseline. Approval of a CRF proposed by ISSC
for further study constitutes authorization by the Parties to
further investigate and study the Change Request without
charge to Flagstar.
e. ISSC will present the results of the study to the Flagstar
Project Executive detailing the technical merits, effects on
price, schedule, and impact on other terms, conditions and
modifications that will result from implementation of the
proposed Change Request. The Flagstar Project Executive shall
then either approve or reject the Change Request.
f. Each approved Change Request will be implemented through a
written change authorization and the Agreement, Supplement and
Schedules will be updated to reflect the changes in scope,
price or terms and conditions, as appropriate.
16. GENERAL
16.1 CONTROL OF SERVICES
This Agreement shall not be construed as constituting either Party as partner of
the other or to create any other form of legal association that would impose
liability upon one Party for the act or failure to act of the other or as
providing either Party with the right, power or authority (express or implied)
to create any duty or obligation of the other Party. Each Party shall be
responsible for the management, direction and control of its employees and such
employees shall not be employees of the other Party.
Each Party will submit to the other Party all advertising, written sales
promotion, press releases and other publicity matters relating to this Agreement
in which the other Party's name or mark is mentioned or language from which the
connection of said name or mark may be inferred or implied, and will not publish
or use such advertising, sales promotion, press releases, or publicity matters
without prior written approval of the other Party. However, either Party may
include the other Party's name and a factual description of the work performed
under this Agreement on employee bulletin boards, in its list of references and
in the experience section of proposals to third parties, in internal business
planning documents and in its annual report to stockholders, and whenever
required by reason of legal, accounting or regulatory requirements.
Page 48 of 52
<PAGE>
16.2 ENTIRE AGREEMENT, UPDATES, AMENDMENTS AND MODIFICATIONS
This Agreement including the Supplement and Schedules A through T, constitute
the entire agreement of the Parties with regard to the Services and matters
addressed therein, and all prior agreements, letters, proposals, discussions and
other documents regarding the Services and the matters addressed in this
Agreement (including the Supplement and Schedules) and are superseded and merged
into this Agreement (including the Supplement and Schedules). Updates,
amendments and modifications to this Agreement may not be made orally, but shall
only be made by a written document signed by both Parties. Any terms and
conditions varying from this Agreement (including the Supplement and Schedules)
on any order or written notification from either Party shall not be effective or
binding on the other Party.
16.3 FORCE MAJEURE
a) Neither Party shall be liable for any default or delay in the
performance of its obligations hereunder if and to the extent and while
such default or delay is caused, directly or indirectly, by fire, flood,
earthquake, elements of nature or acts of God, acts of war, terrorism,
riots, civil disorders, rebellions or revolutions in the United States,
strikes, lockouts, or labor difficulties or any other similar cause
beyond the reasonable control of such Party other than strikes,
lockouts, or labor difficulties initiated by such Party's or its
subcontractor's employees; and provided such default or delay could not
have been prevented by reasonable precautions and cannot reasonably be
circumvented by the nonperforming Party through the use of alternate
sources, work-around plans or other means, (individually, each being a
"Force Majeure Event").
b) If a Force Majeure Event occurs, the nonperforming Party will be excused
from any further performance or observance of the obligation(s) so
affected for as long as such circumstances prevail and such Party
continues to use commercially reasonable efforts to recommence
performance or observance whenever and to whatever extent possible
without delay. Any Party so delayed in its performance will immediately
notify the other by telephone and describe at a reasonable level of
detail the circumstances causing such delay (to be confirmed in writing
within twenty-four (24) hours after the inception of such delay).
c) If any Force Majeure Event substantially prevents, hinders, or delays
performance of the Services necessary for the performance of Flagstar's
critical functions for more than fifteen (15) consecutive days, then at
Flagstar's option:
1) Flagstar may procure such Services from an alternate source.
ISSC will directly and timely pay the alternate source the
full amount charged by such alternate source for the provision
of such Services to Flagstar until such time as ISSC is able
to restore the Services and meet the Performance Standards but
in no event for more than one hundred eighty (180) days; or
2) Flagstar may terminate this Agreement as of a date specified
by Flagstar in a written notice of termination to ISSC, and
Flagstar will pay all fees due and payable through the
termination date. If Flagstar elects such termination,
Flagstar shall not be obligated to pay any other termination
or other fees, however described, to ISSC, except fees for
Services Transfer Assistance through the expiration of any
extension period beyond the termination date.
d) This Section 16.3 does not limit or otherwise affect ISSC's obligation
to provide Disaster Recovery Services in accordance with Schedule G. In
the event of a Force Majeure Event affecting Flagstar this Section 16.3
will not limit or otherwise relieve Flagstar's obligation to pay any
monies due ISSC under the terms of this Agreement, except as provided in
Section 16.3(c)(2).
Page 49 of 52
<PAGE>
16.4 NONPERFORMANCE
Except as otherwise provided in this Agreement, to the extent any nonperformance
by either Party of its nonmonetary obligations under this Agreement results from
or is caused by the other Party's failure to perform its obligations under this
Agreement, such nonperformance shall be excused.
16.5 WAIVER
No waiver of any breach of any provision of this Agreement shall constitute a
waiver of any prior, concurrent or subsequent breach of the same or any other
provisions hereof.
16.6 SEVERABILITY
If any provision of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby, and such
provision shall be deemed to be restated to reflect the Parties' original
intentions as nearly as possible in accordance with applicable law(s).
16.7 LIMITATIONS PERIOD UPON TERMINATION
Neither Party may bring an action, regardless of form, arising out of this
Agreement more than three (3) years after the cause of action has arisen or the
date such cause of action was or should have been discovered.
16.8 COUNTERPARTS
This Agreement shall be executed in counterparts. Each such counterpart shall be
an original and together shall constitute but one and the same document.
16.9 GOVERNING LAW
This Agreement shall be governed by the laws of the State of South Carolina as
such laws are applied to contracts which are entered into and performed entirely
within the State of South Carolina. The Parties agree that any lawsuit commenced
by either Party shall be commenced in the appropriate court for Spartanburg
County, South Carolina or the U.S. District Court for the District of South
Carolina, Greenville division. Each of the Parties hereby consents to the
jurisdiction of and service of process from the appropriate court for
Spartanburg County, South Carolina and the U.S. District Court for the District
of South Carolina, Greenville division. Nothing in this Section 16.9 shall be
deemed to further restrict the Parties' procedural or substantive rights,
including but not limited to, the right to seek removal of any action from state
to Federal Court.
16.10 BINDING NATURE AND ASSIGNMENT
This Agreement will be binding on the Parties and their respective successors
and permitted assigns. Except as provided in this Section 16.10, neither Party
may, or will have the power to, assign this Agreement without the prior written
consent of the other, which consent shall not be unreasonably withheld, except
that either Party may assign its rights and obligations under this Agreement to
an Affiliate which expressly assumes such Party's obligations and
responsibilities hereunder, without the approval of the other Party. The
assigning Party shall remain fully liable for and shall not be relieved from the
full performance of all obligations under this Agreement. Any attempted
assignment that does not comply with the terms of this Section 16.10 shall be
null and void. Any Party assigning its rights or obligations to an Affiliate in
accordance with this Agreement shall provide written notice thereof to the other
Party together with a copy of the assignment document, within three (3) business
days of such assignment.
Page 50 of 52
<PAGE>
16.11 NOTICES
a) Under this Agreement whenever one Party is required or permitted to give
notice to the other Party, such notice will be in writing unless
otherwise specifically provided herein and will be deemed given when
delivered in hand, one (1) day after being given to an express courier
with a reliable system for tracking delivery, or five (5) days after the
day of mailing, when mailed by United States mail, registered or
certified mail, return receipt requested, postage prepaid, or when sent
by facsimile and thereafter delivered by one of the foregoing methods of
delivery.
b) Notifications will be addressed as follows:
1) For termination, breach or default, notify:
In the case of ISSC: with a courtesy, but not legally
required, copy to:
ISSC Project Executive ISSC General Counsel
203 E. Main Street Route 1, Box 100
Spartanburg, SC 29319 Somers, New York 10589
Facsimile: _____________ Facsimile: 914-766-8444
In the case of Flagstar: with a courtesy, but not legally
required, copy to:
Flagstar Corporation Flagstar General Counsel
203 E. Main Street Rhonda J. Parish
Spartanburg, SC 29319 203 E. Main Street
Facsimile:_______________ Facsimile: 864-597-8327
2) For all other notices:
In the case of ISSC: In the case of Flagstar:
ISSC Project Executive Honorio Padron
203 E. Main Street CIO, VP Business
Facsimile:_______________ Engineering & Technology
Facsimile: 864-597-8327
Either Party hereto may from time to time change its address for notification
purposes by giving the other prior written notice of the new address and the
date upon which it will become effective.
16.12 NO THIRD PARTY BENEFICIARIES
The Parties do not intend, nor will any Section hereof be interpreted, to create
for any third party beneficiary rights with respect to either of the Parties,
except as specifically provided in Section 13.
16.13 OTHER DOCUMENTS
Upon request of the other Party, on or after the Effective Date and the date(s)
of any amendments or revisions hereto each Party shall furnish to the other such
certificate of its Secretary, certified copy of resolutions of its Board
Page 51 of 52
<PAGE>
of Directors, or opinion of its counsel as shall evidence that this Agreement or
any amendment or revision hereto has been duly executed and delivered on behalf
of such Party.
16.14 CONSENTS AND APPROVALS
The Parties agree that in any instance where consent, approval or agreement is
required of a Party in order for the other Party to perform under or comply with
the terms and conditions of this Agreement, then such Party will not
unreasonably withhold or delay such consent, approval or agreement and where
consent, approval or agreement cannot be provided, the Party shall notify the
other Party in a timely manner.
16.15 HEADINGS
All headings herein and the table of contents are not to be considered in the
construction or interpretation of any provision of this Agreement. This
Agreement was drafted with the joint participation of both Parties and shall be
construed neither against nor in favor of either, but rather in accordance with
the fair meaning thereof. In the event of any apparent conflicts or
inconsistencies between the Agreements, the Schedules or other attachments to
this Agreement, to the extent possible such provisions shall be interpreted so
as to make them consistent, and if such is not possible, the provisions of this
Agreement shall prevail.
16.16 REMARKETING
Flagstar may not remarket all or any portion of the Services provided under this
Agreement, or make all or any portion of the Services available to any party,
without the prior written consent of ISSC; provided, however, Flagstar may sell
or make available to the other entities in the Flagstar Group, the Services
under this Agreement. Flagstar shall independently set its own pricing and
policies in connection with any such disposition of the Services. Nothing herein
may be construed to limit or hinder Flagstar from (i) marketing, selling or
performing its services to and for any other entity in the Flagstar Group and/or
(ii) from providing any portion of the Services to any other entity in the
Flagstar Group.
Page 52 of 52
____________ ___, 1997
Integrated Systems Solutions Corporation
Route 1, Box 100
Somers, New York 10589
Gentlemen:
In consideration of, but subsequent to, the execution and delivery by
ISSC and Flagstar of that certain Information Systems Management Agreement,
dated February 22, 1996 (the "Agreement"), ISSC and Flagstar agree that Schedule
E, Section E-2, attached hereto as Exhibit A is hereby incorporated into the
Agreement by this reference and made a part thereof. In the event of a conflict
between the terms of this letter and the Agreement, this letter shall be
controlling. Please indicate your acceptance of this letter agreement by signing
in the space indicated below.
FLAGSTAR CORPORATION
By:
---------------------------
Title:
-----------------------
Accepted and agreed to ________ ___, 1997.
INTEGRATED SYSTEM SOLUTIONS
CORPORATION
By:
----------------------
Title:
-------------------
<PAGE>
TABLE OF CONTENTS
Page(s)
Section E-1................................................................. 1
I. INTRODUCTION................................................ 1
II. SYSTEMS MANAGEMENT CONTROLS................................. 2
A. As Is Systems...................................... 2
B. To Be Systems...................................... 2
III. DATA CENTER OPERATIONS...................................... 4
A. Operation of Data Center........................... 4
B. Processing Operations.............................. 5
C. Production Control................................. 6
E. Tape Management.................................... 8
F. Data Base Administration........................... 9
G. Output............................................. 10
H. Quality Assurance.................................. 10
I. Emergency Restoration of Services.................. 11
J. Information Security............................... 11
IV. AS IS SYSTEMS............................................... 11
A. General............................................ 11
B. Existing POS Systems............................... 11
V. TO BE SYSTEMS............................................... 12
A. Implementation of Schedule N Projects.............. 13
B. New POS Systems Implementation..................... 13
VI. DATA NETWORK AND VOICE SERVICES............................. 14
A. Network Services................................... 14
B. Network Connectivity and Operations................ 14
C. Network Engineering................................ 16
D. Network Optimization............................... 17
E. Network Management................................. 18
VII. LOCAL AREA NETWORK.......................................... 19
A. LAN Support Services (General)..................... 19
B. LAN Support Services (Specific).................... 20
C. LAN MAC............................................ 21
VIII. HELP DESK................................................... 21
IX. CLIENT TECHNICAL SERVICES................................... 22
A. Client Technical Services.......................... 22
B. Client Technical Services MAC Support ............. 23
X. APPLICATIONS DEVELOPMENT.................................... 24
A. General Deliverables............................... 24
Page i of ii
<PAGE>
Page(s)
B. AD/M Projects...................................... 24
C. Software Maintenance............................... 25
D. Schedule N Projects................................ 26
E. ISSC Responsibilities.............................. 26
F. Flagstar Responsibilities.......................... 29
G. Project Changes.................................... 30
H. Implementation..................................... 30
I. Customization and Enhancements..................... 31
J. Interfaces, Bridges and Data Conversion............ 31
XI. QUALITY ASSURANCE........................................... 31
Page ii of ii
<PAGE>
ISSC / FLAGSTAR CORPORATION
AGREEMENT FOR INFORMATION TECHNOLOGY SERVICES
SCHEDULE E
SUPPORT SERVICES, PERFORMANCE STANDARDS AND
OPERATIONAL RESPONSIBILITIES
SECTION E-1
SUPPORT SERVICES
I. INTRODUCTION
This Section E-1 describes certain duties, obligations and
responsibilities of ISSC, including, but not limited to:
A. Data Center operations and management;
B. Data Network operations and management;
C. Voice Services operations and management;
D. LAN operations and management;
E. Help Desk operations and management;
F. Client Technical Services operations and management;
G. Applications Development;
H. Software Maintenance;
I. Production and quality assurance services;
During the Term, ISSC will continue to provide information processing
services to Flagstar using the Machines, Software, Network and related
Flagstar Corporate Facilities provided by Flagstar and utilized by
Flagstar prior to the Commencement Date to provide services to itself.
The Parties contemplate that ISSC will operate the As Is Systems in the
Flagstar Corporate Facilities "as is," unless otherwise required to
complete the AD/M Projects or the Schedule N Projects or requested by
Flagstar as New Services in accordance with Sections 6.6 and 6.7 of the
Agreement. Therefore, the
Page 1 of 32
<PAGE>
descriptions contained in this Schedule E of specific types of As Is
Systems, and methods and procedures used to perform the Services with
respect thereto, set forth how ISSC will deliver the services Flagstar
performed for itself prior to the Commencement Date. In addition, ISSC
will provide the Schedule N Projects, will operate the To Be Systems
and will provide such other services as requested and approved by
Flagstar during the Term as New Services in accordance with Sections
6.6 and 6.7 of the Agreement.
The Parties agree that the provision of Services should improve over
the Term based on:
1. the migration from the As Is Systems to the To Be
Systems;
2. ISSC's knowledge of, and access to, resources and
technology; and
3. ISSC's implementation of improved methods and
procedures for providing Services, and efficiencies
arising from the use of ISSC as a service provider.
The Parties agree that appropriate implementation details and
procedures for the Services shall be incorporated into the Procedures
Manual. During the Term, the Parties may, in addition to the Schedule N
Projects delivered in accordance with Schedule N, agree on different or
additional Services, Performance Standards and Minimum Service Levels,
and will amend this Schedule E or the Procedures Manual in writing
accordingly.
All capitalized terms not defined in this Section E shall have the
meanings given them in the Agreement, Supplement and other Schedules.
II. SYSTEMS MANAGEMENT CONTROLS
A. AS IS SYSTEMS - With respect to the As Is Systems, ISSC will
utilize existing Flagstar procedures as in use by Flagstar on
the Commencement Date. ISSC will review such existing Flagstar
procedures and may recommend changes in accordance with the
Change Control Process.
B. TO BE SYSTEMS - With respect to the To Be Systems, ISSC will
provide to Flagstar, and Flagstar and ISSC shall mutually
agree on and use the following processes/procedures as the
standard set of disciplines for managing information systems,
the Systems Management Control ("SMC"), for use by ISSC and
Flagstar. The SMC procedures shall be included in the
Procedures Manual. In general, ISSC's SMC responsibilities
shall include the following processes in the Flagstar
Corporate Facilities:
Page 2 of 32
<PAGE>
1. BATCH MANAGEMENT - for controlling production batch
work including the scheduling of resources, the
processing of data and transactions and the
distribution of data/information between Flagstar
Group users and Flagstar Corporate Facilities.
Flagstar's instructions on what, when and how to
schedule and recover shall be provided to ISSC and
included in the Procedures Manual. Setup and
scheduling shall be performed and controlled by ISSC
in accordance with the Procedures Manual and in
accordance with Flagstar's business requirements.
2. CAPACITY MANAGEMENT - for the development and
maintenance of tactical and strategic plans to ensure
that the Flagstar Corporate Facilities and Network
environments accommodate Flagstar's growing or
changing business requirements. The capacity
management procedures will, among other issues,
provide for Flagstar's input and review of capacity
management.
3. CHANGE MANAGEMENT - to assess the impact of the
change, including without limitation, analysis of the
effects of the proposed changes and the
implementation, quality assurance and testing of the
change, to validate the adequacy of the acceptance
test, schedule the promotion from the test
environment, notify the appropriate functions and
verify successful implementation.
4. CONFIGURATION MANAGEMENT - for processing Machines
and Software configuration changes and maintaining
lists and diagrams of System configurations in the
Procedures Manual. ISSC will provide revised
configurations to Flagstar upon Flagstar's reasonable
request.
5. INVENTORY MANAGEMENT - of the Machines (including
incoming and outgoing) in the Flagstar Corporate
Facilities and Network. This activity is to include,
but not be limited to, vendor coordination and
maintenance.
6. ON-LINE MANAGEMENT - for coordinating the appropriate
skills, information, tools and procedures required to
manage on-line connectivity to the Network and their
supporting Machines and Software systems. This
includes the staffing of a Help Desk facility for
support of Flagstar's personnel.
7. PERFORMANCE MANAGEMENT - to monitor, measure, analyze
and report System and Services performance as it
compares to the Performance Standards. Where
warranted, ISSC may request Flagstar to approve
changes to the Applications Software to enable System
performance
Page 3 of 32
<PAGE>
improvement. The performance management procedures
will, among other issues, provide for Flagstar's
input and review of performance management.
8. PROBLEM MANAGEMENT - to identify, record, track, and
correct issues impacting Services delivery, recognize
recurring problems, address procedural issues and
contain or reduce the impact of problems that occur.
9. RECOVERY MANAGEMENT - for planning, establishing and
testing the recovery procedures required to provide
the Services in the event of a failure and
reintegrate Services facilities once the primary
Services location is available again, including
without limitation, a failure giving rise to invoking
the Disaster Recovery services described in Schedule
G. The intent of this process is to anticipate and
minimize the impact of System resource failure
through the development of predefined, documented
procedures and Software/Machine recovery
capabilities. Flagstar's instructions on what and how
to recover shall be provided to ISSC and included in
the Procedures Manual.
III. DATA CENTER OPERATIONS
A. OPERATION OF DATA CENTER
ISSC shall be responsible for the operation and management of
the Data Center throughout the Term, which responsibility
shall include establishing and maintaining a properly trained
and adequately staffed Data Center population, including
necessary management and support staff. The hours of operation
of the Data Center shall be 24 hours per day, 7 days per week,
exclusive of the regularly scheduled twelve (12) hour period
from 11 a.m. through 11 p.m. on Sundays or unless otherwise
agreed by the Parties. ISSC shall perform the Services in
accordance with the Performance Standards and Minimum Service
Levels. However, the Parties agree that the regularly
scheduled weekly maintenance period will not impact ISSC's
performance of the Services in accordance with the Performance
Standards.
In addition, ISSC will manage and optimize the existing
Flagstar contract with Software Maintenance Specialists
("SMS") in La Mirada, California through successful completion
of the migration to the To Be Systems environment.
Page 4 of 32
<PAGE>
B. PROCESSING OPERATIONS
ISSC shall make available, monitor and process on-line and
batch applications, including scheduled, unscheduled and
on-request Services as well as Flagstar Group user initiated
processing. Included in such responsibilitIes, ISSC shall:
1. support the test and production environments;
2. provide computer room operations support and perform
console monitoring activities;
3. provide report generation;
4. install and maintain networking Machines, Software
and LAN interfaces;
5. operate and provide application availability to
present and future Applications Software to support
the operating schedules of Flagstar with applicable
System availability, 24 hours per day, 7 days per
week (subject to Scheduled Downtime);
6. perform all technical System support operations,
including file storage management, system
programming, capacity planning, problem analysis, job
abend/restart processing and performance tuning,
including providing support for the Machines and
Systems Software for the Machines;
7. with the approval of the Flagstar representative
designated by the Flagstar Project Executive,
schedule System maintenance with minimum interference
with the business needs of Flagstar;
8. complete all processing schedules on time and in the
sequence set forth in the Procedures Manual;
9. to the extent reasonably possible, process special
request activities within the requested time frames
and in the sequence defined by Flagstar;
10. monitor job submissions and ensure that these jobs
are successfully completed as time permits in view of
competing production resources;
11. provide reports and/or review meetings regarding the
utilization of the Concept IS, Client Technical
Services, Help Desk and AD/M Baselines as scheduled
or requested by Flagstar;
Page 5 of 32
<PAGE>
12. continuously endeavor to enhance processing
capabilities and efficiencies for the Machines in the
Flagstar Corporate Facilities through System tuning,
regular monitoring of utilization needs and
efficiencies and other run-time improvements and
report on tuning initiatives for the Machines;
13. consistent with the Agreement, operate, support and
maintain third-party services and projects and
products listed in Schedules A, B, C and D; and
14. refresh the Machines in accordance with the time
schedule set forth in Schedule N.
C. PRODUCTION CONTROL
ISSC shall maintain production schedules and cooperate with
Flagstar in responding to special processing requests and new
processing requirements. Included in such responsibilities,
ISSC shall:
1. prioritize and schedule batch jobs and report
distribution systems in accordance with Flagstar's
schedule parameters, including but not limited to,
automated scheduling features in the operating and
Applications Software and Flagstar's specific
directions so on-line Applications dependent on batch
processing and batch process outputs shall be
available as scheduled;
2. distribute and obtain Flagstar's approval for
production control schedules prior to implementation,
as described in the Change Control Process;
3. update the scheduler data base, as required, to
reflect changes to the production environment;
4. monitor scheduler related incidents, and develop and
recommend refinements and revisions to the scheduler
data base;
5. coordinate and modify schedules for special requests,
subject to applicable Performance Standards
attainment relief, and follow Flagstar's priorities
and promptly notify Flagstar if special requirements
shall affect the timely completion of other tasks, so
that Flagstar can adjust the priorities if Flagstar
so desires; and
6. respond expeditiously to requests from Flagstar for
priority job execution.
Page 6 of 32
<PAGE>
D. FILE SERVICES
ISSC shall manage files on the Machines in a manner which
shall ensure the availability and integrity of all Flagstar
data. Included in such responsibilities, ISSC shall:
1. ensure that all files under ISSC's control are
current and available during requested access times;
2. initiate and complete required activities to ensure
the data is processed according to the specifications
set forth in the Procedures Manual and with data
integrity in all processed files;
3. verify the successful receipt of all incoming files
and the successful transmission of all outgoing
files, using the tools existing as of the
Commencement Date, those that are added in the To Be
and/or such other ISSC-provided tools as ISSC deems
necessary, and the procedures set forth in the
Procedures Manual;
4. document, maintain and, as appropriate, update, and
execute mutually approved file back-up and recovery
procedures;
5. provide recovery procedures for restoring the data
image to a previous level within a mutually agreed
amount of time;
6. conduct routine back-up and recovery procedures as
set forth in the Procedures Manual and as prioritized
by Flagstar (e.g., data set restore) so as not to
impact scheduled operations and provide
recommendations to Flagstar regarding back-up and
recovery considerations, such as improved levels of
protections, efficiencies and cost reductions;
7. conduct routine monitoring and corrective action
according to procedures prepared by ISSC and approved
by Flagstar for intermediate files used for on-line
and batch processing;
8. maintain current documentation of all files;
9. ensure that adequate file space is available for
processing;
10. report Flagstar disk space utilization and
requirements for capacity planning purposes and
Flagstar equipment requirements support;
Page 7 of 32
<PAGE>
11. assist and advise Flagstar in utilizing disk storage
resources in an efficient and cost effective manner;
and
12. refresh the disk storage in accordance with the
Schedule N.
E. TAPE MANAGEMENT
ISSC shall provide tape management services. Included in such
responsibilities, ISSC shall:
1. update Flagstar's procedures governing time periods
for retention of tapes, including reasonable periods
for retention of tapes for auditing purposes, as
appropriate and with Flagstar's consent, and include
such procedures in the Procedures Manual;
2. provide logging and tracking of physical tapes in and
out of the Flagstar Corporate Facilities, and provide
required rotation of tapes for off-site vault
storage;
3. establish procedures to log and track physical tapes
that are checked in and checked out to Third Party
Providers (e.g., tapes for Flagstar's vendors) and
Flagstar Group users;
4. store tapes and paper documentation, as appropriate,
at secure off-site vault storage and mark the
retention time on each tape to be stored at secure
off-site vault storage;
5. complete tape mounts in sufficient time to meet
production processing requirements and complete tape
mounts for nonproduction processing;
6. provide tape specifications to ensure tape media is
reliable and read/write errors are kept to a minimum;
7. ensure equipment is properly cleaned and maintained
at the required intervals in accordance with
manufacturers' specifications to minimize problems
and outages;
8. ensure adequate supplies for the tape environment are
maintained and that the scratch tape pool is
sufficient to service all required processing needs;
9. store tapes in the Flagstar Corporate Facilities
storage area;
Page 8 of 32
<PAGE>
10. retrieve archived tapes and restore required files
and data sets within mutually agreed time frames;
11. upon Flagstar's reasonable request, provide Flagstar
with the right to, and access to, monitor tape
management operations, mailing and receipt control;
12. report tape utilization; and
13. refresh the tape storage devices in accordance with
Schedule N.
F. DATA BASE ADMINISTRATION
ISSC shall be responsible for managing the Flagstar and
Flagstar Group user data and the data base environment.
Included in such responsibilities, ISSC shall:
1. with respect to As Is Systems and To Be Systems,
perform all logical and physical data base management
system ("DBMS") data base control functions
including, but not limited to:
a. allocating physical DBMS data base files;
b. performing all logical and physical DBMS
data base functions to support the current
As Is Systems and the planned To Be Systems,
if any; and
c. performing data base tuning and
reorganization as reasonably required to
maintain System performance requirements;
d. performing logical data base design for
Schedule N and AD/M Projects and reviewing
designs with Flagstar on a regular basis for
Flagstar's comment and approval;
2. plan for changes in the size of data bases due to
business growth, Schedule N Projects and other AD/M
Projects, and review plans with Flagstar on a regular
basis for Flagstar's comment and approval;
3. provide test data base environments for Schedule N
Projects and AD/M Projects that are separate from the
production data base environment;
4. provide data base support for current data base
environments and those established by ISSC;
Page 9 of 32
<PAGE>
5. maintain the physical data base design, create
indices and make recommendations on practical methods
to optimize Applications performance;
6. monitor data base performance and data base space
utilization;
7. maintain or implement data base archive processes and
procedures to meet Flagstar's business requirements
and recover from a data base outage or corrupted data
base within mutually agreed time frames as set forth
in the Procedures Manual;
8. maintain data base definitions and make data base
definitions for Schedule N Projects, AD/M Projects
and other definition, as needed, and make such
definitions available to Flagstar upon request; and
9. test and implement data base environment changes.
G. OUTPUT
ISSC shall provide output device processing and operational
support necessary to accomplish such processing including
production and delivery of fiche, optical print, files and
tape. ISSC shall:
1. produce output on time and within established
Performance Standards;
2. track, manage, communicate and resolve all problems
related to output Services;
3. separate and package all output and ensure that it is
properly distributed to the mutually agreed to
distribution drop point in the Flagstar Corporate
Facilities within the required time frames;
4. work with Flagstar personnel to find, trace or
replace lost or missing items using ISSC monitoring
tools and take appropriate action in accordance with
the Procedures Manual; and
5. execute reruns of output requested by Flagstar and
notify Flagstar if rerunning any output shall impact
scheduled on-line or batch production processing.
H. QUALITY ASSURANCE
Page 10 of 32
<PAGE>
ISSC shall be responsible for providing and implementing
quality assurance processes and procedures that are reasonably
necessary to ensure ISSC's responsibilities are executed
accurately, efficiently and in a timely manner. Subject to the
foregoing, the parties shall mutually agree upon terms and
conditions for conducting checkpoint reviews. These procedures
shall be included in the Procedures Manual.
I. EMERGENCY RESTORATION OF SERVICES
ISSC shall invoke the Disaster Recovery Plan, and provide
Disaster Recovery planning in accordance with Schedule G.
J. INFORMATION SECURITY
ISSC shall use existing security access control tools for
data, data bases and other information repositories and for
Applications, operating systems and libraries as described in
Schedule L.
IV. AS IS SYSTEMS
A. GENERAL
From the Commencement Date through the date of completion of
the cutover to production of each Schedule N Project, ISSC
shall operate the As IS Systems to be replaced by such
Schedule N Project and perform the support and management
functions related thereto and currently performed by Flagstar.
As more specifically described in this Section E-1 and Section
E-3 of this Schedule E, ISSC's responsibilities shall include
without limitation, the provision of the services, functions
and responsibilities performed by the Affected Employees and
the Third Party Providers performing services under Third
Party Agreements prior to the Commencement Date that are
related to the delivery of the As Is Systems until the
production cutover date of the applicable replacement Schedule
N Project, and writing and implementing Software code to
interface the As Is Systems to the Schedule N Projects.
B. EXISTING POS SYSTEMS
ISSC shall act as Flagstar's agent to provide support and
maintenance Services for the Flagstar Restaurants. Included in
such responsibilities, ISSC shall provide support services for
the Existing POS Systems through the ISSC Help Desk and shall
provide Polling in accordance with the Procedures Manual
through the cutover date for the Schedule N Project for
point-of-sale Services.
Page 11 of 32
<PAGE>
Included in such responsibilities ISSC shall provide support,
maintenance and Polling services for the Flagstar Restaurants
listed in Schedule I, and described in Schedules M, N and P
and Procedures Manual. Included in such responsibilities, ISSC
shall:
1. provide Polling in accordance with the Procedures
Manual, as follows:
a. invoking and monitoring daily Polling to the
Flagstar Restaurants,
b. performing menu down-loads and other file
transfers of information for the Flagstar
Restaurants consistent with current Flagstar
procedures on a mutually agreed schedule,
c. performing remote diagnostic support of
Flagstar Restaurants, and
d. performing manual intervention for
restaurants not successfully Polled per the
processes described in the Procedures
Manual;
2. provide single-point-of-contact via the ISSC Help
Desk for problem reporting and resolution (7 days per
week, 24 hours per day);
3. provide the maintenance for the Existing POS System,
exclusive of the Wiring installed at the Flagstar
Restaurants, consistent with the maintenance strategy
used by Flagstar prior to the Commencement Date to
include, but not be limited to, the following;
a. providing Level One, Two and Three Support
for problem isolation and resolution for POS
Machines, exclusive of wiring
b. provide Level One, Two and Three Support for
problem isolation and resolution for POS
Software and connections, and
c. providing on-site maintenance in accordance
with Schedule P and the third party vendor
POS Machines maintenance contracts listed in
Section F-3 of Schedule F; and
4. handle maintenance requests in accordance with
Flagstar's prioritization procedures.
V. TO BE SYSTEMS
Page 12 of 32
<PAGE>
A. IMPLEMENTATION OF SCHEDULE N PROJECTS
ISSC shall implement each Schedule N Project in accordance
with Schedule N. ISSC shall assume responsibility for the
management and operation of the integration of each Schedule N
Project into ISSC's on-going operational Services
responsibilities for the To Be Systems as described in
Schedules E and N.
ISSC will implement the Schedule N Projects and use, operate,
manage and support the Schedule N Projects and all related
functions described in the Agreement, including without
limitation the operational, network, tape/optical, technical
support services, production services, data base services and
Software services. ISSC will provide management and support
for the Software including without limitation performing all
services, functions, and responsibilities regarding the
necessary maintenance and enhancements required to perform the
Services. During the Term, ISSC will perform its
responsibilities with respect to the transition of the As Is
Systems, AD/M Projects and Schedule N Projects to the To Be
Systems to ensure the interoperability of all Machines and
Software.
B. NEW POS SYSTEMS IMPLEMENTATION
Flagstar shall operate the New POS Systems in the Flagstar
Restaurants. ISSC shall assume responsibility for the
management and operation of the integration of the New POS
Systems with the other Services operations in the Flagstar
Restaurants and Flagstar Corporate Facilities as described in
Schedules E and N and for the replacement of all Existing POS
Systems and the upgrade, replacement and addition of
Applications and System Software for the New POS System in
accordance with Schedule N, including without limitation:
1. disconnecting installed POS Machines for the Existing
POS System and preparing same for shipment at
Flagstar's request;
2. providing single-point-of-contact via the ISSC Help
Desk for problem reporting and host System status;
3. providing maintenance for the New POS Machines,
Software, Cabling and connections to the Flagstar
Corporate Facilities' wiring installed at the
Flagstar Restaurants to include, but not be limited
to, the following;
a. providing Level One, Two and Three Support
for problem isolation and resolution for POS
Machines,
Page 13 of 32
<PAGE>
b. providing Level One, Level Two and Level
Three Support for problem isolation and
resolution for POS Software and connections,
and
c. handling maintenance requests in accordance
with Flagstar's prioritization procedures.
VI. DATA NETWORK AND VOICE SERVICES
A. NETWORK SERVICES
ISSC's responsibilities shall include administering, at
Flagstar's request, the procurement of, and directing the
engineering, installation, operation, maintenance, and
management of the Data Network and Voice Services as needed to
support Network operational requirements, subject to the
provisions of the Agreement. Using information provided by
ISSC, Flagstar is responsible for negotiating the terms and
conditions of the KKR Agreement and the CIO Agreement. In
addition, using the tools available to Flagstar prior to the
Commencement Date (or similar tools and techniques), ISSC
shall monitor, to the extent capable of being monitored, the
Flagstar End User Machines, if necessary to determine whether
Network problems are caused by such devices, in which case
ISSC shall initiate the appropriate support process(es).
Network Services are defined as all the dial and leased line
services provided as of the Commencement Date including,
without limitation, those provided at Flagstar Corporate
Facilities, dial telephone services at Flagstar Restaurants
and Flagstar remote office sites necessary for telephone
communications, and POS data polling to and from Flagstar
Restaurants. Network Services include without limitation
administering, MACs for telephone hardware and circuits
required for capacity at Flagstar Corporate Facilities and
Flagstar Restaurants, new Flagstar Restaurants and Flagstar
remote office locations, or reconfigure existing telephone
systems at concept sites.
B. NETWORK CONNECTIVITY AND OPERATIONS
ISSC shall manage and maintain the dial and leased circuit
bandwidth as of the Commencement Date, necessary to deliver
the Services and to meet the Performance Standards, and shall
assume responsibility for the operation of the Network,
including Network management and monitoring as currently
performed by Flagstar, including without limitation, common
carrier access management, equipment design, circuit ordering,
maintenance, and problem prevention,
Page 14 of 32
<PAGE>
identification and resolution. Included in such
responsibilities, ISSC shall perform the following functions
related to Network connectivity and operations for the Data
Network and Voice Services locations listed in Schedule I and
as described in the Topology and Connectivity diagrams in
Exhibits I-1 and I-2 and as updated during the verification
and validation period described in Section 2.3 of the
Agreement.
1. provide, manage, monitor and maintain connectivity
between the Data Center and the Data Network and
Voice Services locations necessary for the
performance of the Services and to meet the
Performance Standards;
2. maintain the Network bandwidth, Network Availability
and Network response times, necessary to deliver the
Services and to meet the Performance Standards;
3. upon Flagstar's request, reallocate the dial and
leased circuit bandwidth provided that if such
reallocation impacts ISSC's ability to provide the
Services, ISSC shall notify Flagstar of the impact
and, if Flagstar decides to proceed, then ISSC shall
be relieved of the affected Performance Standards;
4. maintain Network availability in accordance with the
Performance Standards set forth in this Schedule E;
5. oversee installation and maintenance of Network
circuits and equipment to meet the Performance
Standards;
6. provide cost estimates as required by the Change
Control Process for all costs separately chargeable
to Flagstar;
7. where possible, perform changes to the Network, in
accordance with the Change Control Process, on an
expedited basis at Flagstar's request;
8. schedule Network outages related to installation and
maintenance during off-peak hours, as approved in
advance by Flagstar, and/or as described in the
Procedures Manual;
9. request management functions and equipment order
pre-approval not less than two (2) business days
prior to time required to ensure no delay to Flagstar
operations;
10. serve as a single-point-of-contact for all Network
needs;
Page 15 of 32
<PAGE>
11. coordinate with inter-exchange carriers to provide
connectivity and maintain the Performance Standards
and interface with third party services providers;
12. identify and resolve problems on the Network through
the use of problem management and escalation
procedures set forth in the Procedures Manual;
13. provide MAC for the telephone equipment at Flagstar
Corporate Facilities, using the resources set forth
under the Client Technical Services Baseline
specified in the Supplement and described in Schedule
J or, through Third Party Agreements in effect as of
the Commencement Date, as follows;
a. handle MAC requests on a first-in-first-out
basis unless otherwise prioritized by
Flagstar;
b. provide on-site MAC during normal business
hours, Monday through Friday at Flagstar
Corporate Facilities, unless otherwise
agreed by the Parties pursuant to the Change
Control Process;
14. provide MAC for the PBX at Flagstar Corporate
Facilities, using the resources set forth under the
Client Technical Services Baseline specified in the
Supplement and described in Schedule J or, through
Third Party Agreements in effect as of the
Commencement Date, as follows;
a. handle MAC requests on a first-in-first-out
basis unless otherwise prioritized by
Flagstar;
b. provide on-site MAC during normal business
hours, Monday through Friday at Flagstar
Corporate Facilities, unless otherwise
agreed by the Parties pursuant to the Change
Control Process;
15. manage Third Party Agreement provided software
upgrades, replacements or new software on the PBXs at
Flagstar Corporate Facilities through Third Party
Agreements in effect as of the Commencement Date; and
16. As Is Systems and To Be Systems will be supported by
ISSC with the Client Technical Services Baseline and
in the same manner as is currently done, or as
required for the AD/M Projects and Schedule N
Projects.
C. NETWORK ENGINEERING
Page 16 of 32
<PAGE>
ISSC shall perform support Services as currently performed by
Flagstar as of the Commencement Date related to Network
engineering for the Data Network and Voice Services locations.
Included in such responsibilities, ISSC shall:
1. perform Network design activities, including
recommending Flagstar Network design criteria and
standards;
2. manage the capacity and configuration of the Network
and maintain and deliver to Flagstar lists of any
additions to the Machine inventories and changes to
circuit diagrams, lists, and other Network
documentation and information through the Change
Control Process, but not less than once per quarter
or otherwise as reasonably requested by Flagstar, and
provide revised/updated lists and documentation to
Flagstar at least twice a year;
3. perform engineering functions related to Network
optimization;
4. perform engineering functions related to ordering,
upgrading, and installing Network circuits, systems
and equipment;
5. evaluate and verify that Network, terminal, and
interface equipment is suitable for its intended use;
6. conduct site surveys, as appropriate, and as
currently performed by Flagstar as of the
Commencement Date; and
7. develop acceptance procedures for installation and
changes to the Network and for verifying restoration
of services following problems with Network circuits
or equipment and include such procedures in the
Procedures Manual according to the following:
a. the acceptance procedures shall use
objective and demonstrable criteria for
verifying compliance with performance
specifications and applicable criteria; and
b. as specified in the Procedures Manual, Data
Network and Voice Services, including but
not limited to circuits or Machines shall
not be deemed to be accepted until after
ISSC has notified Flagstar that the
installation change, or restoration has
successfully passed ISSC's testing that has
been mutually agreed to by both Parties.
D. NETWORK OPTIMIZATION
Page 17 of 32
<PAGE>
ISSC shall research and evaluate on an on-going basis during
the Term, means for optimizing the cost effectiveness and the
performance efficiency and effectiveness of the Network as it
relates to data line charges and other costs chargeable to
Flagstar including analyzing rates and packages offered by
communications common carriers. ISSC shall promptly in
accordance with the Change Control Process advise Flagstar of
any cost savings to Flagstar that can be realized by making
changes to the Network that do not involve New Services or
Replacement Services and ISSC shall implement such changes as
requested by Flagstar. ISSC shall identify possible product
and enhancement opportunities for improved performance, and
notify Flagstar of these opportunities in accordance with the
Change Control Process, as appropriate. ISSC shall make
recommendations to Flagstar as to applications or other
methods to optimize the efficiency and effectiveness of
Flagstar's Network.
E. NETWORK MANAGEMENT
ISSC's Network Management operations Level 1 will:
1. monitor and control systems to ensure resources are
allocated in the standard configurations and take
appropriate actions in a timely and accurate manner;
2. determine system configurations and operating
instructions and monitor Network operations and
report any failures;
3. monitor and control the Network on-line services in
accordance with the availability schedule;
4. answer and respond to telephone inquiries and
requests and immediately refer complex issues or
problems to the appropriate Level Two support
organization;
5. assist Level Two Support personnel, as requested,
with problem determination and resolution and
escalate in accordance with procedures as specified
in the Procedures Manual; and
6. log and record all Network Software, equipment and
operations failures.
Page 18 of 32
<PAGE>
VII. LOCAL AREA NETWORK
ISSC shall perform LAN support at Flagstar Corporate Facilities using
the resources set forth under the Client Technical Services Baseline
specified in the Supplement and described in Schedule J.
A. LAN SUPPORT SERVICES (GENERAL)
ISSC shall:
1. manage the LAN and LAN functions;
2. operate the LAN servers and monitors at Flagstar
Corporate Facilities;
3. evaluate new and emerging LAN technologies and
provide support to Flagstar technology planning
activities;
4. perform LAN design and tactical planning;
5. set-up hardware/software for the LAN to include hubs,
bridges, routers and servers;
6. provide Levels One, Two and Three Support for
hardware and software problem isolation and
resolution in the LAN;
7. provide single-point-of-contact via the help desk for
problem reporting and MAC requests;
8. perform MACs for the LAN;
9. perform capacity and utilization planning and
monitoring, security, back- up, recovery and
notification to authorized Flagstar users regarding
changes to the LAN environment and access procedures;
10. set-up hardware and software for the LAN resource
management, monitoring and control platform; and
11. monitor LANs for availability and utilization.
Page 19 of 32
<PAGE>
B. LAN SUPPORT SERVICES (SPECIFIC)
Examples of specific current Flagstar LAN responsibilities
which will be taken over by ISSC include:
1. maintain backups of user and system data of critical
file servers;
2. maintain mail gateways;
3. maintain dial up gateways (including but not limited
to cc:Mail, Notes, Mainframe, Netware Connect);
4. installation, setup and maintain all Network related
equipment, including without limitation, all file
servers, Network routers that comprise the Flagstar
Network;
5. topology (cabling) of LANs;
6. install, setup and maintain Network peripherals
(including but not limited to CD ROMs, printers,
distributed sniffers);
7. diagnostic troubleshooting and analysis of network
(sniffers);
8. setup and configuration of Flagstar Group user, and
vendor software;
9. reporting of hardware and software existence and use
on LAN;
10. research and testing of new technologies relevant to
network (including but not limited to, Web Server,
Novell 4.x, Notes, Ether switches);
11. handle problem logs from help desk and user requests;
12. maintain UNIX HP servers;
13. implement security on all levels of Flagstar network;
14. configure Flagstar managements laptops;
15. support PC to mainframe (XCOM) file transfers.
Page 20 of 32
<PAGE>
C. LAN MAC
ISSC shall perform MACs and maintenance for the LAN hardware,
software and connections using the resources set forth under
the Client Technical Services Baseline specified in the
Supplement and described in Schedule J. These resources
shall:
1. perform Levels One, Two and Three Support maintenance
for the LAN hardware, Software, Cabling and
connections to the Flagstar Network using the
maintenance components or replacement Software
provided by Flagstar;
2. provide Software Maintenance for the Network
Software;
3. contact and coordinate problem resolution with the
Level Two and Three Third Party Agreement vendors for
hardware and software;
4. perform MACs for the LAN hardware, software, Cabling
and connections to the Flagstar Network using the
upgrades to, replacements for or new equipment,
Cables and software provided as stated in the
Agreement;
5. handle MAC and maintenance requests on a
first-in-first-out basis unless otherwise prioritized
by Flagstar;
6. provide on-site MAC and maintenance during normal
business hours, Monday through Friday at the Flagstar
Corporate Facilities unless otherwise agreed to by
the Parties ;
7. manage the mutually agreed to Flagstar consigned
inventory of maintenance components and replacement
LAN equipment and LAN software in a Flagstar supplied
secure area and notify Flagstar on a periodic, or as
needed, basis of inventory status and requirements;
and
8. advise Flagstar of discontinued LAN equipment and LAN
software packages that ISSC will require for
maintenance inventory prior to Flagstar disposition
of same.
VIII. HELP DESK
ISSC will provide Help Desk to Flagstar Group users of the Services in
accordance with Schedule M.
Page 21 of 32
<PAGE>
IX. CLIENT TECHNICAL SERVICES
A. CLIENT TECHNICAL SERVICES
As of the Commencement Date, ISSC shall provide support to
Flagstar Group users, and perform the support and management
functions related thereto currently performed by Flagstar (the
"CLIENT TECHNICAL SERVICES"). ISSC's responsibilities include,
without limitation, the provision of the Client Technical
Services, functions and responsibilities performed by the
Affected Employees and Third Party Providers prior to the
Commencement Date.
ISSC shall perform Client Technical Services support services
for Flagstar Group users located at Flagstar locations using
the resources set forth under the Client Technical Services
Baseline specified in the Supplement and described in Schedule
J. Included in such responsibilities, ISSC shall:
1. research configuration, determine need, procure,
set-up, manage and maintain End User Machines and
Software to include;
a. assembly of End User Machine components,
including Cabling and connection to the
Flagstar Corporate Facilities' wiring,
b. installation and configuration of End User
Machine operating Systems Software,
c. installation and configuration of
communications and emulation Software, and
d. installation and configuration of mutually
agreed business and productivity Software,
e. develop procedures/checklist for installing
hardware and software to insure accuracy and
client satisfaction;
f. develop new product implementation plans;
g. repair data used on End User Machines;
2. update LAN client Software resident on End User
Machines connected to the LAN;
Page 22 of 32
<PAGE>
3. provide single-point-of-contact via the Help Desk for
Client Technical Services problem reporting, MAC
requests and host System status; AND
4. provide Level One and Level Two Support and contact
and coordinate problem resolution with the Level
Three Third Party Agreement vendor for End User
Machines and Software, Cabling and connections to the
Flagstar Corporate Facilities wiring, problem
isolation and resolution for End User Machines.
5. assist with 3B2-400 and Ascend (backup dial
connection for SMS) testing;
6. inventory and support of gateways and controllers;
and
7. research current trends in technology.
B. CLIENT TECHNICAL SERVICES MAC SUPPORT
ISSC shall perform Client Technical Services MACs and
maintenance for the End User Machines, Software and
connections using the resources set forth under the Client
Technical Services Baseline specified in the Supplement and
described in Schedule J. These resources shall:
1. handle Client Technical Services MAC requests in
accordance with Flagstar's prioritization procedures;
2. perform Client Technical Services MACs for the End
User Machines, Software, Cabling and connections to
the Flagstar Corporate Facilities Wiring;
3. provide on-site Client Technical Services MAC during
normal business hours, Monday through Friday, at the
Flagstar Corporate Facilities pursuant to Schedule J,
unless otherwise agreed by the Parties according to
the Change Control Process in accordance with the
Performance Standards and Minimum Service Levels;
Page 23 of 32
<PAGE>
X. APPLICATIONS DEVELOPMENT
A. GENERAL DELIVERABLES
For each AD/M Project, ISSC will develop and provide to
Flagstar for its review and approval the following
Deliverables:
1. Business Impact and Work Plan - ISSC will deliver
work plans for each of the AD/M Projects, including
physical and logical data base design, programming
design, and delivery schedules.
2. Test Plan - ISSC will deliver a test plan for each
AD/M Project that will describe the test(s) (if
appropriate) and will include acceptance criteria as
provided by Flagstar adequate to demonstrate that the
Deliverables under each AD/M Project perform in
accordance with the agreed to specifications and
provide the required functions specified for the
Deliverables for such AD/M Project.
3. Delivered Software - ISSC will prepare a list of the
Software to be developed in connection with each AD/M
Project.
4. Delivered Machine and Network Configuration - ISSC
will deliver a diagram of the Machines and Network
configuration applicable to each AD/M Project.
5. Documented Processes - As part of the AD/M Projects
performed by ISSC under this Agreement, ISSC will
develop mutually agreed to management, operations,
maintenance and support processes for the day-to-day
production operating environments for such projects
prior to promoting such projects to production.
B. AD/M PROJECTS
For each AD/M Project ISSC shall perform Applications
Development and Software Maintenance on the Software specified
on Schedules A and B as required to provide the Services and
meet the Performance Standards, in accordance with this
Agreement and as described below using the AD/M Baseline
resources specified in the Supplement and Schedule J.
1. APPLICATIONS DEVELOPMENT
Page 24 of 32
<PAGE>
ISSC shall perform AD/M Projects for Flagstar at
Flagstar's request, in accordance with the
Applications Development Methodology defined as the
application software development life cycle described
in the Procedures Manual. For each AD/M Project, both
Parties shall designate a single-point-of-contact
with decision-making authority to whom Flagstar may
communicate Flagstar's requirements and give its
approvals and from whom ISSC and Flagstar may obtain
information, as applicable. ISSC shall utilize the
Change Control Process to the extent appropriate
based on the scope of work and the complexity of the
Deliverables to be provided under such AD/M Project
to ensure that the AD/M Projects are using resources
efficiently and that Deliverables are generated in a
timely manner. ISSC shall update Flagstar on the
status of each AD/M Project according to a time
schedule mutually agreed to by the Parties, depending
on the criticality of the particular AD/M Project,
and shall provide Flagstar with such additional
information at a level of detail to be mutually
agreed upon, as Flagstar may reasonably request. ISSC
shall immediately notify Flagstar of AD/M Project
delays which could impact any established time
frames.
ISSC will meet or exceed the Application Development
and Software Maintenance project Performance
Standards mutually agreed by the parties from time to
time.
C. SOFTWARE MAINTENANCE
1. Scope of Software Maintenance Coverage
a. ISSC will provide Software Maintenance for
Software:
1) listed in Schedules A and B;
2) added under Schedule N Projects; and
3) added under New Services.
b. ISSC will employ a Software Maintenance
methodology described in the Procedures
Manual, including standards for work plans,
design and programming, as set forth in the
Procedures Manual.
2. Off-hours Support
Page 25 of 32
<PAGE>
ISSC will provide on-call technical support and
after-hours coverage for each Software product that
executes or is used by Flagstar during after-hours
times. The ISSC Help Desk will maintain phone lists
and escalation procedures for ISSC's on-call support.
3. Other
ISSC will provide Software support and maintenance,
in addition to that specified above, as described in
the Agreement and other Sections of this Schedule E.
D. SCHEDULE N PROJECTS
ISSC shall deliver the Schedule N Projects in accordance with
Schedule N. ISSC shall provide the Applications Development
and Software Maintenance resources required to complete ISSC's
responsibilities as set forth in Schedule N.
ISSC's performance of the Schedule N Projects shall be
performed in accordance with the time schedule set forth in
Schedule N. ISSC will procure and deliver to Flagstar the
hardware, software, documentation, and services specified as
"DELIVERABLES" for each of the Schedule N Projects. ISSC will
provide the installation and implementation services described
therein to complete each of the Schedule N Projects. Any
future Application Development and Maintenance Projects for
which ISSC will be responsible for project management, design,
testing, documentation, implementation, training, etc., will
be described in Schedule N from time to time.
ISSC's delivery of the Schedule N Projects will include the
deliverables described in Section X.A covering the scope of
work including without limitation a description of the
applicable required functions as determined by Flagstar, the
Parties' respective responsibilities, the Deliverables to be
provided and the acceptance criteria as provided by Flagstar
for each and other term and conditions or requirements
specific to the delivery to Flagstar of the required functions
and the successful completion of each Schedule N Project.
E. ISSC RESPONSIBILITIES
ISSC will perform the following as part of the
Services under the Agreement:
Page 26 of 32
<PAGE>
a. BACKLOG MANAGEMENT - collecting, tracking,
reporting, and aging work requests, and
responding to priorities for those requests
as established by Flagstar.
b. WORK MANAGEMENT - organizing, planning,
tracking and reporting tasks associated with
AD/M Projects.
c. PROJECT MANAGEMENT - selecting and
implementing a mutually agreed to standard
Applications Development Methodology which
will facilitate the planning, tracking, and
reporting of activities required for the
successful completion of AD/M Projects
tasks.
d. RELEASE MANAGEMENT - selecting and
organizing work requests in logical units
and the planning, tracking, and reporting of
the work.
e. ESTIMATING/PLANNING/SCHEDULING -
establishing procedures and supporting tools
which will aid members of AD/M Projects
teams and owners, users, and members of
support staffs to improve the accuracy and
consistency of their estimates, plans, and
schedules and to compare them with actual
results so that the procedures can be
refined over time.
f. RISK MANAGEMENT - identifying the risks
associated with AD/M Projects and developing
detailed plans to manage and contain those
risks.
g. DEPENDENCY MANAGEMENT - identifying other
AD/M Projects which may have impacts on the
current AD/M Projects and developing
detailed plans to manage those dependencies.
h. SKILLS PLANNING/SKILLS BALANCING - planning
for education and training of ISSC personnel
for current and anticipated AD/M Projects
and balancing those skills across AD/M
Projects and efficiently and effectively.
i. TECHNICAL VITALITY - making appropriate,
prudent investments in training, education,
and job experiences for ISSC employees to
allow them to stay current with advances in
their professions and to take creative,
innovative approaches to their work.
Page 27 of 32
<PAGE>
j. TOOLS/TECHNIQUES/METHODS - evaluating,
selecting, and acquiring tools, techniques,
and methods for the staff and maintaining an
inventory of them for use by all ISSC staff
members.
k. ASSURANCE - establishing and maintaining
procedures and standards for AD/M Project
Deliverables. Assurance activities include
the following:
1) Technical reviews that may be formal
or informal and are carried out by
members of the AD/M Project or
release team with the assistance of
experts, when appropriate.
2) Project reviews that are carried out
on a schedule which is appropriate
for the AD/M Projects' scope,
complexity, cost, or risk.
3) Inspections/walk-throughs that are
carried out for AD/M Projects
Deliverables such as requirements
and design documents, code, test
plans, and test results as well as
AD/M Projects plans.
4) Joint application requirements and
joint application design sessions
("JARS" and "JADS") that are carried
out by members of the AD/M Project
team and Flagstar Group user
representatives selected by Flagstar
to ensure the completeness,
accuracy, and appropriateness of
Application requirements and design
early in the AD/M Project cycle.
5) Usability assessments that are
carried out for new Applications and
for major enhancements to existing
Applications to establish usability
objectives for the Applications in
areas such as ease of learning and
ease of use and to measure the
results.
6) Process assurance that includes
periodic assessments of standards
and Applications Development
Methodologies in terms of their
currency and appropriateness in the
light of what was learned from
completed AD/M Project.
7) ISSC personnel will create the test
cases and conduct user acceptance
tests with criteria provided by
Flagstar for all Application
changes.
Page 28 of 32
<PAGE>
l. STATUS/TRENDS - ISSC and Flagstar will work
together in the first 60 days to establish
agreed upon measures to manage AD/M Baseline
personnel, quality, results and budget
management.
F. FLAGSTAR RESPONSIBILITIES
Flagstar will be responsible for the activities
described in this clause and will maintain
appropriate levels of skilled personnel to perform
these activities throughout the term of the
Agreement.
a. Identifying opportunities for improvement
within the current and Schedule N
Application set including documenting and
prioritizing activities.
b. Prioritizing work requests, managing the
work groups and subcommittees of Flagstar
Group users, aligning the work requests with
the tactical and strategic goals of Flagstar
and its commitments to its customers as well
as resource and budget constraints and
ensuring that Flagstar's information systems
investments are appropriate.
c. Providing timely notification of all
governmental and regulatory changes to ISSC
in the form of work requests and including
ISSC in planning activities for
corporate-sponsored work requests which may
be undertaken in support of Flagstar or its
customers in other plans.
d. Participating in working sessions with ISSC
to establish task plans for work items which
will be carried out by Flagstar personnel,
including those tasks in a master plan for
the AD/M Project or release, and reporting
progress against the plan in a timely and
accurate manner.
e. Participating in the development of detailed
requirements and design for applications
during JARs and JADs for all AD/M Projects.
f. ISSC and Flagstar will create functional
test criteria will be developed for all AD/M
Projects and changes that will be described
in business terms so that user acceptance
tests can be conducted.
Page 29 of 32
<PAGE>
g. Before the change is introduced into the
production environment, Flagstar will
certify that the business function delivered
will meet the requirements established in
the work request.
h. Flagstar personnel will participate in
reviews of completed AD/M Projects and
releases and in periodic reviews of
installed Applications and assess the
completeness and accuracy of the business
function provided, the adherence to
established business controls, and the
audibility of the Applications.
G. PROJECT CHANGES
Flagstar may request that ISSC delay, suspend or cancel the
implementation of one or more of the AD/M Projects in
accordance with the Change Control Process.
H. IMPLEMENTATION
1. Architectural Validation
During the thirty (30) day period prior to
commencement of an AD/M Project or Schedule N
Project, other than those listed in Schedule N as of
the Commencement Date, the Parties shall perform an
analysis comparing the functionality required to
support Flagstar's required functions, with the
functionality of the proposed solution. The Parties
shall analyze the proposed software and hardware in
light of the Flagstar required functions to ensure
that the deliverables for such solution will provide
Flagstar with the desired functionality relating to
the To Be Systems and interfaces. In determining
whether to overcome any gaps between As Is System and
To Be System functionality by changing the proposed
solution or changing Flagstar's then-current
procedures, the Parties will consider and attempt to
minimize the impact on Flagstar of the proposed
solution to the To Be Systems implementation.
2. DEVELOPMENT PERSONNEL
ISSC will be responsible for ensuring maximum
productivity of the personnel assigned to AD/M
Projects efforts, other than the Schedule N Projects
set forth in Schedule N as of the Commencement Date,
as described in the resource Baselines in the
Supplement and Schedule J (the "Baseline Personnel").
Flagstar shall have the right to monitor the status
Page 30 of 32
<PAGE>
of the AD/M Projects. ISSC shall provide Flagstar
with monthly reports in appropriate detail as
reasonably requested by Flagstar, specifying how ISSC
used the Baseline Personnel during the relevant
period, ISSC's plan for using such Baseline Personnel
in the next period and the status of each approved
AD/M Project service request (either pending or in
progress), as well as the status of on-going AD/M
Projects assigned thereto. The report shall also
specify the extent to which the Baseline Personnel
are available to perform any new work. ISSC shall
provide further status information upon Flagstar's
reasonable request. In addition, ISSC shall make
appropriate Personnel available to meet with Flagstar
on at least a monthly basis to review the status of
existing AD/M Projects, to discuss new AD/M Projects,
and to review the utilization of the Baseline
Personnel. If AD/M Projects are behind schedule the
Parties may agreed to a greater frequency of review.
I. CUSTOMIZATION AND ENHANCEMENTS
In accordance with Schedules E, J and N, ISSC will provide
customization and enhancement to the Applications Software as
requested by Flagstar. Such requests shall be consistent with
the Parties' mutual intent to keep such enhancements to a
minimum to preserve the benefits of the manageability,
reliability and cost savings of the Applications Software
environment; provided, however, that such customization and
enhancement will at a minimum provide for the deliverables set
forth for each AD/M Project or the required functions for new
AD/M Projects.
J. INTERFACES, BRIDGES AND DATA CONVERSION
ISSC will provide all necessary interfaces within and among
the Software and to the Flagstar Corporate Facilities,
Network, Machines and POS Machines as described in Schedule N.
XI. QUALITY ASSURANCE
ISSC shall be responsible for providing and implementing quality
assurance processes and procedures that are reasonably necessary to
ensure that ISSC's AD/M responsibilities are executed accurately,
efficiently and in a timely manner. Subject to the foregoing, the
Parties shall mutually agree upon terms and conditions for conducting
checkpoint reviews, Software testing and acceptance and other quality
assurance procedures. These procedures shall be included in the
Procedures Manual.
ISSC shall:
Page 31 of 32
<PAGE>
A. review problem reports and recommend/implement appropriate
fixes with Flagstar's approval;
B. in conjunction with Flagstar, review new Flagstar production
jobs and job control languages for correctness and conformance
to mutually agreed to standards for efficient resource
utilization;
C. organize and chair change control meetings with Flagstar
designees in accordance with the Change Control Process, on a
weekly basis or on such other frequency agreed to by the
Parties; and
D. prepare and distribute problem and change management reports.
Page 32 of 32
<PAGE>
EXHIBIT A
SCHEDULE E
SUPPORT SERVICES, PERFORMANCE STANDARDS AND
OPERATIONAL RESPONSIBILITIES
SECTION E-2
PERFORMANCE STANDARDS
I. DEFINITIONS
For purposes of this Schedule E, the following terms shall have the
following meanings:
A. "ACTUAL UPTIME" means of the Scheduled Hours, the aggregate
number of hours in any month during which the Network and/or
each defined critical Application is actually available for
use by End Users.
B. "APPLICATION SUBSYSTEM" means individual subsystems or
environments comprising the Applications Software.
C. "AVAILABILITY" means Actual Uptime plus Excusable Downtime
divided by Scheduled Uptime. For purposes of determining
whether ISSC's performance meets any availability Performance
Standard, ISSC's availability performance will be measured
based on a monthly average of daily measurements during each
month of the Term, to be calculated once monthly within 15
business days following the end of each calendar month.
D. "CATEGORY" means mutually agreed to Service for which a
Performance Standard will apply.
E. "EXCUSABLE DOWNTIME" means of the Scheduled Uptime, the
aggregate number of hours in any month during which the
Network and/or each defined Application is down due to:
1. action or inaction by Flagstar (i.e., failing to
provide power for the Machines at the Data Center and
power outages or systems outages attributable to
Application defects and Applications incompatibility
with the Systems Software, existing as of the
Commencement Date, etc.);
Page 1 of 13
<PAGE>
2. a Force Majeure Event (as defined in Section 16.3 of
the Agreement);
3. mutually agreed upon time for such things as
preventive maintenance, system upgrades, etc.; or
4. a failure that has occurred despite ISSC'S provision
of proper preventive or remedial maintenance.
F. "FINAL OBSERVATION PERIOD" means the 90-day measurement period
(1) which begins, with respect to the Categories to be
measured in the As Is Systems environment, after the end of
the seven-day period following completion of the Initial
Observation Period, or (2) which begins, with respect to the
Categories to be measured in the To Be Systems environment,
after the completion of the cutover to production of each
Application Subsystem in the To Be Systems for which
Performance Standards will be established.
G. "HOST SYSTEM" means the Data Center Machines and related
System Software.
H. "INITIAL OBSERVATION PERIOD" means the 90-day measurement
period (1) which begins, with respect to the Categories to be
measured in the As Is Systems environment on April 1st, or (2)
which begins, with respect to the Categories to be measured in
the To Be Systems environment, after completion of the cutover
to production of each Application Subsystem in the To Be
Systems for which Performance Standards will be established.
I. "MINIMUM SERVICE LEVELS" means the level of service which, if
not met, will entitle Flagstar to Service Credits.
J. "ON-TIME DELIVERY" means that schedule if completed within
five days of the scheduled completion date will be deemed to
be on schedule.
K. "SCHEDULED DOWNTIME" means of the Scheduled Hours, the
aggregate number of hours in any month during which the
Network and/or defined Application is scheduled to be
unavailable for use by End Users due to such things as
preventive maintenance, system upgrades, etc. Scheduled
Downtime must be mutually agreed to by the Parties.
L. "SCHEDULED HOURS" means the day of the week and hours per day
that the Network and/or each defined Application is scheduled
to be available for use by End Users, subject to adjustment
for mutually agreed upon Scheduled Downtime.
Page 2 of 13
<PAGE>
M. "SCHEDULED UPTIME" means of the Scheduled Hours, the aggregate
number of hours in any month during which the Network and/or
each defined critical Application is scheduled to be available
for use by End Users.
II. PERFORMANCE STANDARDS - AS IS SYSTEMS
A. By April 1st, 1996, the Parties will determine which
Categories will be measured and the methodology to be utilized
including tools and units of measure. If Flagstar is currently
measuring particular Categories and has documented historical
measurement levels, ISSC will review such information and the
Parties will agree on mutually acceptable target performance
levels for such Categories.
B. During the Initial Observation Period, Flagstar will determine
weighting factors for each Category, and, ISSC will track
actual performance levels of each Category identified in
Section II.A above and report the results of such performance
measurements to Flagstar as set forth in Section V below. The
Parties will review the performance measurement results
reported during the Initial Observation Period and mutually
agree to interim Performance Standards and Minimum Service
Levels upon which ISSC's performance of the Services
Categories will be measured. The Performance Standards and
Minimum Service Levels for each Category will be documented in
writing, mutually agreed upon and attached to this Schedule E,
Section E-2 in accordance with Section 16.2 of the Agreement.
ISSC will not accrue Service Credits for failure to meet the
Minimum Service Levels for As Is System Categories measured
during the Initial Observation Period for each such Category.
C. During the seven-day period following the Initial Observation
Period based on the performance measurements obtained during
the Initial Observation Period, the Parties will mutually
agree on the interim Performance Standards and Minimum Service
Levels for each Category for which ISSC will be measured for
the As Is Systems environment.
D. During the Final Observation Period, ISSC will continue
measuring its performance of the Services Categories for the
As Is Systems environment and will provide Flagstar with
monthly measurement reports in accordance with Section IV
below.
E. Upon completion of the Final Observation Period, the Parties
will review the performance levels achieved for the As Is
Systems Categories during the Final Observation Period which
will be compared to the interim Performance Standards and
Minimum Service Levels established during the seven-day
Page 3 of 13
<PAGE>
period immediately preceding the Final Observation Period.
Upon completion of the Final Observation Period, a second
7-day review will take place during which the Parties will
agree upon final Categories, Performance Standards, and
weighting factors.
F. Effective as of the first day of the Final Observation Period,
Service Credits will be applied for failures to meet the
Minimum Service Levels in accordance with Section VI below and
Performance Incentive Credits will be applied for performance
of Services eligible for Performance Incentive Credits that
exceeds the Minimum Service Levels in accordance with Section
VII below.
G. After completion of the Final Observation Period, ISSC's
performance of the As Is Systems Categories shall be measured
and compared to the final Performance Standards and Minimum
Service Levels on a monthly basis until completion of the
Schedule N Projects applicable to the To Be Systems
environment and the cutover to production of the final
Schedule N Project for such To Be Systems.
III. PERFORMANCE STANDARDS - TO BE SYSTEMS
A. Prior to cutover to production of the first Application
Subsystem of the first Schedule N Project, To Be Systems
Categories for measurement of ISSC's performance of the To Be
Systems will be established by mutual agreement of the parties
based on the following methodology:
1. determine what new Performance Standards and Minimum
Service Levels are required;
2. decide what Performance Standards and Minimum Service
Levels from the As Is Systems Categories should be
continued; and
3. decide weighting and weighting factors of each
Minimum Service Level.
The Parties agree that if the achievement of a particular
Performance Standard and/or Minimum Service Level can be
impacted by or is dependent upon the addition of an
Application Subsystem or are system workload sensitive, such
Performance Standards will not result in Service Credits until
the entire Schedule N Project of which such Application
Subsystem is a part is cutover to production. ISSC will,
however, measure performance against such Performance
Standards and/or Minimum Service Levels and provide the
measurement results to Flagstar.
Page 4 of 13
<PAGE>
B. During the Initial Observation Period for each Application
Subsystem, ISSC will track performance levels of each Category
identified in Section III.A, and report the measurement
results to Flagstar as set forth in Section V below. The
Parties will review the measurement results and mutually agree
to Performance Standards and Minimum Service Levels upon which
ISSC will be measured subject to the qualifications listed in
Section III.A. The Performance Standards and Minimum Service
Levels for each Category will be documented in writing,
mutually agreed upon and attached to this Schedule E, Section
E-2 in accordance with Section 16.2 of the Agreement.
C. During the seven-day period following the Initial Observation
Period for each Application Subsystem in the To Be Systems
environment based on the performance measurements obtained
during the Initial Observation Period, the Parties will
mutually agree on the interim Performance Standards and
Minimum Service Levels for each Category for which ISSC will
be measured for the To Be Systems environment.
D. Upon completion of the Final Observation Period, the Parties
will review the performance levels achieved for the To Be
Systems Categories during the Final Observation Period which
will be compared to the interim Performance Standards and
Minimum Service Levels established during the seven-day period
immediately preceding the Final Observation Period. Upon
completion of the Final Observation Period, a second 7-day
review will take place during which the Parties will agree
upon final Categories, performance standards, and weighting
factors.
E. Effective as of the first day of the Final Observation Period,
Service Credits will be applied for failures to meet the
Minimum Service Levels for the To Be Systems Categories in
accordance with Section VI below and Performance Incentive
Credits will be applied for performance of To Be Systems
Categories eligible for Performance Incentive Credits that
exceeds the Minimum Service Levels in accordance with Section
VII below.
F. After completion of the Final Observation Period for each To
Be System Category, ISSC's performance of such To Be Systems
Category shall be measured and compared to the final
Performance Standards and Minimum Service Levels therefor on a
monthly basis during the Term.
G. For each Schedule N Project, after all Applications Subsystems
applicable to such Schedule N Project are installed and the
entire Schedule N Project is cutover to production, there will
be a Final Observation Period for such Schedule N Project
during which all existing Performance Standards and Minimum
Service Levels will be reviewed applicable thereto and may be
Page 5 of 13
<PAGE>
adjusted by the Parties and additional Performance Standards
and Minimum Service Levels added as set forth in Section III
below. Once the final Performance Standards are agreed to by
the Parties, this Schedule E, Section E-2 will be updated and
distributed to the Parties.
IV. NEW OR ADDITIONAL CATEGORIES
A. If new or additional Categories are selected by the Parties
for the measurement of ISSC's performance of the Services in
the As Is Systems or To Be Systems environment for which
performance data was not collected during the Initial
Observation Period or Final Observation Period for such As Is
Systems or To Be Systems, the Parties will determine which
Categories will be measured, the methodology to be utilized
including tools and units of measure and the period of time
during which measurements will be collected (the "Measurement
Period") for each such new or additional Category. If Flagstar
is currently measuring particular Categories and has
documented historical measurement levels, ISSC will review
such information and the Parties will agree on mutually
acceptable target performance levels for such Categories.
B. During the initial Measurement Period for each new or
additional Category, Flagstar will determine weighting factors
for each Category, and, ISSC will track actual performance
levels of each Category identified in Section IV.A above and
report the results of such performance measurements to
Flagstar as set forth in Section V below. The Parties will
review the performance measurement results reported during the
initial Measurement Period and mutually agree to interim
Performance Standards and Minimum Service Levels upon which
ISSC's performance of the Services Categories will be
measured. The Performance Standards and Minimum Service Levels
for each new or additional Category will be documented in
writing, mutually agreed upon and attached to this Schedule E,
Section E-2 in accordance with Section 16.2 of the Agreement.
ISSC will not accrue Service Credits for failure to meet the
Minimum Service Levels for each new or additional Category
measured during the initial Measurement Period for each such
Category.
C. During the seven-day period following the initial Measurement
Period applicable to each new or additional Category based on
the performance measurements obtained during the initial
Measurement Period, the Parties will mutually agree on the
interim Performance Standards and Minimum Service Levels for
each Category.
D. During the final Measurement Period, ISSC will continue
measuring its performance of each new or additional Category
and will provide Flagstar with monthly measurement reports in
accordance with Section V below.
Page 6 of 13
<PAGE>
E. Upon completion of the final Measurement Period, the Parties
will review the performance levels achieved for each new or
additional Category during the final Measurement Period which
will be compared to the interim Performance Standards and
Minimum Service Levels established during the seven-day period
immediately preceding the final Measurement Period. Upon
completion of the final Measurement Period, a second 7-day
review will take place during which the Parties will agree
upon final Performance Standards, and weighting factors for
each new or additional Category.
F. Effective as of the first day of the applicable final
Measurement Period, Service Credits will be applied for
failures to meet the Minimum Service Levels in accordance with
Section VII below and Performance Incentive Credits will be
applied for performance of Services eligible for Performance
Incentive Credits that exceeds the Minimum Service Levels in
accordance with Section VII below.
V. REPORTS; ERROR CORRECTION
A. On a monthly basis, ISSC will submit to Flagstar a report or
set of reports assessing ISSC's performance of the As Is
Systems environment Categories during the previous calendar
month against the Performance Standards and Minimum Service
Levels for each such Category.
B. Commencing on the first day of the Final Observation Period
for each To Be Systems Category, ISSC will submit to Flagstar
a report or set of reports assessing ISSC's performance of the
To Be Systems environment Categories during the previous
calendar month against the Performance Standards and Minimum
Service Levels for each such Category.
C. Commencing on the completion of the initial Measurement Period
for each new or additional Category as described in Section IV
above, ISSC will submit to Flagstar a report or set of reports
assessing ISSC's performance of the new or additional
Categories during the previous calendar month against the
Performance Standards and Minimum Service Levels for each such
Category.
D. Each such report shall be provided to Flagstar by the fifth
(5th) business day of each month for the Services provided and
the Categories measured in the preceding month.
E. ISSC will also be responsible for promptly investigating and
correcting failures to meet Performance Standards and Minimum
Service Levels by:
1. initiating problem investigations to identify root
causes of failures;
Page 7 of 13
<PAGE>
2. promptly reporting problems to Flagstar that
reasonably could be expected to have a material
adverse effect on Flagstar's operations;
3. correcting the problem; and
4. making written recommendations to Flagstar including
both ISSC actions and Flagstar actions to improve
performance of the Services.
F. ISSC shall identify root causes, correct problems and minimize
recurrences of problems for which ISSC is responsible.
Flagstar will correct and minimize the recurrence of problems
for which Flagstar is responsible and which prevent ISSC from
meeting the Performance Standards.
G. ISSC shall be relieved of only those Performance Standard(s)
and/or Minimum Service Levels where ISSC's failure to meet the
Performance Standard(s) and/or Minimum Service Levels is due
to one of the following occurrences and only to the extent
such Performance Standard(s) and/or Minimum Service Levels is
affected by such occurrence:
1. Flagstar's failure to perform its obligations under
this Agreement to the extent such failure directly
affects ISSC's ability to meet the Performance
Standards and/or Minimum Service Levels;
2. Flagstar's prioritization of ISSC's people,
equipment, applications and services to the extent
such prioritization affects ISSC's ability to meet
the Performance Standards and/or Minimum Service
Levels;
3. circumstances that constitute a Force Majeure Event
pursuant to Section 16.3 of the Agreement;
4. constraints imposed by systems capacity levels below
the existing As Is Systems environment that directly
affect ISSC's ability to provide the Services in a
manner that meets the Performance Standards; and
5. constraints imposed by systems capacity levels below
the To Be Systems environment described in Schedule N
that directly affect ISSC's ability to provide the
Services in a manner that meets the Performance
Standards.
[NOTE: ALTERNATIVELY, NEW DEFINED TERMS "AS IS BASELINE" AND
"TO BE BASELINES" COULD BE USED IN ITEMS 4 AND 5 ABOVE, IF
FLAGSTAR DEEMS IT ADVANTAGEOUS TO MUTUALLY AGREE WITH ISSC ON
THE
Page 8 of 13
<PAGE>
SYSTEM BASELINES APPLICABLE TO THE ESTABLISHED
MINIMUM SERVICE LEVELS AND PERFORMANCE STANDARDS. THE
BASELINES LIKELY WOULD BE COMPRISED OF SPECIFIED
NUMBERS FOR FTE'S, DASD, MB'S ETC. SUCH A FORMULA MAY
HOWEVER REQUIRE A GREAT DEAL OF ADMINISTRATIVE TIME
TO DEVELOP AND MAINTAIN OVER TIME.]
VI. SERVICE CREDITS
A. Through the As Is Initial Observation Period, no Service
Credits will be issued with respect to the As Is Systems
Categories.
B. Flagstar shall provide ISSC with the weighting factors to be
assigned to each As Is System Category during the Initial
Observation Period for the As Is Systems.
C. Each of the Categories will be assigned a weighting factor and
the total of the weighting factors shall not exceed 1.0.
D. The weighting factors for the As Is Systems environment,
described in Section II and VI.B above, will be modified each
time an Application Subsystem for a Schedule N Project is cut
over to production to the To Be Systems environment;
E. Failure to meet the Minimum Service Levels in a specific
Category for a month will result in the calculation of a
Service Credit amount for such month. The Service Credit
amount for each Category will be determined by multiplying the
Category weighting factor by ISSC's maximum liability for the
applicable month.
F. ISSC's maximum liability for Service Credits for As Is Systems
Categories each month is 2% of the Annual Service Charges for
that month.
G. For the To Be Systems Categories, the Parties shall mutually
establish Performance Standards and Minimum Service Levels in
accordance with this Schedule E, Section E-2. The maximum
liability for Service Credits for each To Be System Category
that will be applied when the ISIP Project and POS/MIO Project
are fully placed into production is an aggregate liability of
10% of the monthly Annual Service Charge for that month.
H. Notwithstanding anything to the contrary contained herein,
ISSC's aggregate monthly liability for Service Credits
applicable to the POS/MIO Project rollout
Page 9 of 13
<PAGE>
will not exceed three (3) percent (as a portion of the 10%) of
the Annual Service Charges for each month in which the rollout
is scheduled to occur. On-Time Delivery of New POS Systems
will be deemed to be on schedule if completed within two weeks
of the scheduled completion date. Beginning in the first month
of rollout for the POS Project, Service Credits that may be
due to Flagstar for New POS Systems installed more than two
weeks after the scheduled date of installation will be
calculated as follows. The number of New POS Systems which are
installed more than two weeks later than the scheduled date of
installation will be divided by the total number of New POS
Systems scheduled during that month. The resulting fraction
will be multiplied by three percent (3%) to establish the
percentage by which the monthly annual service charge will be
multiplied to determine the Service Credits due for the POS
Category for that month. New POS Systems for which a Service
Credit has been paid by ISSC shall be rescheduled by mutual
agreement of the parties.
In addition, if ISSC fails to install New POS Systems in
accordance with the rollout schedule, the Monthly Service
Charges shall be adjusted on a pro rata basis as follows. The
number of New POS Systems installed during the applicable
period will be divided by the number of New POS Systems that
were scheduled for installation during such period and the
resulting percentage will be multiplied by the Monthly Service
Charge for such period. Flagstar shall pay the amount derived
from the foregoing calculation in lieu of the Monthly Service
Charge.
During any month in which ISSC installs more New POS Systems
that originally scheduled in order to fulfill its obligations
with respect to backlogged installations, Flagstar shall pay
in lieu of the Monthly Service Charge for such month an amount
equal to the number of such New POS Systems installed during
such period divided by the number of New POS Systems scheduled
to be installed during such period multiplied by the Monthly
Service Charge for such period.
I. As Application Subsystems for the Schedule N Projects are cut
over to production in the To Be System environment a
corresponding downward adjustment will be made to the 2%
maximum liability for the As Is Systems Categories. Except as
set forth in Section VI.J or otherwise agreed by the Parties
with respect to specific projects and/or new Services, in no
event will ISSC be liable to Flagstar for an amount that
exceeds an overall maximum aggregate liability of 10% of the
Annual Service Charges for each month taking into account the
Service Credits for both the As Is Service Categories and the
To Be System Categories taken together.
Page 10 of 13
<PAGE>
J. For the Integrated Systems Implementation Project (ISIP) in
Schedule N, Section-N-2, upon completion of the Architecture
Validation phase, ISSC and Flagstar will mutually agree on a
set of Application Subsystem cut over milestones and weighting
factor for each milestone for which Minimum Service Levels
will apply. ISSC's maximum liability for Service Credits for
all milestones in ISIP, will not exceed 10% of the adjusted
price of ISIP following Architecture Validation. Failure to
meet the Minimum Service Levels for each milestone will result
in a Service Credit amount which will be determined by
multiplying the corresponding weighting factor by ISSC's
maximum liability for the adjusted price of ISIP following
Architecture Validation.
K. In no event will Performance Standards and Minimum Service
Levels be decreased unless such reduction is necessitated by
capacity or resource constraints of the existing systems and
Flagstar elects not to increase such capacity.
VII. PERFORMANCE INCENTIVE CREDITS
A. ISSC and Flagstar agree that it is ISSC's responsibility under
this Agreement to perform the Services in a manner that, at a
minimum, meets the Performance Standards. The Parties further
agree that it is advantageous to Flagstar if ISSC performs its
responsibilities in a manner that exceeds the Performance
Standards. In order to incent ISSC to continuously improve
performance of the Services, ISSC will be eligible for a
performance incentive based upon its performance above the
Performance Standards of certain aspects of the Services that
Flagstar determines have additional "value add" to Flagstar
beyond performance as required by the Agreement in the normal
course of its operations ("Performance Incentive Credits").
B. Flagstar will mutually determine with ISSC which Categories
(if any) will permit ISSC to earn Performance Incentive
Credits ("PICs"). The Parties acknowledge and agree that
Categories for which PIC's may apply will be those Categories
in which ISSC's performance above established Performance
Standards produces an economic or other benefit to Flagstar's
business that Flagstar determines as an appropriate Category
for the application of a PIC. The value and weighting of the
PIC established for any Category will be determined without
regard to the value and weighting of the Service Credit that
may apply to such Category. In the event ISSC exceeds the
Performance Standards for such a Category then ISSC shall be
entitled to receive a PIC as specified below.
Page 11 of 13
<PAGE>
C. The performance reports provided to Flagstar by ISSC pursuant
to Section E-2, Section V will be used to determine whether
ISSC has exceeded the Performance Standard in each Category.
D. ISSC will be eligible for the accrual of PICs on a monthly
basis for the same month for which Service Credits are
initially calculated.
E. Beginning on the fifteenth day of the month following the
completion of the Final Observation Period for the As Is
Systems Categories to which Performance Incentive Credits
apply, if any, and on the fifteenth day of each subsequent
month during the Term, ISSC will calculate whether the
Services exceeded the Performance Standards for each As Is
System Category for which it is eligible to receive a PIC
during the preceding calendar month.
F. Beginning on the fifteenth day of the month following the
completion of the Final Observation Period for each To Be
System Category or new or additional Category to which
Performance Incentive Credits apply, if any, and on the
fifteenth day of each subsequent month during the Term, ISSC
will calculate whether the Services exceeded the Performance
Standards for each such Category for which it is eligible to
receive a PIC during the preceding calendar month.
G. For purposes of determining whether a PIC will accrue to ISSC
the actual performance attainment for each of the Categories
will be considered independently of the other categories.
H. The amount of PICs accruing to ISSC for any month during the
Term must be used to offset Service Credits accruing for the
same period. PICs accruing in a month may not be carried
forward to any subsequent month.
VIII. NETTING OF SERVICE CREDITS AND PERFORMANCE INCENTIVE CREDITS
A. The amount of the PICs for which ISSC is eligible during a
month, if any, will be netted against the Service Credits to
which Flagstar will be entitled for such month. In no event
shall ISSC be entitled to a PIC which is higher than the
Service Credits which Flagstar accrues for the corresponding
period.
B. Flagstar shall be entitled to carryforward all Service Credits
not used in the month in which such Service Credits accrue.
C. If the calculation of the net amount of (1) all PICs and
Service Credits accruing for a month and (2) all carryforward
Service Credits to which
Page 12 of 13
<PAGE>
Flagstar is entitled for such month results in a net Service
Credit, then ISSC will credit Flagstar against the Annual
Service Charge for such month for the amount of the Service
Credits less the PIC amounts for such month.
D. If the calculation of the net sum of (1) all PICs and Service
Credits accruing for a month and (2) all carryforward Service
Credits to which Flagstar is entitled for such month results
in a net PIC, then no amount will be credited to ISSC for such
PIC against the Annual Service Charges for such month.
Page 13 of 13
EXHIBIT 10.50
April 24, 1995
Mr. C. Robert Campbell
4225 Santa Maria Street
Coral Gables, FL 33146
Dear Bob:
We are delighted that you have accepted our offer to join Flagstar as its
Executive Vice President and Chief Financial Officer. This letter outlines the
terms of our offer.
BASE SALARY
Your annual base salary will be $325,000.00, to be paid monthly (on the 18th of
each month, or the nearest Thursday preceding the 18th, via direct deposit).
START DATE
You will report to work on May 1, 1995.
SIGN-ON BONUS
To assist you with your transition to Flagstar, and in recognition of certain
rights and benefits you may be forfeiting by accepting our offer of employment,
you will receive a signing bonus of $100,000.00. One-half of this amount
($50,000.00) will be paid to you as soon as practicable after you join us. The
remainder will be paid to you in January, 1996. Applicable income and FICA taxes
will be withheld from both payments. Should you leave the Company voluntarily
within 12 months following your starting date, you agree to reimburse the
Company the full $100,000.00 amount.
ANNUAL INCENTIVE
You will participate in our annual Senior Management Incentive Plan. For 1995,
your target incentive will be 75% of your base salary. Payouts are dependent
upon the achievement of predetermined goals, which are established annually.
For 1995, we will guarantee payment of at least 50% of your target bonus
($121,875.00). This will be paid to you, less withholding for applicable income
and FICA taxes, no later than February 28, 1996.
<PAGE>
Mr. C. Robert Campbell
April 24, 1995
Page 2
STOCK OPTIONS
We will recommend to the Compensation and Benefits Committee of the Board of
Directors that you be granted the option to purchase 100,000 shares of Flagstar
common stock at the stock's closing price on your starting date. These options
will have a 10-year term and will vest as follows: 50% after 2 years; 75% after
3 years; and 100% after 4 years. These non-qualified options will be subject to
other terms and conditions of the Company's Stock Option Plan, a copy of which
is enclosed.
BENEFITS
You will be eligible to enroll in our group benefits program (medical, dental,
vision, group term life, LTD, etc.) with coverage effective June 1, 1995.
Enclosed is more information about the options available under the program. In
addition, effective on the next entry date (January 1, 1996) you will be
eligible to participate in Flagstar's Deferred Compensation Plan, a
non-qualified, matched pre-tax deferral plan. Information about that program is
also enclosed. Finally, you will be eligible to participate in the Flagstar
Pension Plan.
RELOCATION
We offer a comprehensive relocation program per the materials that you have
received (Plan 1). The program includes a buy-out option at the average of two
independent appraisals. (You may select from a list of approved appraisers.)
In addition to this relocation program, you will receive a relocation supplement
of $100,000.00 (grossed-up for federal and state income taxes). This will be
paid to you as soon as practical after you join us.
If you voluntarily leave the Company before May 1, 1996 you agree to repay to
the Company in full all relocation costs and expenses.
<PAGE>
Mr. C. Robert Campbell
April 24, 1995
Page 3
SEVERANCE AGREEMENT
You will be entitled to a lump sum payment equal to 200% of your then existing
annual base salary, plus 75% of your existing base salary or target bonus,
whichever is greater (less required withholding for income and FICA taxes) in
the event you are involuntarily terminated for any reason other than fraud or
illegal acts, or in the event that as a result of any actions taken by the
Company, you no longer have the title or responsibility of CFO of Flagstar, or
in the event your base salary is reduced.
The payment of any severance benefit to you under this letter agreement is
conditioned upon your signing a release of claims against Flagstar and its
affiliates in a form satisfactory to Flagstar, and any such payment under this
agreement will be in lieu of any other severance plan or practice of the
Company.
Bob, we are very pleased to offer you this position and are delighted you have
decided to become part of our team.
If you are in agreement with these terms, please sign one copy of this letter
and return it to me.
Very truly yours,
/s/ Edna K. Morris
Edna K. Morris
Executive Vice President
Human Resources and Corporate Affairs
Enclosures
cc: Stephen Wood
Rhonda Parish
AGREED AND ACCEPTED:
/s/ C. Robert Campbell
- ----------------------------- ---------------------
C. Robert Campbell Date
EXHIBIT 10.51
April 22, 1996
Mr. Craig S. Bushey
15A Collingham Gardens
SW5 London, ENGLAND SW50HS
Dear Craig:
We are delighted that you have accepted our offer to join Flagstar as its Senior
Vice President and President of its Hardee's division. This letter outlines and
confirms the terms of our offer.
BASE SALARY
Your annual base salary will be $300,000.00, to be paid monthly (on the 18th of
each month, or the nearest Thursday preceding the 18th, via direct deposit).
START DATE
You will report to work on or before May 15, 1996.
SIGN-ON BONUS
To assist you with your transition to Flagstar, and in recognition of certain
rights and benefits you may be forfeiting by accepting our offer of employment,
you will receive a signing bonus of $150,000.00. One-half of this amount
($75,000.00) will be paid to you as soon as practicable after you join us. The
remainder will be paid to you in May, 1997. Applicable income and FICA taxes
will be withheld from both payments. Should you leave the Company voluntarily
within 12 months following your starting date, you agree to reimburse the
Company the full amount.
ANNUAL INCENTIVE
You will participate in our annual Incentive Plan. For 1996, your target
incentive will be 65% of your base salary, prorated based on your starting date.
In addition, your 1996 bonus payout will be no less than $75,000.00. Applicable
income and FICA taxes will be withheld. Payouts under this annual plan are
dependent upon the achievement of predetermined goals, which are established
annually.
<PAGE>
Mr. Craig S. Bushey
April 22, 1996
Page 2
STOCK OPTIONS
We will recommend to the Compensation and Benefits Committee of the Board of
Directors that you be granted the option to purchase 75,000 shares of Flagstar
common stock at the greater of the stock's closing price on your starting date
or $6.00 per share. These options will have a 10-year term and will vest 20% per
year. These non-qualified options will be subject to other terms and conditions
of the Company's Stock Option Plan.
BENEFITS
You will be eligible to enroll in our group benefits program (medical, dental,
vision, group term life, LTD, etc.) with coverage effective on the first day of
the month following 30 days of employment. Enclosed is more information about
the options available under the program. In addition, effective on the next
entry date (January 1, 1997) you will be eligible to participate in Flagstar's
Deferred Compensation Plan, a non-qualified, pre-tax deferral plan. Information
about that program is also enclosed. Finally, you will be eligible to
participate in the Flagstar Pension Plan.
RELOCATION
We offer a comprehensive relocation program. I have enclosed a copy for your
review.
Due to the complexities of your return to the United States, we also have agreed
to (a) provide you (at our expense) with interim housing in
Greenville/Spartanburg for 60 days; (b) provide storage of household goods for
up to 1 year; (c) reimburse you for income tax and/or tax equalization
liabilities you may incur, up to $25,000.00, unless a review of your tax
situation by qualified tax experts indicates that a larger reimbursement amount
is necessary to make you financially whole; (d) reimburse you, up to $50,000.00,
for any penalties you may be legally found to owe Burger King as a result of
your early exit from your current assignment; and (e) provide you with up to
$5,000 of tax preparation assistance in 1996 and 1997. Any amounts payable under
these relocation related provisions will be treated as compensation and taxes
withheld.
<PAGE>
Mr. Craig S. Bushey
April 22, 1996
Page 3
SEVERANCE AGREEMENT
In the event you are involuntarily terminated for a reason other than fraud,
misconduct or illegal acts, you will receive a severance benefit equal to 24
months of your then-existing base pay.
The payment of any severance benefit to you under this letter agreement is
conditioned upon your signing a release of claims against Flagstar and its
affiliates in a form satisfactory to Flagstar, and any such payment under this
agreement will be in lieu of any other severance plan or practice of the
Company.
Craig, we are very pleased to offer you this position and are delighted you have
decided to become part of our team.
If you are in agreement with these terms, please sign one copy of this letter
and return it to me.
Very truly yours,
/s/ Stephen W. Wood
Stephen W. Wood
Senior Vice President
Human Resources
Enclosures (to follow in overnight mail)
cc: Jim Adamson
Rhonda Parish
AGREED AND ACCEPTED:
/s/ Craig S. Bushey
- ----------------------------- ---------------------
Craig S. Bushey Date
EXHIBIT 10.52
TERMS & CONDITIONS OF EMPLOYMENT
FOR
JOHN ROMANDETTI
POSITION: President, Denny's, Inc. and Senior Vice President,
Flagstar Corporation
BASE PAY: $325,000: Increase to $375,000 effective July 1997.
ANNUAL BONUS: 1997 Target: 65% of base salary. For 1997, 50% tied to
Denny's EBITDA performance against plan; 25% tied to
Flagstar EBITDA performance against plan; and 25%
discretionary.
RETENTION BONUS:
$100,000 if actively employed by Company on December
31, 1997; $100,000 if actively employed by Company on
December 31, 1998; and $150,000 if actively employed by
Company on December 31, 1999.
SEVERANCE PROVISIONS:
Same Change of Control Agreement as other members of
Management Committee. Absent Change of Control,
current employment agreement terms apply (2x base pay,
and medical subsidy if terminated for a reason other than
an illegal act or gross misconduct).
If terminated not for cause, Company will provide
relocation to anywhere in the continental United States.
If still leasing apartment in Spartanburg, any lease
liabilities will be covered.
COMMUTING ALLOWANCE:
For 1997: $36,000; For 1998: $18,000 (grossed up for
taxes) Allowance is to cover cost of commuting home to
Phoenix and to rent furnished apartment.
DISABILITY PROTECTION:
Should Romandetti become totally and permanently
disabled while employed by the Company and before age 65
(totally and permanently disabled status as determined
by the Company's LTD carrier), Romandetti to receive 12
months base pay continuation in addition to regular LTD
benefits.
RELOCATION: Entitled to Company's regular executive-level relocation
benefits through December 31, 1998. Company will pay for
spouse 's travel to Denny's headquarters city for
homefinding trip.
BUSINESS TRAVEL:
First class air travel permitted. However, Romandetti
will make reasonable attempts to use upgrade coupons,
etc. when possible/feasible.
AGREED: /s/ Stephen W. Wood
__________________________________ _________________
Stephen W. Wood (for Flagstar) Date
/s/ John R. Romandetti
---------------------------------- -----------------
John R. Romandetti Date
EXHIBIT 10.53
MEMORANDUM
TO : MARK SHIPMAN
FROM : STEPHEN WOOD
RE : CONFIRMING YOUR NEW POSITION
DATE : MAY 24, 1996
This is to confirm certain matters relative to your appointment as President of
our Coco's/Carrows division.
1. You will be a Senior Vice President of Flagstar Corporation.
2. Your base salary will be $250,000, effective May 23, 1996. Flagstar has paid
you in full through May. You will start on the Coco's/Carrows payroll on June
1, and will receive a retroactive payment for the difference in your new and
old salaries for the May 23-31, period.
3. Your 1996 target bonus will remain at 65%.
4. You will be awarded the option to purchase an additional 50,000 shares of
Flagstar common stock at the greater of the stock's closing price on the FRI
transaction closing date, or $6.00. These additional options will have a 10
year term and vest 20% per year over 5 years. This will bring your total
number of options to 75,000.
5. You will receive a $50,000 lump-sum relocation assistance bonus. It will be
grossed up at 36% for federal taxes, and an additional amount for California
state income and Medicare taxes. This will be paid to you by Coco's/Carrows.
6. You will receive our regular Plan 1 (the top plan) relocation benefits,
including the cost-of-living adjustment allowances. If the
homefinding/temporary living allowance (which is grossed-up) proves
insufficient to meet your reasonable needs, you may request an additional
allowance.
7. Should Flagstar terminate your employment for a reason other than fraud,
dishonesty or other illegal acts, you will receive twenty-four (24) months of
severance benefits at your then existing base pay upon the signing of a
mutually acceptable release of claims. This protection will have no end date
and will replace your current "CORE" agreement.
<PAGE>
8. You will become covered under the Coco's/Carrows benefits programs effective
June 1, 1996. Judy Painter will work with you to ensure there are no lapses
of coverage, and to get you enrolled in coverages that best approximate your
current coverage.
A copy of this memo will be placed in your Human Resources file.
<PAGE>
EXHIBIT 11
FLAGSTAR COMPANIES, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1992 (A) 1993 (A) 1994 1995 (A) 1996 (A)
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER SHARE
Adjustment of common and equivalent shares:
Average number of common shares outstanding
before adjustments................................. 24,883 42,370 42,369 42,431 42,434
Assumed exercise of stock warrants and options........ -- -- 9,854 -- --
Total average outstanding and equivalent common
shares........................................... 24,883 42,370 52,223 42,431 42,434
Adjustment of net income (loss) applicable to common
shareholders:
Loss from continuing operations....................... $ (39,225) $(1,238,564) $ (16,820) $ (132,906) $ (85,460)
Interest on senior debt, net.......................... -- -- 23,939 -- --
Dividends on preferred stock.......................... (6,064) (14,175) (14,175) (14,175) (14,175)
Adjusted loss from continuing operations.............. (45,289) (1,252,739) (7,056) (147,081) (99,635)
Income (loss) from discontinued operations............ (12,550) (409,671) 392,670 77,241 --
Adjusted income (loss) before extraordinary item
and cumulative effect of change in accounting
principle.......................................... (57,839) (1,662,410) 385,614 (69,840) (99,635)
Extraordinary items, net.............................. (155,401) (26,405) (11,757) 466 --
Cumulative effect of change in accounting principle,
net................................................ (17,834) (12,010) -- -- --
Adjusted net income (loss) applicable to common
shareholders....................................... $(231,074) $(1,700,825) $ 373,857 $ (69,374) $ (99,635)
Primary earnings (loss) per share applicable to common
shareholders:
On continuing operations.............................. $ (1.82) $ (29.56) $ (0.14) $ (3.47) $ (2.35)
On discontinued operations, net....................... (0.50) (9.67) 7.52 1.82 --
On income (loss) before extraordinary items
and cumulative effect of change in accounting
principle.......................................... (2.32) (39.23) 7.38 (1.65) (2.35)
On extraordinary items, net........................... (6.25) (0.62) (0.22) 0.01 --
On cumulative effect of change in accounting
principle, net..................................... (0.72) (0.29) -- -- --
On net income (loss).................................. $ (9.29) $ (40.14) $ 7.16 $ (1.64) $ (2.35)
</TABLE>
(A) The assumed exercise of the Company's warrants and options is not presented
because such exercise would produce an anti-dilutive result.
<PAGE>
<PAGE>
EXHIBIT 11
FLAGSTAR COMPANIES, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1992 (A) 1993 (A) 1994 1995 (A) 1996 (A)
<S> <C> <C> <C> <C> <C>
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Adjustment of common and equivalent shares:
Average number of common shares outstanding
before adjustments...................................... 24,883 42,370 42,369 42,431 42,434
Assumed exercise of stock warrants and options............. -- -- 9,854 -- --
Assumed conversion of convertible debentures............... -- -- 4,136 -- --
Assumed conversion of preferred stock...................... -- -- 8,562 -- --
Total average outstanding and equivalent common
shares................................................ 24,883 42,370 64,921 42,431 42,434
Adjustment of net income (loss) applicable to common
shareholders:
Loss from continuing operations............................ $ (39,225) $(1,238,564) $(16,820) $(132,906) $(85,460)
Interest on senior debt, net............................... -- -- 23,939 -- --
Interest on convertible debentures, net.................... -- -- 9,628 -- --
Dividends on preferred stock............................... (6,064) (14,175) -- (14,175) (14,175)
Adjusted loss from continuing operations................... (45,289) (1,252,739) 16,747 (147,081) 99,635
Income (loss) from discontinued operations................. (12,550) (409,671) 392,670 77,241 --
Adjusted income (loss) before extraordinary item
and cumulative effect of change in accounting
principle............................................... (57,839) (1,662,410) 409,417 (69,840) (99,635)
Extraordinary items, net................................... (155,401) (26,405) (11,757) 466 --
Cumulative effect of change in accounting principle, net... (17,834) (12,010) -- -- --
Adjusted net income (loss) applicable to common
shareholders............................................ $(231,074) $(1,700,825) $397,660 $ (69,374) $(99,635)
Fully diluted earnings (loss) per share applicable to common
shareholders:
On continuing operations................................... $ (1.82) $ (29.56) $ 0.26 $ (3.47) $ (2.35)
On discontinued operations, net............................ (0.50) (9.67) 6.05 1.82 --
On income (loss) before extraordinary items
and cumulative effect of change in accounting
principle............................................... (2.32) (39.23) 6.31 (1.65) (2.35)
On extraordinary items, net................................ (6.25) (0.62) (0.18) 0.01 --
On cumulative effect of change in accounting principle,
net..................................................... (0.72) (0.29) -- -- --
On net income (loss)....................................... $ (9.29) $ (40.14) $ 6.13 $ (1.64) $ (2.35)
</TABLE>
(A) The assumed exercise of the Company's warrants, options, 10% Convertible
Debentures, and $2.25 Preferred Stock is not presented because such exercise
and conversion would produce and anti-dilutive result.
<PAGE>
EXHIBIT 12
FLAGSTAR COMPANIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Loss from continuing operations before income
taxes................................................... $(45,469) $(1,317,892) $ (19,033) $ (132,920) $(101,852)
Add:
Net interest expense excluding capitalized interest..... 232,058 203,709 220,985 221,645 245,787
Amortization of debt expense............................ 9,362 9,416 6,453 7,504 8,921
Interest factor in rents................................ 14,814 16,290 16,411 16,090 19,774
Total earnings (losses)............................ $210,765 $(1,088,477) $ 224,816 $ 112,319 $ 172,630
Fixed charges:
Net interest expense including capitalized
interest............................................. $232,348 $ 203,987 $ 221,245 $ 221,726 $ 245,787
Amortization of debt expense............................ 9,362 9,416 6,453 7,504 8,921
Interest factor in rents................................ 14,814 16,290 16,411 16,090 19,774
Total fixed charges................................ $256,524 $ 229,693 $ 244,109 $ 245,320 $ 274,482
Ratio of earnings (losses) to fixed charges............... -- -- -- -- --
Deficiency in the coverage of fixed charges by earnings
(losses) before fixed charges........................... $ 45,759 $ 1,318,170 $ 19,293 $ 133,001 $ 101,852
</TABLE>
For purposes of these computations, the ratio of earnings to fixed charges has
been calculated by dividing pretax earnings by fixed charges. Earnings, as used
to compute the ratio, equals the sum of income before income taxes and fixed
charges excluding capitalized interest. Fixed charges are the total interest
expenses including capitalized interest, amortization of debt expenses and a
rental factor that is representative of an interest factor (estimated to be one
third) on operating leases.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF FLAGSTAR COMPANIES, INC.
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
<S> <C>
Flagstar Corporation Delaware
TWS Funding, Inc. Delaware
Denny's Holdings, Inc. New York
FRD Acquisition Co. Delaware
FRI-J Corporation Delaware
Far West Concepts Delaware
FRI-M Corporation Delaware
FRI-NA Corporation Delaware
FRI-C Corporation Delaware
Spartan Holdings, Inc. New York
Canteen Holdings, Inc. New York
TWS 800 Corp. Delaware
TWS 500 Corp. Delaware
TWS 600 Corp. Delaware
TWS 700 Corp. Delaware
El Pollo Loco, Inc. Delaware
Denny's, Inc. California
DFO, Inc. Delaware
Denny's Realty, Inc. Delaware
Quincy's Restaurant, Inc. Alabama
Flagstar Enterprises, Inc.* Alabama
Spartan Realty, Inc. Delaware
Flagstar Systems, Inc. Delaware
Quincy's Realty, Inc. Alabama
Spardee's Realty, Inc. Alabama
</TABLE>
* Flagstar Enterprises, Inc. of Delaware is an assumed name for use only in
Ohio.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-35098 and 33-35099 of Flagstar Companies, Inc. on Form S-8 of our report
dated February 13, 1997 appearing in this Annual Report on Form 10-K of Flagstar
Companies, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 196,966 92,369
<SECURITIES> 0 0
<RECEIVABLES> 32,350 20,217
<ALLOWANCES> 2,506 2,405
<INVENTORY> 32,445 31,543
<CURRENT-ASSETS> 285,342 190,655
<PP&E> 1,750,218 1,891,998
<DEPRECIATION> 645,857 723,416
<TOTAL-ASSETS> 1,507,751 1,687,370
<CURRENT-LIABILITIES> 407,530 483,275
<BONDS> 1,996,111 2,179,393
0 0
630 630
<COMMON> 21,218 21,218
<OTHER-SE> (1,152,825) (1,249,375)
<TOTAL-LIABILITY-AND-EQUITY> 1,507,751 1,687,370
<SALES> 2,571,487 2,542,302
<TOTAL-REVENUES> 2,571,487 2,542,302
<CGS> 0 0
<TOTAL-COSTS> 2,473,253 2,385,910
<OTHER-EXPENSES> 2,005 3,537
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 229,149 254,707
<INCOME-PRETAX> (132,920) (101,852)
<INCOME-TAX> (14) (16,392)
<INCOME-CONTINUING> (132,906) (85,460)
<DISCONTINUED> 77,241 0
<EXTRAORDINARY> 466 0
<CHANGES> 0 0
<NET-INCOME> (55,199) (85,460)
<EPS-PRIMARY> (1.64) (2.35)
<EPS-DILUTED> (1.64) (2.35)
</TABLE>
<PAGE>
EXHIBIT 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance, finances and
management's plans and objectives, including the development of plans to
maintain the Company's liquidity and improve its capital structure over the
short and long-terms, contained or incorporated by reference in the Company's
1996 Annual Report on Form 10-K is forward-looking. In some cases information
regarding certain important factors that could cause actual results to differ
materially from any such forward-looking statement appear together with such
statement. Also, the following factors, in addition to other possible factors
not listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements:
LIQUIDITY AND CAPITAL RESOURCES. Management has indicated in the Company's
1996 Annual Report on Form 10-K its intent to develop plans to maintain the
Company's liquidity and improve its capital structure over the short and long
terms. There can be no assurance, however, that management will be successful in
this regard. Such success will be dependent upon numerous factors including, but
not limited to, the ability of the Company to: (1) reverse negative operating
trends experienced by the Company in recent years due to increased competition,
intensive pressure on price due to discounting, declining customer traffic, and
adverse economic conditions, (2) maintain access to funds available through the
Company's bank credit facility, and (3) reduce its debt service requirements.
COMPETITION. The Company's future performance will be subject to a number
of factors that affect the restaurant industry generally, including competition.
The restaurant business is highly competitive and the competition can be
expected to increase. Price, restaurant location, food quality, quality and
speed of service and attractiveness of facilities are important aspects of
competition as are the effectiveness of marketing and advertising programs. The
competitive environment is also often affected by factors beyond the Company's
or a particular restaurant's control. The Company's restaurants compete with a
wide variety of restaurants ranging from national and regional restaurant chains
(some of which have substantially greater financial resources than the Company)
to locally-owned restaurants. There is also active competition for advantageous
commercial real estate sites suitable for restaurants.
ECONOMIC, MARKET AND OTHER CONDITIONS. Food service businesses are often
affected by changes in consumer tastes, national, regional and local economic
conditions and demographic trends. The performance of individual restaurants may
be adversely affected by factors such as traffic patterns, demographic
considerations and the type, number and location of competing restaurants.
Multi-unit food service chains such as the Company's can also be materially and
adversely affected by publicity resulting from food quality, illness, injury or
other health concerns or operating issues stemming from one restaurant or a
limited number of restaurants. Dependence on frequent deliveries of fresh
produce and groceries subjects food service businesses to the risk that
shortages or interruptions in supply, caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, increased food, labor and employee benefit costs (including
increases in hourly wage and minimum unemployment tax rates), regional weather
conditions and the availability of experienced management and hourly employees
may also adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular.
IMPORTANCE OF LOCATIONS. The success of Company and franchised restaurants
is significantly influenced by location. There can be no assurance that current
locations will continue to be attractive, as demographic patterns change. It is
possible the neighborhood or economic conditions where restaurants are located
could decline in the future, resulting in potentially reduced sales in those
locations.
GOVERNMENT REGULATIONS. The Company and its franchisees are subject to
Federal, state and local laws and regulations governing health, sanitation,
environmental matters, safety, the sale of alcoholic beverages and hiring and
employment practices. Restaurant operations are also subject to Federal and
state laws that prohibit discrimination and laws regulating the design and
operation of facilities, such as the Americans With Disabilities Act of 1990.
The operation of the Company's franchisee system is also subject to regulations
enacted by a number of states and rules promulgated by the Federal Trade
Commission. The Company cannot predict the effect on its operations,
particularly on its relationship with franchisees, caused by the future
enactment of additional legislation regulating the franchise relationship.
