<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) APRIL 1, 1998
CKE RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 1-13192 33-0602639
(STATE OR OTHER JURISDICTION (COMMISSION FILE (I.R.S. EMPLOYER
OF INCORPORATION) NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1200 NORTH HARBOR BOULEVARD, ANAHEIM, CALIFORNIA 92801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(714) 774-5796
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 19, 1998, CKE Restaurants, Inc. ("CKE" or the "Company") signed
a definitive Stock Purchase Agreement with Advantica Restaurant Group, Inc. and
Spartan Holdings, Inc. regarding a proposed transaction pursuant to which CKE
agreed to purchase from Spartan Holding, Inc. all of the issued and outstanding
shares of common stock of Flagstar Enterprises, Inc. ("FEI"), an Alabama
corporation and its subsidiaries.
On April 1, 1998, CKE acquired FEI from Advantica's subsidiary, Spartan
Holdings, Inc. for a purchase price of approximately $381.7 million in cash
(which includes miscellaneous expenses paid to Advantica) and the assumption of
approximately $46 million in certain liabilities (the "FEI Acquisition"). Such
purchase price is subject to adjustment based on changes in the acquired
corporation's working capital. FEI was the largest franchisee in the Hardee's
system, previously operating 557 Hardee's restaurants, located primarily in the
Southeastern United States.
The FEI Acquisition was financed by (i) a $197.2 million private placement
of six-year convertible subordinated notes due 2004, with a 4.25 percent coupon,
which generated net cash proceeds of $192.3 million (the "Notes") and (ii)
borrowings of $189.4 under the Company's amended Senior Credit Facility.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. The following financial
statements of Flagstar Enterprises, Inc. and Subsidiary and Hardee's Food
Systems, Inc. are included in this Current Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FLAGSTAR ENTERPRISES, INC.:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Statements of Consolidated Operations for each of the years
in the three-year period ended December 31, 1997.......... F-5
Statements of Consolidated Cash Flows for each of the years
in the three-year period ended December 31, 1997.......... F-6
Notes to Consolidated Financial Statements.................. F-7
HARDEE'S FOOD SYSTEMS, INC.:
Combined Balance Sheets as of December 31, 1996 and July 15,
1997 (unaudited).......................................... F-22
Combined Statements of Operations for the twenty-six weeks
ended June 30, 1996 and the twenty-eight weeks ended July
15, 1997 (unaudited)...................................... F-24
Combined Statements of Shareholder's Equity for the year
ended December 31, 1996 and the twenty-eight weeks ended
July 15, 1997 (unaudited)................................. F-25
Combined Statements of Cash Flows for the twenty-six weeks
ended June 30, 1996 and the twenty-eight weeks ended July
15, 1997 (unaudited)...................................... F-26
Notes to Combined Financial Statements (unaudited).......... F-27
</TABLE>
1
<PAGE> 3
(b) Pro Forma Financial Information. The following unaudited pro forma
combined condensed financial information is based upon the historical
consolidated financial statements of the Company and has been prepared to
illustrate the effects of both the FEI Acquisition and the Company's acquisition
of Hardee's.
The unaudited pro forma combined condensed balance sheet as of January 26,
1998 gives effect to the FEI Acquisition and certain related transactions, the
application of the estimated net proceeds from the sale of the Notes and
borrowings under the amended Senior Credit Facility to finance the FEI
Acquisition, as if all such transactions had been completed on January 26, 1998
and was prepared based upon the consolidated balance sheet of the Company as of
January 26, 1998 and the consolidated balance sheet of FEI as of December 31,
1997.
The unaudited pro forma combined condensed statement of operations for the
fiscal year ended January 26, 1998 gives effect to the transactions described
above and the Company's acquisition of Hardee's and certain related transactions
as if all such transactions had been completed on January 28, 1997. The
unaudited pro forma combined condensed statement of operations for the fiscal
year ended January 26, 1998 was prepared based upon the consolidated statements
of income of the Company for the fiscal year ended January 26, 1998, which
include the results of operations of Hardee's for the period from July 15, 1997
to January 26, 1998, the combined statements of operations of Hardee's for the
28 weeks ended July 15, 1997 (the "Hardees Combined Interim Financial
Statements"), and the statement of consolidated operations of FEI for the year
ended December 31, 1997.
The unaudited pro forma combined condensed financial information is
provided for comparative purposes only and is not indicative of the results of
operations or financial position of the combined companies that would have
occurred had the Company's acquisitions of Hardee's and FEI occurred at the
beginning of the period presented or on the date indicated, nor is it indicative
of future operating results or financial position. The unaudited pro forma
adjustments are based upon currently available information and upon certain
assumptions that management of the Company believes are reasonable under the
circumstances. The unaudited pro forma combined condensed financial information
and the related notes thereto should be read in conjunction with the Company's
consolidated financial statements, the combined financial statements of Hardee's
and the consolidated financial statements of FEI, and the related notes, which
are listed in item 7(a) above. In addition, the unaudited pro forma combined
condensed financial information does not reflect certain cost savings that
management believes may be realized following both the FEI Acquisition and the
Company's acquisition of Hardee's. These savings are expected to be realized
primarily through the rationalization of Hardee's and FEI's operations and
implementation of the Company's management practices. Additionally, the Company
believes the FEI Acquisition and the acquisition of Hardee's will enable it to
continue to achieve economies of scale, such as enhanced purchasing power.
The FEI Acquisition will be accounted for, and the acquisition of Hardee's
was accounted for, using the purchase method of accounting. Accordingly, the
Company's cost to acquire FEI will be allocated to the assets acquired and
liabilities assumed according to their estimated fair values as of the date of
the FEI Acquisition after giving effect to the purchase price adjustments
required by the Stock Purchase Agreement. The allocation is dependent upon
certain valuations and other studies that have not progressed to a stage where
there is sufficient information to make a definitive allocation. Accordingly,
the purchase allocation adjustments made in connection with the preparation of
the unaudited pro forma combined condensed financial information are
preliminary, and have been made solely for the purpose of preparing such
unaudited pro forma combined condensed financial information; however, no
material effect on the statements of operations is anticipated.
2
<PAGE> 4
CKE RESTAURANTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JANUARY 26, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------
CKE FEI
JANUARY 26, DECEMBER 31, PRO FORMA PRO FORMA
1998 1997 COMBINED ADJUSTMENTS COMBINED
----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 30,382 $ 4,622 $ 35,004 $(16,839)A,C $ 18,165
Accounts and notes receivable........................ 27,317 719 28,036 (27)C 28,009
Related party receivables............................ 1,171 -- 1,171 1,171
Deposits toward future payments obligations.......... -- 11,459 11,459 (11,459)C --
Inventories.......................................... 17,024 7,009 24,033 24,033
Other current assets and prepaid expenses............ 16,262 1,872 18,134 (847)C 17,287
-------- -------- ---------- -------- ----------
Total current assets............................... 92,156 25,681 117,837 (29,172) 88,665
Property and equipment, net............................ 627,026 290,622 917,648 917,648
Property under capital leases, net..................... 47,528 32,619 80,147 80,147
Long-term investments.................................. 48,089 -- 48,089 48,089
Notes receivable....................................... 11,162 -- 11,162 11,162
Related party receivables.............................. 7,626 -- 7,626 7,626
Costs in excess of net assets of businesses acquired,
net.................................................. 95,744 -- 95,744 130,843E 226,587
Franchise rights, net.................................. -- 11,607 11,607 (11,607)D --
Deferred financing costs, net.......................... 4,093 12,205 16,298 (2,307)F 13,991
Other assets........................................... 23,944 1,956 25,900 25,900
-------- -------- ---------- -------- ----------
Total assets.................................. $957,368 $374,690 $1,332,058 $ 87,757 $1,419,815
======== ======== ========== ======== ==========
Current liabilities:
Current portion of long-term debt.................... $ 15,812 $ 9,140 $ 24,952 $ (4,140)A,C $ 20,812
Current portion of capital lease obligations......... 5,499 3,874 9,373 9,373
Accounts payable..................................... 60,303 14,456 74,759 (247)C 74,512
Deferred income taxes, net........................... 5,675 -- 5,675 5,675
Other current liabilities............................ 89,195 63,897 153,092 (53,521)G 99,571
-------- -------- ---------- -------- ----------
Total current liabilities.......................... 176,484 91,367 267,851 (57,908) 209,943
Long-term debt......................................... 138,793 454,396 593,189 (77,673)A,C 515,516
Capital lease obligations.............................. 56,801 41,339 98,140 98,140
Other long-term liabilities............................ 86,778 9,022 95,800 1,904H 97,704
Deferred income taxes, net............................. -- 21,721 21,721 (21,721)C --
Deferred gain.......................................... -- 14,133 14,133 (14,133)I --
-------- -------- ---------- -------- ----------
Total liabilities............................. 458,856 631,978 1,090,834 (169,531) 921,303
Stockholders' equity (deficit)......................... 498,512 (257,288) 241,224 257,288B 498,512
-------- -------- ---------- -------- ----------
Total liabilities and stockholders' equity.... $957,368 $374,690 $1,332,058 $ 87,757 $1,419,815
======== ======== ========== ======== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
3
<PAGE> 5
CKE RESTAURANTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 26, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HARDEE'S
HISTORICAL -------------------------------------- CKE &
CKE 28 WEEKS ENDED JULY 15, 1997 ADJUSTED
JANUARY 26, -------------------------------------- HARDEE'S PRO FORMA
1998 HISTORICAL ADJUSTMENTS(0) ADJUSTED COMBINED ADJUSTMENTS
----------- ---------- -------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues................................ $1,149,659 $399,755 $(2,404) $397,351 $1,547,010 $ (18,082)Q
Operating costs and expenses:
Restaurant operations:
Food and packaging......................... 314,412 114,674 (873) 113,801 428,213
Payroll and other employee benefits........ 311,612 127,213 (1,289) 125,924 437,536
Occupancy and other expenses............... 206,436 79,823 (914) 78,909 285,345
Royalties.................................. -- -- -- -- --
Franchised and licensed restaurants.......... 93,773 17,940 -- 17,940 111,713
Advertising expenses......................... 58,383 19,989 (971) 19,018 77,401
General and administrative expenses.......... 78,852 33,076 -- 33,076 111,928 969J
---------- -------- ------- -------- ---------- ---------
1,063,468 392,715 (4,047) 388,668 1,452,136 969
Operating income (loss)....................... 86,191 7,040 1,643 8,683 94,874 (19,051)
Interest expense.............................. (16,914) (1,436) -- (1,436) (18,350) (5,793)K,L
Other income (expense), net................... 7,363 4,280 -- 4,280 11,643 (4,280)M
---------- -------- ------- -------- ---------- ---------
Income (loss) before income taxes............. 76,640 9,884 1,643 11,527 88,167 (29,124)
Income tax expense (benefit).................. 29,883 -- -- -- 29,883 (6,266)N
---------- -------- ------- -------- ---------- ---------
Net income (loss)............................. $ 46,757 $ 9,884 $ 1,643 $ 11,527 $ 58,284 $ (22,858)
========== ======== ======= ======== ========== =========
Net income per share - basic.................. $ 1.10
==========
Weighted average shares outstanding - basic... 42,394
==========
Net income per common and common equivalent
share - diluted.............................. 1.07
==========
Common and common equivalent shares used in
computing per share amounts - diluted........ 43,747
==========
<CAPTION>
FEI
CKE & ----------------------------------------
HARDEE'S YEAR ENDED DECEMBER 31, 1997
PRO FORMA ---------------------------------------- PRO FORMA
COMBINED HISTORICAL ADJUSTMENTS(R) ADJUSTED ADJUSTMENTS
----------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues................................ $ 1,528,928 $546,268 $ (8,929) $ 537,339
Operating costs and expenses:
Restaurant operations:
Food and packaging......................... 428,213 179,417 (3,099) 176,318
Payroll and other employee benefits........ 437,536 177,176 (3,448) 173,728
Occupancy and other expenses............... 285,345 109,318 (2,283) 107,035
Royalties.................................. -- 18,082 (341) 17,741 (17,741)Q
Franchised and licensed restaurants.......... 111,713 -- -- --
Advertising expenses......................... 77,401 20,836 (362) 20,474
General and administrative expenses.......... 112,897 29,302 (436) 28,866 3,271E
----------- -------- -------- ---------- --------
1,453,105 534,131 (9,969) 524,162 (14,470)
Operating income (loss)....................... 75,823 12,137 1,040 13,177 14,470
Interest expense.............................. (24,143) (47,141) -- (47,141) 16,180F,P
Other income (expense), net................... 7,363 6,430 -- 6,430
----------- -------- -------- ---------- --------
Income (loss) before income taxes............. 59,043 (28,574) 1,040 (27,534) 30,650
Income tax expense (benefit).................. 23,617 (12,698) -- (12,698) 13,945N
----------- -------- -------- ---------- --------
Net income (loss)............................. $ 35,426 (15,876) $ 1,040 $ (14,836) $ 16,705
=========== ======== ======== ========== ========
Net income per share - basic..................
Weighted average shares outstanding - basic...
Net income per common and common equivalent
share - diluted.............................. S
Common and common equivalent shares used in
computing per share amounts - diluted........ S
<CAPTION>
CKE, FEI &
HARDEE'S
PRO FORMA
COMBINED
------------
<S> <C>
Total revenues................................ $2,066,267
Operating costs and expenses:
Restaurant operations:
Food and packaging......................... 604,531
Payroll and other employee benefits........ 611,264
Occupancy and other expenses............... 392,380
Royalties.................................. --
Franchised and licensed restaurants.......... 111,713
Advertising expenses......................... 97,875
General and administrative expenses.......... 145,034
----------
1,962,797
Operating income (loss)....................... 103,470
Interest expense.............................. (55,104)
Other income (expense), net................... 13,793
----------
Income (loss) before income taxes............. 62,159
Income tax expense (benefit).................. 24,864
----------
Net income (loss)............................. $ 37,295
==========
Net income per share - basic.................. $ 0.72
==========
Weighted average shares outstanding - basic... 51,565
==========
Net income per common and common equivalent
share - diluted.............................. 0.74
==========
Common and common equivalent shares used in
computing per share amounts - diluted........ 57,009
==========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
4
<PAGE> 6
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<S> <C>
A. The unaudited pro forma combined condensed balance sheet has
been prepared to reflect the FEI Acquisition by the Company
for an aggregate estimated purchase price of $381,723 (which
includes miscellaneous expenses paid to Advantica and which
is subject to adjustment) plus an estimated $12,678 in
related fees and expenses, which were paid in cash. The
total purchase price was financed as follows:
Senior Credit Facility.................................... $189,429
Estimated Net Proceeds of the Notes....................... 192,294
--------
Total..................................................... $381,723
========
The current portion of the Senior Credit Facility has been
increased from $15,000 to $20,000.
B. The unaudited pro forma combined condensed balance sheet has
been adjusted to eliminate the stockholder's deficit of FEI.
C. To eliminate $4,161 of cash, $27 of receivables, $11,459 of
deposits toward future payment obligations, $847 of prepaid
expenses, $247 of accounts payables, $9,140 of the current
portion of long-term debt, $454,396 of long-term debt and
$21,721 of deferred income tax liabilities not assumed by
the Company.
D. To eliminate $11,607 of franchise rights that after the FEI
Acquisition will have no value to the Company.
E. To record $130,843 for the excess of consideration paid over
the preliminary estimate of the fair value of net assets
acquired, including $2,780 of estimated acquisition costs,
to be amortized over 40 years, and to record goodwill
amortization of $3,271 for the fiscal year ended January 26,
1998.
F. To eliminate $12,205 of deferred financing costs not assumed
by the Company and to record $9,898 of debt issuance costs
of which $4,968 is to be amortized over five years and
$4,930 is to be amortized over six years. The amortization
of debt issuance costs for the fiscal year ended January 26,
1998 is $1,815.
G. To eliminate $50,126 of current liabilities not assumed by
the Company and to eliminate $3,395 of current deferred gain
that is not transferable to the Company.
H. To eliminate $54 of other long-term liabilities not assumed
by the Company, to eliminate $1,042 of deferred gain on
leases which are not transferable to the Company, to record
estimated store closure reserves, at the net present value
of the anticipated lease subsidy (excess of current rent
over estimated sublease income, discounted at 10%), of
$2,000 and to record $1,000 of additional vendor
obligations.
I. To eliminate $14,133 of deferred gain that is not
transferable to the Company.
J. To record goodwill amortization from the Hardee's
acquisition of $969 for the 28 weeks ended July 15, 1997 for
the excess of consideration paid over the estimate of the
fair value of net assets acquired of $71,957, amortized over
40 years.
K. Included in the Company's January 26, 1998 balance sheet are
debt issuance costs of $4,549 and $125 of annual debt
administration fees. The $4,549 of debt issuance costs are
amortized over six years. The amortization of debt issuance
costs and administrative fees for the 28 weeks ended July
15, 1997 is $476.
L. To record interest expense of $5,317 for the 28 weeks ended
July 15, 1997, using an estimated 7.375% interest rate, on
borrowings of $133,885 under the Senior Credit Facility used
to finance the Hardee's acquisition. A 0.125%
increase/decrease in the estimated interest rate
incrementally increases/decreases income before taxes by $90
for the 28 weeks ended July 15, 1997.
M. To eliminate net management fee income of $4,280 received by
Hardee's from FFM (a related party) during the 28 weeks
ended July 15, 1997.
N. To record the income tax effects of the pro forma
adjustments and consolidation of the entities at a pro forma
tax rate of 40.0%.
</TABLE>
5
<PAGE> 7
<TABLE>
<S> <C>
O. During the 28 weeks ended July 15, 1997, Hardee's sold or
closed 128 restaurants, the revenues and expenses of which
are included in the historical statements of operation of
Hardee's. Adjustments in this column remove the operating
results of these restaurants, as disclosed in Note 4 of
Notes to Hardee's Combined Interim Financial Statements.
Operating results for the 28 weeks ending July 15, 1997
included the reversal of a provision for closed stores of
$7,746.
P. To record interest expense of $15,725 for the fiscal year
ended January 26, 1998 on borrowings to finance the FEI
Acquisition of $213,220 under the Senior Credit Facility,
using an estimated 7.375% interest rate, and to record
interest expense on the Notes of $8,382 for the fiscal year
ended January 26, 1998, using an interest rate of 4.25%, net
of historical interest expense of $42,102 for the fiscal
year ended January 26, 1998, recorded by FEI on parent
Company debt, which interest has been eliminated. A 0.125%
increase/decrease in the estimated interest rate
incrementally increases/decreases income before taxes by
$513 for the fiscal year ended January 26, 1998.
Q. To eliminate royalty revenue earned by Hardee's of $18,082
and royalty expense paid by FEI of $17,741 for fiscal year
ended January 26, 1998.
R. During the year ended December 31, 1997, FEI sold or closed
23 restaurants, the revenues and expenses of which are
included in the historical statements of operations of FEI.
Adjustments in this column remove the operating results of
these restaurants, as disclosed in Note 14 of Notes to FEI's
financial statements included elsewhere herein.
S. Net income per common and common equivalent share assumes
the conversion of the Notes (at a conversion price of
$48.204) to increase common and common equivalent shares use
in computing per share amounts by 4,091 to 57,009 for the
fiscal year ended January 26, 1998. Net income is also
increased by $5,029 for the fiscal year ended January 26,
1998, for the reversal of the interest expense incurred on
the Notes, tax effected at 40%.
</TABLE>
(c) Exhibits.
Exhibit Number
<TABLE>
<S> <C>
23.1 Consent of Deloitte & Touche LLP
99A* Press Release dated April 1, 1998
</TABLE>
- ---------------
* Previously filed.
6
<PAGE> 8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CKE RESTAURANTS, INC.
Date: June 12, 1998 By: /s/ CARL A. STRUNK
------------------------------------
Carl A. Strunk,
Executive Vice President and
Chief Financial Officer
7
<PAGE> 9
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Statements of Consolidated Operations for the Years Ended
December 31, 1997, 1996, and 1995......................... F-5
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
Flagstar Enterprises, Inc.
and Subsidiary:
We have audited the accompanying consolidated financial statements of
Flagstar Enterprises, Inc. and subsidiary (the "Company") listed in the
preceding Index to Consolidated Financial Statements. 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.
As discussed in Note 1 to the financial statements, on November 12, 1997,
the Bankruptcy Court entered an order confirming the plan of reorganization of
the Company s ultimate parent, Advantica Restaurant Group, Inc. ("Advantica")
(formerly Flagstar Companies, Inc.), which became effective after the close of
business on January 7, 1998. As described in Note 2, the change in ownership of
Advantica effected by the plan of reorganization requires that Advantica apply
"fresh-start reporting" effective January 7, 1998, in accordance with AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code."
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1997 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 20, 1998, (April 1, 1998 with respect to Note 13)
F-2
<PAGE> 11
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 4,622 $ 3,532
Accounts and notes receivable............................. 719 1,134
Inventories............................................... 7,009 6,991
Deposits toward future payment obligation................. 11,459 10,212
Other..................................................... 1,872 632
--------- ---------
25,681 22,501
--------- ---------
PROPERTY:
Property owned (at cost):
Land................................................... 53,201 54,319
Buildings and improvements............................. 278,646 276,817
Other property and equipment........................... 160,772 171,301
--------- ---------
Total property owned.............................. 492,619 502,437
Less accumulated depreciation.......................... (201,997) (187,521)
--------- ---------
Property owned -- net....................................... 290,622 314,916
--------- ---------
Property held under capital leases:......................... 61,679 62,206
Less accumulated amortization.......................... (29,060) (23,561)
--------- ---------
Property held under capital leases -- net................... 32,619 38,645
--------- ---------
323,241 353,561
--------- ---------
OTHER ASSETS:
Franchise rights, net of accumulated amortization:
1997 -- $15,471;1996 -- $14,613........................ 11,607 13,243
Deferred financing costs, net............................. 12,205 14,473
Other..................................................... 1,956 4,716
--------- ---------
25,768 32,432
--------- ---------
TOTAL ASSETS...................................... $ 374,690 $ 408,494
========= =========
</TABLE>
F-3
<PAGE> 12
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S DEFICIT ACCOUNTS
CURRENT LIABILITIES:
Current portion of real estate financings................. $ 9,140 $ 10,267
Current portion of obligations under capital leases....... 3,874 5,853
Accounts payable.......................................... 14,456 24,986
Bank overdraft............................................ 5,530 10,637
Accrued salaries and vacations............................ 8,808 6,533
Accrued insurance......................................... 4,378 8,052
Accrued taxes............................................. 4,929 3,622
Accrued interest.......................................... 33,159 9,079
Other..................................................... 7,093 5,837
--------- ---------
91,367 84,866
--------- ---------
LONG-TERM LIABILITIES:
Real estate financing, less current maturities............ 97,477 106,640
Obligations under capital leases, less current
maturities............................................. 41,339 44,954
Notes payable to Spartan Holdings, Inc.................... 356,919 356,919
Deferred income taxes..................................... 21,721 30,728
Liability for self-insured claims......................... 6,411 7,100
Deferred gain............................................. 14,133 19,870
Other..................................................... 2,611 6,451
--------- ---------
540,611 572,662
--------- ---------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDER'S DEFICIT
Intercompany receivable from Flagstar..................... (9,391) (29,879)
Common stock -- $.01 par value; 20,000 shares authorized,
issued and outstanding................................. -- --
Other..................................................... 152,700 165,566
Deficit................................................... (400,597) (384,721)
--------- ---------
(257,288) (249,034)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT....... $ 374,690 $ 408,494
========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 13
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUE......................................... $546,268 $602,946 $659,874
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging................................. 179,417 198,858 216,064
Payroll and other employee benefits................ 177,176 197,166 223,921
Occupancy and other operating expenses............. 109,318 99,623 140,037
Royalties.......................................... 18,082 19,912 21,574
Advertising expenses.................................... 20,836 22,952 25,156
General and administrative expenses..................... 29,302 28,999 34,730
-------- -------- --------
Total operating costs and expenses.............. 534,131 567,510 661,482
-------- -------- --------
OPERATING INCOME (LOSS)................................... 12,137 35,436 (1,608)
-------- -------- --------
OTHER CHARGES:
Interest and debt expense, net (contractual interest for
the year ended December 31, 1997 is $57,965)......... 47,141 59,890 61,348
Other (income) expense, net............................. (6,430) (839) 1,665
-------- -------- --------
LOSS BEFORE INCOME TAXES.................................. (28,574) (23,615) (64,621)
BENEFIT FROM INCOME TAXES................................. (12,698) (6,460) (27,940)
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM............................ (15,876) (17,155) (36,681)
EXTRAORDINARY ITEM -- NET OF INCOME TAXES IN 1995 OF $5... -- -- 124
-------- -------- --------
NET LOSS.................................................. $(15,876) $(17,155) $(36,557)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 14
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(15,876) $(17,155) $(36,557)
Adjustments to Reconcile Net Loss to Cash Flows from
Operating Activities:
Charge for restructuring and impaired assets............ 4,592 -- 31,521
Depreciation and amortization of property............... 34,081 35,107 39,022
Amortization of intangible assets....................... 1,554 2,064 3,247
Amortization of deferred financing costs................ 2,268 2,144 2,155
Amortization of deferred gain........................... (3,348) (2,805) (867)
Deferred income tax benefit............................. (9,000) (4,738) (29,869)
Other................................................... 5,281 5,318 2,225
Extraordinary items, net................................ -- -- (124)
Changes in Assets and Liabilities:
Decrease (increase) in assets:
Receivables............................................. 415 (418) 382
Inventories............................................. (18) 213 (344)
Other current assets.................................... (2,487) (13) (5,106)
Other assets............................................ 697 (3,274) (141)
Increase (decrease) in liabilities:
Accounts payable........................................ (15,637) 17,228 (5,133)
Salaries and vacation................................... 2,275 (3,498) 693
Other current liabilities............................... 14,809 (10,563) 2,620
Other non-current liabilities........................... (11,255) 1,867 929
-------- -------- --------
Net cash flows from operating activities.................... 8,351 21,477 4,653
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property...................................... (12,618) (17,850) (21,280)
Proceeds from dispositions of property.................... 4,073 1,793 304
Other long-term assets, net............................... 981 2,376 (826)
-------- -------- --------
Net cash flows used in investing activities................. (7,564) (13,681) (21,802)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs
Net receipts from Flagstar Corporation.................... 16,490 7,255 34,912
Principal payments on real estate financings.............. (10,289) (10,070) (9,663)
Payments on obligations under capital leases.............. (5,898) (5,491) (5,284)
-------- -------- --------
Net cash flows provided by (used in) financing activities... 303 (8,306) 19,965
-------- -------- --------
Increase (decrease) in cash................................. 1,090 (510) 2,816
Cash at:
Beginning of period......................................... 3,532 4,042 1,226
-------- -------- --------
End of period............................................... $ 4,622 $ 3,532 $ 4,042
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid:........................................ $ 227 $ 189 $ 41
======== ======== ========
Interest paid:
To external lenders..................................... $ 17,075 $ 18,366 $ 19,318
======== ======== ========
To Flagstar Corporation for acquisition financing....... $ 7,042 $ 42,382 $ 40,865
======== ======== ========
Non-cash investing and financing activities:
Adjustments to acquisition debt -- net.................. $ -- $ -- $(76,631)
======== ======== ========
Adjustments to deferred financing costs relating to
acquisition debt...................................... $ -- $ -- $ 2,150
======== ======== ========
Capital lease obligations incurred...................... $ 592 $ 540 $ 1,327
======== ======== ========
Federal income tax adjustment........................... $ 4,025 $ 1,439 $ 254
======== ======== ========
Deferred gains resulting from Flagstar Corporation's
sale of Portion Trol Foods and Proficient Food
Company............................................... $ 254 $ 2,544 $ 21,690
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 15
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INTRODUCTION
Flagstar Enterprises, Inc. ("FEI" or the "Company") is a wholly-owned
subsidiary of Spartan Holdings, Inc. ("Spartan' or "Parent") which is a
wholly-owned subsidiary of Flagstar Corporation ("Flagstar"). On July 20, 1989,
Flagstar was acquired by Flagstar Companies, Inc. ("FCI") (which changed its
name to Advantica Restaurant Group, Inc. on January 7, 1998.) Prior to June 16,
1993, FCI and Flagstar were known as TW Holdings, Inc. and TW Services, Inc.,
respectively.
FEI conducts its business through its Hardee's restaurants, which are
operated under licenses from Hardee's Food Systems, Inc. ("HFS"). The Hardee's
restaurants compete in the quick-service hamburger category and are located
primarily in the southeastern United States. At December 31, 1997 and 1996, the
Company operated, as a franchisee, 557 and 580 Hardee's restaurants,
respectively.
On January 7, 1998 (the "Effective Date"), FCI and Flagstar emerged from
proceedings under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") pursuant to FCI and Flagstar's Amended Joint Plan of
Reorganization dated as of November 7, 1997 (the"Plan") (as further described in
Note 2). On the Effective Date, Flagstar merged with and into FCI, the surviving
corporation, and FCI changed its name to Advantica Restaurant Group, Inc.
("Advantica"). The bankruptcy proceedings began when FCI, Flagstar and Flagstar
Holdings, Inc. ("Holdings") filed voluntary petitions for relief under the
Bankruptcy Code in the Bankruptcy Court for the District of South Carolina.
Holdings filed its petition on June 27, 1997, and Flagstar and FCI both filed
their petitions on July 11, 1997. FCI's operating subsidiaries, including the
Company, did not file bankruptcy petitions and were not parties to the above
mentioned Chapter 11 proceedings.
NOTE 2: FRESH START REPORTING
As of the Effective Date of the Plan, Advantica will adopt fresh start
reporting pursuant to the guidance provided by the American Institute of
Certified Public Accountants (the AICPA ) in its Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). Fresh start reporting assumes that a new reporting entity has been
created and requires assets and liabilities be adjusted to their fair values as
of the Effective Date in conformity with the procedures specified by Accounting
Principles Board Opinion No. 16, "Business Combinations" ("APB 16"). In
conjunction with the revaluation of assets and liabilities, a reorganization
value for the entity is determined which generally approximates the fair value
of the entity before considering debt and approximates the amount a buyer would
pay for the assets of the entity after reorganization. Under fresh start
reporting, the reorganization value of the entity is allocated to the entity's
assets. If any portion of the reorganization value cannot be attributed to
specific tangible or identified intangible assets of the emerging entity, such
amount is reported as "reorganization value in excess of amounts allocable to
identifiable assets. Advantica intends to amortize such amount over a five-year
amortization period.
NOTE 3. 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:
Consolidated Financial Statements. The consolidated financial
statements include the accounts of Flagstar Enterprises, Inc. and its
wholly-owned subsidiary, Spardee's Realty, Inc. (collectively, the
"Company"). Spardee's Realty, Inc. holds and leases to Flagstar
Enterprises, Inc. 238 of the owned restaurant locations. All significant
intercompany transactions have been eliminated.
Fiscal Year. Effective January 1, 1997, the Company changed its fiscal
year end from December 31 to the last Wednesday of the calendar year.
Concurrent with this change, the Company changed to a four-four-five week
quarterly closing calendar which is the restaurant industry standard, and
generally
F-7
<PAGE> 16
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
results in four 13-week quarters during the year with each quarter ending
on a Wednesday. Due to the timing of this change, the year ended December
31, 1997 includes more than 52 weeks of operations. As a result, the 1997
fiscal year included an extra day in comparison to the 1996 year.
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.
Cash. Cash represents currency on hand and demand deposits with
financial institutions. Accounts with negative balances resulting from
checks drawn but not presented to the bank are included in current
liabilities as a bank overdraft.
Inventories. Inventories are valued at the lower of average cost or
market and consist of food items and supplies.
Property and Depreciation. Owned property is stated at cost and is
depreciated on the straight-line method over its useful life. Property held
under capital leases (at capitalized value) and leasehold improvements are
amortized on a straight-line basis over their estimated useful lives,
limited generally by the lease period. The following estimated useful lives
were in effect during 1997 and 1996:
Buildings and improvements -- Five to twenty-five years
Equipment -- Three to ten years
Franchise Rights. Franchise rights, net of accumulated amortization of
$15.5 million and $14.6 million at December 31, 1997 and 1996,
respectively, represent amounts paid for or values assigned to the Hardee's
franchise agreements. Franchise rights which existed at the date of the
acquisition of Flagstar by FCI are being amortized on a straight-line basis
over 12 years which was the average remaining life of the franchise
agreements at the acquisition date. Franchise rights purchased, and the
renewal of agreements, subsequent to the acquisition date are being
amortized over the life of the agreement or renewal on a straight-line
basis, generally 20 and 10 years, respectively.
Deferred Financing Costs. Costs related to the issuance of debt are
deferred and amortized as a component of interest expense over the terms of
the respective debt issues using the interest method.
Pre-Opening 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.
Insurance. Through June 30, 1997, the Company was primarily
self-insured for workers compensation, general liability and automobile
risks which are supplemented by stop-loss type insurance policies. As of
July 1, 1997, the Company changed to a guaranteed cost program to cover
workers' compensation insurance in most states. At December 31, 1997, the
Company remains self-insured for workers' compensation in only one state.
The liabilities for estimated incurred losses are discounted to their
present value based on expected loss payment patterns determined by
independent actuaries or on experience. The total discounted self-insurance
liabilities recorded at December 31, 1997 and 1996, reflecting a discount
rate of approximately 5%, were $9.9 million and $14.1 million,
respectively. The related undiscounted amounts at such dates were $11.2
million and $15.1 million, respectively.
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, 1997 and 1996
was $20.8 million and $23.0 million, respectively.
F-8
<PAGE> 17
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred Gain. In September 1995, Flagstar sold its food 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 to Flagstar of approximately $72.0 million,
$22.0 million of which was allocated to FEI based on its pro-rata share of
historical purchasing activity from PFC. The deferred gain is being
amortized over the life of the distribution contract as a reduction of
product cost. During 1996, the deferred gain was adjusted by approximately
$1.6 million, resulting in a net allocated deferred gain of $20.4 million.
During 1996, Flagstar sold Portion-Trol Foods, Inc. ("PTF"), a food
processing operation. In conjunction with the sale, the company entered
into a five-year purchasing agreement with the acquirer. This transaction
resulted in a deferred gain to Flagstar of approximately $41.5 million,
$4.2 million of which was allocated to FEI based on the estimated fair
value of the Company's purchase agreement relative to the total fair value
of all Flagstar's purchase agreements with PTF. The deferred gain is being
amortized over the life of the purchasing contract as a reduction of
product cost.
The portion of the deferred gains related to the sales of PFC and PTF
recognized as a reduction of product costs was approximately $3.3 million
and $2.8 million in 1997 and 1996, respectively.
New Accounting Standards. In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130), which establishes
standards for reporting and display of comprehensive income and its
components in the financial statements. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The Company is in the process of determining its preferred
presentation format under the new standard. The adoption of SFAS 130 will
have no impact on the Company's consolidated results of operations,
financial position or cash flows and will be implemented by the Company in
the fourth quarter of 1998.
In March 1998, the AIPCA issued Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use
(SOP 98-1), which provides guidance on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 requires external
and internal direct costs of developing or obtaining internal-use software
to be capitalized as a long-lived asset and also requires training costs
included in the purchase price of computer software and costs associated
with research and development to be expensed as incurred. In addition, in
the second quarter of 1998, the AICPA is expected to issue a statement of
position which provides additional guidance on the financial reporting of
start-up costs, requiring costs of start-up activities to be expensed as
incurred.
Both statements of position are effective for fiscal years beginning
after December 15, 1997. In accordance with the adoption of fresh start
reporting, upon emergence from bankruptcy (See Note 1), the Company will
adopt both statements of position as of January 7, 1998. The adoption of
both statements of position at January 7, 1998 will not have a material
impact on the Company.
NOTE 4: RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS
During 1997, the Company identified 19 underperforming units for sale or
closure. In accordance with SFAS 121, the carrying value of these units was
written down to estimated fair value less costs to sell, resulting in a charge
to income of $1.9 million. All of the identified units were disposed of prior to
December 31, 1997. The 19 units had aggregate operating revenue of approximately
$7.5 million and negative operating income of $0.6 million during 1997.
F-9
<PAGE> 18
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In conjunction with the completion of the 1995 restructuring plan, the
Company recorded an additional restructuring charge of $2.3 million in 1997
representing the additional write-down of the carrying value of certain assets.
NOTE 5. FRANCHISE RIGHTS
The Company operates certain retail food outlets under the "Hardee's" trade
name. Under the terms of the franchise agreements with Hardee's Food Systems,
Inc. ("HFS"), the Company has exclusive rights to use the Hardee's trade name
for retail outlets in certain areas for a period of twenty years from the date
of the original agreements and generally ten years from the date of the renewal
agreements. Agreements covering present operating locations expire on various
dates from 1997 to 2016. Certain of these agreements do not contain renewal
options; however, the Company has generally renegotiated such franchise
agreements for additional periods.
The franchise agreements provide for royalty payments based on a percentage
of sales (ranging from 2.2%-4.0%) of the related food outlets. Such royalty
expense was $18.1 million, $19.9 million, and $21.6 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company's territorial development agreement with HFS which called for
the Company to open a specified number of Hardee's restaurants in a development
territory in the Southeast (and certain adjacent areas) by the end of 1996 was
terminated during the fourth quarter of 1995. Termination of such agreement
makes the Company's development rights non-exclusive in the development
territory. As a result, other Hardee's franchisees along with the Company are
permitted to open Hardee's restaurants in such territory.
NOTE 6. DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Real estate financings:
10.25% Guaranteed Secured Bonds.......................... $101,641 $108,893
7 1/2% Industrial Development Revenue Bonds, due 2012,
redeemable by bondholders............................. 3,000 3,000
Equipment financings, interest ranging from 8.75% to
9.64%.................................................... 1,976 5,014
-------- --------
Total............................................ $106,617 $116,907
Less -- current maturities................................. 9,140 10,267
-------- --------
Long-term debt............................................. $ 97,477 $106,640
======== ========
</TABLE>
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is approximately $116.2 million at December 31, 1997. Such
computations are based on market quotations for the same or similar debt issues
or the estimated borrowing rates available to Flagstar and the Company.
Real Estate Financings
During 1990, Spardee's Realty, Inc. and Quincy's Realty, Inc., through
Spartan as the depositor of Secured Restaurants Trust, Inc. ("SRT"), completed a
public offering of $225 million 10.25% Guaranteed Secured Bonds (the "Bonds")
due 2000. $130 million of the bonds relate to Spardee's Realty, Inc. and $95
million relate to Quincy's Realty, Inc. The bonds were issued by SRT, a Delaware
statutory business trust formed for the limited purpose of issuing the bonds,
funding the related mortgages, collaterally assigning to NationsBank as
collateral agent, the mortgages and other collateral securing the bonds and
performing other activities related thereto.
F-10
<PAGE> 19
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Spardee's $130 million of bonds are secured by, among other things,
mortgage loans on 238 restaurants, a lien on the related restaurant equipment,
assignment of intercompany lease agreements, U.S. Government Securities, and the
stock of issuing subsidiaries. In addition, these bonds are insured with a
financial guarantee insurance policy written by a company that engages
exclusively in such coverage. Such guarantee prohibits the Company from
incurring debt or making distributions of assets, as defined (see Note 13).
On May 15, 1992, the Company replaced one of the units in the collateral
pool and letter of credit notes with United States Government Securities, which
were purchased at a cost of $6.4 million and deposited in an irrevocable trust
to satisfy principal and interest payments on the related bonds through the
stated maturity. The transaction resulted in the defeasance of a portion of the
bonds totaling $5.4 million. At December 31, 1997 and 1996, the defeased bonds
had an outstanding balance of $4.7 million and $4.9 million, respectively.
Principal and interest on the bonds is payable semi-annually with certain
payments made on a monthly basis. Principal payments total $7.2 million annually
through 1999; and $87.2 million in 2000.
Maturities of real estate and equipment financing debt at December 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $ 9,140
1999.............................................. 7,275
2000.............................................. 87,202
2001.............................................. --
2002.............................................. --
Thereafter........................................ 3,000
--------
Total................................... $106,617
========
</TABLE>
On April 11, 1994, Standard & Poor's Corporation downgraded the long-term
credit ratings on Flagstar's outstanding senior debt securities from B+ to B and
on its subordinated debt securities and FCI's Preferred Stock from B- to CCC+.
As a result of this action, certain payments by the Company relating to mortgage
financing are payable on a monthly, rather than semi-annual, basis to SRT. At
December 31, 1997, SRT held cash of approximately $11.5 million which
represented deposits by the Company toward a future payment obligation.
See Note 13 for information regarding the in-substance defeasance of the
10.25% Guaranteed Secured Bonds on April 1, 1998.
Notes Payable to Spartan
A portion of FCI's total acquisition cost and the debt and related deferred
financing costs used to finance the 1989 acquisition of Flagstar have been
allocated to each of the Flagstar subsidiaries, including Spartan. Such
allocation was based primarily on the relationship of Spartan's projected future
operating cash flows over a nine-year term and the expected proceeds from real
estate financings to the total projected future cash flows of all of the
subsidiaries of Flagstar during this period.
Notes payable to FEI's immediate parent, Spartan, are structured so that
the payment and interest terms parallel Flagstar's various debentures and notes.
The amount of the notes represent the acquisition financing allocated to the
Company. SOP 90-7 requires the Company to report interest expense during the
bankruptcy proceedings only to the extent that it will be paid during the
proceedings or that it is probable to be an allowed priority, secured or
unsecured claim. Accordingly, and in view of the terms of the Plan (see Note
13), as of July 11, 1997, the Company ceased recording interest on the notes
payable to SHI that parallel the debt to be
F-11
<PAGE> 20
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
extinguished as a result of the Plan. Contractual interest expense on those
obligations totaled $38.8 million for the year ended December 31, 1997, which is
$10.8 million in excess of reported interest expense for the period.
The interest rates on the notes payable to SHI are primarily fixed and
averaged 10.9% for the fiscal years ended December 31, 1997, 1996, and 1995,
respectively (excluding the impact of not recording certain interest during the
bankruptcy period).
Notes payable to Spartan mature as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $ --
1999.............................................. --
2000.............................................. --
2001.............................................. 59,606
2002.............................................. 65,025
Thereafter........................................ 232,288
--------
Total................................... $356,919
========
</TABLE>
The estimated fair value of the Company's share of the acquisition
financing is approximately $230.2 million at December 31, 1997. The estimate is
based on market quotations and estimated borrowings rates available to Flagstar.
NOTE 7. LEASES AND RELATED GUARANTEES
The Company's operations utilize property, facilities, equipment and
vehicles leased from others. Restaurant leases, which are primarily for
restaurant land and buildings, are noncancelable and expire on various dates
through 2015. Substantially all restaurant leases contain renewal options
ranging from five to twenty-five years. At December 31, 1997, restaurants were
operated under lease arrangements which generally provide for a fixed base rent,
and in some instances, contingent rental based on a percentage of gross
revenues.
Information regarding the Company's leasing activities at December 31, 1997
is as follows (in thousands):
<TABLE>
<CAPTION>
MINIMUM PAYMENTS
----------------------------------
YEAR CAPITAL LEASES OPERATING LEASES
---- -------------- ----------------
<S> <C> <C>
1998............................................ $ 8,866 $ 5,110
1999............................................ 7,346 4,928
2000............................................ 6,447 4,435
2001............................................ 6,437 3,822
2002............................................ 6,400 3,496
Subsequent years................................ 57,668 23,426
------- -------
Total................................. 93,164 $45,217
=======
Less -- imputed interest........................ 47,951
-------
Present value of capital leases obligations..... 45,213
Less -- current maturities...................... 3,874
-------
Long-term portion............................... $41,339
=======
</TABLE>
The fair value of the Company's capital lease obligations approximates its
carrying value.
F-12
<PAGE> 21
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total rental expense included in the determination of operating income
is as follows for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Base rents....................................... $5,305 $5,388 $5,579
Contingent rents................................. 679 1,002 1,280
------ ------ ------
Total.................................. $5,984 $6,390 $6,859
====== ====== ======
</TABLE>
NOTE 8. INCOME TAXES
A summary of the benefit from income taxes attributable to loss before
extraordinary items is as follows for the years ended December 31, 1997, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal................................... $ (4,022) $(1,706) $ 1,384
State and Other........................... 324 (16) 545
-------- ------- --------
(3,698) (1,722) 1,929
-------- ------- --------
Deferred:
Federal................................... (8,643) (4,320) (26,550)
State and Other........................... (357) (418) (3,319)
-------- ------- --------
(9,000) (4,738) (29,869)
-------- ------- --------
Net benefit from income taxes............... $(12,698) $(6,460) $(27,940)
======== ======= ========
Total benefit related to loss from:
Continuing operations..................... $(12,698) $(6,460) $(27,940)
Extraordinary items....................... 5
======== ======= ========
Total benefit from income taxes............. $(12,698) $(6,460) $(27,935)
======== ======= ========
</TABLE>
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,
------------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred income........................................ $ 7,110 $ 8,743
Self-insurance reserves................................ 4,113 6,023
Capitalized leases..................................... 4,817 4,865
Other accruals and reserves............................ 4,027 4,081
Alternative minimum tax credit carryforwards........... 1,156 1,400
General business credit carryforwards.................. 7,539 7,539
Net operating loss carryforwards....................... 6,072 --
Less: valuation allowance.............................. (421) (359)
------- -------
Total deferred tax assets...................... $34,413 32,292
======= =======
Deferred tax liabilities:
Amortization of intangible assets...................... 7,689 9,377
Depreciation of fixed assets........................... 48,445 53,643
------- -------
Total deferred income tax liability............ $56,134 $63,020
======= =======
</TABLE>
F-13
<PAGE> 22
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 before extraordinary item is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate.............................................. 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax
benefit................................................ -- -- 3%
Non-deductible payments to third parties.................... (3%) (8%) --
Deductible payments to third parties........................ 12% -- --
Targeted jobs tax credits................................... -- -- 4%
Other....................................................... -- -- 1%
--- --- ---
Effective tax rate.......................................... 44% 27% 43%
=== === ===
</TABLE>
At December 31, 1997, the Company has available, for purpose of its tax
sharing agreement with Advantica, general business credit carryforwards of
approximately $7 million, most of which expire in 2005 through 2010, and
alternative minimum tax ("AMT") credits of approximately $1 million. The AMT
credits may be carried forward indefinitely. In addition, the Company has
available regular income tax net operating loss carryforwards of approximately
$17 million which expire in 2012.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company maintains a funded defined benefit pension plan sponsored by
its parent covering substantially all of its employees. Benefits are based on
years of service and the employee's compensation during the last ten years of
employment. The parent's funding policy is to contribute annually the amount
that can be deducted for federal income tax purposes. Contributions are intended
to provide not only for benefits attributed to service to date but also for
those expected to be earned in the future.
The components of the parent's net pension cost of the funded and unfunded
defined benefit plans determined under SFAS No. 87 are as follows for the years
ended December 31, 1997, 1996, and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost.......................................... $ 3,354 $ 3,151 $ 2,639
Interest cost on projected benefit obligation......... 2,926 2,895 2,304
Actual return on plan assets.......................... (5,374) (2,277) (3,722)
Net amortization and deferral......................... 2,636 (242) 2,039
Curtailment/settlement losses(due to early retirement
of certain participants)............................ 1,342 -- --
------- ------- -------
Net pension cost...................................... $ 4,884 $ 3,527 $ 3,260
======= ======= =======
</TABLE>
The net periodic pension cost allocated to the Company was $1.9 million for
both years ended December 31, 1997 and 1996 and $2.2 million for year ended
December 31, 1995.
F-14
<PAGE> 23
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the funded status and amounts recognized in
the parent's balance sheet for its funded defined benefit plan (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Actuarial present value of accumulated benefit
Vested benefits........................................... $ 34,736 $ 27,661
Non-vested benefits....................................... 2,685 1,488
-------- --------
Accumulated benefit obligations............................. $ 37,421 $ 29,149
======== ========
Plan assets at fair value................................... $ 37,342 $ 31,109
Projected benefit obligation................................ (46,800) (36,416)
-------- --------
Funded status............................................... (9,458) (5,307)
Unrecognized net loss from past experience different from
that assumed.............................................. 10,774 6,890
Unrecognized prior service cost............................. (1,395) --
-------- --------
Prepaid Accrued pension costs............................... $ (79) $ 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.
Significant assumptions used in determining net pension cost and funded
status information in 1997, 1996, and 1995 are as follows for both years:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 7.0% 8.0% 8.0%
Rate of salary progression.................................. 4.0% 4.0% 4.0%
Long-term rates of return on assets......................... 10.0% 10.0% 10.0%
</TABLE>
The Company also offers an employee savings plan under which it makes
matching contributions, with certain limitations. The Company made no matching
contributions for the year ended December 31, 1996. The amounts charged to
income were $0.3 and $0.6 for the years ended December 31, 1997 and 1995,
respectively.
Certain employees of the company have been granted stock options under
FCI's 1989 Stock Option Plan (the "1989 Plan") which is described below. The
Company and FCI have adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement 123 "Accounting for Stock Based
Compensation" (SFAS 123) while continuing to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for 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 Plan permits a Committee of the Board of Directors to grant
options to key employees of FCI and its subsidiaries to purchase shares of
common stock of FCI 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
FCI'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 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.
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
F-15
<PAGE> 24
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
On December 13, 1996, the outstanding options of certain officers and
senior staff of FCI (including certain officers and senior staff of the
Company), 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.
During January 1997, FCI issued 291,000 options relative to the 1989 Plan.
Options forfeited during the year totaled approximately 1,070,000. No options
were exercised during the year. On the Effective Date of Advantica's emergence
from bankruptcy, pursuant to the Plan, FCI's common stock was canceled,
extinguished and retired. As a result, all stock options outstanding as of that
date, were effectively canceled. Due to the insignificant quantity of options
issued during 1997 and the fact that all options were issued at an exercise
price which exceeded the market price of the common stock upon issuance and
through January 7, 1998, the date upon which all outstanding options were
effectively canceled, the effect of such issuance is not material and
accordingly, is not disclosed.
Pro forma information regarding net income 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 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. Such pro forma
disclosures are not presented because the impact on the Company's net income for
the years ended December 31, 1996 and 1995, would be immaterial if the options
granted during those periods had been accounted for in accordance with SFAS 123.
A summary of FCI's stock option plans, which includes certain employees of
the Company, as of December 31, 1996 and changes during the year then ended is
presented below. This summary and the following summary of information about
stock options outstanding are not updated for 1997 activity, based on the
insignificance of such activity and the cancellation of all stock option plans
relative to the common stock on January 7, 1998:
<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>
F-16
<PAGE> 25
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about FCI's stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES 12/31/96 CONTRACTUAL LIFE PRICE 12/31/96 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Exercise price equals fair value at grant date.............. $1.65 $3.06
Exercise price exceeds fair value at grant date............. .78 2.97
</TABLE>
NOTE 10. STOCKHOLDER'S DEFICIT
The changes in stockholder's deficit of the Company from January 1, 1996 to
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
INTERCOMPANY NET
RECEIVABLE PARENT
FROM COMMON COMPANY
FLAGSTAR STOCK OTHER DEFICIT ACCOUNTS
------------ ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Parent company accounts at January 1,
1996.................................... $(34,590) $ -- $167,005 $(367,566) $(235,151)
Net loss for the year December 31, 1996... (17,155) (17,155)
Receipts from Flagstar, net............... 7,255 7,255
Deferred gain resulting from Flagstar's
sale of PTF............................. (4,134) (4,134)
Adjustment of deferred resulting from
Flagstar's sale of PFC.................. 1,590 1,590
Federal income tax adjustment............. (1,439) (1,439)
-------- ---- -------- --------- ---------
Parent company accounts at December 31,
1996.................................... $(29,879) $ -- $165,566 $(384,721) $(249,034)
Net loss for the year December 31, 1997... (15,876) (15,876)
Receipts from Flagstar, net............... 16,490 16,490
Non-Cash I/C Elim Pushdown of Interest.... (3,572) (3,572)
Adjustment I/C to PIC..................... 7,824 (7,824) 0
Pension Adjustment........................ (1,017) (1,017)
Adjustment to gain from Flagstar's sale of
PTF..................................... (254) (254)
Federal income tax adjustment............. (4,025) (4,025)
-------- ---- -------- --------- ---------
Parent company accounts at December 31,
1997.................................... $ (9,391) $ -- $$152,700 $(400,597) $(257,288)
======== ==== ======== ========= =========
</TABLE>
The intercompany receivable from Flagstar results from the Company's
participation in a cash concentration program with its parent, under which cash
is transferred between companies based on operating and capital requirements.
Other transactions with the parent such as tax sharing charges and accrued
interest also result in transactions that are recorded in the intercompany
receivable from Flagstar account.
F-17
<PAGE> 26
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENCIES
On March 7, 1997, FCI's Second Amended and Restated Credit Agreement (the
"Credit Agreement") was amended to provide for less restrictive financial
covenants for measurement periods ending on March 31, 1997 and June 30, 1997, as
well as to provide FCI flexibility to forego certain scheduled interest payments
due in March, May and June 1997 without triggering a default under the
agreement, unless any such debt is declared due and payable as a result of the
failure to pay such interest.
On March 17, 1997, in connection with the financial restructuring discussed
in the Notes 1 and 3, Flagstar elected not to make the interest payment due and
payable as of that date to holders of the 11 3/8% Senior Subordinated Debentures
due 2003. In addition, on May 1, 1997, also in connection with the
restructuring, Flagstar elected not to make the interest payments due and
payable as of that date to holders of the 11.25% Senior Subordinated Debentures
due 2004 (collectively with the 11 3/8% Senior Subordinated Notes due 2003, the
"Senior Subordinated Debentures") and 10% Convertible Junior Subordinated
Debentures due 2014 (the "10% Convertible Debentures"). As a result of these
nonpayments, and as a result of a continuation of such nonpayments for 30 days
past their respective due dates, Flagstar was in default under the terms of the
indentures governing such debentures. During the pendency of Flagstar's
bankruptcy proceedings, Flagstar also failed to make the interest payment due
September 15, 1997 on its 10 3/4% Senior Notes due 2001, the interest payment
due September 15, 1997 on its 11 3/8% Debentures, the interest payment due
November 1, 1997 on its 11.25% Debentures, the interest payment due November 1,
1997 on its 10% Convertible Debentures and the interest payment due December 1,
1997 on its 10 7/8% Senior Notes due 2002 (collectively with the 10 3/4% Senior
Notes due 2001, the "Old Senior Notes"). The bankruptcy filings operate as an
automatic stay of all collection and enforcement actions by the holders of the
Senior Subordinated Debentures, 10% Convertible Debentures, the Old Senior Notes
and the respective indentures' trustees with respect to Flagstar's failure to
make the interest payments when due.
On July 11, 1997, FCI entered into a $200.0 million debtor-in-possession
financing facility (the "DIP Facility") between FCI, Flagstar, Holdings, certain
subsidiaries of Flagstar and The Chase Manhattan Bank ("Chase") for working
capital and general corporate purposes and letters of credit. The DIP Facility
refinanced the Credit Agreement and is guaranteed by certain operating
subsidiaries of FCI, and generally is secured by liens on the same collateral
that secured FCI's obligations under the Credit Agreement, including the stock
of certain operating subsidiaries, and certain of FCI's trade and service marks.
At December 31, 1997, Advantica had no working capital advances outstanding
under the DIP Facility; however, letters of credit outstanding were $84.5
million. Substantially all of these letters of credit have been issued to
guarantee the workers compensation self-insurance reserves.
The DIP Facility contains certain financial and negative covenants,
conditions precedent, events of default and other terms, conditions and
provisions customarily found in credit agreements for companies in Chapter 11.
At December 31, 1997, Advantica and its subsidiaries were in compliance with the
terms of the DIP Facility.
On the Effective Date, Advantica entered into a credit agreement with Chase
and other lenders named therein which established the $200.0 million senior
secured credit facility (the "Credit Facility"). The Credit Facility refinances
the DIP Facility and will be used for working capital advances, letters of
credit and general corporate purposes by certain of Advantica's operating
subsidiaries, including the Company, which are borrowers thereunder. The Credit
Facility is guaranteed by Advantica and, subject to certain exceptions, by
Advantica's subsidiaries that are not borrowers thereunder and generally is
secured by liens on the same collateral that formerly secured Advantica's
obligations under the Credit Agreement.
The Credit Facility includes a working capital and letter of credit
facility of up to a total of $200.0 million. The Credit Facility matures on
January 7, 2003 (the "Maturity Date"), subject to earlier termination on March
31, 2000 in the event that certain mortgage financings of Advantica have not, on
or prior to such date,
F-18
<PAGE> 27
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been refinanced with other indebtedness that (a) matures at least 90 days after
the Maturity Date, and (b) is otherwise satisfactory to the lenders. The Credit
Facility is subject to mandatory prepayments and commitment reductions under
certain circumstances upon Advantica's sale of assets or incurrence of
additional debt.
The Credit Facility contains covenants customarily found in credit
agreements for leveraged financings that, among other things, place limitations
on (i) dividends on capital stock; (ii) redemptions and repurchases of capital
stock; (iii) prepayments, redemptions and repurchases of debt (other than loans
under the Credit Facility); (iv) liens and sale-leaseback transactions; (v)
loans and investments; (vi) incurrence of debt; (vii) capital expenditures;
(viii) operating leases; (ix) mergers and acquisitions; (x) asset sales; (xi)
transactions with affiliates; (xii) changes in the business conducted by
Advantica and its subsidiaries; and (xiii) amendment of debt and other material
agreements. The Credit Facility also contains covenants that require Advantica
and its subsidiaries on a consolidated basis to meet certain financial ratios
and tests including provisions for the maintenance of a minimum level of
interest coverage (as defined) and a minimum level of fixed charges coverage (as
defined), limitations on ratios of indebtedness (as defined) to earnings before
interest, taxes, depreciation and amortization (EBITDA) (as defined) and
limitations on annual capital expenditures.
There are various claims and pending legal actions against or indirectly
involving the Company, including actions concerned with employment and other
matters. The amounts of liability, if any, of these direct or indirect claims
and actions at December 31, 1997, over and above any insurance coverage in
respect to certain of them, are not specifically determinable at this time. 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, the prior experience of the Company, and
amounts which the Company and Flagstar have 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's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). Prior to the sale of FEI to HRS parent
company (See Note 13), an arbitration proceeding was pending between the Company
and HFS relating to certain matters arising under these license agreements. Such
proceeding was suspended in connection with the pending sale of FEI. As a result
of the consummation of such sale on April 1, 1998, all claims by the Company
against HFS have been released.
In conjunction with the sale of PTF, the Company entered into a five year
purchasing agreement with the acquirer under which the Company is required to
make minimum annual purchases over the contract terms. The aggregate estimated
commitment remaining at December 31, 1997 is approximately $56.0 million.
NOTE 12. RELATED PARTY TRANSACTIONS
Interest expense on notes payable to SHI (Note 6) amounted to $28.0 million
in 1997 and $42.3 million in 1996, and 1995.
During 1996 and 1995, the Company purchased meat and other food products
costing $8.6 million and $12.2 million respectively, from PTF, a wholly-owned
subsidiary of Denny's Holdings, Inc. prior to its sale in September 1996.
Denny's Holdings, Inc. is a wholly-owned subsidiary of Flagstar.
Flagstar Systems, Inc. ("FSI"), an affiliated company, provides certain
general and administrative support for the restaurant companies including rental
of the corporate offices and maintaining their general accounting records. Such
costs are allocated between FEI and Quincy's Restaurants, Inc. based primarily
on the total revenues of the two companies. Such corporate charges allocated to
FEI were $7.2 million $9.4 million and $12.5 million for the years ended
December 31, 1997 1996, and 1995 respectively. FSI's method of allocating these
expenses is not the only reasonable method and other reasonable methods of
allocation might produce different results.
F-19
<PAGE> 28
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUBSEQUENT EVENTS
FCI Financial Restructuring
On January 7, 1998, FCI and Flagstar emerged from proceedings under Chapter
11 of Title 11 of the Bankruptcy Code pursuant to FCI and Flagstar's Amended
Joint Plan of Reorganization (the "Plan") dated as of November 7, 1997. FCI's
operating subsidiaries, including the Company, did not file bankruptcy petitions
and were not parties to the above mentioned Chapter 11 proceedings.
Material features of the Plan as it became effective as of January 7, 1998,
are as follows:
(a) On the Effective Date, Flagstar merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant
Group, Inc. As a result of the merger of Flagstar into FCI, the $150.0
million note payable from Flagstar to FCI was extinguished; (b) The
following securities of FCI and Flagstar were canceled, extinguished and
retired as of the Effective Date: (i) Flagstar's 10 7/8% Senior Notes due
2002 and 10 3/4% Senior Notes due 2001, (ii) Flagstar's 11.25% Senior
Subordinated Debentures due 2004 and 11 3/8% Senior Subordinated Debentures
due 2003, (iii) Flagstar's 10% Convertible Junior Subordinated Debentures
due 2014, (iv) FCI's $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock, and (v) FCI's Old Common Stock;
(b) Advantica had 100.0 million authorized shares of Common Stock (of
which 40.0 million were issued and outstanding on the Effective Date) and
25.0 million authorized shares of preferred stock (none of which are
currently outstanding). Pursuant to the Plan of Reorganization, ten percent
of the number of shares of Common Stock issued and outstanding on the
Effective Date, on a fully diluted basis, is reserved for issuance under a
new management stock option program. Additionally, 4.0 million shares of
Common Stock are reserved for issuance upon the exercise of new warrants
expiring January 7, 2005 that were issued and outstanding on the Effective
Date and entitle the holders thereof to purchase in the aggregate 4.0
million shares of Common Stock at an exercise price of $14.60 per share
(the "Warrants");
(c) Each holder of the Old Senior Notes received such holder's pro
rata portion of 100.0% of Advantica's 11 1/4% Senior Notes due 2008 (the
"New Senior Notes") in exchange for 100.0% of the principal amount of such
holders' Old Senior Notes and accrued interest through the Effective Date;
(d) Each holder of the Senior Subordinated Debentures received each
holder's pro rata portion of shares of Common Stock equivalent to 95.5% of
the Common Stock issued on the Effective Date;
(e) Each holder of the 10% Convertible Debentures received such
holder's pro rata portion of (i) shares of Common Stock equivalent to 4.5%
of the Common Stock issued on the Effective Date and (ii) 100.0% of the
Warrants issued on the Effective Date; and
(f) Advantica refinanced its prior credit facilities by entering the
Credit Facility (see Note 11).
In conjunction with the extinguishment of the $150.0 million note payable
from Flagstar to FCI, the Senior Subordinated Debentures and the 10% Convertible
Debentures, the portion of the Company's notes payable to SHI that paralleled
such debt was extinguished, resulting in an extraordinary gain of $132.7
million. The remaining notes payable to SHI, which parallel the Old Senior
Notes, were restated to reflect the cancellation of the Old Senior Notes and the
allocation of the New Senior Notes to Advantica's operating subsidiaries. The
allocation is based primarily on each operating subsidiaries relative
reorganization values at January 7, 1998. The restated note payable to SHI is
structured so that the payment and interest terms parallel Advantica's payment
terms under the New Senior Notes.
CHANGE IN OWNERSHIP
On February 18, 1998, Advantica entered into a definitive agreement with
CKE Restaurants, Inc. ("CKE"), the parent company of HFS, for the sale of stock
of the Company. The sale was consummated on
F-20
<PAGE> 29
FLAGSTAR ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
April 1, 1998. As contemplated by such agreement, Advantica received $380.8
million in cash (subject to certain adjustments) in exchange for all of the
outstanding stock of the Company. In addition, CKE assumed the Company's capital
leases. The definitive agreement with CKE includes a covenant not to compete
which expires on the second anniversary of the closing date of the sale. In
general, the covenant requires that Advantica not engage, directly or
indirectly, in the quick-service hamburger restaurant business in certain
designated market areas. A portion of the proceeds (together with amounts
already on deposit) was applied to in-substance defease the Company's 10.25%
Guaranteed Secured Bonds due 2000 which were not assumed by CKE. Such Bonds had
a book value of $113.8 million plus accrued interest of $2.6 million at April 1,
1998. The Bonds were collateralized by certain assets of the Company. Advantica
replaced such collateral by purchasing United States Government Securities and
AAA rated corporate debt instruments and depositing them with the collateral
agent with respect to such Bonds to satisfy principal and interest payments
under such Bonds through the stated maturity date in the year 2000. A portion of
the proceeds was also used to in-substance defease the 10.25% Guaranteed Secured
Bonds due 2000 of Quincy's Restaurants, Inc. which is also a wholly-owned
subsidiary of Advantica.
NOTE 14. SUPPLEMENTAL INFORMATION -- (UNAUDITED)
The following results of operations for the three years ended December 31,
1997, 1996, and 1995 represent the continuing operations of the 557 FEI Hardee's
restaurants open and operating as of December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUE.................................. $537,339 $564,869 $624,155
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging............................ 176,318 186,515 204,764
Payroll and other employee benefits........... 173,728 182,154 208,754
Occupancy and other operating expenses........ 107,035 92,619 100,479
Royalties..................................... 17,741 18,462 20,345
-------- -------- --------
474,822 479,750 534,342
Advertising expenses............................. 20,474 20,789 23,138
General and administrative expenses.............. 28,866 23,818 29,170
-------- -------- --------
Total operating costs and expenses....... 524,162 524,357 586,650
OPERATING INCOME (LOSS)............................ $ 13,177 $ 40,512 $ 37,505
======== ======== ========
Number of Units.................................... 557 557 557
======== ======== ========
</TABLE>
F-21
<PAGE> 30
HARDEE'S FOOD SYSTEMS, INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 15,
1996 1997
------------ ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ --
Receivables............................................... 22,277 16,158
Federal and state income taxes receivable................. 11,237 --
Inventories............................................... 10,906 10,621
Prepaid expenses and other current assets................. 3,016 3,105
--------- ---------
Total current assets.............................. 47,436 29,884
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land...................................................... 93,065 89,699
Buildings, including improvements to leased properties.... 388,757 397,356
Equipment, vehicles and fixtures.......................... 240,145 247,764
Construction in progress.................................. 1,722 949
Leased property under capital leases...................... 10,518 10,633
--------- ---------
734,207 746,401
Less accumulated depreciation and amortization............ (336,883) (349,976)
--------- ---------
Total property, plant and equipment, net.......... 397,324 396,425
--------- ---------
OTHER ASSETS:
Notes receivable due after one year....................... 10,607 10,946
Intangible assets......................................... 299 287
Deferred charges.......................................... 627 485
Deferred income taxes..................................... 34,306 34,306
Other..................................................... 21 758
--------- ---------
Total other assets................................ 45,860 46,782
--------- ---------
TOTAL ASSETS...................................... $ 490,620 $ 473,091
========= =========
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-22
<PAGE> 31
HARDEE'S FOOD SYSTEMS, INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JULY 15,
1996 1997
------------ --------
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdrafts........................................... $ 5,359 $ 7,874
Short-term borrowings..................................... 10,000 --
Trade accounts payable.................................... 10,317 10,980
Trade accounts payable -- inter-unit...................... 5,851 --
Other accounts payable and accrued expenses............... 75,956 59,331
Deferred income........................................... 1,569 --
Current maturities of long-term debt...................... 46 207
Current maturities of obligations under capital leases.... 606 546
Deferred income taxes..................................... 1,166 1,166
-------- --------
Total current liabilities......................... 110,870 80,104
-------- --------
POSTRETIREMENT BENEFITS..................................... 20,440 4,860
-------- --------
ESTIMATED FUTURE COST OF EXCESS PROPERTIES.................. 21,403 15,934
-------- --------
LONG-TERM DEBT TO PARENT AND AFFILIATES..................... -- --
-------- --------
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES................ 1,709 1,536
-------- --------
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT
MATURITIES................................................ 6,124 5,845
-------- --------
DEFERRED CREDITS -- OTHER................................... 6,018 --
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock of no par value.............................. -- --
Authorized 10,000,000 shares; 225 and 155 shares issued at
stated value of $.50 per share in 1997 and 1996,
respectively........................................... 1 1
Additional paid-in capital................................ 316,596 347,468
(Accumulated deficit) Retained earnings................... 7,459 17,343
-------- --------
Total shareholder's equity........................ 324,056 364,812
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................. $490,620 $473,091
======== ========
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-23
<PAGE> 32
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
JUNE 30, JULY 15,
1996 1997
----------- ------------
<S> <C> <C>
REVENUES:
Company-operated restaurants.............................. $350,473 $348,885
Franchised and licensed restaurants and other............. 48,474 50,870
-------- --------
Total revenues.................................... 398,947 399,755
-------- --------
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging..................................... 119,433 114,674
Payroll and other employee benefits.................... 131,186 127,213
Occupancy and other operating expenses................. 88,068 79,823
-------- --------
338,687 321,710
Franchised and licensed restaurants and other.......... 18,760 17,940
Advertising expenses................................... 20,582 19,989
General and administrative expenses.................... 34,038 33,076
-------- --------
Total operating costs and expenses................ 412,067 392,715
-------- --------
OPERATING INCOME (LOSS)..................................... (13,120) 7,040
INTEREST EXPENSE............................................ 3,491 1,436
OTHER INCOME, NET........................................... (4,754) (4,280)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (11,857) 9,884
INCOME TAX EXPENSE.......................................... -- --
-------- --------
NET INCOME (LOSS)........................................... $(11,857) $ 9,884
======== ========
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-24
<PAGE> 33
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE TWENTY-EIGHT WEEKS ENDED JULY 15, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
COMMON STOCK AT BEGINNING AND END OF PERIOD................. $ 1 $ 1
-------- --------
ADDITIONAL PAID-IN CAPITAL:
Amount at beginning of period............................. 253,583 316,596
Capital contributions..................................... 63,013 30,872
-------- --------
Amount at end of period................................ 316,596 347,468
-------- --------
RETAINED EARNINGS:
Amount at beginning of period............................. 35,318 7,459
Net income (loss)......................................... (27,859) 9,884
-------- --------
Amount at end of period................................ 7,459 17,343
-------- --------
TOTAL SHAREHOLDER'S EQUITY........................ $324,056 $364,812
======== ========
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-25
<PAGE> 34
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
JUNE 30, JULY 15,
1996 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(11,857) $ 9,884
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation (including amortization of leased
property under capital leases)................... 23,941 26,577
Amortization of intangible assets.................. 459 154
Loss on disposition of property, plant and
equipment........................................ 861 3,456
Provision (benefit) for (from) postretirement
benefits......................................... 3,845 (15,580)
Amortization of gain on sale of real estate........ (302) (6,018)
Provision (benefit) for (from) excess properties
expense.......................................... 5,955 (5,469)
Provision for deferred income taxes................ 7,965 --
Provision for bad debts............................ 10,612 2,590
Changes in assets and liabilities:
Receivables...................................... (12,680) 4,393
Inventories...................................... 2,354 285
Prepaid expenses and other current assets........ 310 (89)
Trade accounts payable........................... 5,765 (5,188)
Other accounts payable and accrued expenses...... (3,283) (16,625)
Federal and state income taxes................... 3,713 11,237
Deferred income.................................. (1,390) (1,569)
-------- --------
Net cash provided by operating activities.......... 36,268 8,038
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (29,554) (36,082)
Proceeds from disposition of property, plant and
equipment............................................... 5,233 7,287
(Increase) decrease in intangibles and other assets....... 326 (737)
Issuance of notes receivable.............................. (3,860) (2,779)
Collection on notes receivable and direct financing
leases.................................................. 1,476 1,237
-------- --------
Net cash used in investing activities.............. (26,379) (31,074)
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Repayment of long-term debt............................... (19) (12)
Proceeds from short-term borrowings....................... 3,000 --
Repayment of short-term borrowings........................ -- (10,000)
Repayment of notes payable to affiliates.................. (131,777) --
Bank overdrafts........................................... -- 2,515
Repayment of obligations under capital leases............. (365) (339)
Net transfers from parent................................. 110,908 30,872
-------- --------
Net cash provided by (used in) financing
activities....................................... (18,253) 23,036
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (8,364) --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 26,112 --
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 17,748 $ --
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of capitalized amount).................... $ 117 $ 730
Income taxes (net of refunds)........................... 16,132 13,626
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
In conjunction with the acquisition of restaurants from
franchisees, the Company exchanged notes receivable in
the amount of........................................... $ 1,773 $ 339
Exchange of accounts receivable for notes receivable...... $ 377 $ --
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-26
<PAGE> 35
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 30, 1996 AND
THE TWENTY-EIGHT WEEKS ENDED JULY 15, 1997
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of Hardee's Food
Systems, Inc. (the "Company") a North Carolina Corporation and wholly-owned
subsidiary of Imasco Holdings, Inc. ("Imasco Holdings"), a Delaware corporation.
Imasco Holdings is a wholly-owned subsidiary of Imasco Limited, a Canadian
Corporation.
The accounts of Hardee's Food Systems, Inc. include the Restaurant and
Equipment Divisions, however, they do not include the accounts of Fast Food
Merchandisers, Inc. ("FFM") and MRO Mid-Atlantic, ("MRO") two directly owned
subsidiaries.
The common stock of Hardee's Food Systems, Inc. will be sold to CKE
Restaurants, Inc. under a stock purchase agreement dated April 27, 1997 (See
Note 3). FFM and MRO will be spun off to Imasco Holdings or one of its
affiliates.
The Restaurant Division operates a system of approximately 3,200 company
and franchise quick service restaurants under the Hardee's trademark in 37
states and 10 foreign countries. The Equipment Division is engaged in the
business of selling equipment and small wares to Hardee's and other restaurant
businesses.
NOTE 2 -- COMMITMENTS AND CONTINGENCIES
On March 19, 1997, Flagstar Enterprises, Inc. ("Flagstar"), which operates
approximately 557 Hardee's restaurants, commenced an arbitration proceeding
against Hardee's pursuant to provisions of its license agreements. The Demand
for Arbitration, which contains six claims, (i) alleges that Hardee's has
breached certain contractual, fiduciary and statutory duties allegedly owed to
Flagstar, (ii) seeks a declaration relieving Flagstar from its obligations under
the post-termination covenants against competition contained in its license
agreements, and (iii) seeks an award of monetary damages in excess of $500
million (subject to trebling pursuant to the statutory claim).
Subsequent to the sale of the Company to CKE Restaurants, Inc. on July 15,
1997, CKE Restaurants, Inc. reached an agreement to purchase all of the
outstanding capital stock of Flagstar (See Note 3). Upon closing of the
purchase, the pending arbitration between Flagstar and the Company will be
dismissed and terminated with general releases and no payments due from either
party thereto.
Failure to consummate the purchase of Flagstar would result in the
continuation of the pending arbitration proceedings. Based on currently
available information, the Company believes that these claims are without merit
and intends, if necessary, to defend against them vigorously. Therefore, no
estimate of any possible loss to the Company can be made at this time.
NOTE 3 -- SUBSEQUENT EVENTS
On February 18, 1998, CKE agreed to acquire Flagstar from Advantica
Restaurant Group, Inc. for a purchase price of $380.8 million, subject to
adjustment.
On July 15, 1997, the Company was sold to CKE Restaurants, Inc. ("CKE").
FFM, a wholly owned subsidiary of the Company engaged in the food processing and
distribution business and MRO, are not included in the transaction. The purchase
price of $327 million is subject to post-closing adjustments. Imasco and CKE
have not reached agreement as to the post-closing adjustments. The maximum
purchase price adjustment varies from an increase of approximately $8,000,000 to
a decrease of approximately $10,000,000. The outcome of this disagreement is not
presently determinable and is subject to arbitration.
F-27
<PAGE> 36
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWENTY-SIX WEEKS ENDED JUNE 30, 1996 AND
THE TWENTY-EIGHT WEEKS ENDED JULY 15, 1997
(UNAUDITED)
NOTE 4 -- SUPPLEMENTAL INFORMATION
The following results of operations for the twenty-six weeks ended June 30,
1996 and the twenty-eight weeks ended July 15, 1997 represent the continuing
operations of Hardee's Food Systems, Inc. as discussed in Note 1. Included are
the results for the 782 restaurants open and operating as of July 15, 1997, the
franchising operations and the Equipment Division.
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
JUNE 30, JULY 15,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
REVENUES:
Company-operated restaurants.............................. $295,885 $346,481
Franchised and licensed restaurants and other............. 48,474 50,870
-------- --------
Total revenues.................................... 344,359 397,351
-------- --------
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging..................................... 100,665 113,801
Payroll and other employee benefits.................... 108,428 125,924
Occupancy and other operating expenses................. 68,503 78,909
-------- --------
277,596 318,634
Franchised and licensed restaurants and other............. 18,760 17,940
Advertising expenses...................................... 16,426 19,018
General and administrative expenses....................... 34,038 33,076
-------- --------
Total operating costs and expenses................ 346,820 388,668
-------- --------
OPERATING INCOME (LOSS)..................................... $ (2,461) $ 8,683
======== ========
Number of Units............................................. 727 782
</TABLE>
Total general, administrative and supervision expenses for each year have
been included in operating results with no allocation to non-operating units.
F-28
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
23.1 Consent of DeLoitte & Touche, LLP
99A* Press Release dated April 1, 1998
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements on
Forms S-8 (Registration Nos. 33-56313, 33-55337, 333-12399, 33-53089, 2-86142,
33-31190 and 333-12401), on Form S-3 (Registration No. 333-51103) and Form S-4
(Registration No. 333-52633) of CKE Restaurants, Inc. ("CKE") of our report
dated February 20, 1998 (April 1, 1998 with respect to Note 13), on the
consolidated balance sheets of Flagstar Enterprises, Inc. and Subsidiary as of
December 31, 1996 and 1997 and the related consolidated statements of operations
and cash flows for each of the years in the three-year period ended December 31,
1997, which report is included in CKE's Current Report on Form 8-K dated April
1, 1998, as amended.
/s/
Greenville, South Carolina
June 12, 1998
