-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NHvf0LcKa+oNXd2COp9+9pK+03oJVbDxPOKVDnMzLmeO8/j3C93danjqjhS+cdjk W71wrV5vK3kiRIjPXuLQBg== 0000950168-96-000543.txt : 19960401 0000950168-96-000543.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950168-96-000543 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLAGSTAR COMPANIES INC CENTRAL INDEX KEY: 0000852772 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 133487402 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18051 FILM NUMBER: 96541822 BUSINESS ADDRESS: STREET 1: 203 E MAIN ST CITY: SPARTANBURG STATE: SC ZIP: 29319 BUSINESS PHONE: 8035978700 MAIL ADDRESS: STREET 1: 203 EAST MAINE STREET CITY: SPARTANBURG STATE: SC ZIP: 29319 FORMER COMPANY: FORMER CONFORMED NAME: TW HOLDINGS INC DATE OF NAME CHANGE: 19920703 10-K 1 FLAGSTAR COMPANIES, INC. 42186.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-18051 FLAGSTAR COMPANIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3487402 (State or other jurisdiction (I.R.S. employer of incorporation or identification no.) organization) 203 EAST MAIN STREET 29319-9966 SPARTANBURG, SOUTH CAROLINA (Zip code) (Address of principal executive offices)
Registrant's telephone number, including area code: (864) 597-8000. Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED None None
Securities registered pursuant to Section 12(g) of the Act: $.50 Par Value, Common Stock TITLE OF CLASS $.10 Par Value, $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock TITLE OF CLASS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $74,818,531 based upon the closing sales price of registrant's Common Stock on March 7, 1996 of $3.88 per share. As of March 7, 1996, 42,434,606 shares of registrant's Common Stock, $.50 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held April 24, 1996, are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS
PAGE PART I Item 1. Business................................................................................................... 1 Item 2. Properties................................................................................................. 9 Item 3. Legal Proceedings.......................................................................................... 10 Item 4. Submission of Matters to a Vote of Security Holders........................................................ 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................... 12 Item 6. Selected Financial Data.................................................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13 Item 8. Financial Statements and Supplementary Data................................................................ 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 20 PART III Item 10. Directors and Executive Officers of the Registrant......................................................... 20 Item 11. Executive Compensation..................................................................................... 20 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 20 Item 13. Certain Relationships and Related Transactions............................................................. 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 25 INDEX TO FINANCIAL STATEMENTS.......................................................................................... F-1 SIGNATURES.............................................................................................................
PART I ITEM 1. BUSINESS INTRODUCTION Flagstar Companies, Inc. ("FCI"), through its wholly-owned subsidiary Flagstar Corporation ("Flagstar"), is one of the largest restaurant companies in the United States, operating (directly and through franchisees) more than 2,500 moderately priced restaurants. Flagstar's restaurant operations are conducted through four chains or concepts. Denny's is the nation's largest chain of family-oriented full service restaurants, with over 1,500 units in 49 states, Puerto Rico, and four foreign countries, including 508 in California and Florida. According to an independent survey conducted in 1995, Denny's has the leading share of the national market in the family segment. Hardee's is a chain of quick-service restaurants of which Flagstar, with 593 units located primarily in the Southeast, is the largest franchisee. Although specializing in sandwiches, Flagstar's Hardee's restaurants serve fresh fried chicken and offer a breakfast menu that accounts for approximately 42% of total sales and features the chain's famous "made-from-scratch" biscuits. Quincy's, with more than 200 locations, is one of the largest chains of family steakhouse restaurants in the southeastern United States, offering steak, chicken and seafood entrees as well as a buffet food bar, called the "Country Sideboard." A weekend breakfast buffet is available at most Quincy's locations. Flagstar also operates El Pollo Loco, a chain of 217 quick-service restaurants featuring flame-broiled chicken and steak products and related Mexican food items, with a strong regional presence in California. Although operating in two distinct segments of the restaurant industry -- full-service and quick-service -- the Company's restaurants benefit from a single management strategy that emphasizes superior value and quality, friendly and attentive service and appealing facilities. During the past year, Flagstar remodeled 333 of its Company-owned restaurants and added a net of seven (both franchised and Company-owned) new restaurants to its chains (reflecting an increase of 82 franchised and international units offsetting a 75 unit decline in Company-owned restaurants). FCI is a holding company that was organized in Delaware in 1988 in order to effect the acquisition of Flagstar in 1989. On November 16, 1992, FCI and Flagstar consummated the principal elements of a recapitalization (the "Recapitalization"), which included, among other things, an equity investment by TW Associates, L.P. ("TW Associates") and KKR Partners II, L.P. ("KKR Partners II") (collectively, "Associates"), partnerships affiliated with Kohlberg Kravis Roberts & Co. ("KKR"). As a result of such transactions, Associates acquired control of FCI and Flagstar. Prior to June 16, 1993, FCI and Flagstar had been known, respectively, as TW Holdings, Inc. and TW Services, Inc. As used herein, the term "Company" includes FCI, Flagstar and its subsidiaries, except as the context otherwise requires. As a result of the 1989 acquisition of Flagstar, the Company became and remains very highly leveraged. While the Company's cash flows have been, and are expected to continue to be, sufficient to cover interest costs, operating results since the acquisition in 1989 have fallen short of expectations. Such shortfalls have resulted from negative operating trends which are due to increased competition, intensive pressure on pricing due to discounting, declining customer traffic, adverse economic conditions, and relatively limited capital resources to respond to these changes. In the fourth quarter of 1993, management determined that the most likely projections of future results were those based on the assumption that these historical operating trends of each of the Company's restaurant concepts and of its now sold food and vending business would continue, and that such projected financial results of the Company would not support the carrying value of the remaining balance of goodwill and certain other intangible assets. Accordingly, such balances were written-off during 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Consolidated Financial Statements for additional information. These operating trends have generally continued through 1995. RESTAURANTS The Company believes its restaurant operations benefit from the diversity of the restaurant concepts represented by its four chains, the strong market positions and consumer recognition enjoyed by each of these chains, the benefits of a centralized support system for purchasing, menu development, human resources, management information systems, site selection, restaurant design and construction, and an aggressive new management team. The Company owns or has rights in all trademarks it believes are material to its restaurant operations. Denny's and Quincy's may benefit from the demographic trend of aging baby boomers and the growing population of elderly persons. The largest percentage of "family style" customers comes from the 35 and up age group. The Company expects its chain of Hardee's restaurants to maintain a strong market position in the Southeast. 1 During the fourth quarter of 1993, the Company approved a restructuring plan for its restaurant concepts which included the following key features: (1) the identification of units for sale, closure or conversion to another concept; (2) changes to the field management structure to eliminate a layer of management and increase the regional managers' "span of control"; and (3) consolidation of certain Company operations and elimination of overhead positions in the field and in certain of its corporate functions. The restructuring charge reflected in the Company's 1993 Consolidated Financial Statements consisted primarily of the write-down in the carrying value of assets referred to in (1) above and severance and relocation costs associated with (2) and (3) above. As of December 31, 1995, the Company had closed or sold 69 restaurant units referred to in (1) above and intends to close or dispose of an additional 17 units generally in 1996. Management intends to operate the remaining units. As of December 31, 1995, substantially all of the incremental changes relating to (2) and (3) above had been completed. During 1995, the Company identified 36 underperforming units for sale or closure generally during 1996. The carrying value of these units have been written-down to estimated fair value based on sales of similar units or other estimates of selling price, less cost to sell. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1, 2, and 3 to the Consolidated Financial Statements for additional information. DENNY'S
YEAR ENDED DECEMBER 31, 1991 1992 1993 1994 Operating Units (end of year) Owned/operated.................................................................... 996 1,013 1,024 978 Franchised........................................................................ 330 382 431 512 International..................................................................... 65 65 59 58 Revenues (in millions) (1).......................................................... $1,429 $1,449 $1,546 $1,548 Operating Income (Loss) (in millions) (1)........................................... $ 128 $ 130 $ (625)(2) $ 123 Depreciation and Amortization (in millions) (1)..................................... $ 75 $ 82 $ 88 $ 68 Average Unit Sales (in thousands) Owned/operated.................................................................... $1,232 $1,231 $1,233 $1,248 Franchised........................................................................ $1,040 $1,065 $1,057 $1,060 Average Check (4)................................................................... $ 4.37 $ 4.56 $ 4.76 $ 4.75 1995 Operating Units (end of year) Owned/operated.................................................................... 933 Franchised........................................................................ 596 International..................................................................... 24 Revenues (in millions) (1).......................................................... $1,491 Operating Income (Loss) (in millions) (1)........................................... $ 97(3) Depreciation and Amortization (in millions) (1)..................................... $ 70 Average Unit Sales (in thousands) Owned/operated.................................................................... $1,283 Franchised........................................................................ $1,086 Average Check (4)................................................................... $ 4.86
(1) Includes distribution and processing operations. The distribution operations were sold September 8, 1995. (2) Operating income reflects the write-off of goodwill and certain other intangible assets and the provision for restructuring charges of $716 million for the year ended December 31, 1993. For a discussion of the write-off and restructuring and the reasons therefor, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Consolidated Financial Statements. (3) Operating income reflects a provision for restructuring of $5 million and a charge for impaired assets of $24 million for the year ended December 31, 1995. For a discussion of the provision for restructuring and charge for impaired assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 2 to the Consolidated Financial Statements. (4) Amount is calculated on an average unit sales basis for owned/operated units. Denny's is the largest full-service family restaurant chain in the United States in terms of both number of units and total revenues and, according to an independent survey conducted in 1995 by Consumer Reports on Eating Share Trends (CREST), an industry market research firm, Denny's has the leading share of the national market in the family segment. Denny's restaurants currently operate in 49 states, Puerto Rico, and four foreign countries, with principal concentrations in California, Florida, Texas, Arizona, Washington, Ohio, Illinois, and Pennsylvania. Denny's restaurants are designed to provide a casual dining atmosphere with moderately priced food and quick, efficient service to a broad spectrum of customers. The restaurants generally are open 24 hours a day, seven days a week. All Denny's restaurants have uniform menus (with some regional and seasonal variations) offering traditional family fare (including breakfast, steaks, seafood, hamburgers, chicken and sandwiches) and provide both counter and table service for breakfast, lunch and dinner as well as a "late night" menu. The Company acquired the Denny's chain in September 1987. Since the acquisition, the Company has reduced corporate level overhead (including through the relocation of key operating personnel to the Company's Spartanburg, South Carolina headquarters), accelerated Denny's remodeling program, added point-of-sale ("POS") systems to the chain's restaurants, simplified the menu and created new advertising and marketing programs. In 1994, the Company began to implement a "reimaging" strategy intended to result in a fundamental change in the competitive positioning of Denny's. This reimaging strategy involved all restaurants within a market area and included an updated exterior look, new signage, an improved interior layout with more comfortable seating and enhanced lighting. Reimaging also included a new menu, new menu offerings, new uniforms, and enhanced dessert offerings, including in 2 some markets Baskin-Robbins(Register mark) ice cream. The Company completed the reimaging of 306 restaurant units during 1994 and 1995. During 1995 management curtailed the efforts of its reimaging program in order to focus its attention on programs specifically designed at improving customer service, restaurant efficiency, and value positioning. In 1996, the Company plans to complete limited exterior refurbishments to enhance the curb appeal of the remaining 627 Company-owned restaurants. To achieve improvements in customer service and restaurant efficiency, Denny's introduced the "Managing Partners Program" during the fourth quarter of 1995. Under this program, a managing partner will typically have full accountability for three to five restaurants and report directly to the president of Denny's. Managing partners will be compensated for improving customer service and running their restaurants efficiently. This program is expected to provide additional support to the restaurants by flattening the organizational structure and creating more open communications between the restaurants and Denny's senior management. The Company's POS system provides hourly sales reports, cash control and marketing data and information regarding product volumes. POS systems provide guest traffic information for labor scheduling, provide information to evaluate more effectively the impact of menu changes on sales, and reduce the paperwork of managers. Marketing initiatives in 1996 will focus on the positioning of Denny's as the price value leader within its segment, offering value menus at breakfast and lunch through its tiered menu items priced at $1.99, $2.99, $3.99, and $4.99. The Company rolled-out its value menu system-wide in January 1996. These promotions are designed to capitalize on the strong public recognition of the Denny's name. The Company intends to open relatively few Company-owned Denny's restaurants and to expand its franchising efforts in 1996 in order to increase its market share, establish a presence in new areas and further penetrate existing markets. To accelerate the franchise expansion, the Company will identify units to sell to franchisees which are not part of its growth strategy for Company-owned Denny's units. As of December 31, 1995, 15 units have been identified for sale or closure generally during 1996. The field management infrastructures established to serve the existing Denny's system are expected to provide sufficient support for additional units with moderate incremental expense. Expanded franchising also will permit the Company to exploit smaller markets where a franchisee's ties to the local community are advantageous. During 1995, the Company added a net of 84 new Denny's franchises, of which 36 units were previously owned by the Company, bringing total franchised units to 596, or 38% of all Denny's restaurants. The initial fee for a single Denny's franchise is $35,000, and the current royalty payment is 4% of gross sales. In 1995, Denny's realized $47.7 million of revenues from franchising. Franchisees also purchase food and supplies from a Company subsidiary. HARDEE'S
YEAR ENDED DECEMBER 31, 1991 1992 1993 1994 Operating Units (end of year) Owned/operated.................................................................... 500 528 564 595 Revenues (in millions).............................................................. $ 525 $ 607 $ 682 $ 701 Operating Income (Loss) (in millions)............................................... $ 52 $ 72 $ (179)(1) $ 76 Depreciation and Amortization (in millions)......................................... $ 40 $ 44 $ 48 $ 41 Average Unit Sales (in thousands) Owned/operated.................................................................... $1,062 $1,185 $1,255 $1,206 Average Check (3)................................................................... $ 2.72 $ 2.88 $ 3.09 $ 3.11 1995 Operating Units (end of year) Owned/operated.................................................................... 593 Revenues (in millions).............................................................. $ 660 Operating Income (Loss) (in millions)............................................... $ 4(2) Depreciation and Amortization (in millions)......................................... $ 42 Average Unit Sales (in thousands) Owned/operated.................................................................... $1,104 Average Check (3)................................................................... $ 3.16
(1) Operating income reflects the write-off of goodwill and certain other intangible assets and the provision for restructuring charges of $260 million for the year ended December 31, 1993. For a discussion of the write-off and restructuring and the reasons therefor, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Consolidated Financial Statements. (2) Operating income reflects a provision for restructuring of $8 million and a charge for impaired assets of $24 million for the year ended December 31, 1995. For a discussion of the provision for restructuring and charge for impaired assets see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 2 to the Consolidated Financial Statements. (3) Amount is calculated on an average unit sales basis. The Company's Hardee's restaurants are operated under licenses from Hardee's Food Systems, Inc. ("HFS"). The Company is HFS' largest franchisee, operating 17% of Hardee's restaurants nationwide. HFS is the fifth largest sandwich chain in the United States based on national systemwide sales. Of the 593 Hardee's restaurants operated by the Company at December 31, 1995, 572 were located in ten southeastern states. The Company's Hardee's restaurants provide uniform menus in a quick-service format targeted to a broad spectrum of customers. The restaurants offer hamburgers, chicken, 3 roast beef and fish sandwiches, hot dogs, salads and low-fat yogurt, as well as a breakfast menu featuring Hardee's popular "made-from-scratch" biscuits. To add variety to its menu, further differentiate its restaurants from those of its major competitors and increase customer traffic during the traditionally slower late afternoon and evening periods, HFS added fresh fried chicken as a menu item in a number of its restaurants beginning in 1991. The Company accelerated the introduction of fresh fried chicken as a regular menu item during 1992 and completed the rollout in 1993. Substantially all of the Company's Hardee's restaurants have drive-thru facilities, which provided 52% of the chain's revenues in 1995. Most of the restaurants are open 18 hours a day, seven days a week. Operating hours of selected units have been extended to 24 hours a day, primarily on weekends. Hardee's breakfast menu, featuring the chain's signature "made-from-scratch" biscuits, accounts for approximately 42% of total sales at the Company's Hardee's restaurants. Each Hardee's restaurant is operated under a separate license from HFS. Each license grants the exclusive right, in exchange for a franchise fee, royalty payments and certain covenants, to operate a Hardee's restaurant in a described territory, generally a town or an area measured by a radius from the restaurant site. Each license has a term of 20 years from the date the restaurant is first opened for business and is non-cancellable by HFS, except for the Company's failure to abide by its covenants. Earlier issued license agreements are renewable under HFS' renewal policy; more recent license agreements provide for successive five-year renewals upon expiration, generally at rates then in effect for new licenses. A number of the Company's licenses are scheduled for renewal. The Company has historically experienced no difficulty in obtaining such renewals and does not anticipate any problems in the future. The Company's territorial development agreement with HFS which called for the Company to open a specified number of Hardee's restaurants in a development territory in the Southeast (and certain adjacent areas) by the end of 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. During 1995, the Company experienced an 8.6% decline in comparable store sales at its Hardee's restaurants due to continued promotions and discounting by quick-service competitors. In an effort to reverse these negative trends, the Company has taken a variety of steps, including the introduction of the new $0.79 Big Value Menu, as well as, the engagement of a new advertising agency to create and enhance advertising for the value pricing and other Hardee's programs. In addition, the Company is currently working together with HFS and other large franchisees to develop a brand positioning which will better differentiate Hardee's in the marketplace. As of December 31, 1995, 26 units have been identified for sale or closure generally during 1996. QUINCY'S
YEAR ENDED DECEMBER 31, 1991 1992 1993 1994 Operating Units (end of year) Owned/operated.............................................................. 216 217 213 207 Revenues (in millions)........................................................ $ 283 $ 290 $ 279 $ 284 Operating Income (Loss) (in millions)......................................... $ 15 $ 11 $ (154)(1) $ 23 Depreciation and Amortization (in millions)................................... $ 22 $ 22 $ 21 $ 11 Average Unit Sales (in thousands) Owned/operated.............................................................. $1,320 $1,335 $1,302 $1,350 Average Check (3)............................................................. $ 5.40 $ 5.32 $ 5.61 $ 5.79 1995 Operating Units (end of year) Owned/operated.............................................................. 203 Revenues (in millions)........................................................ $ 294 Operating Income (Loss) (in millions)......................................... $ 22(2) Depreciation and Amortization (in millions)................................... $ 12 Average Unit Sales (in thousands) Owned/operated.............................................................. $1,438 Average Check (3)............................................................. $ 5.88
(1) Operating income reflects the write-off of goodwill and certain other intangible assets and the provision for restructuring charges of $164 million for the year ended December 31, 1993. For a discussion of the write-off and restructuring and the reasons therefor, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Consolidated Financial Statements. (2) Operating income reflects a charge for impaired assets of $3 million for the year ended December 31, 1995. For a discussion of the charge for impaired assets see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 2 to the Consolidatd Financial Statements. (3) Amount is calculated on an average unit sales basis. Ranked by 1995 sales, Quincy's is the sixth largest family steakhouse (grill buffet) chain in the country and one of the largest such chains in the southeastern United States. The Quincy's chain consists of 203 Company-owned restaurants at December 31, 1995 which are designed to provide families with limited-service dining at moderate prices. All Quincy's are open seven days a week for lunch and dinner. The restaurants serve steak, chicken and seafood entrees along with a buffet-style food bar, called the "Country Sideboard," offering hot foods, soups, salads and desserts. In addition, weekend breakfast service, which is available at most locations, allows Quincy's to utilize its asset base more efficiently. 4 During 1995, the Company continued its reimaging program at Quincy's with a total of 35 restaurant units reimaged. After experimenting with a number of formats at Quincy's during the years 1993 through 1995, including enhancements to the scatter bar buffet and a few buffet only restaurants, the Company has concluded that it can achieve its greatest success with Quincy's by moving away from the low margin buffet concept and repositioning itself with a simpler menu which emphasizes "value-steak." As of December 31, 1995, 4 units have been identified for sale or closure generally during 1996. EL POLLO LOCO
YEAR ENDED DECEMBER 31, 1991 1992 1993 1994 Operating Units (end of year) Owned/operated.................................................................. 111 120 139 127 Franchised...................................................................... 83 77 64 78 International................................................................... 17 13 6 4 Revenues (in millions)............................................................ $ 101 $ 97 $ 109 $ 133 Operating Income (Loss) (in millions)............................................. $ (2) $ -- $(128)(1) $ 9 Depreciation and Amortization (in millions)....................................... $ 8 $ 8 $ 10 $ 6 Average Unit Sales (in thousands) Owned/operated.................................................................. $ 808 $ 814 $ 829 $ 932 Franchised...................................................................... $ 816 $ 877 $ 918 $ 893 Average Check (2)................................................................. $6.37 $6.36 $6.54 $6.59 1995 Operating Units (end of year) Owned/operated.................................................................. 103 Franchised...................................................................... 112 International................................................................... 2 Revenues (in millions)............................................................ $ 127 Operating Income (Loss) (in millions)............................................. $ 13 Depreciation and Amortization (in millions)....................................... $ 5 Average Unit Sales (in thousands) Owned/operated.................................................................. $1,019 Franchised...................................................................... $ 858 Average Check (2)................................................................. $ 6.77
(1) Operating income reflects the write-off of goodwill and certain other intangible assets and the provision for restructuring charges of $126 million for the year ended December 31, 1993. For a discussion of the write-off and restructuring and reasons therefor, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Consolidated Financial Statements. (2) Amount is based on an average unit sales basis for owned/operated units. El Pollo Loco is the leading chain in the quick-service segment of the restaurant industry to specialize in flame-broiled chicken. Approximately 91% of these restaurants are located in Southern California. El Pollo Loco directs its marketing at customers desiring an alternative to other fast food products. The Company's El Pollo Loco restaurants are designed to facilitate customer viewing of the preparation of the flame-broiled chicken. El Pollo Loco restaurants generally are open 12 hours a day, seven days per week. El Pollo Loco restaurants feature a limited, but expanding menu highlighted by marinated flame-broiled chicken and steak products and related Mexican food items. Since 1993, the Company has been able to increase average annual unit sales at its El Pollo Loco restaurants by over 10%. Much of its recent progress can be attributed to the remodels of units, successful menu positioning, and dual branding of the Foster's Freeze dessert line. During 1995, the Company remodeled 57 of its Company-owned El Pollo Loco units. As of December 31, 1995, 8 units have been identified for sale or closure generally during 1996. Based on El Pollo Loco's recent success, the Company is optimistic about future expansion of the El Pollo Loco concept, principally through franchising in Texas and in other California markets. By the year 2000, the Company hopes to add as many as 250 additional El Pollo Loco restaurant units. In the first quarter of 1996, the Company secured the international rights to the El Pollo Loco brand to facilitate expansion opportunities in Mexico and other countries. OPERATIONS The Company believes that successful execution of basic restaurant operations in each of its restaurant chains is critical to its success. Accordingly, significant effort is devoted to ensuring that all restaurants offer quality food and service. Through a network of division leaders, region leaders, district leaders and restaurant managers, the Company standardizes specifications for the preparation and efficient service of quality food, the maintenance and repair of its premises and the appearance and conduct of its employees. Major emphasis is placed on the proper preparation and delivery of the product to the consumer and on the cost-effective procurement and distribution of quality products. A principal feature of the Company's restaurant operations is the constant focus on improving operations at the unit level. Unit managers are especially hands-on and versatile in their supervisory activities. Region and district leaders have no offices and spend substantially all of their time in the restaurants. A significant majority of restaurant management personnel began as hourly employees in the restaurants and therefore perform restaurant functions and train by example. The Company benefits from an experienced management team. 5 Each of the Company's restaurant chains maintains training programs for employees and restaurant managers. Restaurant managers and assistant managers receive training at specially designated training units. Areas of training for managers include customer interaction, kitchen management and food preparation, data processing and cost control techniques, equipment and building maintenance and leadership skills. Video training tapes demonstrating various restaurant job functions are located at each restaurant location and are viewed by employees prior to a change in job function or utilizing new equipment or procedures. Each of the Company's restaurant chains continuously evaluates its menu. New products are developed in Company test kitchens and then introduced in selected restaurants to determine customer response and to ensure that consistency, quality standards and profitability are maintained. If a new item proves successful at the research and development level, it is usually tested in selected markets, both with and without market support. A successful menu item is then incorporated into the restaurant system. In the case of the Hardee's restaurants, menu development is coordinated through HFS. Financial and management control of the Company's restaurants is facilitated by the use of POS systems. Detailed sales reports, payroll data and periodic inventory information are transmitted to the Company for management review. These systems economically collect accounting data and enhance the Company's ability to control and manage these restaurant operations. Such systems are in use in all of the Company's Denny's, Hardee's, Quincy's and El Pollo Loco restaurants. The Company also operates a food-processing facility in Texas which supplies beef, pork sausage, soup and many other food products currently used by the Company's restaurants. Food and packaging products for the Company's Hardee's restaurants are purchased from HFS and independent suppliers approved by HFS. A substantial portion of the products for the Company's Hardee's and Quincy's restaurants is obtained from MBM Corporation ("MBM"), an independent supplier/distributor. In connection with the 1995 sale of its distribution subsidiary, Proficient Food Company ("PFC"), to MBM, the Company entered into new long-term supply contracts with MBM for the supply of products to its Hardee's and Quincy's units and with PFC for the supply of products to Denny's and El Pollo Loco. Adequate alternative sources of supply for required items are believed to be available. ADVERTISING Denny's primarily relies upon national and regional television and radio advertising. Advertising expenses for Denny's restaurants were $49.2 million for 1995, representing approximately 2.6% of Denny's system-wide restaurant sales. Individual restaurants are also given the discretion to conduct local advertising campaigns. In accordance with HFS licensing agreements, the Company spent approximately 6.8% of Hardee's total gross sales on marketing and advertising during 1995. Of this amount, approximately 2.1% of total gross sales is contributed to media cooperatives and HFS' national advertising fund. The balance is directed by the Company on local levels. HFS engages in substantial advertising and promotional activities to maintain and enhance the Hardee's system and image. The Company participates with HFS in planning promotions and television support for the Company's primary markets and engages in local radio, outdoor and print advertising for its Hardee's operations. The Company, together with a regional advertising agency, advertises its Quincy's restaurants primarily through television, print, radio and billboards. In addition, Quincy's has focused on in-store promotions. The Company spent approximately 5.1% of Quincy's gross sales on Quincy's marketing in 1995. During 1995, El Pollo Loco spent approximately 5.1% of its system-wide restaurant sales on advertising, primarily through regional television, radio, and print media in its market areas. SITE SELECTION The success of any restaurant depends, to a large extent, on its location. The site selection process for Company-owned restaurants consists of three main phases: strategic planning, site identification and detailed site review. The planning phase ensures that restaurants are located in strategic markets. In the site identification phase, the major trade areas within a market area are analyzed and a potential site identified. The final and most time consuming phase is the detailed site review. In this phase, the site's demographics, traffic and pedestrian counts, visibility, building constraints and competition are studied in detail. A detailed budget and return on investment analysis are also completed. The Company considers its site selection standards and procedures to be rigorous and will not compromise those standards or procedures in order to achieve accelerated growth. 6 COMPETITION According to the National Restaurant Association, in the past five years, the total food service industry experienced annual real growth of approximately 1.8%. The restaurant industry not only competes within the food consumed away from home segment of the food industry, but also with sources of food consumed at home. In order to grow at a real growth rate in excess of 1.8%, the Company's restaurant concepts must take market share from other competing restaurant and non-restaurant food sources. The restaurant industry can be divided into three main categories: full-service restaurants, quick-service restaurants, and other miscellaneous establishments. Since the early 1970s, growth in eating places has been driven primarily by quick-service restaurants. On a segment-wide basis, the full-service and quick-service restaurants currently have approximately the same revenues and an equal share of the market. Full-service restaurants include the mid-scale (family-style and family-steak), casual dining and upscale (fine dining) segments. The mid-scale segment, which includes Denny's and Quincy's, is characterized by complete meals, menu variety and moderate prices ($4-$7 average check), and includes a small number of national chains, many local and regional chains, and thousands of independent operators. The casual dining segment, which typically has higher menu prices ($8-$16 average check) and availability of alcoholic beverages, primarily consists of regional chains and small independents. The quick-service segment, which includes Hardee's and El Pollo Loco, is characterized by low prices ($3-$5 average check), finger foods, fast service, and convenience. Large sandwich, pizza, and chicken chains overwhelmingly dominate the quick-service segment. The restaurant industry is highly competitive and affected by many factors, including changes in economic conditions affecting consumer spending, changes in socio-demographic characteristics of areas in which restaurants are located, changes in customer tastes and preferences and increases in the number of restaurants generally and in particular areas. Competition among a few major companies that own or operate quick-service restaurant chains is especially intense. Restaurants, particularly those in the quick-service segment, compete on the basis of name recognition and advertising, the quality and perceived value of their food offerings, the quality and speed of their service, the attractiveness of their facilities and, to a large degree in a recessionary environment, price and perceived value. Denny's, which has a strong national presence, competes primarily with regional family chains such as Big Boy, Shoney's, Friendly's, Perkins and Cracker Barrel -- all of which are ranked among the top six midscale restaurant chains. According to an independent survey conducted during 1995, Denny's had a 14.5% share of the national market in the family segment. Hardee's restaurants compete principally with four other national fast-food chains: McDonald's, Burger King, Wendy's and Taco Bell. In addition, Hardee's restaurants compete with quick-service restaurants serving other kinds of foods, such as chicken outlets (e.g., KFC and Bojangles), family restaurants (e.g., Shoney's and Friendly's) and dinner houses. Management believes that Hardee's has the highest breakfast sales per unit of any major quick-service restaurant chain. According to an independent survey conducted during 1995, Hardee's had a 17.1% share of the Southeast market in the hamburger segment. Quincy's primary competitors include Ryan's and Golden Corral, both of which are based in the Southeast. Quincy's also competes with other family restaurants and with casual dining and quick-service outlets. Nationwide, the top five chains are Sizzler, Ponderosa, Golden Corral, Ryan's, and Western Sizzlin'. According to NATION'S RESTAURANT NEWS (published August 7, 1995), Quincy's ranked sixth nationwide in system-wide sales and third in sales per unit among the family steakhouse (grill buffet) chains. According to an independent survey conducted during 1995, Quincy's had a 19.3% share of the Southeast market in the family steakhouse segment. El Pollo Loco's business is split approximately evenly between the lunch daypart and the dinner daypart. During the lunch daypart, El Pollo Loco competes primarily with McDonald's, Burger King, Taco Bell and Carl's Jr. During the dinner daypart, El Pollo Loco's menu mix is more heavily oriented towards bone-in chicken in large meal combinations (8 or 12 pieces), the majority of which is taken home by consumers. El Pollo Loco's major competitors during the dinner daypart are KFC, Popeyes, Boston Market, and the take-out and delivery pizza restaurants (e.g., Pizza Hut and Domino's). According to an independent survey conducted during 1995, El Pollo Loco had a 35.8% share of the Los Angeles DMA (over 5 million households) in the chicken segment, and had a 4.6% share of the total of all of the quick-service restaurants segment. 7 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information with respect to each executive officer of FCI, along with certain executive officers of Flagstar.
CURRENT PRINCIPAL OCCUPATION OR NAME AGE EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY James B. Adamson 48 Chairman, President and Chief Executive Officer of FCI and Flagstar (February 1995-present); Chief Executive Officer of Burger King Corporation (1993-January 1995); Chief Operating Officer of Burger King Corporation (1991-1993); President of Burger King U.S.A. Retail Division (1991); Executive Vice President, Marketing of Revco, Inc. (1988-1991). C. Robert Campbell 51 Vice President and Chief Financial Officer of FCI and Executive Vice President and Chief Financial Officer of Flagstar (October 1995-present); Executive Vice President of Human Resources and Administration for Ryder System, Inc. (1991-1995); Executive Vice President -- Finance of Vehicle Leasing Division of Ryder System, Inc. (1981-1991). Edna K. Morris 44 Executive Vice President, Human Resources and Corporate Affairs of Flagstar (February 1995-present); Senior Vice President, Human Resources of Flagstar (1993-February 1995); Vice President, Education and Development of Flagstar (1992-1993); Senior Vice President/Human Resources of HFS (1987-1992); Director of Employee Relations of HFS (1987); Personnel Manager, Consolidated Diesel Company, a joint venture between J. I. Case and Cummins Engine Company (1981-1987); Personnel Manager, Manufacturing of HFS (1980-1981). C. Ronald Petty 51 Executive Vice President of Flagstar and President of Denny's (1994-present); Chief Executive Officer of Denny's (February 1995-present); Chief Operating Officer of Denny's (1993-present); Senior Vice President of Flagstar (1993-1994); Independent Consultant (1992-1993); President and Chief Executive Officer of Miami Subs Corporation (1990-1992); President and Chief Operating Officer of Burger King Corporation, US Division (1988-1990); President, International Division of Burger King Corporation (1986-1988). James R. Kibler 41 Senior Vice President of Flagstar and Chief Operating Officer of Flagstar Enterprises, Inc. (1991-present); President of Flagstar Enterprises, Inc. (1994-present); President of Quincy's Restaurants, Inc. (November 1995-present); Senior Vice President of Flagstar Systems, Inc. (1991-present); Vice President of Operations -- Denny's West Coast (1989-1991); Division Leader for Hardee's (1989); Region Leader for Hardee's (1979-1989). Rhonda J. Parish 39 Vice President and General Counsel of FCI and Senior Vice President and General Counsel of Flagstar (January 1995-present); Secretary of FCI and Flagstar (February 1995-present); Assistant General Counsel of Wal-Mart Stores, Inc. (1990-1994); Corporate Counsel of Wal-Mart Stores, Inc. (1983-1990). John A. Romandetti 45 Senior Vice President of Flagstar and President of El Pollo Loco (December 1995-present); Vice President of Operations for Burger King Corporation (1981-1995). Kent M. Smith 58 Senior Vice President and Special Assistant to the Chairman of Flagstar (March 1995-present); Consultant of Pollo Tropical (1994-February 1995); Senior Vice President of Burger King Corporation (1992-1994); President of Strategic Marketing Group (1984-1992). Paul R. Wexler 52 Senior Vice President, Procurement and Distribution of Flagstar (October 1995-present); Vice President, Procurement and Quality Assurance -- Marriott International (1991-1995). Donna M. Mascolo 41 Vice President and Controller of Flagstar (February 1996-present); Vice President and Broker Associate, Transworld Business Brokers, Inc., (1995-present); President, DonMar Global Business Services (1995-present); Regional Vice President and Chief Financial Officer, Kentucky Fried Chicken International Latin American/Carribbean Region (1990-1994). William H. Mitchell 43 Vice President, Real Estate and Development of Flagstar (September 1995-present); Vice President, Real Estate for Flagstar Enterprises, Inc. (1991-1995); Vice President of Real Estate and Construction for Denny's, Inc. Honorio J. Padron 43 Vice President, Business Transformation of Flagstar (March 1995-present); Senior Director of Research and Development of Burger King Corporation (January 1995-March 1995); Director of Reengineering of Burger King Corporation (1993-January 1995); Director of Worldwide Profit and Loss Improvement of Burger King Corporation (1993); Manager of Systems Support of Burger King Corporation (1990-1993).
8 EMPLOYEES At December 31, 1995, the Company had approximately 88,000 employees of which less than 1% are union members. Many of the Company's restaurant employees work part-time, and many are paid at or slightly above minimum wage levels. The Company has experienced no significant work stoppages and considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES Most of the Company's restaurants are free-standing facilities. An average Denny's restaurant ranges from 3,900 to 5,800 square feet and seats 100 to 175 customers. Denny's restaurants generally occupy 35,000 to 45,000 square feet of land. An average Hardee's restaurant operated by the Company has approximately 3,300 square feet and provides seating for 94 persons, and most have drive-thru facilities. Each of the Company's Hardee's restaurants occupies approximately 50,000 square feet of land. The average Quincy's restaurant has approximately 7,100 square feet and provides seating for 250 persons. Each Quincy's restaurant occupies approximately 63,000 square feet of land. A typical El Pollo Loco restaurant has 2,250 square feet and seats 66 customers. The following table sets forth certain information regarding the Company's restaurant properties as of December 31, 1995:
LAND LEASED LAND AND AND LAND AND BUILDING BUILDING BUILDING OWNED OWNED LEASED TYPE OF RESTAURANT DENNY'S............... 265 37 631 HARDEE'S.............. 287 104 202 QUINCY'S.............. 155 42 6 EL POLLO LOCO......... 9 34 60 Total............... 716 217 899
9 The number and location of the Company's restaurants in each chain as of December 31, 1995 are presented below:
DENNY'S EL POLLO LOCO FRANCHISED FRANCHISED STATE OWNED LICENSED HARDEE'S QUINCY'S OWNED LICENSED Alabama.................................................... 1 9 156 46 -- -- Alaska..................................................... -- 4 -- -- -- -- Arizona.................................................... 32 41 -- -- -- 1 Arkansas................................................... 1 5 3 -- -- -- California................................................. 234 107 -- -- 103 104 Colorado................................................... 25 11 -- -- -- -- Connecticut................................................ 5 3 -- -- -- -- Delaware................................................... 3 -- -- -- -- -- Florida.................................................... 103 64 57 41 -- -- Georgia.................................................... -- 24 10 11 -- -- Hawaii..................................................... 4 2 -- -- -- -- Idaho...................................................... -- 7 -- -- -- -- Illinois................................................... 48 9 -- -- -- -- Indiana.................................................... 15 9 -- -- -- -- Iowa....................................................... 1 5 -- -- -- -- Kansas..................................................... 9 4 -- -- -- -- Kentucky................................................... -- 20 -- -- -- -- Louisiana.................................................. 8 2 1 -- -- -- Maine...................................................... -- 4 -- -- -- -- Maryland................................................... 14 16 -- -- -- -- Massachusetts.............................................. 9 -- -- -- -- -- Michigan................................................... 39 1 -- -- -- -- Minnesota.................................................. 13 3 -- -- -- -- Mississippi................................................ 2 2 41 8 -- -- Missouri................................................... 30 6 -- -- -- -- Montana.................................................... -- 2 -- -- -- -- Nebraska................................................... -- 6 -- -- -- -- Nevada..................................................... 12 4 -- -- -- 4 New Hampshire.............................................. 2 1 -- -- -- -- New Jersey................................................. 14 2 -- -- -- -- New Mexico................................................. 2 12 -- -- -- -- New York................................................... 19 14 -- -- -- -- North Carolina............................................. 8 12 61 39 -- -- North Dakota............................................... -- 3 -- -- -- -- Ohio....................................................... 36 22 19 1 -- -- Oklahoma................................................... 9 9 -- -- -- -- Oregon..................................................... 5 18 -- -- -- -- Pennsylvania............................................... 52 3 2 -- -- -- Rhode Island............................................... -- -- -- -- -- -- South Carolina............................................. 9 5 125 42 -- -- South Dakota............................................... -- 1 -- -- -- -- Tennessee.................................................. 3 10 115 12 -- -- Texas...................................................... 66 47 -- -- -- 3 Utah....................................................... 7 10 -- -- -- -- Vermont.................................................... -- 2 -- -- -- -- Virginia................................................... 20 6 3 3 -- -- Washington................................................. 50 18 -- -- -- -- West Virginia.............................................. -- 3 -- -- -- -- Wisconsin.................................................. 13 7 -- -- -- -- Wyoming.................................................... -- 5 -- -- -- -- Canada..................................................... 10 16 -- -- -- -- International.............................................. -- 24 -- -- -- 2 Total.................................................... 933 620 593 203 103 114
At December 31, 1995, the Company owned one manufacturing facility in Texas. The Company also owns a 19-story, 187,000 square foot office tower, which serves as its corporate headquarters, located in Spartanburg, South Carolina. The Company's corporate offices currently occupy approximately 14 floors of the tower, with the balance leased to others. See "Certain Relationships and Related Transactions -- Description of Indebtedness" and Note 4 to the accompanying Consolidated Financial Statements for information concerning encumbrances on certain properties of the Company. ITEM 3. LEGAL PROCEEDINGS FCI, Flagstar, El Pollo Loco and Denny's, along with several former officers and directors of those companies, are named as defendants in an action filed on August 28, 1991 in the Superior Court of Orange County, California. The plaintiffs, who are current and former El Pollo Loco franchisees allege that the defendants, among other things, failed or caused a failure to promote, develop and expand the El Pollo Loco franchise system in breach of contractual obligations to the plaintiff franchisees and made certain misrepresentations to the plaintiffs concerning the El Pollo Loco system. 10 Asserting various legal theories, the plaintiffs seek actual and punitive damages in excess of $90 million, together with declaratory and certain other equitable relief. The defendants have denied all material allegations, and certain defendants have filed cross-complaints against various plaintiffs in the action for breach of contract and other claims. Since the filing of the action the defendants have entered into settlements with five of the plaintiffs leaving three remaining in the lawsuit. The cost of the settlements, which included the purchase of 15 operating EPL franchises, was in the aggregate amount of $20.6 million. With respect to the remaining plaintiffs, the litigation is in the final stages of discovery, with a trial date to hear the outstanding issues in the case, anticipated sometime during 1996. The Company has received proposed deficiencies from the Internal Revenue Service (the "IRS") for federal income taxes and penalties totalling approximately $12.7 million. The proposed deficiencies relate to examinations of certain income tax returns filed by the Company for the seven fiscal periods ended December 31, 1992. The deficiencies primarily involve the proposed disallowance of deductions associated with borrowings and other costs incurred prior to, at and just following the time of the acquisition of Flagstar in 1989. The Company intends to vigorously contest the proposed deficiencies because it believes the proposed deficiencies are substantially incorrect. The Company is also the subject of pending and threatened employment discrimination claims principally in California and Alabama. In certain of these claims, the plaintiffs have threatened to seek to represent a class alleging racial discrimination in employment practices at Company restaurants and to seek actual, compensatory and punitive damages, and injunctive relief. The Company believes that these claims also lack merit and, unless there is an early resolution thereof, intends to defend them vigorously. On June 15, 1994, a derivative action was filed in the Alameda County Superior Court for the State of California by Mr. Adam Lazar, purporting to act on behalf of the Company, against the Company's directors and certain of its current and former officers alleging breach of fiduciary duty and waste of corporate assets by the defendants relating to alleged acts of mismanagement or the alleged failure to act with due care, resulting in policies and practices at Denny's that allegedly gave rise to certain public accommodations class action lawsuits against the Company that were settled in 1994. The action seeks unspecified damages against the defendants on behalf of the Company and its stockholders, including punitive damages, and injunctive relief. There has been only limited discovery in this action to date. Accordingly, it is premature to express a judgment herein as to the likely outcome of the action. Other proceedings are pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company, and in others presenting allegations that are nonroutine and include compensatory or punitive damage claims. The ultimate legal and financial liability of the Company with respect to the matters mentioned above and these other proceedings cannot be estimated with certainty. However, the Company believes, based on its examination of these matters and its experience to date, that sufficient accruals have been established by the Company to provide for known contingencies. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of FCI, $.50 par value per share (the "Common Stock"), is currently traded on the NASDAQ National Market System using the symbol "FLST." As of March 7, 1996, 42,434,606 shares of Common Stock were outstanding, and there were approximately 12,000 record and beneficial stockholders. FCI has not paid and does not expect to pay dividends on its outstanding Common Stock. Restrictions contained in the instruments governing the outstanding indebtedness of Flagstar restrict its ability to provide funds that might otherwise be used by FCI for the payment of dividends on its Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 4 to the accompanying Consolidated Financial Statements of the Company. The closing sales prices indicated below for the Common Stock were obtained from the National Association of Securities Dealers, Inc.
HIGH LOW 1994 First quarter................................................................... 12 3/4 9 Second quarter.................................................................. 10 1/2 7 3/4 Third quarter................................................................... 10 1/4 7 1/2 Fourth quarter.................................................................. 9 3/4 5 1/2 1995 First quarter................................................................... 7 7/8 5 1/2 Second quarter.................................................................. 6 1/2 4 1/4 Third quarter................................................................... 6 1/8 4 5/8 Fourth quarter.................................................................. 5 1/2 2 7/8
ITEM 6. SELECTED FINANCIAL DATA Set forth below are certain selected financial data concerning the Company for each of the five years ended December 31, 1995. Such data generally have been derived from the Consolidated Financial Statements of the Company for such periods which have been audited. The following information should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
YEAR ENDED DECEMBER 31, 1991 1992 1993 1994 (1) (1) (1) (1) 1995 (IN MILLIONS, EXCEPT RATIOS) Income Statement data: Operating revenue.................................. $2,338.7 $2,443.0 $2,615.2 $2,666.0 $2,571.5 Operating income (loss)............................ 179.3 196.7 (1,102.4)(2) 211.5(3) 98.2(4) Loss from continuing operations (5)................ (54.1) (39.2) (1,238.6) (16.8) (132.9) Primary earnings (loss) per share applicable to common shareholders: Continuing operations............................ (2.44) (1.82) (29.56) (0.14) (3.47) Discontinued operations (5)...................... (0.60) (0.50) (9.67) 7.52 1.82 Net income (loss)(6)............................. (3.04) (9.29) (40.14) 7.16 (1.64) Fully diluted earnings (loss) per share applicable to common shareholders: Continuing operations............................ (2.44) (1.82) (29.56) 0.26 (3.47) Discontinued operations (5)...................... (0.60) (0.50) (9.67) 6.05 1.82 Net income (loss) (6)............................ (3.04) (9.29) (40.14) 6.13 (1.64) Cash dividends per common share (7)................ -- -- -- -- -- Ratio of earnings to fixed charges (8)............. -- -- -- -- -- Deficiency in the coverage of fixed charges to earnings before fixed charges (8)................ 69.8 45.8 1,318.2 19.3 133.0 Balance Sheet data (at end of period): Current assets (9)................................. 95.3 98.4 122.2 186.1 285.3 Working capital (deficiency) (9)(10)............... (326.7) (256.3) (273.0) (205.6) (122.2) Net property and equipment......................... 1,256.9 1,269.9 1,167.2 1,196.4 1,104.4 Total assets....................................... 3,186.9 3,170.9 1,538.9 1,587.5 1,507.8 Long-term debt..................................... 2,255.3 2,171.3 2,341.2 2,067.6 1,996.1
(1) Certain amounts for the four years ended December 31, 1994 have been reclassified to conform to the 1995 presentation. 12 (2) Operating loss for the year ended December 31, 1993 reflects charges for the write-off of goodwill and certain other intangible assets of $1,104.6 million and the provision for restructuring charges of $158.6 million. (3) Operating income for the year ended December 31, 1994 reflects a recovery of restructuring charges of $7.2 million. (4) Operating income for the year ended December 31, 1995 reflects a provision for restructuring charges of $15.9 million and a charge for impaired assets of $51.4 million. (5) The Company has reclassified as discontinued operations Preferred Meal Systems, Inc., which was sold in 1991, Canteen Corporation, a food and vending subsidiary, sold in 1994, TW Recreational Services, Inc. ("TWRS"), a recreation services subsidiary, and Volume Services ("VS"), Inc., a stadium concessions subsidiary. TWRS and VS were sold during 1995. (6) For the year ended December 31, 1992, net loss includes extraordinary losses of $6.25 per share related to premiums paid to retire certain indebtedness and to charge-off the related unamortized deferred financing costs and losses of $0.72 per share for the cumulative effect of a change in accounting principle related to implementation of Statement of Financial Accounting Standards No. 106. For the year ended December 31, 1993, net loss includes extraordinary losses of $0.62 per share related to the repurchase of Flagstar's 10% Convertible Junior Subordinated Debentures Due 2014 (the "10% Debentures") and to the charge-off of unamortized deferred financing costs related to a prepayment of Flagstar's senior term loan; net loss for 1993 also includes a charge of $0.29 per share related to a change of accounting method pursuant to Staff Accounting Bulletin No. 92. For the year ended December 31, 1994, net income includes an extraordinary loss of $0.22 per share, as calculated for primary earnings per share, and $0.18 per share, as calculated for fully diluted earnings per share, relating to the charge off of unamortized deferred financing costs associated with the Company's prepayment of its senior term loan and working capital facility during the second quarter of 1994. For the year ended December 31, 1995, net loss includes a $0.01 per share extraordinary gain relating to the repurchase of $24,975,000 of senior indebtedness net of the charge-off of unamortized deferred financing costs. (7) Flagstar's bank credit agreement prohibits, and its public debt indentures significantly limit, distribution to FCI of funds that might otherwise be used by it to pay Common Stock dividends. See Note 4 to the accompanying Consolidated Financial Statements appearing elsewhere herein. (8) The ratio of earnings to fixed charges has been calculated by dividing pre-tax earnings by fixed charges. Earnings, as used to compute the ratio, equal the sum of income from continuing operations before income taxes and fixed charges excluding capitalized interest. Fixed charges are the total interest expense including capitalized interest, amortization of debt expenses and a rental factor that is representative of an interest factor (estimated to be one third) on operating leases. (9) The current assets and working capital deficiency amounts presented exclude assets held for sale of $503.0 million, $480.8 million, $103.2 million, and $77.3 million as of December 31, 1991 through 1994, respectively. Such assets held for sale relate to the Company's food and vending and concessions and recreation services subsidiaries. (10) A negative working capital position is not unusual for a restaurant operating company. At December 31, 1992, the decrease in the working capital deficiency from December 31, 1991 is due primarily to decreased current maturities of the Company's bank debt as a result of the Recapitalization. The increase in the working capital deficiency from December 31, 1992 to December 31, 1993 is attributable primarily to an increase in restructuring and other liabilities. The decrease in the working capital deficiency from December 31, 1993 to December 31, 1994 is due primarily to an increase in cash following the sale of the Company's food and vending subsidiary during 1994. The decrease in the working capital deficiency from December 31, 1994 to December 31, 1995 is due primarily to an increase in cash following the 1995 sales of the Company's (i) distribution subsidiary, Proficient Food Company, net of current assets and liabilities of such subsidiary, and (ii) the concession and recreation services subsidiaries. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Financial Data and the Consolidated Financial Statements" and other more detailed financial information appearing elsewhere herein. 1995 COMPARED TO 1994 OPERATING TRENDS: During 1995, the Company experienced comparable store sales increases at Denny's, Quincy's, and El Pollo Loco, due to the success of the Denny's value menu strategy, the impact of remodelings at Quincy's, and El 13 Pollo Loco's successful menu positioning, dual-branding of Foster's Freeze, and favorable results from remodeled restaurants. However, the Company experienced a significant decline in comparable store sales at Hardee's due to continued competitive promotions and discounting by quick-service competitors. Primarily as a result of lower revenues at Hardee's, the Company experienced a reduction in operating income (before considering the provision for (recovery of) restructuring charges and charge for impaired assets) of $38.8 million. As a result, the trends experienced since the 1989 acquisition generally have continued through 1995; operating income has been insufficient to cover the interest and debt expense (although operating cash flows have been sufficient to cover interest costs), resulting in continued losses from continuing operations. The external factors that have contributed to such trends, including increased competition and intensive pressure on pricing due to discounting, are expected to continue. In response to these factors, during 1995, management instituted the changes described above that have contributed to improving sales on a comparable store basis at Denny's, Quincy's, and El Pollo Loco. Management continues to explore alternatives in an attempt to reverse the negative sales trends at Hardee's. During 1995 the Company began the upgrading of all marketing programs by hiring new marketing agencies for all its restaurant concepts and completed the analytical stage of a comprehensive business transformation program which is intended to result in better customer support at the restaurant level, increased operational efficiencies, and a more streamlined organizational structure. In addition, the proceeds from the sale of certain operations have partially been used to reduce the Company's long-term debt; however, the majority of such proceeds have been retained in short-term liquidity or have been used to fund capital expenditures. OPERATING REVENUES: Operating revenues from continuing operations for 1995 decreased by approximately $94.5 million (3.5%) as compared with 1994 primarily reflecting the sale of non-core assets coupled with continued weakness at Hardee's. Denny's revenues decreased by $57.3 million (3.7%), of which $53.0 million was attributable to a decrease in outside revenues at the Company's food processing and distribution subsidiaries. Such revenue decrease reflects the sale of the Company's distribution subsidiary during the third quarter of 1995. The remaining decrease of $4.3 million is primarily due to a 45-unit net decrease in the number of Company-owned restaurants at December 31, 1995 as compared to December 31, 1994 which was partially offset by an 84-unit increase in the number of franchised restaurants. Comparable store sales at Denny's increased 2.4% during 1995 as compared with 1994 reflecting increases in average check of 2.3% and 0.2% in traffic. During 1995, Denny's completed remodels on 182 Company-owned restaurants. Hardee's revenues decreased during 1995 by $40.6 million to $659.9 million from $700.5 million during 1994 principally due to a decline of 8.6% in comparable store sales. The decrease in comparable store sales resulted from a 10.0% decline in traffic which was mitigated by a 1.6% increase in average check. Although Hardee's traffic continues to be impacted by continued aggressive promotions and discounting by quick service competitors, active involvement by the Company with Hardee's Food Systems, Inc. and a continued focus on a value menu strategy is planned to address this issue. During 1995, the Company remodeled 59 Hardee's restaurants. Quincy's revenues increased by $9.9 million (3.5%) during 1995 as compared with 1994 despite a 4-unit decrease in the number of restaurants operated at December 31, 1995 as compared to December 31, 1994. Such increase in revenues is primarily due to a 4.8% increase in comparable store sales as a result of increases of 3.3% in traffic and 1.5% in average check. During 1995, the increased traffic is partially attributable to the remodeling of 35 of its Quincy's restaurants. Revenues at El Pollo Loco decreased $6.4 million (4.8%) to $126.7 million during 1995 from $133.1 million during 1994 primarily due to a 24-unit net decrease in the number of Company-owned restaurants following the sales of units to franchisees. Comparable store sales at Company-owned El Pollo Loco units increased by 2.0% reflecting an increase in average check of 2.4% which was partially offset by a 0.4% decrease in traffic. During 1995, El Pollo Loco completed remodels on 57 of its Company-owned restaurants. OPERATING EXPENSES: The Company's operating expenses from continuing operations, before considering the effects of the provision for (recovery of) restructuring charges and charge for impaired assets, decreased by $55.7 million (2.3%) in 1995 as compared with 1994. Operating expenses before the provision for restructuring charges and charge for impaired assets at Denny's decreased $59.9 million principally due to decreases in product costs including $43.6 million attributable to Denny's distribution subsidiary which was sold in September 1995. Operating expenses for 1994 include twelve months of charges for the food distribution subsidiary; whereas, 1995 includes approximately nine months of such charges. Denny's operating expenses before the provision for restructuring charges and charge for impaired assets were also reduced during 1995 by gains on the sale of restaurants to franchisees of $20.7 million, including a gain on the sale of Denny's joint venture in 14 Mexico for $6.0 million. This compares to gains in 1994 of $8.8 million. Such decreases in operating expenses were offset, in part, by an increase in advertising expense of $6.0 million. At Hardee's, operating expenses before considering the effects of the provision for restructuring charges and charge for impaired assets decreased by $0.8 million. This reflects increased expenses during 1995 of $12.8 million for general and administrative, payroll and benefits, restructuring of field management, workers' compensation charges, and expenses related to promotional programs. Such increases were more than offset by a $13.6 million decrease in product costs directly associated with decreased revenues in 1995. An increase in operating expenses before considering the effects of the provision for restructuring charges and charge for impaired assets of $9.8 million at Quincy's is principally attributable to increases in payroll and benefits expense of $4.4 million, product costs of $3.3 million associated with an increase in revenues during 1995, and advertising expense of $2.7 million. Operating expenses before considering the effects of the provision for restructuring charges and charge for impaired assets at El Pollo Loco decreased by $9.6 million during 1995 due primarily to a 24-unit net decrease at December 31, 1995 as compared with December 31, 1994 in the number of Company-operated restaurants following the sale of restaurants to franchisees. El Pollo Loco's operating expenses before considering the effects of the provision for restructuring charges and charge for impaired assets during 1995 included gains on the sale of restaurants of $3.8 million as compared with $1.2 million during 1994. Corporate and other expenses before considering the effects of the provision for (recovery of) restructuring charges and charge for impaired assets increased by $4.8 million during 1995 as compared with 1994 due primarily to increased charges of $4.2 million related to various management recruiting, training, and information services initiatives. RESTRUCTURING: Effective in the fourth quarter of 1995, as a result of a comprehensive financial and operational review, the Company approved a restructuring plan. The plan generally involves the reduction in personnel and a decision to outsource the Company's information systems function. Operating expenses for 1995 reflect a provision for restructuring of $15.9 million including charges for severance of $5.4 million, $7.6 million for the write-down of computer hardware and other assets, and $2.9 million for various other charges. Approximately $7.5 million of the restructuring charges represent cash charges of which approximately $0.6 million was incurred and paid in 1995. ACCOUNTING CHANGE: During 1995 the Company adopted Statement of Financial Accounting Standards No. 121 which resulted in a charge to operating expenses of $51.4 million for the write-down of Denny's, Hardee's, and Quincy's restaurant properties. This charge reflects the write-down of 99 units which the Company will continue to operate and an additional 36 units which will be closed or sold generally in 1996. See Note 2 to the Consolidated Financial Statements for further details. As a result of this write-down, the Company estimates that its depreciation expense in future years will be reduced by an average of $6.0 million annually over the estimated remaining useful life of such assets. INTEREST AND DEBT EXPENSE: Total interest and debt expense from continuing and discontinued operations decreased by $18.1 million in 1995 as compared to 1994 ($18.5 million decrease attributable to discontinued operations offset by a $0.4 million increase in continuing operations) principally as a result of a reduction in interest expense of $7.0 million following the payment during June 1994 of the principal amount ($170.2 million) outstanding under the term facility of the Company's Restated Credit Agreement then outstanding and certain other indebtedness upon the sale of the Company's food and vending subsidiary, a reduction in interest expense of $4.0 million during 1995 for other indebtedness which was related to such subsidiaries which have been sold, and a decrease in interest expense of $6.1 million during 1995 related to interest rate exchange agreements. DISCONTINUED OPERATIONS: The Company's concession and recreation services businesses were sold during 1995 and resulted in a net gain of $77.9 million. These businesses are accounted for as discontinued operations and recorded operating revenues of $322.3 million during 1995, a decrease of $3.1 million (0.9%) from 1994. Revenues related to the stadium concession subsidiary increased $9.2 million during 1995 to $190.8 million from $181.6 million in 1994. Operating income and depreciation and amortization expense of the concession subsidiary were $2.4 million and $10.9 million, respectively, during 1995 as compared with $6.5 million and $9.8 million, respectively in 1994. Such decrease in operating income during 1995 is due principally to a decrease in average attendance at major league baseball games during the 1995 season. Revenues related to the recreation services subsidiary decreased by $12.3 million during 1995 to $131.5 million from $143.8 million during 1994. Operating income and depreciation and amortization expense of the recreation services subsidiary for 1995 were $14.7 million and $3.8 million, respectively, as compared with $16.3 million and $4.7 million, 15 respectively, during 1994. Such decrease in revenues and operating income of the recreation services subsidiary is due principally to the loss of the service contract at the Kennedy Space Center during 1995. EXTRAORDINARY ITEMS: The Company recognized an extraordinary gain totaling $0.5 million, net of income taxes, during 1995 which represents a gain on the repurchase of $24,975,000 principal amount of certain indebtedness, net of the charge-off of the related unamortized deferred financing costs. During 1994, the Company also recognized an extraordinary loss totaling $11.7 million, net of income tax benefits of $0.2 million representing the charge-off of unamortized deferred financing costs associated with the prepayment in June 1994 of senior bank debt. 1994 COMPARED TO 1993 OPERATING REVENUES: Operating revenues from continuing operations for 1994 increased by approximately $50.8 million (1.9%) as compared with 1993. Denny's revenues increased $1.9 million (0.1%) due to increased outside revenues of $36.3 million from its food distribution operations offset in part by a reduction of restaurant revenues of $34.4 million, principally as a result of a net decrease of 46 units in the number of Company-owned units. This decrease in the number of Company-owned units was partially offset by a net increase of 81 units in the number of franchise-owned restaurants and by a 0.3% increase in comparable store sales during 1994 as compared to 1993. The increase in comparable store sales resulted from a 0.6% increase in customer traffic offset, in part, by a decrease in average check of 0.4%. Management believes that the positive trend in customer traffic, primarily during the third and fourth quarters of 1994, was the result of the Company-wide $1.99 Original Grand Slam Breakfast promotion. Hardee's revenues increased $18.8 million (2.8%) during 1994 as compared to the prior year due to a net increase of 31 units. Although Hardee's total revenues increased, comparable store sales decreased 3.6% as a result of a 3.9% decrease in customer traffic mitigated, in part, by a 0.3% increase in average check. The decline in customer traffic at Hardee's during 1994 was principally the result of aggressive discounting by the Company's quick-service competitors. Quincy's revenues increased by $5.6 million (2.0%) in 1994 as compared with 1993, primarily due to successful product promotions and the impact of remodeled restaurants resulting in a 2.9% increase in comparable store sales which more than offset a net decrease of 6 units. The increase in comparable store sales at Qunicy's reflects an increase of 3.2% in average check and a 0.3% decrease in customer traffic. Revenues at El Pollo Loco increased by $24.6 million (22.7%) during 1994 over 1993 due primarily to new products and combination meals, including barbeque chicken, additional taco and burrito entrees, and new side orders such as french fries, black beans, corn, and potatoes, introduced during 1994, and the acquisition of high-volume franchise restaurants in late 1993. Comparable store sales increased 6.5% and reflect increases in customer traffic of 6.0% and in average check of 0.5%. OPERATING EXPENSE: The Company's overall operating expenses before considering the effects of the write-off of goodwill and certain other intangible assets and the provisions for restructuring charges in 1993 increased by $0.5 million in 1994 as compared with 1993. At Denny's, operating expenses before considering the effects of the write-off of goodwill and certain other intangible assets and the provision for restructuring charges in 1993 decreased by $29.9 million in 1994 as compared with 1993. A significant portion of the decrease ($20.7 million) was attributable to a reduction in depreciation and amortization expense related to the year-end 1993 write-off of assets and a reduction of $18.5 million in payroll and benefits expense. Such decreases were partially offset by a $3.9 million increase in occupancy expense and a $2.1 million increase in advertising. In addition, Denny's operating expenses for 1994 reflect a gain of approximately $8.8 million related to the sale of Company-owned restaurants. At Hardee's, an increase in operating expenses of $24.4 million was mainly attributable to the increase in the number of restaurants in operation and reflects increases in payroll and benefits expenses of $14.6 million, product costs of $7.4 million, occupancy and maintenance expenses of $2.6 million, and utilities expense of $1.8 million. Such increases were partially offset by reduced depreciation and amortization charges of $1.2 million related to the year-end 1993 write-off of assets. A decrease in operating expenses of $7.6 million at Quincy's was principally attributable to a decrease in depreciation and amortization charges of $9.6 million related to the year-end 1993 write-off of assets which was offset, in part, by increased payroll and benefits expense of $2.3 million. 16 General corporate overhead expense (before allocation to specific operating companies) decreased by $5.2 million in 1994 as compared to 1993 primarily as a result of the effect of the Company's 1993 restructuring plan. INTEREST AND DEBT EXPENSE: Interest and debt expense increased by $13.9 million in 1994 as compared to 1993. During 1993, $45.6 million was allocated to discontinued operations; however, the allocation decreased to $33.7 million as a result of the sale of the Company's food and vending subsidiary in June 1994. Cash interest increased by $6.9 million during 1994 as compared with 1993 due to the higher fixed interest rates on the $400.0 million of the 10 3/4% Senior Notes due 2001 (the "10 3/4% Notes") and 11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8% Debentures") issued during the third quarter of 1993, the proceeds of which were used to refinance a portion of the Company's bank facility that during 1993 had interest at lower variable rates. Interest expense for 1994 included charges of $9.2 million related to interest rate exchange agreements compared to charges of $12.2 million during 1993. See Notes 1 and 4 to the Consolidated Financial Statement for additional information relating to the interest rate exchange agreements. DISCONTINUED OPERATIONS: The Company's concession and recreation services businesses, which are accounted for as discontinued operations, recorded a revenue increase of $3.3 million (1.0%) to $325.4 million during 1994 as compared to 1993. During April 1994, the Company announced its intent to dispose of these businesses. See Note 13 to the accompanying Consolidated Financial Statements for additional information. WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLES AND RESTRUCTURING CHARGES IN 1993 During the fourth quarter of 1993, management determined that the most likely projections of future operating results would be based on the assumption that historical operating trends of the Company derived from the prior four years (1990-1993) would continue, and that such projections indicated an inability to recover the recorded balance of goodwill and certain other intangible assets. The Company's operating results since the 1989 acquisition of Flagstar had fallen short of projections prepared at the date of such acquisition due to increased competition, intensive pressure on pricing due to discounting, declining customer traffic, adverse economic conditions, and relatively limited capital resources to respond to these changes. Accordingly, such assets were written off in 1993, resulting in non-cash charges of $1,475 million ($1,104.6 million to continuing operations and $370.2 million to discontinued operations). Also in response to such trends, the Company adopted a plan of restructuring that resulted in a separate charge in 1993 of $192.0 million ($158.6 million to continuing operations and $33.4 million to discontinued operations). While total operating revenues increased 2.8% in 1992 and 6.7% in 1993, operating income for each of the four full years from the Company's 1989 acquisition of Flagstar through 1993 were insufficient to cover the Company's interest and debt expense as discussed under "Operating Trends", and this trend has continued through 1995. Operating cash flows have been sufficient to cover interest costs. The primary factor affecting the Company's ability to generate operating income sufficient to cover interest and debt expenses and amortization of goodwill and other intangibles has been the comparable store sales at the restaurant concepts and the sales volume at the Company's contract food and vending operation. At the time of the Company's 1989 acquisition of Flagstar, projections of future operations assumed annual growth rates in comparable store sales at all concepts and corresponding increases in operating income. Such projections and those prepared since the 1989 acquisition and prior to the fourth quarter of 1993, indicated that the Company would become profitable within several years. However, since the 1989 acquisition through the end of 1993, and despite increases in comparable store sales at Hardee's, comparable store sales at Denny's and Quincy's increased only slightly and food and vending sales volume declined through 1993. (Since 1993, comparable store sales have increased at Denny's and Quincy's, however, Hardee's comparable store sales have declined during that time.) Projections prepared during the fourth quarter of 1993 indicated that, if the four years trends in customer traffic and other operating factors were to continue future operating income less interest and debt expenses would continue to be insufficient to recover the carrying value of goodwill and other intangible assets. The projections assumed that comparable store sales at each of the restaurants concepts and food and vending sales volume would increase or decrease consistent with the four year historical trends described above. These fourth quarter 1993 projections assumed no additional borrowings to fund new unit growth (because even if new units continued to be developed at historical levels, it would not have a material impact on projected net income) and no reversal of the historical trends that may result from successful restructuring and reimaging programs instituted by management in 1993, since management determined, based on all information then available, that historical trends provided the best estimate of future operating results. Also as a result of the historical operating trends described above and in an attempt to reverse them, effective in the fourth quarter of 1993, the Company approved a restructuring plan that included the sale, closure, or conversion of restaurants, a reduction in personnel, and a reorganization of certain management structures. The restructuring charge 17 (for continuing operations) included primarily a non-cash charge of $130.7 million (including $15 million related to reserves for operating leases) to write-down assets, and incremental charges of $27.9 million for severance, relocation, and other costs. The restructuring charge for discontinued operations was $33.4 million. In conjunction with this plan, 240 units were identified for sale, closure, or conversion to another concept. As of December 31, 1995, 69 units had been closed, sold, or converted to another concept, and 17 units are intended to be disposed of generally during 1996. Management intends to operate the remaining units. As of December 31, 1995, substantially all of the other incremental charges identified in conjunction with the 1993 restructuring have been incurred. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has met its liquidity requirements with internally generated funds and external borrowings. The Company expects to continue to rely on internally generated funds, supplemented by available working capital advances under its Amended and Restated Credit Agreement, dated as of October 26, 1992, among Flagstar and TWS Funding, Inc., as borrowers, certain lenders and co-agents named therein, and Citibank, N.A., as managing agent (as amended, from time to time, including by means of a second amended and restated credit agreement (the "New Facility") anticipated to be consummated in early 1996, the "Restated Credit Agreement"), and other external borrowings, as its primary sources of liquidity. The Company believes that funds from these sources will be sufficient for the next twelve months to meet the Company's working capital, debt service, and capital expenditure requirements. The Company reported a net loss in 1995 attributable in major part to non-cash charges, including a provision for restructuring charges and a charge for impaired assets related to certain restaurants properties. The following table sets forth, for each of the years indicated, a calculation of the Company's cash from operations available for debt repayment, dividends on the Preferred Stock (as defined below), and capital expenditures:
YEAR YEAR ENDED ENDED DECEMBER DECEMBER 31, 31, 1994 1995 Net income (loss)..................................................... $364.1 $(55.2) Charge for impaired assets............................................ -- 51.4 Provision for (recovery of) restructuring charges..................... (7.2) 15.9 Non-cash charges (credits)............................................ 128.7 120.3 Deferred income tax benefits.......................................... (2.8) (3.5) Discontinued operations............................................... (392.7) (77.2) Extraordinary items, net.............................................. 11.8 (0.5) Change in certain working capital items............................... (24.4) (6.1) Change in other assets and other liabilities, net..................... (22.9) (31.0) Cash from operations available for debt repayment, dividends on Preferred Stock, and capital expenditures........................... $54.6 $14.1
The Restated Credit Agreement currently consists of a working capital and letter of credit facility of up to $160.1 million with a working capital sublimit of $78.6 million and a letter of credit sublimit of $125.0 million. By its terms, the Restated Credit Agreement expires in June 1996. The Company is currently in the process of renewing its bank credit agreement. It is anticipated that the New Facility will consist of a $150 million working capital and letter of credit facility secured by a pledge of the stock of the Company's operating subsidiaries and all of its and their respective trademarks, tradenames, copyrights, hedge agreements, tax sharing agreements and bank accounts. The New Facility, as presently contemplated, would terminate March 31, 1999, subject to mandatory prepayments and commitment reductions under certain circumstances upon the Company's sale of assets or incurrence of additional debt. The New Facility would also include certain financial and other operating covenants generally consistent with those provided in the Restated Credit Agreement currently in effect. The Restated Credit Agreement and the indentures governing the Company's outstanding public debt contain negative covenants that restrict, among other things, the Company's ability to pay dividends, incur additional indebtedness, further encumber its assets and purchase or sell assets. In addition, the Restated Credit Agreement includes provisions for the maintenance of a minimum level of interest coverage, limitations on ratios of indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA) and limitations on annual capital expenditures. 18 At December 31, 1995 scheduled debt maturities of long-term debt for the years 1996 through 2000 are as follows:
AMOUNT (IN MILLIONS) 1996........................................................................ $ 38.8 1997........................................................................ $ 38.5 1998........................................................................ $ 32.7 1999........................................................................ $ 26.3 2000........................................................................ $322.2
In addition to scheduled maturities of principal, approximately $240 million of cash will be required in 1996 to meet interest payments on long-term debt and dividends on FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock, par value $0.10 per share ("the Preferred Stock"). The projections of future operating results prepared in the fourth quarter of 1993, which resulted in the conclusion that goodwill and certain other intangibles were impaired (see "Write-off of Goodwill and Certain Other Intangibles and Restructuring Charges in 1993"), assumed that the historical operating trends experienced by the Company since the 1989 acquisition will continue in the future. Such trends have generally continued through 1995. If historical trends are not reversed, the Company may need to refinance or renegotiate the terms of existing debt prior to their maturities. While management believes that the Company will be able, if necessary, to refinance or renegotiate the terms of its existing debt prior to maturity, no assurance can be given that it will be able to do so on acceptable terms. The Company's principal capital requirements are those associated with opening new restaurants and remodeling and maintaining its existing restaurants and facilities. During 1995, total capital expenditures were approximately $129.2 million, of which approximately $71.7 million was used to reimage existing restaurants, $7.2 million was used to open new restaurants, and $50.3 million was used to maintain existing facilities. Of these expenditures, approximately $5.5 million were financed through capital leases. Capital expenditures during 1996 are expected to total approximately $60 million to $80 million. The Company currently expects to finance such capital expenditures internally through continuing operations and asset sales. The Company is able to operate with a substantial working capital deficiency because (i) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (ii) rapid turnover allows a limited investment in inventories, and (iii) accounts payable for food, beverages, and supplies usually become due after the receipt of cash from the related sales. At December 31, 1995, the Company's working capital deficiency was $122.2 million as compared with $128.3 million at the end of 1994. Such decrease is attributable primarily to an increase in cash of approximately $130.2 million as a result of the sale of the Company's distribution and concession and recreation services businesses during 1995, net of the current assets and liabilities of the distribution subsidiary and the net assets of the concession and recreation services businesses which had been included in working capital. On February 22, 1996, the Company entered into an agreement with Integrated Systems Solutions Corporation (ISSC). The ten year agreement for $323 million provides for ISSC to manage and operate the Company's information systems, as well as develop and implement new systems and applications to enhance information technology for the Company's corporate headquarters, restaurants, and field management. ISSC will oversee data center operations, applications development and maintenance, voice and data networking, help desk operations, and point-of-sale technology. On March 1, 1995, the Company entered into an agreement to acquire the Coco's and Carrows restaurant chains, consisting of approximately 350 units operating in the family dining segment. The purchase is subject to the signing of certain ancillary agreements and other customary terms and conditions. If consummated, the purchase price (including estimated expenses) would consist of $131 million of cash ($56 million of which will be financed by bank term loans), the issuance of notes payable to the seller of $150 million, and the assumption of certain capital lease obligations of approximately $31.5 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements which appears on page F-1 herein. 19 FORM 11-K INFORMATION FCI, pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934, as applicable, will file as an amendment to this Annual Report of Form 10-K the information, financial statements and exhibits required by Form 11-K with respect to the Flagstar Thrift Plan and the Denny's Inc. Profit Sharing Retirement Plan. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item with respect to the Company's directors and compliance by the Company's directors, executive officers and certain beneficial owners of the Company's Common Stock with Section 16(a) of the Securities Exchange Act of 1934 is furnished by incorporation by reference of all information under the captions entitled "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for its Annual Meeting of the Stockholders to be held on April 24, 1996 (the "Proxy Statement"). The information required by this item with respect to the Company's executive officers appears in Item I of Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is furnished by incorporation by reference of all information under the caption entitled "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is furnished by incorporation by reference of all information under the caption "General -- Ownership of Capital Securities" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS The information required by this item is furnished by incorporation by reference of all information under the caption "Certain Transactions" in the Company's Proxy Statement. DESCRIPTION OF INDEBTEDNESS The following summary of the principal terms of the current indebtedness of the Company does not purport to be complete and is qualified in its entirety by reference to the documents governing such indebtedness, including the definitions of certain terms therein, copies of which have been filed as exhibits to this Annual Report on Form 10-K. Whenever particular provisions of such documents are referred to herein, such provisions are incorporated herein by reference, and the statements are qualified in their entirety by such reference. THE RESTATED CREDIT AGREEMENT In connection with the Recapitalization, Flagstar entered into the Restated Credit Agreement, pursuant to which senior debt facilities were established consisting (after certain adjustments and prepayments subsequent to the closing of the Recapitalization) of (i) a $171.3 million senior term loan (the "Term Facility"), and (ii) a $350 million senior revolving credit facility (the "Revolving Credit Facility" and, together with the Term Facility, the "Bank Facilities"), with sublimits for working capital advances and standby letters of credit, and a swing line facility of up to $30 million. The proceeds of the Term Facility were used principally to refinance comparable facilities under a prior credit agreement and the balance was used to finance the redemption of certain debt securities pursuant to the Recapitalization and to pay certain transaction costs. Proceeds of the Revolving Credit Facility may be used solely to provide working capital to the Company. In connection with the sale of its food and vending operation on June 17, 1994 the Term Facility was repaid in full and the Revolving Credit Facility was reduced to $250 million. The sale of PFC, TWRS, and VS during 1995 further reduced the Revolving Credit Facility to $160 million at December 31, 1995. Under the Restated Credit Agreement, the 20 Revolving Credit Facility is scheduled to terminate on June 17, 1996 (the "Termination Date"), the second anniversary of the repayment of the Term Facility. The Company is currently negotiating the terms of a new working capital and letter of credit facility. For additional information concerning such New Facility see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". Flagstar has obtained the waivers and consents necessary under the Restated Credit Agreement to permit it to enter into and perform its obligations under the Coco's and Carrows transactions described elsewhere herein. See "Management's Discussion and Analysis of Financial Condition -- Liquidity and Capital Resources." The Restated Credit Agreement as currently in effect provides generally that the working capital advances under the Revolving Credit Facility must be repaid in full and not reborrowed for at least 30 consecutive days during any thirteen-month period but at least once during each fiscal year. Under the Restated Credit Agreement, Flagstar is required to permanently reduce the Revolving Credit Facility by the aggregate amount of Net Cash Proceeds (as defined therein) received from (i) the sale, lease, transfer or other disposition of assets of the Company (other than dispositions of assets permitted by the terms of the Restated Credit Agreement and other dispositions of assets not exceeding $5,000,000 in any fiscal year or $1,000,000 in any transaction or series of related transactions) and (ii) the sale or issuance by FCI or any of its subsidiaries of any Debt (as defined therein) (other than Debt permitted by the terms of the Restated Credit Agreement and to the extent the Net Cash Proceeds are applied to refinance certain existing Subordinated Debt (as defined therein)). The Restated Credit Agreement contains covenants customarily found in credit agreements for leveraged financings that restrict, among other things, (i) liens and security interests other than liens securing the obligations under the Restated Credit Agreement, certain liens existing as of the date of effectiveness of the Restated Credit Agreement, certain liens in connection with the financing of capital expenditures, certain liens arising in the ordinary course of business, including certain liens in connection with intercompany transactions and certain other exceptions; (ii) the incurrence of Debt, other than Debt in respect of the Recapitalization, Debt under the Loan Documents (as defined therein), the 10 3/4% Notes, the 11 3/8% Debentures, certain capital lease obligations, certain Debt in existence on the date of the Restated Credit Agreement, certain Debt in connection with the financing of capital expenditures, certain Debt in connection with Investments (as defined therein) in new operations, properties and franchises, certain trade letters of credit, certain unsecured borrowings in the ordinary course of business, certain intercompany indebtedness and certain other exceptions; (iii) lease obligations, other than obligations in existence as of the effectiveness of the Restated Credit Agreement, certain leases entered into in the ordinary course of business, certain capital leases, certain intercompany leases and certain other exceptions; (iv) mergers or consolidations, except for certain intercompany mergers or consolidations and certain mergers to effect certain transactions otherwise permitted under the Restated Credit Agreement; (v) sales of assets, other than certain dispositions of inventory and obsolete or surplus equipment in the ordinary course of business, certain dispositions in the ordinary course of business of properties no longer used or useful to the business of the Company, certain intercompany transactions, certain dispositions in connection with the sale and leaseback transactions, and certain exchanges of real property, fixtures and improvements for other real property, fixtures and improvements; (vi) investments, other than certain intercompany indebtedness, certain investments made in connection with joint venture or franchise arrangements, certain loans to employees, investments in new operations, properties or franchises subject to certain limitations and certain other exceptions; (vii) payment of dividends or other distributions with respect to capital stock of Flagstar, other than dividends from Flagstar to FCI to enable FCI to repurchase Common Stock and FCI stock options from employees in certain circumstances, payments to FCI with respect to fees and expenses incurred in the ordinary course of business by FCI in its capacity as a holding company for Flagstar, payments under a tax sharing agreement among FCI, Flagstar and its subsidiaries and certain other exceptions; (viii) sales or dispositions of the capital stock of subsidiaries other than sales by certain subsidiaries of Flagstar to Flagstar or certain other subsidiaries and certain other exceptions; (ix) the conduct by Flagstar or certain of its subsidiaries of business inconsistent with its status as a holding company or single purpose subsidiary, as the case may be, or entering into transactions inconsistent with such status; and (x) the prepayment of Debt, other than certain payments of Debt in existence on the date of the Restated Credit Agreement, certain payments to retire Debt in connection with permitted dispositions of assets, certain prepayments of advances under the Restated Credit Agreement and certain other exceptions. The Restated Credit Agreement also contains covenants that require Flagstar and its subsidiaries on a consolidated basis to meet certain financial ratios and tests described below: TOTAL DEBT TO EBITDA RATIO. Flagstar and its subsidiaries on a consolidated basis are required not to permit the ratio of (a) Adjusted Total Debt (as defined below) outstanding on the last day of any fiscal quarter to (b) EBITDA (as defined 21 below) for the Rolling Period (as defined below) ending on such day to be more than a specified ratio, ranging from a ratio of 5.70:1.00 applicable upon the effectiveness of the Restated Credit Agreement to a ratio of 6.50:1.00 applicable on or after December 31, 1995. SENIOR DEBT TO EBITDA RATIO. Flagstar and its subsidiaries on a consolidated basis are required not to permit the ratio of (a) Adjusted Senior Debt (as defined below) outstanding on the last day of any fiscal quarter to (b) EBITDA for the Rolling Period ending on such day to be more than a specified ratio, ranging from a ratio of 3.50:1.00 applicable upon the effectiveness of the Restated Credit Agreement to a ratio of 2.50:1.00 on or after December 31, 1999 (3.30:1.00 as of the Termination Date). INTEREST COVERAGE RATIO. Flagstar and its subsidiaries on a consolidated basis are required not to permit the ratio, determined on the last day of each fiscal quarter for the Rolling Period then ended, of (a) EBITDA less Adjusted Cash Capital Expenditures (as defined below) to (b) Adjusted Cash Interest Expense (as defined below) to be less than a specified ratio, ranging from a ratio of 1.20:1.00 applicable upon the effectiveness of the Restated Credit Agreement to a ratio of 1.60:1.00 on or after December 31, 1997 (1.25:1.00 as of the Termination Date). CAPITAL EXPENDITURES TEST. Flagstar and its subsidiaries are prohibited from making capital expenditures in excess of $195,000,000, $210,000,000, and $200,000,000 in the aggregate for the fiscal years ending December 31, 1992 through 1994, respectively. For the fiscal year ending December 31, 1995 Flagstar and its subsidiaries are prohibited from making capital expenditures in excess of the sum of $175,000,000 plus the available cash proceeds received during such period from the PFC and TWRS sales transactions, subject to certain restrictions, including, without limitation, a reduction equal to the amount of certain prepayments of funded debt during such period. Subsequent to 1995, capital expenditures in excess of $275,000,000 in the aggregate are prohibited for each fiscal year thereafter. "Adjusted Cash Capital Expenditures" is defined in the Restated Credit Agreement to mean, for any period, Cash Capital Expenditures (as defined below) less, for each of the Rolling Periods (as defined below) ending September 30, 1995 through March 31, 1996, an amount equal to the sum of (i) a specified amount, ranging from $125,000,000 for the Rolling Period ending September 30, 1995 to $65,000,000 for the Rolling Period ending March 31, 1996, plus (ii) the available cash proceeds received during such rolling period from the PFC and TWRS sales transactions, subject to certain restrictions, including, without limitation, a reduction equal to the amount of certain prepayments of funded debt during such period. "Adjusted Cash Interest Expense" is defined in the Restated Credit Agreement to mean, for any Rolling Period (as defined below), Cash Interest Expense (as defined below) for such Rolling Period. "Adjusted Senior Debt" is defined in the Restated Credit Agreement to mean Senior Debt (as defined therein) outstanding on the last day of any fiscal quarter. "Adjusted Total Debt" is defined in the Restated Credit Agreement to mean Total Debt (as defined below) outstanding on the last day of any fiscal quarter. "Capex Financing" is defined in the Restated Credit Agreement to mean, with respect to any capital expenditure, the incurrence by certain subsidiaries of Flagstar of any Debt (including capitalized leases) secured by a mortgage or other lien on the asset that is the subject of such capital expenditure, to the extent that the Net Cash Proceeds of such Debt do not exceed the amount of such capital expenditure. "Cash Capital Expenditures" is defined in the Restated Credit Agreement to mean, for any period, without duplication, capital expenditures of the Company for such period, LESS (without duplication) (i) the Net Cash Proceeds of all Capex Financings during such period and (ii) the aggregate amount of the principal component of all obligations of the Company in respect of capitalized leases entered into during such period. "Cash Interest Expense" is defined in the Restated Credit Agreement to mean, for any Rolling Period, without duplication, interest expense net of interest income, whether paid or accrued during such Rolling Period (including the interest component of capitalized lease obligations) on all Debt, INCLUDING, without limitation, (a) interest expense in respect of advances under the Restated Credit Agreement, the 10 7/8% Notes (as defined below) and the Subordinated Debt (as defined therein), (b) commissions and other fees and charges payable in connection with letters of credit, (c) the net payment, if any, payable in connection with all interest rate protection contracts and (d) interest capitalized during construction, but EXCLUDING, in each case, interest not payable in cash (including amortization of discount and deferred debt expenses), all as determined in accordance with generally accepted accounting principles as in effect on December 31, 1991. 22 "EBITDA" of any person is defined in the Restated Credit Agreement to mean, for any period, on a consolidated basis, net income (or net loss) PLUS the sum of (a) interest expense net of interest income, (b) income tax expense, (c) depreciation expense, (d) amortization expense and (e) extraordinary or unusual losses included in net income (net of taxes to the extent not already deducted in determining such losses) LESS extraordinary or unusual gains included in net income (net of taxes to the extent not already deducted in determining such gains), in each case determined in accordance with generally accepted accounting principles as in effect on December 31, 1991. "Funded Debt" is defined in the Restated Credit Agreement to mean the principal amount of Debt in respect of advances under the Bank Facilities and the principal amount of all Debt that should, in accordance with generally accepted accounting principles as in effect on December 31, 1991, be recorded as a liability on a balance sheet and matures more than one year from the date of creation or matures within one year from such date but is renewable or extendible, at the option of the debtor, to a date more than one year from such date or arises under a revolving credit or similar agreement that obligates the lender or lenders to extend credit during period of more than one year from such date, including, without limitation, all amounts of Funded Debt required to be paid or prepaid within one year from the date of determination. "Rolling Period" is defined in the Restated Credit Agreement to mean, for any fiscal quarter, such quarter and the three preceding fiscal quarters. "Total Debt" outstanding on any date is defined in the Restated Credit Agreement to mean the sum, without duplication, of (a) the aggregate principal amount of all Debt of Flagstar and its subsidiaries, on a consolidated basis, outstanding on such date to the extent such Debt constitutes indebtedness for borrowed money, obligations evidenced by notes, bonds, debentures or other similar instruments, obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired or obligations as lessee under leases that have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (b) the aggregate principal amount of all Debt of Flagstar and its subsidiaries , on a consolidated basis, outstanding on such date constituting direct or indirect guarantees of certain Debt of others and (c) the aggregate principal amount of all Funded Debt of Flagstar and its subsidiaries on a consolidated basis consisting of obligations, contingent or otherwise, under acceptance, letter of credit or similar facilities; PROVIDED that advances under the Revolving Credit Facility shall be included in Total Debt only to the extent of the average outstanding principal amount thereof outstanding during the 12-month period ending on the date of determination. Under the Restated Credit Agreement, an event of default will occur if, among other thing, (i) any person or group of two or more persons acting in concert (other than KKR, Gollust Tierney & Oliver and their respective affiliates) acquires, directly or indirectly, beneficial ownership of securities of FCI representing, in the aggregate, more of the votes entitled to be cast by all voting stock of FCI than the votes entitled to be cast by all voting stock of FCI beneficially owned, directly or indirectly, by KKR and its affiliates, (ii) any person or group of two or more persons acting in concert (other than KKR and its affiliates) acquires by contract or otherwise, or enters into a contract or arrangement that results in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of Flagstar or FCI or (iii) Flagstar shall cease at any time to be a wholly-owned subsidiary of FCI. If such an event of default were to occur, the lenders under the Related Credit Agreement would be entitled to exercise a number of remedies, including acceleration of all amounts owed under the Restated Credit Agreement. PUBLIC DEBT As part of the Recapitalization, Flagstar consummated on November 16, 1992 the sale of $300 million aggregate principal amount of 10 7/8% Senior Notes Due 2002 (the "10 7/8% Notes") and issued pursuant to an exchange offer for previously outstanding debt issues $722.4 million principal amount of 11.25% Senior Subordinated Debentures Due 2004 (the "11.25% Debentures"). On September 23, 1993, Flagstar consummated the sale of $275 million aggregate principal amount of 10 3/4% Senior Notes Due 2001 (the "10 3/4% Notes") and $125 million aggregate principal amount of 11 3/8% Senior Subordinated Debentures Due 2003 (the "11 3/8% Debentures"). The 10 7/8% Notes and the 10 3/4% Notes are general unsecured obligations of Flagstar and rank PARI PASSU in right of payment with Flagstar's obligations under the Restated Credit Agreement. The 11.25% Debentures are general unsecured obligations of Flagstar and are subordinate in right of payment to the obligations of Flagstar under the Restated Credit Agreement, the 10 7/8% Notes and the 10 3/4% Notes. The 11.25% Debentures rank PARI PASSU in right of payment with the 11 3/8% Debentures. All such debt is senior in right of payment to the 10% Debentures. 23 THE SENIOR NOTES. Interest on the 10 7/8% Notes is payable semi-annually in arrears on each June 1 and December 1. They will mature on December 1, 2002. The 10 7/8% Notes will be redeemable, in whole or in part, at the option of Flagstar, at any time on or after December 1, 1997, initially at a redemption price equal to 105.4375% of the principal amount thereof to and including November 30, 1998, at a decreased price thereafter to and including November 30, 1999 and thereof at 100% of the principal amount thereof, together in each case with accrued interest. Interest on the 10 3/4% Notes is payable semi-annually in arrears on each March 15 and September 15. They will mature on September 15, 2001. The 10 3/4% Notes may not be redeemed prior to maturity, except that prior to September 15, 1996, the Company may redeem up to 35% of the original aggregate principal amount of the 10 3/4% Notes, at 110% of their principal amount, plus accrued interest, with that portion, if any, of the net proceeds of any public offering for cash of the Common Stock that is used by FCI to acquire from the Company shares of common stock of the Company. THE SENIOR SUBORDINATED DEBENTURES. Interest on the 11.25% Debentures is payable semi-annually in arrears on each May 1 and November 1. They will mature on November 1, 2004. The 11.25% Debentures will be redeemable, in whole or in part, at the option of Flagstar, at any time on or after November 1, 1997, initially at a redemption price equal to 105.625% of the principal amount thereof to and including October 31, 1998, at decreasing prices thereafter to and including October 31, 2002 and thereafter at 100% of the principal amount thereof, together in each case with accrued interest. Interest on the 11 3/8% Debentures is payable semi-annually in arrears on each March 15 and September 15. They will mature on September 15, 2003. The 11 3/8% Debentures will be redeemable, in whole or in part, at the option of the Flagstar, at any time on or after September 15, 1998, initially at a redemption price equal to 105.688% of the principal amount thereof to and including September 14, 1999, at 102.844% of the principal amount thereof to and including September 14, 2000 and thereafter at 100% of the principal amount thereof, together in each case with accrued interest. THE 10% DEBENTURES. Interest on the 10% Debentures is payable semi-annually in arrears on each May 1 and November 1. The 10% Debentures mature on November 1, 2014. Unless previously redeemed, the 10% Debentures are convertible at any time at the option of the holders thereof by exchange into shares of Common Stock at a conversion price of $24.00 per share, subject to adjustment. The 10% Debentures are redeemable, in whole or in part, at the option of the Company upon payment of a premium. The Company is required to call for redemption on November 1, 2002 and on November 1 of each year thereafter, through and including November 1, 2013, $7,000,000 principal amount of the 10% Debentures. A "Change of Control" having occurred on November 16, 1992, holders of the 10% Debentures had the right, under the indenture relating thereto, to require the Company, subject to certain conditions, to repurchase such securities at 101% of their principal amount together with interest accrued to the date of purchase. On February 19, 1993, FCI made such an offer to repurchase the $100 million of 10% Debentures then outstanding. On March 24, 1993 the Company repurchased $741,000 principal amount of the 10% Debentures validly tendered and accepted pursuant to such offer. MORTGAGE FINANCINGS A subsidiary of Flagstar had issued and outstanding, at December 31, 1995, $202.7 million in aggregate principal amount of 10 1/4% Guaranteed Secured Bonds due 2000. Interest is payable semi-annually in arrears on each November 15 and May 15. As a result of the downgrade of Flagstar's outstanding debt securities during 1994, certain payments by the Company which fund such interest payments are due and payable on a monthly basis. Principal payments total $12.5 million annually for the years 1996 through 1999; and $152.7 million in 2000. The bonds are secured by a financial guaranty insurance policy issued by Financial Security Assurance, Inc. and by collateral assignment of mortgage loans on 238 Hardee's and 148 Quincy's restaurants. Another subsidiary of Flagstar had outstanding $160 million aggregate principal amount of 11.03% Notes due 2000. Interest is payable quarterly in arrears, with the principal maturing in a single installment payable in July 2000. These notes are redeemable, in whole, at the subsidiary's option, upon payment of a premium. They are secured by a pool of cross-collateralized mortgages on approximately 240 Denny's restaurant properties. 24 PART IV ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) -- Financial Statements: See the Index to Financial Statements which appears on page F-1 hereof. (2) -- Financial Statement Schedules: No schedules are filed herewith because of the absence of conditions under which they are required or because the information called for is in the Consolidated Financial Statements or Notes thereto. (3) -- Exhibits: Certain of the exhibits to this Report, indicated by an asterisk, are hereby incorporated by reference to other documents on file with the Commission with which they are physically filed, to be a part hereof as of their respective dates.
EXHIBIT NO. DESCRIPTION * 3.1 Restated Certificate of Incorporation of FCI and amendment thereto dated November 16, 1992 (incorporated by reference to Exhibit 3.1 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992 Form 10-K")). * 3.2 Certificate of Designations for the $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock of FCI (incorporated by reference to Exhibit 3.2 to the 1992 Form 10-K). * 3.3 Certificate of Ownership and Merger of FCI dated June 16, 1993 (incorporated by reference to Exhibit 3.3 to FCI's 1993 Form 10-K, File No. 0-18051 (the "1993 Form 10-K")). * 3.4 Certificate of Amendment to the Restated Certificate of Incorporation of FCI dated June 16, 1993 (incorporated by reference to Exhibit 3.4 to the 1993 Form 10-K). 3.5 By-Laws of FCI as amended through July 26, 1995. * 4.1 Specimen certificate of Common Stock of FCI (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-1 (No. 33-29769) of FCI (the "Form S-1")). * 4.2 Specimen certificate of $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock of FCI (incorporated by reference to Exhibit 4.25 to the Registration Statement on Form S-1 (No. 33-47339) of FCI (the "Preferred Stock S-1")). * 4.3 Indenture between Flagstar and United States Trust Company of New York, as Trustee, relating to the 10% Debentures (including the form of security) (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-4 (No. 33-48923) of Flagstar (the "11.25% Debentures S-4")). * 4.4 Supplemental Indenture, dated as of August 7, 1992, between Flagstar and United States Trust Company of New York, as Trustee, relating to the 10% Debentures (incorporated by reference to Exhibit 4.9A to the 11.25% Debentures S-4). * 4.5 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and Assignment of Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company, dated July 12, 1990 (incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to the Registration Statement on Form S-1 (No. 33-29769) of FCI (the "Form S-1 Amendment")). * 4.6 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended and restated as of July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-1 Amendment). * 4.7 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust Company relating to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-1 Amendment). * 4.8 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by reference to Exhibit 4.15 to the 11.25% Debentures S-4). * 4.9 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by reference to Exhibit 4.16 to the 11.25% Debentures S-4). * 4.10 Mortgage Note in the amount of $98,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by reference to Exhibit 4.17 to the 11.25% Debentures S-4). * 4.11 Indenture between Secured Restaurants Trust and The Citizens and Southern National Bank of South Carolina, dated as of November 1, 1990, relating to certain Secured Bonds (incorporated by reference to Exhibit 4.18 to the 11.25% Debentures S-4). * 4.12 Amended and Restated Trust Agreement between Spartan Holdings, Inc., as Depositor for Secured Restaurants Trust, and Wilmington Trust Company, dated as of October 15, 1990 (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-11 (No. 33-36345) of Secured Restaurants Trust (the "Form S-11")).
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EXHIBIT NO. DESCRIPTION * 4.13 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8% Notes (incorporated by reference to Exhibit 4.13 to the 1992 Form 10-K). * 4.14 Supplemental Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 7/8% Notes (incorporated by reference to Exhibit 4.14 to the 1992 Form 10-K). * 4.15 Form of 10 7/8% Note (incorporated by reference to Exhibit 4.15 to the 1992 Form 10-K). * 4.16 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11.25% Debentures (incorporated by reference to Exhibit 4.16 to the 1992 Form 10-K). * 4.17 Form of 11.25% Debenture (incorporated by reference to Exhibit 4.17 to the 1992 Form 10-K). * 4.18 Amended and Restated Credit Agreement, dated as of October 26, 1992, among Flagstar and TWS Funding, Inc., as borrowers, certain lenders and co-agents named therein, and Citibank, N.A., as managing agent (incorporated by reference to Exhibit 28.1 to the Current Report on Form 8-K of Flagstar filed as of November 20, 1992 (the "Form 8-K")). * 4.19 Closing Agreement dated as of November 12, 1992, among Flagstar and TWS Funding Inc., as borrowers, certain lenders and co-agents named therein, and Citibank, N.A., as managing agent (incorporated by reference to Exhibit 28.2 to the Form 8-K). * 4.20 First Amendment to the Amended and Restated Credit Agreement dated as of December 23, 1992 (incorporated by reference to Exhibit 4.20 to the 1992 Form 10-K). * 4.21 Second Amendment to the Amended and Restated Credit Agreement dated as of August 5, 1993 (incorporated by reference to Exhibit 4.23 to the Registration Statement on Form S-2 (No. 33-49843) of Flagstar (the "Form S-2")). * 4.22 Third Amendment to the Amended and Restated Credit Agreement dated as of December 15, 1993 (incorporated by reference to Exhibit 4.22 to the 1993 Form 10-K). * 4.23 Indenture between Flagstar and First Trust National Association, as Trustee, relating to the 10 3/4% Notes (incorporated by reference to Exhibit 4.23 to the 1993 Form 10-K). * 4.24 Form of 10 3/4% Note (incorporated by reference to Exhibit 4.24 to the 1993 Form 10-K). * 4.25 Indenture between Flagstar and NationsBank of Georgia, National Association, as Trustee, relating to the 11 3/8% Debentures (incorporated by reference to Exhibit 4.25 to the 1993 Form 10-K). * 4.26 Form of 11 3/8% Debenture (incorporated by reference to Exhibit 4.26 to the 1993 Form 10-K). * 4.27 Fourth Amendment to the Amended and Restated Credit Agreement dated as of April 26, 1994 (incorporated by reference to Exhibit 10.2 to FCI's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1994 (the "1994 Form 10-Q")). * 4.28 Sixth Amendment to the Amended and Restated Credit Agreement dated as of June 17, 1994 (incorporated by reference to Exhibit 4.28 to FCI's 1994 Form 10-K, File No. 0-18051 (the "1994 Form 10-K"). * 4.29 Seventh Amendment to the Amended and Restated Credit Agreement dated as of October 7, 1994 (incorporated by reference to Exhibit 4.29 to the 1994 Form 10-K). 4.30 Eighth Amendment to the Amended and Restated Credit Agreement dated as of January 6, 1995. 4.31 Ninth Amendment to the Amended and Restated Credit Agreement dated as of August 24, 1995. 4.32 Tenth Amendment to the Amended and Restated Credit Agreement dated as of November 21, 1995. *10.1 Stock Purchase Agreement, dated as of April 26, 1994, among Flagstar, Canteen Holdings, Inc., Compass Group PLC and Compass Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the 1994 Form 10-Q). *10.2 Warrant Agreement, dated November 16, 1992, among FCI, TW Associates and KKR Partners II (incorporated by reference to Exhibit 10.41 to the 1992 Form 10-K). *10.3 Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit 10.42 to the Form S-2). *10.4 Fair Share Agreement dated July 1, 1993 between FCI and the NAACP (incorporated by reference to Exhibit 10.43 to the Form S-2). *10.5 Amendment No. 2 to Stockholders' Agreement, dated as of April 6, 1993, among FCI, GTO and certain affiliated partnerships, DLJ Capital, Jerome J. Richardson and Associates (incorporated by reference to Exhibit 10 to Flagstar's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-9364). *10.6 Amendment (No. 3) to Stockholders' Agreement, dated as of January 1, 1995, among FCI, GTO and certain affiliated partnerships, DLJ Capital, Jerome J. Richardson and Associates (incorporated by reference to Exhibit 10.6 to the 1994 Form 10-K). *10.7 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to Exhibit 10.7 to the 1992 Form 10-K).
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EXHIBIT NO. DESCRIPTION *10.8 Form of Supplemental Executive Retirement Plan Trust of Flagstar (incorporated by reference to Exhibit 10.8 to the 1992 Form 10-K). *10.9 FCI 1989 Non-Qualified Stock Option Plan, as adopted December 1, 1989 and amended through June 7, 1994 (incorporated by reference to Exhibit 10.9 to the 1994 Form 10-K). *10.10 FCI 1990 Non-Qualified Stock Option Plan, as adopted July 31, 1990 and amended through April 28, 1992 (incorporated by reference to Exhibit 10.10 to the 1994 Form 10-K). *10.11 Form of Non-Qualified Stock Option Award Agreement pursuant to FCI 1990 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.10 to the Form S-1 Amendment). *10.12 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.1 to the Form S-11). *10.13 Mortgage Note in the amount of $521,993,982, made by Flagstar Enterprises, Inc. in favor of Spartan Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.12 to the 11.25% Debentures S-4). *10.14 Mortgage Note in the amount of $210,077,402, made by Quincy's Restaurants, Inc. in favor of Spartan Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by reference to Exhibit 10.13 to the 11.25% Debentures S-4). *10.15 Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of November 1, 1990 (incorporated by reference to Exhibit 10.14 to the 11.25% Debentures S-4). *10.16 Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of November 1, 1990 (incorporated by reference to Exhibit 10.15 to the 11.25% Debentures S-4). *10.17 Insurance and Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.16 to the 11.25% Debentures S-4). *10.18 Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.17 to the 11.25% Debentures S-4). *10.19 Bank Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.18 to the 11.25% Debentures S-4). *10.20 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4). *10.21 Liquidity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.20 to the 11.25% Debentures S-4). *10.22 Financial Guaranty Insurance Policy, issued November 15, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.21 to the 11.25% Debentures S-4). *10.23 Amended and Restated Lease between Quincy's Realty, Inc. and Quincy's Restaurants, Inc., dated as of November 1, 1990 (incorporated by reference to Exhibit 10.22 to the 11.25% Debentures S-4). *10.24 Amended and Restated Lease between Spardee's Realty, Inc. and Spardee's Restaurants, Inc., dated as of November 1, 1990 (incorporated by reference to Exhibit 10.23 to the 11.25% Debentures S-4). *10.25 Collateral Assignment Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.24 to the 11.25% Debentures S-4). *10.26 Form of Assignment of Leases and Rents related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.12 to the Form S-11). *10.27 Spartan Guaranty, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.26 to the 11.25% Debentures S-4). *10.28 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.14 to the Form S-11). *10.29 Stock Pledge Agreement among Flagstar Enterprises, Inc. and Secured Restaurants Trust, dated as of November 1, 1990 (incorporated by reference to Exhibit 10.28 to the 11.25% Debentures S-4). *10.30 Stock Pledge Agreement among Quincy's Restaurants, Inc. and Secured Restaurants Trust, dated as of November 1, 1990 (incorporated by reference to Exhibit 10.29 to the 11.25% Debentures S-4). *10.31 Management Agreement, dated as of November 1, 1990, related to the Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.30 to the 11.25% Debentures S-4). *10.32 Form of Collateral Assignment of Security Documents related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.17 to the Form S-11). *10.33 Flagstar Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.32 to the 11.25% Debentures S-4). *10.34 Subordinated Promissory Note, dated July 28, 1992, from Flagstar to FCI (incorporated by reference to Exhibit 10.33 to the 11.25% Debentures S-4). *10.35 Development Agreement between the Company and Hardee's Food Systems, Inc., dated January 1992 (incorporated by reference to Exhibit 10.33 to the Preferred Stock S-1).
27
EXHIBIT NO. DESCRIPTION *10.36 Stock and Warrant Purchase Agreement, dated as of August 11, 1992, between FCI and TW Associates (incorporated by reference to Exhibit 10.38 to the 11.25% Debentures S-4). *10.37 Stockholders' Agreement, dated as of August 11, 1992, among FCI, GTO (on behalf of itself and certain affiliated partnerships), DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit 10.39 to the 11.25% Debentures S-4). *10.38 Technical Amendment to the Stockholders' Agreement dated as of September 30, 1992, among FCI, GTO and certain affiliated partnerships, DLJ Capital, Jerome J. Richardson and TW Associates (incorporated by reference to Exhibit 10.39A to the 11.25% Debentures S-4). *10.39 Richardson Shareholder Agreement, dated as of August 11, 1992, between FCI and Jerome J. Richardson (incorporated by reference to Exhibit 10.40 to the 11.25% Debentures S-4). *10.40 Employment Agreement, dated as of August 11, 1992, between Flagstar and Jerome J. Richardson (incorporated by reference to Exhibit 10.41 to the 11.25% Debentures S-4). 10.41 Amended and Restated Employment Agreement, dated as of January 1, 1996, between Flagstar and Jerome J. Richardson. *10.42 Employment Agreement, dated as of January 10, 1995, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.42 to the 1994 Form 10-K). *10.43 Adamson Shareholder Agreement, dated as of January 10, 1995, between Associates and James B. Adamson (incorporated by reference to Exhibit 10.43 to the 1994 Form 10-K.) *10.44 Amendment to Employment Agreement, dated as of February 27, 1995, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.44 to the 1994 Form 10-K). *10.45 Employment Agreement, dated as of June 7, 1993, between Flagstar and C. Ronald Petty (incorporated by reference to Exhibit 10.47 to the 1994 Form 10-K). *10.46 Form of Agreement providing certain severance benefits (incorporated by reference to Exhibit 10.48 to the 1994 Form 10-K) *10.47 Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994 Form 10-K). *10.48 Consent Decree dated May 24, 1994 among certain named claimants, individually and on behalf of all others similarly situated, Flagstar and Denny's, Inc. (incorporated by reference to Exhbit 10.51 to the 1994 Form 10-K). 11 Computation of Earnings (Loss) Per Share. 12 Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of Flagstar. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule.
* Certain of the exhibits to this Annual Report on Form 10-K, indicated by an asterisk, are hereby incorporated by reference to other documents on file with the Commission with which they are physically filed, to be part hereof as of their respective dates. (b) The Company filed a report of Form 8-K on December 28, 1995 providing certain information in Item 2. Acquisition or Disposition of Assets of such report. This filing reported the consummation of sales of the Company's subsidiaries engaged in the recreation services business and in the concessions business. An unaudited pro forma condensed consolidated balance sheet for September 30, 1995 and unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1994 and the nine months ended September 30, 1995 were included in such filing. 28 FLAGSTAR COMPANIES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE Independent Auditors' Report........................................................................................... F-2 Statements of Consolidated Operations for the Three Years Ended December 31, 1993, 1994 and 1995....................... F-3 Consolidated Balance Sheets as of December 31, 1994 and 1995........................................................... F-4 Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1993, 1994 and 1995....................... F-5 Notes to Consolidated Financial Statements............................................................................. F-7
F-1 INDEPENDENT AUDITORS' REPORT FLAGSTAR COMPANIES, INC. We have audited the accompanying consolidated balance sheets of Flagstar Companies, Inc. and subsidiaries (the Company) as of December 31, 1994 and 1995, and the related statements of consolidated operations and consolidated cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1995 the Company changed its method of accounting for the impairment of long-lived assets. DELOITTE & TOUCHE LLP Greenville, South Carolina February 14, 1996 F-2 FLAGSTAR COMPANIES, INC. STATEMENTS OF CONSOLIDATED OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 Operating revenue.............................................................. $ 2,615,169 $ 2,665,966 $2,571,487 Operating expenses: Product cost................................................................. 899,145 919,087 864,505 Payroll & benefits........................................................... 905,231 919,928 916,951 Depreciation & amortization expense.......................................... 170,231 129,633 132,872 Utilities expenses........................................................... 99,767 99,021 98,212 Other........................................................................ 379,992 394,012 393,482 Write-off of goodwill and certain other intangible assets (Note 3)........... 1,104,553 -- -- Provision for (recovery of) restructuring charges (Note 2)................... 158,620 (7,207 ) 15,873 Charge for impaired assets (Note 2).......................................... -- -- 51,358 3,717,539 2,454,474 2,473,253 Operating income (loss)........................................................ (1,102,370 ) 211,492 98,234 Other charges (credits): Interest and debt expense (Note 4)........................................... 214,541 232,515 232,874 Interest income.............................................................. (1,416 ) (5,077 ) (3,725) Other -- net................................................................. 2,397 3,087 2,005 215,522 230,525 231,154 Loss before income taxes....................................................... (1,317,892 ) (19,033 ) (132,920) Benefit from income taxes (Note 6)............................................. (79,328 ) (2,213 ) (14) Loss from continuing operations................................................ (1,238,564 ) (16,820 ) (132,906) Gain on sale of discontinued operation, net of income tax provision of: 1994 -- $9,999; 1995 -- $10,092 (Note 13)............................................ -- 399,188 77,877 Loss from discontinued operations, net of income tax provision (benefit) of: 1993 -- $(1,821); 1994 -- $471; 1995 -- $(1,361) (Note 13)................... (409,671 ) (6,518 ) (636) Income (loss) before extraordinary items and cumulative effect of change in accounting principle......................................................... (1,648,235 ) 375,850 (55,665) Extraordinary items, net of income tax provision (benefit) of: 1993 -- $(196); 1994 -- $(174); 1995 -- $25 (Note 11)........................................ (26,405 ) (11,757 ) 466 Cumulative effect of change in accounting principles, net of income tax benefit of: 1993 -- $90 (Note 1)..................................................... (12,010 ) -- -- Net income (loss).............................................................. (1,686,650 ) 364,093 (55,199) Dividends on preferred stock................................................... (14,175 ) (14,175 ) (14,175) Net income (loss) applicable to common shareholders............................ $(1,700,825 ) $ 349,918 $ (69,374) Per share amounts applicable to common shareholders (Note 10): Primary Loss from continuing operations.............................................. $ (29.56 ) $ (0.14 ) $ (3.47) Income (loss) from discontinued operations, net.............................. (9.67 ) 7.52 1.82 Income (loss) before extraordinary items and cumulative effect of change in accounting principle....................................................... (39.23 ) 7.38 (1.65) Extraordinary items, net..................................................... (0.62 ) (0.22 ) 0.01 Cumulative effect of change in accounting principle, net..................... (0.29 ) -- -- Net income (loss)............................................................ $ (40.14 ) $ 7.16 $ (1.64) Average outstanding and equivalent common shares............................. 42,370 52,223 42,431 Fully diluted Income (loss) from continuing operations..................................... $ (29.56 ) $ 0.26 $ (3.47) Income (loss) from discontinued operations, net.............................. (9.67 ) 6.05 1.82 Income (loss) before extraordinary items and cumulative effect of change in accounting principle....................................................... (39.23 ) 6.31 $ (1.65) Extraordinary items, net..................................................... (0.62 ) (0.18 ) 0.01 Cumulative effect of change in accounting principle, net..................... (0.29 ) -- -- Net income (loss)............................................................ $ (40.14 ) $ 6.13 $ (1.64) Average outstanding and equivalent shares.................................... 42,370 64,921 42,431
See notes to consolidated financial statements. F-3 FLAGSTAR COMPANIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1994 1995 ASSETS Current Assets: Cash and cash equivalents...................................................................... $ 66,720 $ 196,966 Receivables, less allowance for doubtful accounts of: 1994 -- $4,561; 1995 -- $2,506............................................................................... 37,381 29,844 Merchandise and supply inventories............................................................. 62,293 32,445 Net assets held for sale (Note 13)............................................................. 77,320 -- Other.......................................................................................... 19,676 26,087 263,390 285,342 Property: Property owned (at cost) (Notes 2 and 4): Land......................................................................................... 273,411 255,719 Buildings and improvements................................................................... 813,305 838,956 Other property and equipment................................................................. 462,421 484,684 Total property owned............................................................................. 1,549,137 1,579,359 Less accumulated depreciation.................................................................... 477,176 569,079 Property owned -- net............................................................................ 1,071,961 1,010,280 Buildings and improvements, vehicles, and other equipment held under capital leases (Note 5)..... 194,348 170,859 Less accumulated amortization.................................................................... 69,958 76,778 Property held under capital leases -- net........................................................ 124,390 94,081 1,196,351 1,104,361 Other Assets: Other intangible assets, net of accumulated amortization: 1994 -- $14,646; 1995 -- $17,051...................................................................................... 25,009 22,380 Deferred financing costs -- net (Note 11)...................................................... 71,955 63,482 Other (including loan receivable from former officer of: 1994 -- $15,657; 1995 -- $16,454) (Note 12).................................................................................... 30,762 32,186 127,726 118,048 $ 1,587,467 $ 1,507,751 LIABILITIES Current Liabilities: Current maturities of long-term debt (Note 4).................................................. $ 31,408 $ 38,835 Accounts payable............................................................................... 127,769 125,467 Accrued salaries and vacations................................................................. 48,680 41,102 Accrued insurance.............................................................................. 44,675 48,060 Accrued taxes.................................................................................. 21,795 30,705 Accrued interest and dividends................................................................. 47,568 42,916 Other.......................................................................................... 69,753 80,445 391,648 407,530 Long-Term Liabilities: Debt, less current maturities (Note 4)......................................................... 2,067,648 1,996,111 Deferred income taxes (Note 6)................................................................. 21,679 18,175 Liability for self-insured claims.............................................................. 58,128 53,709 Other non-current liabilities and deferred credits............................................. 110,864 163,203 2,258,319 2,231,198 Commitments and Contingencies (Notes 5 and 8) Shareholders' Equity (Deficit) (Notes 7 and 9): $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock: $0.10 par value; 1994 and 1995, 25,000 shares authorized; 6,300 shares issued and outstanding; liquidation preference $157,500................................................ 630 630 Common stock: $0.50 par value; shares authorized -- 200,000; issued and outstanding 1994 -- 42,369, 1995 -- 42,434............................................................................. 21,185 21,218 Paid-in capital................................................................................ 724,545 724,912 Deficit........................................................................................ (1,807,900 ) (1,877,274 ) Minimum pension liability adjustment........................................................... (960 ) (463 ) (1,062,500 ) (1,130,977 ) $ 1,587,467 $ 1,507,751
See notes to consolidated financial statements. F-4 FLAGSTAR COMPANIES, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 Cash Flows from Operating Activities: Net income (loss)........................................................... $(1,686,650 ) $ 364,093 $ (55,199 ) Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating Activities: Write-off of goodwill and certain other intangible assets................ 1,104,553 -- -- Provision for (recovery of) restructuring charges........................ 158,620 (7,207 ) 15,873 Charge for impaired assets............................................... -- -- 51,358 Depreciation and amortization of property................................ 129,222 122,870 126,488 Amortization of goodwill................................................. 27,449 -- -- Amortization of other intangible assets.................................. 13,560 6,763 6,384 Amortization of deferred financing costs................................. 9,416 6,453 7,504 Deferred income tax benefit.............................................. (84,413 ) (2,793 ) (3,451 ) Other.................................................................... 5,666 (7,363 ) (20,028 ) Loss from discontinued operations, net................................... 409,671 6,518 636 Gain on sale of discontinued operation, net.............................. -- (399,188 ) (77,877 ) Extraordinary items, net................................................. 26,405 11,757 (466 ) Cumulative effect of change in accounting principle, net................. 12,010 -- -- Changes in Assets and Liabilities Net of Effects from Dispositions and Restructurings: Decrease (increase) in assets: Receivables.............................................................. (10,105 ) (4,452 ) (4,713 ) Inventories.............................................................. (5,159 ) 340 (848 ) Other current assets..................................................... (864 ) (11,849 ) (7,086 ) Other assets............................................................. 2,873 2,241 (2,622 ) Increase (decrease) in liabilities: Accounts payable......................................................... 10,105 9,029 16,496 Accrued salaries and vacations........................................... 612 8,821 (5,551 ) Accrued taxes............................................................ 10,878 (9,582 ) (429 ) Other accrued liabilities................................................ 60,796 (16,696 ) (4,014 ) Other noncurrent liabilities and deferred credits........................ (65,737 ) (25,198 ) (28,364 ) Net cash flows from operating activities...................................... 128,908 54,557 14,091 Cash Flows from Investing Activities: Purchase of property........................................................ (99,007 ) (154,480 ) (123,739 ) Proceeds from dispositions of property...................................... 33,678 20,135 25,693 Advances to discontinued operations, net.................................... (51,607 ) (9,670 ) (6,952 ) Proceeds from sale of discontinued operations............................... -- 447,073 172,080 Proceeds from sale of subsidiary............................................ -- -- 122,500 Purchase of other long-term assets.......................................... (19,070 ) (6,205 ) (3,217 ) Net cash flows provided by (used in) investing activities..................... (136,006 ) 296,853 186,365
See notes to consolidated financial statements. F-5 FLAGSTAR COMPANIES, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 Cash Flows from Financing Activities: Net working capital advances (repayments) under credit agreements........... $ 54,000 $(93,000) $ -- Long-term debt issued in connection with refinancings....................... 400,778 -- -- Other long-term borrowings.................................................. 22,146 -- -- Deferred financing costs.................................................... (11,388 ) (25) -- Long-term debt payments..................................................... (440,750 ) (201,664) (56,035) Cash dividends on preferred stock........................................... (14,175 ) (14,175) (14,175) Net cash flows provided by (used in) financing activities................... 10,611 (308,864) (70,210) Increase in cash and cash equivalents....................................... 3,513 42,546 130,246 Cash and Cash Equivalents at: Beginning of period......................................................... 20,661 24,174 66,720 End of period............................................................... $ 24,174 $ 66,720 $196,966 Supplemental Cash Flow Information: Income taxes paid........................................................... $ 4,917 $ 8,035 $ 3,591 Interest paid............................................................... $ 233,671 $244,478 $238,832 Non-cash financing activities: Capital lease obligations................................................ $ 64,029 $ 18,800 $ 5,505 Other financings......................................................... $ 1,278 $ -- -- Dividends declared but not paid.......................................... $ 3,544 $ 3,544 $ 3,544 Non Cash investing activities: Other investing.......................................................... $ -- $ -- $ 8,185
See notes to consolidated financial statements. F-6 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTRODUCTION Flagstar Companies, Inc. (Company) was incorporated under the laws of the State of Delaware on September 24, 1988 to effect the acquisition of Flagstar Corporation (Flagstar). Prior to June 16, 1993 the Company and Flagstar had been known, respectively, as TW Holdings, Inc. and TW Services, Inc. The acquisition was accounted for under the purchase method of accounting as of July 20, 1989. Accordingly, the Company has allocated its total purchase cost of approximately $1.7 billion to the assets and liabilities of Flagstar based upon their respective fair values, which were determined by valuations and other studies. As discussed in Note 3, during 1993 the Company determined that goodwill and certain intangible assets arising principally from the acquisition were impaired resulting in a write-off of such assets. The Company conducts business through its Denny's, Hardee's, Quincy's, and El Pollo Loco restaurant concepts. Denny's, a full service family restaurant chain, operates in forty-nine states, Puerto Rico, and four foreign countries, with principal concentrations in California, Florida, Texas, Washington, Arizona, Pennsylvania, Illinois, and Ohio. Hardee's competes in the quick-service sandwich segment and Quincy's operates in the steakhouse segment. The Company's Hardee's and Quincy's restaurant chains are located primarily in the southeastern United States; El Pollo Loco is a quick-service flame-broiled chicken concept which operates primarily in southern California. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies and methods of their application that significantly affect the determination of financial position, cash flows and results of operations are as follows: (a) CONSOLIDATED FINANCIAL STATEMENTS. The Consolidated Financial Statements include the accounts of the Company, and its subsidiaries. See also Note 13, related to subsidiaries held for sale as of December 31, 1994. Certain 1993 and 1994 amounts have been reclassified to conform to the 1995 presentation. (b) FINANCIAL STATEMENT ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) CASH AND CASH EQUIVALENTS. For purposes of the Statements of Consolidated Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. (d) INVENTORIES. Merchandise and supply inventories are valued primarily at the lower of average cost or market. (e) PROPERTY AND DEPRECIATION. Property and equipment owned are depreciated on the straight-line method over its estimated useful life. Property held under capital leases (at capitalized value) is amortized over its estimated useful life, limited generally by the lease period. The following estimated useful service lives were in effect during all periods presented in the financial statements: Merchandising equipment -- Principally five to ten years Buildings -- Fifteen to forty years Other equipment -- Two to ten years Leasehold improvements -- Estimated useful life limited by the lease period. (f) GOODWILL AND OTHER INTANGIBLE ASSETS. The excess of cost over the fair value of net assets of companies acquired had been amortized over a 40-year period on the straight-line method prior to being written-off at December 31, 1993. Other intangible assets consist primarily of costs allocated in the acquisition to tradenames, franchise and other operating agreements. Such assets are being amortized on the straight-line basis over the useful lives of the franchise or the contract period of the operating agreements. Certain tradenames, franchise and other operating F-7 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued agreements were amortized over periods up to 40 years on the straight-line basis prior to being written-off at December 31, 1993. The Company assesses the recoverability of goodwill and other intangible assets by projecting future net income, before the effect of amortization of intangible assets, over the remaining amortization period of such assets. Management believes that the projected future results are the most likely scenario assuming historical trends continue. See Note 3 for further discussion of the write-off of goodwill and certain other intangible assets. (g) IMPAIRMENT OF LONG-LIVED ASSETS. During 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121 (SFAS No. 121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ". Pursuant to this statement, the Company reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In addition, long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. See Note 2 for further discussion of the impairment of long-lived assets. (h) DEFERRED FINANCING COSTS. Costs related to the issuance of debt are deferred and amortized as a component of interest and debt expense over the terms of the respective debt issues using the interest method. (i) PREOPENING COSTS. The Company capitalizes certain costs incurred in conjunction with the opening of restaurants and amortizes such costs over a twelve month period from the date of opening. (j) INCOME TAXES. Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." (k) INSURANCE. The Company is primarily self insured for workers compensation, general liability, and automobile risks which are supplemented by stop loss type insurance policies. The liabilities for estimated incurred losses are discounted to their present value based on expected loss payment patterns determined by independent actuaries or experience. During 1993, the Company changed its method of determining the discount rate applied to insurance liabilities, retroactive to January 1, 1993, pursuant to Staff Accounting Bulletin (SAB) No. 92 issued by the staff of the Securities and Exchange Commission in June 1993 concerning the accounting for environmental and other contingent liabilities. The SAB requires, among other things, that a risk free rate be used to discount such liabilities rather than a rate based on average cost of borrowing, which had been the Company's practice. As a result of this change, the Company recognized an additional liability, measured as of January 1, 1993, through a one-time pre-tax charge of $12,100,000. The effect of this accounting change on 1993 operating results, in addition to recording the cumulative effect for years prior to 1993, was to increase insurance expense and decrease interest expense by approximately $5,900,000. The total discounted self-insurance liabilities recorded at December 31, 1994 and 1995 were $90,800,000 and $91,000,000 respectively, reflecting a 4% discount rate. The related undiscounted amounts at such dates were $98,800,000 and $98,000,000, respectively. (l) INTEREST RATE EXCHANGE AGREEMENTS. As a hedge against fluctuations in interest rates, the Company has entered into interest rate exchange agreements to swap a portion of its fixed rate interest payment obligations for floating rates without the exchange of the underlying principal amounts. The Company does not speculate on the future direction of interest rates nor does the Company use these derivative financial instruments for trading purposes. Since such agreements are not entered into on a speculative basis, the Company uses the settlement basis of accounting. See Note 4 for further discussion of the interest rate exchange agreements. (m) ADVERTISING COSTS. The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 1993, 1994 and 1995 was $89,365,000, $85,799,000, and $93,012,000, respectively. (n) DISCONTINUED OPERATIONS. The Company has allocated to discontinued operations a pro-rata portion of interest and debt expense related to its acquisition debt based on a ratio of the net assets of its discontinued operations to its total consolidated net assets as of the 1989 acquisition date. Interest included in discontinued operations for F-8 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued the years ended December 31, 1993, 1994, and 1995 was $53.0 million, $37.4 million, and $18.9 million, respectively. (o) POSTEMPLOYMENT BENEFITS. During 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" which requires that benefits provided to former or inactive employees prior to retirement be recognized as an obligation when earned, subject to certain conditions, rather than when paid. The impact of Statement No. 112 on the Company's statement of consolidated operations for 1994 and 1995 is not material. (p) DEFERRED GAIN. In September 1995, the Company sold its distribution subsidiary, Proficient Food Company (PFC), for approximately $128.0 million including receipt of cash of approximately $122.5 million. In conjunction with the sale, the Company entered into an eight year distribution contract with the acquirer of PFC. This transaction resulted in a deferred gain of approximately $72.0 million that is being amortized over the life of the distribution contract as a reduction of product cost. The portion of the deferred gain recognized as a reduction in product costs in 1995 was approximately $2.8 million. (q) CASH OVERDRAFTS. The Company has included in accounts payable on the accompanying consolidated balance sheets cash overdrafts totalling $59.8 million and $54.4 million at December 31, 1994 and 1995, respectively. NOTE 2 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS Effective in the fourth quarter of 1995, as a result of a comprehensive financial and operational review, the Company approved a restructuring plan. The plan generally involved the reduction in personnel and a decision to outsource the Company's information systems function. In addition, the Company adopted SFAS No. 121 during 1995 (see Note 1(g)). In connection with such adoption, 99 restaurant units, which will continue to be operated, were identified as impaired as the future undiscounted cash flows of each of these units is estimated to be insufficient to recover the related carrying value. As such, the carrying values of these units were written down to the Company's estimate of fair value based on sales of similar units or other estimates of selling price. During 1995, the Company also identified 36 underperforming units for sale or closure generally during 1996. The carrying value of these units have been written-down to estimated fair value, based on sales of similar units or other estimates of selling price, less costs to sell. Charges attributable to the restructuring plan and the adoption of SFAS No. 121 during the year ended December 31, 1995 are comprised of the following: Restructuring: Severance................................................................................ $ 5,376 Write-down of computer hardware and software and other assets............................ 7,617 Other.................................................................................... 2,880 $15,873 Impairment of Long-lived Assets: Write-down attributable to the restaurant units the Company will continue to operate.............................................................. $41,670 Write-down attributable to the restaurant units to be disposed........................... 9,688 $51,358
F-9 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS -- Continued Approximately $7.5 million of the restructuring charges represent cash charges of which approximately $600,000 was incurred and paid in 1995. Unpaid amounts are included in other current liabilities on the accompanying consolidated balance sheet. The Company anticipates completion of its restructuring plan generally in 1996. The 36 units identified in 1995 for disposal had aggregate operating revenues of approximately $26.1 million and negative operating income of approximately $2.9 million during 1995, and an aggregate carrying value of approximately $5.8 million as of December 31, 1995. Effective in the fourth quarter of 1993 the Company approved a restructuring plan. The plan involved the sale or closure of restaurants, a reduction in personnel, a reorganization of certain management structures and a decision to fundamentally change the competitive positioning of Denny's, El Pollo Loco and Quincy's. The plan resulted in a restructuring charge during the year ended December 31, 1993 comprised of the following: Write-down of assets...................................................................... $130,711 Severance and relocation.................................................................. 17,080 Other..................................................................................... 10,829 Continuing operations..................................................................... 158,620 Discontinued operations................................................................... 33,383 Total..................................................................................... $192,003
The write-down of assets represented predominantly non-cash adjustments made to reduce to net realizable value approximately 240 of the Company's 1,376 Denny's, Quincy's and El Pollo Loco restaurants. These 240 restaurants were identified for sale, conversion to another concept, or closure. As of December 31, 1995, 69 units had been sold, closed or converted to another concept and 17 are intended to be disposed of generally during 1996, with an additional charge of approximately $744,000 recorded in 1995 for such units. Management intends to operate the remaining units. The 17 units to be disposed generally during 1996 had aggregate operating revenues of approximately $11.8 million and negative operating income of approximately $1.3 million during 1995 and an aggregate carrying value of approximately $1.0 million as of December 31, 1995. NOTE 3 WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLE ASSETS For the year ended December 31, 1993, the Company's consolidated statement of operations reflects charges totaling $1,474.8 million ($1,104.6 million in continuing operations and $370.2 million in discontinued operations) for the write-off of goodwill and certain other intangible assets, primarily tradenames and franchise agreements. Since the acquisition of Flagstar in 1989, the Company has not achieved the revenue and earnings projections prepared at the time of the acquisition. In assessing the recoverability of goodwill and other intangible assets prior to 1993, the Company developed projections of future operations which indicated the Company would become profitable within several years and fully recover the carrying value of the goodwill and certain other intangible assets. However, actual results have fallen short of these projections primarily due to increased competition, intensive pressure on pricing due to discounting, declining customer traffic, adverse economic conditions, and relatively limited capital resources to respond to these changes. During the fourth quarter of 1993, management determined that the most likely projections of future operating results would be based on the assumption that historical operating trends would continue. Thus, the Company determined that the projected financial results would not support the future amortization of the remaining goodwill balance and certain other intangible assets at December 31, 1993. The methodology employed to assess the recoverability of the Company's goodwill and certain other intangible assets involved a detailed six year projection of operating results extrapolated forward 30 years, which approximated the maximum remaining amortization period for such assets as of December 31, 1993. The Company then evaluated the recoverability of goodwill and certain other intangibles on the basis of this projection of future operations. Based on this projection over the next six years, the Company would have a net loss each year before income taxes and amortization of F-10 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 WRITE-OFF OF GOODWILL AND CERTAIN OTHER INTANGIBLE ASSETS -- Continued goodwill and certain other intangibles. Extension of these trends to include the entire 36 year amortization period indicated that there would be losses each year, unless the restructuring plan or other activities were successful in reversing the present operating trends; thus, the analysis indicated that there was insufficient net income to recover the goodwill and certain other intangible asset balances at December 31, 1993. Accordingly, the Company wrote off the goodwill balance and certain other intangible asset balances including tradename and franchise agreements for its Denny's, Quincy's, and El Pollo Loco restaurant operations and tradename and location contracts for its former contract food and vending services operations. The projections generally assumed that historical trends experienced by the Company over the previous four years would continue. The current mix between company-owned and franchised restaurants was assumed to continue, customer traffic for Denny's, Quincy's, and El Pollo Loco was assumed to decline at historical rates, average check amounts for Denny's, Hardee's, Quincy's, and El Pollo Loco were assumed to increase indefinitely at historical rates due to inflation and changes in product mix, volume for Canteen (see Note 13) was assumed to decline at historical rates, and pricing for Canteen was assumed to increase at historical rates, as a result of inflation. Capital expenditures were assumed to continue at a level necessary to repair and maintain current facilities and systems. No new unit growth was assumed. Variable costs for food and labor were assumed to remain at their historical percentage of revenues. Other costs were assumed to increase at the historical inflation rate consistent with revenue pricing increases. Through the year 1999, the Company's projections indicated that interest expense would exceed operating income, which was determined after deducting annual depreciation expense; however, operating income before depreciation would be adequate to cover interest expense. A continuation of this trend for the next 30 years did not generate cash to repay the current debt and management assumes it will be refinanced at constant interest rates. NOTE 4 DEBT At December 31, 1995, the Restated Credit Agreement includes a working capital and letter of credit facility of up to a total of $160.1 million which includes a working capital sublimit of $78.6 million and a letter of credit sublimit of $125.0 million. At such date, the Company had no working capital borrowings; however, letters of credit outstanding were $93.4 million. All outstanding amounts under the Restated Credit Agreement must be repaid by June 17, 1996. See also discussion below. F-11 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 DEBT -- Continued Long-term debt consists of the following:
DECEMBER 31, 1994 1995 (IN THOUSANDS) Notes and Debentures: 10.75% Senior Notes due September 15, 2001, interest payable semi-annually...................... $ 275,000 $ 270,000 10.875% Senior Notes due December 1, 2002, interest payable semi-annually....................... 300,000 280,025 11.25% Senior Subordinated Debentures due November 1, 2004, interest payable semi-annually................................................................................ 722,411 722,411 11.375% Senior Subordinated Debentures due September 15, 2003, interest payable semi-annually... 125,000 125,000 10% Convertible Junior Subordinated Debentures due 2014 (10% Convertible Debentures), interest payable semi-annually; convertible into Company common stock any time prior to maturity at $24.00 per share............................................................................. 99,259 99,259 Mortgage Notes Payable: 10.25% Guaranteed Secured Bonds due 2000........................................................ 205,612 202,715 11.03% Notes due 2000........................................................................... 160,000 160,000 Other notes payable, mature over various terms to 20 years, payable in monthly or quarterly installments with interest rates ranging from 7.5% to 13.25% (a)............................. 23,129 17,415 Capital lease obligations (see Note 5)............................................................ 170,697 144,573 Notes payable secured by equipment, mature over various terms up to 7 years, payable in monthly installments with interest rates ranging from 8.5% to 9.64%(b).................................. 17,948 13,548 Total............................................................................................. 2,099,056 2,034,946 Less current maturities (c)....................................................................... 31,408 38,835 $2,067,648 $1,996,111
(a) Collateralized by restaurant and other properties with a net book value of $22.8 million at December 31, 1995. (b) Collateralized by equipment with a net book value of $14.7 million at December 31, 1995. (c) Aggregate annual maturities during the next five years of long-term debt are as follows (in thousands): 1996 -- $38,835; 1997 -- $38,470; 1998 -- $32,660; 1999 -- $26,267, and 2000 -- $322,188. The borrowings under the Restated Credit Agreement are secured by the stock of certain operating subsidiaries and the Company's trade and service marks and are guaranteed by certain operating subsidiaries. Such guarantees are further secured by certain operating subsidiary assets. The Restated Credit Agreement and indentures under which the debt securities have been issued contain a number of restrictive covenants. Such covenants restrict, among other things, the ability of Flagstar and its subsidiaries to incur indebtedness, create liens, engage in business activities which are not in the same field as that in which the Company currently operates, mergers and acquisitions, sales of assets, transactions with affiliates and the payment of dividends. In addition, the Restated Credit Agreement contains affirmative and negative financial covenants including provisions for the maintenance of a minimum level of interest coverage (as defined), limitations on ratios of indebtedness (as defined) to earnings before interest, taxes, depreciation and amortization (EBITDA), and limitations on annual capital expenditures. The Company was in compliance with the terms of the Restated Credit Agreement at December 31, 1995. Under the most restrictive provision of the Restated Credit Agreement (ratio of senior debt to EBITDA, as defined), at December 31, 1995, the Company could incur approximately $31 million of additional indebtedness. The Company is currently in the process of renewing its bank credit agreement. It is anticipated that the new agreement will consist of a $150 million working capital and letter of credit facility secured by a pledge of the stock of the Company's operating subsidiaries and all of its and their respective trademarks, tradenames, copyrights, hedge agreements, tax sharing agreements and bank accounts. The new agreement, as presently contemplated, would terminate March 31, 1999, subject to mandatory prepayments and commitment reductions under certain circumstances upon the F-12 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 DEBT -- Continued Company's sale of assets or incurrence of additional debt. The new agreement would also include certain financial and other operating covenants generally consistent with those provided in the Restated Credit Agreement currently in effect. At December 31, 1995, the 10.25% guaranteed bonds were secured by, among other things, mortgage loans on 386 restaurants, a lien on the related restaurant equipment, assignment of intercompany lease agreements, and the stock of the issuing subsidiaries. At December 31, 1995, the restaurant properties and equipment had a net book value of $327.2 million. In addition, the bonds are insured with a financial guaranty insurance policy written by a company that engages exclusively in such coverage. Principal and interest on the bonds is payable semiannually; certain payments are made by the Company on a monthly basis. Principal payments total $12.5 million annually through 1999 and $152.7 million in 2000. The Company through its operating subsidiaries covenants that it will maintain the properties in good repair and expend annually to maintain the properties at least $18.1 million in 1996 and increasing each year to $23.7 million in 2000. The 11.03% mortgage notes are secured by a pool of cross collateralized mortgages on 240 restaurants with a net book value at December 31, 1995 of $225.5 million. In addition, the notes are collateralized by, among other things, a security interest in the restaurant equipment, the assignment of intercompany lease agreements and the stock of the issuing subsidiary. Interest on the notes is payable quarterly with the entire principal due at maturity in 2000. The notes are redeemable, in whole, at the issuer's option. The Company through its operating subsidiary covenants that it will use each property as a food service facility, maintain the properties in good repair and expend at least $5.3 million per annum and not less than $33 million, in the aggregate, in any five year period to maintain the properties. At December 31, 1995, the Company has $775 million aggregate notional amount in effect of reverse interest rate exchange agreements with maturities ranging from twelve to forty-eight months. These notional amounts reflect only the extent of the Company's involvement in these financial instruments and do not represent the Company's exposure to market risk. The Company receives interest at fixed rates calculated on such notional amounts and pays interest at floating rates based on six months LIBOR in arrears calculated on like notional amounts. The net expense from such agreements is reflected in interest and debt expense and totalled $12.2 million, $9.2 million, and $3.1 million for the years ended December 31, 1993, 1994, and 1995, respectively. Subsequent to year end, the Company terminated interest rate exchange agreements with notional aggregate amounts totalling $200 million that were scheduled to mature in 1997. Management intends to maintain its remaining exchange agreements until maturity, unless there is a material change in the underlying hedged instruments of the Company. The counterparties to the Company's interest rate exchange agreements are major financial institutions who participate in the Company's senior bank credit facility. Such financial institutions are leading market-makers in the financial derivatives markets, are well capitalized, and are expected to fully perform under the terms of such exchange agreements, thereby mitigating the credit risk to the Company. The Company is exposed to market risk for such exchange agreements due to the interest rate differentials described above. The Company monitors its market risk by periodically preparing sensitivity analyses of various interest rate fluctuation scenarios and the results of such scenarios on the Company's cash flows on a nominal and discounted basis. In addition, the Company obtains portfolio mark-to-market valuations from market-makers of financial derivatives products. Information regarding the Company's reverse interest rate exchange agreements at December 31, 1995 is as follows:
AMOUNT OF WEIGHTED AVERAGE YEAR OF NOTIONAL INTEREST RATE MATURITY PAYMENT RECEIVED PAID 1997 $475,000 5.21% 5.61% 1998 200,000 5.57% 5.66% 1999 100,000 5.82% 5.66% $775,000 5.38% 5.63%
The estimated fair value of the Company's long-term debt (excluding capital lease obligations) is approximately $1.75 billion at December 31, 1995. Such computations are based on market quotations for the same or similar debt issues or F-13 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 DEBT -- Continued the estimated borrowing rates available to the Company. At December 31, 1995, the estimated fair value of the $775 million notional amount of reverse interest rate swaps was a net payable of approximately $2.7 million and represents the estimated amount that the Company would be required to pay to terminate the swap agreements at December 31, 1995. This estimate is based upon a mark-to-market valuation of the Company's swap portfolio obtained from a major financial institution which is one of the counterparties to the exchange agreements. NOTE 5 LEASES AND RELATED GUARANTEES The Company's operations utilize property, facilities, equipment and vehicles leased from others. In addition, certain owned and leased property, facilities and equipment are leased to others. Buildings and facilities leased from others primarily are for restaurants and support facilities. At December 31, 1995, 899 restaurants were operated under lease arrangements which generally provide for a fixed basic rent, and, in some instances, contingent rental based on a percentage of gross operating profit or gross revenues. Initial terms of land and restaurant building leases generally are not less than twenty years exclusive of options to renew. Leases of other equipment primarily consist of merchandising equipment, computer systems and vehicles, etc. Information regarding the Company's leasing activities at December 31, 1995 is as follows:
CAPITAL LEASES OPERATING LEASES MINIMUM MINIMUM MINIMUM MINIMUM LEASE SUBLEASE LEASE SUBLEASE PAYMENTS PAYMENTS PAYMENTS PAYMENTS (IN THOUSANDS) Year: 1996....................................................................... $ 33,943 $ 2,106 $ 44,586 $9,372 1997....................................................................... 30,998 2,010 42,148 9,006 1998....................................................................... 25,248 1,776 38,940 8,291 1999....................................................................... 20,424 1,404 35,403 6,208 2000....................................................................... 15,977 1,031 31,550 5,448 Subsequent years........................................................... 129,168 5,643 175,578 23,932 Total................................................................... 255,758 $13,970 $368,205 $62,257 Less imputed interest........................................................ 111,185 Present value of capital lease obligations................................... $144,573
The total rental expense included in the determination of operating income for the years ended December 31, 1993, 1994 and 1995 is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 (IN THOUSANDS) Basic rents................................................................... $ 48,870 $ 49,234 $ 48,269 Contingent rents.............................................................. 12,306 12,178 11,274 Total......................................................................... $ 61,176 $ 61,412 $ 59,543
Total rental expense does not reflect sublease rental income of $8,998,000, $9,975,000, and $14,426,000 for the years ended December 31, 1993, 1994, and 1995, respectively. F-14 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 INCOME TAXES A summary of the provision for (benefit from) income taxes attributable to the loss before discontinued operations, extraordinary items, and cumulative effect of change in accounting principles is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 (IN THOUSANDS) Current: Federal..................................................................... $ 1,323 $ 365 $ 1,940 State, Foreign and Other.................................................... 3,762 215 1,497 5,085 580 3,437 Deferred: Federal..................................................................... (74,606) -- -- State, Foreign and Other.................................................... (9,807) (2,793) (3,451) (84,413) (2,793) (3,451) Benefit from income taxes..................................................... $ (79,328) $ (2,213) $ (14) The total provision for (benefit from) income taxes related to: Loss before discontinued operations, extraordinary items, and cumulative effect of change in accounting principles................................ $ (79,328) $ (2,213) $ (14) Discontinued operations..................................................... (1,821) 10,470 8,731 Extraordinary items......................................................... (196) (174) 25 Cumulative effect of change in accounting principles........................ (90) -- -- Total provision for (benefit from) income taxes............................... $ (81,435) $ 8,083 $ 8,742
For the year ended December 31, 1993, the Company utilized regular tax net operating loss carryforwards of approximately $9.5 million. For the years ended December 31, 1994 and 1995, the provision for income taxes relating to discontinued operations was reduced due to the utilization of regular tax net operating loss carryforwards of approximately $89 million in 1994 and $75 million in 1995. In addition, the deferred federal tax benefit for the year ended December 31, 1993, has been offset by approximately $2.7 million due to the 1% corporate tax rate increase included in the Omnibus Budget Reconciliation Act of 1993. F-15 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 INCOME TAXES -- Continued The following represents the approximate tax effect of each significant type of temporary difference and carryforward giving rise to the deferred income tax liability or asset:
DECEMBER 31, 1994 1995 (IN THOUSANDS) Deferred tax assets: Deferred income....................................................................................... $ -- $ 24,326 Self-insurance reserves............................................................................... 40,269 33,522 Capitalized leases.................................................................................... 18,539 15,823 Assets held for sale.................................................................................. 7,343 -- Other accruals and reserves........................................................................... 38,246 6,924 Alternative minimum tax credit carryforwards.......................................................... 14,125 18,444 General business credit carryforwards................................................................. 13,225 21,623 Net operating loss carryforwards...................................................................... 44,450 9,764 Less: valuation allowance............................................................................. (28,767) (54,452) Total deferred tax assets............................................................................. 147,430 75,974 Deferred tax liabilities: Depreciation of fixed assets.......................................................................... 164,465 89,787 Amortization of intangible assets..................................................................... 4,644 4,362 Total deferred tax liabilities........................................................................ 169,109 94,149 Total deferred income tax liability................................................................... $ 21,679 $ 18,175
The Company has provided a valuation allowance for the portion of the deferred tax asset for which it is more likely than not that a tax benefit will not be realized. The difference between the statutory federal income tax rate and the effective tax rate on loss from continuing operations before discontinued operations, extraordinary items and cumulative effect of accounting change is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 Statutory rate................................................................ 35% 35% 35% Differences: State, foreign, and other taxes, net of federal income tax benefit.......... -- 12 -- Amortization and write-off of goodwill...................................... (26) -- -- Portion of losses not benefited as a result of the establishment of valuation allowance...................................................... (3) (35) (35) Effective tax rate............................................................ 6% 12% --%
At December 31, 1995, the Company has available, to reduce income taxes that become payable in the future, general business credit carryforwards of approximately $22 million, most of which expire in 2002 through 2007, and alternative minimum tax (AMT) credits of approximately $18 million. The AMT credits may be carried forward indefinitely. In addition, the Company has available regular income tax net operating loss carryforwards of approximately $28 million which expire in 2007. Due to the Recapitalization of the Company which occurred during 1992, the Company's ability to utilize general business credits, and AMT credits which arose prior to 1992 will be limited to a specified annual amount. The annual limitation for the utilization of the tax credit carryforwards is approximately $8 million. The remaining amount of net operating loss carryforward which arose in 1992 of approximately $28 million is presently not subject to any annual limitation. F-16 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 EMPLOYEE BENEFIT PLANS The Company maintains several defined benefit plans which cover a substantial number of employees. Benefits are based upon each employee's years of service and average salary. The Company's funding policy is based on the minimum amount required under the Employee Retirement Income Security Act of 1974. The Company also maintains defined contribution plans. Total net pension cost of defined benefit plans for the years ended December 31, 1993, 1994, and 1995 amounted to $3,724,000, $3,995,000 and $5,594,000, respectively, of which $2,802,000, $3,270,000 and $3,260,000 related to funded defined benefit plans and $922,000, $725,000 and $2,334,000 related to nonqualified unfunded supplemental defined benefit plans for executives. The components of net pension cost of the funded and unfunded defined benefit plans for the years ended December 31, 1993, 1994, and 1995 determined under SFAS No. 87 follow:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 (IN THOUSANDS) Service cost-benefits earned during the year.................................. $ 2,625 $ 3,076 $ 2,829 Interest cost on projected benefit obligations................................ 2,281 2,427 2,651 Actual return on plan assets.................................................. (1,284) 761 (3,722) Net amortization and deferral................................................. 102 (2,269) 2,074 Curtailment/settlement losses (due to early retirements of certain participants)............................................................... -- -- 1,762 Net pension cost.............................................................. $ 3,724 $ 3,995 $ 5,594
The following table sets forth the funded status and amounts recognized in the Company's balance sheet for its funded defined benefit plans:
DECEMBER 31, 1994 1995 (IN THOUSANDS) Actuarial present value of accumulated benefit obligations: Vested benefits....................................................................................... $19,887 $23,993 Non-vested benefits................................................................................... 1,412 1,466 Accumulated benefit obligations......................................................................... $21,299 $25,459 Plan assets at fair value............................................................................... $21,859 $26,513 Projected benefit obligation............................................................................ 27,556 32,059 Funded status........................................................................................... (5,697) (5,546) Unrecognized net loss from past experience different from that assumed.................................. 7,270 6,301 Unrecognized prior service cost......................................................................... 137 69 Prepaid pension costs................................................................................... $ 1,710 $ 824
Assets held by the Company's plans are invested in money market and other fixed income funds as well as equity funds. F-17 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued The following sets forth the funded status and amounts recognized in the Company's balance sheet for its unfunded defined benefit plans:
DECEMBER 31, 1994 1995 (IN THOUSANDS) Actuarial present value of accumulated benefit obligations: Vested benefits........................................................................................ $ 3,888 $ 4,080 Non-vested benefits.................................................................................... 343 12 Accumulated benefit obligations.......................................................................... $ 4,231 $ 4,092 Plan assets at fair value................................................................................ $ -- $ -- Projected benefit obligation............................................................................. (4,623) (4,188) Funded status............................................................................................ (4,623) (4,188) Unrecognized net (gain) loss from past experience different from that assumed............................ 468 (112) Unrecognized prior service cost.......................................................................... 738 109 Unrecognized net asset at January 1, 1987 being amortized over 15 years.................................. (123) (49) Additional liability..................................................................................... (1,163) (543) Other -- 24 Accrued pension costs.................................................................................... $(4,703) $$(4,759)
Significant assumptions used in determining net pension cost and funded status information for all the periods shown above are as follows:
1994 1995 Discount rate.................................................................... 8.25 % 8.0 % Rates of salary progression...................................................... 4.0 % 4.0 % Long-term rates of return on assets.............................................. 10.0 % 10.0 %
In addition, the Company has defined contribution plans whereby eligible employees can elect to contribute from 1%-15% of their compensation to the plans. These plans include profit sharing and savings plans under which the Company makes matching contributions, with certain limitations. Amounts charged to income under these plans were $3,767,000, $3,932,000, and $3,911,000 for the years ended December 31, 1993, 1994, and 1995, respectively. Incentive compensation plans provide for awards to management employees based on meeting or exceeding certain levels of income as defined by such plans The amounts charged to income under the plans for the years ended December 31, 1993, 1994, and 1995 were as follows: zero, $4,212,000, and $610,000. In addition to these incentive compensation plans, certain operations have incentive plans in place under which regional, divisional and local management participate. The 1989 Stock Option Plan permits a Committee of the Board of Directors to grant options to key employees of the Company and its subsidiaries to purchase shares of common stock of the Company at a stated price established by the Committee. Such options are exercisable at such time or times either in whole or part, as determined by the Committee. The 1989 Stock Option Plan authorizes grants of up to 6,500,000 common shares. Options of 3,308,200 and 4,302,120, respectively, were outstanding at December 31, 1994 and 1995 of which 241,610 and 728,221, respectively, were exercisable. Such options have exercise prices of between $5.13 and $17.50 per share and become exercisable between one and two years after the date of grant with an additional twenty to twenty-five percent of such options becoming exercisable each year thereafter. During 1994 and 1995 no options were exercised. If not exercised, the 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 Stock Option Plan were repriced to $6.00 per share, the market value of the common stock at the date of the repricing. 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- F-18 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued 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. In 1990, the Board of Directors adopted a 1990 Non-qualified Stock Option Plan (the 1990 Option Plan) for its directors who do not participate in management and are not affiliated with GTO (see Note 12). Such plan, as currently in effect, authorizes the issuance of up to 110,000 shares of common stock. The plan is substantially similar in all respects to the 1989 Option Plan described above. The Committee of the Board administering the 1990 Option Plan granted options for 30,000 shares as of July 31, 1990 at $29.05 per share, the market price per share on the date of grant. At December 31, 1994 and 1995, respectively, options outstanding under the 1990 Option Plan totalled 10,000 shares. During January 1995, the Company issued 65,306 shares of common stock and granted an option under the 1989 Stock Option Plan to purchase 800,000 shares of the Company's common stock, at market value at the date of grant, for a ten-year period. Such grant becomes exercisable at the rate of 20% per year beginning on January 9, 1996 and each anniversary thereafter. NOTE 8 COMMITMENTS AND CONTINGENCIES There are various claims and pending legal actions against or indirectly involving the Company, including actions concerned with civil rights of employees and customers, other employment related matters, taxes, sales of franchise rights, and other matters. Certain of these are seeking damages in substantial amounts. The amounts of liability, if any, on these direct or indirect claims and actions at December 31, 1995, over and above any insurance coverage in respect to certain of them, are not specifically determinable at this time. Flagstar has received proposed deficiencies from the Internal Revenue Service (IRS) for federal income taxes totalling approximately $12.7 million. The proposed deficiencies relate to examinations of certain income tax returns filed by the Company and Flagstar for the seven fiscal periods ended December 31, 1992. The deficiencies primarily involve the proposed disallowance of deductions associated with borrowings and other costs incurred prior to, at and just following the time of the acquisition of Flagstar in 1989. The Company intends to vigorously contest the proposed deficiencies because it believes the proposed deficiencies are substantially incorrect. The Company is also the subject of pending and threatened employment discrimination claims principally in California and Alabama. In certain of these claims, the plaintiffs have threatened to seek to represent a class alleging racial discrimination in employment practices at Company restaurants and to seek actual, compensatory and punitive damages, and injunctive relief. It is the opinion of Management (including General Counsel), after considering a number of factors, including but not limited to the current status of the litigation (including any settlement discussions), the views of retained counsel, the nature of the litigation or proposed tax deficiencies, the prior experience of the consolidated companies, and the amounts which the Company has accrued for known contingencies that the ultimate disposition of these matters will not materially affect the consolidated financial position or results of operations of the Company. The Company is guarantor on capital lease obligations of approximately $5.7 million at December 31, 1995 from the sale of PFC. See Note 1(p). F-19 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9 SHAREHOLDERS' EQUITY (DEFICIT)
TOTAL TOTAL SHAREHOLDERS' OTHER EQUITY DEFICIT EQUITY (DEFICIT) (IN THOUSANDS) Balance December 31, 1992...................................................... $746,360 $ (456,993) $ 289,367 Activity: Net Loss.................................................................. -- (1,686,650) (1,686,650) Dividends on Preferred Stock.............................................. -- (14,175) (14,175) Minimum pension liability adjustment...................................... (11,091) -- (11,091) Balance December 31, 1993...................................................... 735,269 (2,157,818) (1,422,549) Activity: Net Income................................................................ -- 364,093 364,093 Dividends on Preferred Stock.............................................. -- (14,175) (14,175) Minimum pension liability adjustment...................................... 10,131 -- 10,131 Balance December 31, 1994...................................................... 745,400 (1,807,900) (1,062,500) Activity: Net Loss.................................................................. -- (55,199) (55,199) Dividends on Preferred Stock.............................................. -- (14,175) (14,175) Issuance of Common Stock.................................................. 400 -- 400 Minimum pension liability adjustment...................................... 497 -- 497 Balance December 31, 1995...................................................... $746,297 $(1,877,274) $ (1,130,977)
Each share of the $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock ($2.25 Preferred Stock) is convertible at the option of the holder, unless previously redeemed, into 1.359 shares of common stock. The Preferred Stock may be exchanged at the option of the Company, in up to two parts, at any dividend payment date for the Company's 9% Convertible Subordinated Debentures (Exchange Debentures) due July 15, 2017 in a principal amount equal to $25.00 per share of $2.25 Preferred Stock. Each $25.00 principal amount of Exchange Debenture, if issued, would be convertible at the option of the holder into 1.359 shares of common stock of the Company. The $2.25 Preferred Stock may be redeemed at the option of the Company, in whole or in part, on or after July 15, 1994 at $26.80 per share if redeemed during the twelve month-period beginning July 15, 1994, and thereafter at prices declining annually to $25.00 per share on or after July 15, 2002. At December 31, 1995, there are warrants outstanding which entitle the holder, an affiliate of Kohlberg, Kravis, Roberts & Co. (KKR), a shareholder of the Company, to purchase 15 million shares of Company common stock at $17.50 per share, subject to adjustment for certain events. Such warrants may be exercised through November 16, 2000. NOTE 10 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS The outstanding warrants as well as the stock options issued to management and directors are common stock equivalents. The $2.25 Preferred Stock and 10% Convertible Debentures, which are convertible into the common stock of the Company (see Note 4), are not common stock equivalents; however, such securities are considered "other potentially dilutive securities" which may become dilutive in the calculation of fully diluted per share amounts. The calculations of primary and fully diluted loss per share amounts for the years ended December 31, 1993 and 1995 have been based on the weighted average number of Company shares outstanding. The warrants, options, $2.25 Preferred Stock, and 10% Convertible Debentures have been omitted from the calculations for 1993 and 1995 because they have an antidilutive effect on loss per share. For the year ended December 31, 1994, the calculation of primary earnings per share has been based on the weighted average number of outstanding shares as adjusted by the assumed dilutive effect that would occur if the outstanding warrants and stock options were exercised, using the modified treasury stock method. The calculation of fully F-20 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS -- Continued diluted earnings per share has been based on additional adjustments to the primary earnings per share amount for the dilutive effect of the assumed conversion of the $2.25 Preferred Stock and 10% Convertible Debentures. NOTE 11 EXTRAORDINARY ITEMS The Company recorded losses from extraordinary items as follows:
YEAR ENDED DECEMBER 31, 1993 INCOME LOSSES, TAX NET OF LOSSES BENEFITS TAXES (IN THOUSANDS) Prepayment of Term Loan: Write-off of unamortized deferred financing costs on indebtedness retired................. $26,469 $ (179) $26,290 Recapitalization: Premiums and costs to repurchase 10% Convertible Debentures............................... 90 (12) 78 Write-off of unamortized deferred financing costs on indebtedness retired................. 42 (5) 37 132 (17) 115 Total....................................................................................... $26,601 $ (196) $26,405
YEAR ENDED DECEMBER 31, 1994 INCOME LOSSES, TAX NET OF LOSSES BENEFITS TAXES (IN THOUSANDS) Prepayment of Term Loan: Write-off of unamortized deferred financing costs on indebtedness retired............. $11,931 $ (174) $11,757
YEAR ENDED DECEMBER 31, 1995 INCOME GAIN TAX (LOSS), GAIN PROVISION NET OF (LOSS) (BENEFITS) TAXES (IN THOUSANDS) Repurchase of Senior Indebtness: Gain on repurchase of senior indebtedness................................................ $ 1,461 $ 74 $ 1,387 Write-off of deferred financing costs on repurchase of senior indebtedness............... (970) (49) (921) Total...................................................................................... $ 491 $ 25 $ 466
During the third quarter of 1993, the prepayment of $387.5 million of the Company's term loan under the Restated Credit Agreement resulted in a charge-off of $26.5 million of unamortized deferred financing costs. During the first quarter of 1993, the Company purchased $741,000 in principal amount of 10% Convertible Debentures at 101% of their principal amount plus unpaid accrued interest, pursuant to change in control provisions of the indenture. The repurchase of the 10% Convertible Debentures resulted in a charge of $132,000. During the second quarter of 1994, the Company sold Canteen Corporation, a wholly-owned subsidiary. A portion of the proceeds from the sale was used to prepay $170.2 million of term and $126.1 million of working capital advances which were outstanding under the Company's Restated Credit Agreement resulting in a charge-off of $11.9 million of unamortized deferred financing costs. During the third quarter of 1995, the Company recognized an extraordinary gain totaling $0.5 million, net of income taxes, which represents the repurchase of $24,975,000 principal amount of certain senior indebtedness, net of the charge-off of the related unamortized deferred financing costs of $0.9 million. F-21 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 RELATED PARTY TRANSACTIONS The Company expensed annual advisory fees of $250,000 for the years ended December 31, 1993 and 1994, respectively, for Gollust, Tierney & Oliver, Incorporated (GTO), a stockholder of the Company. Donaldson, Lufkin & Jenrette Securities Corporation (DLJ), a stockholder of the Company, received $4,059,000 during the year ended December 31, 1993 for investment banking services related to the issuance of indebtedness by the Company. KKR received annual financial advisory fees of $1,250,000 for the years ended December 31, 1993, 1994, and 1995. The Company has a loan receivable at December 31, 1995 from its former chairman totaling $16,454,000. The proceeds of the loan were used during 1992 by the former chairman to repay a 1989 loan obtained for the purchase of Company common stock. The loan is due in November 1997 and is secured by 812,000 shares of common stock and certain other collateral. The Company earned for the years ended December 31, 1993, 1994, and 1995 $789,000, $842,000, and $886,000, respectively, on such loan which accrues interest at 5.6% per annum and is payable at maturity. NOTE 13 DISCONTINUED OPERATIONS During April 1994, the Company announced the signing of a definitive agreement to sell the food and vending business and its intent to dispose of the remaining concession and recreation services businesses of its subsidiary, Canteen Holdings, Inc. The Company sold Canteen Corporation, a food and vending subsidiary, for $447.1 million during June 1994, and recognized a net gain of approximately $399.2 million, net of income taxes, during the year ended December 31, 1994. During December 1995, the Company sold TW Recreational Services, Inc., a concession and recreation services subsidiary, for $98.7 million and Volume Services, Inc., a stadium concession services subsidiary for $73.4 million, both subject to certain adjustments, and recognized gains totaling $77.9 million, net of income taxes. The financial statements and related notes presented herein classify Canteen Holdings, Inc. and its subsidiaries as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. Revenues and operating income (loss) of the discontinued operations for the years ended December 31, 1993, 1994, and 1995 were $1.37 billion, $859.7 million, and $322.3 million and $(313.3) million, $32.6 million, and $17.1 million, respectively. F-22 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14 QUARTERLY DATA (UNAUDITED) The results for each quarter include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The consolidated financial results on an interim basis are not necessarily indicative of future financial results on either an interim or an annual basis. Selected consolidated financial data for each quarter within 1994 and 1995 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, 1994: Operating Revenue......................................................... $626,273 $679,563 $700,589 $ 659,541 Operating expenses: Product costs........................................................... 217,607 234,770 239,479 227,231 Payroll & benefits...................................................... 227,318 241,419 238,075 213,116 Depreciation & amortization expense..................................... 31,713 31,767 32,866 33,287 Utilities expense....................................................... 24,438 24,003 27,370 23,210 Other................................................................... 86,445 102,168 100,684 104,715 Recovery of restructuring charges....................................... -- -- -- (7,207) Operating income.......................................................... $ 38,752 $ 45,436 $ 62,115 $ 65,189 Income (loss) before extraordinary item................................... $(23,072) $361,619 $ 23,519 $ 13,784 Net income (loss) applicable to common shareholders....................... $(26,616) $347,253 $ 19,976 $ 9,305 Primary per share amounts applicable to common shareholders: Income (loss) before extraordinary items and cumulative effect of change in accounting principle.............................................. $ (0.63) $ 7.09 $ 0.47 $ 0.24 Net income (loss)....................................................... $ (0.63) $ 6.88 $ 0.47 $ 0.22 Fully diluted per share amounts applicable to common shareholders: Income (loss) before extraordinary item and cumulative effect of change in accounting principle.............................................. $ (0.63) $ 5.78 $ 0.47 $ 0.24 Net income (loss)....................................................... $ (0.63) $ 5.61 $ 0.47 $ 0.22 Year Ended December 31, 1995: Operating Revenue......................................................... $636,464 $681,464 $676,899 $ 576,660 Operating expenses: Product costs........................................................... 218,246 238,514 229,446 178,299 Payroll & benefits...................................................... 228,809 238,889 229,368 219,885 Depreciation & amortization expense..................................... 33,249 33,748 32,802 33,073 Utilities expense....................................................... 23,261 23,708 27,361 23,882 Other................................................................... 95,561 96,471 101,634 99,816 Provision for restructuring charges..................................... -- -- -- 15,873 Charge for impaired assets.............................................. -- -- -- 51,358 Operating income (loss)................................................... $ 37,338 $ 50,134 $ 56,288 $ (45,526) Income (loss) before extraordinary item................................... $(31,060) $(13,554) $ 13,765 $ (24,816) Net income (loss) applicable to common shareholders....................... $(34,604) $(17,098) $ 10,688 $ (28,360) Primary and fully diluted per share amounts applicable to common shareholders: Income (loss) before extraordinary item................................. $ (0.82) $ (0.40) $ 0.24 $ (0.67) Net income (loss)....................................................... $ (0.82) $ (0.40) $ 0.25 $ (0.67)
F-23 FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14 QUARTERLY DATA (UNAUDITED) -- Continued During the second quarter of 1994, the Company sold its food and vending subsidiary (see Note 13) and recorded a $383.9 million net gain on the sale of the discontinued operation. During the fourth quarter of 1994, the Company increased its gain by $15.3 million to reflect the final settlement of such sale. During the fourth quarter of 1994, the Company recognized a reduction in operating expenses of approximately $15.0 million principally due to favorable claims trends associated with the Company's self-insurance liabilities. During the fourth quarter of 1995, the Company sold its concession and recreation services subsidiaries and recorded a $77.9 million net gain on the sales of such discontinued operations. The effect of the Company's other potentially dilutive securities (see Note 10) on the computations of fully diluted loss per share amounts for the first, third, and fourth quarters of 1994 and 1995 quarters were anti-dilutive. Accordingly, the primary and fully diluted loss per share amounts for such quarters are equivalent. NOTE 15 SUBSEQUENT EVENTS (UNAUDITED) On February 22, 1996, the Company entered into an agreement with Integrated Systems Solutions Corporation (ISSC). The ten year agreement for $323 million provides for ISSC to manage and operate the Company's information systems, as well as, develop and implement new systems and applications to enhance information technology for the Company's corporate headquarters, restaurants, and field management. ISSC will oversee data center operations, applications development and maintenance, voice and data networking, help desk operations and point-of-sale technology. On March 1, 1996, the Company entered into an agreement to acquire the Coco's and Carrows restaurant chains, consisting of approximately 350 units operating in the family dining segment. The purchase is subject to the signing of certain ancillary agreements and other customary terms and conditions. If consummated, the purchase price (including estimated expenses) would consist of $131 million of cash ($56 million of which will be financed by bank term loans), the issuance of notes payable to the seller of $150 million, and the assumption of certain capital lease obligations of approximately $31.5 million. F-24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FLAGSTAR COMPANIES, INC. By: /s/ RHONDA J. PARISH Rhonda J. Parish (Vice President, General Counsel and Secretary) Date: March 29, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ JAMES B. ADAMSON Director, Chairman, President and Chief Executive March 29, 1996 Officer (Principal Executive Officer) (James B. Adamson) /s/ C. ROBERT CAMPBELL Vice President and Chief Financial Officer March 29, 1996 (Principal Financial and Accounting Officer) (C. Robert Campbell) /s/ MICHAEL CHU Director March 29, 1996 (Michael Chu) /s/ VERA KING FARRIS Director March 29, 1996 (Vera King Farris) /s/ HENRY R. KRAVIS Director March 29, 1996 (Henry R. Kravis) /s/ ANDREW A. LEVISON Director March 29, 1996 (Andrew A. Levison) /s/ PAUL E. RAETHER Director March 29, 1996 (Paul E. Raether) /s/ CLIFTON S. ROBBINS Director March 29, 1996 (Clifton S. Robbins) /s/ GEORGE R. ROBERTS Director March 29, 1996 (George R. Roberts) /s/ ELIZABETH A. SANDERS Director March 29, 1996 (Elizabeth A. Sanders) /s/ L. EDWIN SMART Director March 29, 1996 (L. Edwin Smart) /s/ MICHAEL T. TOKARZ Director March 29, 1996 (Michael T. Tokarz)
EX-3 2 EXHIBIT 3.5 EXHIBIT 3.5 BY-LAWS1 OF FLAGSTAR COMPANIES, INC. A DELAWARE CORPORATION ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington. SECTION 2. OTHER OFFICES. The Corporation may have other offices, either within or without the state of Delaware, at such place or places as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETING OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the election of directors and for such other business as may be stated in the notice of the meeting shall be held at such place, either within or without the state of Delaware, and at such time and date, commencing in the year 1989, as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and they may transact such other corporate business as shall be stated in the notice of the meeting. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section. The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. SECTION 2. OTHER MEETINGS. Special meetings of stockholders for any purpose may be held at such time and place, within or without the state of Delaware, as may be fixed by the Board of Directors and shall be stated in the notice of meeting. SECTION 3. INSPECTOR OF ELECTION. At each meeting of stockholders at which an election of directors is to be held, the chairman of the meeting may, but shall not be required to, appoint one person, who need not be a 1 As amended through July 26, 1995 stockholder, to act as inspector of election at such meeting. The inspector so appointed, before entering on the discharge of his duties, shall take and subscribe to an oath or affirmation to faithfully execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability, and thereupon the inspector shall take charge of the polls and after the balloting shall canvas the votes and make a certificate of the results of the vote taken. No director or candidate for the office of director shall be appointed inspector. SECTION 4. VOTING. At each meeting of the stockholders, each stockholder entitled to vote at such meeting in accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these By-laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. Every proxy must be executed in writing by the stockholder or by the stockholder's duly authorized attorney. Upon the demand of any stockholder, the vote for directors and the vote upon any question before the meeting, shall be by ballot. All elections for directors and all other questions shall be decided by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of the state of Delaware. A complete list of the stockholders entitled to vote at the ensuing election, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 5. QUORUM. At all meetings of the stockholders, except as otherwise required by law, by the Certificate of Incorporation or by these By-laws, the presence, in person or by proxy, of stockholders of record holding a majority of the shares of stock of the Corporation issued, outstanding and entitled to vote thereat shall constitute a quorum for the transaction of business. In case a quorum shall not be present at any meeting, the holders of record of a majority of the shares of stock entitled to vote thereat, present in person or by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally called; but only those stockholders entitled to vote at the meeting as originally called shall be entitled to vote at any adjournment or adjournments thereof. SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or purposes may be called by the Chairman of the Board of Directors, the President or the Secretary, or by resolution of the Board of Directors. SECTION 7. NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not less than ten nor more than sixty days before the date of the meeting. No business other than that stated in the notice shall be transacted at any meeting without the unanimous consent of all the stockholders entitled to vote thereat. SECTION 8. ACTION WITHOUT MEETING. Unless otherwise provided by the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Such written consent shall be filed in the minute book of the Corporation. 2 ARTICLE III DIRECTORS SECTION 1. NUMBER AND TERM. The number of directors of the Corporation shall be not less than one nor more than fifteen. Within the limits above specified, the number of directors shall be determined from time to time by the stockholders or by the Board of Directors at any meeting thereof. The directors shall be elected at the annual meeting of the stockholders. Each director shall be elected to serve until his successor shall be elected and shall qualify or until his earlier death, resignation or removal as provided in these By-laws. Directors need not be stockholders. No person who has attained the age of 70 shall be eligible to stand for election or re-election by the stockholders or otherwise to be appointed to serve as a director of the Corporation. SECTION 2. RESIGNATION. Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing to the Board of Directors, the Chairman of the Board of Directors, the President or the Secretary. Unless otherwise specified therein, such resignation shall take effect on receipt thereof. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3. VACANCIES. If the office of any director, member of a committee or other officer becomes vacant, the remaining directors in office, though less than a quorum, by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen or until his earlier death, resignation or removal. In the event that the resignation of any director shall specify that it shall take effect at a future date, the vacancy resulting from such resignation may be filled prospectively in the same manner as provided in this paragraph. SECTION 4. REMOVAL. Except as hereinafter provided, any director or directors may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a special meeting of the stockholders called for the purpose, and the vacancies thus created may be filled, at the meeting held for the purpose of removal, by the affirmative vote of a majority in interest of the stockholders entitled to vote. Any director may be removed at any time for cause by the action of the directors, at a special meeting called for that purpose, by the vote in favor of removal of a majority of the total number of directors. SECTION 5. INCREASE OF NUMBER. The maximum number of directors may be increased by amendment of these By-laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify or until their earlier death, resignation or removal. SECTION 6. POWERS. The Board of Directors shall exercise all of the powers of the Corporation except such as are by law, by the Certificate of Incorporation of the Corporation or by these By-laws conferred upon or reserved to the stockholders. SECTION 7. COMMITTEES. The Board of Directors may, by resolution or resolutions passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these By-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation; and, unless the resolution, these By-laws, or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. 3 SECTION 8. MEETINGS. The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by consent in writing of all the directors. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the President or the Secretary on the written request of any two directors on at least two days' notice to each director and shall be held at such place or places as may be determined by the directors, or shall be stated in the call of the meeting. Unless otherwise restricted by the Certificate of Incorporation or by these By-laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. SECTION 9. QUORUM. A majority of the total number of directors shall constitute a quorum for the transaction of business. If a quorum shall be present, the act of a majority of the directors present shall be the act of the Board of Directors, except as otherwise provided by law, by the Certificate of Incorporation or by these By-laws. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. SECTION 10. COMPENSATION. Directors shall not receive any stated salary for their services as directors or as members of committees, but by resolution of the Board of Directors a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board of Directors, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or committee. SECTION 12. RULES AND REGULATIONS. The Board of Directors may adopt such rules and regulations for the conduct of its meetings and for the management of the property, affairs and business of the Corporation as it may deem proper, except as otherwise provided by law, by the Certificate of Incorporation or by these By-laws. ARTICLE IV OFFICERS SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of the Board of Directors, if any shall have been elected, a President, a Treasurer, and a Secretary, all of whom shall be elected by the Board of Directors and who shall hold office until their successors are elected and qualified or until their earlier death, resignation or removal. In addition, the Board of Directors may elect one or more Vice Presidents and such Assistant Secretaries and Assistant Treasurers as they may deem proper. None of the officers of the Corporation need be directors (except for the Chairman of the Board of Directors, if any) or stockholders. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. Any person may hold one or more offices. The compensation of all officers of the Corporation shall be fixed by the Board of Directors. SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. The Board of Directors may delegate to any officer or officers the power to appoint any such officer, to fix their respective terms of office, to prescribe their respective powers and duties, to remove them and to fill vacancies in any such offices. SECTION 3. CHAIRMAN. The Chairman of the Board of Directors, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders, and absent instructions to the contrary by the Board of Directors, shall exercise general supervision over the property, affairs and business of the Corporation, shall authorize the other officers of 4 the Corporation to exercise such powers as he may deem to be in the best interests of the Corporation and shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 4. PRESIDENT. The President shall have such duties as may from time to time be delegated to him by the Board of Directors. In the event there shall be no Chairman, the President shall exercise all powers conferred on the Chairman by Section 3 of this Article. In the event a Chairman is elected, the President shall be the Chief Executive Officer of the Corporation and, in the absence or disability of the Chairman, shall have the powers of the Chairman. SECTION 5. VICE PRESIDENTS. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him by the directors. The Board of Directors may further designate the area or areas of responsibility assigned to a Vice President by appropriate words, such as Senior Vice President or Group Vice President added to the title of the office or offices held by such Vice President. SECTION 6. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. He shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation in such manner as may be ordered by the Board of Directors, the Chairman or the President, taking proper vouchers for such disbursements. He shall render to the Chairman, the President and the Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. SECTION 7. SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these By-laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the Chairman, the President, or the directors, or stockholders, upon whose requisition the meeting is called as provided in these By-laws. He shall record all the proceedings of the meetings of the Corporation and of the directors, in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the directors, the Chairman or the President. He shall have the custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the directors. SECTION 9. RESIGNATION. Any officer may resign at any time, unless otherwise provided in any contract with the Corporation, by giving written notice to the Chairman, if any, or the President or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof. SECTION 10. REMOVAL. Any officer may be removed at any time by an affirmative vote of a majority of the Board of Directors, with or without cause. Any officer not elected by the Board of Directors may be removed in such manner as may be determined by, or pursuant to delegation from the Board of Directors. SECTION 11. VACANCIES. If a vacancy shall occur in any office, such vacancy may be filled for the unexpired portion of the term by the Board of Directors. SECTION 12. SURETY BONDS. In the event the Board of Directors shall so require, any officer or agent of the Corporation shall execute to the Corporation a bond in such sum and with such surety or sureties as the Board of Directors may direct, conditioned on the faithful performance of the officer's duties to the Corporation. ARTICLE V MISCELLANEOUS SECTION 1. CERTIFICATES OF STOCK. A certificate or certificates of stock, signed by the Chairman of the Board of Directors, if one be elected, the President or a Vice President, and the Treasurer or an Assistant Treasurer, or Secretary or an Assistant Secretary, and sealed with the seal of the Corporation, shall be issued to each stockholder certifying the number of shares owned by him in the Corporation. Any of or all of the signatures may be facsimiles. The certificate or certificates of stock shall be in such form as the Board of Directors may from time to time adopt and shall be 5 countersigned and registered in such manner, if any, as the Board of Directors may prescribe. In case any officer who shall have signed, or whose facsimile signature shall have been used on any such certificate, shall cease to be such officer of the Corporation before such certificate shall have been issued by the Corporation, such certificate may nevertheless be adopted by the Corporation and be issued and delivered as though the person who signed such certificate, or whose facsimile signature shall have been used thereon, had not ceased to be such officer; and such issuance and delivery shall constitute adoption of such certificate by the Corporation. There shall be entered on the books of the Corporation the number of each certificate issued, the number (and class or series, if any) of shares represented thereby, the name and address of the person to whom such certificate was issued and the date of issuance thereof. SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. A new certificate of stock may be issued in the place of any certificate theretofore issued by the Corporation, alleged to have been lost, stolen or destroyed, and the directors may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or his legal representatives, to give the Corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of any such certificate, or the issuance of any such new certificate and to provide such evidence of loss, theft or destruction as the Board of Directors may require. SECTION 3. TRANSFER OF SHARES. The shares of stock of the Corporation shall be transferable only upon its books by the holders of record thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered, along with such evidence of the authenticity of such transfer, authorization and other matters as the Corporation or its agents may reasonably require, to the Corporation by the delivery thereof to the person in charge of the stock and transfer books, or to such other person as the directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 4. REGULATIONS, TRANSFER AGENTS AND REGISTRARS. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issuance and transfer of certificates for shares of the stock of the Corporation, may appoint transfer agents or registrars, or both, and may require all certificates of stock to bear the signature of either or both. Nothing herein shall be construed to prohibit the Corporation from acting as its own transfer agent at any of its offices. SECTION 5. STOCKHOLDERS RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 6. SHAREHOLDERS RECORD OWNERSHIP. The Corporation shall be entitled to recognize the exclusive right of a person registered as such on the books of the Corporation as the owner of shares of the Corporation's stock to receive dividends and to vote as such owner. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, regardless of whether the Corporation shall have express or other notice thereof, except as otherwise provided by law. SECTION 7. DIVIDENDS AND RESERVES. Subject to the applicable provisions of law or of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor, at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the Corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital, or as a reserve fund to meet contingencies, or for equalizing dividends, or for the purpose of repairing, maintaining or increasing the property or business of the Corporation or for such other purposes as the directors shall deem conducive to the interests of the Corporation. The Board of Directors may, in its discretion, modify or abolish any such reserve at any time. 6 SECTION 8. SEAL. The corporate seal shall be circular in form and shall contain the name of the Corporation, the year of its creation and the words "CORPORATE SEAL, DELAWARE." Said seal may be used by causing it or a facsimile thereof to be impressed, affixed, reproduced, engraved, printed or otherwise represented. SECTION 9. FISCAL YEAR. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. SECTION 10. EXECUTION OF INSTRUMENTS. All agreements, deeds, contracts, proxies, covenants, bonds, checks, drafts or other orders for the payment of money, bills of exchange, notes, acceptances and endorsements, and all evidences of indebtedness and other documents, instruments or writings of any nature whatsoever, issued in the name of the Corporation, shall be signed by such officers, agents or employees of the Corporation, or by any one of them, and in such manner, as from time to time may be determined, either generally or in specific instances, by the Board of Directors or by such officer or officers to whom the Board of Directors may delegate the power to so determine. SECTION 11. STOCK OF OTHER CORPORATIONS. Subject to such limitations as the Board of Directors may from time to time prescribe, any officer of the Corporation shall have full power and authority on behalf of the Corporation to attend, to act and vote at, and to waive notice of, any meeting of stockholders of any corporations, shares of stock of which are owned by or stand in the name of the Corporation, and to execute and deliver proxies and actions in writing for the voting of any such shares, and at any such meeting or by action in writing may exercise on behalf of the Corporation any and all rights and powers incident to the ownership of such shares. SECTION 12. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by these By-laws to be given, personal notice is not meant unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his address as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the Corporation or these By-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting, whether of stockholders (in person or by proxy) or of directors or of any committee of the Board of Directors, shall constitute a waiver of notice of such meeting, except when such person attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not legally called or convened. SECTION 13. BOOKS, ACCOUNTS AND OTHER RECORDS. Except as otherwise provided by law, the books, accounts and other records of the Corporation shall be kept at such place or places (within or without the state of Delaware) as the Board of Directors, the Chairman or the President may from time to time designate. SECTION 14. INDEMNIFICATION. The Corporation shall, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as the same exists or may hereafter be amended, indemnify all persons whom it may indemnify pursuant thereto. ARTICLE VI AMENDMENTS These By-laws may be altered, amended or repealed and By-laws may be made at any annual meeting of the stockholders or at any special meeting thereof if notice of the proposed alteration or repeal or By-law or By-laws to be made be contained in the notice of such special meeting, by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote thereat, or by the affirmative vote of a majority of the Board of Directors, at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice of the proposed alteration or repeal, or By-law or By-laws to be made, be contained in the notice of such special meeting. 7 EX-4 3 EXHIBIT 4.30 EXHIBIT 4.30 EXECUTION COPY EIGHTH AMENDMENT AND CONSENT EIGHTH AMENDMENT AND CONSENT dated as of January 6, 1995 (this "AMENDMENT"), among FLAGSTAR CORPORATION, a Delaware corporation formerly known as TW Services, Inc. ("FLAGSTAR"), TWS FUNDING, INC., a Delaware corporation ("FUNDING"), and each financial institution executing this Amendment as a "Lender" (each, a "LENDER"). PRELIMINARY STATEMENTS: 1. Flagstar, Funding, the Lenders and the Co-Agents and Managing Agent referred to therein have entered into an Amended and Restated Credit Agreement dated as of October 26, 1992 (as amended to date, the "CREDIT AGREEMENT"; the terms defined therein being used herein as therein defined unless otherwise defined herein). 2. In accordance with Section 5.02(e)(viii) of the Credit Agreement, Canteen Holdings, Inc. ("CANTEEN") proposes to sell IM Parks, Inc. and its Subsidiary pursuant to a Stock Purchase Agreement dated November 2, 1994 (the "PURCHASE AGREEMENT"), the principal terms of which are described on the attached Schedule A (the "SALE TRANSACTION"). 3. The Borrowers have requested that the Lenders agree (a) to permit the Borrowers, following the reduction of the Working Capital Facility pursuant to Section 2.04(b) of the Credit Agreement, to apply the proceeds of the Sale Transaction to either prepay Funded Debt or to make additional Cash Capital Expenditures and (b) to adjust the financial covenants to allow the Borrowers to apply the proceeds of the Sale Transaction to make additional Capital Expenditures. 4. The Borrowers have requested that certain Subsidiaries of Flagstar be released from their obligations under the Guaranty. 5. The Lenders have expressed their willingness to grant the Borrowers' request as set forth above on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. CONSENT CONCERNING THE SALE TRANSACTION. (a) The Lenders hereby agree that the condition set forth in Section 5.02(e)(viii)(i) of the Credit Agreement shall be satisfied if Flagstar shall have returned to the Issuing Banks for cancellation all Letters of Credit set forth on Schedule B hereto other than the Letter of Credit marked with an asterisk on Schedule B (the "NY LETTER OF CREDIT"), PROVIDED that within 60 days after the consummation of the Sale Transaction, the Borrowers shall have returned to the applicable Issuing Bank for cancellation the NY Letter of Credit or shall have deposited cash collateral with such Issuing Bank in an amount equal to the Available Amount of the NY Letter of Credit. (b) The Lenders hereby agree that the conditions set forth in Section 5.02(e)(viii)(ii) of the Credit Agreement shall be satisfied if the Sale Transaction is consummated upon substantially the terms described in the attached Schedule A. SECTION 2. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, hereby amended as follows: (a) Section 1.01 is amended as follows: (i) The definition of "Adjusted Cash Capital Expenditures" is amended in full as follows: "ADJUSTED CASH CAPITAL EXPENDITURES" means, for any period, Cash Capital Expenditures less, for each of the Rolling Periods ending on the last day of the fiscal quarters set forth below, an amount equal to the sum of (i) the amount set opposite such fiscal quarter:
FISCAL QUARTER ENDED AMOUNT December 31, 1994 $ 75,000,000 March 31, 1995 105,000,000 June 30, 1995 125,000,000 September 30, 1995 125,000,000 December 31, 1995 110,000,000 March 31, 1996 65,000,000
PLUS (ii) for each of the Rolling Periods ending March 31, 1995 through March 31, 1996, an amount equal to $110,000,000 less the aggregate amount as of the end of such fiscal quarter used by the Borrowers to prepay, redeem, purchase, defease or otherwise satisfy Funded Debt in reliance on Section 5.02(n)(i)(G). (ii) The definition of "Spardee's" is amended in full as follows: "SPARDEE'S" means Flagstar Enterprises, Inc., an Alabama corporation and a direct, wholly owned Subsidiary of Spartan. (b) Section 5.02(e)(viii) is amended by deleting the word "March" therefrom and substituting therefor the word "December". (c) Section 5.02(n) is amended by deleting the word "and" at the end of clause (i)(E) thereof and substituting a comma therefor, adding the word "and" at the end of clause (i)(F) thereof and adding a new clause (i)(G) to read as follows: (G) prepayments, redemptions, purchases, defeasances or other satisfactions of Funded Debt, in an aggregate principal amount not to exceed $110,000,000, PROVIDED that, both before and after giving effect to any transaction permitted by this clause (G), no Default shall have occurred and be continuing. (d) Section 5.04(d) is amended by (i) deleting the amount set opposite the Fiscal Year Ending In December 1995 and substituting therefor the amount set opposite such period as set forth below:
FISCAL YEAR ENDING IN AMOUNT December 1995 $285,000,000
and (ii) by adding to the end thereof the following: PROVIDED, FURTHER, that the amount set opposite the Fiscal Year Ending In December 1995 shall be reduced by an amount equal to the amount used during such fiscal year to prepay, redeem, purchase, defease or otherwise satisfy Funded Debt in reliance on Section 5.02(n)(i)(G). SECTION 3. RELEASE OF CERTAIN GUARANTORS. The Lenders hereby agree that Denny's Realty, Quincy's Realty and Spardee's Realty are released from their respective obligations under the Guaranty. SECTION 4. CONDITIONS OF EFFECTIVENESS. (a) This Amendment shall become effective when, and only when (i) the Managing Agent shall have received counterparts of this Amendment executed by Flagstar, Funding and the Required Lenders or, as to any of the Lenders, advice satisfactory to the Managing Agent that such Lenders have executed this Amendment, (ii) the Managing Agent shall have received the Consent attached hereto, signed by each Subsidiary of Flagstar and (iii) the Managing Agent shall have received a certificate, dated the date of receipt thereof by the Managing Agent, in form and substance satisfactory to the Managing Agent, signed by a duly authorized officer of each Loan Party, stating that: 2 (A) The representations and warranties contained in each Loan Document and in Section 5 hereof are correct on and as of the date of such certificate as though made on and as of such date, and (B) No event has occurred and is continuing that constitutes a Default. (b) Section 2(a)(i), (c) and (d) hereof shall become effective when, and only when (i) the conditions set forth in Section 4(a) above have been satisfied or waived and (ii) the Sale Transaction shall have been consummated on substantially the terms described on the attached Schedule A. SECTION 5. REPRESENTATIONS AND WARRANTIES. Flagstar represents and warrants as follows: (a) The execution, delivery and performance by each Loan Party of this Amendment and the Credit Agreement, as amended hereby, and the consummation of the transactions contemplated hereby and thereby are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action and do not (i) contravene such Loan Party's charter or by-laws, (ii) violate any law (including, without limitation, the Securities Exchange Act of 1934, as amended), rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time), order, writ, judgment, injunction, decree, determination or award applicable to any Loan Party, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties or (iv) result in or require the creation or imposition of any Lien (other than Liens created by or permitted under the Loan Documents) upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries except, as to (ii) and (iii) above, as would not, and would not be reasonably likely to, have a Material Adverse Effect. (b) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery, recordation, filing or performance by any Loan Party of this Amendment or the Credit Agreement, as amended hereby, or for the consummation of the transactions contemplated hereby and thereby, except where the failure to obtain, take, give or make such authorizations, approvals, actions, notices or filings would not, and would not be reasonably likely to, have a Material Adverse Effect. (c) This Amendment and the Consent have been duly executed and delivered by each Loan Party party thereto. Assuming that (i) this Amendment is duly executed and delivered by, and is within the power and authority of, the Required Lenders and (ii) the Credit Agreement has been duly executed and delivered by, and is within the power and authority of the Managing Agent, the Co-Agents and the Lenders, this Amendment and the Credit Agreement, as amended hereby, are the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally and subject to general principles of equity (regardless of whether considered in a proceeding in equity or at law). SECTION 6. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement and each reference in the other Loan Documents to the Credit Agreement, "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, the Credit Agreement is and shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or Co-Agent or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 7. GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 8. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an 3 original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWERS FLAGSTAR CORPORATION By TITLE: VICE PRESIDENT AND TREASURER TWS FUNDING, INC. By TITLE: TREASURER LENDERS [Print or type name of institution] By TITLE: 4 CONSENT DATED AS OF JANUARY 6, 1995 The undersigned, each a Guarantor under the Amended and Restated Guaranty dated as of November 16, 1992 (as amended to date, the "GUARANTY") and a Grantor under the Amended and Restated Security Agreement dated as of November 16, 1992 (as amended to date, the "SECURITY AGREEMENT") in favor of the Managing Agent for the Lenders parties to the Credit Agreement referred to in the foregoing Eighth Amendment and Consent, hereby consents to said Eighth Amendment and Consent and hereby confirms and agrees that (i) each of the Guaranty and the Security Agreement is, and shall continue to be, except as otherwise specifically provided in said Eighth Amendment and Consent, in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, the Eighth Amendment and Consent, each reference in each of the Guaranty and the Security Agreement to the Credit Agreement, "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement as amended by said Eighth Amendment and (ii) the Security Agreement and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Obligations (as defined therein). SUBSIDIARIES SIGNIFICANT SUBSIDIARIES CANTEEN HOLDINGS, INC. DENNY'S HOLDINGS, INC. SPARTAN HOLDINGS, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE CANTEEN SUBSIDIARY GROUP CANTEEN MANAGEMENT SERVICES, INC. IM PARKS, INC. IM STADIUM, INC. TW RECREATIONAL SERVICES, INC. VOLUME SERVICES, INC. (A KANSAS CORPORATION) VOLUME SERVICES, INC. (A DELAWARE CORPORATION) By VICE PRESIDENT OR TREASURER OF EACH OF THE CORPORATIONS LISTED ABOVE 5 DENNY'S SUBSIDIARY GROUP CB DEVELOPMENT #6, INC. C-B-R DEVELOPMENT CO., INC. DANNY'S DO NUTS #10, INC. DENNY'S, INC. DENNY'S MANAGEMENT, INC. DFC TRUCKING CO. EAVES PACKING COMPANY, INC. EL POLLO LOCO, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE DENNY'S RESTAURANTS OF IDAHO, INC. By TITLE: ASSISTANT TREASURER HAROLD BUTLER ENTERPRISES #362, INC. HAROLD BUTLER ENTERPRISES #607, INC. LA MIRADA ENTERPRISES NO. 1, INC. LA MIRADA ENTERPRISES NO. 5, INC. LA MIRADA ENTERPRISES NO. 6, INC. LA MIRADA ENTERPRISES NO. 7, INC. LA MIRADA ENTERPRISES NO. 8, INC. LA MIRADA ENTERPRISES NO. 9, INC. LA MIRADA ENTERPRISES NO. 14, INC. PORTIONTROL FOODS, INC. PROFICIENT FOOD COMPANY By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE TWS 200 CORP. TWS 300 CORP. TWS 500 CORP. TWS 600 CORP. TWS 700 CORP. TWS 800 CORP. WDH SERVICES, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE 6 CB DEVELOPMENT #9, LTD. DENNY'S OF CANADA LTD. DENNY'S RESTAURANTS OF CANADA, LTD. By TITLE: VICE PRESIDENT SPARTAN SUBSIDIARY GROUP QUINCY'S RESTAURANTS, INC. FLAGSTAR ENTERPRISES, INC. FLAGSTAR SYSTEMS, INC. SPARTAN REALTY, INC. By TREASURER OF EACH OF THE CORPORATIONS LISTED ABOVE SPARTAN MANAGEMENT, INC. By TITLE: TREASURER ADDITIONAL GUARANTOR: AMS HOLDINGS, INC. By TITLE: PRESIDENT OR VICE PRESIDENT 7 EX-4 4 EXHIBIT 4.31 EXHIBIT 4.31 NINTH AMENDMENT, WAIVER AND CONSENT NINTH AMENDMENT, WAIVER AND CONSENT dated as of August 24, 1995 (this "AMENDMENT"), among FLAGSTAR CORPORATION, a Delaware corporation formerly known as TW Services, Inc. ("FLAGSTAR"), TWS FUNDING, INC., a Delaware corporation ("FUNDING"), and each financial institution executing this Amendment as a "Lender" (each, a "LENDER"). PRELIMINARY STATEMENTS: 1. Flagstar, Funding, the Lenders and the Co-Agents and Managing Agent referred to therein have entered into an Amended and Restated Credit Agreement dated as of October 26, 1992 (as amended to date, the "CREDIT AGREEMENT"; the terms defined therein being used herein as therein defined unless otherwise defined herein). 2. In accordance with Section 5.02(e)(viii) of the Credit Agreement, Canteen Holdings, Inc. proposes to sell its direct and indirect Subsidiaries listed on Schedule A hereto (the "IM PARKS SUBSIDIARIES") pursuant to a Stock Purchase Agreement dated July 14, 1995, the principal terms of which are described on the attached Schedule B (the "IM PARKS TRANSACTION"). 3. Denny's Holdings, Inc. proposes to sell its direct and indirect Subsidiaries listed on Schedule C hereto (the "PROFICIENT FOOD SUBSIDIARIES") pursuant to a Stock Purchase Agreement dated July 7, 1995, the principal terms of which are described on the attached Schedule D (the "PROFICIENT FOOD TRANSACTION" and collectively with the IM Parks Transaction, the "TRANSACTIONS"). In anticipation of the Proficient Food Transaction, the Borrowers have requested the amendment of Section 5.02(e) of the Credit Agreement. 4. The Borrowers have requested that the Lenders agree (a) to clarify the application of proceeds of the Transactions to the Obligations under the Loan Documents and (b) waive, at the election of the Lenders, the required reduction of the Working Capital Facility. 5. The Borrowers have requested that the Lenders agree (a) to permit the Borrowers, following the reduction of the Working Capital Facility pursuant to Section 2.04(b) of the Credit Agreement to the extent such reduction has not been waived hereunder by the Lenders, to apply the proceeds of the Proficient Food Transaction and the IM Parks Transaction to either prepay Funded Debt or to make additional Cash Capital Expenditures and (b) to adjust the financial covenants to allow the Borrowers to apply the proceeds of the Proficient Food Transaction and the IM Parks Transaction to make additional Capital Expenditures. 6. The Lenders have expressed their willingness to grant the Borrowers' request as set forth above on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. CONSENT TO IM PARKS TRANSACTION. (a) The Lenders hereby agree that the condition set forth in Section 5.02(e)(viii)(i) of the Credit Agreement shall be satisfied if Flagstar shall have returned to the Issuing Banks for cancellation all Letters of Credit set forth on Schedule E hereto other than the Letter of Credit marked with an asterisk on Schedule E (the "NY LETTER OF CREDIT"), PROVIDED that within 60 days after the consummation of the IM Parks Transaction, the Borrowers shall have returned to the applicable Issuing Bank for cancellation the NY Letter of Credit or shall have deposited cash collateral with such Issuing Bank in an amount equal to the Available Amount of the NY Letter of Credit. (b) The Lenders hereby agree that the conditions set forth in Section 5.02(e)(viii)(ii) of the Credit Agreement shall be satisfied if the IM Parks Transaction is consummated upon substantially the terms described in the attached Schedule B. (c) The Lenders hereby agree that the condition set forth in Section 5.02(e)(viii)(iii) of the Credit Agreement shall be satisfied if, as a result of the closing of the IM Parks Transaction, the Working Capital Facility is reduced by an amount equal to the Net Proceeds (as defined below) from such Transaction less the IM Parks Extension Amount (as defined below). 1 SECTION 2. CONSENT TO PROFICIENT FOOD TRANSACTION. (a) The Lenders hereby agree that the condition set forth in Section 5.02(e)(ix)(i) of the Credit Agreement (as amended hereby) shall be satisfied if Flagstar shall have returned to the Issuing Banks for cancellation all Letters of Credit set forth on Schedule F hereto. (b) The Lenders hereby agree that the conditions set forth in Section 5.02(e)(ix)(ii) of the Credit Agreement (as amended hereby) shall be satisfied if the Proficient Food Transaction is consummated upon substantially the terms described in the attached Schedule D. (c) The Lenders hereby agree that the condition set forth in Section 5.02(e)(ix)(iii) of the Credit Agreement (as amended hereby) shall be satisfied if, as a result of the closing of the Proficient Food Transaction, the Working Capital Facility is reduced by an amount equal to the Net Proceeds (as defined below) from such Transaction less the PFC Extension Amount (as defined below). SECTION 3. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 5 hereof, hereby amended as follows: (a) The definition of "Adjusted Cash Capital Expenditures" in Section 1.01 is amended in full as follows: "ADJUSTED CASH CAPITAL EXPENDITURES" means, for any period, Cash Capital Expenditures less, for each of the Rolling Periods ending on the last day of the fiscal quarters set forth below, an amount equal to the sum of (i) the amount set forth opposite such fiscal quarter:
FISCAL QUARTER ENDED AMOUNT September 30, 1995 $125,000,000 December 31, 1995 110,000,000 March 31, 1996 65,000,000
PLUS (ii) for each of the Rolling Periods ending September 30, 1995 through March 31, 1996, an amount equal to the Available Cash Proceeds from any Permitted Sale Transactions consummated prior to the end of the applicable Rolling Period less the aggregate amount used by the Borrowers to prepay, redeem, purchase, defease or otherwise satisfy Funded Debt in reliance on Section 5.02(n)(i)(G) prior to the end of the applicable Rolling Period less the aggregate amount of prepayments of Advances required to be made pursuant to Section 2.05(b)(ii) prior to the end of the applicable Rolling Period less the aggregate amount of cash paid to the Managing Agent for deposit in the Funding Cash Collateral Account pursuant to Section 2.05(b)(vi) prior to the end of the applicable Rolling Period. (b) The following new defined terms are added to Section 1.01 to be inserted therein in alphabetical order: "AVAILABLE CASH PROCEEDS" means (i) with respect to the disposition of IM Parks, Inc. and its Subsidiaries permitted by Section 5.02(e)(viii), $93,000,000 and (ii) with respect to disposition of the Proficient Food Companies permitted by Section 5.02(e)(ix), $118,000,000. "PERMITTED SALE TRANSACTIONS" means (i) the disposition of IM Parks, Inc. and its Subsidiaries permitted by Section 5.02(e)(viii) and (ii) the disposition of the Proficient Food Companies permitted by Section 5.02(e)(ix). "PROFICIENT FOOD COMPANIES" means Proficient Food Company, TWS 200 Corp. and DFC Trucking Co. (c) Section 5.02(e) is amended by deleting from the end of clause (vii) thereof the word "and", adding to the end of clause (viii) thereof the word "and" and adding a new clause (ix) thereto to read as follows: "(ix) disposition of the Proficient Food Companies on or before December 31, 1995, PROVIDED that (i) on or prior to the date of disposition of the Proficient Food Companies, Funding shall have returned to the Issuing Banks for cancellation, or shall have made other arrangements satisfactory to the requisite Lenders in respect of, the Letters of Credit issued in support of obligations of any of the Proficient Food Companies, (ii) any such disposition shall be for an amount not less than fair market value and on other terms and conditions reasonable and customary in similar transactions, in each case as determined in the reasonable judgment of the Required Lenders and (iii) the Net Cash Proceeds of such dispositions are used to prepay Advances in accordance with Section 2.05;" (d) Section 5.02(e) is further amended by deleting from the proviso clause at the end thereof the phrase "clauses (iv), (v) and (viii)" and substituting therefor the phrase "clauses (iv), (v), (viii) and (ix)". 2 (e) Section 5.02(n) is amended by deleting the word "and" at the end of clause (i)(E) thereof and substituting a comma therefor, adding the word "and" at the end of clause (i)(F) thereof and adding a new clause (i)(G) to read as follows: "(G) prepayments, redemptions, purchases, defeasances or other satisfactions of Funded Debt, in an aggregate principal amount not to exceed the Available Cash Proceeds from any Permitted Sale Transactions consummated prior to such satisfaction of Funded Debt, PROVIDED that, both before and after giving effect to any transaction permitted by this clause (G), no Default shall have occurred and be continuing." (f) Section 5.04(d) is amended by adding to the end thereof the following: "PROVIDED, FURTHER, that the amount set opposite the Fiscal Year Ending In December 1995 shall be (i) increased by an amount equal to the Available Cash Proceeds from any Permitted Sale Transaction consummated prior to the end of such Fiscal Year and (ii) reduced by the sum of (A) an amount equal to the amount used to prepay, redeem, purchase, defease or otherwise satisfy Funded Debt in reliance on Sections 5.02(n)(i)(G) prior to the end of such Fiscal Year, (B) the aggregate amount of prepayments of Advances required to be made pursuant to Section 2.05(b)(ii) prior to the end of such Fiscal Year and (C) the aggregate amount of cash paid to the Managing Agent for deposit in the Funding Cash Collateral Account pursuant to Section 2.05(b)(vi) prior to the end of such Fiscal Year." SECTION 4. EXTENSION OF WORKING CAPITAL COMMITMENTS. (a) DEFINITIONS. As used in this Section 4, the following terms are defined as follows: "EXTENSION AMOUNT" means, with respect to a Permitted Sale Transaction, either the IM Parks Extension Amount or the PFC Extension Amount, as the context may require. "IM PARKS ELECTED COMMITMENT REDUCTION WAIVER" of a Lender means an amount equal to (i) the amount of such Lender's Required Commitment Reduction in respect of the IM Parks Transaction MULTIPLIED by (ii) such Lender's Waiver Percentage. "IM PARKS EXTENSION AMOUNT" means the aggregate amount of the IM Parks Elected Commitment Reduction Waivers. "NET PROCEEDS" means with respect to (i) the Proficient Food Transaction, $90,000,000 and (ii) the IM Parks Transaction, $79,000,000. "PFC ELECTED COMMITMENT REDUCTION WAIVER" of a Lender means an amount equal to (i) the amount of such Lender's Required Commitment Reduction in respect of the Proficient Food Transaction MULTIPLIED by (ii) such Lender's Waiver Percentage. "PFC EXTENSION AMOUNT" means the aggregate amount of the PFC Elected Commitment Reduction Waivers. "REQUIRED COMMITMENT REDUCTION" of a Lender means with respect to a Permitted Sale Transaction the amount of the Net Proceeds from such Permitted Sale Transaction that would be applied to reduce such Lender's Commitment, determined by pro rating such Net Proceeds by reference to such Lender's Working Capital Commitment as a percentage of the Working Capital Facility on the date hereof. "WAIVER PERCENTAGE" of a Lender means the percentage of such Lender's aggregate Required Commitment Reductions in respect of the Permitted Sale Transactions that such Lender elects to waive as indicated on such Lender's signature page hereof. (b) DETERMINATION OF IM PARKS AND PFC ELECTED COMMITMENT REDUCTION WAIVERS. (i) On or before August 24, 1995, each Lender that elects a Waiver Percentage shall deliver to the Managing Agent a copy of its signature page to this Amendment, duly executed by such Lender and specifying in the space provided on such page opposite the name of such Lender the Waiver Percentage. (ii) Promptly upon receipt of the signature pages as contemplated by clause (i) above, the Managing Agent shall notify the Borrowers of the PFC Extension Amount and the IM Parks Extension Amount, and shall promptly notify each Lender that has a Waiver Percentage of the amounts of its IM Parks Elected Commitment Reduction Waiver and its PFC Elected Commitment Reduction Waiver. Promptly after the consummation of each Permitted Sale Transaction, the Managing Agent shall notify each such Lender of its Working Capital Commitment after giving effect to this Amendment, and shall notify the Lenders and the Borrowers of the amount of the Working Capital Facility after giving effect to this Amendment. 3 (c) EXTENSION OF WORKING CAPITAL COMMITMENTS. (i) Subject to the satisfaction of the conditions precedent set forth in Section 5(b) hereof, each Lender that has a Waiver Percentage hereby waives Section 2.04(b) of the Credit Agreement to the extent of the amount of such Lender's PFC Elected Commitment Reduction Waiver, whereupon (A) that portion of the Working Capital Facility equal to the PFC Extension Amount that would otherwise be reduced by application of the Net Cash Proceeds of the Proficient Food Transaction shall instead remain outstanding and (B) the amount of the Working Capital Facility shall be reduced by the amount of the difference, if any, between the Net Proceeds from the Proficient Food Transaction and the PFC Extension Amount. (ii) Subject to the satisfaction of the conditions precedent set forth in Section 5(c) hereof, each Lender that has a Waiver Percentage hereby waives Section 2.04(b) of the Credit Agreement to the extent of the amount of such Lender's IM Parks Elected Commitment Reduction Waiver, whereupon (A) that portion of the Working Capital Facility equal to the IM Parks Extension Amount that would otherwise be reduced by application of the Net Cash Proceeds of the IM Parks Transaction shall instead remain outstanding, and (B) the amount of the Working Capital Facility shall be reduced by the amount of the difference, if any, between the Net Proceeds from the IM Parks Transaction and the IM Parks Extension Amount. SECTION 5. CONDITIONS OF EFFECTIVENESS. (a) This Amendment shall become effective when, and only when (i) the Managing Agent shall have received counterparts of this Amendment executed by Flagstar, Funding and the Required Lenders or, as to any of the Lenders, advice satisfactory to the Managing Agent that such Lenders have executed this Amendment, (ii) the Managing Agent shall have received the Consent attached hereto, signed by each Subsidiary of Flagstar and (iii) the Managing Agent shall have received a certificate, dated the date of receipt thereof by the Managing Agent, in form and substance satisfactory to the Managing Agent, signed by a duly authorized officer of each Loan Party, stating that: (A) The representations and warranties contained in each Loan Document and in Section 6 hereof are correct on and as of the date of such certificate as though made on and as of such date, and (B) No event has occurred and is continuing that constitutes a Default. (b) Section 4(c)(i) shall become effective on and as of the date on or prior to December 31, 1995 when, in addition to the conditions set forth in clause (a) above, (i) the Proficient Food Transaction shall have been consummated and (ii) Flagstar shall have paid to the Managing Agent, in accordance with Section 2.10 of the Credit Agreement and for the account of each Lender who elected a Waiver Percentage, an extension fee equal to 0.125% of such Lender's PFC Elected Commitment Reduction Waiver. (c) Section 4(c)(ii) shall become effective on and as of the date on or prior to December 31, 1995 when, in addition to the conditions set forth in clause (a) above, (i) the IM Parks Transaction shall have been consummated and (ii) Flagstar shall have paid to the Managing Agent, in accordance with Section 2.10 of the Credit Agreement and for the account of each Lender who elected a Waiver Percentage, an extension fee equal to 0.125% of such Lender's IM Parks Elected Commitment Reduction Waiver. SECTION 6. REPRESENTATIONS AND WARRANTIES. Flagstar represents and warrants as follows: (a) The execution, delivery and performance by each Loan Party of this Amendment and the Credit Agreement, as amended hereby, and the consummation of the transactions contemplated hereby and thereby are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action and do not (i) contravene such Loan Party's charter or by-laws, (ii) violate any law (including, without limitation, the Securities Exchange Act of 1934, as amended), rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time), order, writ, judgment, injunction, decree, determination or award applicable to any Loan Party, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties or (iv) result in or require the creation or imposition of any Lien (other than Liens created by or permitted under the Loan Documents) upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries except, as to (ii) and (iii) above, as would not, and would not be reasonably likely to, have a Material Adverse Effect. (b) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery, recordation, filing or performance by any Loan Party of this Amendment or the Credit Agreement, as amended hereby, or for the consummation 4 of the transactions contemplated hereby and thereby, except where the failure to obtain, take, give or make such authorizations, approvals, actions, notices or filings would not, and would not be reasonably likely to, have a Material Adverse Effect. (c) This Amendment and the Consent have been duly executed and delivered by each Loan Party party thereto. Assuming that (i) this Amendment is duly executed and delivered by, and is within the power and authority of, the Required Lenders and (ii) the Credit Agreement has been duly executed and delivered by, and is within the power and authority of the Managing Agent, the Co-Agents and the Lenders, this Amendment and the Credit Agreement, as amended hereby, are the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally and subject to general principles of equity (regardless of whether considered in a proceeding in equity or at law). SECTION 7. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement and each reference in the other Loan Documents to the Credit Agreement, "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, the Credit Agreement is and shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or Co-Agent or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 8. GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 9. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment, Waiver and Consent. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWERS FLAGSTAR CORPORATION By TITLE: VICE PRESIDENT AND TREASURER TWS FUNDING, INC. By TITLE: TREASURER LENDERS Waiver Percentage: % of the [Print or type name of institution] Aggregate Required Commitment Reductions By TITLE:
6 CONSENT DATED AS OF AUGUST 24, 1995 The undersigned, each a Guarantor under the Amended and Restated Guaranty dated as of November 16, 1992 (as amended to date, the "GUARANTY") and a Grantor under the Amended and Restated Security Agreement dated as of November 16, 1992 (as amended to date, the "SECURITY AGREEMENT") in favor of the Managing Agent for the Lenders parties to the Credit Agreement referred to in the foregoing Ninth Amendment, Waiver and Consent (the "AMENDMENT") hereby consents to said Amendment and hereby confirms and agrees that (i) each of the Guaranty and the Security Agreement is, and shall continue to be, except as otherwise specifically provided in said Amendment, in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, the Amendment, each reference in each of the Guaranty and the Security Agreement to the Credit Agreement, "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement as amended by said Ninth Amendment and (ii) the Security Agreement and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Obligations (as defined therein). SUBSIDIARIES SIGNIFICANT SUBSIDIARIES CANTEEN HOLDINGS, INC. DENNY'S HOLDINGS, INC. SPARTAN HOLDINGS, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE CANTEEN SUBSIDIARY GROUP CANTEEN MANAGEMENT SERVICES, INC. IM PARKS, INC. IM STADIUM, INC. TW RECREATIONAL SERVICES, INC. VOLUME SERVICES, INC. (A KANSAS CORPORATION) VOLUME SERVICES, INC. (A DELAWARE CORPORATION) By VICE PRESIDENT OR TREASURER OF EACH OF THE CORPORATIONS LISTED ABOVE 7 DENNY'S SUBSIDIARY GROUP CB DEVELOPMENT #6, INC. C-B-R DEVELOPMENT CO., INC. DANNY'S DO NUTS #10, INC. DENNY'S, INC. DENNY'S MANAGEMENT, INC. DFC TRUCKING CO. EAVES PACKING COMPANY, INC. EL POLLO LOCO, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE DENNY'S RESTAURANTS OF IDAHO, INC. By TITLE: ASSISTANT TREASURER HAROLD BUTLER ENTERPRISES #362, INC. HAROLD BUTLER ENTERPRISES #607, INC. LA MIRADA ENTERPRISES NO. 1, INC. LA MIRADA ENTERPRISES NO. 5, INC. LA MIRADA ENTERPRISES NO. 6, INC. LA MIRADA ENTERPRISES NO. 7, INC. LA MIRADA ENTERPRISES NO. 8, INC. LA MIRADA ENTERPRISES NO. 9, INC. LA MIRADA ENTERPRISES NO. 14, INC. PORTIONTROL FOODS, INC. PROFICIENT FOOD COMPANY By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE TWS 200 CORP. TWS 300 CORP. TWS 500 CORP. TWS 600 CORP. TWS 700 CORP. TWS 800 CORP. WDH SERVICES, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE 8 CB DEVELOPMENT #9, LTD. DENNY'S OF CANADA LTD. DENNY'S RESTAURANTS OF CANADA, LTD. By TITLE: VICE PRESIDENT SPARTAN SUBSIDIARY GROUP QUINCY'S RESTAURANTS, INC. FLAGSTAR ENTERPRISES, INC. FLAGSTAR SYSTEMS, INC. SPARTAN REALTY, INC. By TREASURER OF EACH OF THE CORPORATIONS LISTED ABOVE SPARTAN MANAGEMENT, INC. By TITLE: TREASURER ADDITIONAL GUARANTOR: AMS HOLDINGS, INC. By TITLE: PRESIDENT OR VICE PRESIDENT 9 EX-4 5 EXHIBIT 4.32 EXHIBIT 4.32 [EXECUTION COPY] TENTH AMENDMENT, WAIVER AND CONSENT TENTH AMENDMENT, WAIVER AND CONSENT, dated as of November 21, 1995 (this "AMENDMENT"), among FLAGSTAR CORPORATION, a Delaware corporation formerly known as TW Services, Inc. ("FLAGSTAR"), TWS FUNDING, INC., a Delaware corporation ("FUNDING"), and each financial institution executing this Amendment as a "Lender" (each, a "LENDER"). PRELIMINARY STATEMENTS: 1. Flagstar, Funding, the Lenders and the Co-Agents and Managing Agent referred to therein have entered into a Credit Agreement dated as of October 26, 1992 (as amended to date, the "CREDIT AGREEMENT"; the terms defined therein being used herein as therein defined unless otherwise defined herein). 2. Pursuant to the Ninth Amendment, Waiver and Consent dated as of August 24, 1995, the Lenders agreed that the conditions set forth in Section 5.02(e)(viii)(ii) of the Credit Agreement would be satisfied if the sale by Canteen Holdings, Inc. ("CANTEEN") of IM Parks, Inc. and its Subsidiary pursuant to a Stock Purchase Agreement dated July 14, 1995 (the "PARKS PURCHASE AGREEMENT")(the "PARKS SALE TRANSACTION"), were consummated substantially on the terms described on Exhibit A attached to the Ninth Amendment, Waiver and Consent. The terms of the Parks Sale Transaction have been amended to, among other things, reduce the purchase price from $110,000,000 to $104,100,000 (in each case, subject to adjustment). Flagstar has requested the Lenders to approve the revised terms of the Parks Sale Transaction. 3. Canteen proposes to sell its Volume Services Business by selling IM Stadium, Inc. and its Subsidiaries (the "SUBJECT SUBSIDIARIES") pursuant to a Stock Purchase Agreement proposed to be entered into on November 27, 1995 (the "VOLUME SERVICES PURCHASE AGREEMENT") and having terms substantially similar to those set forth on Schedule A hereto (the "VOLUME SERVICES SALE TRANSACTION"). Flagstar has asked the Lenders to approve the Volume Services Sale Transaction in accordance with Section 5.02(e)(viii) of the Credit Agreement (as amended hereby). 4. The Borrowers have requested that the Loan Documents be amended to permit the issuance of Letters of Credit having an expiration date later than 60 days prior to the expiration of the Working Capital Commitments on a cash collateralized basis. In addition, the Borrowers have requested that the Credit Agreement be amended to adjust certain of the financial covenants. 5. The Borrowers have further requested that the Lenders agree to permit one or more of the Lenders to waive any or all of the reduction of their respective Commitments that would otherwise result from the consummation of the Volume Services Sale Transaction. 6. The Lenders have expressed their willingness to grant Flagstar's request to grant the requisite waivers and consents to permit the consummation of the Parks Sale Transaction and the Volume Services Sale Transaction and to amend the Credit Agreement on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. WAIVER AND CONSENT FOR THE PARKS SALE TRANSACTION. (a) By execution of this Tenth Amendment, Waiver and Consent, the Lenders hereby agree that the condition set forth in Section 5.02(e)(viii)(i) of the Credit Agreement with respect to the Parks Sale Transaction shall be satisfied if Flagstar shall have returned to the Issuing Banks for cancellation all Letters of Credit set forth on Schedule B hereto other than the Letters of Credit marked with an asterisk on Schedule B (the "PARKS REMAINING LETTERS OF CREDIT"), PROVIDED that within 60 days after the consummation of the Parks Sale Transaction, the Borrowers shall have returned to the applicable Issuing Bank for cancellation the Parks Remaining Letters of Credit or shall have deposited cash collateral with such Issuing Bank in an amount equal to the Available Amount of the Parks Remaining Letters of Credit. (b) The Lenders hereby agree that the conditions set forth in Section 5.02(e)(viii)(ii) of the Credit Agreement with respect to the Parks Sale Transaction shall be satisfied if the Parks Sale Transaction is consummated upon substantially the terms described in the attached Schedule C. 1 (c) For the purposes of clarification, the Lenders agree to amend Section 4(c)(ii) of the Ninth Amendment, Consent and Waiver by deleting therefrom the phrase "each Lender that has a Waiver Percentage" and substituting therefor the phrase "the Lenders". SECTION 2. WAIVER AND CONSENT FOR THE VOLUME SERVICES SALE TRANSACTION. (a) The Lenders hereby agree that the condition set forth in Section 5.02(e)(viii)(i) of the Credit Agreement (as amended hereby) with respect to the Volume Services Sale Transaction shall be satisfied if Flagstar shall have returned to the Issuing Banks for cancellation all Letters of Credit set forth on Schedule D hereto other than (x) the Letters of Credit marked with an asterisk on Schedule D (the "VOLUME SERVICES REMAINING LETTERS OF CREDIT"), PROVIDED that within 60 days after the consummation of the Volume Services Sale Transaction, the Borrowers shall have returned to the applicable Issuing Bank for cancellation the Volume Services Remaining Letters of Credit or shall have deposited cash collateral with such Issuing Bank in an amount equal to the Available Amount of the Volume Services Remaining Letters of Credit; and (y) Letters of Credit issued for the account of Flagstar to support retained liabilities in respect of the Volume Services Sale Transaction, PROVIDED that the aggregate Available Amount of such Letters of Credit is deducted from cash received in respect of the Volume Services Sale Transaction for purposes of the determination of the amount of Net Cash Proceeds required pursuant to subsection (b) below. (b) The Lenders hereby agree that the conditions set forth in Section 5.02(e)(viii)(ii) and 5.02(e)(viii)(iii) of the Credit Agreement (as amended hereby) with respect to the Volume Services Sale Transaction shall be satisfied if (x) as a result of the closing of the Volume Services Sale Transaction, the Working Capital Facility is reduced (prior to giving effect to any waivers of Commitment reduction pursuant to Section 5 below) by an amount equal to the Net Cash Proceeds, but not less than $60,000,000, from the Volume Services Sale Transaction and (y) Flagstar shall have delivered to the Managing Agent a certificate representing that the aggregate retained liabilities in respect of the Volume Services Sale Transaction (including, without limitation, retained liabilities which are payable as drawings under Letters of Credit as provided in subsection (a) above) are payable in an amount of not more than $5,000,000 in any twelve consecutive months. SECTION 3. AMENDMENT OF THE CREDIT AGREEMENT. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 6 hereof, hereby amended as follows: (a) Section 2.13(a) is amended by deleting therefrom the second sentence thereof and substituting therefor the following: No Letter of Credit shall have an expiration date (including all rights of Funding or the beneficiary to require renewal) later than the earlier of 60 days before the then scheduled Working Capital Facility Termination Date and one year after the issuance thereof, but may by its terms be renewable annually with the consent of the Issuing Bank thereof, PROVIDED that an Issuing Bank may agree in its sole discretion to permit any Letter of Credit to have an expiration date not later than 60 days before the first anniversary of the then scheduled Working Capital Termination Date, PROVIDED, FURTHER that Funding shall deposit into the Funding Cash Collateral Account at least five Business Days prior to the Working Capital Facility Termination Date an amount equal to 105% of the sum of (i) the aggregate Available Amount of all Letters of Credit that have an expiration date (after giving effect to any renewal) that extends beyond the scheduled Working Capital Facility Termination Date and (ii) the aggregate amount of all fees and expenses owing on or in respect of such Letters of Credit. (b) Section 2.13(f)(ii) is amended by deleting the phrase "and on the Working Capital Termination Date" and substituting therefor the phrase "and on the date of the full drawing, expiration, termination or cancellation of the last of such Letters of Credit to remain outstanding." (c) Section 5.02(e)(viii) is amended by deleting the date "December 31, 1995"and substituting therefor the date "January 31, 1996". (d) Section 5.04(a) is amended to delete therefrom the figure "5.90:1.00" and substituting therefor the figure "6.50:1.00". (e) Section 6.01 is amended by adding to the end of clause (q) thereof the word "or" and adding a new clause (r) thereto to read as follows: (r) any Loan Party or any of its Subsidiaries shall pay an aggregate amount in any period of twelve consecutive months in excess of $5,000,000 in respect of any liabilities retained in connection with the sale of IM Stadium, Inc. and its Subsidiaries in accordance with Section 5.02(e)(viii); 2 SECTION 4. AMENDMENT OF SECURITY AGREEMENT. Section 8 of the Security Agreement is amended in full as follows: SECTION 8. RELEASE OF AMOUNTS. (a) So long as no Event of Default shall have occurred and be continuing on any date prior to the fifth Business Day prior to the Working Capital Facility Termination Date, the Managing Agent will pay and release to Flagstar or Funding, as applicable, at the request of Flagstar, the amount, if any, by which the credit balance of the Cash Collateral Accounts exceeds all amounts then due and payable under the Loan Documents, together with all accrued and unpaid interest and fees under the Credit Agreement; PROVIDED, HOWEVER, that any funds paid into the Cash Collateral Accounts pursuant to Section 2.05(b) of the Credit Agreement shall in no event be paid or released as aforesaid until such amounts are due to be applied pursuant to the prepayment of Advances in accordance with such Section 2.05(b). (b) On each date (x) during the continuance of any Event of Default and (y) after the fifth Business Day prior to the Working Capital Facility Termination Date, the Managing Agent will pay and release to (i) the applicable Issuing Bank (A) an amount equal to each drawing made on such date under any Letter of Credit issued by such Issuing Bank and (B) an amount equal to the fees and expenses accrued but unpaid to such Issuing Bank on such day and (ii) Funding an amount equal to the excess, if any, of the credit balance of the Funding Cash Collateral Account over an amount equal to 105% of the sum of (A) the aggregate Available Amount of all Letters of Credit then outstanding and (B) the aggregate amount of all fees and expenses owing on or in respect of such Letters of Credit. On the date that all of the Letters of Credit have been fully drawn, expired, terminated or cancelled and all of the fees and expenses of each Issuing Bank have been fully paid, all amounts remaining in the Funding Cash Collateral Account shall be released to Funding or as Flagstar shall so direct. SECTION 5. CONSENT TO COMMITMENT REDUCTION WAIVERS. Effective as of the date hereof, the Lenders hereby consent to the waiver by any Lender of any or all of the reduction of its Commitment that would otherwise result from the consummation of the Volume Services Sale Transaction. SECTION 6. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when, and only when (a) the Managing Agent shall have received counterparts of this Amendment executed by Flagstar, Funding and the Required Lenders or, as to any of the Lenders, advice satisfactory to the Managing Agent that such Lenders have executed this Amendment, (b) the Managing Agent shall have received the Consent attached hereto, signed by each Guarantor and each Grantor, (c) the Managing Agent shall have received a certificate of a duly authorized officer of Flagstar to the effect that each of the representations and warranties set forth in Section 7 hereof shall be true and no event shall have occurred and be continuing that, immediately prior to the effectiveness hereof, constituted a Default and (d) Flagstar shall have paid to the Managing Agent in accordance with Section 2.10 of the Credit Agreement and for the account of each Lender an amendment fee equal to 0.125% of the amount of such Lender's Working Capital Commitment. SECTION 7. REPRESENTATIONS AND WARRANTIES. Flagstar represents and warrants as follows: (a) The execution, delivery and performance by each Loan Party of this Amendment and the Credit Agreement and Security Agreement, each as amended hereby, and the consummation of the transactions contemplated hereby and thereby are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action and do not (i) contravene such Loan Party's charter or by-laws, (ii) violate any law (including, without limitation, the Securities Exchange Act of 1934, as amended), rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time), order, writ, judgment, injunction, decree, determination or award applicable to any Loan Party, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties or (iv) result in or require the creation or imposition of any Lien (other than Liens created by or permitted under the Loan Documents) upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries except, as to (ii) and (iii) above, as would not, and would not be reasonably likely to, have a Material Adverse Effect. (b) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery, recordation, filing or performance by any Loan Party of this Amendment or the Credit Agreement and the Security Agreement, each as amended hereby, or for the consummation of the transactions contemplated hereby, except where the failure to obtain, take, give or make such authorizations, approvals, actions, notices or filings would not, and would not be reasonably likely to, have a Material Adverse Effect. 3 (c) This Amendment and the Consent have been duly executed and delivered by each Loan Party party thereto. Assuming that (i) this Amendment is duly executed and delivered by, and is within the power and authority of, the Required Lenders and (ii) the Credit Agreement has been duly executed and delivered by, and is within the power and authority of the Managing Agent, the Co-Agents and the Lenders, this Amendment and the Credit Agreement and the Security Agreement, each as amended hereby, are the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally and subject to general principles of equity (regardless of whether considered in a proceeding in equity or at law). SECTION 8. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement and each reference in the other Loan Documents to the Credit Agreement, "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. Upon the effectiveness hereof, on and after the date hereof each reference in the Security Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Security Agreement and each reference in the other Loan Documents to the Security Agreement, "thereunder", "thereof" or words of like import referring to the Security Agreement, shall mean and be a reference to the Security Agreement as amended hereby. (b) Except as specifically amended above, each of the Credit Agreement and the Security Agreement is and shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or Co-Agent or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 9. GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 10. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWERS FLAGSTAR CORPORATION By TITLE: VICE PRESIDENT AND TREASURER TWS FUNDING, INC. By TITLE: TREASURER LENDERS [Print or type name of institution] By TITLE: 5 CONSENT DATED AS OF NOVEMBER 21, 1994. The undersigned, each a Guarantor under the Amended and Restated Guaranty dated as of November 16, 1992 (as amended to date, the "GUARANTY") and a Grantor under the Amended and Restated Security Agreement dated as of November 16, 1992 (as amended to date, the "SECURITY AGREEMENT") in favor of the Managing Agent for the Lenders parties to the Credit Agreement referred to in the foregoing Tenth Amendment, Waiver and Consent, hereby consents to said Tenth Amendment, Waiver and Consent and hereby confirms and agrees that (i) each of the Guaranty and the Security Agreement is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, said Tenth Amendment, Waiver and Consent, each reference in each of the Guaranty and the Security Agreement to the Loan Documents or any thereof, "thereunder", "thereof" or words of like import shall mean and be a reference to the Loan Documents or such Loan Document as amended by said Tenth Amendment, Waiver and Consent and (ii) the Security Agreement and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Obligations (as defined therein). SUBSIDIARIES SIGNIFICANT SUBSIDIARIES CANTEEN HOLDINGS, INC. DENNY'S HOLDINGS, INC. SPARTAN HOLDINGS, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE CANTEEN SUBSIDIARY GROUP CANTEEN MANAGEMENT SERVICES, INC. IM PARKS, INC. IM STADIUM, INC. TW RECREATIONAL SERVICES, INC. VOLUME SERVICES, INC. (A KANSAS CORPORATION) VOLUME SERVICES, INC. (A DELAWARE CORPORATION) By VICE PRESIDENT OR TREASURER OF EACH OF THE CORPORATIONS LISTED ABOVE 6 DENNY'S SUBSIDIARY GROUP CB DEVELOPMENT #6, INC. C-B-R DEVELOPMENT CO., INC. DANNY'S DO NUTS #10, INC. DENNY'S, INC. DENNY'S MANAGEMENT, INC. DFC TRUCKING CO. EAVES PACKING COMPANY, INC. EL POLLO LOCO, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE DENNY'S RESTAURANTS OF IDAHO, INC. By TITLE: ASSISTANT TREASURER HAROLD BUTLER ENTERPRISES #362, INC. HAROLD BUTLER ENTERPRISES #607, INC. LA MIRADA ENTERPRISES NO. 1, INC. LA MIRADA ENTERPRISES NO. 5, INC. LA MIRADA ENTERPRISES NO. 6, INC. LA MIRADA ENTERPRISES NO. 7, INC. LA MIRADA ENTERPRISES NO. 8, INC. LA MIRADA ENTERPRISES NO. 9, INC. LA MIRADA ENTERPRISES NO. 14, INC. PORTIONTROL FOODS, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE TWS 300 CORP. TWS 500 CORP. TWS 600 CORP. TWS 700 CORP. TWS 800 CORP. WDH SERVICES, INC. By PRESIDENT OR VICE PRESIDENT OF EACH OF THE CORPORATIONS LISTED ABOVE 7 CB DEVELOPMENT #9, LTD. DENNY'S OF CANADA LTD. DENNY'S RESTAURANTS OF CANADA, LTD. By TITLE: VICE PRESIDENT SPARTAN SUBSIDIARY GROUP QUINCY'S RESTAURANTS, INC. FLAGSTAR ENTERPRISES, INC. FLAGSTAR SYSTEMS, INC. SPARTAN REALTY, INC. By TREASURER OF EACH OF THE CORPORATIONS LISTED ABOVE SPARTAN MANAGEMENT, INC. By TITLE: TREASURER ADDITIONAL GUARANTOR: AMS HOLDINGS, INC. By TITLE: PRESIDENT OR VICE PRESIDENT 8 EX-10 6 EXHIBIT 10.41 EXHIBIT 10.41 12/28/95 AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN FLAGSTAR CORPORATION AND JEROME J. RICHARDSON This Amended and Restated Employment Agreement ("Agreement") is entered into as of January 1, 1996, effective as of May 2, 1995, amending and restating the Amended and Restated Employment Agreement entered into as of January 10, 1995 between Flagstar Corporation (formerly, TW Services, Inc.), a Delaware corporation (the "Company"), and Jerome J. Richardson (the "Executive"), residing at 1116 Woodburn Road, Spartanburg, South Carolina. WITNESSETH: WHEREAS, the Executive is currently employed by the Company as its Chairman; and WHEREAS, the Company and the Executive desire to amend and restate the Amended and Restated Employment Agreement dated as of January 10, 1995 and to provide for the Executive's continuing employment as an advisor to the Company following his resignation as Chairman, on the terms, and subject to the conditions, as hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations hereinafter set forth, the parties agree as follows: 1. TERMINATION OF PRIOR EMPLOYMENT AGREEMENT The Employment Agreement dated as of July 26, 1989 will terminate and be of no further force or effect upon the closing (the "Closing") of the purchase, by Kohlberg Kravis Roberts & Co. or one or more of its affiliates of common stock ("Common Stock") of Flagstar Companies, Inc. (formerly TW Holdings, Inc.) ("Holdings") and warrants to purchase shares of Common Stock pursuant to that certain Stock and Warrant Purchase Agreement (the "Purchase Agreement") dated concurrently herewith; the date on which the Closing occurs is hereinafter referred to as the "Closing Date". 2. EMPLOYMENT The Executive hereby resigns as Chairman and a member of the Company's Board of Directors and agrees to serve as an advisor to the Company and shall be employed as such until the close of business on the fifth anniversary of the Closing Date, unless his employment is earlier terminated pursuant to section 6. (The Executive's period of employment under this Agreement, whether ending on the fifth anniversary of the Closing Date or earlier pursuant to section 6 is hereinafter referred to as the "Employment Term.") The Executive will serve the Company subject to the general supervision, advice and direction of the Company's Board of Directors (the "Board") and upon the terms and conditions set forth in this Agreement. 3. DUTIES The Executive shall devote such reasonable time and efforts to the business affairs of the Company as may be requested by the Board, to the extent not inconsistent with the Executive: (i) serving as a director or member of a committee of any not-for-profit organization or engaging in other charitable or community activities; (ii) serving as a director or member of a committee of the corporations or organizations that the Executive presently serves and such corporations and organizations that the Executive upon approval of the Board may serve in the future; (iii) managing his personal investments, including, but not limited to, Richardson Sports, TriArc Foods, and Isotechnology, Inc.; and (iv) serving as a director or officer of, or otherwise engaging in activities related to, the National Football League; provided, that the Executive may not accept employment with any other individual or other entity, or engage in any other venture which is in conflict with the business of the Company. 4. COMPENSATION AND BENEFITS (a) BASE COMPENSATION. The Company shall pay the Executive an annual base salary (the "Base Salary") as compensation for his employment, in equal installments and at least twice in each calendar month. The Base Salary for the Employment Period shall be at the annual rate of $750,000. (b) BONUS. For calendar years after 1994, the Executive's bonus compensation during the Employment Period shall be determined by the Board in its reasonable discretion. (c) LOAN. Within 60 days after the Closing Date, provided that Nations Bank shall transfer to the Company or Holdings, in accordance with the provisions of Regulation G under Section 7(a) of the Securities and Exchange Act of 1934 relating to transfers of margin loans, all of the collateral which it shall then hold to secure its loan (the "NB Loan") made to the Executive in 1989 to finance the Executive's purchase of 675,475 shares (the "Shares") of Common stock and which collateral shall consist of at least the Shares and provided that the Executive shall consent to such transfer of collateral, the Company or Holdings, respectively, shall extend to the Executive a loan (the "Loan") in an amount equal to the lesser of the original principal of the NB Loan, approximately $13.5 Million, or the amount of the outstanding principal of the NB Loan on the date the Executive repays the NB Loan. The Executive shall use the proceeds of the Loan, and such other of his funds which may be required, to pay all of the current outstanding principal and interest due on the NB Loan. The Loan shall be evidenced by a recourse promissory note (the "Note") from the Executive to the Company or Holdings, as the case may be, which shall be secured by the Shares pursuant to a Pledge Agreement to be entered into by the Executive and the Company or Holdings. The terms of the Note shall be as follows: (i) All principal and interest on the Note shall be due and payable on the fifth anniversary of the Closing Date, provided, however, that in the event of a payment to the Executive pursuant to Section 7(a), the amount of such payment, less any applicable federal, state or local taxes payable by the Executive with respect thereto, shall be immediately offset to pay principal and interest on the Loan to the extent of such payment, with the balance of the Loan being payable on the fifth anniversary of the Closing Date; and provided, further, at the election of the Company or Holdings, as the case may be, in its sole and absolute discretion, all such principal and interest shall become due and payable on the termination of the Executive's employment with the Company in a Termination for Cause or by reason of a Voluntary Termination, as each is defined in Section 6(c). (ii) The interest rate shall be fixed at an annual rate equal to the applicable federal rate pursuant to Internal Revenue Code section 7872 for five-year term loans as in effect on the date the Note is executed. (d) STOCK OPTIONS. Effective as soon as practicable after the Closing, subject to the termination of the Executive's stock option dated as of December 6, 1989 (the "1989 Option") for 160,000 shares of Common Stock, the Company shall grant to the Executive a new option for 160,000 shares of Common Stock (the "Exchange Option") and a new option for 440,000 shares of Common Stock (the "Additional Option") (the Exchange option and the Additional Option are hereinafter collectively referred to as the "New Options"). The New Options shall be granted subject to the following terms and conditions: (i) the exercise price with respect to 100,000 shares under the Exchange Option shall be $15.00 per share, (ii) the exercise price with respect to 60,000 shares under the Exchange Option and all of the shares under the Additional Option shall be 17.50 per share, (iii) the New Options shall be exercisable at the rate of 20% per year beginning on the first anniversary of the Closing Date, conditioned on the Executive's continuing to be employed by the Company, PROVIDED, HOWEVER that if the Company terminates the Executive's employment other than in a Termination for Cause, or if the Executive dies, the New Options shall be immediately and fully exercisable, (iv) the New Options shall be granted under and subject to Holdings' 1989 NonQualified Stock Option Plan (the "Option Plan"), (v) all shares of Common Stock acquired by the Executive upon any exercise of the New Options shall be subject to the Richardson Shareholder Agreement (the "Shareholder Agreement") entered into by the Executive and the Company, and (vi) the grant of the New Options shall be subject to approval by Holdings, shareholders. (e) VACATION. During each calendar year during the Employment Term, the Executive shall be entitled to no fewer than four weeks paid vacation, as determined by the Board, unless, based on his length of service with the Company and his position with the Company, the Executive is entitled to a greater number of weeks paid vacation under the Company's generally applicable vacation policy. (f) BENEFITS. During the Employment Term, the Executive shall be entitled to participate in all pension, profit sharing and other retirement plans, all incentive compensation plans and all group health, hospitalization and disability insurance plans and other employee welfare benefit plans in which other senior executives of the Company may participate on terms and conditions no less favorable than those (i) which apply to such other senior executives of the Company and (ii) which 2 are substantially equivalent on an aggregate basis to those which are currently in effect, except in any case to the extent the Executive may otherwise agree in writing. The Executive will continue to be provided with office space and secretarial assistance at 311 East Main Street, Spartanburg, South Carolina. (g) INSURANCE POLICY. During the Employment Term the Company shall continue in effect the agreement dated January 2, 1975 between the Executive and Spartan Food System, Inc. covering Massachusetts Mutual Life Insurance Company policy number 5-215831 and the Company shall not terminate said agreement without the written consent of the Executive. 5. REIMBURSEMENT OF EXPENSES (a) EXPENSES INCURRED IN PERFORMANCE OF EMPLOYMENT. In addition to the compensation provided for under section 4 hereof, upon submission of proper vouchers, the Company will pay or reimburse the Executive for all normal and reasonable expenses, including travel expenses, incurred by the Executive during the Employment Term in connection with the Executive's responsibilities to the Company. (b) FEES AND EXPENSES IN RELATION HERETO. The Company agrees to reimburse the Executive for the reasonable professional fees and expenses incurred in relation to this Agreement, its subject matter, and the attendant agreements relating to the Executive's Common Stock and stock options of Holdings. 6. TERMINATION (a) Notwithstanding Section 2 hereof, the Employment Term shall terminate upon the occurrence of any of the following events: (i) immediately upon the death of the Executive; provided, however, that in such event and in addition to any other death benefits, the Executive's surviving spouse shall be paid the Base Salary in monthly installments for a period of one (1) year commencing immediately upon the death of the Executive; (ii) upon the close of business on the 180th day following the date on which the Company gives the Executive written notice of the termination of his employment as a result of a Permanent Disability (as defined in subsection (c)); provided, however, that the Executive shall be paid one-half of the Base Salary and Bonus for a period of two years after the termination of the Executive's employment; (iii)upon the close of business on the effective date of a "Voluntary Termination" (as defined in subsection (c)) by the Executive of his employment with the Company; (iv) upon the close of business on the date on which the Company gives the Executive written notice of "Termination for Cause" (as defined in subsection (c)) of his employment. (b) In the event of the termination of the Employment Term pursuant to subsection (a), the Company shall pay the Executive (or, in the case of his death, his estate or other legal representative), not later than 90 days after such termination, in a lump sum (except for additional payments due under clauses (i) and (ii) of subsection (a), all accrued but unpaid Base Salary and Bonus and other accrued benefits pursuant to section 4 through the date of his termination. (c) For purposes of this Agreement: (1) "Permanent Disability" shall mean the Executive's inability to perform the duties contemplated by this Agreement by reason of a physical or mental disability or infirmity which has continued for more than 180 consecutive days. The Executive agrees to submit such medical evidence regarding such disability or infirmity as is reasonably requested by the Company. (2) "Termination for Cause" shall mean any termination of the Executive's employment for "cause." For purposes of this Agreement, termination of the Executive's employment shall be deemed to have been for cause only if termination of his employment shall have been the result of (i) an act or acts by him, or any omission by him, constituting a felony, and the Executive has entered a guilty plea or confession to, or has been convicted of, such felony, or as a result of any proven act of fraud or dishonesty by the Executive which results or is intended to result in any material financial or economic harm to the Company, or (ii) breach of a material provision of this Agreement or of the Shareholder's Agreement by the Executive. (3) "Voluntary Termination", shall mean any voluntary termination by the Executive of his employment with the Company; the Executive shall give the Company at least 120 days' prior written notice of the effective date of any 3 Voluntary Termination. For the purposes of this Agreement, the Executive shall not be deemed to have terminated his employment with the Company voluntarily if (i) the Executive terminates his employment with the Company as a result of a material breach by the Company of a material provision of this Agreement which the Company does not take measures to correct within 60 days after the Executive notifies the Board in writing of the action or omission which the Executive believes constitutes such a breach and (ii) within 10 days of the expiration of the 60-day period referred to in (i) above, the Executive gives 30 days' prior written notice to the Company of his intention to terminate his employment. 7. ACCELERATION OF BENEFITS; NO MITIGATION (a) In the event that the Executive's employment is terminated for any reason other than as set forth in section 6, then all remaining Base Salary, Bonus and other benefits for the remaining Employment Term of this Agreement (assuming Executive's employment had continued until the fifth anniversary of the Closing Date) shall be immediately due, owing and payable in a lump sum to the Executive without mitigation; for the purposes of this section only, the Executive's annual Base Salary and Bonus, in the aggregate, shall be deemed to be payable at a rate of $1,500,000 for each full year of the Employment Term (assuming Executive's employment had continued until the fifth anniversary of the Closing Date). The Company shall also be obligated to provide health and welfare benefits to the Executive and his dependents for the remainder of the Employment Term (assuming Executive's employment had continued until the fifth anniversary of the Closing Date), on terms no less favorable than those in effect for continuing senior executives of the Company, and shall provide the Executive with service credit under any retirement plan in which the Executive participates for the remainder of the Employment Term (assuming Executive's employment had continued until the fifth anniversary of the Closing Date). In the event that the Executive's participation in any health, welfare or retirement plan is prohibited by law or the terms of the plan after his termination of employment, the Company shall provide the Executive with the cash equivalent of the benefits under such plan to which he would be entitled pursuant to the preceding sentence. (b) In the event that the Company terminates the Executive's employment within one year after the Closing Date for any reason other than as set forth in section 6, if any of the payments or other benefits (collectively, the "Payments") payable to the Executive hereunder are held to be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, the Company shall pay to the Executive an additional amount such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payment and any federal, state or local income tax and Excise Tax upon the payment provided by this section, shall be equal to the Payments. 8. PROTECTED INFORMATION; PROHIBITED SOLICITATION (a) The Executive hereby recognizes and acknowledges that during the course of his employment by the Company, the Company has disclosed and will furnish, disclose or make available to the Executive confidential or proprietary information related to the Company's business, including, without limitation, customer lists, ideas, processes, inventions and devices, that such confidential or proprietary information has been developed and will be developed through the Company's expenditure of substantial time and money, and that all such confidential information could be used by the Executive and others to compete with the Company. The Executive hereby agrees that all such confidential or proprietary information shall constitute trade secrets, and further agrees to use such confidential or proprietary information only for the purpose of carrying out his duties with the Company and not otherwise to disclose such information. No information otherwise in the public domain shall be considered confidential. (b) The Executive hereby agrees, in consideration of his employment hereunder and in view of the confidential position to be held by the Executive hereunder, that during the Employment Term and for the period ending on the date which is three years after the later of (1) the termination of the Employment Term and (2) the date on which the Company is no longer required to provide the payments and benefits described in section 4, the Executive shall not, without the written consent of the Company, knowingly solicit, entice or persuade any other employees of the Company or any affiliate of the Company to leave the services of the Company or such affiliate for any reason. (c) The Executive further agrees that, in the event of the Termination for Cause or the Voluntary Termination of his employment with the Company, he shall not (except as to the activities described in section 3) for a period of three years following such termination enter into any relationship whatsoever, either directly or indirectly, alone or in partnership, or as an officer, director, employee or stockholder (beneficially owning stock or options to acquire stock totaling more than five percent of the outstanding shares) of any corporation (other than the Company or Holdings), or otherwise acquire or agree to acquire a significant present or future equity or other proprietorship interest, whether as a stockholder, partner, proprietor or otherwise, with any enterprise, business or division thereof (other than the Company or Holdings), which is 4 engaged in the restaurant or food services business in those states within the United States in which the Company, holdings and any of its subsidiaries is at the time of such termination of employment conducting its business and which has annual sales of at least $50,000,000. (d) So long as the Executive is employed by the Company and so long as the restrictions of this section apply, prior to accepting any engagement to act as an employee, officer, director, trustee, principal, agent or representative of any type of business or service (other than as an employee of the Company), the Executive shall (i) to the extent not described in Section 3, disclose such engagement in writing to the Company and (ii) disclose to the other entity with which he has agreed to act as an employee, officer, director, trustee, agent or representative, or to other principals together with whom he proposes to act as a principal in such business or service, the existence of the covenants set forth in this section and the provisions of section 9. (e) The restrictions in this section 8 shall survive the termination of this Agreement and shall be in addition to any restrictions imposed upon the Executive by statute or at common law. (f) The parties hereby acknowledge that the restrictions in this section 8 have been specifically negotiated and agreed to by the parties hereto and are limited to only those restrictions necessary to protect the Company from unfair competition. The parties hereby agree that if the scope or enforceability of any provision, paragraph or subparagraph of this section 8 is in any way disputed at any time, and should a court find that such restrictions are overly broad, the court may modify and enforce the covenant to the extent that it believes to be reasonable under the circumstances. Each provision, paragraph and subparagraph of this section 8 is separable from every other provision, paragraph, and subparagraph and constitutes a separate and distinct covenant. 9. INJUNCTIVE RELIEF The Executive hereby expressly acknowledges that any breach or threatened breach by the Executive of any of the terms set forth in sections 3 and 8 of this Agreement may result in significant and continuing injury to the Company, the monetary value of which would be impossible to establish. Therefore, the Executive agrees that the Company shall be entitled to apply for injunctive relief in a court of appropriate jurisdiction. The provisions of this section shall survive the Employment Term. 10. PARTIES BENEFITED; ASSIGNMENTS This Agreement shall be binding upon the Executive, his heirs and his personal representative or representatives, and upon the Company and its successors and assigns. Neither this Agreement nor any rights or obligations hereunder may be assigned by the Executive. 11. NOTICES Any notice required or permitted by this Agreement shall be in writing, sent by registered or certified mail, return receipt requested, addressed to the Board and the Company at its then principal office, with a copy to TW Associates, L.P., c/o Kohlberg Kravis Roberts & Co., Nine West 57th Street, New York, New York, Attention: Clifton S. Robbins, or to the Executive at the address set forth in the preamble, as the case may be, or to such other address or addresses as any party hereto or TW Associates, L.P. may from time to time specify in writing for the purpose in a notice given to the other parties in compliance with this section. Notices shall be deemed given when received. 12. GOVERNING LAW This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without regard to conflict of law principles. 13. INDEMNIFICATION AND INSURANCE; LEGAL EXPENSES The Company shall indemnify the Executive to the fullest extent permitted by the laws of the State of Delaware, as in effect at the time of the subject act or omission, and he will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company (other than any dispute, claim or controversy described in section 9 of this Agreement except that the Executive shall be entitled to reimbursement of his reasonable attorneys' fees and expenses if he is the prevailing party). 5 14. PUBLIC ANNOUNCEMENTS The Company and the Executive agree that neither shall make any public announcement concerning the terms of this Agreement or the relinquishment by the Executive of the position of Chief Executive officer of the Company without the consent of the other party, unless required to do so by law. 15. MISCELLANEOUS This Agreement contains the entire agreement of the parties relating to the subject matter hereof. This Agreement supersedes any prior written or oral agreements or understandings between the parties relating to the subject matter hereof. No modification or amendment of this Agreement shall be valid unless in writing and signed by or on behalf of the parties hereto. A waiver of the breach of any term or condition of this Agreement shall not be deemed to constitute a waiver of any subsequent breach of the same or any other term or condition. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations. If any provision of this Agreement, or the application thereof to any person or circumstance, shall, for any reason and to any extent, be held invalid or unenforceable, such invalidity and unenforceability shall not affect the remaining provisions hereof and the application of such provisions to other persons or circumstances, all of which shall be enforced to the greatest extent permitted by law. The compensation provided to the Executive pursuant to this Agreement shall be subject to any withholdings and deductions required by any applicable tax laws. Any amounts payable under this Agreement to the Executive after the death of the Executive shall be paid to the Executive's estate or legal representative. The headings in this Agreement are inserted for convenience or reference only and shall not be a part of or control or affect the meaning of any provision hereof. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first written above. FLAGSTAR CORPORATION By: /s/ RHONDA PARISH Title: Sr. V.P., General Counsel & Secretary /s/ Jerome J. Richardson JEROME J. RICHARDSON 6 AGREEMENT TO FURNISH FACILITIES AND SERVICES THIS AGREEMENT made and entered into as of January 1, 1996, by and between Flagstar Corporation (formerly TW Services, Inc.), a Delaware corporation ("Company"), Jerome J. Richardson ("Executive"), residing at 1116 Woodburn Road, Spartanburg, South Carolina, and Richardson Sports Limited Partnership ("RS"), a North Carolina limited partnership with offices in Charlotte, North Carolina. WITNESSETH WHEREAS, Company and Executive entered into an "Amended and Restated Employment Agreement" effective as of January 10, 1995 (hereinafter the "Amended Agreement"), some of the terms of which require that Company provide Executive with office space and secretarial assistance; and WHEREAS, Executive is the principal owner of RS which owns and operates a franchise for a professional football team in the National Football League; and WHEREAS, Executive, as allowed under the terms of the Amended Agreement, is spending substantial time on business related to RS; and WHEREAS, RS has agreed to assume Company's obligations to provide office space, secretarial assistance and certain support services related to Executive's activities and Company has agreed to pay RS for assuming those liabilities; and WHEREAS, Executive is agreeable to the assumption of Company's liability by RS; NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, Company, Executive and RS have agreed as follows: 1. EFFECTIVE DATE AND TERM. This Agreement shall be effective as of January 1, 1996, and shall extend through November 16, 1997, subject to termination in the event the Amended Agreement terminates. If the Amended Agreement is terminated other than at the end of the term, November 16, 1997, this Agreement shall also terminate and the obligations of Company to Executive and to RS shall cease in accordance with the terms of the Amended Agreement as to Executive, and this Agreement as to RS. 2. TRANSFER AND ASSUMPTION OF OBLIGATIONS. Section 4(f) of the Agreement requires Company to provide Executive with office space and secretarial assistance at 311 East Main Street, Spartanburg, South Carolina. RS hereby assumes the obligation imposed on Company to furnish office space, secretarial assistance, equipment (except for that described on Exhibit A) and supplies, and Executive hereby releases Company from any further liability or responsibility to provide office space, secretarial assistance, equipment and supplies, and RS hereby agrees to assume full responsibility for those obligations. In consideration of RS' undertakings hereunder, Company shall during the term of this Agreement pay a fixed fee per month to RS pursuant to Paragraph 3 below. Company shall continue to provide equipment as described on Exhibit A, which is attached to and made a part hereof, and the fixed fee shall include the costs of maintenance of the equipment described on Exhibit A. Upon the expiration of this Agreement, RS shall have the right to purchase all or any part of the equipment listed on Exhibit A at book value, as reflected on the Company's books. 3. COMPENSATION TO RS. During the term of this Agreement, beginning January 1, 1996, and continuing on the first day of each month thereafter through October 1, 1997, Company agrees to pay RS the sum of $19,167.22 per month in 1996 and $19,469.32 per month beginning January 1, 1997, through October 1, 1997, which includes (a) rent at $5,000 per month, (b) secretarial compensation (including salaries and all fringe benefits) at $9,607.22 per month for 1996 and $9,909.32 beginning January 1, 1997, and on November 1, 1997, the sum of $9,954.66; and (c) the provision of office equipment and supplies at the rate of $4,560 per month throughout the term hereof in full compensation and satisfaction of the assumption of Company's obligations by RS as herein set forth. RS will reimburse the Company monthly for telephone lease payments, T-1 connection charges, additional telephone line fees, fax machine lease charge and telephone service charges, the totals of which averaged $3,062 per month in 1995. 4. CONSENT FOR RS TO HIRE COMPANY EMPLOYEES. To assist RS in meeting its obligations to provide secretarial service for Executive, Company hereby grants permission to RS to hire one or both of the following Company employees: Diane Hoch and Natalie Rossi. 7 5. AMENDMENT OF AMENDED AGREEMENT. Except as herein specifically provided, the Amended Agreement between Company and Executive shall remain in full force and effect. 6. BINDING NATURE OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 7. GOVERNING LAW. The terms of this Agreement shall be governed by the laws of the State of North Carolina. IN WITNESS WHEREOF, Company, Executive and RS have duly executed this Agreement as of the date first set forth above. FLAGSTAR CORPORATION By: /s/ RHONDA PARISH Title: Sr. Vice President, General Counsel & Secretary (Company) /s/ JEROME J. RICHARDSON Jerome J. Richardson (Executive) RICHARDSON SPORTS LIMITED PARTNERSHIP By: PFF, INC., GENERAL PARTNER By: /s/ MARK S. RICHARDSON Mark S. Richardson VICE PRESIDENT (RS) 8 EX-11 7 EXHIBIT 11 EXHIBIT 11 FLAGSTAR COMPANIES, INC. COMPUTATION OF EARNINGS (LOSS) PER SHARE (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1991 (A) 1992 (A) 1993 (A) 1994 1995 (A) PRIMARY EARNINGS (LOSS) PER SHARE Adjustment of common and equivalent shares: Average number of common shares outstanding before adjustments...................................... 22,212 24,883 42,370 42,369 42,431 Assumed exercise of stock warrants and options............. -- -- -- 9,854 -- Total average outstanding and equivalent common shares................................................ 22,212 24,883 42,370 52,223 42,431 Adjustment of net income (loss) applicable to common shareholders: Loss from continuing operations............................ $(54,122) $ (39,225) $(1,238,564) $(16,820) $(132,906) Interest on senior debt, net............................... -- -- -- 23,939 -- Dividends on preferred stock............................... -- (6,064) (14,175) (14,175) (14,175) Adjusted loss from continuing operations................... (54,122) (45,289) (1,252,739) (7,056) (147,081) Income (loss) from discontinued operations................. (13,453) (12,550) (409,671) 392,670 77,241 Adjusted income (loss) before extraordinary item and cumulative effect of change in accounting principle..... (67,575) (57,839) (1,662,410) 385,614 (69,840) Extraordinary items, net................................... -- (155,401) (26,405) (11,757) 466 Cumulative effect of change in accounting principle, net... -- (17,834) (12,010) -- -- Adjusted net income (loss) applicable to common shareholders............................................ $(67,575) $(231,074) $(1,700,825) $373,857 $ (69,374) Primary earnings (loss) per share applicable to common shareholders: On continuing operations................................... $ (2.44) $ (1.82) $ (29.56) $ (0.14) $ (3.47) On discontinued operations, net............................ (0.60) (0.50) (9.67) 7.52 1.82 On income (loss) before extraordinary items and cumulative effect of change in accounting principle................ (3.04) (2.32) (39.23) 7.38 (1.65) On extraordinary items, net................................ -- (6.25) (0.62) (0.22) 0.01 On cumulative effect of change in accounting principle, net..................................................... -- (0.72) (0.29) -- -- On net income (loss)....................................... $ (3.04) $ (9.29) $ (40.14) $ 7.16 $ (1.64)
(A) The assumed exercise of the Company's warrants and options is not presented because such exercise would produce an anti-dilutive result. EXHIBIT 11 FLAGSTAR COMPANIES, INC. COMPUTATION OF EARNINGS (LOSS) PER SHARE (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1991 (A) 1992 (A) 1993 (A) 1994 1995 (A) FULLY DILUTED EARNINGS (LOSS) PER SHARE Adjustment of common and equivalent shares: Average number of common shares outstanding before adjustments...................................... 22,212 24,883 42,370 42,369 42,431 Assumed exercise of stock warrants and options............. -- -- -- 9,854 -- Assumed conversion of convertible debentures............... -- -- -- 4,136 -- Assumed conversion of preferred stock...................... -- -- -- 8,562 -- Total average outstanding and equivalent common shares................................................ 22,212 24,883 42,370 64,921 42,431 Adjustment of net income (loss) applicable to common shareholders: Loss from continuing operations............................ $(54,122) $ (39,225) $(1,238,564) $(16,820) $(132,906) Interest on senior debt, net............................... -- -- -- 23,939 -- Interest on convertible debentures, net.................... -- -- -- 9,628 -- Dividends on preferred stock............................... -- (6,064) (14,175) -- (14,175) Adjusted income (loss) from continuing operations.......... (54,122) (45,289) (1,252,739) 16,747 (147,081) Income (loss) from discontinued operations................. (13,453) (12,550) (409,671) 392,670 77,241 Adjusted income (loss) before extraordinary item and cumulative effect of change in accounting principle..... (67,575) (57,839) (1,662,410) 409,417 (69,840) Extraordinary items, net................................... -- (155,401) (26,405) (11,757) 466 Cumulative effect of change in accounting principle, net... -- (17,834) (12,010) -- -- Adjusted net income (loss) applicable to common shareholders............................................ $(67,575) $(231,074) $(1,700,825) $397,660 $ (69,374) Fully diluted earnings (loss) per share applicable to common shareholders: On continuing operations................................... $ (2.44) $ (1.82) $ (29.56) $ 0.26 $ (3.47) On discontinued operations, net............................ (0.60) (0.50) (9.67) 6.05 1.82 On income (loss) before extraordinary items and cumulative effect of change in accounting principle................ (3.04) (2.32) (39.23) 6.31 (1.65) On extraordinary items, net................................ -- (6.25) (0.62) (0.18) 0.01 On cumulative effect of change in accounting principle, net..................................................... -- (0.72) (0.29) -- -- On net income (loss)....................................... $ (3.04) $ (9.29) $ (40.14) $ 6.13 $ (1.64)
(A) The assumed exercise and conversion of the Company's warrants, options, 10% Convertible Debentures, and $2.25 Preferred Stock is not presented because such exercise and conversion would produce an anti-dilutive result. EX-12 8 EXHIBIT 12 EXHIBIT 12 FLAGSTAR COMPANIES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1991 1992 1993 1994 1995 Loss from continuing operations before income taxes.......... $(69,596) $(45,469) $(1,317,892) $(19,033) $(132,920) Add: Net interest expense excluding capitalized interest........ 236,372 232,058 203,709 220,985 221,645 Amortization of debt expense............................... 11,249 9,362 9,416 6,453 7,504 Interest factor in rents................................... 13,450 14,814 16,290 16,411 16,090 Total earnings (losses)............................... 191,475 $210,765 $(1,088,477) $224,816 $ 112,319 Fixed charges: Gross interest expense including capitalized interest................................................ 236,602 $232,348 $ 203,987 $221,245 $ 221,726 Amortization of debt expense............................... 11,249 9,362 9,416 6,453 7,504 Interest factor in rents................................... 13,450 14,814 16,290 16,411 16,090 Total fixed charges................................... 261,301 $256,524 $ 229,693 $244,109 $ 245,320 Ratio of earnings (losses) to fixed charges.................. -- -- -- -- -- Deficiency in the coverage of fixed charges by earnings (losses) before fixed charges.............................. $ 69,826 $ 45,759 $ 1,318,170 $ 19,293 $ 133,001
For purposes of these computations, the ratio of earnings to fixed charges has been calculated by dividing pretax earnings by fixed charges. Earnings, as used to compute the ratio, equals the sum of income before income taxes and fixed charges excluding capitalized interest. Fixed charges are the total interest expenses including capitalized interest, amortization of debt expenses and a rental factor that is representative of an interest factor (estimated to be one third) on operating leases. EX-21 9 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF FLAGSTAR COMPANIES, INC.
NAME STATE OF INCORPORATION Flagstar Corporation Delaware TWS Funding, Inc. Delaware Denny's Holdings, Inc. New York Spartan Holdings, Inc. New York AMS Holdings, Inc. New York Canteen Holdings, Inc. New York TWS 800 Corp. Delaware TWS 300 Corp. Delaware TWS 500 Corp. Delaware TWS 600 Corp. Delaware TWS 700 Corp. Delaware TWS 200 Corp. Delaware El Pollo Loco, Inc. Delaware Portiontrol Food, Inc. Texas Denny's, Inc. California DFO, Inc. Delaware Denny's Realty, Inc. Delaware Quincy's Restaurant, Inc. Alabama Flagstar Enterprises, Inc.* Alabama Spartan Realty, Inc. Delaware Flagstar Systems, Inc. Delaware Spartan Management, Inc. Delaware Quincy's Realty, Inc. Alabama Spardee's Realty, Inc. Alabama La Mirada Enterprises No. 1, Inc. Texas La Mirada Enterprises #5, Inc. Wisconsin La Mirada Enterprises #6, Inc. Wisconsin La Mirada Enterprises #7, Inc. Wisconsin La Mirada Enterprises #8, Inc. Wisconsin La Mirada Enterprises #9, Inc. Wisconsin Denny's, Inc. Charitable Fund California Denny's of Canada, Ltd. British Columbia Denny's Restaurants of Canada, Ltd. Federal (Canada)
* Flagstar Enterprises, Inc. of Delaware is an assumed name for use only in Ohio. EX-23 10 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-35098 and 33-35099 of Flagstar Companies, Inc. on Form S-8 of our report dated February 14, 1996 appearing in this Annual Report on Form 10-K of Flagstar Companies, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Greenville, South Carolina March 29, 1996 EX-27 11 EXHIBIT 27
5 THE FINANCIAL INFORMATION INCLUDED HEREIN AS OF DECEMBER 31, 1994 AND FOR THE YEAR ENDED DECEMBER 31, 1994 HAS BEEN RECLASSIFIED TO CONFORM TO THE 1995 PRESENTATION. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF FLAGSTAR COMPANIES, INC. AS CONTAINED IN ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 0 12-MOS YEAR DEC-31-1994 DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 DEC-31-1995 .001 .001 $66,720 $196,966 0 0 41,942 32,350 4,561 2,506 62,293 32,445 263,390 285,243 1,743,485 1,750,218 547,134 645,857 1,587,467 1,507,751 391,648 407,530 2,067,648 1,996,111 21,185 21,218 0 0 630 630 (1,084,315) (1,152,825) 1,587,467 1,507,751 0 0 2,665,966 2,571,487 0 0 2,454,474 2,473,253 3,087 2,005 0 0 227,438 229,149 (19,033) (132,920) (2,213) (14) (16,820) (132,906) 392,670 77,241 (11,757) 466 0 0 364,093 (55,199) 7.16 (1.64) 6.13 (1.64)
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