Sequential Page 1 of 18
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1994,
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________
Commission file number 0-18051
FLAGSTAR COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3487402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
203 East Main Street
Spartanburg, South Carolina 29319-9966
(Address of principal executive offices)
(Zip Code)
(803) 597-8000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 14, 1994, 42,369,310 shares of the registrant's Common Stock, par
value $0.50 per share, were outstanding.
1
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Flagstar Companies, Inc.
Statements of Consolidated Operations
For the Three Months and Nine Months Ended September 30, 1994 and 1993
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
(In thousands, except per share amounts)
Operating Revenues..................... $ 700,589 $689,941 $2,006,425 $1,940,925
Operating Expenses:
Product costs........................ 239,479 240,406 691,856 666,191
Payroll & benefits................... 238,075 231,758 706,812 677,344
Depreciation & amortization expense.. 32,866 41,438 96,344 124,146
Utilities expense.................... 27,370 27,811 75,811 74,524
Other................................ 100,858 106,015 289,530 291,302
638,648 647,428 1,860,353 1,833,507
Operating Income....................... 61,941 42,513 146,072 107,418
Other Charges:
Interest and debt expense............ 59,085 53,108 167,631 158,684
Other non-operating expenses - net... 715 278 1,393 866
59,800 53,386 169,024 159,550
Income(Loss) From Continuing Operations
Before Income Taxes.................. 2,141 (10,873) (22,952) (52,132)
Provision For(Benefit From) Income Taxes (2,109) 7,476 (1,663) (6,825)
Income(Loss)From Continuing Operations. 4,250 (18,349) (21,289) (45,307)
Gain on Sale of Discontinued Operation,
Net of Income Taxes of $7,056........ --- --- 383,944 ---
Income(Loss) From Discontinued
Operations........................... 17,614 11,809 (1,473) (5,223)
Provision For (Benefit From) Income
Taxes On Discontinued Operations..... (1,655) 165 (884) (1,902)
Income(Loss) From Discontinued
Operations, Net...................... 19,269 11,644 383,355 (3,321)
Extraordinary Items, Net of Income Tax
Benefit of $1,111 and $10,361 for the
nine months of 1994 and 1993,
respectively, and $10,310 for
the three months of 1993............. --- (16,159) (10,822) (16,240)
Cumulative Effect of Change in Accounting
Principle, Net of Income Tax Benefit
of $4,659............................ --- --- --- (7,441)
Net Income (Loss)...................... 23,519 (22,864) 351,244 (72,309)
Dividends on Preferred Stock........... (3,543) (3,543) (10,631) (10,631)
Net Income(Loss) Applicable to Common
Stockholders......................... $ 19,976 $(26,407) $ 340,613 $ (82,940)
2
FORM 10-Q
Flagstar Companies, Inc.
Statements of Consolidated Operations (Continued)
For the Three Months and Nine Months Ended September 30, 1994 and 1993
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
(In thousands, except per share amounts)
Income (Loss) Per Share Applicable to Common
Stockholders:
Primary
Income (Loss) From Continuing
Operations.......................... $ 0.02 $ (0.51) $ (0.27) $ (1.32)
Income (Loss) From Discontinued
Operations, Net...................... 0.45 0.27 7.33 (0.08)
Extraordinary Items, Net.............. --- (0.38) (0.21) (0.38)
Cumulative Effect of Change in
Accounting Principle, Net --- --- --- (0.18)
Net Income(Loss) $ 0.47 $ (0.62) $ 6.85 $ (1.96)
Average Outstanding and Equivalent
Common Shares 42,369 42,369 52,283 42,370
Fully Diluted
Income From Continuing Operations $ 0.06
Income From Discontinued
Operations, Net 5.90
Extraordinary Item, Net (0.17)
Cumulative Effect of Change
in Accounting Principle, Net ---
Net Income $ 5.79
Average Outstanding and Equivalent
Common Shares 64,981
3
FORM 10-Q
Flagstar Companies, Inc.
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993
(Unaudited)
September 30, December 31,
1994 1993
(In thousands)
Assets
Current Assets:
Cash and cash equivalents............... $ 143,246 $ 24,174
Receivables, less allowance for doubtful
accounts of:
1994 - $4,217; 1993 - $4,790......... 34,010 32,929
Merchandise and supply inventories....... 66,402 62,633
Net assets held for sale................. 38,380 103,208
Other.................................... 16,891 2,495
298,929 225,439
Property:
Property owned (at cost):
Land................................... 271,983 265,671
Buildings and improvements............. 779,986 749,001
Other property and equipment........... 441,813 413,212
Total property owned...................... 1,493,782 1,427,884
Less accumulated depreciation............. 457,366 387,439
Property owned - net...................... 1,036,416 1,040,445
Buildings and improvements, vehicles, and
other equipment held under capital
leases.................................. 190,336 177,819
Less accumulated amortization............. 65,211 51,095
Property held under capital leases - net.. 125,125 126,724
1,161,541 1,167,169
Other Assets:
Other intangible assets - net............. 24,730 25,567
Deferred financing costs.................. 73,472 91,086
Other..................................... 28,843 29,662
127,045 146,315
Total Assets $1,587,515 $1,538,923
4
FORM 10-Q
Flagstar Companies, Inc.
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993
(Unaudited)
September 30, December 31,
1994 1993
(In thousands)
Liabilities
Current Liabilities:
Current maturities of long-term debt................ $ 30,965 $ 34,213
Accounts payable.................................... 83,081 93,435
Accrued salaries and vacations...................... 57,031 47,338
Accrued insurance................................... 57,805 49,585
Accrued taxes....................................... 25,282 21,853
Accrued interest and dividends...................... 69,031 41,187
Accrued restructuring costs......................... 7,719 19,404
Other............................................... 44,119 88,217
375,033 395,232
Long-Term Liabilities:
Debt, less current maturities....................... 2,072,095 2,341,164
Deferred income taxes............................... 26,630 23,861
Liability for self-insured claims................... 67,060 60,720
Other non-current liabilities and deferred credits.. 128,633 140,495
2,294,418 2,566,240
Total Liabilities 2,669,451 2,961,472
Stockholders' Deficit (1,081,936) (1,422,549)
Total Liabilities & Stockholders' Deficit $1,587,515 $ 1,538,923
5
FORM 10-Q
Flagstar Companies, Inc.
Statements of Consolidated Cash Flows
For the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
Nine Months Ended
September 30,
1994 1993
(In thousands)
Cash Flows From Operating Activities:
Net income(loss) $ 351,244 $ (72,309)
Adjustments to reconcile net income(loss)
to cash flows from operating
activities:
Depreciation and amortization
of property 91,283 94,048
Amortization of goodwill --- 20,567
Amortization of other
intangible assets 5,061 9,531
Amortization of deferred
financing costs 4,935 7,807
Deferred income tax benefit (1,354) (16,757)
Extraordinary items, net 10,822 16,240
Gain on sale of discontinued
operation, net (383,944) ---
Equity loss from discontinued operations, net 588 3,321
Cumulative effect of change
in accounting
principle, net --- 7,441
Other 9,809 5,248
Decrease (increase) in assets:
Receivables 444 (4,246)
Inventories (3,246) (8,680)
Other current assets (14,395) (1,043)
Other assets (450) (4,519)
Increase (decrease) in
liabilities:
Accounts payable (10,354) 17,484
Accrued salary and vacations 9,692 2,473
Accrued taxes 3,993 15,942
Other accrued liabilities (28,218) (6,282)
Other non-current liabilities
and deferred credits (5,575) (13,452)
Total adjustments (310,909) 145,123
Net cash flows from operating activities 40,335 72,814
Cash Flows From (Used In) Investing Activities:
Purchases of property (83,499) (65,855)
Proceeds from disposition of
property 10,817 28,549
Proceeds from sale of
discontinued operation 450,000 ---
Receipts from discontinued operations 1,139 34,779
Other long-term assets, net (2,280) (4,378)
Net cash flows from (used in)
investing activities 376,177 (6,905)
6
FORM 10-Q
Flagstar Companies, Inc.
Statements of Consolidated Cash Flows
For the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
Nine Months Ended
September 30,
1994 1993
(In thousands)
Cash Flows From (Used in) Financing Activities:
Net short-term borrowings(repayments)
under credit agreement $ (93,000)$ (36,300)
Long-term borrowings --- 417,873
Deferred financing costs (20) (13,918)
Long-term debt payments (193,789) (420,560)
Cash dividends on preferred stock (10,631) (10,631)
Other --- (85)
Net cash flows used in financing activities (297,440) (63,621)
Increase in cash and
cash equivalents 119,072 2,288
Cash and Cash Equivalents at:
Beginning of period 24,174 20,662
End of period $ 143,246 $ 22,950
Supplemental Cash Flow Information:
Income taxes paid $ 4,340 $ 5,133
Interest paid $ 159,781 $ 129,042
Non-cash financing activities:
Capital lease obligations $ 14,856 $ 47,035
Dividends declared but not paid $ 3,543 $ 3,543
7
FORM 10-Q
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
(Unaudited)
Note 1. Introduction.
Flagstar Companies, Inc. ("FCI" or, together with its subsidiaries, the
"Company") is the parent holding company of Flagstar Corporation ("Flagstar").
Flagstar, through its wholly-owned subsidiaries, Denny's Holdings, Inc. and
Spartan Holdings, Inc. (and their respective subsidiaries), operates four
restaurant chains.
Note 2. Interim Period Presentation.
The Statements of Consolidated Operations of FCI and its subsidiaries
for the three months and nine months ended September 30, 1994 and 1993,
respectively, include all adjustments management believes are necessary for a
fair presentation of the results of operations for such interim periods. All
such adjustments are of a normal and recurring nature.
Note 3. Divestiture of Canteen Operations
On April 27, 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 Consolidated Balance Sheets and Statements of
Consolidated Operations and Cash Flows for 1993 periods have been reclassified
to reflect such businesses as discontinued operations. The Company sold its
food and vending business for $450.0 million on June 17, 1994, recognizing a
net gain of approximately $383.9 million in the second quarter of 1994. On
November 3, 1994, the Company announced that it had agreed to sell TW
Recreational Services, Inc., a concession and recreation services subsidiary,
for approximately $130.0 million. Such transaction is expected to be completed
at the end of the fourth quarter of 1994 or during the first quarter of 1995.
The Company is currently reevaluating its efforts to sell Volume Services, Inc.,
a stadium concession services subsidiary, in view of the baseball and hockey
strikes.
The Company has allocated to the discontinued segment a pro-rata
portion of its interest expense of $4.5 million and $11.2 million for the
quarters ended September 30, 1994 and 1993, respectively, and $29.2 million and
$33.3 million for the nine months ended September 30, 1994 and 1993,
respectively.
Note 4. Earnings (Loss) Per Common Share
The Company uses the modified treasury stock method in its computation
of earnings (loss) per common share. For the three months ended September 30,
1994, the fully diluted earnings per common share on net income is $0.46 per
share; since the difference between the fully diluted earnings per share and
primary earnings per share amounts does not exceed three percent, the fully
diluted amounts are not presented. For the three months and nine months
periods ended September 30, 1993, the computations of fully diluted earnings
per share are anti-dilutive; as such, fully diluted earnings per share amounts
are not presented for such periods.
Note 5. Settlement of Class Actions
On July 29, 1994 and August 1, 1994, the previously announced
settlement of two public accommodations class actions were given final court
approval by the U.S. District Court for the District of Maryland and the U. S.
District Court of the North District of California, respectively.
8
FORM 10-Q
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results of Operations
The following discussion is intended to highlight significant changes
in financial position as of September 30, 1994 and the results of operations
for the three months and nine months ended September 30, 1994 as compared to
the corresponding 1993 periods.
The interim Consolidated Financial Statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto for the year ended December 31, 1993 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the Flagstar Companies, Inc. 1993 Annual Report on
Form 10-K.
Results of Operations
Three Months Ended September 30, 1994 Compared to Three Months Ended September
30, 1993
Operating revenues from continuing operations for the third quarter of
1994 increased by approximately $10.6 million (1.5%) as compared with the same
period in 1993. Denny's revenues decreased by $1.2 million (0.3%) due to a
reduction in restaurant revenues of $7.6 million offset in part by an increase
in outside revenues of $6.4 million from its food distribution operations. At
September 30, 1994 as compared with September 30, 1993, Denny's had a net
decrease of 35-units in the number of Company-owned units and a net increase of
72-units in the number of franchise-owned restaurants (resulting from a
management decision to expand Denny's franchise operations). Denny's average
unit sales increased by 0.7% for the quarter as compared with the third quarter
of 1993, reflecting a 3.4% increase in customer traffic, offset in part by a
2.6% decrease in the average check. The increase in customer traffic as well
as the decrease in the average check during the third quarter of 1994 are
principally the result of the $1.99 Original Grand Slam Breakfast promotion.
Hardee's experienced an increase in revenues for the quarter of $2.8 million
(1.6%) as compared to the prior year quarter primarily due to a net increase of
38-units in the number of restaurants. Hardee's experienced a 5.4% decrease in
average unit sales resulting from a 4.9% decrease in customer traffic and a
0.5% decrease in the average check. The decline in customer traffic at
Hardee's resulted principally from an emphasis on value promotions by
competitors during the 1994 quarter and the decrease in average check is due to
Hardee's own value meal promotions during the 1994 quarter. Quincy's revenues
increased by $1.3 million (1.9%) as compared with the third quarter of 1993,
despite a net decrease of 2-units in the number of Quincy's restaurants at
September 30, 1994 as compared with September 30, 1993. Average unit sales
increased by 3.1% as a result of a 0.7% increase in the average check and a
2.4% increase in customer traffic. Revenues of El Pollo Loco, which account
for approximately 5.0% of total operating revenues from continuing operations,
increased by $7.7 million (28.3%) during the third quarter of 1994 over the
same period in 1993 as a result of a net increase of 11-units in Company-owned
restaurants and an increase in average unit sales of 16.3%. The increase in
average unit sales at El Pollo Loco is attributed to new product promotions and
the acquisition of high volume franchise restaurants in late 1993, resulting in
an increase in customer traffic of 17.4% offset in part by a 0.9% decrease in
the average check. The number of franchised and international El Pollo Loco
restaurants decreased by 8-units at September 30, 1994 as compared with
September 30, 1993.
9
FORM 10-Q
The Company's operating expenses from continuing operations decreased
by $8.8 million (1.4%) in the third quarter of 1994 as compared with the same
period of 1993, primarily attributable to a $13.4 million decrease in the
operating expenses of Denny's. Denny's reduced its operating expenses
primarily through its cost containment efforts which consisted of decreases in
product costs of $4.3 million, utilities expenses of $1.0 million, and
advertising expenses of $0.9 million as well as depreciation and amortization
charges of $5.7 million related to the year-end 1993 write-off of assets. An
increase in operating expenses of $4.5 million at Hardee's is primarily
attributable to increased revenues and consists of increases in payroll and
benefits expenses of $3.8 million, product costs of $0.8 million, occupancy and
maintenance expenses of $0.9 million, and utilities expense of $0.2 million.
Such increases were partially offset by reduced depreciation and amortization
charges of $1.8 million related to the year-end 1993 write-off of assets. A
decrease in operating expenses of $2.1 million at Quincy's is primarily due to
a $2.2 million reduction in depreciation and amortization charges related to
the year-end 1993 write-off of assets. Corporate and other expenses decreased
by $2.0 million, primarily due to decreases in payroll and benefits expense of
$3.3 million as a result of a reduction in work force as part of the Company's
plan of restructuring.
Interest and debt expense increased by $6.0 million in the third quarter
of 1994 as compared to the same period of 1993, primarily due to an increase in
cash interest of $5.8 million. This increase is attributable to the higher
fixed interest rates that accrued during the 1994 quarter on the $400.0 million
of senior notes and senior subordinated 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 the third quarter of 1993 accrued interest
at lower variable rates. Such increases were offset in part by lower effective
interest rates resulting from interest rate swaps during the 1994 quarter in
comparison to the prior year quarter. The increase in cash interest was also
offset in part by a $0.2 million reduction in non-cash interest expense
resulting primarily from reduced amortization of deferred financing costs due
to the prepayment of a portion of the Company's indebtedness under its bank
facility and the write-off of the associated deferred financing costs in
September 1993.
The Company's contract food and vending and recreation services
businesses, which are accounted for as discontinued operations, recorded
operating revenues of $129.1 million during the third quarter of 1994, a
decrease of $260.7 million (66.9%) over the same period of 1993. This decrease
in revenues is due primarily to the consummation of the sale during June 1994
of the Company's food and vending subsidiary which had recorded revenues of
$256.1 million during the third quarter of 1993, and a decrease in revenues of
$4.5 million (3.4%)as compared to the same period of 1993 from the Company's
concession and recreation businesses. In August 1994, the major league
baseball players union initiated a strike that is currently unresolved. The
strike has adversely impacted the operations and timing of the disposition of
the Company's concession business. Operating expenses for Canteen's
concession and recreation services businesses decreased by $7.7 million
primarily due to a decrease in product costs of $1.8 million, a decrease in
payroll and benefits expense of $2.9 million, and reduced depreciation and
amortization charges of $1.7 million related to the year end 1993 write-off of
assets.
10
FORM 10-Q
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September
30, 1993
Operating revenues from continuing operations for the first nine
months of 1994 increased by approximately $65.5 million (3.4%) as compared with
the same period in 1993. Denny's revenues increased $26.2 million (2.3%) due
to increased outside revenues of $35.7 million from its food distribution
operations offset in part by a reduction of restaurant revenues of $9.5
million. At September 30, 1994 as compared with September 30, 1993, Denny's
had a net decrease of 35-units in the number of Company owned units and a net
increase of 72-units in the number of franchise-owned restaurants (resulting
from a management decision to expand Denny's franchise operations). Denny's
average unit sales increased by 0.2% during the nine month period as compared
with the first nine months of 1993, reflecting a 1.1% increase in average check
offset in part by a decrease in customer traffic of 0.9%. Management believes
that the negative trends in customer traffic which Denny's experienced during
the first quarter of 1994 began to reverse during the second quarter of 1994
and continued a positive trend during the third quarter as a result of the
Company-wide $1.99 Original Grand Slam Breakfast promotion. Hardee's
experienced an increase in revenues of $16.3 million (3.2%) for the first nine
months of 1994 as compared to the prior year period primarily due to a net
increase of 38-units in the number of restaurants. Although Hardee's revenues
increased, a 3.8% decrease in average unit sales resulted from a 5.0% decrease
in customer traffic mitigated in part by a 1.3% increase in the average check.
The decline in customer traffic at Hardee's was affected by an emphasis on
value promotions by competitors during the nine month period of 1994. Quincy's
revenues increased by $2.3 million (1.1%) as compared with the first nine
months of 1993, primarily due to a 2.8% increase in average unit sales and
despite a net decrease of 2-units in the number of units. The increase in
average unit sales resulted from a 4.0% increase in the average check which was
offset in part by a 1.2% decrease in customer traffic. Revenues at El Pollo
Loco, which account for approximately 5.0% of total operating revenues from
continuing operations, increased by $20.7 million (25.9%) during the first nine
months of 1994 over the same period in 1993 partially as a result of a net
increase of 11-units in the number of Company-owned restaurants and an increase
in average unit sales of 12.1%. The increase in average unit sales at El Pollo
Loco reflects a 12.9% increase in customer traffic offset in part by a 0.7%
decrease in the average check. The number of franchised and international
restaurants at El Pollo Loco reflected a net decrease of 8-units at September
30, 1994 as compared with September 30, 1993.
The Company's overall operating expenses increased by $26.8 million
(1.5%) in the first nine months of 1994 as compared with the same period of
1993. A significant portion of the increase ($9.3 million) is attributable to
Denny's. The increase in operating expenses at Denny's is attributable
primarily to increased revenues and is comprised principally of increases in
product costs of $18.1 million and in payroll and benefits expenses of $17.5
million. Such increases were partially offset by an $17.1 million reduction in
depreciation and amortization related to the year-end 1993 write-off of assets
and a $10.0 million reduction in overhead expenses allocated to Denny's from
Flagstar. In addition, Denny's operating expenses for the first nine months of
1994 reflect a gain of approximately $3.9 million related to the sale of 46
Company-owned restaurants. At Hardee's, an increase in operating expenses of
$16.0 million is mainly attributable to increased revenues and reflects
increases in payroll and benefits expenses of $10.4 million, product costs of
$5.7 million, occupancy and maintenance expenses of $1.3 million, and utilities
expense of $1.6 million. Such increases were partially offset by reduced
depreciation and amortization charges of $5.4 million related to the year-end
1993 write-off of assets. Conversely, a decrease in operating expenses of $9.5
million at Quincy's is principally attributable to decreases in product cost of
$0.4 million, payroll and benefits expenses of $0.6 million, occupancy and
maintenance expenses of $0.7 million, and reduced depreciation and
amortization charges of $6.7 million
11
FORM 10-Q
related to the year-end 1993 write-off of assets. Corporate and other
expenses decreased by a $1.7 million, and reflect reduced depreciation and
amortization charges of $1.4 million related to the year-end 1993 write-off of
assets.
Interest and debt expense increased by $8.9 million in the first nine
months of 1994 as compared to the same period of 1993, primarily due to an
increase in cash interest of $9.9 million. This increase is attributable to
the higher fixed interest rates that accrued during the 1994 period on the $400
million of senior notes and senior subordinated 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 the first nine months of 1993
accrued interest at lower variable rates. Such increases were offset in part
by lower effective interest rates resulting from interest rate swaps during the
1994 period in comparison to the prior year period. The increase in cash
interest was also offset in part by a $0.9 million reduction in non-cash
interest expense which resulted primarily from reduced amortization of deferred
financing costs due to the prepayment of a portion of the Company's
indebtedness under its bank facility and the write-off of the associated
deferred financing costs in September 1993.
The Company's contract food and vending and recreation services
businesses, which are accounted for as discontinued operations, recorded
operating revenues of $794.5 million during the first nine months of 1994, a
decrease of $226.3 million (22.2%) over the same period of 1993. The decrease
in revenues is due primarily to the consummation of the sale during June 1994
of the Company's food and vending subsidiary which had recorded revenues of
$256.1 million during the third quarter of 1993. Revenues from the concession
and recreation services operations increased by $3.2 million (1.3%) to $260.2
million during the first nine months of 1994 as compared to the same period of
1993. In August 1994, the major league baseball players union initiated a
strike that is currently unresolved. The strike has adversely impacted the
operations and timing of the disposition of the Company's concession business.
Operating expenses for Canteen's concession and recreation services businesses
decreased by $1.8 million primarily due to a $5.4 million reduction in
depreciation and amortization charges related to the year-end 1993 write-off of
assets, offset in part by an increase in payroll and benefits expenses of $3.1
million.
For the nine months ended September 30, 1994, the Company recognized
an extraordinary loss totalling $10.8 million, net of income tax benefits of
$1.1 million. The extraordinary loss represents the charge-off of unamortized
deferred financing costs associated with the prepayment in June 1994 of senior
bank debt. During the nine months ended September 30, 1993, the Company
recognized extraordinary losses totalling $16.2 million, net of income tax
benefits of $10.4 million. Such losses resulted from the write-off of $26.5
million of unamortized deferred financing costs associated with the prepayment
in the third quarter of 1993 of $387.5 million of senior bank indebtedness and
a charge of $0.1 million, net of income tax benefits, which represented
premiums paid, costs incurred, and the charge-off of unamortized deferred
financing costs on indebtedness retired during the first quarter of 1993.
12
FORM 10-Q
Liquidity And Capital Resources
At September 30, 1994 and December 31, 1993, the Company had working
capital deficits of $76.1 million and $169.8 million, respectively. The
decrease in the working capital deficit is attributable primarily to an
increase in cash and cash equivalents from the sale of the Company's food and
vending subsidiary and the liquidation of certain liabilities from the proceeds
of such sale during the nine months ended September 30, 1994. On June 17,
1994, the Company sold its food and vending subsidiary for $450.0 million. The
proceeds of such sale were used to pay off the remaining $170.7 million
principal balance of the Company's bank term loan and an additional $126.5
million of working capital advances which were outstanding under the Company's
credit facility. As a result of such sale and application of proceeds, cash
increased by $119.1 million. Assets held for sale were reduced to reflect the
sale of such subsidiary and operation of the remaining subsidiaries. Also in
connection with such sale, the working capital and letter of credit facility
decreased from $350.0 million to $250.0 million. The decrease of $44.1 million
in other accrued liabilities principally reflects the payment of $61.5 million
during 1994 in settlement of claims of racial discrimination and related fees
and administrative costs by Denny's. The decrease of $11.7 million in the
accrued liability for restructuring from December 31, 1993 to September 30,
1994 is primarily due to payments for severance and relocation. The increase
in accrued interest of $27.8 million is due to the timing of interest payments.
The Company is able to operate with a substantial working capital deficiency
because (i) restaurant operations and most other 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.
In the fourth quarter of 1993, the Company approved a restructuring
plan which included a restructuring of the restaurant field management and a
downsizing of the work force at the corporate office. Most of the corporate
office downsizing was accomplished near the end of the first quarter of 1994.
The changes in field management structures and personnel are still in process.
Also as part of the restructuring plan, the Company identified approximately
240 restaurant units to be sold to franchisees, closed or converted to another
concept. As of September 30, 1994, 28 units had been sold, converted to
another concept, or closed, with the majority of the remaining units expected
to be sold to franchisees. The Company anticipates that the remaining
portions of the restructuring plan related to Company's concepts will be
completed during 1995.
The Company uses reverse interest rate exchange agreements to convert
a portion of its fixed rate debt into floating rate debt in order to hedge
against fluctuations in interest rates. The combination of the Company's
long-term debt issues and these reverse interest rate exchange agreements
effectively creates floating rate long-term debt. At September 30, 1994 the
Company's $800 million notional amount of reverse interest rate exchange
agreements earned for the Company interest at a weighted average interest rate
of 5.39%, while the Company paid interest at 5.77% based on the six month Libor
in arrears on such notional amount.
On November 3, 1994, the Company announced that it had agreed to sell
TW Recreational Services, Inc., a concession and recreation services
subsidiary, for approximately $130 million. Such transaction is expected to be
completed at the end of the fourth quarter of 1994 or during the first quarter
of 1995.
13
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 29, 1994 and August 1, 1994, the previously announced
settlement of two public accommodations class actions were
given final court approval by the U.S. District Court for the
District of Maryland and the U. S. District Court of the North
District of California, respectively.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. The following are included as exhibits to this filing: (1) Exhibit
11, Computation of Earnings (Loss) per Share and (2) Exhibit 27,
Financial Data Schedule.
b. The registrant filed a report on Form 8-K dated July 1, 1994
providing certain information under Item 2 (Other Events) and Item
7 (Financial Statements and Exhibits) thereof relating to the
consummation of sale by the Company to Compass Group PLC, a public
limited company incorporated in England and Wales, of the Company's
food and vending operation. The filing also included, as an
exhibit, the press release of the Company dated June 17, 1994 which
announced the completion of the transaction.
14
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAGSTAR COMPANIES, INC.
Date: November 14, 1994 By: /s/ D. Randy Laney
D. Randy Laney
Executive Vice President and
Chief Administrative Officer
Date: November 14, 1994 By: /s/ A. Ray Biggs
A. Ray Biggs
Vice President and
Chief Financial Officer
15
FORM 10-Q