Form 10Q
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 June 30, 1996, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to _____________
Commission file number 0-18051
FLAGSTAR COMPANIES, INC.
(Exact name of registrant as specified in its charter)
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)
(864) 597-8000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 7, 1996, 42,434,671 shares of the registrant's Common Stock, par
value $0.50 per share, were outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Flagstar Companies, Inc.
Statements of Consolidated Operations
For the Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share amounts)
Operating Revenue ................................... $ 626,570 $ 681,464 $ 1,176,995 $ 1,317,927
----------- ----------- ----------- -----------
Operating Expenses:
Product costs ..................................... 184,842 238,514 344,870 456,760
Payroll & benefits ................................ 235,605 238,763 450,136 467,572
Depreciation & amortization expense ............... 30,006 33,748 59,052 66,998
Utilities expense ................................. 24,329 23,149 47,083 46,410
Other ............................................. 108,428 97,156 205,008 192,714
----------- ----------- ----------- -----------
583,210 631,330 1,106,149 1,230,454
----------- ----------- ----------- -----------
Operating Income .................................... 43,360 50,134 70,846 87,473
Other Charges:
Interest and debt expense - net ................... 62,546 56,491 120,258 115,426
Other non-operating expenses - net ................ 163 53 136 388
----------- ----------- ----------- -----------
Loss From Continuing Operations
Before Income Taxes ............................... (19,349) (6,410) (49,548) (28,341)
Provision For (Benefit From) Income Taxes ........... (1,914) (76) (4,804) 396
----------- ----------- ----------- -----------
Loss From Continuing Operations ..................... (17,435) (6,334) (44,744) (28,737)
Loss From Discontinued Operations - Net
of Provision for (Benefit from) Income
Taxes of $(6) and $354 ............................ -- (7,220) -- (15,877)
----------- ----------- ----------- -----------
Net Loss ............................................ (17,435) (13,554) (44,744) (44,614)
Dividends on Preferred Stock ........................ (3,544) (3,544) (7,088) (7,088)
----------- ----------- ----------- -----------
Net Loss Applicable to Common
Shareholders ...................................... $ (20,979) $ (17,098) $ (51,832) $ (51,702)
=========== =========== =========== ===========
Loss Per Share Applicable to Common
Shareholders:
Loss From Continuing Operations ................... $ (0.49) $ (0.23) $ (1.22) $ (0.84)
Loss from Discontinued Operations-Net ............. -- (0.17) -- (0.38)
----------- ----------- ----------- -----------
Net Loss .......................................... $ (0.49) $ (0.40) $ (1.22) $ (1.22)
=========== =========== =========== ===========
Average Outstanding and Equivalent
Common Shares ..................................... 42,434 42,434 42,434 42,426
=========== =========== =========== ===========
2
Flagstar Companies, Inc.
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
(Unaudited)
June 30, December 31,
1996 1995
(In thousands)
Assets
Current Assets:
Cash and cash equivalents ....................................................... $ 68,193 $ 196,966
Receivables, less allowance for doubtful
accounts of:
1996 - $2,099; 1995 - $2,506 ................................................. 24,104 29,844
Merchandise and supply inventories .............................................. 37,064 32,445
Other ........................................................................... 26,913 26,087
---------- ----------
156,274 285,342
---------- ----------
Property:
Property owned (at cost):
Land ......................................................................... 264,375 255,719
Buildings and improvements ................................................... 889,014 838,956
Other property and equipment ................................................. 519,377 484,684
---------- ----------
Total property owned ............................................................ 1,672,766 1,579,359
Less accumulated depreciation ................................................... 597,467 569,079
---------- ----------
Property owned - net ............................................................ 1,075,299 1,010,280
---------- ----------
Buildings and improvements, vehicles, and
other equipment held under capital
leases ........................................................................ 204,258 170,859
Less accumulated amortization ................................................... 86,653 76,778
---------- ----------
Property held under capital leases - net ........................................ 117,605 94,081
---------- ----------
1,192,904 1,104,361
---------- ----------
Other Assets:
Excess of purchase price over net
assets acquired - net ......................................................... 220,503 --
Other intangible assets - net ................................................... 30,132 22,380
Deferred financing costs - net .................................................. 68,088 63,482
Other ........................................................................... 36,991 32,186
---------- ----------
355,714 118,048
---------- ----------
Total Assets ........................................................... $1,704,892 $1,507,751
========== ==========
3
Flagstar Companies, Inc.
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
(Unaudited)
June 30, December 31,
1996 1995
(In thousands)
Liabilities
Current Liabilities:
Current maturities of long-term debt....................... $ 48,487 $ 38,835
Accounts payable........................................... 121,676 125,467
Accrued salaries and vacations............................. 64,056 41,102
Accrued insurance.......................................... 52,266 48,060
Accrued taxes.............................................. 31,689 30,705
Accrued interest and dividends............................. 45,042 42,916
Other...................................................... 79,637 80,445
----------- ------------
442,853 407,530
----------- ------------
Long-Term Liabilities:
Debt, less current maturities.............................. 2,204,754 1,996,111
Deferred income taxes...................................... 17,982 18,175
Liability for self-insured claims.......................... 61,921 53,709
Other non-current liabilities and
deferred credits 160,191 163,203
----------- ------------
2,444,848 2,231,198
----------- ------------
Total Liabilities 2,887,701 2,638,728
----------- ------------
Shareholders' Deficit (1,182,809) (1,130,977)
----------- ------------
Total Liabilities & Shareholders' Deficit $ 1,704,892 $ 1,507,751
=========== ============
4
Flagstar Companies, Inc.
Statements of Consolidated Cash Flows
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
Six Months Ended
June 30,
1996 1995
(In thousands)
Cash Flows From (used in) Operating Activities:
Net Loss $ (44,744) $(44,614)
--------- ----------
Adjustments to reconcile net loss
to cash flows from (used in) operating
activities:
Depreciation and amortization
of property 55,790 63,747
Amortization of intangible
assets 3,262 3,251
Amortization of deferred
financing costs 3,804 3,258
Deferred income tax benefit (193) (687)
Equity in loss of discontinued operations - net 15,877
Other (8,416) (8,548)
Changes in assets and liabilities net of effect of acquisition:
Decrease (increase) in assets:
Receivables 9,911 11,461
Inventories 600 (9,096)
Other current assets 20 (1,442)
Other assets (7,504) (926)
Increase (decrease) in
liabilities:
Accounts payable (29,569) (16,847)
Accrued salary and vacations 8,863 3,199
Accrued taxes (7,758) 3,034
Other accrued liabilities (6,892) (16,855)
Other non-current liabilities
and deferred credits (1,236) (1,919)
-------- --------
Total adjustments 20,682 47,507
--------- --------
Net cash flows from (used in) operating activities (24,062) 2,893
-------- --------
Cash Flows From (Used In) Investing Activities:
Purchases of property (9,658) (52,382)
Proceeds from disposition of
property 7,367 10,854
Advances to discontinued operations (12,826)
Acquisition of business, net of cash acquired (127,961)
Other long-term assets - net (50) (1,207)
-------- --------
Net cash flows used in investing activities (130,302) (55,561)
--------- ---------
5
Flagstar Companies, Inc.
Statements of Consolidated Cash Flows
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
Six Months Ended
June 30,
1996 1995
(In thousands)
Cash Flows From (Used in) Financing Activities:
Net borrowings under credit
agreement $ 57,400 $ 33,000
Long-term debt payments (20,469) (16,768)
Deferred financing costs (4,252)
Cash dividends on preferred stock (7,088) (7,088)
Other (3)
------------ ----------
Net cash flows from financing activities 25,591 9,141
------------ ----------
Decrease in cash and
cash equivalents (128,773) (43,527)
Cash and Cash Equivalents at:
Beginning of period 196,966 66,720
---------- ----------
End of period $ 68,193 $ 23,193
========== ==========
Supplemental Cash Flow Information:
Income taxes paid $ 699 $ 664
========== ==========
Interest paid $ 109,118 $ 127,642
========== ==========
Non-cash financing activities:
Capital lease obligations $ 1,325 $ 3,545
========== ==========
Dividends declared but not paid $ 3,544 $ 3,544
========== ==========
6
FLAGSTAR COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(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., Spartan
Holdings, Inc. and FRD Acquisition Co. (and their respective subsidiaries),
operates six restaurant chains.
Note 2. Interim Period Presentation.
The Statements of Consolidated Operations of FCI and its subsidiaries
for the three months and six months ended June 30, 1996 and 1995, 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. Acquisition
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a
newly formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 company-owned units within the family dining
segment. The acquisition price of $306.5 million (which was paid in exchange for
all of the outstanding stock of FRI-M Corporation ("FRI-M"), the subsidiary of
Family Restaurants, Inc. which owned the Coco's and Carrows chains) was financed
with $125.0 million in cash ($75.0 million of which was provided from the
Company's cash balances and the remaining $50.0 million pursuant to bank term
loans), the issuance of $150.0 million in senior notes of FRD to the seller and
the assumption of certain capital lease obligations of approximately $31.5
million. The purchase price is subject to adjustment and based on preliminary
calculations such adjustment will result in the issuance of an additional $5.7
million in senior notes. An accrual for this amount is included in other
non-current liabilities in the accompanying June 30, 1996 balance sheet. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities and results of operations of Coco's and
Carrows are included in the Company's consolidated financial statements for the
period subsequent to the acquisition.
In accordance with the purchase method of accounting, the purchase
price has been allocated to the underlying assets and liabilities of FRI-M based
on their respective fair values at the date of acquisition. Because the purchase
price is subject to adjustment and the final allocation of the purchase price is
dependent upon certain valuations and other studies not yet completed, the
current allocation and resulting goodwill is preliminary in nature. Based on
this preliminary valuation, the excess cost over the fair value of net assets
acquired is $221,015,000 and is being amortized over a 40-year period on a
straight line basis. The Company anticipates finalizing this allocation by the
end of 1996, and does not anticipate the impact of the reallocation to be
significant to the financial statements.
The following unaudited pro forma financial information shows the
results of operations of the Company as though the acquisition occurred as of
January 1, 1995. These results include the amortization of excess of purchase
price over net assets acquired over a 40-year life, a reduction of overhead
expenses due to anticipated cost savings and efficiencies from combining the
operations of the Company and FRI-M, an increase in
7
interest expense as a result of the debt issued to finance the acquisition, and
a reduction in income tax expense to reflect the fact that the Company's net
operating losses will offset FRI-M's separate income tax provision(except for
current foreign and state income taxes) when calculated on a consolidated basis.
Six Months Ended
June 30,
(In thousands, except per share amounts) 1996 1995
----------- -----------
Revenue .................................................................................. $ 1,371,459 $ 1,561,557
Loss from continuing operations .......................................................... (42,680) (26,673)
Net Loss ................................................................................. (42,680) (42,550)
Loss per common share:
Loss from continuing operations ..................................................... (1.17) (.80)
Net loss ............................................................................ (1.17) (1.18)
The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations had the acquisition taken
place on January 1, 1995 or (ii) future results of operations of the combined
businesses.
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 June 30, 1996 and the results of operations for the
three months and six months ended June 30, 1996 as compared to the corresponding
1995 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, 1995 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. 1995 Annual Report on
Form 10-K.
Results of Operations
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
General:
Revenue from continuing operations for the second quarter of 1996
decreased by approximately $54.9 million (8.1%) as compared with the same period
in 1995. Such decrease is attributable primarily to the September 1995 sale of
Denny's distribution subsidiary, Proficient Food Company ("PFC"), fewer Company
operated restaurants versus the prior year, and decreases in revenue at the
Company's Hardee's and Quincy's restaurants, offset in part, by a revenue
increase following the Company's purchase of the Coco's and Carrows restaurant
chains during May 1996 as further described below. The sale of PFC resulted in a
decline in second quarter revenue of $72.4 million. In addition, the Company had
85 fewer Company-owned restaurants at June 30, 1996 as compared to June 30, 1995
and revenue at the Company's Hardee's and Quincy's restaurants decreased by
$15.2 million and $9.5 million, respectively, during the second quarter of 1996
as compared to the same period of 1995 due to weak sales results at these
restaurants. The Company's revenue decrease was mitigated
8
by revenue of $49.3 million from the purchased Coco's and Carrows units
following the May 1996 acquisition. Comparable sales for Denny's and El Pollo
Loco increased by 1.7% and 8.5%, respectively, during the second quarter of 1996
over the comparable 1995 period while Hardee's and Quincy's experienced
decreases in comparable store sales of 7.0% and 10.9%, respectively.
Operating expenses from continuing operations decreased by $48.1
million during the second quarter of 1996 as compared to the same period of
1995. Such decrease was primarily associated with the decrease in operating
revenue described above. These results also reflect $6.3 million in gains from
sales of restaurants to franchisees, compared to $6.9 million in the prior year
quarter. Loss from continuing operations was $17.4 million during the second
quarter of 1996 as compared with $6.3 million during the same period of 1995.
The increase in other operating expense is primarily due to expenses
related to Coco's and Carrows since their acquisition in May 1996 and increased
advertising expenditures associated with Denny's National Grand Value Breakfast
Menu Promotion and other new programs in 1996.
Denny's:
- --------
Three Months Ended
June 30,
Increase/
1996 1995 (Decrease)
---- ---- --------
Revenue:
Restaurants $316,698 $320,959 $ (4,261)
Processing and Distribution 674 76,575 (75,901)
-------- -------- --------
Total 317,372 397,534 (80,162)
Operating Expenses 282,878 365,090 (82,212)
-------- -------- --------
Operating Income $ 34,494 $ 32,444 $ 2,050
======== ======== ========
Denny's revenue decreased by $80.2 million during the 1996 quarter as
compared with the 1995 period. This decrease resulted primarily from the sale of
Denny's distribution subsidiary, PFC, during September 1995. During the second
quarter of 1995, Denny's revenue included $72.4 million of outside sales by PFC.
In addition, during the second quarter of 1996 in comparison to the comparable
1995 period, outside revenue of Denny's food processing subsidiary, Portion-Trol
Foods, Inc. decreased by $3.5 million. Revenues at Denny's restaurants decreased
by $4.3 million due to a 44-unit net decrease in the number of Company-owned
restaurants at June 30, 1996 in comparison to June 30, 1995 pursuant to the
Company's strategy of focusing on its franchise operations and the sale of
restaurants to franchisees, along with selected restaurant closures. Comparable
store sales at Company-owned Denny's increased by 1.7% reflecting an increase in
traffic of 2.3% which was partially offset by a decrease in average check of
0.6%. This increase is primarily attributable to Denny's new tiered Breakaway
Value Menus, introduced earlier this year.
Operating expenses for the second quarter of 1996 decreased by $82.2
million, as compared to the same period of 1995. $69.2 million of this decrease
is attributable to the sale of PFC. The remaining decrease of $13.0 million is
due primarily to the 44-unit net decrease in the number of Company-owned
restaurants, decreased outside sales at Denny's food processing subsidiary and a
reduction in depreciation and amortization expense during 1996 following a
charge for impaired assets of approximately $23.9 million during the fourth
quarter of 1995. Denny's operating expenses included gains on the sale of
restaurants to franchisees of $6.1 million during the current year quarter as
well as the prior year quarter.
9
Hardee's:
- --------
Three Months Ended
June 30,
Increase/
1996 1995 (Decrease)
---- ---- --------
Revenue $159,991 $175,144 $(15,153)
Operating Expenses 151,765 159,641 (7,876)
-------- -------- --------
Operating Income $ 8,226 $ 15,503 $ (7,277)
======== ======== ========
Hardee's revenue decreased by $15.2 million during the 1996 quarter as
compared with the 1995 period principally due to continued aggressive promotions
by competitors within the quick-service segment and a 20-unit net decrease in
the number of restaurants operated at the 1996 quarter-end in comparison to the
1995 quarter-end. Comparable store sales decreased by 7.0% during the second
quarter of 1996 as compared with the comparable period of 1995 and reflect
declines in average check of 3.9% and in traffic of 3.2%.
Operating expenses for the 1996 quarter as compared to the same period
of 1995 decreased by $7.9 million principally due to lower comparable store
sales during the 1996 quarter, the decrease in the number of restaurants
operated during the 1996 quarter, and a reduction in depreciation and
amortization expense during the 1996 quarter following a charge for impaired
assets of approximately $23.7 million during the fourth quarter of 1995.
Quincy's:
- ---------
Three Months Ended
June 30,
Increase/
1996 1995 (Decrease)
----- ----- ---------
Revenue $66,652 $76,148 $(9,496)
Operating Expenses 64,809 69,917 (5,108)
------- ------- -------
Operating Income $ 1,843 $ 6,231 $(4,388)
======= ======= =======
Reflecting continued competitive conditions in the family steak house
segment, Quincy's revenue decreased by $9.5 million during the 1996 quarter from
the comparable period of 1995. Comparable store sales decreased by 10.9% during
the 1996 quarter as compared to 1995 reflecting decreases in traffic of 8.9% and
in average check of 2.1%. In addition, the Company had a 5-unit net decrease in
the number of restaurants at quarter-end 1996 as compared to quarter-end 1995.
Operating expenses for the 1996 quarter as compared to the 1995 period
decreased by $5.1 million principally due to the decrease in comparable store
sales described above, including a $3.5 million decrease in product cost and
$1.9 million decrease in payroll and benefits expense.
10
El Pollo Loco:
- --------------
Three Months Ended
June 30,
Increase/
1996 1995 (Decrease)
----- ----- --------
Revenue $33,279 $32,638 $ 641
Operating Expenses 28,970 29,118 (148)
------- ------- -------
Operating Income $ 4,309 $ 3,520 $ 789
======= ======= =======
Revenue at El Pollo Loco increased by $0.6 million during the 1996
quarter from the comparable 1995 quarter despite a 16-unit decrease in number of
restaurants operated at June 30, 1996 as compared to June 30, 1995. The decrease
in the number of restaurants operated by the Company is in furtherance of the
Company's franchise strategy and has contributed to the 30-unit increase in the
number of franchised restaurants operated at June 30, 1996 as compared to June
30, 1995. Comparable store sales for Company-owned restaurants increased by 8.5%
during the 1996 quarter over the comparable 1995 period and reflects an increase
in traffic of 15.0% which was partially offset by a 5.6% decrease in average
check. The increase in traffic is primarily attributable to continued favorable
customer responses to the Pollo Bowl promotion and Foster's Freeze rollout.
Operating expenses for the 1996 quarter decreased by $0.1 million
primarily due to the above-described 16-unit decrease in the number of
Company-owned restaurants. The decrease in operating expenses was partially
offset by a decrease in gains recognized on the sale of restaurants to
franchisees during the 1996 period of $0.2 million from $0.8 million in the 1995
period.
Coco's and Carrows:
- ------------------
On May 23, 1996, the Company through its wholly-owned subsidiary, FRD,
acquired the Coco's and Carrows restaurant chains consisting of 347 units
operating in the family dining segment. The Company's operating results for the
second quarter of 1996 include five weeks of operations subsequent to the
purchase date and include revenue of $27.0 million for Coco's and $22.2 million
for Carrows. Comparable store sales for such five week period decreased 1.7% for
Coco's and increased 3.8% for Carrows as compared to the comparable 1995 period.
During the five week period, operating expenses for Coco's and Carrows were
$25.1 million and $20.2 million, respectively, and resulted in operating income
of $1.9 million for Coco's and $2.0 million for Carrows.
Interest and Debt Expense:
- -------------------------
Total interest and debt expense from continuing operations and
discontinued operations totaled $62.5 million during the second quarter of 1996
as compared with $61.4 million during the comparable period of 1995. The second
quarter of 1996 includes $2.5 million of interest and debt expense recorded at
Coco's and Carrows, which were acquired during May 1996.
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 20, 1995
- -----------------------------------------------------------------------------
General:
- -------
Operating revenue from continuing operations for the first six months
of 1996 decreased by approximately $140.9 million (10.7%) as compared with the
same period of 1995. Such decrease is attributable primarily to the sale of
Denny's distribution subsidiary and decreases in revenue at the Company's
Hardee's and Quincy's restaurants, offset in part, by revenue increases
following the Company's purchase of the Coco's and Carrows restaurant chains
during May 1996 as further described below. A decrease in revenue of
approximately
11
$138.3 million is attributable to the September 1995 sale of Denny's
distribution subsidiary, PFC. In addition, revenue at the Company's Hardee's and
Quincy's restaurants decreased by $28.1 million and $13.4 million, respectively,
during the first six months of 1996 due to weak sales results at these
restaurants and adverse winter weather conditions in the Southeast. The
Company's revenue decrease was mitigated by revenue of $49.3 million from the
purchased Coco's and Carrows restaurant units following the May 1996
acquisition. Comparable store sales for Denny's and El Pollo Loco increased by
2.6% and 8.2%, respectively, during the first six months of 1996 over the
comparable 1995 period while Hardee's and Quincy's experienced decreases in
comparable store sales of 7.2% and 7.6%, respectively.
Operating expenses from continuing operations decreased by $124.3
million during the first six months of 1996 as compared to the same period of
1995. Such decrease was primarily associated with the decrease in operating
revenue described above. Loss from continuing operations was $44.7 million
during the first six months of 1996 as compared with $28.7 million during the
same period of 1995.
The increase in other operating expense is primarily due to expenses
related to Coco's and Carrows since their acquisition in May 1996 and increased
advertising expenditures associated with Denny's National Grand Value Breakfast
Menu Promotion and other new programs in 1996.
Denny's:
- --------
Six Months Ended
June 30,
Increase/
1996 1995 (Decrease)
---- ---- --------
Revenue:
Restaurants $ 621,875 $ 625,943 $ (4,068)
Processing and Distribution 1,204 146,069 (144,865)
--------- --------- ---------
Total 623,079 772,012 (148,933)
Operating Expenses 565,324 709,207 (143,883)
--------- --------- ---------
Operating Income $ 57,755 $ 62,805 $ (5,050)
========= ========= =========
Denny's revenue decreased by $148.9 million during the first six months
of 1996 as compared with the 1995 period. This decrease resulted primarily from
the sale of Denny's distribution subsidiary, PFC, during September 1995. During
the first six months of 1995, Denny's revenue included $138.3 million of outside
sales by PFC. Outside revenue at Denny's food processing subsidiary,
Portion-Trol Foods, Inc., decreased by $6.6 million during the first six months
of 1996 in comparison to the 1995 period. Comparable store sales at
Company-owned Denny's increased by 2.6% reflecting increases in traffic of 2.2%
and in average check of 0.3%. Such increases are attributable to the successful
launch of Denny's tiered menu items during 1996. As a result of a 44-unit net
decrease in the number of Company-owned restaurants at June 30, 1996 in
comparison to June 30, 1995, however, revenue at Denny's restaurants subsidiary
decreased by $4.1 million during the first six months of 1996. The net decrease
in restaurant units was due to the Company's strategy of focusing on its
franchise operations and the sale of restaurants to franchisees, along with
selected restaurant closures.
Operating expenses for the second quarter of 1996 decreased by $143.9
as compared to the same period of 1995. $131.5 million of this decrease is
attributable to the sale of PFC. The remaining decrease of $12.4 million is due
primarily to the 44-unit net decrease in the number of Company-owned
restaurants, decreased outside sales at Denny's food processing subsidiary and a
reduction in depreciation and amortization expense during 1996 following a
charge for impaired assets of approximately $23.9 million during the fourth
quarter of 1995. During this period, Denny's recorded $6.1 million in income
from gains on the sale of restaurants versus $8.5 million in the same period
last year.
12
Hardee's:
- ---------
Six Months Ended
June 30,
Increase/
1996 1995 (Decrease)
---- ---- --------
Revenue $305,065 $333,170 $(28,105)
Operating Expenses 292,280 310,696 (18,416)
-------- -------- --------
Operating Income $ 12,785 $ 22,474 $ (9,689)
======== ======== ========
Hardee's revenue decreased by $28.1 million during the first six months
of 1996 as compared with the 1995 period principally due to the following: (i)
continued aggressive promotions by competitors within the quick-service segment,
(ii) inclement weather during the first quarter, and (iii) a 20-unit decrease in
the number of restaurants operated at the end of the first six months of 1996 in
comparison to the 1995 period. The first two factors resulted in a 7.2% decrease
in comparable store sales during the first six months of 1996 as compared with
the comparable period of 1995 and reflects declines of 6.0% in traffic and 1.3%
in average check.
Operating expenses in the first six months of 1996 as compared with the
same period of 1995 decreased by $18.4 million principally due to lower
comparable store sales during the 1996 period, the decrease in the number of
restaurants, and a reduction in depreciation and amortization expense during the
1996 period following a charge for impaired assets during the fourth quarter of
1995.
Quincy's:
- --------
Six Months Ended
June 30,
Increase/
1996 1995 (Decrease)
---- ---- --------
Revenue $135,188 $148,564 $(13,376)
Operating Expenses 128,086 138,135 (10,049)
-------- -------- --------
Operating Income $ 7,102 $ 10,429 $ (3,327)
======== ======== ========
Quincy's revenue decreased by $13.4 million during the 1996 quarter
from the comparable period of 1995 principally due to a decrease in comparable
store sales of 7.6% and a 5-unit net decrease in the number of restaurants. In
addition to continued competitive conditions in the family steak house segment,
inclement weather during the first quarter of 1996 is also believed to have
adversely affected revenue. The decrease in comparable store sales reflects a
9.6% decrease in traffic which was partially offset by an increase in average
check of 2.2%.
Operating expenses in the six months ended June 30, 1996 as compared
with the same period of 1995 decreased by $10.0 million principally due to the
decreases in comparable store sales as described above and include decreases in
product cost of $5.7 million and payroll and benefits of $3.0 million.
13
El Pollo Loco:
- --------------
Six Months Ended
June 30,
Increase/
1996 1995 (Decrease)
---- ---- --------
Revenue $64,387 $64,181 $ 206
Operating Expenses 57,154 58,631 (1,477)
------- ------- -------
Operating Income $ 7,233 $ 5,550 $ 1,683
======= ======= =======
Revenue at El Pollo Loco increased by $0.2 million during the first six
months of 1996 from the comparable period of 1995 despite the sale of
restaurants to franchisees during 1995 in furtherance of the Company's franchise
strategy. Such strategy resulted in a 16-unit net decrease in the number of
Company-owned restaurants at June 30, 1996 as compared to June 30, 1995.
Comparable store sales for the first six months of 1996 increased by 8.2% over
the 1995 period reflecting an increase in traffic of 11.2% which was partially
offset by a decrease in average check of 2.7%. The increase in traffic is
primarily attributable to favorable customer responses to the Pollo Bowl
promotion and Foster's Freeze rollout.
Operating expenses for the first six months of 1996 as compared to the
same period of 1995 decreased by $1.5 million primarily due to the
above-described 16-unit decrease in the number of Company-owned restaurants. The
decrease in operating expenses was partially offset by a decrease in gains
recognized on the sale of restaurants to franchisees during the 1996 period of
$0.5 million as compared to $1.7 million of the 1995 period.
Coco's and Carrows
- ------------------
The Company's operating results for the first six months of 1996
include five weeks of operations subsequent to the Coco's and Carrows purchase
date and include revenue of $27.0 million for Coco's and $22.2 million for
Carrows. Comparable store sales for such five week period decreased by 1.7% for
Coco's and increased 3.8% for Carrows as compared to the comparable 1995 period.
During the five week period, operating expenses for Coco's and Carrows were
$25.1 million and $20.2 million, respectively, and resulted in operating income
of $1.9 million for Coco's and $2.0 million for Carrows.
Interest and Debt Expense:
- --------------------------
Interest and debt expense from continuing operations and discontinued
operations totaled $120.3 million during the first six months of 1996 as
compared with $125.0 million during the comparable 1995 period principally due
to the following: (i) a decrease in interest expense of $1.1 million during the
1996 period related to the impact of lower interest rates on interest rate
exchange agreements, (ii) a decrease of approximately $4.2 million due to a
reduction in principal outstanding during the 1996 period, and (iii) an increase
in interest income of $1.8 million during 1996 due to increased cash and cash
equivalents prior to the Coco's and Carrows acquisition. Such decreases in
interest expense were offset, in part, during the first six months of 1996 by an
increase in interest and debt expense of $2.5 million recorded at Coco's and
Carrows, which were acquired during May 1996.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1996 and December 31, 1995, the Company had working capital
deficits of $286.6 million and $122.2 million, respectively. The increase in the
deficit is attributable primarily to a reduction in cash and cash equivalents
which has been used for Company operations and to consummate the Coco's and
Carrows acquisition during May 1996. The Company is able to operate with a
substantial working capital deficiency because: (i) restaurant operations are
conducted primarily on a cash (and cash equivalent) basis with a
14
low level of accounts receivable, (ii) rapid turnover allows a limited
investment in inventories and (iii) accounts payable for food, beverages, and
supplies usually become due after the receipt of cash from related sales.
The Minimum Wage Bill recently enacted by Congress is expected to be
signed into law during the third quarter of 1996 and become effective beginning
in the fourth quarter of 1996. The Company will attempt to offset any increases
in the minimum wage through a combination of pricing and cost control efforts;
however, there can be no assurance that the Company will be able to pass such
cost increases on to the customer.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Not applicable.
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.
----------------------------------------------------
The annual meeting of stockholders of FCI was held on
Wednesday, April 24,1996 at which meeting the following
matters were voted on by the stockholders of FCI:
(i) Election of Directors
---------------------
Votes Against
Name Votes For or Withheld
- -------------------------------------------------------------------------------
James B. Adamson 36,707,576 103,291
Michael Chu 36,706,212 104,655
Vera King Farris 36,704,998 105,869
Henry R. Kravis 36,705,995 104,872
A. Andrew Levison 36,707,384 103,483
Paul E. Raether 36,707,040 103,827
George R. Roberts 36,703,637 107,230
L. Edwin Smart 36,707,152 103,715
Michael T. Tokarz 36,706,594 104,273
(ii) Ratification of the Selection of Auditors
-----------------------------------------
Votes Abstaining
Votes For Votes Against and Broker Non-Votes
36,712,883 48,035 49,949
(iii) Approval of 1996 Incentive Compensation for the Company's
----------------------------------------------------------
employees.
----------
Votes Abstaining
Votes For Votes Against and Broker Non-Votes
35,657,410 664,602 508,855
Item 5. Other Information.
------------------
Not applicable.
16
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a. The following are included as exhibits to this report:
-----------------------------------------------------
Exhibit
No. Description
- ------- -----------
10.1 Eleventh Amendment and Consent, dated as of March 31, 1996, to the
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.
10.2 Second Amended and Restated Credit Agreement, dated as of April 10,
1996 among TWS Funding, Inc., as borrower, Flagstar Corporation,
certain lenders and co-agents named therein, and Citibank, N.A., as
funding agent.
10.3 Credit Agreement, dated as of May 23, 1996, among FRD Acquisition Co.,
FRI-M Corporation, certain lenders and co-agents named therein, and
Credit Lyonnais New York Branch as administrative agent (incorporated
by reference to Exhibit 10.1 of the Registration Statement on Form S-1
(333-07601) of FRD Acquisition Co. (the "Form S-1").
10.4 Indenture between FRD Acquisition Co. and the Bank of New York, as
trustee relating to the 12 1/2% Senior Notes (incorporated by reference
to Exhibit 4.1 of the Form S-1).
27 Financial Data Schedule
b. The Registrant filed a report on Form 8-K dated May 23, 1996, providing
information under Item 2. Acquisition or Disposition of Assets of such
report. The filing reported the consummation of the acquisition of
Coco's and Carrows restaurant chains by FRD Acquisition Co., a
subsidiary of the Company.
c. The Registrant filed a report on Form 8-K/A dated August 6, 1996,
providing information under Item 7., Financial Statements and Exhibits,
of such report which was not available at the time of filing the Form
8-K discussed above. This information included the financial statements
of the business acquired, as well as pro forma financial information.
17
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: August 12, 1996 By: /s/ Rhonda J. Parish
Rhonda J. Parish
Vice President and
General Counsel
Date: August 12, 1996 By: /s/ C. Robert Campbell
----------------------------
C. Robert Campbell
Vice President and
Chief Financial Officer
18