Sequential Page 1 of 14 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 March 31, 1996, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to _____________ Commission file number 0-18051 FLAGSTAR COMPANIES, INC. (Exact name of registrant as specified in its charter) 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 May 10, 1996, 42,434,606 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 Ended March 31, 1996 and 1995 (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 1996 1995 (In thousands, except per share amounts) <S> <C> <C> Operating Revenue.................................... $550,425 $636,463 Operating Expenses: Product costs...................................... 160,028 218,246 Payroll & benefits................................. 214,531 228,809 Depreciation & amortization expense................ 29,047 33,249 Utilities expense.................................. 22,754 23,261 Other.............................................. 96,579 95,559 522,939 599,124 Operating Income..................................... 27,486 37,339 Other Charges: Interest and debt expense - net.................... 57,712 58,935 Other non-operating expenses - net................. (26) 335 Loss From Continuing Operations Before Income Taxes................................ (30,200) (21,931) Provision For (Benefit From) Income Taxes............ (2,890) 472 Loss From Continuing Operations...................... (27,310) (22,403) Loss From Discontinued Operations - Net of Provision for Income Taxes of $360...................................... --- (8,657) Net Loss............................................. (27,310) (31,060) Dividends on Preferred Stock......................... (3,544) (3,544) Net Loss Applicable to Common Shareholders.... ...... $ (30,854) $(34,604) Loss Per Share Applicable to Common Shareholders:...................................... Loss From Continuing Operations.................... $ (0.73) $ (0.61) Loss from Discontinued Operations-Net.............. --- (0.21) Net Loss........................................... $ (0.73) $ (0.82) Average Outstanding and Equivalent Common Shares...................................... 42,434 42,419 </TABLE> 2
FORM 10-Q Flagstar Companies, Inc. Consolidated Balance Sheets March 31, 1996 and December 31, 1995 (Unaudited) <TABLE> <CAPTION> March 31, December 31, 1996 1995 (In thousands) <S> <C> <C> Assets Current Assets: Cash and cash equivalents........................... $ 162,190 $ 196,966 Receivables, less allowance for doubtful accounts of: 1996 - $2,376; 1995 - $2,506..................... 26,819 29,844 Merchandise and supply inventories.................. 31,676 32,445 Other............................................... 35,117 26,087 255,802 285,342 Property: Property owned (at cost): Land............................................ 256,521 255,719 Buildings and improvements...................... 825,433 838,956 Other property and equipment.................... 482,057 484,684 Total property owned............................... 1,564,011 1,579,359 Less accumulated depreciation...................... 576,190 569,079 Property owned - net............................... 987,821 1,010,280 Buildings and improvements, vehicles, and other equipment held under capital leases........................................... 175,558 170,859 Less accumulated amortization...................... 83,948 76,778 Property held under capital leases - net........... 91,610 94,081 1,079,431 1,104,361 Other Assets: Other intangible assets - net...................... 23,344 22,380 Deferred financing costs - net..................... 61,635 63,482 Other.............................................. 31,460 32,186 116,439 118,048 Total Assets $1,451,672 $1,507,751 </TABLE> 3
FORM 10-Q Flagstar Companies, Inc. Consolidated Balance Sheets March 31, 1996 and December 31, 1995 (Unaudited) <TABLE> <CAPTION> March 31, December 31, 1996 1995 (In thousands) <S> <C> <C> Liabilities Current Liabilities: Current maturities of long-term debt............... $ 38,774 $ 38,835 Accounts payable................................... 88,729 125,467 Accrued salaries and vacations..................... 47,156 41,102 Accrued insurance.................................. 47,670 48,060 Accrued taxes...................................... 29,843 30,705 Accrued interest and dividends..................... 67,169 42,916 Other.............................................. 76,646 80,445 395,987 407,530 Long-Term Liabilities: Debt, less current maturities...................... 1,990,008 1,996,111 Deferred income taxes.............................. 18,057 18,175 Liability for self-insured claims.................. 52,270 53,709 Other non-current liabilities and deferred credits................................. 157,181 163,203 2,217,516 2,231,198 Total Liabilities 2,613,503 2,638,728 Shareholders' Deficit (1,161,831) (1,130,977) Total Liabilities & Shareholders' Deficit $ 1,415,672 $ 1,507,751 </TABLE> 4
FORM 10-Q Flagstar Companies, Inc. Statements of Consolidated Cash Flows For the Three Months Ended March 31, 1996 and 1995 (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 1996 1995 (In thousands) <S> <C> <C> Cash Flows From Operating Activities: Net Loss $(27,310) $(31,060) Adjustments to reconcile net loss to cash flows from (used in) operating activities: Depreciation and amortization of property 27,646 31,621 Amortization of other intangible assets 1,400 1,629 Amortization of deferred financing costs 1,847 1,639 Deferred income tax benefit (118) (661) Equity in loss of discontinued operations - net --- 8,657 Other (352) (2,208) Decrease (increase) in assets: Receivables 3,178 11,033 Inventories 768 (6,453) Other current assets (8,212) (5,344) Other assets (4,352) (477) Increase (decrease) in liabilities: Accounts payable (39,583) (10,381) Accrued salary and vacations 6,055 1,342 Accrued taxes (5,978) (2,495) Other accrued liabilities 24,475 13,682 Other non-current liabilities and deferred credits (1,476) (111) Total adjustments 5,298 41,473 Net cash flows from (used in) operating activities (22,012) 10,413 Cash Flows From (Used In) Investing Activities: Purchases of property (2,818) (24,489) Proceeds from disposition of property 461 3,403 Advances to discontinued operations --- (14,135) Other long-term assets - net 51 (645) Net cash flows used in investing activities (2,306) (35,866) </TABLE> 5
FORM 10-Q Flagstar Companies, Inc. Statements of Consolidated Cash Flows For the Three Months Ended March 31, 1996 and 1995 (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 1996 1995 (In thousands) <S> <C> <C> Cash Flows From (Used in) Financing Activities: Long-term debt payments $ (6,914) $ (7,541) Cash dividends on preferred stock (3,544) (3,544) Net cash flows used in financing activities (10,458) (11,085) Decrease in cash and cash equivalents (34,776) (36,538) Cash and Cash Equivalents at: Beginning of period 196,966 66,720 End of period $ 162,190 $ 30,182 Supplemental Cash Flow Information: Income taxes paid $ 1,552 $ 480 Interest paid $ 31,720 $ 37,707 Non-cash financing activities: Capital lease obligations $ 744 $ 1,113 Dividends declared but not paid $ 3,544 $ 3,544 </TABLE> 6
FORM 10-Q FLAGSTAR COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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. 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 ended March 31, 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 In March 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. 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. 7
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 March 31, 1996 and the results of operations for the three months ended March 31, 1996 as compared to the corresponding 1995 period. 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 March 31, 1996 Compared to Three Months Ended March 31, 1995 General: Operating revenue from continuing operations for the first quarter of 1996 decreased by approximately $86.0 million (13.5%) as compared with the same period in 1995. Approximately $65.9 million of this decrease is attributable to a decrease in outside revenue attributable to the September 1995 sale of Denny's distribution subsidiary, Proficient Food Company ("PFC"), which was sold in September 1995. In addition, revenue at the Company's Hardee's and Quincy's restaurants decreased by $13.0 million and $3.9 million, respectively, during the first quarter of 1996 as compared to the same period of 1995 due to weak sales results at these restaurants and adverse winter weather conditions in the Southeast. Comparable store sales for Denny's and El Pollo Loco increased by 3.3% and 7.9%, respectively, during the first quarter of 1996 over the comparable 1995 period while Hardee's and Quincy's experienced decreases in comparable store sales of 7.3% and 4.1%, respectively. Operating expenses from continuing operations decreased by $76.2 million during the first quarter of 1996 as compared to the same period of 1995 primarily as a result of the decrease in operating revenue described above. Loss from continuing operations was $27.3 million during the first quarter of 1996 as compared with $22.4 million during the same period of 1995. 8
FORM 10-Q Denny's: <TABLE> Three Months Ended March 31, Increase/ 1996 1995 (Decrease) <S> <C> <C> <C> Revenue: Restaurants $305,178 $304,983 $ 195 Processing and Distribution 529 69,496 (68,967) Total 305,707 374,479 (68,772) Operating Expenses 282,447 344,119 (61,672) Operating Income $ 23,260 $ 30,360 $ (7,100) </TABLE> Denny's revenue decreased by $68.8 million during 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 1995 quarter, Denny's revenue included $65.9 million of outside sales by PFC. Outside revenue at Denny's food processing subsidiary, Portion-Trol Foods, Inc., decreased by $3.1 million during the 1996 quarter in comparison to the 1995 period. Comparable store sales at Company-owned Denny's increased by 3.3% reflecting increases in traffic of 2.0% and in average check of 1.3%. Such increases are attributable to the successful launch of Denny's tiered menu items during 1996. As a result of a 45-unit net decrease in the number of Company-owned restaurants at March 31, 1996 in comparison to March 31, 1995, however, revenue at Denny's restaurant subsidiary increased by only $0.2 million during the 1996 quarter. 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 1996 quarter as compared with the 1995 period increased by $0.5 million after deducting $62.3 million in operating expenses for the 1995 period for the Denny's distribution subsidiary. During the 1995 quarter, operating expenses included gains on the sale of restaurants of approximately $2.4 million. There were no gains in the first quarter of 1996. Hardee's: <TABLE> Three Months Ended March 31, Increase/ 1996 1995 (Decrease) <S> <C> <C> <C> Revenue $145,074 $158,026 $(12,952) Operating Expenses 140,515 151,055 (10,540) Operating Income $ 4,559 $ 6,971 $ (2,412) </TABLE> Hardee's revenue decreased by $13.0 million during the 1996 quarter 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 1996 quarter, and (iii) a 19-unit decrease in the number of restaurants operated at the end of the 1996 quarter in comparison to the 1995 quarter-end. The first two factors resulted in a 7.3% decrease in comparable store sales during the first quarter of 1996 as compared with the comparable period of 1995 reflecting a decline of 8.8% in traffic which was only partially mitigated by a 1.7% increase in average check. 9
FORM 10-Q Operating expenses for the 1996 quarter as compared to the same period of 1995 decreased by $10.5 million principally due to lower comparable store sales during the 1996 quarter, the decrease in the number of restaurants and a reduction in depreciation and amortization expense during the 1996 quarter following a charge for impaired assets of approximately $23.7 million recorded during the fourth quarter of 1995. Quincy's: <TABLE> Three Months Ended March 31, Increase/ 1996 1995 (Decrease) <S> <C> <C> <C> Revenue $68,536 $72,416 $(3,880) Operating Expenses 63,277 68,218 (4,941) Operating Income $ 5,259 $ 4,198 $ 1,061 </TABLE> Quincy's revenue decreased by $3.9 million during the 1996 quarter from the comparable period of 1995 principally due to a decrease in comparable store sales of 4.1% and a 7-unit net decrease in the number of restaurants. Inclement weather during the first quarter 1996 is also estimated to have adversely affected revenue. The decrease in comparable store sales reflects a 10.2% decrease in traffic which was partially offset by an increase in average check of 6.9%. Operating expenses for the 1996 quarter as compared to the 1995 period decreased by $4.9 million principally due to favorable decreases in product costs of $2.3 million, payroll of $1.1 million, advertising of $0.5 million and overhead of $0.5 million. El Pollo Loco: <TABLE> Three Months Ended March 31, Increase/ 1996 1995 (Decrease) <S> <C> <C> <C> Revenue $31,108 $31,542 $ (434) Operating Expenses 28,184 29,512 (1,328) Operating Income $ 2,924 $ 2,030 $ 894 </TABLE> Revenue at El Pollo Loco decreased by $0.4 million during the 1996 quarter from the comparable 1995 quarter primarily due to the sale of restaurants to franchisees during 1995 in furtherance of the Company's franchise strategy resulting in a 21-unit net decrease in the number of Company-owned restaurants at March 31, 1996 as compared to March 31, 1995. Comparable store sales for the 1996 quarter increased by 7.9% over the 1995 quarter reflecting increases in traffic of 7.2% and average check of 0.6%, respectively. The increase in traffic is primarily attributable to favorable customer responses to the Pollo Bowl promotion and Foster's Freeze rollout. 10
FORM 10-Q 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 $0.3 million as compared to $0.9 million for the 1995 period. Interest and Debt Expense: Total interest and debt expense from continuing operations and discontinued operations totaled $57.7 million during the first quarter of 1996 as compared with $63.5 million during the comparable period of 1995 principally due to the following: (i) a decrease in interest expense of $2.6 million during the 1996 period related to changes in interest rate exchange agreements, (ii) a decrease of approximately $1.5 million due to a reduction in principal outstanding during the 1996 period, and (iii) an increase in interest income of $1.3 million during 1996 due to increased cash and cash equivalents. Liquidity and Capital Resources At March 31, 1996 and December 31, 1995, the Company had working capital deficits of $140.2 million and $122.2 million, respectively. The increase in the deficit between December 31, 1995 and March 31, 1996 is attributable primarily to a reduction in cash and cash equivalents which has been used for Company operations and an increase in accrued interest due to the timing of interest payments. 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 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. During April 1996, the Company entered into an agreement with a syndicate of banks led by co-agents Bankers Trust Company, Chemical Bank, and Citibank, N.A. for a new three-year $150 million revolving credit facility. The new credit facility replaces the previously existing credit facility which was scheduled to expire in June 1996 and will be used for the issuance of letters of credit and for working capital purposes. The facility includes a sub-limit of $75 million on working capital borrowings, but no such sub-limit for the issuance of letters of credit. The Company believes that the new credit facility will provide an additional source of liquidity and financial flexibility to the operation and growth of the Company's four restaurant concepts and the anticipated acquisition of the Coco's and Carrows restaurant chains. 11
FORM 10-Q 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. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. a. Exhibit 27 Financial Data Schedule is included as an exhibit to this filing. b. Not applicable. 12
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: May 14, 1996 By: /s/ Rhonda J. Parish Rhonda J. Parish Vice President and General Counsel Date: May 14, 1996 By: /s/ C. Robert Campbell C. Robert Campbell Vice President and Chief Financial Officer 13