UNITED STATES
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 26, 2002 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
DENNY'S CORPORATION
- -------------------------------------------------------------------------------
(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)
Advantica Restaurant Group, Inc.
- -------------------------------------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of August 12, 2002, 40,279,660 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Quarter
Ended Ended
June 26, 2002 June 27, 2001
------------- -------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 217,452 $ 242,122
Franchise and license revenue 22,890 22,270
-------- --------
Total operating revenue 240,342 264,392
-------- --------
Costs of company restaurant sales:
Product costs 51,531 60,435
Payroll and benefits 88,112 97,955
Occupancy 12,170 14,979
Other operating expenses 28,583 35,425
-------- --------
Total costs of company restaurant sales 180,396 208,794
Costs of franchise and license revenue 7,376 8,901
General and administrative expenses 14,033 16,695
Amortization of goodwill and other intangible assets with
indefinite lives --- 7,854
Depreciation and other amortization 20,860 23,493
Restructuring charges and exit costs 2,781 8,495
Impairment charges 497 8,343
Gains on refranchising and other, net (1,764) (5,896)
-------- --------
Total operating costs and expenses 224,179 276,679
-------- --------
Operating income (loss) 16,163 (12,287)
-------- --------
Other (income) expenses:
Interest expense, net 18,920 18,011
Other nonoperating (income) expense, net (19,271) 18
-------- --------
Total other (income) expenses, net (351) 18,029
-------- --------
Income (loss) before income taxes 16,514 (30,316)
Provision for income taxes 302 535
-------- --------
Income (loss) from continuing operations 16,212 (30,851)
Discontinued operations, net -- --
-------- --------
Net income (loss) applicable to common shareholders $ 16,212 $ (30,851)
======== ========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Income (loss) from continuing operations $ 0.40 $ (0.77)
Discontinued operations, net --- ---
-------- --------
Net income (loss) $ 0.40 $ (0.77)
======== ========
Weighted average shares outstanding:
Basic 40,276 40,143
======== ========
Diluted 40,478 40,143
======== ========
See accompanying notes
2
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 26, 2002 June 27, 2001
------------- -------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 429,686 $ 478,909
Franchise and license revenue 45,115 43,834
-------- --------
Total operating revenue 474,801 522,743
-------- --------
Costs of company restaurant sales:
Product costs 103,225 120,107
Payroll and benefits 176,404 195,094
Occupancy 24,569 30,048
Other operating expenses 57,890 71,300
-------- --------
Total costs of company restaurant sales 362,088 416,549
Costs of franchise and license revenue 14,621 17,059
General and administrative expenses 28,211 34,290
Amortization of goodwill and other intangible assets with
indefinite lives --- 16,173
Depreciation and other amortization 41,558 46,585
Restructuring charges and exit costs 3,079 8,495
Impairment charges 497 8,343
Gains on refranchising and other, net (3,580) (10,296)
-------- --------
Total operating costs and expenses 446,474 537,198
-------- --------
Operating income (loss) 28,327 (14,455)
-------- --------
Other expenses:
Interest expense, net 38,207 36,471
Other nonoperating income, net (19,271) (7,767)
-------- --------
Total other expenses, net 18,936 28,704
-------- --------
Income (loss) before income taxes 9,391 (43,159)
(Benefit from) provision for income taxes (2,137) 1,068
-------- --------
Income (loss) from continuing operations 11,528 (44,227)
Discontinued operations, net --- ---
-------- --------
Net income (loss) applicable to common shareholders $ 11,528 $ (44,227)
======== ========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Income (loss) from continuing operations $ 0.29 $ (1.10)
Discontinued operations, net --- ---
-------- --------
Net income (loss) $ 0.29 $ (1.10)
======== ========
Weighted average shares outstanding:
Basic 40,255 40,130
======== ========
Diluted 40,443 40,130
======== ========
See accompanying notes
3
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)
June 26, 2002 December 26, 2001
------------- -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 3,672 $ 6,696
Receivables, less allowance for doubtful accounts of:
2002 -- $2,721; 2001 -- $2,730 7,521 6,508
Inventories 7,718 7,979
Other 12,161 18,954
-------- --------
Total Current Assets 31,072 40,137
-------- --------
Property, net 338,911 362,441
Other Assets:
Goodwill 52,366 53,353
Intangible assets 96,674 100,912
Deferred financing costs, net 8,443 10,067
Other 35,940 40,343
-------- --------
Total Assets $ 563,406 $ 607,253
======== ========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 62,552 $ 599
Current maturities of capital lease obligations 4,025 4,523
Accounts payable 38,458 55,862
Net liabilities of discontinued operations 19,357 15,115
Other 110,564 126,618
-------- --------
234,956 202,717
-------- --------
Long-Term Liabilities:
Notes and debentures, less current maturities 529,176 609,531
Capital lease obligations, less current maturities 33,927 35,527
Liability for insurance claims 28,165 26,778
Other noncurrent liabilities and deferred credits 65,119 72,457
-------- --------
Total Long-Term Liabilities 656,387 744,293
-------- --------
Total Liabilities 891,343 947,010
Total Shareholders' Deficit (327,937) (339,757)
-------- --------
Total Liabilities and Shareholders' Deficit $ 563,406 $ 607,253
======== ========
See accompanying notes
4
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Shareholders' Deficit
(Unaudited)
Accumulated Total
Additional Other Shareholders'
Common Stock Paid-in Comprehensive Equity/
Shares Amount Capital Deficit Income (Loss) (Deficit)
------ ------ ---------- ------- ------------- -------------
(In thousands)
Balance, December 26, 2001 40,143 $ 401 $ 417,293 $ (749,869) $ (7,582) $ (339,757)
------ ---- -------- --------- -------- ----------
Comprehensive loss:
Net income -- --- --- 11,528 --- 11,528
Other comprehensive income:
Foreign currency translation adjustments --- --- --- --- 176 176
------ ---- -------- --------- -------- ----------
Comprehensive income --- --- 11,528 176 11,704
Issuance of common stock 106 2 88 --- --- 90
Exercise of stock options 31 --- 26 --- --- 26
------ ---- -------- ---------- --------- ----------
Balance, June 26, 2002 40,280 $ 403 $ 417,407 $ (738,341) $ (7,406) $ (327,937)
====== ==== ======== ========= ======== ==========
See accompanying notes
5
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 26, 2002 June 27, 2001
------------- -------------
(In thousands)
Cash Flows from Operating Activities:
Net income (loss) $ 11,528 $ (44,227)
Adjustments to reconcile net income (loss) to cash flows used in
operating activities:
Amortization of goodwill and other intangible assets with
indefinite lives --- 16,173
Depreciation and other amortization 41,558 46,585
Restructuring charges and exit costs 3,079 8,495
Impairment charges 497 8,343
Amortization of deferred gains (3,776) (5,274)
Amortization of deferred financing costs 2,097 1,652
Gains on refranchising and other, net (3,580) (10,296)
Amortization of debt premium (947) (920)
Gain on early extinguishment of debt (19,246) (7,778)
Changes in Assets and Liabilities, Net of Effects of Acquisitions and
Dispositions:
Decrease (increase) in assets:
Receivables (916) 8,765
Inventories 124 (4)
Other current assets 2,800 (8,728)
Other assets 303 (2,854)
Increase (decrease) in liabilities
Accounts payable (2,383) (6,162)
Accrued salaries and vacations (6,644) (2,813)
Accrued taxes 578 1,135
Other accrued liabilities (7,797) (16,943)
Other noncurrent liabilities and deferred credits (5,540) (1,298)
-------- --------
Net cash flows provided by (used in) operating activities 11,735 (16,149)
-------- --------
Cash Flows from Investing Activities:
Purchase of property (13,853) (13,238)
Proceeds from disposition of property 5,451 18,273
Receipts from (advances to) discontinued operations, net 4,086 (56,078)
Deposits securing FRD letters of credit 4,083 ---
-------- --------
Net cash flows used in investing activities (233) (51,043)
-------- --------
See accompanying notes
6
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 26, 2002 June 27, 2001
------------- -------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ 3,300 $ 55,000
Long-term debt payments (2,799) (3,531)
Deferred financing costs (1,920) ---
Proceeds from exercise of stock options 26 ---
Net change in bank overdrafts (13,133) (7,392)
-------- --------
Net cash flows (used in) provided by financing activities (14,526) 44,077
-------- --------
Decrease in cash and cash equivalents (3,024) (23,115)
Cash and Cash Equivalents at:
Beginning of period 6,696 27,260
-------- --------
End of period $ 3,672 $ 4,145
======== ========
See accompanying notes
7
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Notes to Condensed Consolidated Financial Statements
June 26, 2002
(Unaudited)
Note 1. General
-------
Denny's Corporation (formerly Advantica Restaurant Group, Inc.), through its
wholly owned subsidiaries, Denny's Holdings, Inc., and Denny's, Inc. owns
and operates the Denny's restaurant brand, or Denny's. On July 10, 2002,
subsequent to quarter end, we completed the divestiture of FRD Acquisition
Co., or FRD, a wholly owned subsidiary. We have accounted for FRD as a
discontinued operation in the accompanying consolidated financial statements
(see Note 9).
With the closing of the FRD divestiture, Advantica Restaurant Group, Inc.
completed its transition from a restaurant holding company to a one-brand
entity. Accordingly, on July 10, 2002, we changed our name to Denny's
Corporation.
Our consolidated financial statements are unaudited and include all adjustments
we believe are necessary for a fair presentation of the results of operations
for such interim periods. Excluding restructuring charges and exit costs
recorded in the two quarters ended June 26, 2002, all such adjustments are of a
normal and recurring nature. These interim consolidated financial statements
should be read in conjunction with our consolidated financial statements and
notes thereto for the year ended December 26, 2001 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in our 2001 Annual Report on Form 10-K. The results of
operations for the two quarters ended June 26, 2002 are not necessarily
indicative of the results for the entire fiscal year ending December 25, 2002.
At June 26, 2002, we had a shareholders' deficit of approximately $327.9 million
and have incurred net losses in each of the last three fiscal years. Our
revolving credit facility matures on January 7, 2003. We expect to remain in
compliance with our loan covenants throughout fiscal year 2002. Our ability to
maintain continuity of operations will depend on a number of factors, including
our ability to negotiate a new credit facility. We are currently considering
alternatives for refinancing our revolving credit facility. We believe that we
will be able to negotiate a replacement credit facility on or prior to the
January 2003 maturity date; however, no assurance can be given that we will be
successful in negotiating a sufficient facility on commercially reasonable
terms.
The accompanying consolidated financial statements reflect the following changes
in classification:
As discussed further in Note 2, "Change in Accounting for Goodwill and
Other Intangible Assets," we reclassified net reorganization value in
excess of amounts allocable to identifiable assets, or reorganization
value, of $28.3 million to goodwill at December 26, 2001.
As discussed further in Note 8, "Implementation of New Accounting
Standards," we reclassified a $7.8 million extraordinary item recorded
during 2001 to other operating (income) expenses, net during the second
quarter of 2002.
Prior to fiscal year 2002, we allocated certain indirect general and
administrative expenses to costs of franchise and license revenue.
Beginning with the first quarter of 2002, we have ceased the allocation
of these indirect costs to the costs of franchise and license revenue
line. Prior year general and administrative expenses and costs of
franchise and license revenue have been reclassified to conform to the
current year presentation.
These changes in classification have no effect on previously reported total
assets, net income (loss) or income (loss) per share.
8
Note 2. Change in Accounting for Goodwill and Other Intangible Assets
-------------------------------------------------------------
We adopted Statement of Financial Accounting Standard No. 142, or SFAS 142,
"Goodwill and Other Intangible Assets," at the beginning of fiscal year 2002,
and as a result we are no longer amortizing reorganization value, goodwill and
trade names. Further, in accordance with SFAS 142, we have reclassified $28.3
million of reorganization value to goodwill. We also reclassified reorganization
value to goodwill on the consolidated balance sheet as of December 26, 2001 to
be comparable to the consolidated balance sheet as of June 26, 2002.
During the first quarter of 2002, we completed our testing of intangible assets
with definite lives and our assessment of impairment of goodwill and other
intangible assets with indefinite lives. We performed an impairment test and
determined that none of the recorded goodwill or other intangible assets with
indefinite lives was impaired. In accordance with SFAS 142, goodwill and other
intangible assets with indefinite lives will be tested for impairment at least
annually, and more frequently if circumstances indicate that it may be impaired.
We anticipate performing our annual impairment test during the fourth quarter of
each fiscal year.
The changes in carrying amounts of goodwill, including amounts previously
reported as reorganization value, for the two quarters ended June 26, 2002
following the adoption of SFAS 142 are as follows:
(In thousands)
Balance at December 26, 2001 $ 53,353
Reversal of income tax liabilities related
to reorganization (987)
-------
Balance at June 26, 2002 $ 52,366
=======
The following table reflects intangible assets as reported at December 26, 2001
and at June 26, 2002 following the adoption of SFAS 142:
December 26, 2001 June 26, 2002
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
(In thousands)
Intangible assets with indefinite lives:
Trade names $ 42,323 $ --- $ 42,323 $ ---
Liquor licenses 1,221 --- 1,221 ---
Intangible assets with definite lives:
Franchise agreements 80,049 23,828 78,400 26,304
Foreign license agreements 2,041 894 2,041 1,007
-------- ------- -------- -------
$ 125,634 $ 24,722 $ 123,985 $ 27,311
======== ======= ======== =======
Estimated amortization expense for intangible assets with definite lives in the
next five years is as follows:
(In thousands)
Remainder of 2002 $ 3,093
2003 6,148
2004 5,838
2005 5,672
2006 5,353
9
The following table reflects consolidated operating results as though we adopted
SFAS 142 as of the beginning of the two quarters ended June 27, 2001:
Quarter Two Quarters
Ended Ended
-------------------------- ---------------------------
June 26, June 27, June 26, June 27,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands)
Reported net income (loss) $ 16,212 $ (30,851) $ 11,528 $ (44,227)
Add back amortization of reorganization value --- 7,151 --- 14,725
Add back goodwill amortization --- 410 --- 861
Add back trade name amortization --- 293 --- 587
------- -------- ------- --------
Adjusted net income (loss) $ 16,212 $ (22,997) $ 11,528 $ (28,054)
======= ======== ======= ========
Reported basic and diluted income (loss) per share $ 0.40 $ (0.77) $ 0.29 $ (1.10)
Add back amortization of reorganization value --- 0.18 --- 0.37
Add back goodwill amortization --- 0.01 --- 0.02
Add back trade name amortization --- 0.01 --- 0.01
------- -------- ------- --------
Adjusted net income (loss) $ 0.40 $ (0.57) $ 0.29 $ (0.70)
======= ======== ======= ========
Note 3. Restructuring Charges and Exit Costs
------------------------------------
As a result of changes in our organizational structure, we have recorded charges
for restructuring and exit costs. These costs consist primarily of severance and
outplacement costs for terminated employees and the costs of future obligations
related to closed units or units identified for closure. In assessing the cost
of future obligations related to closed units or units identified for closure,
we make assumptions regarding the timing of units' closures, amounts of future
subleases, amounts of future property taxes and costs of closing the units. If
these estimates or their related assumptions change in the future, we may be
required to record additional exit costs or reduce exit costs previously
recorded.
Exit costs were comprised of the following:
Quarter Two Quarters
Ended Ended
-------------------------- ---------------------------
June 26, June 27, June 26, June 27,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands)
Future rents, net of estimated sublease income $ 2,513 $ 3,378 $ 2,485 $ 3,378
Property taxes 107 2,952 266 2,952
Brokerage commissions --- 942 --- 942
De-identification and maintenance costs 113 878 232 878
Severance and other costs 48 345 96 345
------ ------ ------ ------
$ 2,781 $ 8,495 $ 3,079 $ 8,495
====== ====== ====== ======
Exit costs recorded during the two quarters ended June 26, 2002 consist of
approximately $0.6 million related to the closure of underperforming units and
$2.5 million related to future lease obligations on our former corporate
headquarters facility due to the bankruptcy of our most significant tenant.
At June 26, 2002, discounted accrued exit costs totaled approximately $19.3
million. Cash payments for exit cost liabilities paid during the two quarters
ended June 26, 2002 were approximately $4.7 million. Estimated cash payments
related to exit cost liabilities in the next five years are as follows:
(in thousands)
Remainder of 2002 $ 4,154
2003 7,757
2004 5,362
2005 2,620
2006 2,274
10
During 2000 and 2001, we recorded severance and outplacement costs related to
restructuring plans of $13.6 million. Through June 26, 2002, $12.7 million of
these costs have been paid, of which $2.9 million was paid during the two
quarters ended June 26, 2002. The remaining $0.9 million is expected to be paid
out by the first quarter of 2003.
Note 4. Income Taxes
------------
On March 9, 2002, President Bush signed into law H.R. 3090, the Job Creation and
Worker Assistance Act of 2002, or the Act. The Act will allow us to carry back
alternative minimum tax, or AMT, net operating losses generated during 2001,
which will result in a cash refund of 1998 AMT taxes paid of approximately $2.7
million. During the two quarters ended June 26, 2002, we recorded a receivable
and a corresponding reduction of current income tax expense related to the
expected cash refund.
Note 5. Income (Loss) Per Share Applicable to Common Shareholders
---------------------------------------------------------
Quarter Two Quarters
Ended Ended
-------------------------- ---------------------------
June 26, June 27, June 26, June 27,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands)
Numerator for basic and diluted income (loss) per share ---
income (loss) from continuing operations available
to common shareholders $ 16,212 $(30,851) $ 11,528 $(44,227)
======= ======= ======= =======
Denominator:
Denominator for basic income (loss) per share --- weighted
average shares 40,276 40,143 40,255 40,130
------- ------- ------ -------
Effect of dilutive securities:
Options 202 --- 188 ---
------- ------- ------ -------
Denominator for diluted income (loss) per share ---
adjusted weighted average shares and assumed
conversions of dilutive securities 40,478 40,143 40,443 40,130
======= ======= ======= =======
Basic income (loss) per share from continuing operations $ 0.40 $ (0.77) $ 0.29 $ (1.10)
======= ======= ======= =======
Diluted income (loss) per share from continuing
operations $ 0.40 $ (0.77) $ 0.29 $ (1.10)
======= ======= ======= =======
The calculations of basic and diluted income (loss) per share have been based on
the weighted average number of shares outstanding. Warrants have been omitted
from the calculations for all periods presented because they have an
antidilutive effect on income (loss) per share. Options have been omitted from
the calculations for the quarter and two quarters ended June 27, 2001 because
they have an antidilutive effect on loss per share.
Note 6. Revolving Credit Facility
-------------------------
Denny's, Inc. is the borrower under a senior secured revolving credit facility,
or credit facility, with JP Morgan Chase Bank and other lenders which provides
Denny's with a working capital and letter of credit facility. Under the terms of
the credit facility, commitments were reduced from $200.0 million to $155.3
million as of July 10, 2002 upon receipt of cash payments related to Denny's
receivable and deposits securing outstanding letters of credit under the
Coco's/Carrows credit facility (see Note 9). The cash payments included the
collection of scheduled payments and the payment received in connection with
the divestiture of FRD on July 10, 2002 (see Note 9).
At June 26, 2002, we had working capital advances of $62.0 million and letters
of credit outstanding of $49.4 million under the credit facility. Advances
accrue interest at a variable rate (approximately 5.9% at June 26, 2002) based
on the prime rate or an adjusted Eurodollar rate. The credit facility matures on
January 7, 2003; therefore, we have classified the amounts due under the
facility as current liabilities on our consolidated balance sheet. As discussed
in Note 1, we are currently considering alternatives for refinancing our credit
facility. We believe that we will be able to negotiate a replacement facility on
or prior to the January 2003 maturity date; however, no assurance can be given
that we will be successful in negotiating a sufficient facility on commercially
reasonable terms.
11
We were in compliance with the terms of the credit facility at June 26, 2002.
Under the most restrictive provision of the credit facility (the interest
coverage ratio), EBITDA could have been approximately $17.2 million less for the
four quarters ended June 26, 2002 and we would still have been in compliance.
Note 7. Debt
----
On April 15, 2002, we exchanged $88.1 million aggregate principal amount of our
11 1/4% senior notes due 2008, or 11 1/4% Notes, for $70.4 million aggregate
principal amount of 12 3/4% senior notes due 2007, or 12 3/4% Notes. Denny's
Corporation and its wholly owned subsidiary, Denny's Holdings, Inc. (the direct
parent of Denny's restaurant operations), are jointly obligated with respect to
the 12 3/4% Notes; therefore, the 12 3/4% Notes are structurally senior to the
11 1/4% Notes. The 11 1/4% Notes pay interest on January 15 and July 15 of each
year and will expire on January 7, 2008. The 12 3/4% Notes pay interest on
March 31 and September 30 of each year and will expire on September 30, 2007. As
a result of our completing the exchange offer, we recorded a gain of $19.2
million in the second quarter of 2002 (which is included in other nonoperating
income in the accompanying consolidated financial statements). In addition,
costs of approximately $1.4 million incurred in connection with this exchange of
debt were deferred and will be amortized over the term of the 12 3/4% Notes.
Note 8. Implementation of New Accounting Standards
------------------------------------------
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 27, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 has had no impact on our
financial statements.
Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which became effective for us on December 27, 2001, the first day of
our 2002 fiscal year. SFAS 142 requires us, among other things, to discontinue
goodwill amortization, including the amortization of reorganization value. In
addition, the standard provides for reclassifying certain intangibles as
goodwill, reassessing the useful lives of intangibles, reclassifying certain
intangibles out of previously reported goodwill and identifying reporting units
for purposes of assessing potential future impairments of goodwill. See Note 2
for a discussion of the effects of adopting this new accounting standard.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, or SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," related to the disposal of a segment of a business. SFAS 144
became effective for us on December 27, 2001, the first day of our 2002 fiscal
year. Our adoption of the statement had no impact on our financial position or
results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, or SFAS 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statements No. 13, and Technical Corrections." Among other things, SFAS 145
eliminates FASB Statement No. 4, or SFAS 4, "Reporting Gains and Losses from
Extinguishment of Debt." Under SFAS 4, all gains and losses from extinguishment
of debt were required to be aggregated and, if material, classified as an
extraordinary item, net of any related income tax effect. As a result of the
elimination of SFAS 4, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The provisions of SFAS 145 related to the
rescission of SFAS 4 are effective for fiscal years beginning after May 15,
2002. We have early adopted SFAS 145 in the second quarter of 2002. See Note 1
for a discussion of the effects of adopting this new accounting standard.
12
Note 9. Discontinued Operations
-----------------------
FRD Bankruptcy and Divestiture
On January 16, 2001, FRD elected not to make the scheduled interest payment (and
all subsequent interest payments) due on the $156.9 million aggregate principal
amount of its 12.5% senior notes due 2004. On February 14, 2001, to facilitate
the divestiture of its Coco's and Carrows brands and to preserve their going
concern value, FRD filed for protection under Chapter 11 of the United States
Bankruptcy Code.
On February 19, 2002, Advantica and Denny's, along with FRD, Coco's and Carrows,
entered into a stipulation and agreement of settlement, or settlement agreement,
with the official committee of unsecured creditors of FRD seeking to resolve
various disputes relating to the administration of FRD's bankruptcy
case. The bankruptcy court approved the settlement agreement on March 8, 2002
and confirmed a plan of reorganization on June 20, 2002. On July 10, 2002,
through FRD's bankruptcy proceedings, the divestiture of FRD was completed. As
part of the transaction, Denny's received a payment of approximately $32.5
million in connection with FRD's senior secured credit facility where Denny's
was lender. Such payment represented all outstanding obligations under the
facility less a $10 million discount. This was the maximum amount payable to
Denny's under the plan of reorganization and settlement agreement (see
Coco's /Carrows Credit Facility below). FRD's Letters of Credit under the prior
credit facility remain outstanding. The letters of credit secure certain
obligations of FRD and its subsidiaries under various insurance programs which
are anticipated to be satisfied in the ordinary course of business. Denny's has
agreed to continue to provide the cash collateral supporting these letters of
credit (currently $5.7 million) for a fee until the letters of credit terminate
or are replaced. Denny's also received a separate four-year note payable from
reorganized FRD for continuing to provide the cash collateral. Denny's will
continue to provide various management and support services to FRD over an
initial term of up to one year under a services agreement that provides for a
fee of up to approximately $6.3 million. FRD has the option, with notice, to
reduce or terminate the services provided by Denny's during this initial term.
As a result of the divestiture of FRD, we will record a gain on the disposal of
discontinued operations in the third quarter of 2002 estimated to be
approximately $56.0 million, representing the receipt of proceeds of
approximately $32.5 million, and the elimination of the net liabilities of
discontinued operations of approximately $23.5 million at July 10, 2002.
As required by our credit facility, the proceeds received from the divestiture
of FRD were used to reduce the balance outstanding under the credit facility by
approximately $32.5 million. Based on current borrowing rates of approximately
5.9%, such reduction of outstanding borrowings under the credit facility would
result in proforma annual interest savings of approximately $1.9 million.
Our statements of consolidated operations and cash flows for all periods
presented herein reflect FRD as discontinued operations. Revenue, operating
income (loss) and net loss of the discontinued operations for the reported
periods are as follows:
Quarter Two Quarters
Ended Ended
-------------------------- ---------------------------
June 26, June 27, June 26, June 27,
2002 2001 2002 2001
-------- -------- -------- --------
(In millions)
Revenue $ 83.6 $ 87.9 $ 167.0 $ 177.3
Operating income (loss) 1.1 (1.2) 0.9 (2.0)
Net loss (1.2) (3.2) (3.9) (9.2)
FRD's net losses of $3.9 million, $22.4 million and $89.5 million for the two
quarters ended June 26, 2002, the fiscal year ended December 26, 2001 and the
two quarters ended December 27, 2000, respectively, which were incurred
subsequent to the
13
measurement date, are deferred and included as a component of
net liabilities of discontinued operations (included in other assets of
discontinued operations in the table below) in our consolidated balance sheets,
and accordingly, will be a component of the gain on disposal of discontinued
operations to be recorded in the third quarter of 2002.
As a result of its Chapter 11 bankruptcy filing, FRD's financial position at
June 26, 2002 and December 26, 2001 has been presented in conformity with SOP
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," and accordingly, all prepetition liabilities of FRD that are subject to
compromise through this bankruptcy proceeding are segregated as liabilities
subject to compromise. Our presentation of FRD's financial position does not
purport to show (a) the realizable value of its assets on a liquidation basis or
their availability to satisfy liabilities, (b) the amounts of its prepetition
liabilities that may be allowed for claims or contingencies, or (c) the effect
of any change in capitalization on its shareholder accounts. The financial
position of FRD is reported as net liabilities of discontinued operations in our
consolidated balance sheets and consists of the assets and liabilities reported
below.
June 26, December 26,
2002 2001
-------- ------------
(In thousands)
Assets
Current assets $ 22,793 $ 27,273
Property owned, net 65,838 69,470
Other assets, including deferred losses from operations 133,654 129,213
-------- -------
222,285 225,956
-------- -------
Less liabilities
Current liabilities
Current portion of obligations under capital lease 2,165 2,523
Coco's/Carrows Credit Facility payable to Denny's (see below) 46,206 51,692
Other current liabilities 38,319 37,434
-------- -------
86,690 91,649
-------- -------
Long-term liabilities
Obligations under capital lease, noncurrent 4,030 4,680
Other long-term liabilities 20,794 20,100
-------- -------
24,824 24,780
-------- -------
Total liabilities not subject to compromise 111,514 116,429
Liabilities subject to compromise 176,334 176,334
-------- -------
Total liabilities 287,848 292,763
-------- -------
Net liabilities of FRD 65,563 66,807
Denny's receivable related to Coco's/Carrows Credit Facility (see below) 46,206 51,692
-------- -------
Net liabilities of discontinued operations $ 19,357 $ 15,115
======== =======
Coco's/Carrows Credit Facility
At June 26, 2002, FRD's principal operating subsidiaries, Coco's and Carrows,
had a senior secured credit facility, with Denny's as the senior secured lender.
At June 26, 2002, FRD's operating subsidiaries had $20.7 million of outstanding
term loan borrowings, working capital borrowings of $24.7 million and letters of
credit outstanding of $5.6 million. At the time it became the senior secured
lender in January 2001, Denny's, Inc. deposited cash collateral with one of
Coco's and Carrows' former lenders to secure the Coco's/Carrows credit
facility's outstanding letters of credit. At June 26, 2002, the balance of such
deposit was $5.7 million, which is reflected in other current assets in our
consolidated balance sheets. Denny's receivable of $46.2 million, including
14
accrued interest of $0.8 million at June 26, 2002, relates to borrowings under
the Coco's/Carrows credit facility. This receivable eliminates in consolidation,
thereby reducing the net liabilities of discontinued operations on our
consolidated balance sheet at June 26, 2002. As a result of FRD's bankruptcy and
divestiture, the balances of the Coco's/Carrows Credit Facility have been
satisfied as discussed above in FRD Bankruptcy and Divestiture.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in our
financial position as of June 26, 2002 and results of operations for the quarter
and two quarters ended June 26, 2002 compared to the quarter and two quarters
ended June 27, 2001. The forward-looking statements included in Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
reflect our best judgment based on factors currently known, involve risks,
uncertainties, and other factors which may cause our actual performance to be
materially different from the performance indicated or implied by such
statements. Such factors include, among others: our ability to maintain
continuity of operations and negotiate a replacement credit facility prior to
its January 2003 maturity date; competitive pressures from within the restaurant
industry; the level of success of our operating initiatives and advertising and
promotional efforts, including the initiatives and efforts specifically
mentioned herein; adverse publicity; changes in business strategy or development
plans; terms and availability of capital; regional weather conditions; overall
changes in the general economy, particularly at the retail level; and other
factors included in the discussion below, or in Management's Discussion and
Analysis of Financial Condition and Result of Operations contained in our Annual
Report on Form 10-K for the year ended December 26, 2001 and in Exhibit 99
thereto.
Restaurant Operations and Unit Activity
- ---------------------------------------
Quarter Ended Two Quarters Ended
------------------------------------ --------------------------------------
June 26, June 27, Increase/ June 26, June 27, Increase/
2002 2001 (Decrease) 2002 2001 (Decrease)
-------- -------- ---------- -------- -------- ----------
(Dollars in thousands)
Total systemwide sales (a) $ 562,846 $ 578,255 (2.7%) $ 1,104,668 $ 1,130,852 (2.3%)
EBITDA as defined (b) 40,301 35,898 12.3% 73,461 65,141 12.8%
Average unit sales:
Company-owned 368.9 353.4 4.4% 717.2 684.8 4.7%
Franchise 305.5 298.0 2.5% 597.2 583.9 2.3%
Company-owned data:
Same-store sales (decrease) increase (c)(d) (0.4%) 2.0% (0.3%) 2.1%
Guest check average increase (d) 2.1% 1.4% 1.7% 2.6%
(a) Total systemwide sales includes sales from company-owned, franchised
and licensed restaurants and is not a measure which has been determined
in accordance with accounting principles generally accepted in the
United States of America.
(b) We define "EBITDA" as operating income (loss) before depreciation,
amortization and impairment, restructuring and exit costs as follows:
Quarter Two Quarters
Ended Ended
-------------------------- ---------------------------
June 26, June 27, June 26, June 27,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands)
Operating income (loss) $ 16,163 $(12,287) $ 28,327 $(14,455)
Total amortization and depreciation 20,860 31,347 41,558 62,758
Total impairment, restructuring and exit costs 3,278 16,838 3,576 16,838
------ ------- ------- -------
$ 40,301 $ 35,898 $ 73,461 $ 65,141
======= ======= ======= =======
15
We believe that EBITDA as defined is a key internal measure used to
evaluate the amount of cash flow available for debt repayment and
funding of additional investments. EBITDA as defined is not a measure
defined by accounting principles generally accepted in the United
States of America and should not be considered as an alternative to net
income or cash flow data prepared in accordance with accounting
principles generally accepted in the United States of America. Our
measure of EBITDA as defined may not be comparable to similarly titled
measures reported by other companies.
(c) Same-store sales includes sales from restaurants that were open the
same days in both the current year and prior year.
(d) Prior year amounts have not been restated for 2001 comparable units.
The table below summarizes Denny's restaurant unit activity for the quarter
ended June 26, 2002.
Ending Units Units Ending Ending
Units Opened/ Units Sold/ Units Units
March 27, 2002 Acquired Refranchised Closed June 26, 2002 June 27, 2001
--------------- -------- ------------ ------ ------------- -------------
Company-owned 602 1 (10) (5) 588 663
Franchised units 1,108 12 10 (18) 1,112 1,114
Licensed units 14 --- --- --- 14 14
------ ---- ---- ---- ------ ------
1,724 13 --- (23) 1,714 1,791
====== ==== ==== ==== ====== ======
Results of Operations
- ---------------------
Quarter Ended June 26, 2002 Compared to Quarter Ended June 27, 2001
- -------------------------------------------------------------------
Company Operations
Company restaurant sales are the revenues generated from restaurants operated by
Denny's. Denny's company restaurants recorded a 0.4% decline in same-store sales
for the current year quarter. Company restaurant sales decreased $24.7 million
(10.2%) primarily due to a net 75-unit decrease in company-owned restaurants.
The decrease in company-owned restaurants resulted from store closures and the
sale of restaurants to franchisees.
Total costs of company restaurant sales decreased $28.4 million (13.6%), driven
by the decrease in the number of company-owned restaurants. As a percentage of
company restaurant sales, total costs of company restaurant sales decreased to
83.0% from 86.2% as a result of the closure of certain underperforming units as
well as other operating cost reductions. Specifically, product costs decreased
to 23.7% from 25.0% resulting from lower commodity costs and improved food waste
controls. Payroll and benefits remained consistent for the period at 40.5%.
Occupancy costs decreased to 5.6% from 6.2% of company restaurant sales as a
result of the closure of underperforming units. Other operating expenses
decreased to 13.1% from 14.6% primarily as a result of lower utility costs,
lower repairs and maintenance expenses and lower legal settlement costs,
including a $1.0 million reduction in estimated legal settlement liabilities
resulting from the favorable settlement of certain cases.
Operating margins for company-owned restaurants were $37.1 million (17.0% of
company restaurant sales) for the quarter ended June 26, 2002 compared with
$33.3 million (13.8% of company restaurant sales) for the quarter ended June 27,
2001.
Franchise Operations
Franchise and license revenues are the revenues received by Denny's from its
franchisees and include royalties, initial franchise fees and occupancy revenue
related to restaurants leased or subleased to franchisees.
Franchise and license revenue was $22.9 million for the quarter ended June 26,
2002, comprised of royalties and initial franchise fees of $14.5 million and
occupancy revenue of $8.4 million, compared with $22.3 million for the quarter
ended June 27, 2001, comprised of royalties and fees of $13.8 million and
occupancy revenue of $8.5 million. The revenue increase of $0.6 million (2.8%)
resulted primarily from an increase in average unit sales of franchise
restaurants.
16
Costs of franchise and license revenue include occupancy costs related to
restaurants leased or subleased to franchisees and direct costs consisting
primarily of payroll and benefit costs of franchise operations personnel, bad
debt expense and marketing expenses, net of marketing contributions received
from franchisees.
Costs of franchise and license revenue were $7.4 million for the quarter ended
June 26, 2002, comprised of occupancy costs of $5.7 million and other direct
expenses of $1.7 million, compared with $8.9 million for the quarter ended June
27, 2001, comprised of occupancy costs of $5.0 million and other direct expenses
of $3.9 million. Costs of franchise and license revenue decreased $1.5 million
(17.1%), driven by a $1.6 million decrease in net marketing expense and a $0.5
million decrease in bad debt expense, partially offset by a $0.7
million increase in rent expense. As a percentage of franchise and license
revenues, these costs decreased to 32.2% for the quarter ended June 26, 2002
from 40.0% for the quarter ended June 27, 2001, resulting primarily from the
decrease in net marketing expense and bad debt expense, partially offset by an
increase in rent expense.
Franchise operating margins were $15.5 million (67.8% of franchise and license
revenue) for the quarter ended June 26, 2002 compared with $13.4 million (60.0%
of franchise and license revenue) for the quarter ended June 27, 2001.
Other Operating Costs and Expenses
Other operating costs and expenses such as general and administrative expenses
and depreciation and amortization expense relate to both company and franchise
operations.
General and administrative expenses decreased $2.7 million (15.9%) compared with
the prior year quarter. The decrease resulted from reductions in corporate
overhead costs related to recent workforce reductions. Depreciation and other
amortization decreased $10.5 million primarily as a result of fewer
company-owned units and due to the implementation of SFAS 142 relating to the
amortization of excess reorganization value. See Notes 2 and 8 to our
consolidated financial statements.
Lower refranchising activity in 2002 resulted in a $4.1 million decrease in
gains on refranchising and other, net.
Exit costs of $2.8 million recorded in 2002 primarily represent additional
provisions for future rent obligations on our former corporate headquarters
facility due to the bankruptcy of our most significant tenant. For additional
information concerning restructuring charges and exit costs, see Note 3 to our
consolidated financial statements.
Operating income was $16.2 million for the quarter ended June 26, 2002 compared
with a loss of $12.3 million for the quarter ended June 27, 2001.
Interest expense, net, for the quarter ended June 26, 2002 was comprised of
$20.1 million interest expense offset by $1.2 million interest income compared
with $19.7 million interest expense offset by $1.7 million interest income for
the quarter ended June 27, 2001. The decrease in interest income resulted from
lower cash balances and a reduction in the balance of the Coco's and Carrows
credit facility.
Other nonoperating income for the quarter ended June 26, 2002 primarily
represents a gain on the exchange of debt of $19.2 million. For further
information regarding our debt exchange, see Note 7 to our consolidated
financial statements.
The provision for income taxes from continuing operations has been computed
based on management's estimate of the annual effective income tax rate applied
to income (loss) before income taxes. We recorded an income tax provision
reflecting an approximate rate of 1.8% for the quarter ended June 26, 2002
compared with an income tax provision reflecting an approximate rate of 1.8%
for the quarter ended June 27, 2001.
The consolidated statements of operations and cash flows presented herein
reflect FRD as discontinued operations for the quarters ended June 26, 2002 and
June 27, 2001. Revenue and operating income (loss) of discontinued operations
for the two quarters ended June 26, 2002 and June 27, 2001 were $83.6 million
and $1.1 million and $87.9 million and ($1.2 million),
17
respectively. FRD's net losses of $1.2 million and $3.2 million for the quarters
ended June 26, 2002 and June 27, 2001, respectively, which were incurred
subsequent to the measurement date, are deferred and included as a component of
net liabilities of discontinued operations.
Net income was $16.2 million for the quarter ended June 26, 2002 compared with a
net loss of $30.9 million for the quarter ended June 27, 2001 due to the factors
noted above.
Results of Operations
- ---------------------
Two Quarters Ended June 26, 2002 Compared to Two Quarters Ended June 27, 2001
- -----------------------------------------------------------------------------
Company Operations
Company restaurant sales are the revenues generated from restaurants operated by
Denny's. Denny's company restaurants recorded a 0.3% decline in same-store sales
for the two quarters ended June 26, 2002. Company restaurant sales decreased
$49.2 million (10.3%) primarily due to a net 75-unit decrease in company-owned
restaurants. The decrease in company-owned restaurants resulted from store
closures and the sale of restaurants to franchisees.
Total costs of company restaurant sales decreased $54.5 million (13.1%), driven
by the decrease in the number of company-owned restaurants. As a percentage of
company restaurant sales, total costs of company restaurant sales decreased to
84.3% from 87.0% as a result of the closure of certain underperforming units as
well as other operating cost reductions. Specifically, product costs decreased
to 24.0% from 25.1% resulting from lower commodity costs and improved food waste
controls. Payroll and benefits increased to 41.1% from 40.7% due to increased
staffing levels and wage rate increases. Occupancy costs decreased to 5.7% from
6.3% as a result of the closure of underperforming units. Other operating
expenses decreased to 13.5% from 14.9% primarily as a result of lower utility
costs, lower repairs and maintenance expenses and lower legal settlement costs,
including a $1.0 million reduction in estimated legal settlement liabilities
resulting from the settlement of certain cases.
Operating margins for company-owned restaurants were $67.6 million (15.7% of
company restaurant sales) for the two quarters ended June 26, 2002 compared with
$62.4 million (13.0% of company restaurant sales) for the two quarters ended
June 27, 2001.
Franchise Operations
Franchise and license revenues are the revenues received by Denny's from its
franchisees and include royalties, initial franchise fees and occupancy revenue
related to restaurants leased or subleased to franchisees.
Franchise and license revenue was $45.1 million for the two quarters ended June
26, 2002, comprised of royalties and initial franchise fees of $28.0 million and
occupancy revenue of $17.1 million, compared with $43.8 million for the two
quarters ended June 27, 2001, comprised of royalties and fees of $27.1 million
and occupancy revenue of $16.7 million. The revenue increase of $1.3 million
(2.9%) resulted primarily from an increase in average unit sales of franchise
restaurants.
Costs of franchise and license revenue include occupancy costs related to
restaurants leased or subleased to franchisees and direct costs consisting
primarily of payroll and benefit costs of franchise operations personnel, bad
debt expense and marketing expenses, net of marketing contributions received
from franchisees.
Costs of franchise and license revenue were $14.6 million for 2002, comprised of
occupancy costs of $11.2 million and other direct expenses of $3.4 million for
the two quarters ended June 26, 2002, compared with $17.1 million for the two
quarters ended June 27, 2001, comprised of occupancy costs of $10.0 million and
other direct expenses of $7.1 million. Costs of franchise and license revenue
decreased $2.5 million (14.3%), driven by a $3.3 million decrease in net
marketing expense and a $0.5 million decrease in bad debt expense. As a
percentage of franchise and license revenues, these costs decreased to 32.4% in
18
the two quarters ended June 26, 2002 from 38.9% in the two quarters ended June
27, 2001, resulting primarily from the decrease in net marketing expense and bad
debt expenses, partially offset by an increase in rent expense.
Our franchise operating margins were $30.5 million (67.6% of franchise and
license revenue) for the two quarters ended June 26, 2002 compared with $26.8
million (61.1% of franchise and license revenue) for the two quarters ended June
27, 2001.
Other Operating Costs and Expenses
Other operating costs and expenses such as general and administrative expenses
and depreciation and amortization expense relate to both company and franchise
operations.
General and administrative expenses decreased $6.1 million (17.7%) compared
with the two quarters ended June 27, 2001. The two quarters ended June 27, 2001
included approximately $1.6 million of nonrecurring senior management recruiting
expenses. The remaining decrease resulted from organizational changes
implemented during 2001. Depreciation and other amortization decreased $21.2
million primarily as a result of fewer company-owned units and due to the
implementation of SFAS 142 relating to the amortization of excess reorganization
value. See Notes 2 and 8 to our consolidated financial statements.
Lower refranchising activity in 2002 resulted in a $6.7 million decrease in
gains on refranchising and other, net.
Exit costs of $3.1 million recorded in 2002 primarily represent additional
provisions for future rent obligations on our former corporate headquarters
facility due to the bankruptcy of our most significant tenant. For additional
information concerning restructuring charges and exit costs, see Note 3 to our
consolidated financial statements.
Operating income was $28.3 million for the two quarters ended June 26, 2002
compared with a loss of $14.5 million for the two quarters ended June 27, 2001.
Interest expense, net, for the two quarters ended June 26, 2002 was comprised of
$40.6 million interest expense offset by $2.4 million interest income compared
with $40.0 million interest expense offset by $3.5 million interest income for
the two quarters ended June 27, 2001. The decrease in interest income resulted
from lower cash balances and a reduction in the balance of the Coco's and
Carrows credit facility.
The (benefit from) provision for income taxes from continuing operations has
been computed based on management's estimate of the annual effective income tax
rate applied to income (loss) before income taxes. We recorded an income tax
benefit reflecting an approximate rate of 22.8% for the two quarters ended
June 26, 2002 compared with an income tax provision reflecting an approximate
rate of 2.5% for the two quarters ended June 27, 2001. The change in income
taxes for the period resulted from a $2.7 million benefit recorded in the two
quarters ended June 26, 2002 related to the enactment of H.R. 3090, the Job
Creation and Worker Assistance Act of 2002. See Note 4 to our consolidated
financial statements.
The consolidated statements of operations and cash flows presented herein
reflect FRD as discontinued operations. Revenue and operating income (loss) of
discontinued operations for the two quarters ended June 26, 2002 and June 27,
2001 were $167.0 million and $0.9 million and $177.3 million and ($2.0 million),
respectively. FRD's net losses of $3.9 million and $9.2 million for the two
quarters ended June 26, 2002 and June 27, 2001, respectively, which were
incurred subsequent to the measurement date, are deferred and included as a
component of net liabilities of discontinued operations.
Other nonoperating income for the two quarters ended June 26, 2002 primarily
represents a gain on the exchange of debt of $19.2 million. For further
information regarding our debt exchange, see Note 7 to the consolidated
financial statements. During the first quarter of 2001, as a result of the
settlement of the remaining issues related to our former information systems
outsourcing contract with IBM, approximately $7.8 million of capital lease
obligations were forgiven and a gain was recorded as a component of other
nonoperating income.
19
Net income was $11.5 million for the two quarters ended June 26, 2002 compared
with a net loss of $44.2 million for the two quarters ended June 27, 2001 due to
the factors noted above.
Liquidity and Capital Resources
- -------------------------------
Revolving Credit Facility
At June 26, 2002, we had working capital advances of $62.0 million and letters
of credit outstanding of $49.4 million under the credit facility. Advances under
the credit facility accrue interest at a variable rate (approximately 5.9% at
June 26, 2002) based on the prime rate or an adjusted Eurodollar rate. The
credit facility matures on January 7, 2003; therefore, we have classified the
amounts due under the facility as current liabilities on our consolidated
balance sheet. We are currently considering alternatives for refinancing our
credit facility. We believe that we will be able to negotiate a replacement
credit facility on or prior to the January 2003 maturity date; however, no
assurance can be given that we will be successful in negotiating a sufficient
facility on commercially reasonable terms.
We were in compliance with the terms of the credit facility at June 26, 2002.
Under the most restrictive provision of the credit facility (the interest
coverage ratio), EBITDA could have been approximately $17.2 million less for
the four quarters ended June 26, 2002, and we would still have been in
compliance.
Cash Requirements
Our principal capital requirements have been largely associated with remodeling
and maintaining our existing restaurants and facilities. For the quarter ended
June 26, 2002, our capital expenditures were $14.5 million. Of that amount,
approximately $0.7 million was financed through capital leases. Capital
expenditures during 2002 are expected to total $35 million to $45 million;
however, we are not committed to spending this amount and could spend less if
circumstances require.
Historically, we have met our liquidity requirements with internally generated
funds, external borrowings and in recent years, proceeds from asset sales. Our
ability to meet liquidity requirements, debt service obligations and to maintain
continuity of operations will depend on a number of factors, including our
ability to refinance our current credit facility by its January 7, 2003 maturity
date and our ability to meet targeted levels of operating cash flow. We are
currently considering alternatives for refinancing our credit facility. We
believe that we will be able to negotiate a replacement credit facility by the
January 2003 maturity date; however, no assurance can be given that we will be
successful in negotiating a sufficient facility on commercially reasonable
terms. Additionally, there can be no assurance that targeted levels of operating
cash flow will actually be achieved. Our ability to achieve operating cash flow
targets will depend upon consumer tastes, the success of marketing initiatives
and other efforts to increase customer traffic in our restaurants, prevailing
economic conditions and other matters, some of which are beyond our control. We
believe that, together with funds available under the credit facility (or
replacement facility), we will have sufficient cash flow from operations to
meet working capital requirements, to pay interest and scheduled amortization
on all of our outstanding indebtedness and to fund anticipated capital
expenditures through 2002.
At June 26, 2002, our working capital deficit, excluding net liabilities of
discontinued operations, was $184.5 million compared with $147.5 million at
December 26, 2001. The increase in the working capital deficit at June 26, 2002
is primarily related to the reclassification of our borrowings under the
credit facility to current liabilities. Excluding the reclassification of the
credit facility borrowings, our working capital deficit decreased to $122.5
million, resulting primarily from the use of cash on hand and borrowings under
the credit facility to satisfy current liabilities and the reduction of
company-owned units from refranchising activity and store closures. We are able
to operate with a substantial working capital deficit because (1)restaurant
operations and most food service operations are conducted primarily on a cash
(and cash equivalent) basis with a low level of accounts receivable, (2) rapid
turnover allows a limited investment in inventories, and (3) accounts payable
for food, beverages and supplies usually become due after the receipt of cash
from the related sales.
20
Implementation of New Accounting Standards
- ------------------------------------------
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 27, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 has had no impact on our
financial statements.
Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which became effective for us on December 27, 2001, the first day of
our 2002 fiscal year. SFAS 142 requires us, among other things, to discontinue
goodwill amortization, including the amortization of reorganization value. In
addition, the standard provides for reclassifying certain intangibles as
goodwill, reassessing the useful lives of intangibles, reclassifying certain
intangibles out of previously reported goodwill and identifying reporting units
for purposes of assessing potential future impairments of goodwill. See Note 2
to our consolidated financial statements for a discussion of the effects of
adopting this new accounting standard.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, or SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," related to the disposal of a segment of a business. SFAS 144
became effective for us on December 27, 2001, the first day of our 2002 fiscal
year. Our adoption of the statement had no impact on our financial position or
results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, or SFAS 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statements No. 13, and Technical Corrections." Among other things, SFAS 145
eliminates FASB Statement No. 4, or SFAS 4, "Reporting Gains and Losses from
Extinguishment of Debt". Under SFAS 4, all gains and losses from extinguishment
of debt were required to be aggregated and, if material, classified as an
extraordinary item, net of any related income tax effect. As a result of the
elimination of SFAS 4, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The provisions of SFAS 145 related to the
rescission of SFAS 4 are effective for fiscal years beginning after May 15,
2002. We have early adopted SFAS 145 in the second quarter of 2002. See Note 1
to our consolidated financial statements for a discussion of the effects of
adopting this new accounting standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk related to certain instruments entered
into for other than trading purposes. Specifically, borrowings under the
credit facility bear interest at a variable rate based on the prime rate or an
adjusted Eurodollar rate. A 100 basis point change in the credit facility
interest rate (approximately 5.9% at June 26, 2002) would cause the interest
expense for the remainder of 2002 to change by approximately $0.3 million. This
computation is determined by considering the impact of hypothetical interest
rates on our variable long-term debt at June 26, 2002. However, the nature and
amount of our borrowings under the credit facility may vary as a result of
future business requirements, market conditions and other factors.
Our other outstanding long-term debt bears fixed rates of interest. The
estimated fair value of our fixed rate long-term debt (excluding capital leases)
was approximately $438 million at June 26, 2002. This computation is based on
market quotations for the same or similar debt issues or the estimated borrowing
rates available to us. The difference in the estimated fair value of long-term
debt compared to its historical cost reported in our consolidated balance sheets
at June 26, 2002 relates primarily to market quotations for our 11 1/4% Notes.
21
We have established a policy to identify, control and manage market risks which
may arise from changes in interest rates, foreign currency exchange rates,
commodity prices and other relevant rates and prices. We do not use derivative
instruments for trading purposes, and no interest rate or other financial
derivatives were in place at June 26, 2002.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 20, 2002, the United States Bankruptcy Court for the District of
Delaware approved and confirmed the First Amended Plan of Reorganization (the
"Plan") filed in FRD's bankruptcy case. The terms of the Plan are
consistent with the terms of the stipulation and settlement agreement (the
"Stipulation and Settlement Agreement") entered into on February 19, 2002 (and
approved by the Bankruptcy Court on March 8, 2002) by and among FRD, the
Official Committee of Unsecured Creditors of FRD, Advantica, Denny's, FRI-M
Corporation, Coco's and Carrows, as previously reported in the Company's Form
10-Q for the first quarter of 2002. See Note 9 to our consolidated financial
statements for additional information.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
On January 16, 2001, FRD elected not to make the interest payment (and all
subsequent interest payments) due and payable with respect to its 12.5%
Senior Notes due 2004 (the "FRD Senior Notes"). As a result of this nonpayment,
and as a result of FRD's Chapter 11 filing on February 14, 2001, FRD is in
default under the indenture governing the FRD Senior Notes. Therefore, the FRD
Senior Notes are included in liabilities subject to compromise in net
liabilities of discontinued operations on the accompanying consolidated balance
sheets. FRD's bankruptcy filing operated as an automatic stay of all collection
and enforcement actions by the holders of the FRD Senior Notes with respect to
FRD's failure to make the interest payments when due. For additional information
regarding discontinued operations and confirmation of FRD's Plan, see Note 9 to
our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Advantica Restaurant Group, Inc., or
Advantica, was held on Wednesday, May 22, 2002, at which the following matters
were voted on by the stockholders of Advantica:
(i) Election of Directors
--------------------
Votes Against
Name Votes For or Withheld
---- --------- -------------
Vera K. Farris 37,751,856 1,496,332
Nelson J. Marchioli 37,766,731 1,481,457
Robert E. Marks 37,752,756 1,495,432
Lloyd I. Miller, III 37,751,856 1,496,332
Charles F. Moran 37,748,756 1,499,432
Elizabeth A. Sanders 37,751,182 1,497,006
Donald R. Shepherd 37,721,738 1,526,450
(ii) Ratification of the Selection of Auditors for the 2002 fiscal year
------------------------------------------------------------------
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
37,993,291 30,790 1,224,107
22
(iii) Approval of 2002 Incentive program for the Company's Employees
--------------------------------------------------------------
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
36,479,403 2,749,851 18,934
(iv) Approval of Denny's, Inc. Omnibus Incentive Compensation Plan
-------------------------------------------------------------
Votes For Votes Against Votes Abstaining
---------- ------------- ----------------
36,519,753 2,702,496 25,939
Item 6. Exhibits and Reports on Form 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
- ------- -----------
2.1 First amended Plan of Reorganization of FRD Acquisition, Co., confirmed
by order of the United States Bankruptcy Court for the District of
Delaware on June 20, 2002 (incorporated by reference to Exhibit 2.2 to
Advantica's Form 8-K dated July 10, 2002).
4.1 Indenture relating to the 12 3/4% senior notes due 2007 (including the
form of security) dated as of April 15, 2002, between Advantica and
Denny's Holdings, Inc., as issuers, and U.S. Bank National Association,
as trustee (incorporated by reference to Exhibit 4.1 to Advantica's
Quarterly Report on Form 10-Q for the quarter ended March 27, 2002).
99.1 Statement of Nelson J. Marchioli, President and Chief Executive Officer
of Denny's Corporation, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Statement of Andrew F. Green, Senior Vice President and Chief Financial
Officer of Denny's Corporation, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
23
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.
DENNY'S CORPORATION
Date: August 12, 2002 By: /s/ Rhonda J. Parish
------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: August 12, 2002 By: /s/ Andrew F. Green
------------------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer