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
September 25, 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)
- --------------------------------------------------------------------------------
(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 November 1, 2002, 40,290,160 shares of the registrant's Common Stock, par
value $0.01 per share, were outstanding.
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
September 25, 2002 September 26, 2001
------------------ ------------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 223,499 $ 245,870
Franchise and license revenue 23,355 24,202
-------- --------
Total operating revenue 246,854 270,072
-------- --------
Costs of company restaurant sales:
Product costs 52,573 60,504
Payroll and benefits 92,937 96,266
Occupancy 12,398 13,246
Other operating expenses 33,083 36,248
-------- --------
Total costs of company restaurant sales 190,991 206,264
Costs of franchise and license revenue 7,349 7,396
General and administrative expenses 10,804 15,327
Amortization of goodwill and other intangible assets with
indefinite lives --- 7,770
Depreciation and other amortization 20,734 21,448
Impairment charges 465 ---
Gains on refranchising and other, net (2,372) (1,827)
-------- --------
Total operating costs and expenses 227,971 256,378
-------- --------
Operating income 18,883 13,694
-------- --------
Other expenses:
Interest expense, net 18,980 18,261
Other nonoperating expense, net 28 1
-------- --------
Total other expenses, net 19,008 18,262
-------- --------
Loss before income taxes (125) (4,568)
Provision for income taxes 303 212
-------- --------
Loss from continuing operations (428) (4,780)
Gain on disposal of discontinued operations 56,562 ---
-------- --------
Net income (loss) applicable to common shareholders $ 56,134 $ (4,780)
======== ========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations $ (0.01) $ (0.12)
Gain on disposal of discontinued operations 1.40 ---
-------- --------
Net income (loss) $ 1.39 $ ( 0.12)
======== ========
Weighted average shares outstanding:
Basic 40,280 40,143
======== ========
Diluted 40,280 40,143
======== ========
See accompanying notes
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 25, 2002 September 26, 2001
------------------ ------------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 653,185 $ 724,779
Franchise and license revenue 68,470 68,036
-------- --------
Total operating revenue 721,655 792,815
-------- --------
Cost of company restaurant sales:
Product costs 155,798 180,611
Payroll and benefits 269,341 291,360
Occupancy 36,967 43,294
Other operating expenses 90,973 107,548
-------- --------
Total costs of company restaurant sales 553,079 622,813
Costs of franchise and license revenue 21,970 24,455
General and administrative expenses 39,015 49,617
Amortization of goodwill and other intangible assets with
indefinite lives --- 23,943
Depreciation and other amortization 62,292 68,033
Restructuring charges and exit costs 3,079 8,495
Impairment charges 962 8,343
Gains on refranchising and other, net (5,952) (12,123)
-------- --------
Total operating costs and expenses 674,445 793,576
-------- --------
Operating income (loss) 47,210 (761)
-------- --------
Other expenses:
Interest expense, net 57,187 54,732
Other nonoperating income, net (19,243) (7,766)
-------- --------
Total other expenses, net 37,944 46,966
-------- --------
Income (loss) before income taxes 9,266 (47,727)
(Benefit from) provision for income taxes (1,834) 1,280
-------- --------
Income (loss) from continuing operations 11,100 (49,007)
Gain on disposal of discontinued operations 56,562 ---
-------- --------
Net income (loss) applicable to common shareholders $ 67,662 $ (49,007)
======== ========
Per share amounts applicable to common shareholders:
Basic earnings per share:
Income (loss) from continuing operations $ 0.28 $ (1.22)
Gain on disposal of discontinued operations 1.40 ---
-------- --------
Net income (loss) $ 1.68 $ (1.22)
======== ========
Diluted earnings per share:
Income (loss) from continuing operations $ 0.27 $ (1.22)
Gain on disposal of discontinued operations 1.40 ---
-------- --------
Net income (loss) $ 1.67 $ (1.22)
======== ========
Weighted average shares outstanding:
Basic 40,264 40,134
======== ========
Diluted 40,484 40,134
======== ========
See accompanying notes
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)
September 25, 2002 December 26, 2001
------------------ -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 4,035 $ 6,696
Receivables, less allowance for doubtful accounts of:
2002 -- $2,570; 2001 -- $2,730 6,745 6,508
Inventories 7,461 7,979
Other 10,294 18,954
-------- --------
Total Current Assets 28,535 40,137
-------- --------
Property, net 328,022 362,441
Other Assets:
Goodwill 51,415 53,353
Intangible assets 94,290 100,912
Deferred financing costs, net 7,351 10,067
Other 40,164 40,343
-------- --------
Total Assets $ 549,777 $ 607,253
======== ========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 40,539 $ 599
Current maturities of capital lease obligations 3,857 4,523
Accounts payable 34,181 55,862
Net liabilities of discontinued operations --- 15,115
Other 96,110 126,618
-------- --------
174,687 202,717
-------- --------
Long-Term Liabilities:
Notes and debentures, less current maturities 528,596 609,531
Capital lease obligations, less current maturities 33,115 35,527
Liability for insurance claims 26,042 26,778
Other noncurrent liabilities and deferred credits 59,140 72,457
-------- --------
Total Long-Term Liabilities 646,893 744,293
-------- --------
Total Liabilities 821,580 947,010
Total Shareholders' Deficit (271,803) (339,757)
-------- --------
Total Liabilities and Shareholders' Deficit $ 549,777 $ 607,253
======== ========
See accompanying notes
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Shareholder' Deficit
(Unaudited)
Accumulated
Common Stock Additional Other Total
----------------- Paid-in Comprehensive Shareholders'
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 income:
Net income --- --- --- 67,662 --- 67,662
Other comprehensive income:
Foreign currency translation adjustments --- --- --- --- 176 176
------ ---- ------- --------- ------ --------
Comprehensive income --- --- --- 67,662 176 67,838
Issuance of common stock 106 2 88 --- --- 90
Exercise of stock options 31 --- 26 --- --- 26
------ ---- ------- --------- ------ --------
Balance, September 25, 2002 40,280 $ 403 $ 417,407 $ (682,207) $ (7,406) $ (271,803)
====== ==== ======== ========= ======= =========
See accompanying notes
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 25, 2002 September 26, 2001
------------------ ------------------
(In thousands)
Cash Flows from Operating Activities:
Net income (loss) $ 67,662 $ (49,007)
Adjustments to reconcile net income (loss) to cash flows provided by
(used in) operating activities:
Amortization of goodwill and other intangible assets with
indefinite lives --- 23,943
Depreciation and other amortization 62,292 68,033
Restructuring charges and exit costs 3,079 8,495
Impairment charges 962 8,343
Amortization of deferred gains (5,664) (8,421)
Amortization of deferred financing costs 3,223 2,478
Gain on disposal of discontinued operations (56,562) ---
Gains on refranchising and other, net (5,952) (12,123)
Amortization of debt premium (1,388) (1,398)
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 (17) 8,215
Inventories 332 336
Other current assets (1,045) (3,777)
Other assets (172) (3,263)
Increase (decrease) in liabilities:
Accounts payable (7,823) (10,484)
Accrued salaries and vacations (4,500) (115)
Accrued taxes 2,116 1,460
Other accrued liabilities (22,763) (33,762)
Other noncurrent liabilities and deferred credits (11,828) (5,612)
-------- --------
Net cash flows provided by (used in) operating activities 2,706 (14,437)
-------- --------
Cash Flows from Investing Activities:
Purchase of property (24,884) (25,248)
Proceeds from disposition of property 12,155 26,157
Receipts from (advances to) discontinued operations, net 39,386 (54,707)
Proceeds from (deposits for) FRD letters of credit 4,083 (9,790)
-------- --------
Net cash flows provided by (used in) investing activities 30,740 (63,588)
-------- --------
See accompanying notes
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 25, 2002 September 26, 2001
------------------ ------------------
(In thousands)
Cash Flows from Financing Activities:
Net (repayments) borrowings under credit agreements $ (18,700) $ 73,300
Long-term debt payments (4,012) (5,487)
Deferred financing costs (1,954) (176)
Proceeds from exercise of stock options 26 ---
Net change in bank overdrafts (11,467) (13,207)
-------- --------
Net cash flows (used in) provided by financing activities (36,107) 54,430
-------- --------
Decrease in cash and cash equivalents (2,661) (23,595)
Cash and Cash Equivalents at:
Beginning of period 6,696 27,260
-------- --------
End of period $ 4,035 $ 3,665
======== ========
See accompanying notes
Denny's Corporation (formerly Advantica Restaurant Group, Inc.)
Notes to Condensed Consolidated Financial Statements
September 25, 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, 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 completion 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, exit
costs, gains on exchanges of debt and the gain on disposal of discontinued
operations, 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 three
quarters ended September 25, 2002 are not necessarily indicative of the results
for the entire fiscal year ending December 25, 2002.
At September 25, 2002, we had a shareholders' deficit of approximately
$271.8 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. As
discussed further in Note 6, "Revolving Credit Facility", we have entered into
a commitment letter for a new credit facility to replace our existing facility.
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 nonoperating income, 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.
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
September 25, 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 they 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 three quarters ended September 25,
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)
Reduction of liabilities recorded in connection
with a business combination (951)
-------
Balance at September 25, 2002 $ 51,415
=======
The following table reflects intangible assets as reported at September 25,
2002 and at December 26, 2001 following the adoption of SFAS 142:
September 25, 2002 December 26, 2001
------------------ -----------------
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 76,855 27,087 80,049 23,828
Foreign license agreements 2,041 1,063 2,041 894
-------- -------- -------- --------
$ 122,440 $ 28,150 $ 125,634 $ 24,722
======== ======== ======== ========
Estimated amortization expense for intangible assets with definite lives in the
next five years is as follows:
(In thousands)
Remainder of 2002 $ 1,482
2003 6,002
2004 5,727
2005 5,561
2006 5,261
The following table reflects consolidated operating results as though we
adopted SFAS 142 as of the beginning of the three quarters ended
September 26, 2001:
Quarter Ended Three Quarters
Ended
September 25, September 26, September 25, September 26,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(In thousands)
Reported net income (loss) $ 56,134 $ (4,780) $ 67,662 $ (49,007)
Add back amortization of reorganization value --- 7,067 --- 21,792
Add back goodwill amortization --- 409 --- 1,270
Add back trade name amortization --- 294 --- 881
------- -------- ------- --------
Adjusted net income (loss) $ 56,134 $ 2,990 $ 67,662 $ (25,064)
======= ======== ======= ========
Reported basic income (loss) per share $ 1.39 $ (0.12) $ 1.68 $ (1.22)
Add back amortization of reorganization value --- 0.17 --- 0.54
Add back goodwill amortization --- 0.01 --- 0.03
Add back trade name amortization --- 0.01 --- 0.02
------- -------- ------- --------
Adjusted net income (loss) $ 1.39 $ 0.07 $ 1.68 $ (0.63)
======= ======== ======= ========
Reported diluted income (loss) per share $ 1.39 $ (0.12) $ 1.67 $ (1.22)
Add back amortization of reorganization value --- 0.17 --- 0.54
Add back goodwill amortization --- 0.01 --- 0.03
Add back trade name amortization --- 0.01 --- 0.02
------- -------- ------- --------
Adjusted net income (loss) $ 1.39 $ 0.07 $ 1.67 $ (0.63)
======= ======= ======= ========
Note 3. Restructuring Charges and Exit Costs
------------------------------------
As a result of changes in our organizational structure and in our portfolio of
restaurants, 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:
Three Quarters Ended
September 25, September 26,
2002 2001
------------- -------------
(In thousands)
Future rents, net of estimated sublease income $ 2,485 $ 3,378
Property taxes 266 2,952
Brokerage commissions --- 942
De-identification and maintenance costs 232 878
Severance and other costs 96 345
------ ------
$ 3,079 $ 8,495
====== ======
No exit costs were recorded for the quarters ended September 25, 2002 and
September 26, 2001.
Exit costs recorded during the three quarters ended September 25, 2002 consist
of approximately $0.6 million related to the closure of underperforming units
and $2.5 million related to future lease obligations on Denny's former
corporate headquarters facility due to the bankruptcy of our most significant
subtenant. At September 25, 2002, discounted accrued exit costs totaled
approximately $22.6 million. Cash payments for exit cost liabilities paid
during the three quarters ended September 25, 2002 were approximately $7.0
million. Estimated cash payments related to exit cost liabilities in the next
five years are as follows:
(in thousands)
Remainder of 2002 $ 2,203
2003 7,761
2004 5,014
2005 2,711
2006 2,359
During 2000 and 2001, we recorded severance and outplacement costs related to
restructuring plans of $13.6 million. Through September 25, 2002, $13.2
million of these costs have been paid, of which $3.4 million was paid during
the three quarters ended September 25, 2002. The remaining $0.4 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 first quarter of 2002, we recorded a
receivable and a corresponding reduction of current income tax expense related
to the expected cash refund. We received the cash refund subsequent to the end
of the third quarter.
Note 5. Income (Loss) Per Share Applicable to Common Shareholders
---------------------------------------------------------
Quarter Ended Three Quarters Ended
------------- --------------------
September 25, September 26, September 25, September 26,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(In thousands)
Numerator for basic and diluted (loss) income per share ---
(loss) income from continuing operations available to
common shareholders $ (428) $ (4,780) $ 11,100 $ (49,007)
========= ======== ======= ========
Denominator:
Denominator for basic (loss) income per share ---
weighted average shares 40,280 40,143 40,264 40,134
Effect of dilutive securities:
Options --- --- 220 ---
--------- -------- ------- --------
Denominator for diluted (loss) income per share ---
adjusted weighted average shares and assumed
conversions of dilutive securities 40,280 40,143 40,484 40,134
========= ======== ======= ========
Basic (loss) income per share from continuing operations $ (0.01) $ (0.12) $ 0.28 $ (1.22)
========= ======== ======= ========
Diluted (loss) income per share from continuing
operations $ (0.01) $ (0.12) $ 0.27 $ (1.22)
========= ======== ======= ========
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. Except for the three quarters
ended September 25, 2002, options have been omitted from the calculations
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 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 September 25, 2002, we
had working capital advances of $40.0 million and letters of credit outstanding
of $52.1 million under the credit facility, leaving a net availability of $63.2
million. Advances under the credit facility accrue interest at a variable rate
(approximately 5.9% at September 25, 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 outstanding under the facility as
current liabilities on our consolidated balance sheet at September 25, 2002.
We were in compliance with the terms of the credit facility at September 25,
2002. Under the most restrictive provision of the credit facility (the interest
coverage ratio), EBITDA could have been approximately $13.7 million less for
the four quarters ended September 25, 2002 and we would still have been in
compliance.
Subsequent to September 25, 2002, we entered into a commitment letter, pursuant
to which we received commitments from JPMorgan Chase Bank, Farallon Capital
Management, LLC and Foothill Capital Corporation with respect to a $125.0
million, two-year senior secured revolving credit facility, or new facility, of
which up to $60.0 million will be available for the issuance of letters of
credit. The new facility will refinance the existing facility and will be used
for working capital, capital expenditures and other general corporate purposes.
The new facility will be guaranteed by the Company and its other subsidiaries
and will be generally secured by liens on the same collateral that secure the
existing facility. In addition, the new facility will be secured by
first-priority mortgages on approximately 250 owned restaurant properties. The
closing of the new facility, expected to occur in the fourth quarter of 2002, is
subject to, among other conditions, the negotiation of definitive agreements on
mutually acceptable terms, as well as obtaining commitments for the balance of
the new facility from other lenders. J. P. Morgan Securities, Inc. will act as
lead arranger for the new facility.
Note 7. Debt
----
On April 15, 2002, we exchanged $88.1 million aggregate principal amount of
Denny's Corporation's 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 three quarters ended
September 25, 2002 (which is included in other nonoperating income in the
accompanying 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. At September 25, 2002,
$441.5 million aggregate principal amount of 11 1/4% Notes was outstanding and
$70.4 million aggregate principal amount of 12 3/4% Notes was outstanding.
Subsequent to September 25, 2002, we closed a series of privately negotiated
transactions for the exchange of an additional aggregate $33.2 million
principal amount of 11 1/4% Notes for $26.6 million principal amount of
12 3/4% Notes. The 12 3/4% Notes were issued under a tack-on provision of the
indenture that governs the 12 3/4% Notes which allows up to $50 million of
additional notes to be issued under the same indenture. As a result of our
completing the additional exchange, we expect to record a gain of approximately
$7 million in the fourth quarter of 2002.
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. Our 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 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 SFAS 144 had no impact
on our financial position or results of operations.
In April 2002, the FASB issued SFAS 145, "Rescission 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.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This statement replaces Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including certain
costs incurred in a Restructuring)". Among other things, SFAS 146 requires that
a liability relating to an exit activity be recorded when incurred as opposed to
the date of a company's commitment to exit an activity. The provisions of
SFAS 146 are effective for exit and disposal activities initiated after
December 31, 2002 with earlier application encouraged. We are currently
assessing the effects of adopting SFAS 146 on our financial position and
results of operations.
Note 9. Discontinued Operations
-----------------------
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 related to FRD's senior secured credit facility for
which Denny's was the lender. Such payment represented all outstanding
obligations under the facility less a $10 million discount.
FRD's letters of credit under the senior secured credit facility in the amount
of $5.6 million 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 in the amount of $5.7 million for continuing
to provide the cash collateral. The cash collateral has been deposited with
one of Coco's and Carrows former lenders and is reflected as a component of
other noncurrent assets at September 25, 2002. Prior to July 10, 2002, the
deposit was reflected as a component of other current assets.
Also on July 10, 2002, Denny's entered into a service agreement to provide
various management and support services to FRD over an initial term of up to one
year. Under the terms of the service agreement, FRD has given notice of
termination of all such services, with the last of such services terminating on
November 30, 2002. Total fees received under the service agreement from
commencement on July 10, 2002 through September 25, 2002 were $1.1 million.
Fees of approximately $1.2 million are expected to be received in the fourth
quarter through the termination date. As a result of the disposal of FRD and
the termination of the service agreement, we expect to reduce our number of
support staff positions by approximately thirty-three in the fourth quarter of
2002.
As a result of the divestiture of FRD, we recorded a gain on the disposal of
discontinued operations in the quarter ended September 25, 2002 of $56.6
million, representing the receipt of proceeds of approximately $32.5 million,
and the elimination of the net liabilities of discontinued operations of
approximately $24.1 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 our credit facility by
approximately $32.5 million.
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 September 25, 2002 and results of operations for the
quarter and three quarters ended September 25, 2002 compared to the quarter and
three quarters ended September 26, 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 completing the refinancing
of our credit facility prior to its January 7, 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
Results 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 Three Quarters Ended
------------- --------------------
September 25, September 26, Increase/ September 25, September 26, Increase/
2002 2001 (Decrease) 2002 2001 (Decrease)
------------- ------------- ---------- ------------- ------------- ----------
(Dollars in thousands)
Total systemwide sales (a) $ 586,163 $ 609,965 (3.9%) $ 1,689,105 $ 1,739,047 (2.9%)
EBITDA as defined (b) 40,082 42,912 (6.6%) 113,543 108,053 5.1%
Company-owned data:
Average unit sales 385.5 379.2 1.7% 1,100.0 1,062.1 3.6%
Same-store sales (decrease)
increase (c) (d) (1.5%) 3.2% (0.7%) 2.5%
Guest check average increase (c) (d) 0.7% 1.2% 1.3% 2.1%
Guest count (decrease) increase (c) (d) (2.2%) 2.0% (2.0%) 0.4%
Franchise data:
Average unit sales 322.8 321.9 0.3% 920.0 906.1 1.5%
Same-store sales (decrease)
increase (c) (d) (2.4%) 1.1% (1.7%) 0.7%
__________________________
(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 Ended Three Quarters Ended
September 25, September 26, September 25, September 26,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(In thousands)
Operating income (loss) $ 18,883 $ 13,694 $ 47,210 $ (761)
Total amortization and depreciation 20,734 29,218 62,292 91,976
Total impairment, restructuring and exit costs 465 --- 4,041 16,838
------- -------- --------- ---------
$ 40,082 $ 42,912 $ 113,543 $ 108,053
======= ======== ========= =========
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, guest check average, and guest count calculations
include restaurants that were open the same days in both the current
year and prior year.
(d) Prior year amounts have not been restated for 2002 comparable units.
The table below summarizes Denny's restaurant unit activity for the quarter
ended September 25, 2002.
Ending Units Units Ending Ending
Units Opened/ Units Sold/ Units Units
June 26, 2002 Acquired Refranchised Closed September 25, 2002 September 26, 2001
------------- -------- ------------ ------ ------------------ -----------------
Company-owned 588 --- --- (11) 577 638
Franchised units 1,112 9 --- (26) 1,095 1,124
Licensed units 14 --- --- --- 14 14
----- ----- ----- ----- ----- -----
1,714 9 --- (37) 1,686 1,776
===== ===== ===== ===== ===== =====
Results of Operations
- ---------------------
Quarter Ended September 25, 2002 Compared to Quarter Ended September 26, 2001
- -----------------------------------------------------------------------------
Company Operations
Company restaurant sales are the revenues generated from restaurants operated
by Denny's. Company restaurant sales decreased $22.4 million (9.1%) due to a
net 61-unit decrease in company-owned restaurants and a 1.5% decline in
same-store sales for the current quarter. The decrease in company-owned
restaurants resulted from store closures and the sale of restaurants to
franchisees.
Total costs of company restaurant sales decreased $15.3 million (7.4%),
driven by the decrease in the number of company-owned restaurants. As a
percentage of company restaurant sales, total costs of company restaurant sales
increased to 85.5% from 83.9%. Product costs decreased to 23.5% from 24.6%
resulting from lower commodity costs and improved food waste controls. Payroll
and benefits increased to 41.6% from 39.2% due to increased restaurant staffing
levels, wage rate increases and higher health benefits costs. Occupancy costs
increased to 5.5% from 5.4% of company restaurant sales. Other operating
expenses increased to 14.8% from 14.7% as higher marketing expenses were offset
by lower utilities costs and repairs and maintenance expenses compared to the
prior year.
Operating margins for company-owned restaurants were $32.5 million (14.5% of
company restaurant sales) for the quarter ended September 25, 2002, compared
with $39.6 million (16.1% of company restaurant sales) for the quarter ended
September 26, 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 $23.4 million for the quarter ended
September 25, 2002, comprised of royalties and initial franchise fees of $14.7
million and occupancy revenue of $8.7 million, compared with $24.2 million for
the quarter ended September 26, 2001, comprised of royalties and fees of $15.2
million and occupancy revenues of $9.0 million. The revenue decrease of $0.8
million (3.5%) resulted primarily from a decrease in initial franchise fees on
fewer refranchising transactions.
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 $7.3 million for the quarter ended
September 25, 2002, comprised of occupancy costs of $5.8 million and other
direct expenses of $1.5 million, compared with $7.4 million for the quarter
ended September 26, 2001, comprised of occupancy costs of $5.3 million and
other direct expenses of $2.1 million. Costs of franchise and license revenue
were essentially flat as a $1.9 million decrease in net marketing expenses was
offset by a $0.5 million decrease in rent expense and a net $1.4 million
reduction in bad debt expense in the prior year related to the collection of
certain past due accounts. As a percentage of franchise and license revenues,
these costs increased to 31.5% for the quarter ended September 25, 2002 from
30.6% for the quarter ended September 26, 2001.
Franchise operating margins were $16.0 million (68.5% of franchise and license
revenue) for the quarter ended September 25, 2002 compared with $16.8 million
(69.4% of franchise and license revenue) for the quarter ended
September 26, 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 $4.5 million (29.5%) compared with
the prior year quarter. The decrease resulted primarily from reductions in
corporate overhead costs related to recent workforce reductions. Depreciation
and other amortization, including amortization of goodwill and other intangibles
with indefinite lives, decreased $8.5 million primarily as a result of fewer
company-owned units and due to the implementation of SFAS 142 relating to the
discontinuance of the amortization of excess reorganization value. See Notes 2
and 8 to our consolidated financial statements.
Gains on refranchising and other, net for the quarter ended September 25, 2002
of $2.4 million were the result of the sale of surplus properties. Gains of
$1.8 million recorded for the quarter ended September 26, 2001 were the result
of refranchising company-owned restaurants.
Operating income was $18.9 million for the quarter ended September 25, 2002
compared with income of $13.7 million for the quarter ended September 26, 2001.
Interest expense, net for the quarter ended September 25, 2002 was comprised of
$19.6 million interest expense offset by $0.6 million interest income compared
with $19.9 million interest expense offset by $1.6 million interest income for
the quarter ended September 26, 2001. The decrease in interest expense resulted
from lower borrowings under our credit facility and our senior notes exchange
(see Note 7 to our consolidated financial statements), partially offset by
higher deferred financing cost amortization related to our credit facility.
The decrease in interest income resulted from lower cash balances and a
reduction in Denny's receivable balance under Coco's and Carrows' credit
facility.
The provision for income taxes from continuing operations of $0.3 million and
$0.2 million for the quarters ended September 25, 2002 and September 26, 2001,
respectively, primarily represent gross receipts based state and foreign
income taxes which do not directly fluctuate in relation to changes in loss
before income taxes. We have provided valuation allowances related to any
benefits from income taxes resulting from the application of a statutory tax
rate to our net operating losses. Accordingly, no additional (benefit from) or
provision for income taxes has been reported for the periods presented.
As a result of the divestiture of FRD, we recorded a gain on disposal of
discontinued operations of $56.6 million during the quarter ended
September 25, 2002. See Note 9 to our consolidated financial statements.
Net income was $56.1 million for the quarter ended September 25, 2002 compared
with a net loss of $4.8 million for the quarter ended September 26, 2001 due to
the factors noted above.
Results of Operations
- ---------------------
Three Quarters Ended September 25, 2002 Compared to Three Quarters Ended
- ------------------------------------------------------------------------
September 26, 2001
- ------------------
Company Operations
Company restaurant sales decreased $71.6 million (9.9%) primarily due to a net
61-unit decrease in company-owned restaurants and a 0.7% decline in same-store
sales for the three quarters ended September 25, 2002. The decrease in
company-owned restaurants resulted from store closures and the sale of
restaurants to franchisees.
Total costs of company restaurant sales decreased $69.7 million (11.2%), 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
84.7% from 85.9% as a result of the closure of certain underperforming units as
well as other operating costs reductions. Specifically, product costs
decreased to 23.9% from 24.9% resulting from lower commodity costs and improved
food waste controls. Payroll and benefits increased to 41.2% from 40.2% due to
increased restaurant staffing levels, wage rate increases and higher health
benefits costs. Occupancy costs decreased to 5.7% from 6.0% as a result of the
closure of underperforming units. Other operating expenses decreased to 13.9%
from 14.8% 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 $100.1 million (15.3% of
company restaurant sales) for the three quarters ended September 25, 2002,
compared with $102.0 million (14.1% of company restaurant sales) for the three
quarters ended September 26, 2001.
Franchise Operations
Franchise and license revenue was $68.5 million for the three quarters ended
September 25, 2002, comprised of royalties and initial franchise fees of $42.7
million and occupancy revenue of $25.8 million, compared with $68.0 million
for the three quarters ended September 26, 2001, comprised of royalties and
fees of $42.3 million and occupancy revenues of $25.7 million. The revenue
increase of $0.5 million (0.6%) resulted primarily from an increase in average
unit sales of franchise restaurants.
Costs of franchise and license revenue were $22.0 million for the three quarters
ended September 25, 2002, comprised of occupancy costs of $17.0 million and
other direct expenses of $5.0 million, compared with $24.5 million for the
three quarters ended September 26, 2001, comprised of occupancy costs of $15.3
million and other direct expenses of $9.2 million. Costs of franchise and
license revenue decreased $2.5 million (10.2%) driven by a $5.2 million
decrease in net marketing expense partially offset by a $1.7 million increase
in rent expense. Additionally, prior year costs benefited from a net $0.8
million reduction in bad debt expense related to the collection of certain past
due accounts. As a percentage of franchise and license revenues, these costs
decreased to 32.1% for the three quarters ended September 25, 2002 from 35.9%
for the three quarters ended September 26, 2001.
Our franchise operating margins were $46.5 million (67.9% of franchise and
license revenue) for the three quarters ended September 25, 2002 compared with
$43.6 million (64.1% of franchise and license revenue) for the three quarters
ended September 26, 2001.
Other Operating Costs and Expenses
General and administrative expenses decreased $10.6 million (21.4%) for the
three quarters ended September 25, 2002 compared with the three quarters ended
September 26, 2001. The three quarters ended September 26, 2001 included
approximately $1.6 million of nonrecurring senior management recruiting
expenses. The remaining decrease resulted from reductions in corporate
overhead costs related to workforce reductions. Depreciation and other
amortization, including amortization of goodwill and other intangible assets
with indefinite lives, decreased $29.7 million primarily as a result of fewer
company-owned units and due to the implementation of SFAS 142 relating to the
discontinuance of amortization of excess reorganization value. See Notes 2 and
8 to our consolidated financial statements.
Lower refranchising activity in the three quarters ended September 25, 2002
resulted in a $6.2 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 Denny's former corporate
headquarters facility in California due to the bankruptcy of our most
significant subtenant. For additional information concerning restructuring
charges and exit costs, see Note 3 to our consolidated financial statements.
Operating income was $47.2 million for the three quarters ended September 25,
2002 compared with a loss of $0.8 million for the three quarters ended
September 26, 2001.
Interest expense, net for the three quarters ended September 25, 2002 was
comprised of $60.2 million of interest expense offset by $3.0 million of
interest income compared with $59.9 million of interest expense offset by $5.2
million of interest income for the three quarters ended September 26, 2001. The
decrease in interest expense resulted from lower borrowings under our credit
facility and our senior notes exchange (see Note 7 to our consolidated
financial statements), partially offset by higher deferred financing cost
amortization related to our credit facility and higher interest expense related
to discounted liabilities for exit costs (see Note 3 to our consolidated
financial statements). The decrease in interest income resulted from lower
cash balances and a reduction in Denny's receivable balance under Coco's and
Carrows' credit facility.
Other nonoperating income for the three quarters ended September 25, 2002
primarily represents a gain of $19.2 million on the exchange of debt. 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.
For the three quarters ended September 25, 2002, we recorded a benefit from
income taxes of $1.8 million. The benefit from income taxes resulted from a
$2.7 million benefit recorded in the first quarter of 2002 related to the
enactment of H.R. 3090, the Job Creation and Worker Assistant Act of 2002. See
Note 4 to our consolidated financial statements. Excluding this benefit, we
recorded a provision for income taxes of $0.9 million for the three quarters
ended September 25, 2002 compared with a provision for income taxes of $1.3
million for the three quarters ended September 26, 2001. These provisions for
income taxes primarily represent gross receipts based state and foreign income
taxes which do not directly fluctuate in relation to changes in income (loss)
before income taxes. We have reduced or provided valuation allowances related
to any provisions for (benefit from) income taxes resulting from the
application of a statutory tax rate to our net operating income (losses).
Accordingly, no additional (benefit from) or provision for income taxes has
been reported for the periods presented.
As a result of the divestiture of FRD, we recorded a gain on disposal of
discontinued operations of $56.6 million during the three quarters ended
September 25, 2002. See Note 9 to our consolidated financial statements.
Net income was $67.7 million for the three quarters ended September 25, 2002
compared with a net loss of $49.0 million for the three quarters ended
September 26, 2001 due to the factors noted above.
Liquidity and Capital Resources
- -------------------------------
Revolving Credit Facility
At September 25, 2002, commitments under our revolving credit facility were
$155.3 million. We had working capital advances of $40.0 million and letters
of credit outstanding of $52.1 million under the credit facility at
September 25, 2002 leaving a net availability of $63.2 million. Advances under
the credit facility accrue interest at a variable rate (approximately 5.9% at
September 25, 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 outstanding under the facility as current liabilities on our
consolidated balance sheet at September 25, 2002.
We were in compliance with the terms of the credit facility at September 25,
2002. Under the most restrictive provision of the credit facility (the
interest coverage ratio), EBITDA could have been approximately $13.7 million
less for the four quarters ended September 25, 2002 and we would still have
been in compliance.
Subsequent to September 25, 2002, we entered into a commitment letter, pursuant
to which we received commitments from JPMorgan Chase Bank, Farallon Capital
Management, LLC and Foothill Capital Corporation with respect to a $125.0
million, two-year senior secured revolving credit facility, or new facility, of
which up to $60.0 million will be available for the issuance of letters of
credit. The new facility will refinance the existing facility and will be
used for working capital, capital expenditures and other general corporate
purposes. The new facility will be guaranteed by the Company and its other
subsidiaries and will be generally secured by liens on the same collateral that
secured the existing facility. In addition, the new facility will be secured
by first-priority mortgages on approximately 250 owned restaurant properties.
The closing of the new facility, expected to occur in the fourth quarter of
2002, is subject to, among other conditions, the negotiation of definitive
agreements on mutually acceptable terms, as well as obtaining commitments for
the balance of the new facility from other lenders. J.P. Morgan Securities,
Inc. will act as lead arranger for the new facility.
Cash Requirements
Our principal capital requirements have been largely associated with remodeling
and maintaining our existing restaurants and facilities. For the three
quarters ended September 25, 2002, our capital expenditures were $25.8 million.
Of that amount, approximately $0.9 million was financed through capital
leases. Capital expenditures during 2002 are expected to total $35.0 million
to $45.0 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 and 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 flows.
As noted above, we have entered into a commitment letter for a new credit
facility to replace our existing facility. 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. There can be no assurance that targeted levels of operating cash
flows will actually be achieved. We believe that, together with funds
available under the credit facility and the new 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.
Our working capital deficit was $146.2 million at September 25, 2002 compared
with $162.6 million at December 26, 2001. Excluding net liabilities of
discontinued operations at December 26, 2001 and the $40.0 million
reclassification of our credit facility borrowings to current liabilities
during the three quarters ended September 25, 2002, our working capital deficit
was $106.2 million at September 25, 2002 compared with $147.5 million at
December 26, 2001. This working capital deficit decrease of $41.3 million
resulted primarily from the use of 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.
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. Our 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 SFAS 144 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, "Rescission 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.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, or SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This statement replaces Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including certain costs incurred in a
Restructuring)." Among other things, SFAS 146 requires that a liability
relating to an exit activity be recorded when incurred as opposed to the date
of a company's commitment to exit an activity. The provisions of SFAS 146 are
effective for exit and disposal activities initiated after December 31, 2002
with earlier application encouraged. We are currently assessing the effects of
adopting SFAS 146 on our financial position and results of operations.
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 September 25, 2002) would cause the
interest expense for the remainder of 2002 to change by approximately $0.1
million. This computation is determined by considering the impact of
hypothetical interest rates on our variable long-term debt at September 25,
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 $408.0 million at September 25, 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 September 25, 2002 relates primarily to market quotations for
our 11 1/4% Notes.
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 September 25, 2002.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation (under the supervision and with the participation of management,
including our President and Chief Executive Officer, Nelson J. Marchioli, and
our Senior Vice President and Chief Financial Officer, Andrew F. Green) of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
amended. Based upon the evaluation, Messrs. Marchioli and Green each concluded
that disclosure controls and procedures are effective in timely alerting them
to material information required to be included in Denny's Corporation's
periodic SEC filing.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 10, 2002 in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"), the reorganization of FRD under the United
States Bankruptcy Code was consummated pursuant to the First Amended Plan of
Reorganization (the "Plan"). The Bankruptcy Court, on June 20, 2002, had
previously approved and confirmed the Plan, the terms of which were 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, Denny's Corporation (formerly
Advantica Restaurant Group, Inc), 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. Pursuant to the Plan, FRD's unsecured creditors, who were
generally the holders of FRD's 12 1/4% senior notes, received 100% of the
reorganized equity of FRD. See Note 9 to our consolidated financial statements
for additional information, including the July 10, 2002 disposal of FRD.
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 was in default
under the indenture governing the FRD Senior Notes. Therefore, the FRD Senior
Notes were included in liabilities subject to compromise in net liabilities of
discontinued operations on the accompanying December 26, 2001 consolidated
balance sheet. 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 the July 10, 2002
divestiture of FRD, see Item 1. above and Note 9 to our consolidated financial
statements.
Item 6. Exhibits and Reports on Form 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
------ -----------
10.1 Waiver and Agreement, dated as of June 17, 2002, ("Amendment
No. 10"), to the Credit Agreement dated January 7, 1998,
among Denny's, Inc., El Pollo Loco, Inc., Flagstar
Enterprises, Inc., Quincy's Restaurants Inc., as borrowers,
Advantica Restaurant Group, Inc., as guarantor, the lenders
named therein, and the Chase Manhattan Bank (the "Denny's
Credit Agreement").
10.2 Waiver and Agreement, dated as of June 27, 2002, ("Amendment
No. 11"), to the Denny's Credit Agreement.
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.
b. During the quarter we filed two reports on Form 8-K. One report was
filed on July 25, 2002 reporting (under Item 2) the disposition of FRD
and (under Item 5) our change in name from "Advantica Restaurant
Group, Inc." to "Denny's Corporation". The other report was filed on
August 12, 2002 reporting (under Item 5) our submission to
the Securities and Exchange Commission ("SEC") of the statements under
oath of our principal executive officer and principal financial
officer as required by the SEC June 27, 2002 Order (File No. 4-460).
No financial statements were required to be included with these Form
8-K filings.
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: November 12, 2002 By: /s/ Rhonda J. Parish
---------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and
Secretary
Date: November 12, 2002 By: /s/ Andrew F. Green
-------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer
CERTIFICATIONS
I, Nelson J. Marchioli, President and Chief Executive Officer of Denny's
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Denny's
Corporation,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Nelson J. Marchioli
-----------------------
Nelson J. Marchioli
President and Chief
Executive Officer
CERTIFICATIONS
I, Andrew F. Green, Senior Vice President and Chief Financial Officer of
Denny's Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Denny's
Corporation,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedure (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Andrew F. Green
-------------------
Andrew F. Green
Senior Vice President
and Chief Financial
Officer