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 March 26, 2003 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
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(Address of principal executive offices)
(Zip Code)
(864) 597-8000
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(Registrant's telephone number, including area code)
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(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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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 May 8, 2003, 40,742,929 shares of the registrant's Common Stock, par value
$.01 per share, were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Denny's Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Quarter
Ended Ended
March 26, 2003 March 27, 2002
-------------- --------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 199,444 $ 212,234
Franchise and license revenue 21,397 22,225
-------- --------
Total operating revenue 220,841 234,459
-------- --------
Costs of company restaurant sales:
Product costs 49,075 51,694
Payroll and benefits 88,544 88,292
Occupancy costs 12,100 12,399
Other operating expenses 28,745 29,307
-------- --------
Total costs of company restaurant sales 178,464 181,692
Costs of franchise and license revenue 6,492 7,245
General and administrative expenses 13,203 14,178
Depreciation and amortization 14,257 20,698
Restructuring charges and exit costs 46 298
Impairment charges 289 ---
Gains on disposition of assets and other, net (2,317) (1,816)
-------- --------
Total operating costs and expenses 210,434 222,295
-------- --------
Operating income 10,407 12,164
-------- --------
Other expenses:
Interest expense, net 19,217 19,287
Other nonoperating expense, net 7 ---
-------- --------
Total other expenses, net 19,224 19,287
-------- --------
Loss before income taxes (8,817) (7,123)
Provision for (benefit from) income taxes 265 (2,439)
-------- --------
Net loss applicable to common shareholders $ (9,082) $ (4,684)
======== ========
Per share amounts applicable to common shareholders:
Basic and diluted net loss per share $ (0.22) $ (0.12)
======== ========
Weighted average and equivalent shares outstanding 40,513 40,235
======== ========
See accompanying notes
2
Denny's Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
March 26, December 25,
2003 2002
--------- ------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 3,748 $ 5,717
Receivables, net 8,566 11,980
Inventories 8,536 7,715
Other 13,281 8,329
-------- --------
Total Current Assets 34,131 33,741
-------- --------
Property, net 315,897 324,725
Other Assets:
Goodwill 50,073 50,073
Intangible assets, net 90,243 92,257
Deferred financing costs, net 11,870 12,646
Other 36,276 38,049
-------- --------
Total Assets $ 538,490 $ 551,491
======== ========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 569 $ 554
Current maturities of capital lease obligations 3,674 3,886
Accounts payable 43,517 50,660
Other 90,137 97,703
-------- --------
Total Current Liabilities 137,897 152,803
-------- --------
Long-Term Liabilities:
Notes and debentures, less current maturities 573,326 560,359
Capital lease obligations, less current maturities 30,376 31,177
Liability for insurance claims 25,436 25,160
Other noncurrent liabilities and deferred credits 59,111 60,883
-------- --------
Total Long-Term Liabilities 688,249 677,579
-------- --------
Total Liabilities 826,146 830,382
Total Shareholders' Deficit (287,656) (278,891)
-------- --------
Total Liabilities and Shareholders' Deficit $ 538,490 $ 551,491
======== ========
See accompanying notes
3
Denny's Corporation
Condensed Consolidated Statements of Shareholders' Deficit
(Unaudited)
Accumulated
Common Stock Additional Other Total
----------------- Paid-in Comprehensive Shareholders'
Shares Amount Capital Deficit Income (Loss) Deficit
------ ------ ---------- ------- ------------- -------------
(In thousands)
Balance, December 25, 2002 40,290 $ 403 $ 417,415 $ (681,733) $ (14,976) $ (278,891)
------ ---- -------- ---------- --------- ----------
Comprehensive loss:
Net loss --- --- --- (9,082) --- (9,082)
Issuance of common stock 453 4 313 --- --- 317
------ ---- -------- ---------- --------- ----------
Balance, March 26, 2003 40,743 $ 407 $ 417,728 $ (690,815) $ (14,976) $ (287,656)
====== ==== ======== ========== ========= ==========
See accompanying note
4
Denny's Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Quarter Quarter
Ended Ended
March 26, 2003 March 27, 2002
-------------- --------------
(In thousands)
Cash Flows from Operating Activities:
Net loss $ (9,082) $ (4,684)
Adjustments to reconcile net loss to cash flows
used in operating activities:
Depreciation and amortization 14,257 20,698
Impairment charges 289 ---
Restructuring charges and exit costs 46 298
Amortization of deferred gains (955) (1,888)
Amortization of deferred financing costs 1,193 1,029
Gains on disposition of assets and other, net (2,317) (1,816)
Amortization of debt premium (396) (504)
Changes in assets and liabilities, net of
effects of acquisitions and dispositions:
Decrease (increase) in assets:
Receivables 3,826 (1,944)
Inventories (821) 144
Other current assets (4,873) 1,343
Other assets (385) 141
Increase (decrease) in liabilities:
Accounts payable 1,887 (4,747)
Accrued salaries and vacations 3,745 (3,867)
Accrued taxes (1,091) (1,276)
Other accrued liabilities (8,450) (16,715)
Other noncurrent liabilities and deferred credits (1,495) (3,072)
------- -------
Net cash flows used in operating activities (4,622) (16,860)
------- -------
Cash Flows from Investing Activities:
Purchase of property (5,293) (4,221)
Proceeds from disposition of property 3,835 2,069
Receipts from discontinued operations, net --- 1,353
------- -------
Net cash flows used in investing activities (1,458) (799)
------- -------
See accompanying notes
5
Denny's Corporation
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Quarter Quarter
Ended Ended
March 26, 2003 March 27, 2002
-------------- --------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreement $ 13,500 $ 32,500
Long-term debt payments (1,130) (1,486)
Deferred financing costs paid (1,042) (1,167)
Proceeds from exercise of stock options --- 19
Net bank overdrafts (7,217) (13,553)
-------- --------
4,111 16,313
-------- --------
Decrease in cash and cash equivalents (1,969) (1,346)
Cash and Cash Equivalents at:
Beginning of period 5,717 6,696
-------- --------
End of period $ 3,748 $ 5,350
======== ========
See accompanying notes
6
Denny's Corporation
Notes to Condensed Consolidated Financial Statements
March 26, 2003
(Unaudited)
Note 1. General
- ----------------
Denny's Corporation, through its wholly owned subsidiaries, Denny's Holdings,
Inc., and Denny's, Inc., owns and operates the Denny's restaurant brand, or
Denny's.
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
and impairment charges, 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 25, 2002 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our 2002 Annual Report on Form 10-K. The results of operations for
the quarter ended March 26, 2003 are not necessarily indicative of the results
for the entire fiscal year ending December 31, 2003.
Note 2. 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.
In assessing the cost of future obligations related to units closed or
identified for closure prior to December 26, 2002, the date we adopted SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities," 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 assumptions or their related estimates change in the future, we may be
required to record additional exit costs or reduce exit costs previously
recorded. Exit costs recorded for each of the periods presented include the
effect of such changes in estimates.
As a result of the adoption of SFAS 146, liabilities for future lease costs and
the fair value of related subleases of units closed after December 25, 2002 are
recorded when the unit is closed. All other costs related to unit closures are
expensed as incurred.
The following table summarizes the activity for the quarter ended March 26, 2003
related to discounted accrued exit cost liabilities:
(in thousands)
Balance, December 25, 2002 $ 19,680
Payments, net (2,310)
Interest accretion 537
-------
Balance, March 26, 2003 $ 17,907
=======
7
Estimated net cash payments related to exit cost liabilities at March 26, 2003
are as follows:
(in thousands)
Remainder of 2003 $ 5,525
2004 4,916
2005 2,354
2006 1,914
2007 1,626
Subsequent years 9,440
--------
Total 25,775
Less imputed interest 7,868
--------
Discounted accrued exit cost liabilities $ 17,907
========
Note 3. Capital Structure
- --------------------------
Stock Based Compensation
We account for stock-based employee compensation plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in net loss, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation", or SFAS 123, to stock-based
employee compensation.
Quarter Ended
-------------
March 26, March 27,
2003 2002
--------- ---------
(in thousands, except per share amounts)
Net loss, as reported $ (9,082) $ (4,684)
Total stock-based employee compensation
expense determined under fair value
based method for all awards 383 493
-------- --------
Pro forma net loss $ (9,465) $ (5,177)
======== ========
Net loss per share:
Basic and diluted - as reported $ (0.22) $ (0.12)
======== ========
Basic and diluted - pro forma $ (0.23) $ (0.13)
======== ========
Loss Per Share Applicable to Common Shareholders
The calculations of basic and diluted loss per share have been based on the
weighted average number of shares outstanding. Because of the net loss for the
quarters ended March 26, 2003 and March 27, 2002, warrants and options of the
company would be antidilutive and, therefore, have been omitted from the
calculation of weighted average dilutive shares.
Note 4. Revolving Credit Facility
- ----------------------------------
In December of fiscal 2002, we entered into a new senior secured credit
facility, or credit facility, which provides Denny's with a working capital and
letter of credit facility of up to $125 million. The credit facility matures on
December 20, 2004. At March 26, 2003, we had working capital advances of $60.2
million and letters of credit outstanding of $48.4 million under our credit
facility, leaving net availability of $16.4 million. Advances under the credit
facility accrue interest at a variable rate (approximately 6.4% at March 26,
2003) based on the prime rate or an adjusted Eurodollar rate.
8
We were in compliance with the terms of the credit facility at March 26, 2003.
Under the most restrictive provision of the credit facility (minimum EBITDA, as
defined in the credit facility, test), EBITDA could have been approximately
$10.4 million less for the four quarters ended March 26, 2003 and we would still
have been in compliance.
Note 5. Supplemental Cash Flow Information
- -------------------------------------------
Quarter Ended
-------------
March 26, March 27,
2003 2002
--------- ---------
(in thousands)
Income taxes paid $ 124 $ 210
======== ========
Interest paid $ 23,847 $ 33,533
======== ========
Noncash investing activities:
Notes forgiven related to reacquisition of
restaurants $ --- $ 186
======== =========
Noncash financing activities:
Capital leases entered into $ 344 $ 191
======== ========
Note 6. Implementation of New Accounting Standards
- ---------------------------------------------------
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)". The principal difference between SFAS 146 and EITF 94-3
relates to its requirements for recognition of a liability for a cost associated
with an exit or disposal activity. This statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost as defined
in EITF 94-3 was recognized at the date of an entity's commitment to an exit
plan. A fundamental conclusion reached by the Board in SFAS 146 is that an
entity's commitment to a plan, by itself, does not create a present obligation
to others that meets the definition of a liability. SFAS 146 eliminates the
definition and requirements for recognition of exit costs in EITF 94-3. This
statement also establishes that fair value is the objective for initial
measurement of the liability. The adoption of SFAS 146 did not have a material
impact on our financial position and results of operations; however, the timing
of the recognition of future costs under SFAS 146 is substantially different
than the timing under EITF 94-3. SFAS 146 is effective for exit and disposal
activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, or FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN 45 did not have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". This interpretation addresses the
consolidation by business enterprises of variable interest entities, as defined
in the interpretation, and sets forth additional disclosure regarding such
interests. FIN 46 applies immediately to variable interest entities created, or
in which the Company obtains an interest, after January 31, 2003, and becomes
effective June 26, 2003 for all variable interest entities held by the Company
prior to that date. The adoption of FIN 46 has not had and is not expected to
have a material effect on the Company's consolidated financial statements.
9
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" and provides
for alternative methods for accounting for a change by registrants to the fair
value method of accounting for stock-based compensation. Additionally, SFAS 148
amends the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock-based compensation and the
related pro-forma disclosures when the intrinsic value method continues to be
used. SFAS 148 is effective for fiscal years beginning after December 15, 2002.
Annual disclosures are effective for years ending after December 15, 2002.
Interim disclosures are effective for the first fiscal quarter beginning after
December 31, 2002. See Note 3.
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 March 26, 2003 and results of operations for the
quarter ended March 26, 2003 compared to the quarter ended March 27, 2002. 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: 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; political environment
(including acts of war and terrorism); 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 25, 2002 and in Exhibit 99 thereto.
Restaurant Operations and Unit Activity
- ---------------------------------------
Quarter Ended
March 26, March 27, Increase
2003 2002 (Decrease)
--------- --------- ----------
(dollars in thousands)
Total systemwide sales (a) $ 525,965 $ 540,959 (2.8%)
EBITDA as defined (b) 24,664 32,862 (24.9%)
Company-owned data:
Average unit sales 354.8 348.6 1.8%
Same-store sales decrease (c)(d) (0.4%) (0.1%)
Guest check average increase (c)(d) 2.5% 1.2%
Guest count decrease (c)(d) (2.8%) (1.4%)
Franchise data:
Average unit sales 292.7 291.7 0.3%
Same-store sales decrease (c)(d) (1.6%) (1.3%)
- ------------------
(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.
10
(b) We calculate EBITDA as operating income before depreciation and
amortization as follows:
Quarter Ended
-------------
March 26, March 27,
2003 2002
--------- ---------
(In thousands)
Operating income $ 10,407 $ 12,164
Total amortization and depreciation 14,257 20,698
------- -------
EBITDA as defined $ 24,664 $ 32,862
======= =======
We believe that, in addition to other financial measures, EBITDA is an
appropriate indicator to assist in the evaluation of our operating and
liquidity performance, and it provides additional information with
respect to our ability to meet future debt service, capital
expenditures and working capital requirements. However, EBITDA should
be considered as a supplement to, not a substitute for, operating
income, cash flows, or other measures of financial performance prepared
in accordance with accounting principles generally accepted in the
United States of America.
(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 2003 comparable units.
The table below summarizes Denny's restaurant unit activity for the quarter
ended March 26, 2003.
Ending Ending Ending
Units Units Units Units Units
December 25, Opened/ Units Sold/ March 26, March 27,
2002 Acquired Refranchised Closed 2003 2002
------------ -------- ------------ ------ --------- ---------
Company-owned 566 1 --- (4) 563 602
Franchised units 1,095 4 --- (8) 1,091 1,108
Licensed units 15 --- --- --- 15 14
----- --- --- ---- ----- -----
1,676 5 --- (12) 1,669 1,724
===== === === ==== ===== =====
11
Results of Operations
- ---------------------
Quarter Ended March 26, 2003 Compared to Quarter Ended March 27, 2002
- ---------------------------------------------------------------------
Company Operations
Company restaurant sales decreased $12.8 million (6.0%) due to a net 39-unit
decrease in company-owned restaurants and a 0.4% 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 $3.2 million (1.8%), 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
89.5% from 85.6%. Product costs increased to 24.6% from 24.4% resulting from a
$0.9 million reduction of deferred gain amortization related to the sale of
former distribution subsidiaries in previous years. Excluding deferred gains for
both years, product costs as a percentage of sales were 25.1% in 2003 and 25.2%
in 2002. Payroll and benefits increased to 44.4% from 41.6% due to higher
medical costs, increased restaurant staffing levels aimed at improving customer
satisfaction and higher wage rates. Occupancy costs increased to 6.1% from 5.8%
of company restaurant sales. Other operating expenses increased to 14.4% from
13.8% as a result of increases in utilities and repairs and maintenance expenses
compared to the prior quarter, partially offset by lower marketing expenses.
We define operating margins for company-owned restaurants as company restaurant
sales less total costs of company restaurant sales. Operating margins for
company-owned restaurants were 10.5% of company restaurant sales ($21.0 million)
for the quarter ended March 26, 2003, compared with 14.4% of company restaurant
sales ($30.5 million) for the quarter ended March 27, 2002.
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. The composition of
the franchise portfolio and the nature of individual lease arrangements have a
significant impact on franchise occupancy revenue, as well as the related
franchise occupancy expense and franchise operating margins.
Franchise and license revenue was $21.4 million for the quarter ended March 26,
2003, comprised of royalties and initial franchise fees of $13.3 million and
occupancy revenue of $8.1 million, compared with $22.2 million for the quarter
ended March 27, 2002, comprised of royalties and fees of $13.6 million and
occupancy revenues of $8.6 million. The revenue decrease of $0.8 million (3.7%)
resulted primarily from a 16-unit decrease in franchised and licensed units and
a decrease in initial franchise fees on fewer franchise restaurant openings
compared to the prior year quarter.
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 and bad
debt expense.
Costs of franchise and license revenue were $6.5 million for the quarter ended
March 26, 2003, comprised of occupancy costs of $5.5 million and other direct
expenses of $1.0 million, compared with $7.2 million for the quarter ended March
27, 2002, comprised of occupancy costs of $5.5 million and other direct expenses
of $1.7 million. Costs of franchise and license revenue decreased $0.8 million
(10.4%) as a result of a decrease in initial expenses associated with the
opening of new restaurants, a net $0.4 million reduction in bad debt expense in
the current year and reductions in other direct expenses. As a percentage of
franchise and license revenues, these costs decreased to 30.3% for the quarter
ended March 26, 2003 from 32.6% for the quarter ended March 27, 2002.
12
We define franchise operating margins as franchise and license revenue less
costs of franchise and license revenue. Franchise operating margins were 69.7%
of franchise and license revenue ($14.9 million) for the quarter ended March 26,
2003 compared with 67.4% of franchise and license revenue ($15.0 million) for
the quarter ended March 27, 2002.
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 $1.0 million (6.9%) compared with
the prior year quarter. The decrease resulted primarily from reductions in
corporate overhead costs related to organizational changes.
Depreciation and amortization decreased $6.4 million primarily resulting from
certain assets becoming fully depreciated. In January 1998, certain assets were
revalued and assigned a five year life as a result of the Company's emergence
from bankruptcy. Those assets became fully amortized in January 2003.
Gains on disposition of assets and other, net of $2.3 million in 2003 and $1.8
million in 2002 primarily represented gains on sales of surplus properties.
Operating income was $10.4 million for the quarter ended March 26, 2003 compared
with income of $12.2 million for the quarter ended March 27, 2002.
Interest expense, net for the quarter ended March 26, 2003 was comprised of
$19.6 million interest expense offset by $0.4 million interest income compared
with $20.5 million interest expense offset by $1.2 million interest income for
the quarter ended March 27, 2002. The decrease in interest expense resulted from
lower borrowings under our credit facility during 2003 and the effects of our
senior note exchanges during 2002, partially offset by higher deferred financing
cost amortization related to our credit facility. The decrease in interest
income resulted from the repayment in 2002 of the credit facility of FRD
Acquisition Co., our former subsidiary (with respect to which Denny's was the
lender).
The provision for (benefit from) income taxes from continuing operations was
$0.3 million and $(2.4) million for the years ended March 26, 2003 and March 27,
2002, respectively. Included in income taxes for the quarter ended March 27,
2002 was a $2.7 million benefit related to the enactment of H.R. 3090, the Job
Creation and Worker Assistant Act of 2002. Excluding this benefit, we recorded a
provision for income taxes of $0.3 million for the quarter ended March 27, 2002.
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 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.
Net loss was $9.1 million for the quarter ended March 26, 2003 compared with a
net loss of $4.7 million for the quarter ended March 27, 2002 due to the factors
noted above.
Liquidity and Capital Resources
- -------------------------------
Revolving Credit Facility
In December 2002, we entered into a new senior secured credit facility, or
credit facility, which provides Denny's with a working capital and letter of
credit facility of up to $125 million. The credit facility matures on December
20, 2004. At March 26, 2003, we had working capital advances of $60.2 million
and letters of credit outstanding of $48.4 million under the new credit
facility, leaving net availability of $16.4 million. Advances under the credit
facility accrue interest at a variable rate (approximately 6.4% at March 26,
2003) based on the prime rate or an adjusted Eurodollar rate.
13
We were in compliance with the terms of the credit facility at March 26, 2003.
Under the most restrictive provision of the credit facility (minimum EBITDA, as
defined in the credit facility, test), EBITDA could have been approximately
$10.4 million less for the four quarters ended March 26, 2003 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
March 26, 2003, our capital expenditures were $5.6 million. Of that amount,
approximately $0.3 million was financed through capital leases. Capital
expenditures during 2003 are expected to total $35.0 million to $40.0 million;
however, we are not committed to spending this amount and could spend more or
less if circumstances require.
We continue to monitor our cash flow and liquidity needs. Although we believe
that funds from operations and amounts available under our working capital
facility will be adequate to cover those needs, we may seek additional sources
of funds including additional financing sources and continued selected asset
sales to maintain sufficient cash flow to fund our ongoing operating needs, pay
interest and scheduled debt amortization and fund anticipated capital
expenditures over the next twelve months.
Our working capital deficit was $103.8 million at March 26, 2003 compared with
$119.1 million at December 25, 2002. This working capital deficit decrease of
$15.3 million resulted primarily from the use of cash on hand and borrowings
under the credit facility to satisfy current liabilities. 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
- ------------------------------------------
See Note 6 to our Condensed Consolidated Financial Statements.
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 6.4% at March 26, 2003) would cause the interest expense for the
remainder of 2003 to change by approximately $0.5 million. This computation is
determined by considering the impact of hypothetical interest rates on our
variable long-term debt at March 26, 2003. 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 $422.7 million at March 26, 2003. The carrying value of such
debt was approximately $513.7 million at March 26, 2003. 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 March 26, 2003 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 March 26, 2003.
14
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
There are various claims and pending legal actions against or indirectly
involving us, including actions concerned with civil rights of employees and
customers, other employment related matters, taxes, sales of franchise rights
and businesses and other matters. Our ultimate legal and financial liability
with respect to these matters cannot be estimated with certainty. However, we
believe, based on our examination of these matters and our experience to date,
that the ultimate disposition of them will not significantly affect our
financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
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.
15
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: May 12, 2003 By: /s/ Rhonda J. Parish
------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: May 12, 2003 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 officer 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 officer 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 officer 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: May 12, 2003 /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 officer 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 officer 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 officer 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: May 12, 2003 /s/ Andrew F. Green
-------------------
Andrew F. Green
Senior Vice President
and Chief Financial Officer