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 29, 2004 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 29319-0001
- --------------------------------------------------------------------------------
(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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 1, 2004, 89,856,916 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Ended
-------------
September 29, 2004 September 24, 2003
------------------ ------------------
(In thousands, except per share amounts)
<s> <c> <c>
Revenue:
Company restaurant sales $ 224,330 $ 215,573
Franchise and license revenue 22,815 22,817
--------- ---------
Total operating revenue 247,145 238,390
--------- ---------
Costs of company restaurant sales:
Product costs 58,328 56,215
Payroll and benefits 91,929 91,080
Occupancy 12,850 12,296
Other operating expenses 30,913 31,354
--------- ---------
Total costs of company restaurant sales 194,020 190,945
Costs of franchise and license revenue 6,948 6,801
General and administrative expenses 16,727 11,982
Depreciation and amortization 13,529 15,254
Restructuring charges and exit costs 1,080 70
Impairment charges 195 1,190
Gains on disposition of assets and other, net (998) (778)
--------- ---------
Total operating costs and expenses 231,501 225,464
--------- ---------
Operating income 15,644 12,926
--------- ---------
Other expenses:
Interest expense, net 17,556 18,990
Other nonoperating expense (income), net 9,699 (57)
--------- ---------
Total other expenses, net 27,255 18,933
--------- ---------
Loss before income taxes (11,611) (6,007)
Provision for income taxes 202 266
--------- ---------
Net loss $ (11,813) $ (6,273)
========= =========
Per share amounts:
Basic and diluted net loss per share $ (0.14) $ (0.15)
========= =========
Weighted average shares outstanding:
Basic and diluted 86,614 40,743
========== =========
See accompanying notes
2
Denny's Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three Quarters Ended
---------------------
September 29, 2004 September 24, 2003
------------------ ------------------
(In thousands, except per share amounts)
<s> <c> <c>
Revenue:
Company restaurant sales $ 649,998 $ 623,474
Franchise and license revenue 66,283 65,817
--------- ---------
Total operating revenue 716,281 689,291
--------- ---------
Cost of company restaurant sales:
Product costs 167,764 158,298
Payroll and benefits 270,205 271,775
Occupancy 37,540 36,343
Other operating expenses 88,118 88,185
--------- ---------
Total costs of company restaurant sales 563,627 554,601
Costs of franchise and license revenue 21,165 20,071
General and administrative expenses 46,136 38,229
Depreciation and amortization 41,941 43,931
Restructuring charges and exit costs 666 (866)
Impairment charges 692 1,889
Gains on disposition of assets and other, net (1,230) (5,647)
--------- ---------
Total operating costs and expenses 672,997 652,208
--------- ---------
Operating income 43,284 37,083
--------- ---------
Other expenses:
Interest expense, net 56,481 57,196
Other nonoperating expense (income), net 9,635 (177)
--------- ---------
Total other expenses, net 66,116 57,019
--------- ---------
Loss before income taxes (22,832) (19,936)
Provision for income taxes 609 796
--------- ---------
Net loss $ (23,441) $ (20,732)
========== =========
Per share amounts:
Basic and diluted net loss per share: $ (0.42) $ (0.51)
========== =========
Weighted average shares outstanding:
Basic and diluted 56,312 40,666
========== =========
See accompanying notes
3
Denny's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 29, 2004 December 31, 2003
------------------ -----------------
(In thousands)
<s> <c> <c>
Assets
Current Assets:
Cash and cash equivalents $ 27,342 $ 7,363
Receivables, net 7,768 9,771
Inventories 8,235 8,158
Other current assets 8,220 6,965
--------- --------
Total Current Assets 51,565 32,257
--------- --------
Property, net 283,901 296,995
Other Assets:
Restricted cash 216,423 ---
Goodwill 50,404 50,404
Intangible assets, net 78,900 83,879
Deferred financing costs, net 17,897 9,887
Other assets 30,583 33,230
--------- ---------
Total Assets $ 729,673 $ 506,652
========= =========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 410 $ 51,714
Current maturities of capital lease obligations 3,338 3,462
Accounts payable 35,012 40,617
Other current liabilities 92,817 96,932
--------- ---------
Total Current Liabilities 131,577 192,725
--------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities 733,345 509,593
Capital lease obligations, less current maturities 27,708 28,728
Liability for insurance claims 26,281 25,585
Other noncurrent liabilities and deferred credits 56,985 62,953
--------- ---------
Total Long-Term Liabilities 844,319 626,859
--------- ---------
Total Liabilities 975,896 819,584
Total Shareholders' Deficit (246,223) (312,932)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 729,673 $ 506,652
========= =========
See accompanying notes
4
Denny's Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Deficit
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Deficit
------ ------ ------- ------- ---- -------
(In thousands)
<s> <c> <c> <c> <c> <c> <c>
Balance, December 31, 2003 41,003 $ 410 $ 417,816 $ (713,216) $ (17,942) $ (312,932)
------ ---- -------- ---------- --------- ----------
Net loss --- --- --- (23,441) --- (23,441)
Equity issuance 48,430 484 89,311 --- --- 89,795
Exercise of common stock options 424 5 350 --- --- 355
------ ---- -------- ---------- --------- ----------
Balance, September 29, 2004 89,857 $ 899 $ 507,477 $ (736,657) $ (17,942) $ (246,223)
====== ==== ======== ========== ========= ==========
See accompanying notes
5
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Quarters Ended
--------------------
September 29, 2004 September 24, 2003
------------------ ------------------
(In thousands)
<s> <c> <c>
Cash Flows from Operating Activities:
Net loss $ (23,441) $ (20,732)
Adjustments to reconcile net loss to cash flows provided by operating activities:
Depreciation and amortization 41,941 43,931
Impairment charges 692 1,889
Restructuring charges and exit costs 666 (866)
Recognition of deferred gains --- (2,644)
Amortization of deferred financing costs 4,665 3,753
Gains on disposition of assets and other, net (1,230) (5,647)
Amortization of debt premium (1,369) (1,219)
Loss on early extinguishment of debt 9,695 ---
Changes in assets and liabilities, net of effects of acquisitions and
dispositions:
Decrease (increase) in assets:
Receivables 2,099 4,494
Inventories (77) (510)
Other current assets (1,255) (1,732)
Other assets (994) (1,663)
Increase (decrease) in liabilities:
Accounts payable (3,180) (4,195)
Accrued salaries and vacations 5,122 1,677
Accrued taxes 961 2,558
Other current liabilities (13,759) (13,055)
Other noncurrent liabilities and deferred credits (4,793) (1,840)
--------- --------
Net cash flows provided by operating activities 15,743 4,199
--------- --------
Cash Flows from Investing Activities:
Purchase of property (22,152) (22,965)
Proceeds from disposition of property 2,111 16,323
Change in restricted cash (216,423) ---
--------- --------
Net cash flows used in investing activities (236,464) (6,642)
--------- --------
See accompanying notes
6
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Three Quarters Ended
--------------------
September 29, 2004 September 24, 2003
------------------ ------------------
(In thousands)
<s> <c> <c>
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ 293,900 $ 16,300
Long-term debt payments (122,274) (3,356)
Deferred financing costs paid (13,054) (2,137)
Debt retirement costs (7,313) ---
Proceeds from exercise of stock options 355 ---
Proceeds from equity issuance, net 90,044 ---
Net bank overdrafts (958) (10,280)
--------- ---------
Net cash flows provided by financing activities 240,700 527
--------- ---------
Increase (decrease) in cash and cash equivalents 19,979 (1,916)
Cash and Cash Equivalents at:
Beginning of period 7,363 5,717
--------- ---------
End of period $ 27,342 $ 3,801
========= =========
See accompanying notes
7
Denny's Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 29, 2004
(Unaudited)
Note 1. General
-------
Denny's Corporation, through its wholly owned subsidiaries, Denny's Holdings,
Inc., or Denny's Holdings, 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. 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 31, 2003 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our 2003 Annual Report on Form 10-K. The results of operations for
the quarter ended September 29, 2004 are not necessarily indicative of the
results for the entire fiscal year ending December 29, 2004.
Note 2. Restructuring Charges and Exit Costs
------------------------------------
Restructuring charges and exit costs consist primarily of severance and
outplacement costs for terminated employees and the costs of future obligations
related to closed units.
In assessing the discounted liabilities for future costs related to units closed
or identified for closure prior to December 26, 2002, the date we adopted
Statement of Financial Accounting Standards No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," or SFAS 146, 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, discounted liabilities for future lease
costs net of 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, including property taxes and maintenance related costs, are expensed
as incurred.
Restructuring charges and exit costs were comprised of the following:
Quarter Ended Three Quarters Ended
---------------------------------------- ----------------------------------------
September 29, 2004 September 24, 2003 September 29, 2004 September 24, 2003
------------------ ------------------ ------------------ ------------------
(In thousands)
<s> <c> <c> <c> <c>
Exit costs $ 964 $ 13 $ 439 $ (1,512)
Severance and other restructuring charges 116 57 227 646
---------- --------- ---------- -----------
Total restructuring and exit costs $ 1,080 $ 70 $ 666 $ (866)
========== ========= ========== ===========
The components of the change in accrued exit cost liabilities are as follows:
(In thousands)
Balance, December 31, 2003 $ 13,044
Provisions for units closed in 2004 280
Change in estimates of accrued exit costs, net 159
Payments, net (3,768)
Interest accretion 1,024
-----------
Balance, September 29, 2004 $ 10,739
===========
8
Estimated net cash payments related to exit cost liabilities in the next five
years are as follows:
(In thousands)
Remainder of 2004 $ 848
2005 2,219
2006 1,784
2007 1,511
2008 1,407
Thereafter 8,539
-----------
Total 16,308
Less imputed interest 5,569
-----------
Present value of exit cost liabilities $ 10,739
===========
Note 3. Refinancing Transactions
------------------------
During the third and fourth quarters of 2004, we completed a series of
recapitalization transactions intended to reduce interest expense, extend debt
maturities and increase our financial flexibility. The recapitalization
consisted of the transactions and the use of proceeds therefrom as described
below, which we refer to collectively as the "Refinancing Transactions":
Private Placement
In July 2004, Denny's Corporation received net proceeds of approximately $89.8
million from a private placement of 48.4 million shares of our common stock at a
price of $1.90 per share (the "Private Placement"). The proceeds are net of $2.2
million of direct costs related to the Private Placement, $0.2 million of which
were included in other accrued expenses at September 29, 2004.
New Credit Facilities
On September 21, 2004, our subsidiaries, Denny's, Inc. and Denny's Realty, Inc.
(the "Borrowers"), entered into new senior secured credit facilities in an
aggregate principal amount of $420 million. The new credit facilities consist of
a first lien facility and a second lien facility. The new first lien facility
consists of a $225 million five-year term loan facility (the "Term Loan
Facility") and a $75 million four-year revolving credit facility, of which $45
million is available for the issuance of letters of credit (the "Revolving
Facility" and together with the Term Loan Facility, the "New First Lien
Facility"). The second lien facility consists of an additional $120 million
six-year term loan facility (the "Second Lien Facility," and together with the
New First Lien Facility, the "New Credit Facilities"). The Second Lien Facility
ranks pari passu with the New First Lien Facility in right of payment, but is in
a second lien position with respect to the collateral securing the New First
Lien Facility. The New Credit Facilities are secured by substantially all of our
assets and guaranteed by Denny's Corporation, Denny's Holdings and
all of their subsidiaries.
The Term Loan Facility will mature on September 30, 2009 and will amortize in
equal quarterly installments of $0.6 million (commencing March 31, 2005) with
all remaining amounts due on the maturity date. The Revolving Facility will
mature on September 30, 2008. The Second Lien Facility will mature on September
30, 2010 with no amortization of principal prior to the maturity date.
The interest rates under the New First Lien Facility are as follows: At the
option of the Borrowers, Adjusted LIBOR plus a spread of 3.25% per annum (3.50%
per annum for the Revolving Facility) or ABR (the Alternate Base Rate, which is
the highest of the Bank of America Prime Rate and the Federal Funds Effective
Rate plus 1/2 of 1%) plus a spread of 1.75% per annum (2.0% per annum for the
Revolving Facility). The interest rate on the Second Lien Facility, at the
Borrower's option, is Adjusted LIBOR plus a spread of 5.125% per annum or ABR
plus a spread of 3.625% per annum.
9
Denny's Corporation will be required to make mandatory prepayments under certain
circumstances and may make certain optional prepayments under the New Credit
Facilities. It may be assessed a prepayment premium upon optional or certain
mandatory prepayments.
The New Credit Facilities include negative covenants that are usual for
facilities and transactions of this type and substantially similar to those that
were contained in the prior credit facility, including but not limited to
limitations on dividends on capital stock; limitations of redemptions and
repurchases of capital stock; limitations on prepayments, redemptions and
repurchases of debt; limitations on liens, sale-leaseback transactions, loans,
investments, debt (including hedging and other derivative agreements), operating
leases, mergers, acquisitions and asset sales; limitations on transactions with
affiliates; limitations on restrictions on liens and other restrictive
agreements; limitations on changes in business conducted by Denny's Corporation,
the borrowers and the subsidiaries of Denny's Corporation; limitations on assets
of Denny's Corporation and Denny's Holdings; restrictions on changing fiscal
year, accounting policies, and organizational, debt and other material
agreements.
The New Credit Facilities include the following financial covenants (as defined
in the credit agreements governing the New Credit Facilities ("Credit
Agreements"): (a) a maximum total debt to EBITDA ratio, (b) a maximum senior
secured debt to EBITDA ratio, (c) a minimum fixed charge coverage ratio, and (d)
limitations on capital expenditures.
The New Credit Facilities include events of default that are usual for
facilities and transactions of this type. In addition, an event of default will
result on the date that is six months prior to the maturity date of any senior
or subordinated notes of Denny's Corporation, Denny's Holdings, the borrowers or
any of their subsidiaries that mature prior to the latest maturity date of any
of the New Credit Facilities, from the failure to repay or refinance the
aggregate amount of any such senior or subordinated notes outstanding in excess
of $25,000,000, or amend the maturity thereof to a date at least six months
after the maturity date of such New Credit Facilities.
We were in compliance with the covenants in the Credit Agareements at September
29, 2004.
At September 29, 2004, we had outstanding letters of credit of $39.6 million
under our Revolving Facility, leaving net availability of $35.4 million. There
were no revolving loans outstanding at September 29, 2004.
Through September 29, 2004, we incurred approximately $13.5 million of deferred
financing costs related to the New Credit Facilities, $0.4 million of which were
included in other accrued liabilities at September 29, 2004.
Senior Notes Offering
On October 5, 2004, subsequent to the end of the third quarter, Denny's Holdings
issued $175 million aggregate principal amount of Denny's Holdings' 10% Senior
Notes due 2012 (the "10% Notes"). The 10% Notes are irrevocably, fully and
unconditionally guaranteed on a senior basis by Denny's Corporation. The 10%
Notes are general, unsecured senior obligations of Denny's Holdings, and rank
equal in right of payment to all existing and future indebtedness and other
obligations that are not, by their terms, expressly subordinated in right of
payment to the notes; rank senior in right of payment to all existing and future
subordinated indebtedness; and are effectively subordinated to all existing and
future secured debt to the extent of the value of the assets securing such debt
and structurally subordinated to all indebtedness and other liabilities of the
subsidiaries of Denny's Holdings, including the New Credit Facilities. The 10%
Notes bear interest at the rate of 10% per year from and including October 5,
2004, payable semi-annually in arrears on April 1 and October 1 of each year,
commencing on April 1, 2005. The 10% Notes will mature on October 1, 2012.
10
At any time on or after October 1, 2008, Denny's Holdings may redeem all or a
portion of the 10% Notes for cash at its option at the following redemption
prices (expressed as percentages of the principal amount) if redeemed during the
12-month period commencing October 1 of the years indicated below, in each case
together with accrued and unpaid interest and liquidated damages, if any,
thereon to the date of redemption of the 10% Notes (the "Redemption Date"):
Year: Percentage
------------------------------------------------------
2008...................................... 105.0%
2009...................................... 102.5%
2010 and thereafter....................... 100.0%
At any time on or prior to October 1, 2007, upon one or more Qualified Equity
Offerings (as defined in the indenture governing the 10% Notes (the
"Indenture")) for cash, up to 35% of the aggregate principal amount of the 10%
Notes issued pursuant to the Indenture may be redeemed at the option of Denny's
Holdings within 90 days of such Qualified Equity Offering, on not less than 30
days, but not more than 60 days, notice to each holder of the 10% Notes to be
redeemed, with cash contributed to Denny's Holdings from the cash proceeds of
such Qualified Equity Offering, at a redemption price equal to 110% of the
principal amount, together with accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Redemption Date; provided, however, that
immediately following such redemption not less than 65% of the aggregate
principal amount of the 10% Notes originally issued pursuant to the Indenture
remain outstanding.
The Indenture contains covenants limiting the ability of Denny's Holdings and
its subsidiaries (but not its parent, Denny's Corporation) to, among other
things, incur additional indebtedness (including disqualified capital stock);
pay dividends or make distributions or certain other restricted payments; make
certain investments; create liens on our assets to secure debt; enter into sale
and leaseback transactions; enter into transactions with affiliates; merge or
consolidate with another company; sell, lease or otherwise dispose of all or
substantially all of its assets; enter into new lines of business; and guarantee
indebtedness. These covenants are subject to a number of important limitations
and exceptions.
Denny's Corporation is a holding company with no operations or assets, other
than as related to the ownership of the common stock of Denny's Holdings and its
status as a holding company. Denny's Corporation is not subject to the
restrictive covenants in the Indenture. Denny's Holdings is restricted from
paying dividends and making distributions to Denny's Corporation under the terms
of the Indenture.
Through September 29, 2004, we incurred approximately $1.0 million of deferred
financing costs related to the 10% Notes, all of which were included in other
accrued liabilities at September 29, 2004.
Use of Proceeds from Refinancing Transactions
Through September 29, 2004, we used the net proceeds from the Private Placement
principally to repay the $40 million term loan under our then existing senior
secured credit facility (the "Old Credit Facility") and to repurchase
approximately $35.1 million aggregate principal amount of the 11 1/4% Senior
Notes Due 2008 of Denny's Corporation (the "11 1/4% Notes") and approximately
$8.7 million aggregate principal amount of the 12 3/4% Senior Notes Due 2007 of
Denny's Corporation and Denny's Holdings (the "12 3/4% Notes").
Additionally, through September 29, 2004, we used a portion of the term loan
borrowings under the New Credit Facilities to repay amounts outstanding under
the Old Credit Facility, pay certain fees and expenses in connection with the
Refinancing Transactions and repurchase approximately $75.1 million aggregate
principal amount of the 12 3/4% Notes.
At September 29, 2004, the remaining proceeds of approximately $236.4 million
from borrowings under the New Credit Facilities were recorded in cash
(approximately $20.0 million) and restricted cash (approximately $216.4 million)
in the accompanying Condensed Consolidated Balance Sheet. Amounts recorded as
restricted cash are restricted by the Credit Agreements pending the repurchase
or redemption of the remaining senior notes.
11
For the three quarters ended September 29, 2004, we recorded $9.7 million of
losses on early extinguishment of debt which primarily represent the payment of
premiums and expenses as well as write-offs of deferred financing costs and debt
premiums associated with the repurchases of the 11 1/4% Notes and 12 3/4% Notes
and the termination of the Old Credit Facility. These losses are included as a
component of other nonoperating expense (income), net in the accompanying
Condensed Consolidated Statements of Operations for the quarter and three
quarters ended September 29, 2004.
Subsequent to the end of the third quarter, we used the remaining proceeds from
borrowings under the New Credit Facilities and proceeds from the offering of 10%
Notes to repurchase or redeem the remaining 11 1/4% and 12 3/4% Notes and pay
fees and expenses in connection with the Refinancing Transactions. As a result,
we expect to record approximately $12 million of additional losses on early
extinguishment of debt during the fourth quarter of 2004 which primarily
represent the payment of expenses and write-offs of deferred financing costs and
debt premiums associated with these repurchases and redemptions.
Long-term debt consists of the following at December 31, 2003 and September 29,
2004:
September 29, 2004 December 31, 2003
------------------ -----------------
(In thousands)
<s> <c> <c>
Notes and Debentures:
11 1/4% Senior Notes due January 15, 2008, interest payable semi-annually $ 343,920 $ 378,970
12 3/4% Senior Notes due September 30, 2007, interest payable semi-annually 36,544 120,389
New Credit Facilities:
New First Lien Facility:
Revolver Loans outstanding due September 30, 2008................. -- --
Term Loans due September 30, 2009................................. 225,000 --
Second Lien Facility Term Loans due September 30, 2010.............. 120,000 --
Old Credit Facility:
11.0% Term Loans...................................................... -- 40,000
Revolver Loans outstanding............................................ -- 11,100
Other notes payable, maturing over various terms to 10 years, payable in
monthly and semi-annual installments with interest rates ranging from
7.5% to 9.17%......................................................... 557 586
Notes payable secured by equipment, maturing over various terms up to 6
years, payable in monthly and quarterly installments with interest
rates ranging from 9.0% to 11.97%................................... 818 1,243
Capital lease obligations................................................. 31,046 32,190
---------- ----------
757,885 584,478
Premium on 11 1/4% Senior Notes........................................... 6,916 9,019
---------- ----------
Total debt.............................................................. 764,801 593,497
Less current maturities................................................... 3,748 55,176
---------- ----------
Total long-term debt.................................................... $ 761,053 $ 538,321
========== ==========
Note 4. Defined Benefit Plans
---------------------
We maintain defined benefit plans which cover a substantial number of employees.
Benefits are based upon each employee's years of service and average salary. Our
funding policy is based on the minimum amount required under the Employee
Retirement Income Security Act of 1974. The pension plan was closed to new
participants as of December 31, 1999. Benefits will cease to accrue for pension
plan participants as of December 31, 2004. We also maintain defined contribution
plans.
12
The components of net pension cost of the pension plan and other defined benefit
plans as determined under Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," are as follows:
Pension Plan Other Defined Benefit Plans
----------------------------------------- -----------------------------------------
Quarter Ended Quarter Ended
------------- -------------
September 29, 2004 September 24, 2003 September 29, 2004 September 24, 2003
------------------ ------------------ ------------------ ------------------
(In thousands)
<s> <c> <c> <c> <c>
Service cost $ 120 $ 75 $ 78 $ 98
Interest cos 734 718 57 59
Expected return on plan assets (700) (633) -- --
Amortization of net loss 201 214 6 14
----------- ----------- ----------- -----------
Net periodic benefit cost $ 355 $ 374 $ 141 $ 171
=========== =========== =========== ===========
Pension Plan Other Defined Benefit Plans
----------------------------------------- -----------------------------------------
Three Quarters Ended Three Quarters Ended
-------------------- --------------------
September 29, 2004 September 24, 2003 September 29, 2004 September 24, 2003
------------------ ------------------ ------------------ ------------------
(In thousands)
Service cost $ 360 $ 224 $ 233 $ 294
Interest cost 2,200 2,155 170 179
Expected return on plan assets (2,098) (1,898) -- --
Amortization of net loss 601 641 18 42
----------- ----------- ----------- ------------
Net periodic benefit cost $ 1,063 $ 1,122 $ 421 $ 515
=========== =========== =========== ============
We made contributions of $2.9 million to our pension plan during the three
quarters ended September 29, 2004. No contributions were made to our pension
plan during the three quarters ended September 24, 2003. We made contributions
of $0.3 million and $0.3 million to our other defined benefit plans during the
three quarters ended September 29, 2004 and September 24, 2003, respectively. As
of September 29, 2004, we expect to contribute $0.6 million to our pension plan
and $0.1 million to our other defined benefit plans during the remainder of
fiscal 2004.
Note 5. Stock Based Compensation
------------------------
We have adopted the disclosure-only provisions of SFAS 123, "Accounting for
Stock Based Compensation," while continuing to follow Accounting Principles
Board Opinion No. 25, or APB 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for our stock-based compensation plans
(i.e., the "intrinsic method"). Under APB 25, because the exercise price of our
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense has been recognized in our
statements of operations.
13
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma
information follows:
Quarter Ended Three Quarters Ended
-------------------------------------- --------------------------------------
September 29, 2004 September 24, 2003 September 29, 2004 September 24, 2003
------------------ ------------------ ------------------ ------------------
(In thousands, except per share amounts)
<s> <c> <c> <c> <c>
Reported net loss $ (11,813) $ (6,273) $ (23,441) $ (20,732)
Less total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 93 320 384 1,080
--------- --------- --------- ----------
Pro forma net loss $ (11,906) $ (6,593) $ (23,825) $ (21,812)
========= ========= ========== =========
Loss per share:
Basic and diluted - as reported $ (0.14) $ (0.15) $ (0.42) $ (0.51)
========= ========= ========= =========
Basic and diluted - pro forma $ (0.14) $ (0.16) $ (0.42) $ (0.54)
========= ========= ========= =========
Subsequent to the end of the third quarter, we granted approximately 4.0 million
common stock options to certain employees. The options have an exercise price of
$2.42 and will vest 33.33% of the shares on each of December 29, 2004, December
28, 2005 and December 27, 2006, respectively. At the grant date, November 11,
2004, the fair market value of the common stock was $4.22. The vesting of these
options is subject to the achievement of certain performance measures through
December 29, 2004.
Additionally, subsequent to the end of the third quarter, we granted
approximately 3.0 million restricted stock units to certain employees. The
restricted stock units will be earned in 1/3 increments (from 0% to 100% of the
target award for each such increment) based on the "total shareholder return" of
the Common Stock (measured as increase of stock price plus reinvested dividends,
divided by beginning stock price) over a 1-year performance period, the first
such period ending in June 2005 (with any amounts not earned carried over to
possibly be earned over a 2-year or 3-year period), as compared to the total
shareholder return of a peer group of restaurant companies over the same period.
The full award will be considered earned after 5 years based on continued
employment. Once earned, the restricted stock units will vest over a period of
two years based on continued employment of the holder. On each of the first two
anniversaries of the end of the performance period, 50% of the earned restricted
stock units will be paid to the holder (one half of the value will be paid in
cash and one-half in shares of common stock), provided that the holder is then
still employed with the Company or an affiliate. At grant date, November 11,
2004, the fair market value of the common stock was $4.22.
We will record compensation expense under these stock-based compensation awards
beginning in the fourth quarter of 2004 over the related vesting periods.
Amounts of compensation expense to be recorded will be dependent upon meeting
certain performance measures and the fair market value of the common stock over
the performance and vesting periods. These options and restricted stock units
were granted under the Denny's Corporation 2004 Omnibus Incentive Plan approved
by the shareholders on August 25, 2004.
Note 6. Net Loss Per Share
------------------
Warrants outstanding of 3.2 million at September 29, 2004 and September 24, 2003
have been omitted from the calculations of weighted average diluted shares for
all periods presented because they have an antidilutive effect on net loss per
share. Options outstanding of 6.6 million and 7.5 million at September 29, 2004
and September 24, 2003, respectively, have also been omitted from the
calculations of weighted average diluted shares for all periods presented
because they have an antidilutive effect on net loss per share.
14
Note 7. Supplemental Cash Flow Information
----------------------------------
Three Quarters Ended
--------------------
September 29, 2004 September 24, 2003
------------------ ------------------
(In thousands)
<s> <c> <c>
Income taxes paid, net $ 1,091 $ 377
========= =========
Interest paid $ 64,363 $ 59,163
========= =========
Noncash financing activities:
Capital leases entered into $ 1,990 $ 1,334
========= =========
Accrual of deferred financing costs $ 1,387 $ ---
========= =========
Accrual of equity issuance costs $ 249 $ ---
========= =========
Note 8. Implementation of New Accounting Standards
------------------------------------------
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
FIN No. 46 (Revised) (FIN 46-R) to address certain FIN 46 implementation issues,
including the delay of the effective date for certain types of Variable Interest
Entities (VIEs). This interpretation clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," for companies
that have interests in entities that are VIEs as defined under FIN 46. According
to this interpretation, if a company has an interest in a VIE and is at risk for
a majority of the VIE's expected losses or receives a majority of the VIE's
expected gains, it shall consolidate the VIE. FIN 46-R also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders. For entities acquired or created before February 1, 2003, FIN 46-R is
effective no later than the end of the first interim or reporting period ending
after March 15, 2004, except for those VIEs that are considered to be special
purpose entities, for which the effective date is no later than the end of the
first interim or annual reporting period ending after December 15, 2003. For all
entities that were acquired subsequent to January 31, 2003, this interpretation
is effective as of the first interim or annual period ending after December 31,
2003. We completed adoption of FIN 46-R during the first quarter of 2004. The
adoption of FIN 46-R had no effect on our consolidated financial statements.
In December 2003 the FASB issued SFAS No. 132 (Revised) (SFAS 132-R),
"Employer's Disclosure about Pensions and Other Postretirement Benefits." SFAS
132-R retains disclosure requirements of the original SFAS 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net
periodic benefit cost. SFAS 132-R is effective for fiscal years ending after
December 15, 2003, except that certain disclosures are effective for fiscal
years ending after June 15, 2004. Interim period disclosures are effective for
interim periods beginning after December 15, 2003. See Note 4.
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 29, 2004 and results of operations for the
quarter and three quarters ended September 29, 2004 compared to the quarter and
three quarters ended September 24, 2003. 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; 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 31, 2003 and in Exhibit 99 thereto.
15
Statements of Operations
Quarter Ended Three Quarters Ended
------------- --------------------
September 29, 2004 September 24, 2003 September 29, 2004 September 24, 2003
------------------ ------------------ ------------------ ------------------
(Dollars in thousands) (Dollars in thousands)
<s> <c> <c> <c> <c>
Revenue:
Company restaurant sales.................... $224,330 90.8% $215,573 90.4% $649,998 90.7% $623,474 90.5%
Franchise and license revenue............... 22,815 9.2% 22,817 9.6% 66,283 9.3% 65,817 9.5%
-------- ------ -------- ------ -------- ------ -------- ------
Total operating revenue.................. 247,145 100.0% 238,390 100.0% 716,281 100.0% 689,291 100.0%
-------- ------ -------- ------ -------- ------ -------- ------
Costs of company restaurant sales (a):
Product costs............................... 58,328 26.0% 56,215 26.1% 167,764 25.8% 158,298 25.4%
Payroll and benefits........................ 91,929 41.0% 91,080 42.3% 270,205 41.6% 271,775 43.6%
Occupancy................................... 12,850 5.7% 12,296 5.7% 37,540 5.8% 36,343 5.8%
Other operating expenses.................... 30,913 13.8% 31,354 14.5% 88,118 13.6% 88,185 14.1%
-------- ------ -------- ------ -------- ------ -------- ------
Total costs of company restaurant sales.. 194,020 86.5% 190,945 88.6% 563,627 86.7% 554,601 89.0%
Costs of franchise and license revenue (a).... 6,948 30.5% 6,801 29.8% 21,165 31.9% 20,071 30.5%
General and administrative expenses........... 16,727 6.8% 11,982 5.0% 46,136 6.4% 38,229 5.5%
Depreciation and amortization................. 13,529 5.5% 15,254 6.4% 41,941 5.9% 43,931 6.4%
Restructuring charges and exit costs.......... 1,080 0.4% 70 0.0% 666 0.1% (866) (0.1%)
Impairment charges............................ 195 0.1% 1,190 0.5% 692 0.1% 1,889 0.3%
Gains on disposition of assets and other, net. (998) (0.4%) (778) (0.3%) (1,230) (0.2%) (5,647) (0.8%)
-------- ------ -------- ------ -------- ------ -------- ------
Total operating costs and expenses....... 231,501 93.7% 225,464 94.6% 672,997 94.0% 652,208 94.6%
-------- ------ -------- ------ -------- ------ -------- ------
Operating income.............................. 15,644 6.3% 12,926 5.4% 43,284 6.0% 37,083 5.4%
-------- ------ -------- ------ -------- ------ -------- ------
Other expenses:
Interest expense, net....................... 17,556 7.1% 18,990 8.0% 56,481 7.9% 57,196 8.3%
Other nonoperating expense (income), net.... 9,699 3.9% (57) (0.0%) 9,635 1.3% (177) (0.0%)
-------- ------ -------- ------ -------- ------ -------- ------
Total other expenses, net................ 27,255 11.0% 18,933 7.9% 66,116 9.2% 57,019 8.3%
-------- ------ -------- ------ -------- ------ -------- ------
Loss before income taxes...................... (11,611) (4.7%) (6,007) (2.5%) (22,832) (3.2%) (19,936) (2.9%)
Provision for income taxes.................... 202 0.1% 266 0.1% 609 0.1% 796 0.1%
-------- ------ -------- ------ -------- ------ -------- ------
Net loss ..................................... $(11,813) (4.8%) $ (6,273) (2.6%) $(23,441) (3.3%) $(20,732) (3.0%)
======== ====== ======== ====== ======== ====== ======== ======
Other Data:
Company-owned average unit sales.............. $ 408.2 $ 384.5 $1,174.1 $1,111.5
Same-store sales increase (decrease)
(company-owned) (b)........................... 6.8% (1.2%) 5.9% (0.8%)
Guest check average increase (b)............ 3.8% 4.5% 3.4% 3.6%
Guest count increase (decrease) (b)......... 2.9% (5.4%) 2.4% (4.2%)
- ------------------
(a) Costs of company restaurant sales percentages are as a percentage of company
restaurant sales. Costs of franchise and license revenue percentages are as
a percentage of franchise and license revenue. All other percentages are as
a percentage of total operating revenue.
(b) Same-store sales include sales from restaurants that were open the same days
in both the current year and prior year. For purposes of calculating
same-store sales, the 1st week of 2004 was compared to the 2nd week of 2003
due to a 53rd week in 2003. Prior year amounts have not been restated for
2004 comparable units.
Unit Activity
- -------------
Ending Ending Ending
Units Units Units Units Units Units
June 30, 2004 Opened Reacquired Closed September 29, 2004 September 24, 2003
------------- ------ ---------- ------ ------------------ ------------------
<s> <c> <c> <c> <c> <c> <c>
Company-owned restaurants 556 --- 1 (4) 553 562
Franchised and licensed restaurants 1,063 6 (1) (12) 1,056 1,084
----- ---- -- --- ----- -----
1,619 6 0 (16) 1,609 1,646
===== ==== == === ===== =====
16
Quarter Ended September 29, 2004 Compared with Quarter Ended September 24, 2003
- -------------------------------------------------------------------------------
Company Restaurant Operations
During the quarter ended September 29, 2004, we realized a 6.8% increase in
same-store sales, comprised of a 3.8% increase in guest check average and a 2.9%
increase in guest counts. Company restaurant sales increased $8.8 million
(4.1%). Higher sales resulted primarily from the increase in same-store sales
for the current period partially offset by a 10 equivalent-unit decrease in
company-owned restaurants. The decrease in company-owned restaurants resulted
primarily from store closures.
Total costs of company restaurant sales as a percentage of company restaurant
sales decreased to 86.5% from 88.6%. Product costs decreased to 26.0% from
26.1%, including the impact of a $0.7 million reduction of deferred gain
amortization related to the sale of former distribution subsidiaries in previous
years. This deferred gain became fully amortized in September of 2003. Excluding
the amortization of deferred gains for the prior year, product costs as a
percentage of sales were 26.4% in 2003. Payroll and benefits decreased to 41.0%
from 42.3% due to increased labor efficiency resulting from higher sales as well
as decreased health benefits costs resulting from new health benefits programs
implemented in 2004. These cost improvements were partially offset by higher
workers' compensation costs and increased in-restaurant incentive compensation
compared to the prior year. Occupancy costs were 5.7% in both quarters. Other
operating expenses were comprised of the following amounts and percentages of
company restaurant sales:
Quarter Ended
-------------
September 29, 2004 September 24, 2003
------------------- -------------------
(Dollars in thousands)
Utilities $ 10,497 4.7% $ 10,228 4.7%
Repairs and maintenance 4,855 2.2% 4,873 2.3%
Marketing 7,188 3.2% 7,811 3.6%
Other 8,373 3.7% 8,442 3.9%
--------- ----- --------- -----
Other operating expenses $ 30,913 13.8% $ 31,354 14.5%
======== ===== ========= =====
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. 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.
Franchise and license revenue and costs of franchise and license revenue were
comprised of the following amounts and percentages of franchise and license
revenue:
Quarter Ended
-------------
September 29, 2004 September 24, 2003
------------------ -------------------
(Dollars in thousands)
Royalties and initial fees $ 14,838 65.0% $ 14,445 63.3%
Occupancy revenue 7,977 35.0% 8,372 36.7%
--------- ------ --------- ------
Franchise and license revenue $ 22,815 100.0% $ 22,817 100.0%
========= ====== ========= ======
Occupancy costs $ 5,154 22.6% $ 5,255 23.0%
Other direct costs 1,794 7.9% 1,546 6.8%
--------- ------ --------- ------
Costs of franchise and license
revenue $ 6,948 30.5% $ 6,801 29.8%
========= ====== ========= ======
Revenues were essentially flat as a 6.6% increase in franchisee same-store sales
was offset by a 28-unit decrease in franchised and licensed units due to unit
closures.
The increase in costs of franchise and license revenue as a percentage of
franchise and license revenues was primarily due to increased franchise
operations personnel incentive compensation compared to the prior year.
17
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 increased $4.7 million compared with the
quarter ended September 24, 2003. The increase resulted primarily from higher
accruals for incentive compensation of approximately $2.9 million compared to
the prior year and the incurrence of recapitalization related expenses
(approximately $1.4 million).
Gains on disposition of assets and other, net of $1.0 million in 2004 and $0.8
million in 2003 primarily represent gains on cash sales of surplus properties.
Operating income was $15.6 million for the quarter ended September 29, 2004
compared with $12.9 million for the quarter ended September 24, 2003.
Interest expense, net for the quarter ended September 29, 2004 was comprised of
$18.0 million of interest expense offset by $0.4 million of interest income,
compared with $19.3 million of interest expense offset by $0.3 million of
interest income for the quarter ended September 24, 2003. The decrease in
interest expense resulted from the repurchase of a portion of the 11 1/4% Notes
and 12 3/4% Notes and the repayment of balances outstanding under the Old Credit
Facility.
Other nonoperating expenses of $9.7 million for the quarter ended September 29,
2004 primarily represent the payment of premiums and expenses as well as
write-offs of deferred financing costs and debt premiums associated with the
repurchase of $118.9 million of the 11 1/4% Notes and 12 3/4% Notes and the
replacement of the Old Credit Facility.
The provision for income taxes was $0.2 million and $0.3 million for the
quarters ended September 29, 2004 and September 24, 2003, respectively. 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. In
establishing our valuation allowance, we have taken into consideration certain
tax planning strategies involving the sale of appreciated properties in order to
alter the timing of the expiration of certain net operating loss, or NOL,
carryforwards in the event they were to expire unused. Such strategies, if
implemented in future periods, are considered by us to be prudent and feasible
in light of current circumstances. Circumstances may change in future periods
such that we can no longer conclude that such tax planning strategies are
prudent and feasible, which would require us to record additional deferred tax
valuation allowances.
Net loss was $11.8 million for the quarter ended September 29, 2004 compared
with $6.3 million for the quarter ended September 24, 2003 due to the factors
noted above.
Three Quarters Ended September 29, 2004 Compared with Three Quarters Ended
- --------------------------------------------------------------------------
September 24, 2003
- ------------------
Company Restaurant Operations
During the three quarters ended September 29, 2004, we realized a 5.9% increase
in same-store sales, comprised of a 2.4% increase in guest counts and a 3.4%
increase in guest check average. Company restaurant sales increased $26.5
million (4.3%). Higher sales resulted primarily from the increase in same-store
sales for the current year partially offset by a 7 equivalent-unit decrease in
company-owned restaurants. The decrease in company-owned restaurants resulted
primarily from store closures.
Total costs of company restaurant sales as a percentage of company restaurant
sales decreased to 86.7% from 89.0%. Product costs increased to 25.8% from
18
25.4%, including the impact of a $2.6 million reduction of deferred gain
amortization related to the sale of former distribution subsidiaries in previous
years. This deferred gain became fully amortized in September of 2003. Excluding
the amortization of deferred gains for the prior year, product costs as a
percentage of sales were 25.8% in 2003. Payroll and benefits decreased to 41.6%
from 43.6% due to increased labor efficiency resulting from higher sales as well
as decreased health benefits costs resulting from new health benefits programs
implemented in 2004. These cost improvements were partially offset by higher
workers' compensation costs and increased incentive compensation compared to the
prior year. Occupancy costs were 5.8% in both years. Other operating expenses
were comprised of the following amounts and percentages of company restaurant
sales:
Three Quarters Ended
--------------------
September 29, 2004 September 24, 2003
------------------ ------------------
(Dollars in thousands)
Utilities $ 29,713 4.6% $ 28,366 4.5%
Repairs and maintenance 12,374 1.9% 13,880 2.2%
Marketing 22,427 3.5% 21,579 3.5%
Other 23,604 3.6% 24,360 3.9%
--------- ------ --------- ------
Other operating expenses $ 88,118 13.6% $ 88,185 14.1%
========= ====== ========= ======
Franchise Operations
Franchise and license revenue and costs of franchise and license revenue were
comprised of the following amounts and percentages of franchise and license
revenue:
Three Quarters Ended
--------------------
September 29, 2004 September 24, 2003
------------------ ------------------
(Dollars in thousands)
Royalties and initial fees $ 42,761 64.5% $ 41,237 62.7%
Occupancy revenue 23,522 35.5% 24,580 37.3%
--------- ------ -------- ------
Franchise and license revenue $ 66,283 100.0% $ 65,817 100.0%
========= ====== ======== ======
Occupancy costs 15,757 23.8% 16,190 24.6%
Other direct costs 5,408 8.1% 3,881 5.9%
--------- ------ -------- ------
Costs of franchise and license
revenue $ 21,165 31.9% $ 20,071 30.5%
========= ====== ======== ======
The revenue increase of $0.5 million (0.7%) resulted from a 6.0% increase in
franchisee same-store sales partially offset by a 28-unit decrease in franchised
and licensed units due to unit closures.
Costs of franchise and license revenue increased $1.1 million (5.5%). The
increase as a percentage of franchise and license revenues was due to increased
franchise operations personnel incentive compensation compared to the prior year
coupled with prior year costs benefiting from a net $0.4 million reduction in
bad debt expense related to the collection of certain past due accounts.
Other Operating Costs and Expenses
General and administrative expenses increased $7.9 million (20.7%) compared with
the three quarters ended September 24, 2003. The increase resulted primarily
from higher accruals for incentive compensation of approximately $6.9 million
compared to the prior year and the incurrence of recapitalization related
expenses (approximately $3.9 million). These increases were partially offset by
reductions in corporate overhead related to organizational changes.
Gains on disposition of assets and other, net of $1.2 million in 2004 and $5.6
million in 2003 primarily represent gains on cash sales of surplus properties.
Operating income was $43.3 million for the three quarters ended September 29,
2004 compared with $37.1 million for the three quarters ended September 24,
2003.
19
Interest expense, net for the three quarters ended September 29, 2004 was
comprised of $57.6 million of interest expense offset by $1.1 million of
interest income, compared with $58.3 million of interest expense offset by $1.1
million of interest income for the three quarters ended September 24, 2003. The
decrease in interest expense resulted from the repurchase of a portion of the 11
1/4% Notes and 12 3/4% Notes and the repayment of balances outstanding under the
Old Credit Facility.
Other nonoperating expenses of $9.6 million for the three quarters ended
September 29, 2004 primarily represent the payment of premiums and expenses as
well as write-offs of deferred financing costs and debt premiums associated with
the repurchase of $118.9 million of the 11 1/4% Notes and 12 3/4% Notes and the
replacement of the Old Credit Facility.
The provision for income taxes was $0.6 million and $0.8 million for the three
quarters ended September 29, 2004 and September 24, 2003, respectively. 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. In
establishing our valuation allowance, we have taken into consideration certain
tax planning strategies involving the sale of appreciated properties in order to
alter the timing of the expiration of certain net operating loss, or NOL,
carryforwards in the event they were to expire unused. Such strategies, if
implemented in future periods, are considered by us to be prudent and feasible
in light of current circumstances. Circumstances may change in future periods
such that we can no longer conclude that such tax planning strategies are
prudent and feasible, which would require us to record additional deferred tax
valuation allowances.
Net loss was $23.4 million for the three quarters ended September 29, 2004
compared with $20.7 million for the three quarters ended September 24, 2003 due
to the factors noted above.
Liquidity and Capital Resources
- -------------------------------
During the third and fourth quarters of 2004, we completed a series of
recapitalization transactions intended to reduce interest expense, extend debt
maturities and increase our financial flexibility. The recapitalization
consisted of the transactions and the use of proceeds therefrom as described
below, which we refer to collectively as the "Refinancing Transactions":
Private Placement
In July 2004, Denny's Corporation received net proceeds of approximately $89.8
million from a private placement of 48.4 million shares of our common stock at a
price of $1.90 per share (the "Private Placement"). The proceeds are net of $2.2
million of direct costs related to the Private Placement, $0.2 million of which
were included in other accrued expenses at September 29, 2004.
New Credit Facilities
On September 21, 2004, our subsidiaries, Denny's, Inc. and Denny's Realty, Inc.
(the "Borrowers"), entered into new senior secured credit facilities in an
aggregate principal amount of $420 million. The new credit facilities consist of
a first lien facility and a second lien facility. The new first lien facility
consists of a $225 million five-year term loan facility (the "Term Loan
Facility") and a $75 million four-year revolving credit facility, of which $45
million is available for the issuance of letters of credit (the "Revolving
Facility" and together with the Term Loan Facility, the "New First Lien
Facility"). The second lien facility consists of an additional $120 million
six-year term loan facility ranking (the "Second Lien Facility," and together
with the New First Lien Facility, the "New Credit Facilities"). The Second Lien
Facility ranks pari passu with the New First Lien Facility in right of payment,
but is in a second lien position with respect to the collateral securing the New
First Lien Facility. The New Credit Facilities are secured by substantially all
of our assets and guaranteed by Denny's Corporation, Denny's Holdings and all of
their subsidiaries.
The Term Loan Facility will mature on September 30, 2009 and will amortize in
20
equal quarterly installments at a rate equal to approximately 1% per annum
(commencing March 31, 2005) with all remaining amounts due on the maturity date.
The Revolving Facility will mature on September 30, 2008. The Second Lien
Facility will mature on September 30, 2010 with no amortization of principal
during the six year term.
The interest rates under the New First Lien Facility are as follows: At the
option of the Borrowers, Adjusted LIBOR plus a spread of 3.25% per annum (3.50%
per annum for the Revolving Facility) or ABR (the Alternate Base Rate, which is
the highest of the Bank of America Prime Rate and the Federal Funds Effective
Rate plus 1/2 of 1%) plus a spread of 1.75% per annum (2.0% per annum for the
Revolving Facility). The interest rate on the Second Lien Facility, at the
Borrower's option, is Adjusted LIBOR plus a spread of 5.125% per annum or ABR
plus a spread of 3.625% per annum.
At September 29, 2004, we had outstanding letters of credit of $39.6 million
under our Revolving Facility, leaving net availability of $35.4 million. There
were no revolving loans outstanding at September 29, 2004.
Senior Notes Offering
On October 5, 2004, subsequent to the end of the third quarter, Denny's Holdings
issued $175 million aggregate principal amount of Denny's Holdings' 10% Senior
Notes due 2012 (the "10% Notes"). The 10% Notes are irrevocably, fully and
unconditionally guaranteed on a senior basis by Denny's Corporation. The 10%
Notes will be general, unsecured senior obligations of Denny's Holdings, and
will rank equal in right of payment to all existing and future indebtedness and
other obligations that are not, by their terms, expressly subordinated in right
of payment to the notes; will rank senior in right of payment to all existing
and future subordinated indebtedness; and are effectively subordinated to all
existing and future secured debt to the extent of the value of the assets
securing such debt and structurally subordinated to all indebtedness and other
liabilities of the subsidiaries of Denny's Holdings, including the New Credit
Facilities. The 10% Notes will bear interest at the rate of 10% per year from
and including October 5, 2004, payable semi-annually in arrears on April 1 and
October 1 of each year, commencing on April 1, 2005. The 10% Notes will mature
on October 1, 2012.
Use of Proceeds from Refinancing Transactions
Through September 29, 2004, we used the net proceeds from the Private Placement
principally to repay the $40 million term loan under our then existing senior
secured credit facility (the "Old Credit Facility") and to repurchase
approximately $35.1 million aggregate principal amount of the 11 1/4% Senior
Notes Due 2008 of Denny's Corporation (the "11 1/4% Notes") and approximately
$8.7 million aggregate principal amount of the 12 3/4% Senior Notes Due 2007 of
Denny's Corporation and Denny's Holdings (the "12 3/4% Notes").
Additionally, through September 29, 2004, we used a portion of the term loan
borrowings under the New Credit Facilities to repay amounts outstanding under
the Old Credit Facility, pay certain fees and expenses in connection with the
Refinancing Transactions and repurchase approximately $75.1 million aggregate
principal amount of the 12 3/4% Notes.
At September 29, 2004, the remaining proceeds of approximately $236.4 million
from borrowings under the New Credit Facilities were recorded in cash
(approximately $20.0 million) and restricted cash (approximately $216.4 million)
in the accompanying Condensed Consolidated Balance Sheet.
Subsequent to the end of the third quarter, we used the remaining proceeds from
borrowings under the New Credit Facilities and proceeds from the offering of 10%
Notes to repurchase or redeem the remaining 11 1/4% and 12 3/4% Notes and pay
fees and expenses in connection with the Refinancing Transactions.
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Long-term debt consists of the following at December 31, 2003, September 29,
2004 and on a proforma basis at September 29, 2004 as if all the Refinancing
Transactions had occurred on September 29, 2004:
Proforma
September 29, September 29, December 31,
2004 2004 2003
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Notes and Debentures:
10% Senior Notes due October 1, 2012, interest payable semi-annually.... $ 175,000 $ -- $ --
11 1/4% Senior Notes due January 15, 2008, interest payable semi-annually -- 343,920 378,970
12 3/4% Senior Notes due September 30, 2007, interest payable semi-annually -- 36,544 120,389
New Credit Facilities:
New First Lien Facility:
Revolver Loans outstanding due September 30, 2008................. -- -- --
Term Loans due September 30, 2009................................. 225,000 225,000 --
Second Lien Facility Term Loans due September 30, 2010.............. 120,000 120,000 --
Old Credit Facility:
11.0% Term Loans...................................................... -- -- 40,000
Revolver Loans outstanding............................................ -- -- 11,100
Other notes payable, maturing over various terms to 10 years, payable in
monthly and semi-annual installments with interest rates ranging from
7.5% to 9.17%......................................................... 557 557 586
Notes payable secured by equipment, maturing over various terms up to 6
years, payable in monthly and quarterly installments with interest rates
ranging from 9.0% to 11.97%....................................... 818 818 1,243
Capital lease obligations................................................. 31,046 31,046 32,190
---------- ---------- ----------
552,421 757,885 584,478
Premium on 11 1/4% Senior Notes........................................... -- 6,916 9,019
---------- ---------- ----------
Total debt.............................................................. 552,421 764,801 593,497
Less current maturities................................................... 3,748 3,748 55,176
---------- ---------- ----------
Total long-term debt.................................................... $ 548,673 $ 761,053 $ 538,321
========== ========== ==========
As a result of the Refinancing Transactions, our future contractual obligations
and commitments related to long-term debt have been reduced and extended.
Aggregate annual maturities of long-term debt, excluding capital lease
obligations, at September 29, 2004 (on a proforma basis) are as follows:
Year: (In thousands)
-----
2004..................................... $ 161
2005..................................... 1,978
2006..................................... 2,433
2007..................................... 2,452
2008..................................... 2,970
Thereafter............................... 511,381
---------
$ 521,375
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 29, 2004, our capital expenditures were $24.1 million. Of that
amount, approximately $2.0 million was financed through capital leases. Capital
expenditures during 2004 are expected to total approximately $40 million;
however, we are not committed to spending this amount and could spend more or
less if circumstances require.
Our working capital deficit was $80.0 million at September 29, 2004, which
included remaining proceeds of approximately $20.0 million from borrowings under
the New Credit Facilities. These remaining proceeds, along with restricted cash
of $216.4 million, were used subsequent to the end of the third quarter to
repurchase or redeem the remaining 11 1/4% and 12 3/4% Notes and pay fees and
expenses in connection with the Refinancing Transactions. Excluding the $20.0
million of remaining proceeds, we had a working capital deficit of $100.0
million compared with a working capital deficit of $160.5 million at December
31, 2003. This decrease in the working capital deficit resulted primarily from
the repayment of balances outstanding under our Old Credit Facility, which were
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classified as current liabilities at December 31, 2003, with proceeds from the
Private Placement.
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 8 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, certain of our debt
instruments bear interest at variable rates as follows:
Rate at September 29, 2004
---------------------------
New Credit Facilities:
First Lien Facility Term Loans, LIBOR plus 3.25% 5.1%
Second Lien Facility Term Loans, LIBOR plus 5.125% 6.9%
A 100 basis point change in the rate for these debt instruments would cause the
interest expense for the remainder of 2004 to change by $0.9 million. This
computation is determined by considering the impact of hypothetical interest
rates on balance outstanding under the New Credit Facilities at September 29,
2004. However, the nature and amount of our borrowings under the New Credit
Facilities 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 $397.0 million at September 29, 2004. The carrying value of
such debt was approximately $381.8 million at September 29, 2004. 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 29, 2004 relates primarily to market
quotations for our 11 1/4% Notes and 12 3/4% Notes. These notes were redeemed or
repurchased subsequent to quarter end. See Note 3 to our Condensed Consolidated
Financial Statements.
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 29, 2004.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act") our management conducted an evaluation (under the
supervision and with the participation of our President and Chief Executive
Officer, Nelson J. Marchioli, and our Senior Vice President and Chief Financial
Officer, Andrew F. Green) as of the end of the period covered by this report, of
the effectiveness of our disclosure controls and procedures as defined in Rule
13a-15(e) under the Exchange Act. Based on that evaluation, Messrs. Marchioli
and Green each concluded that Denny's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that Denny's files or submits under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
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There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) of the
Exchange Act that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders of Denny's Corporation was held on Wednesday,
August 25, 2004, and the following matters were voted on by the stockholders of
Denny's Corporation:
(i) Approval of an amendment to the Restated Certificate of Incorporation
of Denny's Corporation to increase the number of authorized shares of
common stock, par value $0.01 per share, from 100,000,000 shares to
135,000,000 shares.
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
61,654,545 336,959 32,278
(ii) Approval of the Denny's Corporation 2004 Omnibus Incentive Plan
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
59,734,135 2,269,365 20,282
On September 7, 2004, Denny's Corporation commenced consent solicitations of the
holders of each of the 11 1/4% Notes and the 12 3/4% Notes (none of which are
currently outstanding) to the adoption of certain amendments to the respective
indentures governing those notes between us and U.S. Bank National Association,
as trustee, eliminating substantially all of the restrictive covenants and
events of default relating to such restrictive covenants from the respective
indentures and reducing the minimum notice period for a redemption of each of
the notes from 30 days to three days. The holders of approximately 83% of
outstanding principal amount of the 11 1/4% Notes gave their consent and holders
of approximately 67% of outstanding principal amount of the 12 3/4% Notes gave
their consent. The remaining holders withheld their consent. September 20, 2004
was the last day on which consents could be given or revoked.
Item 5. Other Information
As described above, the stockholders of Denny's Corporation previously approved
the Denny's Corporation 2004 Omnibus Incentive Plan to promote the Company's
success by linking the personal interests of its employees, officers, directors
and consultants to those of the stockholders, and by providing participants with
an incentive for performance. The plan is administered by the Compensation
Committee of the Board of Directors or the Board of Directors as a whole. Ten
million shares of the common stock of Denny's Corporation are reserved for
issuance upon the grant or exercise of awards pursuant to the plan.
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The plan authorizes the granting of incentive awards from time to time to
selected employees, officers, directors and consultants of Denny's Corporation
and its affiliates. Awards may be in any of the following forms: (i) options to
purchase shares of common stock, which may be non-qualified stock options or
incentive stock options under the U.S. tax code (the "Code"); (ii) stock
appreciation rights; (iii) performance awards; (iv) restricted stock; (v)
restricted stock units; (vi) deferred stock units; (vii) dividend equivalents;
(viii) other stock-based awards in the discretion of the Compensation Committee,
including unrestricted stock grants; and purely cash-based awards. The
Compensation Committee may designate any award other than a market-priced option
or stock appreciation right as a qualified performance-based award in order to
make the award fully deductible without regard to the $1,000,000 deduction limit
imposed by Code Section 162(m), in accordance with the plan.
Item 6. Exhibits
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
4.1 12 3/4% Senior Notes due 2007 Supplemental Indenture, dated
September 21, 2004, among Denny's Corporation (f/k/a Advantica
Restaurant Group, Inc.) and Denny's Holdings, Inc., as Issuers
and U.S. Bank National Association, as Trustee.
4.2 11 1/4% Senior Notes due 2008 Supplemental Indenture dated as
of September 21, 2004 between Denny's Corporation (f/k/a
Advantica Restaurant Group, Inc.), as Issuer, and U.S. Bank
National Association (successor to First Trust National
Association), as Trustee.
4.3 10% Senior Notes due 2012 Indenture (including the form of
security) dated as of October 5, 2004 between Denny's
Holdings, Inc., as Issuer, Denny's Corporation, as Guarantor,
and U.S. Bank National Association, as Trustee.
4.4* Amendment No. 1 dated as of July 2, 2004 to the Rights
Agreement dated as of December 14, 1998, between Denny's
Corporation and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 99.1 to our Current
Report on Form 8-K dated July 2, 2004).
4.5* Amendment No. 2 dated as of July 27, 2004 to the Rights
Agreement, dated as of December 14, 1998, as previously
amended as of July 2, 2004, between Denny's Corporation and
Continental Stock Transfer & Trust Company (incorporated by
reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004).
10.1 Credit Agreement dated as of September 21, 2004, Among
Denny's, Inc., Denny's Realty, Inc., as Borrowers, Denny's
Corporation, Denny's Holdings, Inc., DFO, Inc., as Guarantors,
the Lenders named herein, Bank of America, N.A., as
Administrative Agent, and UBS SECURITIES LLC, as Syndication
Agent, and Banc of America Securities LLC and UBS Securities
LLC, as Joint Lead Arrangers and Joint Bookrunners (First
Lien).
10.2 Credit Agreement dated as of September 21, 2004, Among
Denny's, Inc., Denny's Realty, Inc., as Borrowers, Denny's
Corporation, Denny's Holdings, Inc., DFO, Inc., as Guarantors,
the Lenders named herein, Bank of America, N.A., as
Administrative Agent, and UBS SECURITIES LLC, as Syndication
Agent, and Banc of America Securities LLC and UBS Securities
LLC, as Joint Lead Arrangers and Joint Bookrunners (Second
Lien).
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10.3 Guarantee and Collateral Agreement dated as of September 21,
2004, among Denny's, Inc., Denny's Realty, Inc., Denny's
Corporation, Denny's Holdings, Inc., DFO, Inc., each other
Subsidiary Loan Party and Bank of America, N.A., as Collateral
Agent (First Lien).
10.4 Guarantee and Collateral Agreement dated as of September 21,
2004, among Denny's, Inc., Denny's Realty, Inc., Denny's
Corporation, Denny's Holdings, Inc., DFO, Inc., each other
Subsidiary Loan Party and Bank of America, N.A., as Collateral
Agent (Second Lien).
10.5 Denny's Holdings, Inc. $175,000,000 10% Senior Notes due 2012
Purchase Agreement dated September 29, 2004 by and among
Denny's Holdings, Inc., Denny's Corporation, UBS Securities
LC, Goldman, Sachs & Co. and Banc of America Securities LLC.
10.6 Registration Rights Agreement dated as of October 5, 2004, by
and among Denny's Holdings, Inc. as Issuer, Denny's
Corporation as Guarantor, and UBS Securities LLC, Goldman,
Sachs & Co. and Banc of America Securities LLC as Initial
Purchasers.
10.7 Description of amendments to the Denny's, Inc. Omnibus
Incentive Compensation Plan for Executives, the Advantica
Stock Option Plan and the Advantica Restaurant Group Director
Stock Option Plan.
10.8* Amendment No. 1 dated as of July 2, 2004 to the Credit
Agreement dated as of December 16, 2002, as amended and
restated as of September 26, 2003, among Denny's, Inc.,
Denny's Realty, Inc., Denny's Corporation, Denny's Holdings,
Inc., DFO, Inc., the Lenders from time to time party thereto,
JPMorgan Chase Bank, as Administrative Agent, and Wells Fargo
Foothill, Inc. (f/k/a Foothill Capital Corporation), as
Syndication Agent (incorporated by reference to Exhibit 10.1
to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
10.9* Amendment No. 2 dated as of July 27, 2004 to the Credit
Agreement dated as of December 16, 2002, as amended and
restated as of September 26, 2003 and as amended by Amendment
No. 1 thereto dated of July 2, 2004, among Denny's Inc.,
Denny's Realty, Inc., Denny's Corporation, Denny's Holdings,
Inc., DFO, Inc., the Lenders from time to time party thereto,
JPMorgan Chase Bank, as Administrative Agent, and Wells Fargo
Foothill, Inc. f/k/a Foothill Capital Corporation), as
Syndication Agent (incorporated by reference to Exhibit 10.2
to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
10.10* Form of Subscription Agreement dated July 6, 2004 in
connection with the Private Placement of Common Stock of
Denny's Corporation (incorporated by reference to Exhibit 99.2
to our Current Report on Form 8-K dated July 6, 2004).
10.11* Denny's Corporation 2004 Omnibus Incentive Plan (incorporated
by reference to Appendix B to our Definitive Proxy Statement
filed on August 2, 2004 and furnished to stockholders of the
Company in connection with the August 25, 2004 Special Meeting
of Stockholders of the Company.)
10.12* Form of stock option agreement to be used under the Denny's
Corporation 2004 Omnibus Incentive Plan (incorporated by
reference to Exhibit 99.2 to our Registration Statement on
Form S-8 (File No. 333-120093) filed on October 29, 2004.
31.1 Certification of Nelson J. Marchioli, President and Chief
Executive Officer of Denny's Corporation, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2 Certification of Andrew F. Green, Senior Vice President and
Chief Financial Officer of Denny's Corporation, pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Nelson J. Marchioli, President and Chief
Executive Officer of Denny's Corporation and 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.
_________________________
*Incorporated by reference.
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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 15, 2004 By: /s/ Rhonda J. Parish
-----------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: November 15, 2004 By: /s/ Andrew F. Green
-----------------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer
28