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 28, 2005
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 [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of October 31, 2005, 91,696,328 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 28, 2005 September 29, 2004
------------------ ------------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 225,824 $ 224,330
Franchise and license revenue 22,898 22,815
---------- ----------
Total operating revenue 248,722 247,145
---------- ----------
Costs of company restaurant sales:
Product costs 56,712 58,328
Payroll and benefits 94,289 91,929
Occupancy 12,211 12,850
Other operating expenses 38,483 30,913
---------- ----------
Total costs of company restaurant sales 201,695 194,020
Costs of franchise and license revenue 7,069 6,948
General and administrative expenses 14,654 16,727
Depreciation and amortization 13,818 13,529
Restructuring charges and exit costs 2,056 1,080
Impairment charges 320 195
Gains on disposition of assets and other, net (40) (998)
---------- ----------
Total operating costs and expenses 239,572 231,501
---------- ----------
Operating income 9,150 15,644
---------- ----------
Other expenses:
Interest expense, net 13,934 17,556
Other nonoperating expense (income), net (86) 9,699
---------- ----------
Total other expenses, net 13,848 27,255
---------- ----------
Loss before income taxes (4,698) (11,611)
Provision for (benefit from) income taxes (1,264) 202
---------- ----------
Net loss $ (3,434) $ (11,813)
========== ==========
Per share amounts:
Basic and diluted net loss per share $ (0.04) $ (0.14)
========== ==========
Weighted average shares outstanding:
Basic and diluted 91,363 86,614
========== ==========
See accompanying notes
2
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Quarters Ended
--------------------
September 28, 2005 September 29, 2004
------------------ ------------------
Revenue:
Company restaurant sales $ 667,833 $ 649,998
Franchise and license revenue 67,513 66,283
---------- ----------
Total operating revenue 735,346 716,281
---------- ----------
Cost of company restaurant sales:
Product costs 169,485 167,764
Payroll and benefits 278,845 270,205
Occupancy 38,261 37,540
Other operating expenses 100,022 88,118
---------- ----------
Total costs of company restaurant sales 586,613 563,627
Costs of franchise and license revenue 21,530 21,165
General and administrative expenses 46,873 46,136
Depreciation and amortization 40,857 41,941
Restructuring charges and exit costs 4,416 666
Impairment charges 585 692
Gains on disposition of assets and other, net (1,790) (1,230)
---------- ----------
Total operating costs and expenses 699,084 672,997
---------- ----------
Operating income 36,262 43,284
---------- ----------
Other expenses:
Interest expense, net 40,810 56,481
Other nonoperating expense (income), net (545) 9,635
---------- ----------
Total other expenses, net 40,265 66,116
---------- ----------
Loss before income taxes (4,003) (22,832)
Provision for (benefit from) income taxes (1,178) 609
---------- ----------
Net loss $ (2,825) $ (23,441)
========== ==========
Per share amounts:
Basic and diluted net loss per share: $ (0.03) $ (0.42)
========== ==========
Weighted average shares outstanding:
Basic and diluted 90,785 56,312
========== ===========
See accompanying notes
3
Denny's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 28, 2005 December 29, 2004
------------------ -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 27,828 $ 15,561
Receivables, net 15,854 12,375
Inventories 7,752 8,289
Prepaid and other current assets 9,244 7,330
---------- ----------
Total Current Assets 60,678 43,555
---------- ----------
Property, net 274,423 285,401
Other Assets:
Goodwill 50,186 50,186
Intangible assets, net 73,126 77,484
Deferred financing costs, net 16,634 19,108
Other assets 23,102 24,759
---------- ----------
Total Assets $ 498,149 $ 500,493
========== ==========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 2,429 $ 1,975
Current maturities of capital lease obligations 3,841 3,396
Accounts payable 35,948 42,647
Other current liabilities 90,319 88,226
---------- ----------
Total Current Liabilities 132,537 136,244
---------- ----------
Long-Term Liabilities:
Notes and debentures, less current maturities 516,851 519,236
Capital lease obligations, less current maturities 27,008 28,149
Liability for insurance claims 30,951 28,108
Other noncurrent liabilities and deferred credits 51,581 54,186
---------- ----------
Total Long-Term Liabilities 626,391 629,679
---------- ----------
Total Liabilities 758,928 765,923
Total Shareholders' Deficit (260,779) (265,430)
---------- ----------
Total Liabilities and Shareholders' Deficit $ 498,149 $ 500,493
========== ==========
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 Income/(Loss) Deficit
------ ------ ------- ------- ------------- -------
(In thousands)
Balance, December 29, 2004 89,987 $ 900 $ 510,686 $(757,303) $ (19,713) $ (265,430)
------ ------ --------- --------- ---------- ----------
Net loss --- --- --- (2,825) --- (2,825)
Unrealized gain on hedged transaction --- --- --- --- 1,053 1,053
Stock option expense --- --- 2,846 --- --- 2,846
Issuance of common stock pursuant to
stock-based compensation plans 378 4 1,664 --- --- 1,668
Exercise of common stock options 1,331 13 1,896 --- --- 1,909
------ ------ --------- --------- ---------- -----------
Balance, September 28, 2005 91,696 $ 917 $ 517,092 $(760,128) $ (18,660) $ (260,779)
====== ====== ========= ========= ========== ===========
See accompanying notes
5
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Quarters Ended
--------------------
September 28, 2005 September 29, 2004
------------------ ------------------
(In thousands)
Cash Flows from Operating Activities:
Net loss $ (2,825) $ (23,441)
Adjustments to reconcile net loss to cash flows provided by operating activities:
Depreciation and amortization 40,857 41,941
Impairment charges 585 692
Restructuring charges and exit costs 4,416 666
Amortization of deferred financing costs 2,620 4,665
Gains on disposition of assets and other, net (1,790) (1,230)
Amortization of debt premium --- (1,369)
Stock option expense 2,846 ---
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 2,622 2,099
Inventories 537 (77)
Other current assets (1,914) (1,255)
Other assets (4,551) (994)
Increase (decrease) in liabilities:
Accounts payable (3,124) (3,180)
Accrued salaries and vacations (7,242) 5,122
Accrued taxes 470 961
Other current liabilities 6,265 (13,759)
Other noncurrent liabilities and deferred credits 559 (4,793)
---------- ----------
Net cash flows provided by operating activities 40,331 15,743
---------- ----------
Cash Flows from Investing Activities:
Purchase of property (28,621) (22,152)
Proceeds from disposition of property 3,392 2,111
Change in restricted cash --- (216,423)
---------- ----------
Net cash flows used in investing activities (25,229) (236,464)
---------- ----------
See accompanying notes
6
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Three Quarters Ended
--------------------
September 28, 2005 September 29, 2004
------------------ ------------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ --- $ 293,900
Net bank overdrafts 259 (958)
Long-term debt payments (4,707) (122,274)
Deferred financing costs paid (296) (13,054)
Debt retirement costs --- (7,313)
Proceeds from exercise of stock options 1,909 355
Proceeds from equity issuance, net --- 90,044
---------- ----------
Net cash flows provided by (used in) financing activities (2,835) 240,700
---------- ---------
Increase in cash and cash equivalents 12,267 19,979
Cash and Cash Equivalents at:
Beginning of period 15,561 7,363
---------- ---------
End of period $ 27,828 $ 27,342
========== =========
See accompanying notes
7
Denny's Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 28, 2005
(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 29, 2004 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our 2004 Annual Report on Form 10-K. The results of operations for
the quarter ended September 28, 2005 are not necessarily indicative of the
results for the entire fiscal year ending December 28, 2005.
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 28, 2005 September 29, 2004 September 28, 2005 September 29, 2004
------------------ ------------------ ------------------ ------------------
(In thousands)
Exit costs $ 783 $ 964 $ 1,530 $ 439
Severance and other restructuring charges 1,273 116 2,886 227
-------- -------- -------- -------
Total restructuring and exit costs $ 2,056 $ 1,080 $ 4,416 $ 666
======== ======== ======== =======
8
The components of the change in accrued exit cost liabilities are as follows:
(In thousands)
Balance, December 29, 2004 $ 9,841
Provisions for units closed in 2005 1,018
Change in estimates of accrued exit costs, net 512
Payments, net (2,223)
Interest accretion 798
-----------
Balance, September 28, 2005 $ 9,946
===========
Estimated net cash payments related to exit cost liabilities in the next five
years are as follows:
(In thousands)
Remainder of 2005 $ 703
2006 2,175
2007 1,491
2008 1,437
2009 1,444
Thereafter 8,202
-----------
Total 15,452
Less imputed interest 5,506
-----------
Present value of exit cost liabilities $ 9,946
===========
At the beginning of fiscal 2005, the liability for severance and other
restructuring charges was $0.1 million. During the three quarters ended
September 28, 2005, an additional $2.9 million of expense was recorded, $2.7
million of which was paid during the same period. The remaining balance of $0.3
million is expected to be paid through the first two quarters of 2006.
Note 3. Credit Facility
---------------
Our subsidiaries, Denny's, Inc. and Denny's Realty, Inc. (the "Borrowers"), have
senior secured credit facilities with an aggregate principal amount of $420
million. The credit facilities consist of a first lien facility and a second
lien facility. The 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 "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 First Lien Facility, the "Credit Facilities"). The Second Lien
Facility ranks pari passu with the First Lien Facility in right of payment, but
is in a second lien position with respect to the collateral securing the First
Lien Facility.
The Term Loan Facility matures on September 30, 2009 and amortizes in equal
quarterly installments of $0.6 million with all remaining amounts due on the
maturity date. The Revolving Facility matures on September 30, 2008. The Second
Lien Facility matures on September 30, 2010 with no amortization of principal
prior to the maturity date.
The interest rates under the 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
Borrowers' option, is Adjusted LIBOR plus a spread of 5.125% per annum or ABR
plus a spread of 3.625% per annum. The interest rates on the First Lien Facility
and Second Lien Facility at September 28, 2005 were 6.99% and 8.88%,
respectively.
9
At September 28, 2005, we had outstanding letters of credit of $43.5 million
under our Revolving Facility, leaving net availability of $31.5 million. There
were no revolving loans outstanding at September 28, 2005.
The 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 Credit Facilities contain certain financial covenants (i.e.,
maximum total debt to EBITDA (as defined under the Credit Facilities) ratio
requirements, maximum senior secured debt to EBITDA ratio requirements, minimum
fixed charge coverage ratio requirements and limitations on capital
expenditures), negative covenants, conditions precedent, material adverse change
provisions, events of default and other terms, conditions and provisions
customarily found in credit agreements for facilities and transactions of this
type. We were in compliance with the terms of the Credit Facilities as of
September 28, 2005.
During the first quarter of 2005, we entered into an interest rate swap with a
notional amount of $75 million. The Company has designated the interest rate
swap as a cash flow hedge of the Company's exposure to variability in future
cash flows attributable to payments of LIBOR plus a fixed 3.25% spread due on a
related $75 million notional debt obligation under the Term Loan Facility. Under
the terms of the swap, the Company will pay a fixed rate of 3.76% on the $75
million notional amount and receive payments from a counterparty based on the
3-month LIBOR rate for a term ending on September 30, 2007. Interest rate
differentials paid or received under the swap agreement are recognized as
adjustments to interest expense.
To the extent the swap is effective in offsetting the variability of the hedged
cash flows, changes in the fair value of the swap are not included in current
earnings but are reported as other comprehensive income (loss). The components
of the cash flow hedge included in accumulated other comprehensive income (loss)
in the Condensed Consolidated Statement of Shareholders' Deficit for the quarter
and three quarters ended September 28, 2005 and September 29, 2004 are as
follows:
Quarter Ended Three Quarters Ended
------------- --------------------
September 28, 2005 September 29, 2004 September 28, 2005 September 29, 2004
------------------ ------------------ ------------------ ------------------
(In thousands)
Interest expense recognized as a result of
interest rate swaps $ (52) $ --- $ (313) $ ---
Unrealized gain for change in fair value of
interest swap rates 810 --- 1,366 ---
-------- --------- --------- ---------
Net increase in Accumulated Other
Comprehensive Income (Loss) $ 758 $ --- $ 1,053 $ ---
======== ========= ========= =========
The Company did not note any ineffectiveness in the hedge during the three
quarters ended September 28, 2005. We do not enter into derivative financial
instruments for trading or speculative purposes.
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 ceased to accrue for pension plan
participants as of December 31, 2004.
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:
10
Pension Plan Other Defined Benefit Plans
-------------------------------------------- -------------------------------------------
Quarter Ended Quarter Ended
------------- -------------
September 28, 2005 September 29, 2004 September 28, 2005 September 29, 2004
------------------ ------------------ ------------------ ------------------
(In thousands)
Service cost $ 115 $ 120 $ --- $ 78
Interest cost 739 734 59 57
Expected return on plan assets (757) (700) --- ---
Amortization of net loss 221 201 8 6
-------- -------- -------- -------
Net periodic benefit cost $ 318 $ 355 $ 67 $ 141
======== ======== ======== =======
Pension Plan Other Defined Benefit Plans
-------------------------------------------- -------------------------------------------
Three Quarters Ended Three Quarters Ended
-------------------- --------------------
September 28, 2005 September 29, 2004 September 28, 2005 September 29, 2004
------------------ ------------------ ------------------ ------------------
(In thousands)
Service cost $ 345 $ 360 $ --- $ 233
Interest cost 2,215 2,200 177 170
Expected return on plan assets (2,270) (2,098) --- ---
Amortization of net loss 662 601 24 18
-------- -------- -------- -------
Net periodic benefit cost $ 952 $ 1,063 $ 201 $ 421
======== ======== ======== =======
We made contributions of $2.5 million and $2.9 million to our pension plan
during the three quarters ended September 28, 2005 and September 29, 2004,
respectively. We made contributions of $1.1 million and $0.3 million to our
other defined benefit plans during the three quarters ended September 28, 2005
and September 29, 2004, respectively. We expect to contribute $0.7 million to
our pension plan and $0.1 million to our other defined benefit plans during the
remainder of fiscal 2005.
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, compensation expense is recognized
when the exercise price of our employee stock options is less than the market
price of the underlying stock on the date of grant.
The table below sets forth pro forma information with respect to our stock based
compensation expense, with the estimated fair value of the options amortized to
expense over the options' vesting period:
11
Quarter Ended Three Quarters Ended
------------- --------------------
September 28, 2005 September 29, 2004 September 28, 2005 September 29, 2004
------------------ ------------------ ------------------ ------------------
(In thousands, except per share amounts)
Reported net loss $ (3,434) $ (11,813) $ (2,825) $ (23,441)
Stock-based employee compensation expense
included in reported net loss, net of related taxes 977 631 3,946 1,286
Less total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (1,143) (724) (5,386) (1,670)
--------- --------- --------- ---------
Pro forma net loss $ (3,600) $ (11,906) $ (4,265) $ (23,825)
========= ========= ========= =========
Loss per share:
Basic and diluted - as reported $ (0.04) $ (0.14) $ (0.03) $ (0.42)
========= ========= ========= =========
Basic and diluted - pro forma $ (0.04) $ (0.14) $ (0.05) $ (0.42)
========= ========= ========= =========
Stock-based employee compensation expense, which is included as a component of
general and administrative expenses, consisted of $1.0 million related to stock
options and $0.4 million related to restricted stock units for the quarter ended
September 28, 2005, and $0.6 million related to restricted stock units for the
quarter ended September 29, 2004. Stock-based employee compensation expense
consisted of $3.1 million related to stock options and $3.0 million related to
the restricted stock units for the three quarters ended September 28, 2005, and
$1.3 million related to restricted stock units for the three quarters ended
September 29, 2004. For all periods presented, amounts recorded as stock
compensation expense related to stock options resulted from the issuance of
stock options with an exercise price that was less than the market price on the
date of grant.
Based on the number of options outstanding at September 28, 2005 and their
related vesting periods, compensation expense related to stock options is
estimated to be $0.7 million for the remainder of fiscal 2005. Amounts of
additional expense to be recorded related to restricted stock units will be
dependent upon meeting certain performance measures and the fair market value of
the stock over the performance and vesting periods. As of September 28, 2005,
3.3 million restricted stock units were outstanding, 0.9 million of which have
vested.
Note 6. Accumulated Other Comprehensive Income (Loss)
---------------------------------------------
The components of Accumulated Other Comprehensive Income (Loss) in the Condensed
Consolidated Statement of Shareholder's Deficit are as follows:
September 28, 2005 December 29, 2004
------------------ -----------------
Additional minimum pension liability $ (19,713) $ (19,713)
Unrealized gain on hedged transaction 1,053 ---
------------- -------------
$ (18,660) $ (19,713)
============= =============
Total comprehensive loss for the three quarters ended September 28, 2005 and
September 29, 2004 was $1.8 million and $23.4 million, respectively.
12
Note 7. Net Loss Per Share
------------------
Quarter Ended Three Quarters Ended
------------- --------------------
September 28, 2005 September 29, 2004 September 28, 2005 September 29, 2004
------------------ ------------------ ------------------ -----------------
(In thousands, except per share amounts)
Numerator for basic and diluted loss per share -
loss from continuing operations $ (3,434) $(11,813) $(2,825) $(23,441)
======== ======== ======= ========
Denominator:
Denominator for basic loss per share - weighted
average shares 91,363 86,614 90,785 56,312
Effect of dilutive securities:
Options --- --- --- ---
Restricted stock units and awards --- --- --- ---
-------- -------- -------- --------
Denominator for diluted loss per share -
adjusted weighted average shares and assumed
conversions of dilutive securities 91,363 86,614 90,785 56,312
======== ======== ======== ========
Basic and diluted loss per share from continuing
operations $ (0.04) $ (0.14) $ (0.03) $ (0.42)
======== ======== ======== ========
Stock options excluded (1) 9,328 6,742 9,328 6,742
======== ======== ======== ========
Restricted stock units and awards (1) 3,325 --- 3,325 ---
======== ======== ======== ========
Common stock warrants excluded (1) --- 3,236 --- 3,236
======== ======== ======== =========
(1) Excluded from diluted weighted-average shares outstanding as the impact
would have been antidilutive. The common stock warrants expired on January
7, 2005.
Note 8. Supplemental Cash Flow Information
----------------------------------
Three Quarters Ended
--------------------
September 28, 2005 September 29, 2004
------------------ ------------------
(In thousands)
Income taxes paid, net $ 1,052 $ 1,091
========== ==========
Interest paid $ 30,307 $ 64,363
========== ==========
Noncash financing activities:
Capital leases entered into $ 1,952 $ 1,990
========== ==========
Issuance of common stock pursuant to
stock-based compensation plans $ 1,668 $ ---
========== ==========
Accrual of deferred financing costs $ --- $ 1,387
========== ==========
Accrual of equity issuance costs $ --- $ 249
========== ==========
13
Note 9. Implementation of New Accounting Standards
------------------------------------------
In December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123 (Revised) (SFAS 123-R), "Share-Based Payment". This standard
requires expensing of stock options and other share-based payments and
supersedes SFAS No. 123 which had allowed companies to choose between expensing
stock options or showing pro forma disclosure only. On April 14, 2005, the SEC
announced the adoption of a rule that delays the effective date of SFAS 123-R.
This standard will be effective as of the beginning of the Company's 2006 fiscal
year and will apply to previously issued and unvested awards, as well as all
awards granted, modified, cancelled or repurchased after the effective date. The
Company is currently evaluating the expected impact that the adoption of SFAS
123-R will have on its financial condition or results of operations. Pro forma
information regarding net income and earnings per share as if we had accounted
for our employee stock options granted under the fair value method of SFAS 123
is presented in Note 5 to our Condensed Consolidated Financial Statements.
Note 10. Commitments and Contingencies
-----------------------------
On September 24, 2002, the Division of Labor Standards Enforcement ("DLSE") of
the State of California's Department of Industrial Relations filed a complaint
in the Superior Court of California for the County of Alameda against the
Company alleging violation of California law regarding payment of accrued
vacation upon termination of employment. The complaint sought wage payments for
employees who allegedly forfeited accrued vacation, waiting time penalties,
interest, injunctive relief and costs.
On October 7, 2005, Denny's Corporation and its subsidiary Denny's, Inc.
finalized a settlement with the DLSE regarding all disputes related to the
litigation. Pursuant to the terms of the settlement, Denny's has agreed to pay a
sum of approximately $7.8 million to former employees, payable in installments
of $3.5 million on November 30, 2005 and approximately $4.3 million on January
6, 2006, in accordance with the instruction of the DLSE.
Through the second quarter of 2005, Denny's had accrued $3.0 million of
liabilities related to this litigation and, accordingly, recorded an additional
$4.8 million charge to legal settlement costs, included in other operating
expenses, in the third quarter of 2005. As a result of the settlement, the
action by the DLSE against the Company was dismissed with prejudice.
There are various other 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. Based on our examination of these matters and
our experience to date, we have recorded our best estimate of legal and
financial liability, if any, with respect to these matters. However, the
ultimate disposition of these matters cannot be determined with certainty.
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 28, 2005 and results of operations for the
quarter and three quarters ended September 28, 2005 compared to the quarter and
three quarters ended September 29, 2004. 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; the 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 29, 2004 and in Exhibit 99 thereto.
14
Statements of Operations
- ------------------------
Quarter Ended Three Quarters Ended
------------- --------------------
September 28, 2005 September 29, 2004 September 28, 2005 September 29, 2004
------------------ ------------------ ------------------ ------------------
(Dollars in thousands) (Dollars in thousands)
Revenue:
Company restaurant sales.................. $225,824 90.8% $224,330 90.8% $667,833 90.8% $649,998 90.7%
Franchise and license revenue............. 22,898 9.2% 22,815 9.2% 67,513 9.2% 66,283 9.3%
-------- ------ -------- ------ -------- ------ -------- ------
Total operating revenue................. 248,722 100.0% 247,145 100.0% 735,346 100.0% 716,281 100.0%
-------- ------ -------- ------ -------- ------ -------- ------
Costs of company restaurant sales (a):
Product costs............................. 56,712 25.1% 58,328 26.0% 169,485 25.4% 167,764 25.8%
Payroll and benefits...................... 94,289 41.8% 91,929 41.0% 278,845 41.8% 270,205 41.6%
Occupancy................................. 12,211 5.4% 12,850 5.7% 38,261 5.7% 37,540 5.8%
Other operating expenses.................. 38,483 17.0% 30,913 13.8% 100,022 15.0% 88,118 13.6%
-------- ------ -------- ------ -------- ------ -------- ------
Total costs of company restaurant sales 201,695 89.3% 194,020 86.5% 586,613 87.8% 563,627 86.7%
Costs of franchise and license revenue (a).. 7,069 30.9% 6,948 30.5% 21,530 31.9% 21,165 31.9%
General and administrative expenses......... 14,654 5.9% 16,727 6.8% 46,873 6.4% 46,136 6.4%
Depreciation and amortization............... 13,818 5.6% 13,529 5.5% 40,857 5.6% 41,941 5.9%
Restructuring charges and exit costs, net... 2,056 0.8% 1,080 0.4% 4,416 0.6% 666 0.1%
Impairment charges.......................... 320 0.1% 195 0.1% 585 0.1% 692 0.1%
Gains on disposition of assets and other, net (40) 0.0% (998) (0.4%) (1,790) (0.2%) (1,230) (0.2%)
-------- ------ -------- ------ -------- ------ -------- ------
Total operating costs and expenses...... 239,572 96.3% 231,501 93.7% 699,084 95.1% 672,997 94.0%
-------- ------ -------- ------ -------- ------ -------- ------
Operating income............................ 9,150 3.7% 15,644 6.3% 36,262 4.9% 43,284 6.0%
-------- ------ -------- ------ -------- ------ -------- ------
Other expenses:
Interest expense, net..................... 13,934 5.6% 17,556 7.1% 40,810 5.5% 56,481 7.9%
Other nonoperating expense (income), net.. (86) 0.0% 9,699 3.9% (545) (0.1%) 9,635 1.3%
-------- ------ -------- ------ -------- ------ -------- ------
Total other expenses, net............... 13,848 5.6% 27,255 11.0% 40,265 5.5% 66,116 9.2%
-------- ------ -------- ------ -------- ------ -------- ------
Loss before income taxes.................... (4,698) (1.9%) (11,611) (4.7%) (4,003) (0.5%) (22,832) (3.2%)
Provision for (benefit from) income taxes... (1,264) (0.5%) 202 0.1% (1,178) (0.2%) 609 0.1%
-------- ------ -------- ------ -------- ------ -------- ------
Net loss.................................... $ (3,434) (1.4%) $(11,813) (4.8%) $ (2,825) (0.4%) $(23,441) (3.3%)
======== ====== ======== ====== ======== ====== ======== ======
Other Data:
Company-owned average unit sales............ $ 418.2 $ 408.2 $1,227.6 $1,174.1
Same-store sales increase (company-owned)(b) 1.5% 6.8% 3.9% 5.9%
Guest check average increase (b)....... 4.1% 3.8% 4.1% 3.4%
Guest count increase (decrease) (b).... (2.5%) 2.9% (0.2%) 2.4%
- ----------------
(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.
Unit Activity
- -------------
Ending Ending Ending
Units Units Units Units Units Units
June 29, 2005 Opened Reacquired Closed September 28, 2005 September 29, 2004
------------- ------ ---------- ------ ------------------ ------------------
Company-owned restaurants 548 1 --- (3) 546 553
Franchised and licensed restaurants 1,040 2 --- (6) 1,036 1,056
------ ------ ----- ------ ------- -------
1,588 3 --- (9) 1,582 1,609
====== ====== ===== ====== ======= =======
15
Quarter Ended September 28, 2005 Compared with Quarter Ended September 29, 2004
- -------------------------------------------------------------------------------
Company Restaurant Operations
During the quarter ended September 28, 2005, we realized a 1.5% increase in
same-store sales, comprised of a 4.1% increase in guest check average and a 2.5%
decrease in guest counts. Company restaurant sales increased $1.5 million
(0.7%). Higher sales resulted primarily from the increase in same-store sales
for the current quarter partially offset by a nine 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 increased to 89.3% from 86.5%. Product costs decreased to 25.1% from 26.0%
due to shifts in menu mix and the impact of a higher guest check average.
Payroll and benefits increased to 41.8% from 41.0% due to higher investments in
labor, wage rate increases related to merit increases and minimum wage increases
and higher fringe related costs. These cost increases were partially offset by a
reduction in management bonuses and a favorable shift in health benefit costs.
Occupancy costs decreased to 5.4% from 5.7% resulting from $1.1 million of
favorability in general liability costs. Other operating expenses were
comprised of the following amounts and percentages of company restaurant sales:
Quarter Ended
-------------
September 28, 2005 September 29, 2004
-------------------------- --------------------------
(Dollars in Thousands)
Utilities $ 11,229 5.0% $ 10,497 4.7%
Repairs and maintenance 4,745 2.1% 4,855 2.2%
Marketing 7,438 3.3% 7,188 3.2%
Legal settlement expense 6,427 2.8% 772 0.3%
Other 8,644 3.8% 7,601 3.4%
-------- -------- -------- --------
Other operating expenses $ 38,483 17.0% $ 30,913 13.8%
======== ======== ======== ========
During the quarter ended September 28, 2005, we recorded an additional $4.8
million of legal settlement expense related to the settlement of a case in the
state of California, as discussed in Note 10 to our Condensed Consolidated
Financial Statements. The remaining increase of $0.9 million relates to general
developments in other pending cases.
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 for the periods indicated:
16
Quarter Ended
-------------
September 28, 2005 September 29, 2004
----------------------- -----------------------
(Dollars in Thousands)
Royalties and initial fees $ 15,137 66.1% $ 14,838 65.0%
Occupancy revenue 7,761 33.9% 7,977 35.0%
--------- --------- --------- ---------
Franchise and license revenue 22,898 100.0% 22,815 100.0%
========= ========= ========= =========
Occupancy costs 5,333 23.3% 5,154 22.6%
Other direct costs 1,736 7.6% 1,794 7.9%
--------- --------- --------- ---------
Costs of franchise and license revenue $ 7,069 30.9% $ 6,948 30.5%
========= ========= ========= =========
Royalties increased $0.3 million (2.0%) resulting from a 3.8% increase in
franchise same-store sales, partially offset by the effects of a twenty-two
equivalent-unit decrease in the number of franchise and licensed units.
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 are comprised of the following:
Quarter Ended
-------------
September 28, 2005 September 29, 2004
------------------ ------------------
(Dollars in Thousands)
Stock-based compensation $ 1,443 $ 631
Transaction costs --- 1,371
Other general and administrative expenses 13,211 14,725
--------- ---------
Total general and administrative expenses $ 14,654 $ 16,727
========= =========
The increase in stock-based compensation costs resulted from the issuance of
stock options and restricted stock units during the fourth quarter of 2004.
Additional information related to stock-based compensation is presented in Note
5 to our Condensed Consolidated Financial Statements. Transaction costs recorded
in the 2004 quarter represented costs associated with the recapitalization
transactions completed in the third and fourth quarters of 2004 as further
discussed below. The decrease in other general and administrative expenses
primarily resulted from a $2.1 million reduction in incentive based
compensation, partially offset by the effects of increased staffing.
Depreciation and amortization increased slightly to $13.8 million in the third
quarter of 2005 from $13.5 million in the third quarter of 2004.
Restructuring charges and exit costs increased to $2.1 million in the third
quarter of 2005 from $1.1 million in the third quarter of 2004, due primarily to
higher severance costs.
Gains on disposition of assets and other, net, of $0.1 million in the third
quarter of 2005 and $1.0 million in the third quarter of 2004 primarily
represent gains on cash sales of surplus properties.
Operating income was $9.2 million for the quarter ended September 28, 2005
compared with $15.6 million for the quarter ended September 29, 2004.
17
Interest expense, net, for the quarter ended September 28, 2005 was comprised of
$14.4 million of interest expense offset by $0.5 million of interest income and
includes interest expense recognized as a result of the interest rate swap
discussed in Note 3 to our Condensed Consolidated Financial Statements. 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. The
decrease in interest expense is attributable to a reduction in both outstanding
borrowings and interest rates as a result of the recapitalization transactions
completed in the third and fourth quarters of 2004. These recapitalization
transactions generally consisted of a private placement of common stock,
refinancing our previous credit facilities, issuing new senior notes, and
repurchasing previously issued senior notes.
Other nonoperating expenses of $9.7 million for the quarter ended September 29,
2004 primarily represents the payment of premiums and expenses, as well as
write-offs of deferred financing costs and debt premiums associated with the
recapitalization transactions completed in 2004.
The benefit from income taxes was $1.3 million compared with the provision for
income taxes of $0.2 million for the quarters ended September 28, 2005 and
September 29, 2004, respectively. The benefit from income taxes for the quarter
ended September 28, 2005 was determined using our effective tax rate estimated
for the entire fiscal year. We currently anticipate pre-tax income for the
entire fiscal year and expect to record approximately $1.0 million to $2.0
million of provision for income taxes for the 2005 fiscal year. The provision
for income taxes for the quarter ended September 29, 2004 primarily represents
gross receipts-based state and foreign income taxes, which do not directly
fluctuate in relation to changes in income or 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 generated in previous periods. 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 $3.4 million for the quarter ended September 28, 2005 compared with
$11.8 million for the quarter ended September 29, 2004 due to the factors noted
above.
Three Quarters Ended September 28, 2005 Compared with Three Quarters Ended
- --------------------------------------------------------------------------
September 29, 2004
- ------------------
Company Restaurant Operations
During the three quarters ended September 28, 2005, we realized a 3.9% increase
in same-store sales, comprised of a 4.1% increase in guest check average and a
0.2% decrease in guest counts. Company restaurant sales increased $17.8 million
(2.7%). Higher sales resulted primarily from the increase in same-store sales
for the current year partially offset by a nine 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 increased to 87.8% from 86.7%. Product costs decreased to 25.4% from 25.8%
due to shifts in menu mix and the impact of a higher guest check average.
Payroll and benefits increased slightly to 41.8% from 41.6% due to higher
investments in labor, wage rate increases related to merit increases and minimum
wage increases and higher fringe related costs. These cost increases were
partially offset by a reduction in management bonuses and a favorable shift in
health benefit costs. Occupancy costs decreased slightly to 5.7% from 5.8%.
Other operating expenses were comprised of the following amounts and percentages
of company restaurant sales:
18
Three Quarters Ended
--------------------
September 28, 2005 September 29, 2004
------------------------- ------------------------
(Dollars in Thousands)
Utilities $ 31,227 4.7% $ 29,713 4.6%
Repairs and maintenance 13,690 2.0% 12,374 1.9%
Marketing 22,221 3.3% 22,427 3.5%
Legal settlement expense 7,882 1.2% 1,272 0.2%
Other 25,002 3.7% 22,332 3.4%
---------- ---------- ---------- ----------
Other operating expenses $ 100,022 15.0% $ 88,118 13.6%
========== ========== ========== ==========
During the three quarters ended September 28, 2005, we recorded an additional
$6.0 million of legal settlement expense related to the settlement of a case in
the state of California, as discussed in Note 10 to our Condensed Consolidated
Financial Statements. The remaining increase of $0.6 million relates to general
developments in other pending cases.
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 for the periods indicated:
Three Quarters Ended
--------------------
September 28, 2005 September 29, 2004
------------------------- -------------------------
(Dollars in Thousands)
Royalties and initial fees $ 44,258 65.6% $ 42,761 64.5%
Occupancy revenue 23,255 34.4% 23,522 35.5%
---------- ---------- ---------- ----------
Franchise and license revenue 67,513 100.0% 66,283 100.0%
========== ========== ========== ==========
Occupancy costs 15,781 23.4% 15,757 23.8%
Other direct costs 5,749 8.5% 5,408 8.1%
---------- ---------- ---------- ----------
Costs of franchise and license revenue $ 21,530 31.9% $ 21,165 31.9%
========== ========== ========== ==========
Royalties increased $1.5 million (3.5%) resulting from a 5.6% increase in
franchise same-store sales, partially offset by the effects of a twenty-four
equivalent-unit decrease in the number of franchise and licensed units. The
decline in occupancy revenue is attributable to the decrease in franchised and
licensed units.
Other Operating Costs and Expenses
General and administrative expenses are comprised of the following:
Three Quarters Ended
--------------------
September 28, 2005 September 29, 2004
------------------ ------------------
(Dollars in Thousands)
Stock-based compensation $ 6,136 $ 1,287
Transaction costs --- 3,913
Other general and administrative expenses 40,737 40,936
---------- -----------
Total general and administrative expenses $ 46,873 $ 46,136
========== ===========
19
The increase in stock-based compensation costs resulted from the issuance of
stock options and restricted stock units during the fourth quarter of 2004.
Additional information related to stock-based compensation is presented in Note
5 to our Condensed Consolidated Financial Statements. Transaction costs recorded
in the 2004 quarters represented costs associated with the recapitalization
transactions completed in the third and fourth quarters of 2004 as further
discussed below. Other general and administrative expenses decreased slightly
due to a $3.6 million reduction in incentive based compensation, partially
offset by the effects of increased staffing.
Depreciation and amortization decreased $1.1 million in the first three quarters
of 2005 primarily resulting from certain assets becoming fully depreciated at
the end of 2004.
Restructuring charges and exit costs increased to $4.4 million in the first
three quarters of 2005 from $0.7 million in the first three quarters of 2004,
due primarily to higher severance costs.
Gains on disposition of assets and other, net, of $1.8 million in the first
three quarters of 2005 and $1.2 million in the first three quarters of 2004
primarily represent gains on cash sales of surplus properties.
Operating income was $36.3 million for the three quarters ended September 28,
2005 compared with $43.3 million for the three quarters ended September 29,
2004.
Interest expense, net, for the three quarters ended September 28, 2005 was
comprised of $42.0 million of interest expense offset by $1.2 million of
interest income and includes interest expense recognized as a result of the
interest rate swap discussed in Note 3 to out Condensed Consolidated Financial
Statements. 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 for the three quarters ended September 29, 2004. The decrease
in interest expense resulted from the completion of our recapitalization
transactions during the third and fourth quarters of 2004.
Other nonoperating expenses of $9.6 million for the three quarters ended
September 29, 2004 primarily represent the payments of premiums and expenses, as
well as write-offs of deferred financing costs and debt premiums associated with
the recapitalization transactions completed in 2004.
The benefit from income taxes was $1.2 million compared with the provision for
income taxes of $0.6 million for the three quarters ended September 28, 2005 and
September 29, 2004, respectively. The benefit from income taxes for the three
quarters ended September 28, 2005 was determined using our effective tax rate
estimated for the entire fiscal year. We currently anticipate pre-tax income for
the entire fiscal year and expect to record approximately $1.0 million to $2.0
million of provision for income taxes for the 2005 fiscal year. The provision
for income taxes for the three quarters ended September 29, 2004 primarily
represents gross receipts-based state and foreign income taxes, which do not
directly fluctuate in relation to changes in income or 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 generated in previous periods. 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 $2.8 million for the three quarters ended September 28, 2005
compared with $23.4 million for the three quarters ended September 29, 2004 due
to the factors noted above.
20
Liquidity and Capital Resources
- -------------------------------
Credit Facilities
Our subsidiaries, Denny's, Inc. and Denny's Realty, Inc. (the "Borrowers"), have
senior secured credit facilities with an aggregate principal amount of $420
million. The credit facilities consist of a first lien facility and a second
lien facility. The 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 "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 First Lien Facility, the "Credit Facilities"). The Second Lien
Facility ranks pari passu with the First Lien Facility in right of payment, but
is in a second lien position with respect to the collateral securing the First
Lien Facility.
The Term Loan Facility matures on September 30, 2009 and amortizes in equal
quarterly installments of $0.6 million with all remaining amounts due on the
maturity date. The Revolving Facility matures on September 30, 2008. The Second
Lien Facility matures on September 30, 2010 with no amortization of principal
prior to the maturity date.
The interest rates under the 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
Borrowers' option, is Adjusted LIBOR plus a spread of 5.125% per annum or ABR
plus a spread of 3.625% per annum. The interest rates on the First Lien Facility
and Second Lien Facility at September 28, 2005 were 6.99% and 8.88%,
respectively.
At September 28, 2005, we had outstanding letters of credit of $43.5 million
under our Revolving Facility, leaving net availability of $31.5 million. There
were no revolving loans outstanding at September 28, 2005.
The 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 Credit Facilities contain certain financial covenants (i.e.,
maximum total debt to EBITDA (as defined under the Credit Facilities) ratio
requirements, maximum senior secured debt to EBITDA ratio requirements, minimum
fixed charge coverage ratio requirements and limitations on capital
expenditures), negative covenants, conditions precedent, material adverse change
provisions, events of default and other terms, conditions and provisions
customarily found in credit agreements for facilities and transactions of this
type. We were in compliance with the terms of the Credit Facilities as of
September 28, 2005.
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 28, 2005, our capital expenditures were $30.6 million. Of that
amount, approximately $2.0 million was financed through capital leases. Capital
expenditures during 2005 are expected to total between approximately $50 million
and $55 million; however, we are not committed to spending this amount and could
spend more or less if circumstances require.
Our working capital deficit was $71.9 million at September 28, 2005 compared
with $92.7 million at December 29, 2004. 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 9 to our Condensed Consolidated Financial Statements.
21
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 First
Lien Facility bear interest at a variable rate based on LIBOR (adjusted LIBOR
rate plus 3.25%) or ABR (the Alternative Base Rate, which is the highest of
Prime Rate or Federal Funds Effective Rate plus 1/2 of 1%) plus a spread of
1.75%. Borrowings under the Second Lien Facility bear interest at adjusted LIBOR
plus 5.125% or ABR plus 3.625%.
During the first quarter of 2005, we entered into an interest rate swap with a
notional amount of $75 million. The Company has designated the interest rate
swap as a cash flow hedge of the Company's exposure to variability in future
cash flows attributable to payments of LIBOR plus a fixed 3.25% spread due on a
related $75 million notional debt obligation under the Term Loan Facility. Under
the terms of the swap, the Company will pay a fixed rate of 3.76% on the $75
million notional amount and receive payments from a counterparty based on the
3-month LIBOR rate for a term ending on September 30, 2007. The swap effectively
increases our ratio of fixed rate debt to total debt from approximately 38% to
approximately 51%.
Based on the levels of borrowings under the Credit Facilities at September 28,
2005, if interest rates changed by 100 basis points, our annual cash flow and
income before income taxes would change by approximately $2.7 million, after
considering the impact of the interest rate swap. This computation is determined
by considering the impact of hypothetical interest rates on the variable rate
portion of the Credit Facilities at September 28, 2005. However, the nature and
amount of our borrowings under the 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 $175.5 million, compared with a book value of $176.0 million
at September 28, 2005. This fair value computation is based on market quotations
for the same or similar debt issues or the estimated borrowing rates available
to us. The difference between the estimated fair value of long-term debt
compared with its historical cost reported in our consolidated balance sheets at
September 28, 2005 relates primarily to market quotations for our 10% Senior
Notes due 2012. The estimated fair value of the interest rate swap at September
28, 2005 was $1.1 million.
We also have exposure to interest rate risk related to our pension plan, other
defined benefit plans, and self-insurance liabilities. A 25 basis point increase
in discount rate would reduce our projected benefit obligation related to our
pension plan and other defined benefit plans by $2.0 million and $0.2 million,
respectively, and reduce our annual net periodic benefit cost related to our
pension plan by $0.1 million. A 25 basis point decrease in discount rate would
increase our projected benefit obligation related to our pension plan and other
defined benefit plans by $2.1 million and $0.2 million, respectively, and
increase our annual net periodic benefit cost related to our pension plan by
$0.1 million. The annual impact of a 25 basis point increase or decrease in
discount rate on periodic benefit costs related to our other defined benefit
plans would be less than $0.1 million. A 25 basis point increase or decrease in
discount rate related to our self-insurance liabilities would result in a
decrease or increase of $0.2 million, respectively.
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 enter into
financial instruments for trading or speculative purposes.
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, F. Mark Wolfinger) 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 Wolfinger 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.
22
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
On September 24, 2002, the Division of Labor Standards Enforcement ("DLSE") of
the State of California's Department of Industrial Relations filed a complaint
in the Superior Court of California for the County of Alameda against the
Company alleging violation of California law regarding payment of accrued
vacation upon termination of employment. The complaint sought wage payments for
employees who allegedly forfeited accrued vacation, waiting time penalties,
interest, injunctive relief and costs.
On October 7, 2005 Denny's Corporation and its subsidiary Denny's, Inc.
finalized a settlement with the DLSE regarding all disputes related to the
litigation. Pursuant to the terms of the settlement, Denny's has agreed to pay a
sum of approximately $7.8 million to former employees, payable in installments
of $3.5 million on November 30, 2005 and approximately $4.3 million on January
6, 2006, in accordance with the instruction of the DLSE.
Through the second quarter of 2005, Denny's had accrued $3.0 million of
liabilities related to this litigation and, accordingly, recorded an additional
$4.8 million charge to legal settlement costs, included in other operating
expenses, in the third quarter of 2005. As a result of the settlement, the
action by the DLSE against the Company was dismissed with prejudice.
There are various other 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. Based on our examination of these matters and
our experience to date, we have recorded our best estimate of legal and
financial liability, if any, with respect to these matters. However, the
ultimate disposition of these matters cannot be determined with certainty.
Item 6. Exhibits
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
10.1 Employment Offer Letter from Denny's Corporation to F. Mark
Wolfinger dated August 16, 2005, and accepted August 16, 2005.
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.
31.2 Certification of F. Mark Wolfinger, 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 F. Mark
Wolfinger, 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.
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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 7, 2005 By: /s/ Rhonda J. Parish
--------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: November 7, 2005 By: /s/ F. Mark Wolfinger
---------------------
F. Mark Wolfinger
Senior Vice President and
Chief Financial Officer
24