April 13, 2006
Ms. Linda Cvrkel
Branch Chief
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, DC 20549
Dear Ms. Cvrkel:
We received your letter dated March 30, 2006, providing comment on the Denny's
Corporation ("Denny's" or the "Company") Form 10-K for the fiscal year ended
December 28, 2005, which was filed on March 13, 2006. Your letter offered the
following comment:
1. Given the significant level of operating losses and net losses
experienced during the past three fiscal years, please explain in
further detail how the Company has determined that its various
categories of long-lived assets, including goodwill, property, plant and
equipment, trademarks and trade names were not impaired at December 28,
2005. As part of your response, you should explain in detail how each
category of long-lived assets was evaluated for impairment, including
the methods used in determining fair values and any other significant or
relevant assumptions. Your response should also indicate whether
projected sales and profit margins used in your analysis are expected to
improve in future periods and your basis for assuming these
improvements. We may have further comment upon receipt of your
response.
Please consider the following in response to your comment:
Denny's has actually experienced operating income during each of the last three
fiscal years, including $46.0 million in 2003, $53.8 million in 2004 and $48.5
million in 2005, as noted in our Consolidated Statements of Operations. The net
losses experienced during each of the last three fiscal years is largely
attributable to high net interest expense, including $78.2 million in 2003,
$69.4 million in 2004 and $55.2 million in 2005.
Long-Lived Assets
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As disclosed in footnote 2 to our consolidated financial statements, and
consistent with paragraph 8 of Statement of Financial Accounting Standards No.
144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," we assess impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. We assess
impairment of restaurant-level assets based on the operating cash flows of the
individual restaurants and our plans for restaurant closings. We write down
long-lived assets to fair value if, based on our analysis, the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
assets.
More specifically, we assess recoverability of company owned restaurant-level
assets for individual restaurant units based on the following criteria, which we
believe are indicators that the carrying value of the individual unit assets may
not be recoverable:
- Units experiencing rolling twelve month operating results of less than
certain pre-determined thresholds,
- Units that require more than a pre-determined number of years to recoup
assets from operations, or
- Units that have experienced other difficulties.
The process of determining which units are impaired involves the consideration
of the following factors:
- Forecasted unit-level cash flows assuming no growth in sales or
improvement in operating margins
- The number of months a unit has reported negative operating results
- A comparison of financial results with previous periods (to identify
problematic trends),
- A comparison of financial results with other units (to identify global
vs. unit-specific factors), and
- Conversations with restaurant field managers to determine unit-specific
factors.
If, based on an analysis of the above factors, we determine certain assets are
impaired, we record an impairment loss for the amount by which the carrying
amount of long-lived assets exceeds their fair value.
Applying the methodologies discussed above, we recorded impairment charges
totaling $4.0 million, $1.1 million and $1.2 million in fiscal years 2003, 2004
and 2005, respectively, as reported in our Consolidated Statements of
Operations. These impairment charges primarily relate to leasehold improvements
and equipment in certain identified underperforming restaurants.
Intangible Assets with Finite Useful Lives
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Franchise and Other Operating Agreements
When assessing the recoverability of franchise and other operating agreements,
we consider operating results of individual franchise units, the trend of timely
royalty receivable payments, and the current amount of royalty receivable that
is past due. If an analysis of the above factors indicates that we will not
recover the carrying amount of the related franchise and other operating
agreement asset, we compare the fair value of the related assets to their book
value. We then record an impairment loss for the amount by which the carrying
amount of individual franchise and other operating agreements exceed their fair
value and write those assets down to their fair value. We have recorded no
impairment for franchise and other operating agreement assets in the past three
years. However, in some cases, we have adjusted the lives of certain franchise
agreements based on our analysis.
Other Indefinite Lived Intangible Assets and Goodwill
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Trademarks and Trade Names
As disclosed in footnote 2 to our consolidated financial statements, and
consistent with paragraph 17 of SFAS 142, "Goodwill and Other Intangible
Assets," we test trademarks and trade names for impairment at least annually,
and more frequently if circumstances indicate impairment may exist. As part of
the annual assessment, we determine whether events and changes in circumstances
continue to support an indefinite useful life.
Our annual analysis involves comparing the estimated fair value of trademarks
and trade names with the related carrying amount. We determine the fair value
based on the estimated future cash flows of the Company using financial
estimates prepared during our annual financial planning process (which generally
includes forecasts for 1 to 3 years). For purposes of computing fair value, we
do not assume growth in sales or improvement in operating margins for years in
which specific forecasts have not been prepared. In addition, we also prepare a
break even analysis to determine the point at which impairment of these assets
would occur.
Our analysis of fair value using the present value of estimated future cash
flows indicated that the fair value of trademarks and trade names exceeds their
recorded value by a substantial amount (greater than 100%) at year-end. At
December 28, 2005, we had approximately $42.3 million recorded for trademarks
and trade names. Our break even analysis indicated that estimated annual
operating cash flows would have to decline by more than 40% of 2005 actual
operating cash flows before any impairment is indicated.
Applying the methodologies discussed above, we determined that there was no
implied impairment to the carrying value of our trademarks and trade names at
December 28, 2005.
Goodwill
As disclosed in footnote 2 to our consolidated financial statements, and
consistent with paragraph 26 of SFAS 142, "Goodwill and Other Intangible
Assets," we test goodwill for impairment at least annually, and more frequently
if circumstances indicate impairment may exist.
Our annual analysis compares the estimated fair value of the Company with the
carrying amount of our assets and liabilities. We estimate fair value using
guidance included in paragraphs 23 through 25 of SFAS 142. Given our single
reporting unit structure, we believe it is appropriate to use the market
capitalization of our common stock in preparing a fair value analysis for these
purposes.
Our analysis of fair value using the market capitalization of our common stock
indicated that the fair value of goodwill exceeded its recorded value by a
substantial amount (greater than 100%) at year-end. At December 28, 2005, we had
approximately $50.2 million recorded for goodwill.
Applying the methodologies discussed above, we determined that there was no
implied impairment to the carrying value of our goodwill at December 28, 2005.
It is our understanding that the Company is responsible for the adequacy and
accuracy of the disclosure in its filings with the Commission. We acknowledge
that staff comments from the Commission or changes to disclosures in response to
staff comments do not foreclose the Commission from taking action with respect
to the filing. Further, we understand that we may not assert staff comments as a
defense in any proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
We believe the details discussed in this response to your letter sufficiently
address the comment raised. However, we are available to discuss this matter
further.
Respectfully,
/s/ F. Mark Wolfinger
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F. Mark Wolfinger
Senior Vice President and
Chief Financial Officer