UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 29, 2006
--------------
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
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(Address of principal executive offices)
(Zip Code)
(864) 597-8000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 May 2, 2006, 92,004,061 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
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 225,022 $ 218,015
Franchise and license revenue 22,963 22,034
--------- ---------
Total operating revenue 247,985 240,049
--------- ---------
Costs of company restaurant sales:
Product costs 55,729 56,196
Payroll and benefits 94,008 91,659
Occupancy 13,137 13,097
Other operating expenses 32,444 30,121
--------- ---------
Total costs of company restaurant sales 195,318 191,073
Costs of franchise and license revenue 7,213 7,009
General and administrative expenses 17,229 16,068
Depreciation and amortization 14,065 13,270
Restructuring charges and exit costs 721 2,274
Impairment charges --- ---
Gains on disposition of assets and other, net (1,571) (885)
--------- ---------
Total operating costs and expenses 232,975 228,809
--------- ---------
Operating income 15,010 11,240
--------- ---------
Other expenses:
Interest expense, net 14,643 13,212
Other nonoperating income, net (162) (371)
--------- ---------
Total other expenses, net 14,481 12,841
--------- ---------
Income (loss) before income taxes and cumulative effect of change in
accounting principle 529 (1,601)
Provision for (benefit from) income taxes 49 (141)
--------- ---------
Net income (loss) before cumulative effect of change in accounting principle $ 480 $ (1,460)
Cumulative effect of change in accounting principle, net of tax 232 ---
--------- ---------
Net income (loss) $ 712 $ (1,460)
========= =========
Basic and diluted net income (loss) per share:
Basic and diluted net income (loss) before cumulative effect of change
in accounting principle, net of tax $ 0.01 $ (0.02)
Cumulative effect of change in accounting principle, net of tax 0.00 ---
--------- ---------
Basic and diluted net income (loss) per share $ 0.01 $ (0.02)
========= =========
Weighted average shares outstanding:
Basic 91,785 90,219
========= =========
Diluted 96,907 90,219
========= =========
See accompanying notes
2
Denny's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 29, 2006 December 28, 2005
-------------- -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 29,909 $ 28,236
Receivables, net 16,592 18,444
Inventories 8,202 8,207
Prepaid and other current assets 8,227 8,362
--------- ---------
Total Current Assets 62,930 63,249
--------- ---------
Property, net 280,322 288,140
Other Assets:
Goodwill 50,765 50,186
Intangible assets, net 70,628 71,664
Deferred financing costs, net 14,888 15,761
Other assets 25,448 23,881
--------- ---------
Total Assets $ 504,981 $ 512,881
========= =========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 1,876 $ 1,871
Current maturities of capital lease obligations 6,590 6,226
Accounts payable 40,893 48,021
Other 88,497 92,756
--------- ---------
Total Current Liabilities 137,856 148,874
--------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities 516,192 516,803
Capital lease obligations, less current maturities 28,461 28,862
Liability for insurance claims, less current portion 30,751 31,187
Other noncurrent liabilities and deferred credits 52,398 52,557
--------- ---------
Total Long-Term Liabilities 627,802 629,409
--------- ---------
Total Liabilities 765,658 778,283
Total Shareholders' Deficit (260,677) (265,402)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 504,981 $ 512,881
========= =========
See accompanying notes
3
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 28, 2005 91,751 $ 918 $ 517,854 $ (764,631) $ (19,543) $ (265,402)
------ ----- --------- ---------- ---------- -----------
Comprehensive income:
Net income --- --- --- 712 --- 712
Unrealized gain on hedged transaction,
net of tax --- --- --- --- 285 285
------ ----- --------- ---------- ---------- -----------
Comprehensive income --- --- --- 712 285 997
Share-based compensation --- --- 1,279 --- --- 1,279
Reclassification of share-based compensation --- --- 2,181 --- --- 2,181
Issuance of common stock for share-based
compensation 43 --- 186 --- --- 186
Exercise of common stock options 51 1 81 --- --- 82
------ ----- --------- ---------- ---------- -----------
Balance, March 29, 2006 91,845 $ 919 $ 521,581 $ (763,919) $ (19,258) $ (260,677)
====== ===== ========= ========== ========== ===========
See accompanying notes
4
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Cash Flows from Operating Activities:
Net income (loss) $ 712 $ (1,460)
Adjustments to reconcile net income (loss) to cash flows provided by
operating activities:
Cumulative effect of change in accounting principle, net of tax (232) ---
Depreciation and amortization 14,065 13,270
Restructuring charges and exit costs 721 2,274
Amortization of deferred financing costs 873 868
Gains on disposition of assets and other, net (1,571) (885)
Share-based compensation 2,432 2,645
Changes in assets and liabilities, net of effects of acquisitions and
dispositions:
Decrease (increase) in assets:
Receivables 1,469 963
Inventories 5 200
Other current assets 134 (545)
Other assets (1,978) (1,559)
Increase (decrease) in liabilities:
Accounts payable (5,372) (1,597)
Accrued salaries and vacations (3,226) (9,732)
Accrued taxes (481) (203)
Other accrued liabilities 173 3,939
Other noncurrent liabilities and deferred credits (564) 1,476
--------- ---------
Net cash flows provided by operating activities 7,160 9,654
--------- ---------
Cash Flows from Investing Activities:
Purchase of property (7,014) (6,639)
Proceeds from disposition of property 3,073 1,272
Acquisition of restaurant units (825) ---
Collection of note receivable payments from former subsidiary 381 ---
--------- ---------
Net cash flows used in investing activities (4,385) (5,367)
========= =========
See accompanying notes
5
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Cash Flows from Financing Activities:
Long-term debt payments $ (2,153) $ (1,106)
Deferred financing costs paid --- (132)
Proceeds from exercise of stock options 82 339
Net change in bank overdrafts 969 983
--------- ---------
Net cash flows provided by (used in) financing activities (1,102) 84
--------- ---------
Increase in cash and cash equivalents 1,673 4,371
Cash and Cash Equivalents at:
Beginning of period 28,236 15,561
--------- ---------
End of period $ 29,909 $ 19,932
========= =========
See accompanying notes
6
Denny's Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 29, 2006
(Unaudited)
Note 1. Introduction and Basis of Reporting
-----------------------------------
Denny's Corporation, through its wholly owned subsidiaries, Denny's Holdings,
Inc. and Denny's, Inc., owns and operates the Denny's restaurant brand, or
Denny's.
Our consolidated financial statements are unaudited and include all adjustments
we believe are necessary for a fair presentation of the results of operations
for such interim periods. 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 28, 2005 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our 2005 Annual Report on Form 10-K. The results of operations for
the quarter ended March 29, 2006 are not necessarily indicative of the results
for the entire fiscal year ending December 27, 2006.
Note 2. Summary of Significant Accounting Policies
------------------------------------------
Effective December 29, 2005, the first day of fiscal 2006, we adopted Statement
of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based Payment,"
or SFAS 123(R) using the modified-prospective-transition method. This standard
requires expensing of stock options and other share-based payments and applies
to all awards granted, modified, cancelled or repurchased after the effective
date. Additionally, for awards outstanding as of December 29, 2005 for which the
requisite service has not been rendered, compensation expense will be recognized
as the requisite service is rendered. Therefore results for prior periods have
not been restated. SFAS 123(R) supersedes SFAS 123, "Accounting for Stock Based
Compensation," or SFAS No. 123, which had allowed companies to choose between
expensing stock options or showing pro forma disclosure only.
Under SFAS 123(R), we are required to estimate potential forfeitures of
share-based awards and adjust the compensation cost accordingly. Our estimate of
forfeitures will be adjusted over the requisite service period to the extent
that actual forfeitures differ, or are expected to differ, from such estimates.
Prior to the adoption of SFAS 123(R), we recorded forfeitures as they occurred.
As a result of this change, we recognized a cumulative effect of change in
accounting principle in the Condensed Consolidated Statement of Operations of
$0.2 million for the quarter ended March 29, 2006. Additionally, in accordance
with SFAS 123(R), $2.2 million related to restricted stock units payable in
shares, previously recorded as liabilities, were reclassified to additional
paid-in capital in the Condensed Consolidated Balance Sheet for the quarter
ended March 29, 2006. Our previous practice was to accrue compensation expense
for restricted stock units payable in shares as a liability until such time as
the shares were actually issued.
We use the Black-Scholes option pricing model, which requires the input of
subjective assumptions. These assumptions include estimating the length of time
employees will retain their vested stock options before exercising them
("expected term"), the estimated volatility of our common stock price over the
expected term and the number of options that will ultimately not complete their
vesting requirements ("forfeitures"). Changes in the subjective assumptions can
materially affect the estimate of fair value share-based compensation and,
consequently, the related amount recognized in the Condensed Consolidated
Statements of Operations.
See Note 6 to the Condensed Consolidated Financial Statements, "Share-Based
Compensation."
There have been no other material changes to our significant accounting policies
and estimates from the information provided in Note 2 of our 10-K for the fiscal
year ended December 28, 2005.
7
Note 3. Restructuring Charges and Exit Costs
------------------------------------
Restructuring charges and exit costs were comprised of the following:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Exit costs $ 211 $ 863
Severance and other restructuring charges 510 1,411
-------- --------
Total restructuring and exit costs $ 721 $ 2,274
======== ========
The components of the change in accrued exit cost liabilities are as follows:
(In thousands)
Balance, beginning of year $ 9,531
Provisions for units closed during the year ---
Changes in estimate of accrued exit costs, net 211
Payments, net (918)
Interest accretion (included in interest expense) 249
--------
Balance, end of quarter $ 9,073
========
Estimated net cash payments related to exit cost liabilities in the next five
years are as follows:
(In thousands)
Remainder of 2006 $ 1,594
2007 1,494
2008 1,451
2009 1,429
2010 1,483
Thereafter 6,622
--------
Total 14,073
Less imputed interest 5,000
--------
Present value of exit cost liabilities $ 9,073
========
Note 4. 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 $417
million. The credit facilities consist of a first lien facility and a second
lien facility. The first lien facility consists of a $222 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
8
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. The weighted-average interest rates on the
First Lien Facility and Second Lien Facility at March 29, 2006 were 7.9% and
9.8%, respectively.
At March 29, 2006, we had outstanding letters of credit of $43.2 million under
our Revolving Facility, leaving net availability of $31.8 million. There were no
revolving loans outstanding at March 29, 2006.
The Credit Facilities are secured by substantially all of our assets and are
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 March
29, 2006.
The indenture governing the Denny's Holdings 10% Senior Notes due 2012 (the
"Indenture") is fully and unconditionally guaranteed by Denny's Corporation.
Denny's Corporation is a holding company with no independent assets or
operations, 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.
In January 2005, we entered into an interest rate swap with a notional amount of
$75 million to hedge a portion of the cash flows of our floating rate term loan
debt. We have designated the interest rate swap as a cash flow hedge of our
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, we 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. The components of the
cash flow hedge included in accumulated other comprehensive income (loss)
in the Condensed Consolidated Statement of Shareholders' Deficit for the
quarters ended March 29, 2006 and March 30, 2005, are as follows:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Net interest income (expense) recognized as a result of interest rate swap $ 143 $ (134)
Unrealized gain for changes in fair value of interest swap rates 142 1,103
--------- ---------
Net increase in Accumulated Other Comprehensive Income (Loss), net of tax $ 285 $ 969
========= =========
We did not note any ineffectiveness in the hedge during the quarter ended March
29, 2006. We do not enter into derivative financial instruments for trading or
speculative purposes.
9
Note 5. Defined Benefit Plans
---------------------
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
------------- -------------
March 29, 2006 March 30, 2005 March 29, 2006 March 30, 2005
-------------- -------------- -------------- --------------
(In thousands)
Service cost $ 91 $ 115 $ --- $ ---
Interest cost 771 738 48 59
Expected return on plan assets (814) (757) --- ---
Amortization of net loss 251 221 6 8
--------- --------- --------- ---------
Net periodic benefit cost $ 299 $ 317 $ 54 $ 67
========= ========= ========= =========
We made contributions of $0.7 million and $0.6 million to our qualified pension
plan in the quarters ended March 29, 2006 and March 30, 2005, respectively. We
made contributions of $0.1 million and $0.4 million to our other defined benefit
plans during the quarters ended March 29, 2006 and March 30, 2005, respectively.
We expect to contribute $3.3 million to our qualified pension plan and an
additional $0.2 million to our other defined benefit plans during the remainder
of fiscal 2006.
Note 6. Share-Based Compensation
------------------------
Share-Based Compensation Plans
We maintain four plans (Denny's Corporation 2004 Omnibus Incentive Plan (the
"2004 Omnibus Plan"), Denny's, Inc. Omnibus Incentive Compensation Plan for
Executives, Advantica Stock Option Plan and the Advantica Restaurant Group
Director Stock Option Plan) under which stock options and other awards granted
to our employees, directors and consultants are outstanding. On August 25, 2004,
our stockholders approved the 2004 Omnibus Plan which replaced the other
previous plans as the vehicle for granting share-based compensation to our
employees, officers and directors. 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 our common stock are reserved for issuance upon the grant or
exercise of awards pursuant to the plan, plus a number of additional shares (not
to exceed 1,500,000) underlying awards outstanding as of August 25, 2004
pursuant to the other previous plans which thereafter cancel, terminate or
expire unexercised for any reason. The plan authorizes the granting of incentive
awards from time to time to selected employees, officers, directors and
consultants of Denny's and its affiliates. However, we reserve the right to pay
discretionary bonuses, or other types of compensation, outside of the 2004
Omnibus Plan.
The Compensation Committee, or the Board of Directors as a whole, has sole
discretion to determine the exercise price, term and vesting schedule of options
awarded under such plans. Under the terms of the above referenced plans,
optionees who terminate for any reason other than cause, disability, retirement
or death will be allowed 60 days after the termination date to exercise vested
options. Vested options are exercisable for one year when termination is by a
reason of disability, retirement or death. If termination is for cause, no
option shall be exercisable after the termination date.
Additionally, under the 2004 Omnibus Plan and the previous director plan,
directors have been granted options under terms which are substantially similar
to the terms of the plans noted above.
Stock Options
Options granted to date generally vest evenly over 3 years, have a 10-year
contractual life and are issued at the market value at the date of grant.
10
A summary of our stock option plans is presented below:
Quarter Ended
March 29, 2006
--------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Options Exercise Price Contractual Life Intrinsic Value
---------------- -------------- ---------------- ---------------
(In thousands) (In thousands)
Outstanding, beginning of year 9,228 $ 2.06
Granted 759 4.25
Exercised (90) 1.62
Forfeited (61) 1.57
---------------
Outstanding, end of quarter 9,836 2.24 6.91 $ 25,518
=============== ==============
Exercisable, end of quarter 7,068 1.95 6.38 $ 20,537
=============== ==============
The aggregate intrinsic value in the table above was calculated using the
difference between the market price of our stock on March 29, 2006 and the
exercise price for only those options that have an exercise price that is less
than the market price of our stock. The aggregate intrinsic value of the options
exercised during the quarter ended March 29, 2006 was $0.3 million.
The following table summarizes information about stock options outstanding at
March 29, 2006 (option amounts in thousands):
Weighted-
Average
Remaining Weighted- Weighted-
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
--------------- ------------ ----------- -------------- ------------ --------------
$0.54 - 0.92 2,220 6.27 $ 0.71 1,787 $ 0.71
1.01 - 1.03 1,270 4.88 1.03 1,270 1.03
1.06 - 2.00 810 4.86 1.93 810 1.93
2.42 3,485 8.30 2.42 2,444 2.42
2.65 - 4.40 1,255 7.63 3.87 440 3.51
4.45 - 6.31 652 7.90 4.64 173 4.78
7.00 60 2.85 7.00 60 7.00
10.00 84 1.84 10.00 84 10.00
------------ ------------
9,836 6.91 7,068
============ ============
On November 11, 2004, we granted options under the 2004 Omnibus Plan to certain
employees with an exercise price of $2.42 (which are included in the table
above). These options vest 1/3 of the shares on each of December 29, 2004,
December 28, 2005 and December 27, 2006, respectively. The vesting of these
options was subject to the achievement of certain performance measures which
were met as of December 29, 2004. As a result of performance criteria and the
issuance of the options with an exercise price below the market price at the
date of grant, prior to the adoption of SFAS 123(R), we recognized compensation
expense related to these options equal to the difference between the exercise
price of the options and the market price of $4.40 on December 29, 2004, the
measurement date, ratably over the options' vesting period.
The weighted average fair value per option of options granted during the
quarters ended March 29, 2006 and March 30, 2005 was $3.19 and $3.02,
respectively. The fair value of the stock options granted in the quarters ended
March 29, 2006 and March 30, 2005 was estimated at the date of grant using the
Black-Scholes option pricing model. We used the following weighted average
11
assumptions for the grants:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
Dividend yield 0.0% 0.0%
Expected volatility 87% 90%
Risk-free interest rate 4.7% 4.0%
Weighted average expected life 6.0 years 6.0 years
The risk-free interest rate was based on published U.S. Treasury spot rates in
effect at the time of grant with terms approximating the expected life of the
option. The dividend yield assumption was based on our dividend payment history
and expectations of future dividend payments. The expected volatility was based
on the historical volatility of our stock for a period approximating the
expected life. The expected life of the options represents the period of time
the options are expected to be outstanding based on historical trends.
We recognized compensation expense of approximately $0.8 million and $1.2
million for the quarters ended March 29, 2006 and March 30, 2005, respectively,
related to these options, which is included as a component of general and
administrative expenses in our Condensed Consolidated Statements of Operations.
Compensation expense for the quarter ended March 30, 2005 related to the
intrinsic value of options with an exercise price that was below the market
price on the date of grant.
As of March 29, 2006, there was approximately $4.6 million of unrecognized
compensation cost related to unvested stock option awards granted, which is
expected to be recognized over a weighted average of 1.84 years.
Restricted Stock Units
We previously granted approximately 3.4 million restricted stock units (half of
which are liability classified and half of which are equity classified) with a
grant date fair value of $4.22 per share and approximately 0.6 million
restricted stock units (half of which are liability classified and half of which
are equity classified) with a grant date fair value of $4.06 per share to
certain employees. As of March 29, 2006 and December 28, 2005, approximately
3.3 million of these units were outstanding as a result of forfeitures.
These 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 our common stock over a 1-year performance period (measured as the
increase of stock price plus reinvested dividends, divided by beginning stock
price) as compared with the total shareholder return of a peer group of
restaurant companies over the same period. The first such period ended in June
2005. Subsequent periods end in June of each year thereafter with any amounts
not earned carried over to possibly be earned over a 2-year or 3-year period.
The full award will be considered earned after 5 years based on continued
employment if not earned in the first three years based on the performance
criteria.
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 (half of the value will be paid in cash
and half in shares of common stock), provided that the holder is then still
employed with Denny's or an affiliate.
In March 2006, we granted approximately 0.4 million restricted stock units
(which are equity classified) with a grant date fair value of $4.45 per share to
certain employees. These restricted stock units will be earned (from 0% to 200%
of the target award) based on certain operating performance measures for fiscal
2006. Once earned, the restricted stock units will vest over a period of two
years based on continued employment of the holder. Subsequent to the two-year
vesting period, the earned restricted stock units will be paid to the holder in
shares of common stock, provided the holder is then still employed with the
Denny's or an affiliate.
12
Compensation expense related to the equity classified units is based on the
number of units expected to vest and the fair market value of the common stock
on the grant date. Compensation expense related to the liability classified
units is based on the number of units expected to vest and the fair market value
of the common stock on the date of payment. Therefore, balances related to the
liability classified units are adjusted to fair value at each balance sheet
date. We recognized approximately $1.6 million and $1.4 million of compensation
expense for the quarters ended March 29, 2006 and March 30, 2005, respectively,
related to the restricted stock units, which is included as a component of
general and administrative expenses in our Condensed Consolidated Statements of
Operations.
At March 29, 2006, approximately $3.1 million of accrued compensation was
included as a component of other current liabilities (based on the fair value of
the related shares as of March 29, 2006) and $2.7 million was included as a
component of additional paid-in capital in the Condensed Consolidated Balance
Sheet related to restricted stock units.
As of March 29, 2006, there was approximately $10.0 million of unrecognized
compensation cost ($5.8 million for liability classified units and $4.2 million
for equity classified units) related to unvested restricted stock unit awards
granted, which is expected to be recognized over a weighted average of 3.77
years.
Total share-based compensation included as a component of net income (loss) was
as follows (in thousands):
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
Share-based compensation related to liability classified awards:
Share-based compensation related to restricted stock units $ 1,066 $ 656
Other share-based compensation 87 95
-------------- --------------
Total share-based compensation related to liability classified awards $ 1,153 $ 751
-------------- --------------
Share-based compensation related to equity classified units:
Share-based compensation related to stock options $ 792 $ 1,163
Share-based compensation related to restricted stock units 487 731
-------------- --------------
Total share-based compensation related to equity classified awards 1,279 1,894
-------------- --------------
Total share-based compensation $ 2,432 $ 2,645
============== ==============
The following table presents the impact of our adoption of SFAS 123(R) on
selected Condensed Consolidated Statement of Operations line items for the
quarter ended March 29, 2006 (in thousands, except for per share amounts):
Quarter Ended March 29, 2006
-------------------------------------
Under SFAS 123(R) Under APB 25
---------------- ---------------
Net income before income taxes and cumulative effect of change in
accounting principle $ 529 $ 1,049
============== ==============
Net income before cumulative effect of change in accounting principle $ 480 $ 952
============== ==============
Basic and diluted income per share before cumulative effect of change
in accounting principle $ 0.01 $ 0.01
============== ==============
Prior to the adoption of SFAS 123(R), we accounted for our share-based
compensation plans under the provisions of SFAS 123, while continuing to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The following table illustrates the
effect on net loss and net loss per common share had we applied the fair value
recognition provisions of SFAS 123 to share-based compensation as of March 30,
2005 (in thousands, except for per share amounts):
13
Quarter Ended
--------------
March 30, 2005
--------------
Reported net loss $ (1,460)
Share-based employee compensation expense included in reported net loss,
net of related taxes 2,412
Less total share-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (3,332)
-------------
Pro forma net loss $ (2,380)
=============
Basic and diluted loss per share, as reported $ (0.02)
=============
Basic and diluted loss per share, pro forma $ (0.03)
=============
Note 7. Accumulated Other Comprehensive Income (Loss)
---------------------------------------------
The components of Accumulated Other Comprehensive Income (Loss) in the Condensed
Consolidated Statement of Shareholders' Deficit are as follows (in thousands):
March 29, 2006 December 28, 2005
-------------- -----------------
Additional minimum pension liability $ (20,799) $ (20,799)
Unrealized gain on hedged transaction 1,541 1,256
========= =========
$ (19,258) $ (19,543)
========= =========
Note 8. Net Income (Loss) Per Share
---------------------------
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands, except per share amounts)
Numerator:
Numerator for basic and diluted net income (loss) per share -
net income (loss) from continuing operations before cumulative effect
of change in accounting principle $ 480 $ (1,460)
========= =========
Numerator for basic and diluted net income (loss) per share -
net income (loss) $ 712 $ (1,460)
========= =========
Denominator:
Denominator for basic net income (loss) per share - weighted average shares 91,785 90,219
Effect of dilutive securities:
Options 4,306 ---
Restricted stock units and awards 816 ---
--------- ---------
Denominator for diluted net income (loss) per share - adjusted weighted
average shares and assumed conversions of dilutive securities 96,907 90,219
========= =========
Basic and diluted net income (loss) per share before cumulative effect of
change in accounting principle $ 0.01 $ (0.02)
========= =========
Basic and diluted net income (loss) per share $ 0.01 $ (0.02)
========= =========
Stock options excluded (1) 958 10,251
--------- ---------
Restricted stock units and awards excluded (1) --- 3,112
========= =========
(1) Excluded from diluted weighted-average shares outstanding as the impact
would have been antidilutive.
14
Note 9. Supplemental Cash Flow Information
----------------------------------
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Income taxes paid, net $ 279 $ 235
========= =========
Interest paid $ 8,611 $ 7,213
========= =========
Noncash financing activities:
Capital leases entered into $ 1,534 $ 358
========= =========
Issuance of common stock, pursuant to share-based
compensation plans $ 186 $ 1,539
========= =========
Note 10. Commitments and Contingencies
-----------------------------
In the fourth quarter of 2005, Denny's Corporation and its subsidiary Denny's,
Inc. finalized a settlement with the Division of Labor Standards Enforcement
("DLSE") of the State of California's Department of Industrial Relations
regarding all disputes related to the DLSE's litigation against us. Pursuant to
the terms of the settlement, Denny's agreed to pay a sum of approximately $8.1
million to former employees, of which $3.5 million was paid in the fourth
quarter of 2005. The remaining $4.6 million was included in other liabilities in
the accompanying Condensed Consolidated Balance Sheet at December 28, 2005 and
was paid on January 6, 2006, in accordance with the instruction of the DLSE.
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 reserves reflecting our best estimate
of 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 March 29, 2006 and results of operations for the
quarter ended March 29, 2006 compared to the quarter ended March 30, 2005. 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 (including with regard to energy costs), particularly at
the retail level; political environment (including acts of war and terrorism);
and other factors included in the discussion below, or in Part II. Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Part I. Item 1A. Risk Factors, contained in our Annual Report on
Form 10-K for the year ended December 28, 2005.
15
Statements of Operations
- ------------------------
Quarter Ended
-------------
March 29, 2006 March 30, 2005
------------------------ ------------------------
(Dollars in thousands)
Revenue:
Company restaurant sales $ 225,022 90.7% $ 218,015 90.8%
Franchise and license revenue 22,963 9.3% 22,034 9.2%
--------- ------ --------- ------
Total operating revenue 247,985 100.0% 240,049 100.0%
--------- ------ --------- ------
Costs of company restaurant sales (a):
Product costs 55,729 24.8% 56,196 25.8%
Payroll and benefits 94,008 41.8% 91,659 42.0%
Occupancy 13,137 5.8% 13,097 6.0%
Other operating expenses 32,444 14.4% 30,121 13.8%
--------- ------ --------- -------
Total costs of company restaurant sales 195,318 86.8% 191,073 87.6%
Costs of franchise and license revenue (a) 7,213 31.4% 7,009 31.8%
General and administrative expenses 17,229 6.9% 16,068 6.7%
Depreciation and amortization 14,065 5.7% 13,270 5.5%
Restructuring charges and exit costs 721 0.3% 2,274 0.9%
Impairment charges -- -- -- --
Gains on disposition of assets and other, net (1,571) (0.6%) (885) (0.4%)
--------- ------ --------- ------
Total operating costs and expenses 232,975 93.9% 228,809 95.3%
--------- ------ --------- ------
Operating income 15,010 6.1% 11,240 4.7%
--------- ------ --------- ------
Other expenses:
Interest expense, net 14,643 5.9% 13,212 5.5%
Other nonoperating (income) expense, net (162) (0.1%) (371) (0.2%)
---------- ------ --------- ------
Total other expenses, net 14,481 5.8% 12,841 5.3%
--------- ------ --------- ------
Income (loss) before income taxes and cumulative effect of change
in accounting principle 529 0.2% (1,601) (0.7%)
Provision for (benefit from) income taxes 49 0.0% (141) (0.1%)
--------- ------ --------- ------
Net income (loss) before cumulative effect of change in accounting
principle 480 0.2% (1,460) (0.6%)
Cumulative effect of change in accounting principle, net of tax 232 0.1% --- ---
--------- ------ --------- ------
Net income (loss) $ 712 0.3% $ (1,460) (0.6%)
========= ====== ========= ======
Other Data:
Company-owned average unit sales $ 419.2 $ 398.1
Franchise average unit sales 365.7 339.0
Same-store sales increase (company-owned) (b) 4.6% 6.3%
Guest check average increase (b) 8.0% 3.2%
Guest count increase (decrease) (b) (3.1%) 3.0%
- ------------------
(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 Units Units Units Units Ending Units Ending Units
December 28, 2005 Opened Acquired Closed March 29, 2006 March 30, 2005
----------------- ------ -------- ------ -------------- --------------
Company-owned restaurants 543 1 1 --- 545 549
Franchised and licensed restaurants 1,035 4 (1) (8) 1,030 1,038
----- --- ----- ---- ----- -----
1,578 5 --- (8) 1,575 1,587
===== === ===== ==== ===== =====
16
Quarter Ended March 29, 2006 Compared with Quarter Ended March 30, 2005
- -----------------------------------------------------------------------
Company Restaurant Operations
During the quarter ended March 29, 2006, we realized a 4.6% increase in
same-store sales, comprised of an 8.0% increase in guest check average and a
3.1% decrease in guest counts. Company restaurant sales increased $7.0 million
(3.2%). Higher sales resulted primarily from the increase in guest check average
partially offset by the decrease in guest counts and an eleven equivalent-unit
decrease in company-owned restaurants.
Total costs of company restaurant sales as a percentage of company restaurant
sales decreased to 86.8% from 87.6%. Product costs decreased to 24.8% from 25.8%
due to shifts in menu mix and the impact of a higher guest check average.
Payroll and benefits decreased slightly to 41.8% from 42.0% due to a higher
guest check average partially offset by the effects of higher average labor
hours. Occupancy costs decreased to 5.8% from 6.0% primarily due to the increase
in company restaurant sales. Other operating expenses were comprised of the
following amounts and percentages of company restaurant sales:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------------- --------------------
(Dollars in thousands)
Utilities $ 11,648 5.2% $ 10,294 4.7%
Repairs and maintenance 4,312 1.9% 4,520 2.1%
Marketing 7,463 3.3% 7,277 3.3%
Other 9,021 4.0% 8,030 3.7%
----------- ------ --------- -----
Other operating expenses $ 32,444 14.4% $ 30,121 13.8%
========== ====== ========= =====
The increase in utilities is primarily the result of higher natural gas costs.
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
-------------
March 29, 2006 March 30, 2005
-------------------- --------------------
(Dollars in thousands)
Royalties and initial fees $ 15,173 66.1% $ 14,229 64.6%
Occupancy revenue 7,790 33.9% 7,805 35.4%
--------- ------ --------- ------
Franchise and license revenue $ 22,963 100.0% $ 22,034 100.0%
========= ====== ========= ======
Occupancy costs $ 5,125 22.3% $ 5,268 23.9%
Other direct costs 2,088 9.1% 1,741 7.9%
--------- ------ --------- ------
Costs of franchise and license revenue $ 7,213 31.4% $ 7,009 31.8%
========= ======= ========= ======
Royalties increased $0.9 million (0.7%) resulting from a 6.2% increase in
franchisee same-store sales, partially offset by the effects of an eleven
equivalent-unit decrease in franchise and licensed units. The decline in
occupancy revenue is attributable to the decrease in franchise and licensed
units.
17
Costs of franchise and license revenue increased $0.2 million primarily due to a
$0.1 million increase in other direct costs related to an incentive award
program for franchisees who achieved certain performance criteria in 2006.
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
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Share-based compensation $ 2,432 $ 2,645
Other general and administrative expenses 14,797 13,423
------------ ------------
Total general and administrative expenses $ 17,229 $ 16,068
============ ============
The increase in other general and administrative expenses primarily resulted
from the effects of investments in corporate staffing partially offset by a
decrease in legal fees.
Depreciation and amortization is comprised of the following:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Depreciation of property and equipment $ 11,247 $ 10,770
Amortization of capital lease assets 1,274 777
Amortization of intangible assets 1,544 1,723
--------- ---------
Total depreciation and amortization expense $ 14,065 $ 13,270
========= =========
The overall increase in depreciation and amortization expense of $0.8 million is
primarily due to the implementation of our new point of sale system.
Restructuring charges and exit costs were comprised of the following:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
--------------- --------------
(In thousands)
Exit costs $ 211 $ 863
Severance and other restructuring charges 510 1,411
--------- ---------
Total restructuring and exit costs $ 721 $ 2,274
========= =========
Gains on disposition of assets and other, net of $1.6 million in the first
quarter of 2006 and $0.9 million in the first quarter of 2005 primarily
represent gains on cash sales of surplus properties.
Operating income was $15.0 million for the quarter ended March 29, 2006 compared
with $11.2 million for the quarter ended March 30, 2005.
18
Interest expense, net is comprised of the following:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
-------------- --------------
(In thousands)
Interest on senior notes $ 4,363 $ 4,374
Interest on credit facilities 7,065 5,777
Interest on capital lease liabilities 1,129 1,002
Letters of credit and other fees 766 663
Interest income (436) (343)
--------- ---------
Total cash interest 12,887 11,473
Amortization of deferred financing costs 873 868
Interest accretion on other liabilities 883 871
--------- ---------
Total interest expense, net $ 14,643 $ 13,212
========= =========
The increase in interest expense primarily resulted from the effect of higher
interest rates on the variable-rate portion of our credit facilities.
The provision for income taxes was $0.1 million in the first quarter of 2006
compared with a benefit from income taxes of $0.1 million in the first quarter
of 2005. The provision for income taxes for the quarter ended March 29, 2006 was
determined using our effective tax rate estimated for the entire fiscal year, as
the Company currently expects to have income for the entire fiscal year.
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.
As a result of adopting SFAS 123(R), we recorded a cumulative effect of change
in accounting principle, net of tax of $0.2 million. See Notes 2 and 6 to our
Condensed Consolidated Financial Statements.
Net income was $0.7 million for the quarter ended March 29, 2006 compared with a
net loss of $1.5 million for the quarter ended March 30, 2005 due to the factors
noted above.
19
Liquidity and Capital Resources
- -------------------------------
The following table sets forth a calculation of our cash provided by operations,
for the periods indicated:
Quarter Ended
-------------
March 29, 2006 March 30, 2005
--------------- --------------
(In thousands)
Net income (loss) $ 712 $ (1,460)
Cumulative effect of change in accounting principle (232) ---
Restructuring charges and exit costs 721 2,274
Gains on disposition of assets and other, net (1,571) (885)
Shared-based compensation 2,432 2,645
Other noncash charges 14,938 14,138
Change in certain working capital items (7,298) (6,975)
Change in other assets and other liabilities, net (2,542) (83)
--------- ---------
Cash provided by operations $ 7,160 $ 9,654
========= =========
Our principal capital requirements have been largely associated with remodeling
and maintaining our existing company-owned restaurants and facilities. Net cash
flows used for investing activities were $4.4 million for the quarter ended
March 29, 2006. Our capital expenditures for the first quarter of 2006 were $8.5
million, of which $1.5 million was financed through capital leases. Capital
expenditures for the quarter were partially offset by net proceeds from
dispositions of surplus property of $3.1 million. In addition to occasional
sales of surplus properties, we have begun to explore the possible sale of owned
real estate underlying our franchisee and certain company operated restaurants.
Our initial focus is on the sale of company-owned franchisee-operated real
estate. We have begun discussions with certain of these franchisees, as well as
potential third party purchasers. Although no assurances can be given in this
regard, the sale of these real estate assets, whether to a franchisee or to a
third party, could provide additional liquidity to reduce our debt balances.
Cash flows used in financing activities were $1.1 million for the quarter ended
March 29, 2006, including $2.2 million of payments related to capital lease
obligations, our Credit Facilities and other long-term debt instruments.
Our subsidiaries, Denny's, Inc. and Denny's Realty, Inc. (the "Borrowers"), have
senior secured credit facilities with an aggregate principal amount of $417
million. The credit facilities consist of a first lien facility and a second
lien facility. The first lien facility consists of a $222 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
Borrower's option, is Adjusted LIBOR plus a spread of 5.125% per annum or ABR
plus a spread of 3.625% per annum. The weighted-average interest rates on the
First Lien Facility and Second Lien Facility at March 29, 2006 were 7.9% and
9.8%, respectively.
20
At March 29, 2006, we had outstanding letters of credit of $43.2 million under
our Revolving Facility, leaving net availability of $31.8 million. There were no
revolving loans outstanding at March 29, 2006.
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 facility as of March
29, 2006.
Our working capital deficit was $74.9 million at March 29, 2006 compared with
$85.6 million at December 28, 2005. 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 Notes 2 and 6 to our Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to interest rate risk related to certain instruments entered
into for other than trading purposes. Specifically, 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 Borrower's option, is Adjusted
LIBOR plus a spread of 5.125% per annum or ABR plus a spread of 3.625% per
annum.
During the first quarter of 2005, we entered into an interest rate swap with a
notional amount of $75 million to hedge a portion of the cash flows of our
floating rate term loan debt. We have designated the interest rate swap as a
cash flow hedge of the our 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, we 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 from approximately 34% of total debt to approximately
48%. The estimated fair value of the interest rate swap at March 29, 2006 was
$1.5 million.
Based on the levels of borrowings under the Credit Facilities at March 29, 2006,
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 March 29, 2006. 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
obligations and revolving credit facility advances) was approximately $181.4
million, compared with a book value of $175.9 million at March 29, 2006. This
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 March 29, 2006 relates primarily
to market quotations for our 10% Senior Notes due 2012.
We also have exposure to interest rate risk related to our pension plan, other
21
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 $0.1 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 $0.1 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.
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
In the fourth quarter of 2005, Denny's Corporation and its subsidiary Denny's,
Inc. finalized a settlement with the Division of Labor Standards Enforcement
("DLSE") of the State of California's Department of Industrial Relations
regarding all disputes related to the DLSE's litigation against us. Pursuant to
the terms of the settlement, Denny's agreed to pay a sum of approximately $8.1
million to former employees, of which $3.5 million was paid in the fourth
quarter of 2005. The remaining $4.6 million was included in other liabilities in
the accompanying Condensed Consolidated Balance Sheet at December 28, 2005 and
was paid on January 6, 2006, in accordance with the instruction of the DLSE.
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 reserves reflecting 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.
22
Item 6. Exhibits
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
10.1 Written description of the 2006 Corporate Incentive Program.
10.2 Written description of the Long Term Growth Incentive Program.
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.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENNY'S CORPORATION
Date: May 8, 2006 By: /s/ Rhonda J. Parish
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Rhonda J. Parish
Executive Vice President,
Chief Administrative Officer
Chief Human Resources Officer
General Counsel and Secretary
Date: May 8, 2006 By: /s/ F. Mark Wolfinger
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F. Mark Wolfinger
Senior Vice President and
Chief Financial Officer
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