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 _______
Delaware 13-3487402
------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
|
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.
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
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
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
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
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
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
Denny's Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 28, 2005
(Unaudited)
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.
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
======== ======== ======== =======
|
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.
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.
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.
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:
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.
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:
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.
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.
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.
|
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
========== ==========
|
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.
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.
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
====== ====== ===== ====== ======= =======
|
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:
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.
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.
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:
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
========== ===========
|
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.
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.
See Note 9 to our Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, borrowings under the 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.
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.
|
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
|
Exhibit 10.1
August 16, 2005
Mark Wolfinger
1817 Brightwaters Blvd NE
St. Petersburg, FL 33704
Dear Mark,
I am delighted to offer you the opportunity to join Denny's, Inc. (hereafter "Denny's" or the "Company") as Senior Vice President and Chief Financial Officer ("CFO") reporting to the President and CEO. This letter outlines the terms of our offer.
In recognition of your having previously paid tuition for your three children to attend the school in which they are currently enrolled during the 2005-2006
Mark Wolfinger
August 16, 2005
school year, Denny's will, upon receipt of itemized billings from Christ Church School for your children's tuition for the 2005-2006 school year, pay those tuition costs directly to Christ Church School on your behalf. In the event we determine or this payment is deemed to be income to you, the Company will provide a gross up to accommodate your tax liability.
Additionally, you will receive an award of 300,000 units of Performance-Based Restricted Stock. Up to one-third of this award can be earned in each of the following years: 2006, 2007, and 2008, based on the total shareholder return performance of the Company versus peer companies over a July-June time frame. The first measurement date for your total shareholder performance will be July 1, 2005 through June 30, 2006. Awards that are not earned in the appropriate period may carry forward to the next year and be earned then if cumulative performance would provide that result. The full award will be considered earned after five years (cliff vesting) based on continued employment. Generally, awards earned will be paid one-half one year after the applicable performance period has ended and one-half two years thereafter. The restricted stock units will be paid half in cash and half in stock.
The Stock Option Program and the Performance-Based Restricted Stock Awards are governed by the Denny's Corporation 2004 Omnibus Incentive Plan document, the Stock Option Award agreement and the 2005 Peer Total Return Program written description (which is presently being developed by Hewitt). In the event there is a discrepancy between these documents and the above description, the terms of these documents, not this description, will control. Each year, the Compensation and Incentives Committee of the Denny's Corporation Board of Directors determines, at its discretion, if the Company will be granting stock options and restricted stock units to eligible employees.
Mark Wolfinger
August 16, 2005
Assistance with temporary living expenses will be provided through January 15, 2006 (in addition to benefits provided by the Relocation policy) in the amount of $3,250.00 per month, grossed up to accommodate your tax liability. This amount should offset your costs for temporary housing and weekend airfare to and from St. Petersburg.
Mark Wolfinger
August 16, 2005
Mark, we all look forward to having you on the Denny's team. If you are in agreement with these terms, please sign one copy of this letter and return it to me. Should you have any questions about any portion of this offer, please call me directly at 864-597-8242.
Welcome to the Denny's team!
Sincerely,
/s/ Rhonda J. Parish --------------------- Rhonda J. Parish |
ACKNOWLEDGED:
/s/ F. Mark Wolfinger August 16, 2005 --------------------- Mark Wolfinger |
Exhibit 31.1
CERTIFICATION
I, Nelson J. Marchioli, President and Chief Executive Officer of Denny's Corporation, certify that:
1. I have reviewed this report on Form 10-Q of Denny's Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
/s/ Nelson J. Marchioli
-------------------------------------
Nelson J. Marchioli
President and Chief Executive Officer
Date: November 7, 2005
|
Exhibit 31.2
CERTIFICATION
I, F. Mark Wolfinger, Senior Vice President and Chief Financial Officer of Denny's Corporation, certify that:
1. I have reviewed this report on Form 10-Q of Denny's Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
/s/ F. Mark Wolfinger
-------------------------------------------------
F. Mark Wolfinger
Senior Vice President and Chief Financial Officer
Date: November 7, 2005
|
Exhibit 32.1
CERTIFICATION
Nelson J. Marchioli
President and Chief Executive Officer of Denny's Corporation
and
F. Mark Wolfinger
Senior Vice President and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Denny's Corporation (the "Company")
on Form 10-Q for the period ended September 28, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Nelson J. Marchioli, President and Chief Executive Officer of the Company, and
I, F. Mark Wolfinger, Senior Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Nelson J. Marchioli
-------------------------------------------------
Nelson J. Marchioli
President and Chief Executive Officer
November 7, 2005
/s/ F. Mark Wolfinger
-------------------------------------------------
F. Mark Wolfinger
Senior Vice President and Chief Financial Officer
November 7, 2005
|
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Denny's Corporation and will be retained by Denny's Corporation and furnished to the Securities and Exchange Commission or its staff upon request.