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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 June 25, 2003 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 29319-9966
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of August 8, 2003, 40,742,929 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
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Quarter
Ended Ended
June 25, 2003 June 26, 2002
------------- -------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 208,457 $ 217,452
Franchise and license revenue 21,603 22,890
--------- ---------
Total operating revenue 230,060 240,342
--------- ---------
Costs of company restaurant sales:
Product costs 53,008 51,531
Payroll and benefits 92,151 88,112
Occupancy 11,947 12,170
Other operating expenses 28,086 28,583
--------- ---------
Total costs of company restaurant sales 185,192 180,396
Costs of franchise and license revenue 6,778 7,376
General and administrative expenses 13,044 14,033
Depreciation and amortization 14,420 20,860
Restructuring charges and exit costs (982) 2,781
Impairment charges 410 497
Gains on disposition of assets and other, net (2,552) (1,764)
-------- ---------
Total operating costs and expenses 216,310 224,179
-------- ---------
Operating income 13,750 16,163
-------- ---------
Other expenses:
Interest expense, net 18,989 18,920
Gains on exchanges of debt and other, net (127) (19,271)
-------- ---------
Total other expenses (income), net 18,862 (351)
-------- ---------
Income (loss) before income taxes (5,112) 16,514
Provision for income taxes 265 302
-------- ---------
Net income (loss) $ (5,377) $ 16,212
========= =========
Per share amounts:
Basic and diluted net income (loss) per share $ (0.13) $ 0.40
========= =========
Weighted average shares outstanding:
Basic 40,743 40,276
========= =========
Diluted 40,743 40,478
========= =========
See accompanying notes
2
Denny's Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 25, 2003 June 26, 2002
------------- -------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 407,901 $ 429,686
Franchise and license revenue 43,000 45,115
--------- ---------
Total operating revenue 450,901 474,801
--------- ---------
Cost of company restaurant sales:
Product costs 102,083 103,225
Payroll and benefits 180,695 176,404
Occupancy 24,047 24,569
Other operating expenses 56,831 57,890
--------- ---------
Total costs of company restaurant sales 363,656 362,088
Costs of franchise and license revenue 13,270 14,621
General and administrative expenses 26,247 28,211
Depreciation and amortization 28,677 41,558
Restructuring charges and exit costs (936) 3,079
Impairment charges 699 497
Gains on disposition of assets and other, net (4,869) (3,580)
--------- ---------
Total operating costs and expenses 426,744 446,474
--------- ---------
Operating income 24,157 28,327
--------- ---------
Other expenses:
Interest expense, net 38,206 38,207
Gains on exchanges of debt and other, net (120) (19,271)
--------- ---------
Total other expenses, net 38,086 18,936
--------- ---------
Income (loss) before income taxes (13,929) 9,391
Provision for (benefit from) income taxes 530 (2,137)
--------- ---------
Net income (loss) $ (14,459) $ 11,528
========= =========
Per share amounts:
Basic and diluted income (loss) per share: $ (0.36) $ 0.29
========= =========
Weighted average shares outstanding:
Basic 40,628 40,255
========= =========
Diluted 40,628 40,443
========= =========
See accompanying notes
3
Denny's Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
June 25, December 25,
2003 2002
------------ ------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 4,547 $ 5,717
Receivables, net 7,941 11,980
Inventories 8,643 7,715
Other 12,727 8,329
---------- ----------
Total Current Assets 33,858 33,741
---------- ----------
Property, net 307,479 324,725
Other Assets:
Goodwill 50,404 50,073
Intangible assets, net 88,502 92,257
Deferred financing costs, net 10,698 12,646
Other 34,324 38,049
---------- ----------
Total Assets $ 525,265 $ 551,491
========== ==========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 583 $ 554
Current maturities of capital lease obligations 3,536 3,886
Accounts payable 46,937 50,660
Other 90,482 97,703
---------- ----------
Total Current Liabilities 141,538 152,803
---------- ----------
Long-Term Liabilities:
Notes and debentures, less current maturities 562,468 560,359
Capital lease obligations, less current maturities 29,556 31,177
Liability for insurance claims 24,955 25,160
Other noncurrent liabilities and deferred credits 59,781 60,883
---------- ----------
Total Long-Term Liabilities 676,760 677,579
---------- ----------
Total Liabilities 818,298 830,382
Total Shareholders' Deficit (293,033) (278,891)
---------- ----------
Total Liabilities and Shareholders' Deficit $ 525,265 $ 551,491
========== ==========
See accompanying notes
4
Denny's Corporation
Condensed Consolidated Statement of Shareholders' Deficit
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Deficit
------ ------ ---------- ----------- ------------- -------------
(In thousands)
Balance, December 25, 2002 40,290 $ 403 $ 417,415 $ (681,733) $ (14,976) $ (278,891)
------ ----- --------- ---------- --------- ----------
Net loss --- --- --- (14,459) --- (14,459)
Issuance of common stock 453 4 313 --- --- 317
------ ----- --------- ---------- ---------- ----------
Balance, June 25, 2003 40,743 $ 407 $ 417,728 $ (696,192) $ (14,976) $ (293,033)
====== ===== ========= ========== ========== ==========
See accompanying notes
5
Denny's Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 25, 2003 June 26, 2002
------------- -------------
(In thousands)
Cash Flows from Operating Activities:
Net income (loss) $ (14,459) $ 11,528
Adjustments to reconcile net income (loss) to cash flows
provided by operating activities:
Depreciation and amortization 28,677 41,558
Impairment charges 699 497
Restructuring charges and exit costs (936) 3,079
Recognition of deferred gains (1,909) (3,776)
Amortization of deferred financing costs 2,382 2,097
Gains on disposition of assets and other, net (4,869) (3,580)
Amortization of debt premium (802) (947)
Gain on early extinguishment of debt --- (19,246)
Changes in assets and liabilities, net of effects of acquisitions and
dispositions:
Decrease (increase) in assets:
Receivables 4,640 (916)
Inventories (928) 124
Other current assets (4,319) 2,800
Other assets (743) 303
Increase (decrease) in liabilities:
Accounts payable 1,042 (2,383)
Accrued salaries and vacations (384) (6,644)
Accrued taxes 17 578
Other accrued liabilities (3,247) (7,797)
Other noncurrent liabilities and deferred credits (2,341) (5,540)
--------- ---------
Net cash flows provided by operating activities 2,520 11,735
--------- ---------
Cash Flows from Investing Activities:
Purchase of property (13,958) (13,853)
Proceeds from disposition of property 11,882 5,451
Receipts from discontinued operations, net --- 4,086
Deposits made to secure FRD letters of credit --- 4,083
--------- ---------
Net cash flows used in investing activities (2,076) (233)
--------- ---------
See accompanying notes
6
Denny's Corporation
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 25, 2003 June 26, 2002
------------- -------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreement $ 3,200 $ 3,300
Long-term debt payments (2,258) (2,799)
Deferred financing costs paid (1,058) (1,920)
Proceeds from exercise of stock options --- 26
Net bank overdrafts (1,498) (13,133)
---------- ----------
Net cash flows used in financing activities (1,614) (14,526)
---------- ----------
Decrease in cash and cash equivalents (1,170) (3,024)
Cash and Cash Equivalents at:
Beginning of period 5,717 6,696
---------- ----------
End of period $ 4,547 $ 3,672
========== ==========
See accompanying notes
7
Denny's Corporation
Notes to Condensed Consolidated Financial Statements
June 25, 2003
(Unaudited)
Note 1. General
- ----------------
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 25, 2002 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our 2002 Annual Report on Form 10-K. The results of operations for
the two quarters ended June 25, 2003 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 2003.
Note 2. Restructuring Charges and Exit Costs
- ---------------------------------------------
As a result of changes in our organizational structure and in our portfolio of
restaurants, we have recorded charges for restructuring and exit costs. These
costs consist primarily of severance and outplacement costs for terminated
employees and the costs of future obligations related to closed units.
In assessing the cost of obligations related to units closed or identified for
closure prior to December 26, 2002, the date we adopted SFAS 146, "Accounting
for Costs Associated with Exit or Disposal Activities," 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 and 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.
The following table summarizes the activity for the two quarters ended June 25,
2003 related to discounted accrued exit cost liabilities:
(in thousands)
Balance, December 25, 2002 $ 19,680
Reversal of accrued exit costs, net (1,526)
Payments, net (5,171)
Interest accretion 980
--------
Balance, June 25, 2003 $ 13,963
========
During the two quarters ended June 25, 2003, we entered into a settlement
agreement on the lease for our former corporate headquarters. As a result we
recorded a reversal of approximately $1.6 million of related exit costs. In
addition, we recorded approximately $0.6 million of restructuring charges
related to the elimination of twenty out-of-restaurant support staff positions.
8
Estimated net cash payments related to exit cost liabilities at June 25, 2003
are as follows:
(in thousands)
Remainder of 2003 $ 2,491
2004 3,290
2005 2,173
2006 1,729
2007 1,477
Subsequent years 9,324
--------
Total 20,484
Less imputed interest 6,521
--------
Discounted accrued exit cost liabilities $ 13,963
========
Note 3. Capital Structure
- --------------------------
Stock Based Compensation
We account for stock-based employee compensation plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in the condensed
consolidated statement of operations, as all options granted under those plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net income
(loss) and net income (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation", or SFAS 123, to stock-based employee
compensation.
Quarter Ended Two Quarters Ended
------------- ------------------
June 25, June 26, June 25, June 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Net income (loss), as reported $ (5,377) $ 16,212 $ (14,459) $ 11,528
Total stock-based employee compensation expense determined
under fair value based method for all awards 377 519 760 1,012
--------- --------- --------- ---------
Pro forma net income (loss) $ (5,754) $ 15,693 $ (15,219) $ 10,516
========= ========= ========= =========
Income (loss) per share:
Basic and diluted - as reported $ (0.13) $ 0.40 $ (0.36) $ 0.29
========= ========= ========= =========
Basic and diluted - pro forma $ (0.14) $ 0.39 $ (0.37) $ 0.26
========= ========= ========= =========
Income (Loss) Per Share
The calculations of basic and diluted income (loss) per share have been based on
the weighted average number of shares outstanding. Warrants have been omitted
from the calculation of weighted average diluted shares for all periods as they
would be antidilutive. Because of the net loss for the quarter and two quarters
ended June 25, 2003, options have been omitted from the calculation of weighted
average diluted shares. Common stock equivalents for the quarter and two
quarters ended June 26, 2002 were 202 and 188, respectively.
Note 4. Revolving Credit Facility
- ----------------------------------
In December of fiscal 2002, we entered into a new senior secured credit
facility, or credit facility, which provides Denny's with a working capital and
letter of credit facility of up to $125 million. The credit facility matures on
December 20, 2004. At June 25, 2003, we had working capital advances of $49.9
million and letters of credit outstanding of $38.3 million under our credit
facility, leaving net availability of $36.8 million. Advances under the credit
facility accrue interest at a variable rate (approximately 6.3% at June 25,
2003) based on the prime rate or an adjusted Eurodollar rate.
9
Profitability was below our expectations for the first two quarters of 2003.
Accordingly, we were required to obtain an amendment to the credit facility to
provide less restrictive financial covenants effective for the quarter ended
June 25, 2003 and for the remaining term of the facility. We were in compliance
with the terms of the credit facility, as amended, as of June 25, 2003. Also,
pursuant to the amendment, the proceeds of certain additional debt issued by
Denny's Holdings (a wholly-owned subsidiary of Denny's Corporation) subsequent
to the amendment may be used for general corporate purposes or to repay the
credit facility without a concurrent reduction of the facility commitments.
Note 5. Supplemental Cash Flow Information
- -------------------------------------------
Two Quarters Ended
------------------
June 25, June 26,
2003 2002
------------- -------------
(in thousands)
Income taxes paid, net $ 18 $ 613
=========== ===========
Interest paid, net $ 34,053 $ 37,219
=========== ===========
Noncash investing activities:
Notes received related to sale of properties $ --- $ 82
=========== ============
Receivables forgiven related to reacquisition of restaurants $ 366 $ 186
=========== ============
Noncash financing activities:
Capital leases entered into $ 412 $ 688
=========== ============
Note 6. Implementation of New Accounting Standards
- ---------------------------------------------------
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This statement replaces Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including certain costs incurred
in a Restructuring)". The principal difference between SFAS 146 and EITF 94-3
relates to its requirements for recognition of a liability for a cost associated
with an exit or disposal activity. This statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost as defined
in EITF 94-3 was recognized at the date of an entity's commitment to an exit
plan. A fundamental conclusion reached by the Board in SFAS 146 is that an
entity's commitment to a plan, by itself, does not create a present obligation
to others that meets the definition of a liability. SFAS 146 eliminates the
definition and requirements for recognition of exit costs in EITF 94-3. This
statement also establishes that fair value is the objective for initial
measurement of the liability. The adoption of SFAS 146 did not have a material
impact on our financial position and results of operations; however, the timing
of the recognition of future costs under SFAS 146 is substantially different
than the timing under EITF 94-3. SFAS 146 is effective for exit and disposal
activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, or FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN 45 did not have a material impact on the Company's consolidated
financial statements.
10
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". This interpretation addresses the
consolidation by business enterprises of variable interest entities, as defined
in the interpretation, and sets forth additional disclosure regarding such
interests. FIN 46 applies immediately to variable interest entities created, or
in which the Company obtains an interest, after January 31, 2003, and becomes
effective June 26, 2003 for all variable interest entities held by the Company
prior to that date. The adoption of FIN 46 has not had and is not expected to
have a material effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" and provides
for alternative methods for accounting for a change by registrants to the fair
value method of accounting for stock-based compensation. Additionally, SFAS 148
amends the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock-based compensation and the
related pro-forma disclosures when the intrinsic value method continues to be
used. SFAS 148 is effective for fiscal years beginning after December 15, 2002.
Annual disclosures are effective for years ending after December 15, 2002.
Interim disclosures are effective for the first fiscal quarter beginning after
December 31, 2002. See Note 3.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
requires issuers to classify as liabilities (or assets in some circumstances)
three classes of freestanding financial instruments that embody obligations for
the issuer. Generally, the statement is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not have any financial instruments within the scope of the SFAS 150 as of
June 25, 2003, and, therefore, does not anticipate that SFAS 150 will have a
material impact to the Company's consolidated financial statements.
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 June 25, 2003 and results of operations for the quarter
and two quarters ended June 25, 2003 compared to the quarter and two quarters
ended June 26, 2002. 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, including the initiatives
and efforts specifically mentioned herein; adverse publicity; changes in
business strategy or development plans; terms and availability of capital;
regional weather conditions; overall changes in the general economy,
particularly at the retail level; political environment (including acts of war
and terrorism); and other factors included in the discussion below, or in
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the year ended
December 25, 2002 and in Exhibit 99 thereto.
11
Restaurant Operations and Unit Activity
- ---------------------------------------
Quarter Ended Two Quarters Ended
------------- ------------------
June 25, June 26, Increase/ June 25, June 26, Increase/
2003 2002 (Decrease) 2003 2002 (Decrease)
-------- -------- ---------- -------- -------- ----------
(Dollars in thousands)
Total systemwide sales (a) $ 545,685 $ 562,846 (3.0%) $ 1,071,650 $ 1,104,668 (3.0%)
Company-owned data:
Average unit sales 372.2 368.9 0.9% 727.0 717.2 1.4%
Same-store sales decrease (b)(c) (0.6%) (0.4%) (0.5%) (0.3%)
Guest check average increase (b)(c) 3.9% 2.1% 3.2% 1.7%
Guest count decrease (b)(c) (4.3%) (2.4%) (3.6%) (1.9%)
Franchise data:
Average unit sales 300.4 305.5 (1.7%) 593.1 597.2 (0.7%)
Same-store sales decrease (b)(c) (2.1%) (1.3%) (1.8%) (1.3%)
- ------------------
(a) Total systemwide sales includes sales from company-owned, franchised
and licensed restaurants and is not a measure which has been determined
in accordance with accounting principles generally accepted in the
United States of America.
(b) Same-store sales, guest check average, and guest count calculations
include restaurants that were open the same days in both the current
year and prior year.
(c) Prior year amounts have not been restated for 2003 comparable units.
The table below summarizes Denny's restaurant unit activity for the quarter
ended June 25, 2003.
Ending Ending Ending
Units Units Franchised Units Units
March 26, Opened/ Units Units June 25, June 26,
2003 Acquired Reacquired Closed 2003 2002
--------- -------- ---------- ------ -------- --------
Company-owned 563 --- 1 (1) 563 588
Franchised units 1,091 5 (1) (10) 1,085 1,112
Licensed units 15 --- --- --- 15 14
------ --- --- --- ----- -----
1,669 5 --- (11) 1,663 1,714
====== === === === ===== =====
12
Results of Operations
- ---------------------
Quarter Ended June 25, 2003 Compared to Quarter Ended June 26, 2002
- -------------------------------------------------------------------
Company Operations
Company restaurant sales are the revenues generated from restaurants operated by
Denny's. Company restaurant sales decreased $9.0 million (4.1%) due to a net
25-unit decrease in company-owned restaurants and a 0.6% decline in same-store
sales for the current quarter. The decrease in company-owned restaurants
resulted from store closures and the sale of restaurants to franchisees.
Total costs of company restaurant sales increased $4.8 million (2.7%). As a
percentage of company restaurant sales, total costs of company restaurant sales
increased to 88.8% from 83.0%. Product costs increased to 25.4% from 23.7%,
including a $0.9 million reduction of deferred gain amortization related to the
sale of former distribution subsidiaries in previous years. Excluding deferred
gains for both years, product costs as a percentage of sales were 25.9% in 2003
and 24.6% in 2002. This increase resulted from a shift in menu mix and increases
in commodity costs, especially pork. Payroll and benefits increased to 44.2%
from 40.5% due to higher medical costs, increased restaurant staffing levels
aimed at improving customer satisfaction and higher wage rates. Occupancy costs
increased to 5.7% from 5.6% of company restaurant sales. Other operating
expenses increased to 13.5% from 13.1% as a result of increases in utilities and
repairs and maintenance expenses compared to the prior quarter, partially offset
by lower marketing expenses.
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. The composition of
the franchise portfolio and the nature of individual lease arrangements have a
significant impact on franchise occupancy revenue, as well as the related
franchise occupancy expense and franchise operating margins.
Franchise and license revenue was $21.6 million for the quarter ended June 25,
2003, comprised of royalties and initial franchise fees of $13.5 million and
occupancy revenue of $8.1 million, compared with $22.9 million for the quarter
ended June 26, 2002, comprised of royalties and fees of $14.5 million and
occupancy revenues of $8.4 million. The revenue decrease of $1.3 million (5.6%)
resulted primarily from a 26-unit decrease in franchised and licensed units due
to unit closures and a decrease in initial franchise fees on fewer franchise
restaurant openings compared to the prior year quarter.
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.
Costs of franchise and license revenue were $6.8 million for the quarter ended
June 25, 2003, comprised of occupancy costs of $5.4 million and other direct
expenses of $1.4 million, compared with $7.4 million for the quarter ended June
26, 2002, comprised of occupancy costs of $5.7 million and other direct expenses
of $1.7 million. Costs of franchise and license revenue decreased $0.6 million
(8.1%) as a result of a decrease in initial expenses associated with the opening
of new restaurants and reductions in other direct expenses. As a percentage of
franchise and license revenues, these costs decreased to 31.4% for the quarter
ended June 25, 2003 from 32.2% for the quarter ended June 26, 2002.
13
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 decreased $1.0 million (7.0%) compared with
the prior year quarter. The decrease resulted primarily from reductions in
corporate overhead costs related to organizational changes and lower accruals
for incentive compensation because certain annual bonus targets for 2003 are not
projected to be met.
Depreciation and amortization decreased $6.4 million primarily resulting from
certain assets becoming fully depreciated. In January 1998, certain assets were
revalued and assigned a five year life as a result of the company's emergence
from bankruptcy. Those assets became fully amortized in January 2003.
Restructuring and exit costs for the quarter ended June 25, 2003 reflect the
reversal of rent obligations resulting from our release from the remaining lease
term of our former corporate headquarters in California. See Note 2 to our
Condensed Consolidated Financial Statements.
Gains on disposition of assets and other, net of $2.6 million in 2003 and $1.8
million in 2002 primarily represented gains on sales of surplus properties.
Operating income was $13.8 million for the quarter ended June 25, 2003 compared
with income of $16.2 million for the quarter ended June 26, 2002.
Interest expense, net for the quarter ended June 25, 2003 was comprised of $19.4
million interest expense offset by $0.4 million interest income compared with
$20.1 million interest expense offset by $1.2 million interest income for the
quarter ended June 26, 2002. The decrease in interest expense resulted from
lower borrowings under our credit facility during 2003 and the effects of our
senior note exchanges during 2002, partially offset by higher deferred financing
cost amortization related to our credit facility. The decrease in interest
income resulted from the repayment in 2002 of the credit facility of FRD
Acquisition Co., our former subsidiary (with respect to which Denny's was the
lender).
Gains on exchanges of debt and other, net of $19.2 million for the quarter ended
June 26, 2002 primarily represents a gain on the exchange of a portion of our
11 1/4% Senior Notes for 12 3/4% Senior Notes.
The provision for income taxes was $0.3 million for each of the quarters ended
June 25, 2003 and June 26, 2002, respectively. These provisions for income taxes
primarily represent gross receipts based state and foreign income taxes which do
not directly fluctuate in relation to changes in loss before income taxes. We
have provided valuation allowances related to any benefits from income taxes
resulting from the application of a statutory tax rate to our net operating
losses. Accordingly, no additional (benefit from) or provision for income taxes
has been reported for the periods presented.
Net loss was $5.4 million for the quarter ended June 25, 2003 compared with net
income of $16.2 million for the quarter ended June 26, 2002 due to the factors
noted above.
14
Results of Operations
- ---------------------
Two Quarters Ended June 25, 2003 Compared to Two Quarters Ended June 26, 2002
- -----------------------------------------------------------------------------
Company Operations
Company restaurant sales decreased $21.8 million (5.1%) primarily due to a net
25-unit decrease in company-owned restaurants. The decrease in company-owned
restaurants resulted from store closures and the sale of restaurants to
franchisees.
Total costs of company restaurant sales increased $1.6 million (0.4%). As a
percentage of company restaurant sales, total costs of company restaurant sales
increased to 89.2% from 84.3%. Product costs increased to 25.0% from 24.0%,
including a $1.9 million reduction of deferred gain amortization related to the
sale of former distribution subsidiaries in previous years. Excluding deferred
gains for both years, product costs as a percentage of sales were 25.5% in 2003
and 24.9% in 2002. This increase resulted from a shift in menu mix and increases
in commodity costs, especially pork. Payroll and benefits increased to 44.3%
from 41.1% due to higher medical costs, increased restaurant staffing levels
aimed at improving customer satisfaction and higher wage rates. Occupancy costs
increased to 5.9% from 5.7% of company restaurant sales. Other operating
expenses increased to 13.9% from 13.5% as a result of increases in utilities and
repairs and maintenance, partially offset by lower marketing expenses.
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.
Franchise and license revenue was $43.0 million for the two quarters ended June
25, 2003, comprised of royalties and initial franchise fees of $26.8 million and
occupancy revenue of $16.2 million, compared with $45.1 million for the two
quarters ended June 26, 2002, comprised of royalties and fees of $28.0 million
and occupancy revenue of $17.1 million. The revenue decrease of $2.1 million
(4.7%) resulted primarily from a 26-unit decrease in franchised and licensed
units due to unit closures and a decrease in initial franchise fees on fewer
franchise restaurant openings.
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.
Costs of franchise and license revenue were $13.3 million for the two quarters
ended June 25, 2003, comprised of occupancy costs of $10.9 million and other
direct expenses of $2.4 million compared with $14.6 million for the two quarters
ended June 26, 2002, comprised of occupancy costs of $11.2 million and other
direct expenses of $3.4 million. Costs of franchise and license revenue
decreased $1.4 million (9.2%) as a result of a decrease in initial expenses
associated with the opening of new restaurants and a net $0.3 million reduction
in bad debt expense. As a percentage of franchise and license revenues, these
costs decreased to 30.9% in the two quarters ended June 25, 2003 from 32.4% in
the two quarters ended June 26, 2002.
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 decreased $2.0 million (7.0 %) compared to
the two quarters ended June 26, 2002. The decrease resulted primarily from
reductions in corporate overhead related to organizational changes and lower
accruals for incentive compensation because certain annual bonus targets for
2003 are not projected to be met.
15
Depreciation and other amortization decreased $12.9 million primarily resulting
from certain assets becoming fully depreciated. In January 1998, certain assets
were revalued and assigned a five year life as a result of the company's
emergence from bankruptcy. Those assets became fully amortized in January 2003.
Restructuring and exit costs for the two quarters ended June 25, 2003 reflect
the reversal of rent obligations resulting from our release from the remaining
lease term of our former corporate headquarters in California. See Note 2 to our
Condensed Consolidated Financial Statements.
Gains on disposition of assets and other, net of $4.9 million in 2003 and $3.6
million in 2002 primarily represent gains on sales of surplus properties.
Operating income was $24.2 million for the two quarters ended June 25, 2003
compared with income of $28.3 million for the two quarters ended June 26, 2002.
Interest expense, net, for the two quarters ended June 25, 2003 was comprised of
$38.9 million interest expense offset by $0.7 million interest income compared
with $40.6 million interest expense offset by $2.4 million interest income for
the two quarters ended June 26, 2002. The decrease in interest expense resulted
from lower borrowings under our credit facility during 2003 and the effects of
our senior note exchanges during 2002, partially offset by higher deferred
financing cost amortization related to our credit facility. The decrease in
interest income resulted from the repayment in 2002 of the credit facility of
FRD Acquisition Co., our former subsidiary (with respect to which Denny's was
the lender).
Gains on exchanges of debt and other, net of $19.2 million for the two quarters
ended June 26, 2002 primarily represents a gain on the exchange of a portion of
our 11 1/4% Senior Notes for 12 3/4% Senior Notes.
The provision for (benefit from) income taxes was $0.5 million and $(2.1)
million for the two quarters ended June 25, 2003 and June 26, 2002,
respectively. Included in income taxes for the two quarters ended June 26, 2002
was a $2.7 million benefit related to the enactment of H.R. 3090, the Job
Creation and Worker Assistant Act of 2002. Excluding this benefit, we recorded a
provision for income taxes of $0.6 million for the two quarters ended June 26,
2002. These provisions for income taxes primarily represent gross receipts based
state and foreign income taxes which do not directly fluctuate in relation to
changes in loss before income taxes. We have provided valuation allowances
related to any benefits from income taxes resulting from the application of a
statutory tax rate to our net operating losses. Accordingly, no additional
(benefit from) or provision for income taxes has been reported for the periods
presented.
Net loss was $14.5 million for the two quarters ended June 25, 2003 compared
with net income of $11.5 million for the two quarters ended June 26, 2002 due to
the factors noted above.
Liquidity and Capital Resources
- -------------------------------
Revolving Credit Facility
In December 2002, we entered into a new senior secured credit facility, or
credit facility, which provides Denny's with a working capital and letter of
credit facility of up to $125 million. The credit facility matures on December
20, 2004. At June 25, 2003, we had working capital advances of $49.9 million and
letters of credit outstanding of $38.3 million under the new credit facility,
leaving net availability of $36.8 million. Advances under the credit facility
accrue interest at a variable rate (approximately 6.3% at June 25, 2003) based
on the prime rate or an adjusted Eurodollar rate.
16
Profitability was below our expectations for the first two quarters of 2003.
Accordingly, we were required to obtain an amendment to the credit facility to
provide less restrictive financial covenants effective for the quarter ended
June 25, 2003 and for the remaining term of the facility. We were in compliance
with the terms of the credit facility, as amended, as of June 25, 2003. Under
the most restrictive provisions of the amended credit facility (minimum EBITDA
test, as defined in the credit facility), EBITDA could have been approximately
$5.4 million less for the four quarters ended June 25, 2003 and we would still
have been in compliance. Also, pursuant to the amendment, the proceeds of
certain additional debt issued by Denny's Holdings (a wholly-owned subsidiary of
Denny's Corporation) subsequent to the amendment may be used for general
corporate purposes or to repay the credit facility without a concurrent
reduction of the facility commitments.
Cash Requirements
Our principal capital requirements have been largely associated with remodeling
and maintaining our existing restaurants and facilities. For the two quarters
ended June 25, 2003, our capital expenditures were $14.4 million. Of that
amount, approximately $0.4 million was financed through capital leases. Capital
expenditures during 2003 are expected to total $35.0 million to $40.0 million;
however, we are not committed to spending this amount and could spend more or
less if circumstances require.
Historically, we have met our liquidity requirements with funds from operations,
amounts available under our credit facility, and funds from selected asset
sales. Although we believe that these sources will provide adequate funds to
cover our liquidity needs through 2003, we may be required to seek additional
sources of funds including additional financing sources and continued selected
asset sales to maintain sufficient cash flow to fund our ongoing operating
needs, pay interest and scheduled debt amortization and fund anticipated capital
expenditures over the next twelve months. We believe that we would be able to
access these additional sources of funds, if needed; however, no assurances can
be given that we would be able to do so on commercially reasonable terms.
Our working capital deficit was $107.7 million at June 25, 2003 compared with
$119.1 million at December 25, 2002. This working capital deficit decrease of
$11.4 million resulted primarily from the use of cash on hand and borrowings
under the credit facility to satisfy current liabilities. We are able to operate
with a substantial working capital deficit because (1) restaurant operations and
most food service operations are conducted primarily on a cash (and cash
equivalent) basis with a low level of accounts receivable, (2) rapid turnover
allows a limited investment in inventories, and (3) accounts payable for food,
beverages and supplies usually become due after the receipt of cash from the
related sales.
Implementation of New Accounting Standards
- ------------------------------------------
See Note 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, borrowings under the credit
facility bear interest at a variable rate based on the prime rate or an adjusted
Eurodollar rate. A 100 basis point change in the credit facility interest rate
(approximately 6.3% at June 25, 2003) would cause the interest expense for the
remainder of 2003 to change by approximately $0.2 million. This computation is
determined by considering the impact of hypothetical interest rates on our
variable long-term debt at June 25, 2003. However, the nature and amount of our
borrowings under the credit facility may vary as a result of future business
requirements, market conditions and other factors.
17
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 $418.7 million at June 25, 2003. The carrying value of such
debt was approximately $513.2 million at June 25, 2003. This computation is
based on market quotations for the same or similar debt issues or the estimated
borrowing rates available to us. The difference in the estimated fair value of
long-term debt compared to its historical cost reported in our consolidated
balance sheets at June 25, 2003 relates primarily to market quotations for our
11 1/4% Notes.
We have established a policy to identify, control and manage market risks which
may arise from changes in interest rates, foreign currency exchange rates,
commodity prices and other relevant rates and prices. We do not use derivative
instruments for trading purposes, and no interest rate or other financial
derivatives were in place at June 25, 2003.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation
(under the supervision and with the participation of management, including our
President and Chief Executive Officer, Nelson J. Marchioli, and our Senior Vice
President and Chief Financial Officer, Andrew F. Green) of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rules 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based upon
the evaluation, Messrs. Marchioli and Green each concluded that disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in Denny's Corporation's periodic SEC
filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims and pending legal actions against or indirectly
involving us, including actions concerned with civil rights of employees and
customers, other employment related matters, taxes, sales of franchise rights
and businesses and other matters. Our ultimate legal and financial liability
with respect to these matters cannot be estimated with certainty. However, we
believe, based on our examination of these matters and our experience to date,
that the ultimate disposition of them will not significantly affect our
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Denny's Corporation was held on Thursday,
May 29, 2003, at which the following matters were voted on by the stockholders
of Denny's Corporation:
(i) Election of Directors
---------------------
Votes Against
Name Votes For or Withheld
---- --------- -----------
Vera K. Farris 32,299,803 513,305
Vada Hill 32,300,623 512,485
Nelson J. Marchioli 32,256,318 556,790
Robert E. Marks 32,299,825 513,283
Charles F. Moran 32,299,347 513,761
Elizabeth A. Sanders 32,300,804 512,304
Donald R. Shepherd 32,299,803 513,305
Debra Smithart-Oglesby 32,300,621 512,489
18
(ii) Ratification of the Selection of KPMG LLP as Auditors for the 2003 fiscal
-------------------------------------------------------------------------
year
----
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
32,306,757 22,205 484,146
(iii) Approval of 2003 Incentive Program for the Company's Employees
--------------------------------------------------------------
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
30,741,659 2,064,746 6,705
Item 6. Exhibits and Reports on Form 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
10.1 Amendment, dated May 30, 2003, to the Employment Agreement, dated
January 2, 2001, between Nelson J. Marchioli and Advantica
Restaurant Group, Inc. (now known as Denny's Corporation).
10.2 Amendment No. 1, dated as of June 30, 2003, to the Credit
Agreement, dated as of December 16, 2002, among Denny's Inc. and
Denny's Realty, Inc., as borrowers, Denny's Corporation, Denny's
Holdings, Inc. and DFO, Inc., as guarantors, the lenders named
therein, JPMorgan Chase Bank as issuing bank, administrative
agent, and collateral agent, and Foothill Capital Corporation,
as syndication agent.
31.1 Statement 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 Statement of Andrew F. Green, Senior Vice President and Chief
Financial Officer of Denny's Corporation, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Statement of Nelson J. Marchioli, President and Chief Executive
Officer of Denny's Corporation and Andrew F. Green, Senior Vice
President and Chief Financial Officer of Denny's Corporation,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
b. On April 17, 2003, we reported on Form 8-K (under Item 9) that, on
April 10, 2003, we issued a press release announcing same-store sales
for our company-owned restaurants during the five weeks period and the
quarter ended March 26, 2003.
On April 30, 2003, we reported on Form 8-K/A (under Item 4), amending
our report on Form 8-K (under Item 4) filed on April 23, 2003, that we
notified Deloitte & Touche LLP that it would not be retained to perform
the audit of our company's financial statements for the fiscal year
ended December 31, 2003. We also reported that we engaged KPMG LLP as
independent accountants to audit the company's financial statements for
the fiscal year ended December 31, 2003.
On May 8, 2003, we reported on Form 8-K (under Item 9) that we issued a
press release on May 7, 2003 announcing financial results for the
quarter ended March 26, 2003.
19
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: August 6, 2003 By: /s/ Rhonda J. Parish
--------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: August 6, 2003 By: /s/ Andrew F. Green
-------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer
20