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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 September 24, 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 (I.R.S. Employer
of 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]
As of November 10, 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
September 24, 2003 September 25, 2002
------------------ ------------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 215,573 $ 223,499
Franchise and license revenue 22,817 23,355
--------- ---------
Total operating revenue 238,390 246,854
--------- ---------
Costs of company restaurant sales:
Product costs 56,215 52,573
Payroll and benefits 91,080 92,937
Occupancy 12,296 12,398
Other operating expenses 31,354 33,083
--------- ---------
Total costs of company restaurant sales 190,945 190,991
Costs of franchise and license revenue 6,801 7,349
General and administrative expenses 11,982 10,804
Depreciation and amortization 15,254 20,734
Restructuring charges and exit costs 70 ---
Impairment charges 1,190 465
Gains on disposition of assets and other, net (778) (2,372)
--------- ---------
Total operating costs and expenses 225,464 227,971
--------- ---------
Operating income 12,926 18,883
--------- ---------
Other expenses:
Interest expense, net 18,990 18,980
Other nonoperating (income) expense, net (57) 28
--------- ---------
Total other expenses, net 18,933 19,008
--------- ---------
Loss before income taxes (6,007) (125)
Provision for income taxes 266 303
--------- ---------
Loss from continuing operations (6,273) (428)
Gain on disposal of discontinued operations --- 56,562
--------- ---------
Net income (loss) $ (6,273) $ 56,134
========= =========
Per share amounts:
Basic and diluted earnings per share:
Loss from continuing operations $ (0.15) $ (0.01)
Gain on disposal of discontinued operations --- 1.40
--------- ---------
Basic and diluted net income (loss) per share $ (0.15) $ 1.39
========= =========
Weighted average shares outstanding:
Basic and diluted 40,743 40,280
========= =========
See accompanying notes
2
Denny's Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 24, 2003 September 25, 2002
------------------ ------------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 623,474 $ 653,185
Franchise and license revenue 65,817 68,470
--------- ---------
Total operating revenue 689,291 721,655
--------- ---------
Cost of company restaurant sales:
Product costs 158,298 155,798
Payroll and benefits 271,775 269,341
Occupancy 36,343 36,967
Other operating expenses 88,185 90,973
--------- ---------
Total costs of company restaurant sales 554,601 553,079
Costs of franchise and license revenue 20,071 21,970
General and administrative expenses 38,229 39,015
Depreciation and amortization 43,931 62,292
Restructuring charges and exit costs (866) 3,079
Impairment charges 1,889 962
Gains on disposition of assets and other, net (5,647) (5,952)
--------- ---------
Total operating costs and expenses 652,208 674,445
--------- ---------
Operating income 37,083 47,210
--------- ---------
Other expenses:
Interest expense, net 57,196 57,187
Gains on exchanges of debt and other, net (177) (19,243)
--------- ---------
Total other expenses, net 57,019 37,944
--------- ---------
Income (loss) before income taxes (19,936) 9,266
Provision for (benefit from) income taxes 796 (1,834)
--------- ---------
Income (loss) from continuing operations (20,732) 11,100
Gain on disposal of discontinued operations --- 56,562
--------- ---------
Net income (loss) $ (20,732) $ 67,662
========= =========
Per share amounts:
Basic earnings per share:
Income (loss) from continuing operations $ (0.51) $ 0.28
Gain on disposal of discontinued operations --- 1.40
--------- ---------
Net income (loss) $ (0.51) $ 1.68
========+ =========
Diluted earnings per share:
Income (loss) from continuing operations $ (0.51) $ 0.27
Gain on disposal of discontinued operations --- 1.40
--------- ---------
Net income (loss) $ (0.51) $ 1.67
========= =========
Weighted average shares outstanding:
Basic 40,666 40,264
========= =========
Diluted 40,666 40,484
========= =========
See accompanying notes
3
Denny's Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
September 24, December 25,
2003 2002
------------- ------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 3,801 $ 5,717
Receivables, net 8,114 11,980
Inventories 8,226 7,715
Other 10,140 8,329
--------- ---------
Total Current Assets 30,281 33,741
--------- ---------
Property, net 302,002 324,725
Other Assets:
Goodwill 50,404 50,073
Intangible assets, net 86,163 92,257
Deferred financing costs, net 10,405 12,646
Other 33,637 38,049
--------- ---------
Total Assets $ 512,892 $ 551,491
========= =========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 601 $ 554
Current maturities of capital lease obligations 3,417 3,886
Accounts payable 32,919 50,660
Other 84,733 97,703
--------- ---------
Total Current Liabilities 121,670 152,803
---------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities 574,994 560,359
Capital lease obligations, less current maturities 29,638 31,177
Liability for insurance claims 25,309 25,160
Other noncurrent liabilities and deferred credits 60,587 60,883
--------- ---------
Total Long-Term Liabilities 690,528 677,579
--------- ---------
Total Liabilities 812,198 830,382
Total Shareholders' Deficit (299,306) (278,891)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 512,892 $ 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 --- --- --- (20,732) --- (20,732)
Issuance of common stock 453 4 313 --- --- 317
------ ---- -------- --------- -------- ---------
Balance, September 24, 2003 40,743 $ 407 $ 417,728 $ (702,465) $ (14,976) $ (299,306)
====== ==== ======== ========= ======== =========
See accompanying notes
5
Denny's Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 24, 2003 September 25, 2002
------------------ ------------------
(In thousands)
Cash Flows from Operating Activities:
Net income (loss) $ (20,732) $ 67,662
Adjustments to reconcile net income (loss) to cash flows
provided by operating activities:
Depreciation and amortization 43,931 62,292
Impairment charges 1,889 962
Restructuring charges and exit costs (866) 3,079
Recognition of deferred gains (2,644) (5,664)
Amortization of deferred financing costs 3,753 3,223
Gains on disposition of assets and other, net (5,647) (5,952)
Gain on disposal of discontinued operations --- (56,562)
Amortization of debt premium (1,219) (1,388)
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 4,494 (17)
Inventories (510) 332
Other current assets (1,732) (1,045)
Other assets (1,663) (172)
Increase (decrease) in liabilities:
Accounts payable (4,195) (7,823)
Accrued salaries and vacations 1,677 (4,500)
Accrued taxes 2,558 2,116
Other accrued liabilities (13,055) (22,763)
Other noncurrent liabilities and deferred credits (1,840) (11,828)
--------- ---------
Net cash flows provided by operating activities 4,199 2,706
--------- ---------
Cash Flows from Investing Activities:
Purchase of property (22,965) (24,884)
Proceeds from disposition of property 16,323 12,155
Receipts from discontinued operations, net --- 39,386
Refunds of deposits securing FRD letters of credit --- 4,083
--------- ---------
Net cash flows (used in) provided by investing activities (6,642) 30,740
--------- ---------
See accompanying notes
6
Denny's Corporation
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 24, 2003 September 25, 2002
------------------ ------------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings (repayments) under credit agreement $ 16,300 $ (18,700)
Long-term debt payments (3,356) (4,012)
Deferred financing costs paid (2,137) (1,954)
Proceeds from exercise of stock options --- 26
Net bank overdrafts (10,280) (11,467)
--------- ---------
Net cash flows provided by (used in) financing activities 527 (36,107)
--------- ---------
Decrease in cash and cash equivalents (1,916) (2,661)
Cash and Cash Equivalents at:
Beginning of period 5,717 6,696
---------- ---------
End of period $ 3,801 $ 4,035
========== =========
See accompanying notes
7
Denny's Corporation
Notes to Condensed Consolidated Financial Statements
September 24, 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 three quarters ended September 24, 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 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 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 three quarters ended
September 24, 2003 related to discounted accrued exit cost liabilities:
(in thousands)
Balance, December 25, 2002 $ 19,680
Provisions for units closed in 2003 426
Reversals of accrued exit costs, net (1,938)
Payments, net (6,116)
Interest accretion 1,392
--------
Balance, September 24, 2003 $ 13,444
========
During the three quarters ended September 24, 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 which is
included in the reversals of accrued exit costs, net disclosed above.
In addition to the exit costs included in the above table, we recorded in the
second quarter of fiscal 2003 approximately $0.6 million of restructuring
charges related to the elimination of approximately twenty out-of-restaurant
support staff positions.
Estimated net cash payments related to exit cost liabilities at
September 24, 2003 are as follows:
8
(in thousands)
Remainder of 2003 $ 2,123
2004 5,024
2005 2,441
2006 1,794
2007 1,531
Subsequent years 6,366
---------
Total 19,279
Less imputed interest 5,835
---------
Discounted accrued exit cost liabilities $ 13,444
=========
Subsequent to quarter end, we identified thirty-three out-of-restaurant support
staff positions to be eliminated. As a result we will record approximately $1.3
million of related restructuring costs in the fourth quarter of 2003.
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 SFAS 123 "Accounting for Stock-Based Compensation", to
stock-based employee compensation.
Quarter Ended Three Quarters Ended
------------- --------------------
September 24, September 25, September 24, September 25,
2003 2002 2003 2002
----------- ----------- ----------- ----------
(in thousands, except per share accounts)
Net income (loss), as reported $ (6,273) $ 56,134 $ (20,732) $ 67,662
Total stock-based employee compensation expense determined
under fair value based method for all awards 320 439 1,080 1,451
-------- -------- -------- --------
Pro forma net income (loss) $ (6,593) $ 55,695 $ (21,812) $ 66,211
======== ======== ======== ========
Basic earnings per share:
As reported $ (0.15) $ 1.39 $ (0.51) $ 1.68
======== ======== ======== ========
Pro forma $ (0.16) $ 1.38 $ (0.54) $ 1.64
======== ======== ======== ========
Diluted earnings per share:
As reported $ (0.15) $ 1.39 $ (0.51) $ 1.67
======== ======== ======== ========
Pro forma $ (0.16) $ 1.38 $ (0.54) $ 1.64
======== ======== ======== ========
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 their
exercise price would cause them to be antidilutive. Because of the loss from
continuing operations for the quarter and three quarters ended September 24,
2003 and for the quarter ended September 25, 2002, options have been omitted
from the calculation of weighted average diluted shares for those periods.
Dilutive common stock equivalents for the three quarters ended September 25,
2002 were approximately 0.2 million. Options outstanding at September 30, 2002
of approximately 3.2 million shares were excluded from the calculation of
diluted loss per share for the three quarters ended September 30, 2002, as the
impact would have been antidilutive.
9
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. At September 24, 2003, we had
working capital advances of $63.0 million and letters of credit outstanding of
$38.2 million under our credit facility, leaving net availability of $23.8
million. Advances under the credit facility accrue interest at a variable rate
(approximately 6.1% at September 24, 2003) based on the prime rate or an
adjusted Eurodollar rate.
We obtained an amendment to the credit facility to provide less restrictive
financial covenants effective for the quarter ended June 25, 2003 and the
remaining term of the credit facility. We were in compliance with the terms of
the credit facility, as amended, as of September 24, 2003.
On September 26, 2003, subsequent to quarter end, we amended and restated our
$125 million revolving credit facility to include a new $40 million term loan,
thereby increasing the aggregate commitments to $165 million. The amended and
restated facility, including the new term loan, will continue to mature on
December 20, 2004. The structure of the revolving portion of the credit facility
is generally unchanged. The new term loan bears interest at a fixed rate of
11.0% per annum and will not amortize prior to maturity. We used the $40 million
term loan proceeds to pay down outstanding revolving loans, thus increasing
availability under the revolving portion of the credit facility and enhancing
our current liquidity position.
Effective September 30, 2003, commitments under the revolving portion of the
credit facility were reduced to $123 million as scheduled in the credit
agreement. As of October 29, 2003, the credit facility consists of outstanding
term loans of $40 million, outstanding letters of credit of $38 million, and
outstanding revolver advances of $20 million, leaving a net availability of $65
million.
Note 5. Supplemental Cash Flow Information
----------------------------------
Three Quarters Ended
September 24, September 25,
2003 2002
---------- ----------
(in thousands)
Income taxes paid, net $ 377 $ 341
========= =========
Interest paid $ 59,163 $ 67,691
========= =========
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 $ 1,334 $ 885
========= =========
10
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 our consolidated financial
statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51" ("FIN 46"). This interpretation
addresses the consolidation of entities whose equity holders have either (a) not
provided sufficient equity at risk to allow the entity to finance its own
activities or (b) do not possess certain characteristics of a controlling
financial interest. FIN 46 requires the consolidation of these entities, known
as variable interest entities ("VIE's"), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that is subject to a
majority of the risk of loss from the VIE's activities, entitled to receive a
majority of the VIE's residual returns, or both. FIN 46 applies immediately to
variable interests in VIE's created or obtained after January 31, 2003. As
amended by FASB Staff Position ("FSP") No. FIN 46-6, FIN 46 is effective for
variable interests in a VIE created before February 1, 2003 at the end of the
first interim or annual period ending after December 15, 2003 (the end of fiscal
2003, December 31, 2003, for us). FIN 46 requires certain disclosures in
financial statements issued after January 31, 2003, if it is reasonably possible
that we will consolidate or disclose information about variable interest
entities. As of the date of the filing, we are still assessing the impact of
FIN 46 on our 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, above.
11
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. We do not
have any financial instruments within the scope of SFAS 150 as of September 24,
2003, and, therefore, do not anticipate that SFAS 150 will have a material
impact on our 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 September 24, 2003 and results of operations for the
quarter and three quarters ended September 24, 2003 compared to the quarter and
three quarters ended September 25, 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; 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.
Restaurant Operations and Unit Activity
Quarter Ended Three Quarters Ended
------------- --------------------
September 24, September 25, Increase/ September 24, September 25, Increase/
2003 2002 (Decrease) 2003 2002 (Decrease)
---- ---- ---------- ---- ---- ----------
Company-owned data:
Company unit sales (in millions) 215.6 223.5 (3.5%) 623.5 653.2 (4.5%)
Average unit sales (in thousands) 384.5 385.5 (0.3%) 1,111.5 1,100.0 1.0%
Same-store sales decrease (a) (1.2%) (1.5%) (0.8%) (0.7%)
Guest check average increase (a) 4.5% 0.7% 3.6% 1.3%
Guest count decrease (a) (5.4%) (2.2%) (4.2%) (2.0%)
Franchise data:
Franchise unit sales (in millions) 353.5 363.3 (2.7%) 1,017.2 1,038.3 (2.0%)
Average unit sales (in thousands) 315.8 322.8 (2.2%) 908.9 920.0 (1.2%)
Same-store sales decrease (a) (1.7%) (2.4%) (1.8%) (1.7%)
- ------------------
(a) 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. Prior year amounts have not been restated for 2003
comparable units.
The table below summarizes Denny's restaurant unit activity for the quarter
ended September 24, 2003.
Ending Ending
Ending Units Units Units
Units Opened/ Units September 24, September 25,
June 25, 2003 Acquired Closed 2003 2002
------------- -------- ------ ---- ----
Company-owned 563 --- (1) 562 577
Franchised units 1,085 6 (22) 1,069 1,095
Licensed units 15 --- --- 15 14
----- --- --- ----- --
1,663 6 (23) 1,646 1,686
===== === == ===== =====
12
Results of Operations
- ---------------------
Quarter Ended September 24, 2003 Compared to Quarter Ended September 25, 2002
- -----------------------------------------------------------------------------
Company Operations
Company restaurant sales are the revenues generated from restaurants operated by
Denny's. Company restaurant sales decreased $7.9 million (3.5%) due to a net
15-unit decrease in company-owned restaurants and a 1.2% decline in same-store
sales for the current quarter. The decrease in company-owned restaurants
resulted primarily from store closures.
Total costs of company restaurant sales were flat. As a percentage of company
restaurant sales, total costs of company restaurant sales increased to 88.6%
from 85.5%. Product costs increased to 26.1% from 23.5%, including a $1.2
million reduction of deferred gain recognition 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 26.4% in 2003 and 24.4% in
2002. This increase resulted from a shift in menu mix and increases in commodity
costs, especially pork and beef. Payroll and benefits increased to 42.3% from
41.6% due to higher medical costs and higher wage rates. Occupancy costs
increased to 5.7% from 5.6% of company restaurant sales. Other operating
expenses decreased to 14.5% from 14.8% as a result of decreases in marketing
expenses, partially offset by increases in utilities expense.
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 $22.8 million for the quarter ended September
24, 2003, comprised of royalties and initial franchise fees of $14.4 million and
occupancy revenue of $8.4 million, compared with $23.4 million for the quarter
ended September 25, 2002, comprised of royalties and fees of $14.7 million and
occupancy revenues of $8.7 million. The revenue decrease of $0.5 million (2.3%)
resulted primarily from a net 25-unit decrease in franchised and licensed units
due to unit closures.
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
September 24, 2003, comprised of occupancy costs of $5.3 million and other
direct expenses of $1.5 million, compared with $7.3 million for the quarter
ended September 25, 2002, comprised of occupancy costs of $5.8 million and other
direct expenses of $1.5 million. Costs of franchise and license revenue
decreased $0.5 million (7.5%) as a result of the change in the franchise
portfolio from franchise unit closings. As a percentage of franchise and license
revenues, these costs decreased to 29.8% for the quarter ended September 24,
2003 from 31.5% for the quarter ended September 25, 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 increased $1.2 million (10.9%) compared with
the prior year quarter. The increase resulted primarily from the elimination of
management and support service fees collected from FRD Acquisition Co. due to
our divestiture of this former subsidiary in July 2002.
13
Depreciation and amortization decreased $5.5 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 our emergence from
bankruptcy. Those assets became fully depreciated in January 2003.
Gains on disposition of assets and other, net of $0.8 million in 2003 and $2.4
million in 2002 primarily represented gains on cash sales of surplus properties.
Operating income was $12.9 million for the quarter ended September 24, 2003
compared with income of $18.9 million for the quarter ended September 25, 2002.
Interest expense, net for the quarter ended September 24, 2003 was comprised of
$19.3 million of interest expense offset by $0.3 million interest of income
compared with $19.6 million of interest expense offset by $0.6 million of
interest income for the quarter ended September 25, 2002. The decrease in
interest expense resulted from the reduction in discounted accrued exit cost
liabilities related to closed units 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 with FRD Acquisition Co., our
former subsidiary (with respect to which Denny's was the lender).
The provision for income taxes was $0.3 million for each of the quarters ended
September 24, 2003 and September 25, 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 provision for income taxes has been
reported for the periods presented.
As a result of the divestiture of FRD, we recorded a gain on disposal of
discontinued operations of $56.6 million during the quarter ended September 25,
2002.
Net loss was $6.3 million for the quarter ended September 24, 2003 compared with
net income of $56.1 million for the quarter ended September 25, 2002 due to the
factors noted above.
Results of Operations
- ---------------------
Three Quarters Ended September 24, 2003 Compared to Three Quarters Ended
- ------------------------------------------------------------------------
September 25, 2002
- ------------------
Company Operations
Company restaurant sales decreased $29.7 million (4.5%) primarily due to a net
15-unit decrease in company-owned restaurants and a 0.8% decline in same-store
sales for the three quarters ended September 24, 2003. The decrease in
company-owned restaurants resulted primarily from store closures.
Total costs of company restaurant sales increased $1.5 million (0.3%). As a
percentage of company restaurant sales, total costs of company restaurant sales
increased to 89.0% from 84.7%. Product costs increased to 25.4% from 23.9%,
including a $3.0 million reduction of deferred gain recognition 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 25.8% in 2003
and 24.7% in 2002. This increase resulted from a shift in menu mix and increases
in commodity costs, especially pork and beef. Payroll and benefits increased to
43.6% from 41.2% due to increased restaurant staffing levels aimed at improving
customer satisfaction, higher medical costs and higher wage rates. Occupancy
costs increased to 5.8% from 5.7% of company restaurant sales. Other operating
expenses increased to 14.1% from 13.9% as a result of increases in utilities and
legal settlement costs which benefited from the favorable settlement of certain
cases in the prior year. Partially offsetting these increases were lower
marketing expenses.
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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 $65.8 million for the three quarters ended
September 24, 2003, comprised of royalties and initial franchise fees of $41.2
million and occupancy revenue of $24.6 million, compared with $68.5 million for
the three quarters ended September 25, 2002, comprised of royalties and fees of
$42.7 million and occupancy revenue of $25.8 million. The revenue decrease of
$2.7 million (3.9%) resulted primarily from a net 25-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 $20.1 million for the three quarters
ended September 24, 2003, comprised of occupancy costs of $16.2 million and
other direct expenses of $3.9 million compared with $22.0 million for the three
quarters ended September 25, 2002, comprised of occupancy costs of $17.0 million
and other direct expenses of $5.0 million. Costs of franchise and license
revenue decreased $1.9 million (8.6%) as a result of the change in the franchise
portfolio from franchise unit closings and a reduction in administrative fees.
As a percentage of franchise and license revenues, these costs decreased to
30.5% in the three quarters ended September 24, 2003 from 32.1% in the three
quarters ended September 25, 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 $0.8 million (2.0%) compared to
the three quarters ended September 25, 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. These decreases were partially offset by
the elimination of management and support service fees collected from FRD due to
their divestiture in the prior year.
Depreciation and other amortization decreased $18.4 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 depreciated in January
2003.
Restructuring and exit costs for the three quarters ended September 24, 2003
reflect the reversal of rent obligations resulting from our release from the
remaining lease term of our former corporate headquarters in California
partially offset by the recording of restructuring charges related to the
elimination of approximately twenty out-of-restaurant support staff positions.
See Note 2 to our Condensed Consolidated Financial Statements.
Gains on disposition of assets and other, net of $5.6 million in 2003 and $6.0
million in 2002 primarily represent gains on cash sales of surplus properties.
Operating income was $37.1 million for the three quarters ended September 24,
2003 compared with income of $47.2 million for the three quarters ended
September 25, 2002.
15
P
Interest expense, net, for the three quarters ended September 24, 2003 was
comprised of $58.3 million of interest expense offset by $1.1 million of
interest income compared with $60.2 million of interest expense offset by $3.0
million of interest income for the three quarters ended September 25, 2002. The
decrease in interest expense resulted from lower borrowings under our credit
facility during 2003, the effects of our senior note exchanges during 2002 and
the reduction in discounted accrued exit cost liabilities, 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 with 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 three
quarters ended September 25, 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 $0.8 million and $(1.8)
million for the three quarters ended September 24, 2003 and September 25, 2002,
respectively. Included in income taxes for the three quarters ended September
25, 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 $0.9 million for the three quarters
ended September 25, 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.
As a result of the divestiture of FRD, we recorded a gain on disposal of
discontinued operations of $56.6 million during the quarter ended September 25,
2002.
Net loss was $20.7 million for the three quarters ended September 24, 2003
compared with net income of $67.7 million for the three quarters ended September
25, 2002 due to the factors noted above.
Liquidity and Capital Resources
- -------------------------------
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. At September 24, 2003, we had
working capital advances of $63.0 million and letters of credit outstanding of
$38.2 million under our credit facility, leaving net availability of $23.8
million. Advances under the credit facility accrue interest at a variable rate
(approximately 6.1% at September 24, 2003) based on the prime rate or an
adjusted Eurodollar rate.
We obtained an amendment to the credit facility to provide less restrictive
financial covenants effective for the quarter ended June 25, 2003 and the
remaining term of the credit facility. We were in compliance with the terms of
the credit facility, as amended, as of September 24, 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 $5.1
million less for the four quarters ended September 24, 2003 and we would still
have been in compliance.
On September 26, 2003, subsequent to quarter end, we amended and restated our
$125 million revolving credit facility to include a new $40 million term loan,
thereby increasing the aggregate commitments to $165 million. The amended and
restated facility, including the new term loan, will continue to mature on
December 20, 2004. The structure of the revolving portion of the credit facility
is generally unchanged. The new term loan bears interest at a fixed rate of
11.0% per annum and will not amortize prior to maturity. We used the $40 million
term loan proceeds to pay down outstanding revolving loans, thus increasing
availability under the revolving portion of the credit facility and enhancing
our current liquidity position.
16
Effective September 30, 2003, commitments under the revolving portion of the
credit facility were reduced to $123 million as scheduled in the credit
agreement. As of October 29, 2003, the credit facility consists of outstanding
term loans of $40 million, outstanding letters of credit of $38 million, and
outstanding revolver advances of $20 million, leaving a net availability of $65
million.
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 25, 2003, our capital expenditures were $24.3 million. Of that
amount, approximately $1.3 million was financed through capital leases. Capital
expenditures during 2003 are expected to total approximately $35.0 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. With these sources of liquidity and the additional liquidity made
available by the securing of our new $40 million term, we believe we will have
adequate funds to cover our liquidity needs through 2004.
Although we have recently improved our short-term liquidity position through the
new $40 million term loan, and although the Company's cash flows together with
borrowings under its credit facility have been sufficient to fund its operations
and make interest payments when due, the Company is exploring possible
alternatives to improve its long-term liquidity and capital structure and has
retained UBS Securities LLC as a financial advisor to assist it in that regard.
The Company has not made a determination at this time whether it will ultimately
seek to implement any specific alternative, and there can be no assurance that,
if it does so, its efforts will be successful in this regard.
Our working capital deficit was $91.4 million at September 24, 2003 compared
with $119.1 million at December 25, 2002. This working capital deficit decrease
of $27.7 million resulted primarily from the use of 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 6.1% at September 24, 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 September 24, 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.
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 $334.7 million at September 24, 2003. The carrying value of
such debt was approximately $512.6 million at September 24, 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 September 24, 2003 relates primarily to market
quotations for our 11 1/4% Notes.
17
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 September 24, 2003.
Item 4. Controls and Procedures
At 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 (the
"Exchange Act"). Based upon the evaluation, Messrs. Marchioli and Green each
concluded that disclosure controls and procedures are effective, as of the end
of the period covered by this report, in timely alerting them to material
information required to be included in Denny's Corporation's periodic SEC
filings.
There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by Rules 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
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 5. Other Information
On November 1, 2003, the Company entered into a new employment
agreement with Nelson J. Marchioli, a copy of which is included with
this report as exhibit 10.3.
Item 6. Exhibits and Reports on Form 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
10.1 Credit Agreement, dated as of December 16, 2002 and amended
and restated as of September 26, 2003, 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 administrative
agent, Wells Fargo Foothill, Inc., as syndication agent and
J.P. Morgan Securities Inc., as sole advisor, lead arranger
and bookrunner.
10.2 Credit Guarantee and Collateral Agreement, dated as of
December 16, 2002 and amended and restated as of September 26,
2003, among Denny's Corporation, Denny's Holdings, Inc.,
Denny's, Inc., Denny's Realty, Inc., each other subsidiary
loan party referenced therein and JPMorgan Chase, as
collateral agent.
10.3 Employment Agreement, dated November 1, 2003, between Denny's
Corporation and Nelson J. Marchioli.
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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 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 Certification 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 July 14, 2003, we reported on Form 8-K (intended to be
furnished under item 12 but instead furnished under Item 9
pursuant to SEC Release No. 33-8216) that, on July 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 June 25, 2003.
On August 5, 2003, we reported on Form 8-K (under Item 12) that we
issued a press release on July 31, 2003 announcing financial
results for the quarter ended June 25, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENNY'S CORPORATION
Date: November 10, 2003 By: /s/ Rhonda J. Parish
--------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: November 10, 2003 By: /s/ Andrew F. Green
-------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer
20