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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 March 31, 2004 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission file number 0-18051
DENNY'S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3487402
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
203 East Main Street
Spartanburg, South Carolina 29319-0001
(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 May 3, 2004, 41,230,557 shares of the registrant's common stock, par value
$.01 per share, were outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Ended
-------------
March 31, 2004 March 26, 2003
-------------- --------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 207,762 $ 199,444
Franchise and license revenue 21,633 21,397
--------- ---------
Total operating revenue 229,395 220,841
--------- ---------
Costs of company restaurant sales:
Product costs 53,075 49,075
Payroll and benefits 88,258 88,544
Occupancy 12,548 12,100
Other operating expenses 28,039 28,745
--------- ---------
Total costs of company restaurant sales 181,920 178,464
Costs of franchise and license revenue 7,168 6,492
General and administrative expenses 15,181 13,203
Depreciation and amortization 14,218 14,257
Restructuring charges and exit costs 105 46
Impairment charges --- 289
Gains on disposition of assets and other, net (74) (2,317)
--------- ---------
Total operating costs and expenses 218,518 210,434
--------- ---------
Operating income 10,877 10,407
--------- ---------
Other expenses:
Interest expense, net 19,468 19,217
Other nonoperating (income) expense, net (65) 7
--------- ---------
Total other expenses, net 19,403 19,224
--------- ---------
Loss before income taxes (8,526) (8,817)
Provision for income taxes 204 265
--------- ---------
Net loss $ (8,730) $ (9,082)
========= =========
Per share amounts:
Basic and diluted net loss per share $ (0.21) $ (0.22)
========= =========
Weighted average shares outstanding:
Basic and diluted 41,076 40,513
========= =========
See accompanying notes
2
Denny's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, 2004 December 31, 2003
-------------- -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 3,334 $ 7,363
Receivables, net 8,009 9,771
Inventories 8,111 8,158
Other 8,117 6,965
--------- ---------
Total Current Assets 27,571 32,257
--------- ---------
Property, net 289,909 296,995
Other Assets:
Goodwill 50,404 50,404
Intangible assets, net 81,956 83,879
Deferred financing costs, net 8,294 9,887
Other 32,562 33,230
--------- ---------
Total Assets $ 490,696 $ 506,652
========= =========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 59,635 $ 51,714
Current maturities of capital lease obligations 3,391 3,462
Accounts payable 35,286 40,617
Other 87,606 96,932
--------- ---------
Total Current Liabilities 185,918 192,725
--------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities 508,973 509,593
Capital lease obligations, less current maturities 28,502 28,728
Liability for insurance claims 27,007 25,585
Other noncurrent liabilities and deferred credits 61,771 62,953
--------- ---------
Total Long-Term Liabilities 626,253 626,859
--------- ---------
Total Liabilities 812,171 819,584
Total Shareholders' Deficit (321,475) (312,932)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 490,696 $ 506,652
========= =========
See accompanying notes
3
Denny's Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Deficit
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Shareholders'
------------
Shares Amount Capital Deficit Loss Deficit
------ ------ ------- ------- ---- -------
(In thousands)
Balance, December 31, 2003 41,003 $ 410 $ 417,816 $ (713,216) $ (17,942) $ (312,932)
------ ---- -------- ---------- --------- ----------
Net loss --- --- --- (8,730) --- (8,730)
Exercise of common stock options 214 2 185 --- --- 187
------ ---- -------- ---------- --------- ----------
Balance, March 31, 2004 41,217 $ 412 $ 418,001 $ (721,946) $ (17,942) $ (321,475)
====== ==== ======== ========== ========= ==========
See accompanying notes
4
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended
-------------
March 31, 2004 March 26, 2003
-------------- --------------
(In thousands)
Cash Flows from Operating Activities:
Net loss $ (8,730) $ (9,082)
Adjustments to reconcile net loss to cash flows used in operating activities:
Depreciation and amortization 14,218 14,257
Impairment charges --- 289
Restructuring charges and exit costs 105 46
Recognition of deferred gains --- (955)
Amortization of deferred financing costs 1,594 1,193
Gains on disposition of assets and other, net (74) (2,317)
Amortization of debt premium (454) (396)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease (increase) in assets:
Receivables 1,787 3,826
Inventories 47 (821)
Other current assets (1,152) (4,873)
Other assets (523) (385)
Increase (decrease) in liabilities:
Accounts payable (5,575) 1,887
Accrued salaries and vacations 1,544 3,745
Accrued taxes (2,117) (1,091)
Other accrued liabilities (8,858) (8,450)
Other noncurrent liabilities and deferred credits 271 (1,495)
---------- ---------
Net cash flows used in operating activities (7,917) (4,622)
---------- ---------
Cash Flows from Investing Activities:
Purchase of property (4,144) (5,293)
Proceeds from disposition of property 105 3,835
---------- ---------
Net cash flows used in investing activities (4,039) (1,458)
---------- ---------
See accompanying notes
5
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Quarter Ended
-------------
March 31, 2004 March 26, 2003
-------------- --------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreement $ 7,900 $ 13,500
Long-term debt payments (1,261) (1,130)
Deferred financing costs paid --- (1,042)
Proceeds from exercise of stock options 187 ---
Net bank overdrafts 1,101 (7,217)
--------- ---------
Net cash flows provided by financing activities 7,927 4,111
--------- ---------
Decrease in cash and cash equivalents (4,029) (1,969)
Cash and Cash Equivalents at:
Beginning of period 7,363 5,717
--------- ---------
End of period $ 3,334 $ 3,748
========= =========
See accompanying notes
6
Denny's Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(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 31, 2003 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our 2003 Annual Report on Form 10-K. The results of operations for
the quarter ended March 31, 2004 are not necessarily indicative of the results
for the entire fiscal year ending December 29, 2004.
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.
Restructuring charges and exit costs were comprised of the following:
Quarter Ended
-------------
March 31, 2004 March 26, 2003
-------------- --------------
(In thousands)
Exit costs $ 44 $ 46
Severance and other restructuring charges 61 --
--------- ---------
Total restructuring and exit costs $ 105 $ 46
========= =========
7
The components of the change in accrued exit cost liabilities are as follows:
(In thousands)
Balance, December 31, 2003 $ 13,044
Provisions for units closed in 2004 246
Reversals of accrued exit costs, net (202)
Payments, net (1,447)
Interest accretion 354
---------
Balance, March 31, 2004 $ 11,995
=========
Estimated net cash payments related to exit cost liabilities in the next five
years are as follows:
(In thousands)
Remainder of 2004 $ 2,798
2005 2,120
2006 1,734
2007 1,465
2008 1,393
Thereafter 8,327
---------
Total 17,837
Less imputed interest 5,842
---------
Present value of exit cost liabilities $ 11,995
=========
Note 3. Credit Facility
---------------
We have a senior secured credit facility, or credit facility, which initially
provided Denny's with a working capital and letter of credit facility of up to
$125 million. On September 26, 2003, we amended and restated our $125 million
credit facility to include $40 million of term loans, thereby increasing the
aggregate commitments to $165 million. The term loans do 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 March
31, 2004, commitments under the credit facility were reduced to $158 million as
scheduled in the credit agreement. The amended and restated facility, including
the term loans, will mature on December 20, 2004.
At March 31, 2004, we had outstanding revolving loans of $19.0 million, letters
of credit of $35.1 million and term loans of $40.0 million under our credit
facility, leaving net availability of $63.9 million. Revolving loans under the
credit facility accrue interest at a variable rate (approximately 6.1% at March
31, 2004) based on the prime rate or an adjusted Eurodollar rate. Term loans
bear interest at a fixed rate of 11.00% per annum.
The credit facility is generally secured by liens on the stock of our
subsidiaries, accounts receivable, intellectual property, cash and cash
accounts. In addition, the facility is secured by first-priority mortgages on
240 owned restaurant properties and our corporate headquarters, located in
Spartanburg, South Carolina. Denny's Corporation and its subsidiaries are
guarantors under the credit facility. The credit facility contains certain
financial covenants (i.e., minimum EBITDA (as defined under the credit facility)
requirements, total debt to EBITDA ratio requirements and total senior secured
debt to EBITDA requirements), negative covenants, conditions precedent, material
adverse change provisions, events of default and other terms, conditions and
provisions customarily found in credit agreements for leveraged financings. We
were in compliance with the terms of the credit facility, as amended, as of
March 31, 2004 and we expect to remain in compliance with the terms of our
credit facility through its expiration date.
8
Note 4. Defined Benefit Plans
---------------------
We maintain defined benefit plans which cover a substantial number of employees.
Benefits are based upon each employee's years of service and average salary. Our
funding policy is based on the minimum amount required under the Employee
Retirement Income Security Act of 1974. The Pension Plan was closed to new
participants as of December 31, 1999. Benefits will cease to accrue for Pension
Plan participants as of December 31, 2004. We also maintain defined contribution
plans.
The components of net pension cost of the pension plan and other defined benefit
plans as determined under Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," are as follows:
Pension Plan Other Defined Benefit Plans
---------------------------------- ----------------------------------
Quarter Ended Quarter Ended
------------- -------------
March 31, 2004 March 26, 2003 March 31, 2004 March 26, 2003
-------------- -------------- -------------- --------------
(In thousands)
Service cost $ 120 $ 75 $ 78 $ 98
Interest cost 733 719 57 60
Expected return on plan assets (699) (633) -- --
Amortization of net loss 200 214 6 14
------------ ------------ ------------ ------------
Net periodic benefit cost $ 354 $ 375 $ 141 $ 172
============ ============ ============ ============
No contributions were made to our qualified pension plan in the quarter ended
March 31, 2004 or in the quarter ended March 26, 2003. We made contributions of
$0.1 million and $0.3 million to our other defined benefit plans during the
quarters ended March 26, 2004 and March 26, 2003, respectively. As of March 31,
2004, we expect to contribute $3.5 million to our qualified pension plan and an
additional $0.1 million to our other defined benefit plans during the remainder
of fiscal 2004.
Note 5. Stock Based Compensation
------------------------
We have adopted the disclosure-only provisions of SFAS 123, "Accounting for
Stock Based Compensation," while continuing to follow Accounting Principles
Board Opinion No. 25, or APB 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for our stock-based compensation plans
(i.e., the "intrinsic method"). Under APB 25, because the exercise price of our
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense has been recognized in our
statements of operations.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma
information follows:
Quarter Ended
-------------
March 31, 2004 March 26, 2003
-------------- --------------
(In thousands, except per share amounts)
Reported net loss $ (8,730) $ (9,082)
Less total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects 204 383
-------- -------
Pro forma net loss $ (8,934) $ (9,465)
======== =======
Loss per share:
Basic and diluted as reported $ (0.21) $ (0.22)
======== =======
Basic and diluted - pro forma $ (0.22) $ (0.23)
======== =======
9
Note 6. Net Loss Per Share
------------------
Warrants have been omitted from the calculations of weighted average diluted
shares for all periods presented because they have an antidilutive effect on net
loss per share. Options outstanding of 6.9 million and 5.8 million for the
quarters ended March 31, 2004 and March 26, 2003, respectively, have also been
omitted from the calculations of weighted average diluted shares because they
have an antidilutive effect on net loss per share.
Note 7. Supplemental Cash Flow Information
----------------------------------
Quarter Ended
-------------
March 31, 2004 March 26, 2003
-------------- --------------
(In thousands)
Income taxes paid, net $ 169 $ 124
========= =========
Interest paid $ 32,069 $ 23,847
========= =========
Noncash financing activities:
Capital leases entered into $ 969 $ 344
========= =========
Note 8. Implementation of New Accounting Standards
------------------------------------------
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
FIN No. 46 (Revised) (FIN 46-R) to address certain FIN 46 implementation issues,
including the delay of the effective date for certain types of Variable Interest
Entities (VIE). This interpretation clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," for companies
that have interests in entities that are VIE's as defined under FIN 46.
According to this interpretation, if a company has an interest in a VIE and is
at risk for a majority of the VIE's expected losses or receives a majority of
the VIE's expected gains, it shall consolidate the VIE. FIN 46-R also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. For entities acquired or created before February 1, 2003, FIN
46-R is effective no later than the end of the first interim or reporting period
ending after March 15, 2004, except for those VIE's that are considered to be
special purpose entities, for which the effective date is no later than the end
of the first interim or annual reporting period ending after December 15, 2003.
For all entities that were acquired subsequent to January 31, 2003, this
interpretation is effective as of the first interim or annual period ending
after December 31, 2003. We completed adoption of FIN 46-R during the first
quarter of 2004. The adoption of FIN 46-R had no effect on our consolidated
financial statements.
In December 2003 the FASB issued SFAS No. 132 (Revised) (SFAS 132-R),
"Employer's Disclosure about Pensions and Other Postretirement Benefits." SFAS
132-R retains disclosure requirements of the original SFAS 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net
periodic benefit cost. SFAS 132-R is effective for fiscal years ending after
December 15, 2003, except that certain disclosures are effective for fiscal
years ending after June 15, 2004. Interim period disclosures are effective for
interim periods beginning after December 15, 2003. See Note 4.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to highlight significant changes in our
financial position as of March 31, 2004 and results of operations for the
quarter ended March 31, 2004 compared to the quarter ended March 26, 2003. 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
10
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 2003 and in Exhibit 99 thereto.
Statements of Operations
- ------------------------
Quarter Ended
March 31, 2004 March 26, 2003
-------------- --------------
(Dollars in thousands)
Revenue:
Company restaurant sales..........................................$ 207,762 90.6% $ 199,444 90.3%
Franchise and license revenue..................................... 21,633 9.4% 21,397 9.7%
---------- ------ ---------- ------
Total operating revenue........................................ 229,395 100.0% 220,841 100.0%
---------- ------ ---------- ------
Costs of company restaurant sales (a):
Product costs..................................................... 53,075 25.5% 49,075 24.6%
Payroll and benefits.............................................. 88,258 42.5% 88,544 44.4%
Occupancy......................................................... 12,548 6.0% 12,100 6.1%
Other operating expenses.......................................... 28,039 13.5% 28,745 14.4%
---------- ------ ---------- ------
Total costs of company restaurant sales........................ 181,920 87.6% 178,464 89.5%
Costs of franchise and license revenue (a).......................... 7,168 33.1% 6,492 30.3%
General and administrative expenses................................. 15,181 6.6% 13,203 6.0%
Depreciation and amortization....................................... 14,218 6.2% 14,257 6.5%
Restructuring charges and exit costs................................ 105 0.0% 46 0.0%
Impairment charges.................................................. -- -- 289 0.1%
Gains on disposition of assets and other, net....................... (74) 0.0% (2,317) (1.0%)
---------- ------ ---------- -----
Total operating costs and expenses............................. 218,518 95.3% 210,434 95.3%
---------- ------ ---------- ------
Operating income.................................................... 10,877 4.7% 10,407 4.7%
---------- ------ ---------- -----
Other expenses:
Interest expense, net............................................. 19,468 8.5% 19,217 8.7%
Other nonoperating (income) expense, net.......................... (65) 0.0% 7 0.0%
---------- ------ ---------- -----
Total other expenses, net...................................... 19,403 8.5% 19,224 8.7%
---------- ------ ---------- -----
Loss before income taxes............................................ (8,526) (3.7%) (8,817) (4.0%)
Provision for income taxes.......................................... 204 0.1% 265 0.1%
---------- ------ ---------- -----
Net loss ...........................................................$ (8,730) (3.8%) $ (9,082) (4.1%)
========== ====== ========== =====
Other Data:
Company-owned average unit sales....................................$ 373.1 $ 354.8
Same-store sales increase (decrease) (company-owned) (b)............ 6.4% (0.4%)
Guest check average increase (b).................................. 3.0% 2.5%
Guest count increase (decrease) (b)............................... 3.3% (2.8%)
- ------------------
(a) Costs of company restaurant sales percentages are as a percentage of company
restaurant sales. Costs of franchise and license revenue percentages are as
a percentage of franchise and license revenue. All other percentages are as
a percentage of total operating revenue.
(b) Same-store sales include sales from restaurants that were open the same days
in both the current year and prior year. For purposes of calculating
same-store sales, the 1st week of 2004 was compared to the 2nd week of 2003
due to a 53rd week in 2003. Prior year amounts have not been restated for
2004 comparable units.
Unit Activity
- -------------
Ending Units Ending Ending
Units Opened/ Units Units Units
December 31, 2003 Acquired Closed March 31, 2004 March 26, 2003
----------------- -------- ------ -------------- --------------
Company-owned restaurants 561 -- (3) 558 563
Franchised and licensed restaurants 1,077 3 (16) 1,064 1,106
----- --- --- ----- -----
1,638 3 (19) 1,622 1,669
===== === === ===== =====
11
Quarter Ended March 31, 2004 Compared with Quarter Ended March 26, 2003
- -----------------------------------------------------------------------
Company Restaurant Operations
During the quarter ended March 31, 2004, we realized a 6.4% increase in
same-store sales, comprised of a 3.3% increase in guest counts and a 3.0%
increase in guest check average. Company restaurant sales increased $8.3 million
(4.2%). Higher sales resulted primarily from the increase in same-store sales
for the current year partially offset by a 5 equivalent-unit decrease in
company-owned restaurants. The decrease in company-owned restaurants resulted
primarily from store closures.
Total costs of company restaurant sales as a percentage of company restaurant
sales decreased to 87.6% from 89.5%. Product costs increased to 25.5% from
24.6%, including the impact of a $1.0 million reduction of deferred gain
amortization related to the sale of former distribution subsidiaries in previous
years. This deferred gain became fully amortized in September of 2003. Excluding
the amortization of deferred gains for the prior year, product costs as a
percentage of sales were 25.1% in 2003. This increase in product cost resulted
from unfavorable commodity costs, especially pork and beef, quality improvements
to existing products and a shift in menu mix. Payroll and benefits decreased to
42.5% from 44.4% due to increased labor efficiency resulting from higher sales
as well as decreased health benefits costs resulting from new health benefits
programs implemented in 2004. These cost improvements were partially offset by
increased in-restaurant bonuses as a result of our improved operating
performance. Occupancy costs decreased slightly to 6.0% from 6.1% of company
restaurant sales. Other operating expenses were comprised of the following
amounts and percentages of company restaurant sales:
Quarter Ended
-------------
March 31, 2004 March 26, 2003
------------------- -------------------
(Dollars in Thousands)
Utilities $ 9,840 4.7% $ 9,087 4.6%
Repairs and maintenance 3,347 1.6% 4,695 2.3%
Marketing 7,464 3.6% 6,979 3.5%
Other 7,388 3.6% 7,984 4.0%
---------- ------ ---------- ------
Other operating expenses $ 28,039 13.5% $ 28,745 14.4%
========== ====== ========== ======
Franchise Operations
Franchise and license revenues are the revenues received by Denny's from its
franchisees and include royalties, initial franchise fees and occupancy revenue
related to restaurants leased or subleased to franchisees. Costs of franchise
and license revenue include occupancy costs related to restaurants leased or
subleased to franchisees and direct costs consisting primarily of payroll and
benefit costs of franchise operations personnel and bad debt expense.
Franchise and license revenue and costs of franchise and license revenue were
comprised of the following amounts and percentages of franchise and license
revenue:
Quarter Ended
-------------
March 31, 2004 March 26, 2003
------------------- -------------------
(Dollars in Thousands)
Royalties and initial fees $ 13,907 64.3% $ 13,263 62.0%
Occupancy revenue 7,726 35.7% 8,134 38.0%
---------- ------ ---------- ------
Franchise and license revenue 21,633 100.0% 21,397 100.0%
========== ====== ========== ======
Occupancy costs 5,387 24.9% 5,536 25.9%
Other direct costs 1,781 8.2% 956 4.4%
---------- ------ ---------- ------
Costs of franchise and license revenue $ 7,168 33.1% $ 6,492 30.3%
========== ====== ========== ======
The revenue increase of $0.2 million (1.1%) resulted from a 6.7% increase in
franchisee same-store sales partially offset by a 42-unit decrease in franchised
and licensed units due to unit closures.
12
Costs of franchise and license revenue increased $0.7 million (10.4%). The
increase as a percentage of franchise and license revenues was impacted by prior
year costs benefitting from a net $0.3 million reduction in bad debt expense
related to the collection of certain past due accounts.
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 $2.0 million (15.0%) compared with
the quarter ended March 26, 2003. The increase resulted primarily from the
incurrence of costs related to exploring possible alternatives to improve our
long-term liquidity and capital structure (approximately $2.0 million) and
higher accruals for incentive compensation. These increases were partially
offset by reductions in corporate overhead related to organizational changes.
Gains on disposition of assets and other, net of $0.1 million in 2004 and $2.3
million in 2003 primarily represent gains on cash sales of surplus properties.
Operating income was $10.9 million for the quarter ended March 31, 2004 compared
with $10.4 million for the quarter ended March 26, 2003.
Interest expense, net for the quarter ended March 31, 2004 was comprised of
$19.8 million of interest expense offset by $0.3 million of interest income,
compared with $19.6 million of interest expense offset by $0.4 million of
interest income for the quarter ended March 26, 2003. The increase in interest
expense resulted from higher deferred financing cost amortization related to our
credit facility.
The provision for income taxes was $0.2 million and $0.3 million for the
quarters ended March 31, 2004 and March 26, 2003, 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. In
establishing our valuation allowance, we have taken into consideration certain
tax planning strategies involving the sale of appreciated properties in order to
alter the timing of the expiration of certain net operating loss, or NOL,
carryforwards in the event they were to expire unused. Such strategies, if
implemented in future periods, are considered by us to be prudent and feasible
in light of current circumstances. Circumstances may change in future periods
such that we can no longer conclude that such tax planning strategies are
prudent and feasible, which would require us to record additional deferred tax
valuation allowances.
Net loss was $8.7 million for the quarter ended March 31, 2004 compared with
$9.1 million for the quarter ended March 26, 2003 due to the factors noted
above.
Liquidity and Capital Resources
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Revolving Credit Facility
We have a senior secured credit facility, or credit facility, which initially
provided Denny's with a working capital and letter of credit facility of up to
$125 million. On September 26, 2003, we amended and restated our $125 million
credit facility to include $40 million of term loans, thereby increasing the
aggregate commitments to $165 million. The term loans do 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 March
31, 2004, commitments under the credit facility were reduced to $158 million as
scheduled in the credit agreement. The amended and restated facility, including
the term loans, will mature on December 20, 2004.
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At March 31, 2004, we had outstanding revolving loans of $19.0 million, letters
of credit of $35.1 million and term loans of $40.0 million under our credit
facility, leaving net availability of $63.9 million. Revolving loans under the
credit facility accrue interest at a variable rate (approximately 6.1% at March
31, 2004) based on the prime rate or an adjusted Eurodollar rate. Term loans
bear interest at a fixed rate of 11.00% per annum.
The credit facility is generally secured by liens on the stock of our
subsidiaries, accounts receivable, intellectual property, cash and cash
accounts. In addition, the facility is secured by first-priority mortgages on
240 owned restaurant properties and our corporate headquarters, located in
Spartanburg, South Carolina. Denny's Corporation and its subsidiaries are
guarantors under the credit facility. The credit facility contains certain
financial covenants (i.e., minimum EBITDA (as defined under the credit facility)
requirements, total debt to EBITDA ratio requirements and total senior secured
debt to EBITDA requirements), negative covenants, conditions precedent, material
adverse change provisions, events of default and other terms, conditions and
provisions customarily found in credit agreements for leveraged financings. We
were in compliance with the terms of the credit facility, as amended, as of
March 31, 2004, and we expect to remain in compliance with the terms of our
credit facility through its expiration date.
We continue to be dependent upon our credit facility in order to provide
sustained liquidity for continuing operations. We believe that our forecasted
cash flow from operations for 2004, combined with our capacity for additional
borrowings under our credit facility, will enable us to meet our anticipated
cash requirements and fund capital expenditures through December 20, 2004, the
expiration date of the credit facility, and through the end of 2004 under the
assumption that we successfully negotiate a replacement credit facility.
Our ability to maintain continuity of operations will depend on a number of
factors, including our ability to negotiate a replacement credit facility. We
believe we will be able to successfully obtain a replacement senior secured
credit facility, based on the following key considerations:
1) Although we aer a highly leveraged company, our senior leverage (total
debt less our 11 1/4% Senior Notes due 2008 and 12 3/4% Senior Notes
due 2007) is relatively low which we believe provides sufficient
capacity for an adequate replacement facility.
2) We benefit from a significant owned real estate portfolio that would be
available as collateral, if needed, for a replacement facility. These
assets had an aggregate fair value of approximately $248 million based
on appraisals obtained in October of 2002, which is well in excess of
our credit facility needs.
3) Other than our credit facility, we have no other significant debt
maturities coming due until our senior notes mature in 2007 and 2008.
4) Despite our non-investment grade credit profile, we believe there is a
relatively strong market for a secured loan transaction for Denny's,
especially among institutional lenders, based on preliminary
discussions with potential interested sources.
We believe that we will be able to obtain a refinancing of our credit facility
before our current facility expires. If we are unable to obtain such additional
financing, when needed, on terms favorable to the Company, our financial
condition and results of operations will be materially affected.
Cash Requirements
Our principal capital requirements have been largely associated with remodeling
and maintaining our existing restaurants and facilities. For the quarter ended
March 31, 2004, our capital expenditures were $5.1 million. Of that amount,
approximately $1.0 million was financed through capital leases. Capital
expenditures during 2004 are expected to total approximately $40.0 million;
however, we are not committed to spending this amount and could spend more or
less if circumstances require.
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Although we have recently improved our short-term liquidity position through the
$40 million term loan, and although our cash flows together with borrowings
under our credit facility have been sufficient to fund our operations and make
interest payments when due, we continue to explore possible alternatives to
improve our long-term liquidity and capital structure with our financial
advisor, UBS Securities LLC. We have not made a determination at this time
whether we will ultimately seek to implement any specific alternative, and there
can be no assurance that, if we do so, our efforts will be successful.
Our working capital deficit was $158.3 million at March 31, 2004 compared with
$160.5 million at December 31, 2003. 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 8 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 (prime rate
plus 4%) or an adjusted Eurodollar rate (LIBOR plus 5%). A 100 basis point
change in the credit facility interest rate (approximately 6.1% at March 31,
2004) would cause the interest expense for the remainder of 2004 to change by
approximately $0.1 million. This computation is determined by considering the
impact of hypothetical interest rates on the revolving portion of our credit
facility at March 31, 2004. 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 $514.5 million at March 31, 2004. The carrying value of such
debt was approximately $549.6 million at March 31, 2004. 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 March 31, 2004 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 March 31, 2004.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended, our management conducted an evaluation (under the supervision and with
the participation of our President and Chief Executive Officer, Nelson J.
Marchioli, and our Senior Vice President and Chief Financial Officer, Andrew F.
Green) as of the end of the period covered by this report, of the effectiveness
of our disclosure controls and procedures as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, Messrs.
Marchioli and Green each concluded that Denny's disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports that Denny's files or submits under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There have been no changes in our internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) of the
Securities Exchange Act of 1934, as amended, that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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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 6. Exhibits and Reports on Form 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
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 January 12, 2004, we reported on Form 8-K (under Items 7 and
12) that we issued a press release on January 9, 2004, announcing
same-store sales for our company-owned restaurants during the
six-week period, 14-week quarter and 53-week year ended December
31, 2003.
On February 20, 2004, we reported on Form 8-K (under Items 7 and
12) that we issued a press release on February 18, 2004,
announcing financial results for the fourth quarter and year ended
December 31, 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: May 7, 2004 By: /s/ Rhonda J. Parish
-----------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: May 7, 2004 By: /s/ Andrew F. Green
----------------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer
17