Back to GetFilings.com
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 30, 2005 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 [X] No [ ]
As of May 3, 2005, 90,687,506 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 30, 2005 March 31, 2004
-------------- --------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 218,015 $ 207,762
Franchise and license revenue 22,034 21,633
----------- -----------
Total operating revenue 240,049 229,395
----------- -----------
Costs of company restaurant sales:
Product costs 56,196 53,075
Payroll and benefits 91,659 88,258
Occupancy 13,097 12,548
Other operating expenses 30,121 28,039
----------- -----------
Total costs of company restaurant sales 191,073 181,920
Costs of franchise and license revenue 7,009 7,168
General and administrative expenses 16,068 15,181
Depreciation and amortization 13,270 14,218
Restructuring charges and exit costs 2,274 105
Impairment charges --- ---
Gains on disposition of assets and other, net (885) (74)
----------- -----------
Total operating costs and expenses 228,809 218,518
----------- -----------
Operating income 11,240 10,877
----------- -----------
Other expenses:
Interest expense, net 13,212 19,468
Other nonoperating income, net (371) (65)
----------- ------------
Total other expenses, net 12,841 19,403
----------- -----------
Loss before income taxes (1,601) (8,526)
Provision for (benefit from) income taxes (141) 204
----------- -----------
Net loss $ (1,460) $ (8,730)
=========== ===========
Per share amounts:
Basic and diluted net loss per share $ (0.02) $ (0.21)
=========== ===========
Weighted average shares outstanding:
Basic and diluted 90,219 41,076
=========== ===========
See accompanying notes
2
Denny's Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 30, 2005 December 29, 2004
-------------- -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 19,932 $ 15,561
Receivables, net 11,878 12,375
Inventories 8,089 8,289
Prepaid and other current assets 7,875 7,330
----------- -----------
Total Current Assets 47,774 43,555
----------- -----------
Property, net 277,611 285,401
Other Assets:
Goodwill 50,186 50,186
Intangible assets, net 76,141 77,484
Deferred financing costs, net 18,258 19,108
Other assets 26,376 24,759
----------- -----------
Total Assets $ 496,346 $ 500,493
=========== ===========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 2,420 $ 1,975
Current maturities of capital lease obligations 3,425 3,396
Accounts payable 39,216 42,647
Other current liabilities 84,333 88,226
----------- -----------
Total Current Liabilities 129,394 136,244
----------- -----------
Long-Term Liabilities:
Notes and debentures, less current maturities 518,630 519,236
Capital lease obligations, less current maturities 27,463 28,149
Liability for insurance claims, less current portion 30,229 28,108
Other noncurrent liabilities and deferred credits 53,510 54,186
----------- -----------
Total Long-Term Liabilities 629,832 629,679
----------- -----------
Total Liabilities 759,226 765,923
----------- -----------
Total Shareholders' Deficit (262,880) (265,430)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 496,346 $ 500,493
=========== ===========
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 29, 2004 89,987 $ 900 $ 510,686 $ (757,303) $ (19,713) $ (265,430)
------- ---- -------- ---------- --------- ----------
Net loss --- --- --- (1,460) --- (1,460)
Unrealized gain on hedged transaction --- --- --- --- 969 969
Stock option expense --- --- 1,163 --- --- 1,163
Issuance of common stock 347 3 1,536 --- --- 1,539
Exercise of common stock options 268 3 336 --- --- 339
------- ---- -------- ---------- --------- ----------
Balance, March 30, 2005 90,602 $ 906 $ 513,721 $ (758,763) $ (18,744) $ (262,880)
======= ==== ======== ========== ========= ==========
See accompanying notes
4
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended
-------------
March 30, 2005 March 31, 2004
-------------- --------------
(In thousands)
Cash Flows from Operating Activities:
Net loss $ (1,460) $ (8,730)
Adjustments to reconcile net loss to cash flows provided by (used in) operating
activities:
Depreciation and amortization 13,270 14,218
Restructuring charges and exit costs 2,274 105
Amortization of deferred financing costs 868 1,594
Gains on disposition of assets and other, net (885) (74)
Amortization of debt premium --- (454)
Stock option expense 1,163 ---
Changes in assets and liabilities, net of effects of acquisitions and
dispositions:
Decrease (increase) in assets:
Receivables 963 1,787
Inventories 200 47
Prepaid and other current assets (545) (1,152)
Other assets (1,559) (523)
Increase (decrease) in liabilities:
Accounts payable (1,597) (5,575)
Accrued salaries and vacations (8,345) 1,544
Accrued taxes (203) (2,117)
Other accrued liabilities 4,034 (8,858)
Other noncurrent liabilities and deferred credits 1,476 271
--------- ---------
Net cash flows provided by (used in) operating activities 9,654 (7,917)
--------- ---------
Cash Flows from Investing Activities:
Purchase of property (6,639) (4,144)
Proceeds from disposition of property 1,272 105
--------- ---------
Net cash flows used in investing activities (5,367) (4,039)
--------- ---------
See accompanying notes
5
Denny's Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
Quarter Ended
-------------
March 30, 2005 March 31, 2004
-------------- --------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreement $ --- $ 7,900
Long-term debt payments (1,106) (1,261)
Deferred financing costs paid (132) ---
Proceeds from exercise of stock options 339 187
Net bank overdrafts 983 1,101
---------- ---------
Net cash flows provided by financing activities 84 7,927
---------- ---------
Increase (decrease) in cash and cash equivalents 4,371 (4,029)
Cash and Cash Equivalents at:
Beginning of period 15,561 7,363
----------- ---------
End of period $ 19,932 $ 3,334
=========== =========
See accompanying notes
6
Denny's Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 30, 2005
(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 29, 2004 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our 2004 Annual Report on Form 10-K. The results of operations for
the quarter ended March 30, 2005 are not necessarily indicative of the results
for the entire fiscal year ending December 28, 2005.
Note 2. Restructuring Charges and Exit Costs
------------------------------------
Restructuring charges and exit costs consist primarily of severance and
outplacement costs for terminated employees and the costs of future obligations
related to closed units.
In assessing the discounted liabilities for future costs related to units closed
or identified for closure prior to December 26, 2002, the date we adopted
Statement of Financial Accounting Standards No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," or SFAS 146, we make assumptions
regarding the timing of units' closures, amounts of future subleases, amounts of
future property taxes and costs of closing the units. If these assumptions or
their related estimates change in the future, we may be required to record
additional exit costs or reduce exit costs previously recorded. Exit costs
recorded for each of the periods presented include the effect of such changes in
estimates.
As a result of the adoption of SFAS 146, discounted liabilities for future lease
costs net of the fair value of related subleases of units closed after December
25, 2002 are recorded when the unit is closed. All other costs related to unit
closures, including property taxes and maintenance related costs, are expensed
as incurred.
Restructuring charges and exit costs were comprised of the following:
Quarter Ended
-------------
March 30, 2005 March 31, 2004
-------------- --------------
(In thousands)
Exit costs $ 863 $ 44
Severance and other restructuring charges 1,411 61
-------- --------
Total restructuring and exit costs $ 2,274 $ 105
======== ========
7
The components of the change in accrued exit cost liabilities are as follows:
(In thousands)
Balance, December 29, 2004 $ 9,841
Provisions for units closed in 2005 715
Changes in estimate of accrued exit costs, net 148
Payments, net (1,169)
Interest accretion 270
---------
Balance, March 30, 2005 $ 9,805
=========
Estimated net cash payments related to exit cost liabilities in the next five
years are as follows:
(In thousands)
Remainder of 2005 $ 1,855
2006 1,700
2007 1,405
2008 1,358
2009 1,356
Thereafter 7,816
---------
Total 15,490
Less imputed interest 5,685
---------
Present value of exit cost liabilities $ 9,805
=========
Note 3. Credit Facilities
-----------------
Our subsidiaries, Denny's, Inc. and Denny's Realty, Inc. (the "Borrowers"), have
senior secured credit facilities with an aggregate principal amount of $420
million. The credit facilities consist of a first lien facility and a second
lien facility. The first lien facility consists of a $225 million five-year term
loan facility (the "Term Loan Facility") and a $75 million four-year revolving
credit facility, of which $45 million is available for the issuance of letters
of credit (the "Revolving Facility" and together with the Term Loan Facility,
the "First Lien Facility"). The second lien facility consists of an additional
$120 million six-year term loan facility (the "Second Lien Facility," and
together with the First Lien Facility, the "Credit Facilities"). The Second Lien
Facility ranks pari passu with the First Lien Facility in right of payment, but
is in a second lien position with respect to the collateral securing the First
Lien Facility.
At March 30, 2005, we had outstanding letters of credit of $37.5 million under
our Revolving Facility, leaving net availability of $37.5 million. There were no
revolving loans outstanding at March 30, 2005.
The Term Loan Facility matures on September 30, 2009 and amortizes in equal
quarterly installments of $0.6 million (commencing March 31, 2005) with all
remaining amounts due on the maturity date. The Revolving Facility matures on
September 30, 2008. The Second Lien Facility matures on September 30, 2010 with
no amortization of principal prior to the maturity date.
The interest rates under the First Lien Facility are as follows: At the option
of the Borrowers, Adjusted LIBOR plus a spread of 3.25% per annum (3.50% per
annum for the Revolving Facility) or ABR (the Alternate Base Rate, which is the
highest of the Bank of America Prime Rate and the Federal Funds Effective Rate
plus 1/2 of 1%) plus a spread of 1.75% per annum (2.0% per annum for the
Revolving Facility). The interest rate on the Second Lien Facility, at the
Borrower's option, is Adjusted LIBOR plus a spread of 5.125% per annum or ABR
plus a spread of 3.625% per annum. The interest rates on the First Lien Facility
and Second Lien Facility at March 30, 2005 were 5.74% and 7.65%, respectively.
8
During the first quarter of 2005, we entered into an interest rate swap with a
notional amount of $75 million. The Company has designated the interest rate
swap as a cash flow hedge of the Company's exposure to variability in future
cash flows attributable to payments of LIBOR plus a fixed 3.25% spread due on a
related $75 million notional debt obligation under the Term Loan Facility. Under
the terms of the swap, the Company will pay a fixed rate of 3.76% on the $75
million notional amount and receive payments from a counterparty based on the
3-month LIBOR rate for a term ending on September 30, 2007. Interest rate
differentials paid or received under the swap agreement are recognized as
adjustments to interest expense. To the extent the swap is effective in
offsetting the variability of the hedged cash flows, changes in the fair value
of the swap are not included in current earnings but are reported as accumulated
other comprehensive income (loss). A gain of $1.0 million was recognized in
accumulated other comprehensive income (loss) at March 30, 2005 for the change
in fair value of the swap during the first quarter of 2005. No fair value
adjustments on the interest rate swap were recognized in earnings during the
quarter ended March 30, 2005 since the Company did not note any ineffectiveness
in the hedge. We do not enter into derivative financial instruments for trading
or speculative purposes.
The Credit Facilities are secured by substantially all of our assets and
guaranteed by Denny's Corporation, Denny's Holdings and all of their
subsidiaries. The Credit Facilities contain certain financial covenants (i.e.,
maximum total debt to EBITDA (as defined under the Credit Facilities) ratio
requirements, maximum senior secured debt to EBITDA ratio requirements, minimum
fixed charge coverage ratio requirements and limitations on capital
expenditures), negative covenants, conditions precedent, material adverse change
provisions, events of default and other terms, conditions and provisions
customarily found in credit agreements for facilities and transactions of this
type. We were in compliance with the terms of the credit facility as of March
30, 2005.
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 ceased to accrue for Pension Plan
participants as of December 31, 2004.
The components of net pension cost of the pension plan and other defined benefit
plans as determined under Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," are as follows:
Pension Plan Other Defined Benefit Plans
---------------------------------- ----------------------------------
Quarter Ended Quarter Ended
------------- -------------
March 30, 2005 March 31, 2004 March 30, 2005 March 31, 2004
-------------- -------------- -------------- --------------
(In thousands)
Service cost $ 115 $ 120 $ --- $ 78
Interest cost 738 733 59 57
Expected return on plan assets (757) (699) --- ---
Amortization of net loss 221 200 8 6
------------ ------------ ------------ ------------
Net periodic benefit cost $ 317 $ 354 $ 67 $ 141
============ ============ ============ ============
We made contributions of $0.6 million to our qualified pension plan in the
quarter ended March 30, 2005, and no contributions were made in the quarter
ended March 31, 2004. We made contributions of $0.4 million and $0.1 million to
our other defined benefit plans during the quarters ended March 30, 2005 and
March 31, 2004, respectively. We expect to contribute $2.7 million to our
qualified pension plan and $0.2 million to our other defined benefit plans
during the remainder of fiscal 2005.
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
9
related interpretations in accounting for our stock-based compensation plans
(i.e., the "intrinsic method"). Under APB 25, compensation expense is recognized
when the exercise price of our employee stock options is less than the market
price of the underlying stock on the date of grant.
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 30, 2005 March 31, 2004
-------------- --------------
(In thousands, except per share amounts)
Reported net loss $ (1,460) $ (8,730)
Stock-based employee compensation expense included in reported
net loss, net of related tax effects 2,412 328
Less total stock-based compensation expense determined
under fair value based method, net of related tax effects (3,332) (532)
--------- --------
Pro forma net loss $ (2,380) $ (8,934)
========= ========
Loss per share:
Basic and diluted - as reported $ (0.02) $ (0.21)
========= ========
Basic and diluted - pro forma $ (0.03) $ (0.22)
========= ========
Stock-based employee compensation expense, which is included as a component of
general and administrative expenses, consisted of $1.2 million related to stock
options and $1.4 million related to restricted stock units for the quarter ended
March 30, 2005, and $0.3 million related to restricted stock units for the
quarter ended March 31, 2004. Additionally, 0.3 million shares of common stock
were issued during the quarter ended March 30, 2005 related to restricted stock
units earned.
Based on the number of options outstanding at March 30, 2005 and their related
vesting period, compensation expense related to stock options is estimated to be
$2.4 million for the remainder of fiscal 2005. Amounts of additional expense to
be recorded related to restricted stock units will be dependent upon meeting
certain performance measures and the fair market value of the stock over the
performance and vesting periods.
Note 6. Net Loss Per Share
------------------
Options outstanding of 10.3 million and 6.9 million for the quarters ended March
30, 2005 and March 31, 2004, respectively, have been omitted from the
calculations of weighted average diluted shares because they have an
antidilutive effect on net loss per share. Approximately 3.2 million warrants,
which expired on January 7, 2005, also have been omitted from the calculations
of weighted average diluted shares for each of the periods presented.
Note 7. Supplemental Cash Flow Information
----------------------------------
Quarter Ended
-------------
March 30, 2005 March 31, 2004
-------------- --------------
(In thousands)
Income taxes paid, net $ 235 $ 169
========= =========
Interest paid $ 7,213 $ 32,399
========= =========
Noncash financing activities:
Capital leases entered into $ 358 $ 969
========= =========
Issuance of common stock $ 1,539 $ ---
========= =========
10
Note 8. Implementation of New Accounting Standards
------------------------------------------
In December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123 (Revised) (SFAS 123-R), "Share-Based Payment". This standard
requires expensing of stock options and other share-based payments and
supersedes SFAS No. 123 which had allowed companies to choose between expensing
stock options or showing pro forma disclosure only. On April 14, 2005, the SEC
announced the adoption of a rule that delays the effective date of 123-R. This
standard will be effective as of the beginning of the Company's 2006 fiscal year
and will apply to previously issued and unvested awards, as well as all awards
granted, modified, cancelled or repurchased after the effective date. The
Company is currently evaluating the expected impact that the adoption of SFAS
123-R will have on its financial condition or results of operations. Pro forma
information regarding net income and earnings per share as if we had accounted
for our employee stock options granted under the fair value method of SFAS 123
is presented in Note 5 to our Condensed Consolidated Financial Statements.
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 30, 2005 and results of operations for the
quarter ended March 30, 2005 compared with the quarter ended March 31, 2004. The
forward-looking statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, which reflect our best judgment
based on factors currently known, involve risks, uncertainties, and other
factors which may cause our actual performance to be materially different from
the performance indicated or implied by such statements. Such factors include,
among others: competitive pressures from within the restaurant industry; the
level of success of our operating initiatives and advertising and promotional
efforts; adverse publicity; changes in business strategy or development plans;
terms and availability of capital; regional weather conditions; overall changes
in the general economy, particularly at the retail level; political environment
(including acts of war and terrorism); and other factors included in the
discussion below, or in Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 29, 2004 and in Exhibit 99 thereto.
11
Statements of Operations
Quarter Ended
-------------
March 30, 2005 March 31, 2004
---------------- --------------
(Dollars in thousands)
Revenue:
Company restaurant sales...............................................$ 218,015 90.8% $ 207,762 90.6%
Franchise and license revenue.......................................... 22,034 9.2% 21,633 9.4%
----------- ------ ----------- ------
Total operating revenue............................................. 240,049 100.0% 229,395 100.0%
----------- ------ ----------- ------
Costs of company restaurant sales (a):
Product costs.......................................................... 56,196 25.8% 53,075 25.5%
Payroll and benefits................................................... 91,659 42.0% 88,258 42.5%
Occupancy.............................................................. 13,097 6.0% 12,548 6.0%
Other operating expenses............................................... 30,121 13.8% 28,039 13.5%
----------- ------ ----------- ------
Total costs of company restaurant sales............................. 191,073 87.6% 181,920 87.6%
Costs of franchise and license revenue (a)............................... 7,009 31.8% 7,168 33.1%
General and administrative expenses...................................... 16,068 6.7% 15,181 6.6%
Depreciation and amortization............................................ 13,270 5.5% 14,218 6.2%
Restructuring charges and exit costs..................................... 2,274 0.9% 105 0.0%
Impairment charges....................................................... -- -- -- --
Gains on disposition of assets and other, net............................ (885) (0.4%) (74) 0.0%
----------- ------ ----------- -------
Total operating costs and expenses.................................. 228,809 95.3% 218,518 95.3%
----------- ------ ----------- -------
Operating income......................................................... 11,240 4.7% 10,877 4.7%
----------- ------ ----------- -------
Other expenses:
Interest expense, net.................................................. 13,212 5.5% 19,468 8.5%
Other nonoperating (income) expense, net............................... (371) (0.2%) (65) 0.0%
----------- ------ ----------- -------
Total other expenses, net........................................... 12,841 5.3% 19,403 8.5%
----------- ------ ------------ -------
Loss before income taxes................................................. (1,601) (0.7%) (8,526) (3.7%)
Provision for (benefit from) income taxes................................ (141) (0.1%) 204 0.1%
----------- ------ ------------ -------
Net loss ................................................................$ (1,460) (0.6%) $ (8,730) (3.8%)
=========== ====== ============ =======
Other Data:
Company-owned average unit sales.........................................$ 398.1 $ 373.1
Franchise average unit sales.............................................$ 339.0 $ 313.9
Same-store sales increase (company-owned) (b)............................ 6.3% 6.4%
Guest check average increase (b)....................................... 3.2% 3.0%
Guest count increase (b)............................................... 3.0% 3.3%
- ------------------
(a) Costs of company restaurant sales percentages are as a percentage of company
restaurant sales. Costs of franchise and license revenue percentages are as
a percentage of franchise and license revenue. All other percentages are as
a percentage of total operating revenue.
(b) Same-store sales include sales from restaurants that were open the same days
in both the current year and prior year.
Unit Activity
- -------------
Ending Units Ending Ending
Units Opened/ Units Units Units
December 29, 2004 Acquired Closed March 30, 2005 March 31, 2004
----------------- -------- ------ -------------- --------------
Company-owned restaurants 553 -- (4) 549 558
Franchised and licensed restaurants 1,050 1 (15) 1,036 1,064
----- --- --- ----- -----
1,603 1 (19) 1,585 1,622
===== === === ===== =====
12
Quarter Ended March 30, 2005 Compared with Quarter Ended March 31, 2004
- -----------------------------------------------------------------------
Company Restaurant Operations
During the quarter ended March 30, 2005, we realized a 6.3% increase in
same-store sales, comprised of a 3.0% increase in guest counts and a 3.2%
increase in guest check average. Company restaurant sales increased $10.3
million (4.9%). Higher sales resulted primarily from the increase in same-store
sales for the current quarter partially offset by an 8 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 remained flat at 87.6%. Product costs increased slightly to 25.8% from
25.5% due to shifts in menu mix and commodity cost pressures. Payroll and
benefits decreased to 42.0% from 42.5% due to a reduction in incentive
compensation costs and favorability in health benefit costs. These cost
improvements were partially offset by the effects of higher investments in labor
and higher unemployment tax rates. Occupancy costs remained flat at 6.0% of
company restaurant sales. Other operating expenses were comprised of the
following amounts and percentages of company restaurant sales:
Quarter Ended
-------------
March 30, 2005 March 31, 2004
---------------- ----------------
(Dollars in Thousands)
Utilities $10,294 4.7% $ 9,840 4.7%
Repairs and maintenance 4,520 2.1% 3,347 1.6%
Marketing 7,277 3.3% 7,464 3.6%
Other 8,030 3.7% 7,388 3.6%
------- ------ ------- ------
Other operating expenses $30,121 13.8% $28,039 13.5%
======= ====== ======= ======
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 30, 2005 March 31, 2004
---------------- ----------------
(Dollars in Thousands)
Royalties and initial fees $14,229 64.6% $13,907 64.3%
Occupancy revenue 7,805 35.4% 7,726 35.7%
------- ------ ------- ------
Franchise and license revenue 22,034 100.0% 21,633 100.0%
======= ====== ======= ======
Occupancy costs 5,268 23.9% 5,387 24.9%
Other direct costs 1,741 7.9% 1,781 8.2%
------- ------ ------- ------
Costs of franchise and license revenue $ 7,009 31.8% $ 7,168 33.1%
======= ====== ======= ======
13
The revenue increase of $0.4 million (1.9%) resulted from a 7.1% increase in
franchisee same-store sales. The increase was partially offset by a 24
equivalent-unit decrease in franchised and licensed units due to unit closures.
Costs of franchise and license revenue decreased $0.2 million (2.2%). The
decrease as a percentage of franchise and license revenues primarily was due to
a reduction in bad debt expense and lower occupancy costs compared to the
prior year.
Other Operating Costs and Expenses
Other operating costs and expenses such as general and administrative expenses
and depreciation and amortization expense relate to both company and franchise
operations.
General and administrative expenses are comprised of the following:
Quarter Ended
-------------
March 30, 2005 March 31, 2004
-------------- --------------
(Dollars in Thousands)
Stock-based compensation $ 2,645 $ 328
Transaction costs --- 1,982
Other general and administrative expenses 13,423 12,871
-------- --------
Total general and administrative expenses $ 16,068 $ 15,181
======== ========
The increase in stock-based compensation costs resulted from the issuance of
stock options and restricted stock units during the fourth quarter of 2004.
Additional information related to stock-based compensation is presented in Note
5 to our Condensed Consolidated Financial Statements. Transaction costs recorded
in 2004 represented costs associated with the refinancing transactions completed
in the third and fourth quarters of 2004 as further discussed below.
Depreciation and amortization decreased $1.0 million primarily resulting from
certain assets becoming fully depreciated.
Gains on disposition of assets and other, net of $0.9 million in 2005 and $0.1
million in 2004 primarily represent gains on cash sales of surplus properties.
Operating income was $11.2 million for the quarter ended March 30, 2005 compared
with $10.9 million for the quarter ended March 31, 2004.
Interest expense, net for the quarter ended March 30, 2005 was comprised of
$13.6 million of interest expense offset by $0.3 million of interest income,
compared with $19.8 million of interest expense offset by $0.3 million of
interest income for the quarter ended March 31, 2004. The decrease in interest
expense is attributed to a reduction in both outstanding borrowings and interest
rates as a result of the refinancing transactions completed in the third and
fourth quarters of 2004. These refinancing transactions generally consisted of a
private placement of common stock, refinancing our previous credit facilities,
issuing new senior notes, and repurchasing previously issued senior notes.
The benefit from income taxes was $0.1 million for the quarter ended March 30,
2005, compared with provision for income taxes of $0.2 million for the quarter
ended March 31, 2004. The benefit for income taxes for the quarter ended March
30, 2005 was determined using our effective tax rate estimated for the entire
fiscal year. The Company currently expects to have taxable income for the entire
fiscal year, so it is currently considered more likely than not that this
benefit will be realized in subsequent interim periods of fiscal 2005. The
provision for income taxes for the quarter ended March 31, 2004 primarily
represents 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 generated in previous periods. In establishing our valuation allowance,
14
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 $1.5 million for the quarter ended March 30, 2005 compared with
$8.7 million for the quarter ended March 31, 2004 due to the factors noted
above.
Liquidity and Capital Resources
- -------------------------------
Credit Facilities
Our subsidiaries, Denny's, Inc. and Denny's Realty, Inc. (the "Borrowers"), have
senior secured credit facilities with an aggregate principal amount of $420
million. The credit facilities consist of a first lien facility and a second
lien facility. The first lien facility consists of a $225 million five-year term
loan facility (the "Term Loan Facility") and a $75 million four-year revolving
credit facility, of which $45 million is available for the issuance of letters
of credit (the "Revolving Facility" and together with the Term Loan Facility,
the "First Lien Facility"). The second lien facility consists of an additional
$120 million six-year term loan facility (the "Second Lien Facility," and
together with the First Lien Facility, the "Credit Facilities"). The Second Lien
Facility ranks pari passu with the First Lien Facility in right of payment, but
is in a second lien position with respect to the collateral securing the First
Lien Facility.
The Term Loan Facility matures on September 30, 2009 and amortizes in equal
quarterly installments of $0.6 million (commencing March 31, 2005) with all
remaining amounts due on the maturity date. The Revolving Facility matures on
September 30, 2008. The Second Lien Facility matures on September 30, 2010 with
no amortization of principal prior to the maturity date.
The interest rates under the First Lien Facility are as follows: At the option
of the Borrowers, Adjusted LIBOR plus a spread of 3.25% per annum (3.50% per
annum for the Revolving Facility) or ABR (the Alternate Base Rate, which is the
highest of the Bank of America Prime Rate and the Federal Funds Effective Rate
plus 1/2 of 1%) plus a spread of 1.75% per annum (2.0% per annum for the
Revolving Facility). The interest rate on the Second Lien Facility, at the
Borrower's option, is Adjusted LIBOR plus a spread of 5.125% per annum or ABR
plus a spread of 3.625% per annum. The interest rates on the First Lien Facility
and Second Lien Facility at March 30, 2005 were 5.74% and 7.65%, respectively.
At March 30, 2005, we had outstanding letters of credit of $37.5 million under
our Revolving Facility, leaving net availability of $37.5 million. There were no
revolving loans outstanding at March 30, 2005.
The Credit Facilities are secured by substantially all of our assets and
guaranteed by Denny's Corporation, Denny's Holdings and all of their
subsidiaries. The Credit Facilities contain certain financial covenants (i.e.,
maximum total debt to EBITDA (as defined under the Credit Facilities) ratio
requirements, maximum senior secured debt to EBITDA ratio requirements, minimum
fixed charge coverage ratio requirements and limitations on capital
expenditures), negative covenants, conditions precedent, material adverse change
provisions, events of default and other terms, conditions and provisions
customarily found in credit agreements for facilities and transactions of this
type. We were in compliance with the terms of the credit facility as of March
30, 2005.
Cash Requirements
Our principal capital requirements have been largely associated with remodeling
and maintaining our existing restaurants and facilities. For the quarter ended
March 30, 2005, our capital expenditures were $7.0 million. Of that amount,
approximately $0.4 million was financed through capital leases. Capital
expenditures during 2005 are expected to total between approximately $55 million
and $65 million; however, we are not committed to spending this amount and could
15
spend more or less if circumstances require.
Our working capital deficit was $81.6 million at March 30, 2005 compared with
$92.7 million at December 29, 2004. We are able to operate with a substantial
working capital deficit because (1) restaurant operations and most food service
operations are conducted primarily on a cash (and cash equivalent) basis with a
low level of accounts receivable, (2) rapid turnover allows a limited investment
in inventories, and (3) accounts payable for food, beverages and supplies
usually become due after the receipt of cash from the related sales.
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 First
Lien Facility bear interest at a variable rate based on LIBOR (adjusted LIBOR
rate plus 3.25%) or an alternative base rate (highest of Prime Rate or Federal
Funds Effective Rate plus 0.5%) plus a spread of 1.75%. Borrowings under the
Second Lien Facility bear interest at adjusted LIBOR plus 5.125% or the
alternative base rate plus 3.625%.
During the first quarter of 2005, we entered into an interest rate swap with a
notional amount of $75 million. The Company has designated the interest rate
swap as a cash flow hedge of the Company's exposure to variability in future
cash flows attributable to payments of LIBOR plus a fixed 3.25% spread due on a
related $75 million notional debt obligation under the Term Loan Facility. Under
the terms of the swap, the Company will pay a fixed rate of 3.76% on the $75
million notional amount and receive payments from a counterparty based on the
3-month LIBOR rate for a term ending on September 30, 2007. The swap effectively
increases our ratio of fixed rate debt from approximately 38% of total debt to
approximately 51%.
Based on the levels of borrowings under the Credit Facilities at March 30, 2005,
if interest rates changed by 100 basis points our annual cash flow and income
before income taxes would change by approximately $2.7 million, after
considering the impact of the interest rate swap. This computation is determined
by considering the impact of hypothetical interest rates on the variable rate
portion of the Credit Facilities at March 30, 2005. However, the nature and
amount of our borrowings under the Credit Facilities may vary as a result of
future business requirements, market conditions and other factors.
Our other outstanding long-term debt bears fixed rates of interest. The
estimated fair value of our fixed rate long-term debt (excluding capital leases)
was approximately $183.5 million, compared with a book value of $176.0 million
at March 30, 2005. This fair value computation is based on market quotations for
the same or similar debt issues or the estimated borrowing rates available to
us. The difference between the estimated fair value of long-term debt compared
with its historical cost reported in our consolidated balance sheets at March
30, 2005 relates primarily to market quotations for our 10% Senior Notes due
2012.
We also have exposure to interest rate risk related to our pension plan, other
defined benefit plans, and self-insurance liabilities. A 25 basis point increase
in discount rate would reduce our projected benefit obligation related to our
pension plan and other defined benefit plans by $2.0 million and $0.2 million,
respectively, and reduce our annual net periodic benefit cost related to our
pension plan by $0.1 million. A 25 basis point decrease in discount rate would
increase our projected benefit obligation related to our pension plan and other
defined benefit plans by $2.1 million and $0.2 million, respectively, and
increase our annual net periodic benefit cost related to our pension plan by
$0.1 million. The annual impact of a 25 basis point increase or decrease in
discount rate on periodic benefit costs related to our other defined benefit
plans would be less than $0.1 million. A 25 basis point increase or decrease in
discount rate related to our self-insurance liabilities would result in a
decrease or increase of $0.2 million, respectively.
We have established a policy to identify, control and manage market risks which
may arise from changes in interest rates, foreign currency exchange rates,
commodity prices and other relevant rates and prices. We do not enter into
financial instruments for trading or speculative purposes.
16
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.
In connection with the previously disclosed material weakness attributed to
deficiencies in the Company's controls relative to the selection, monitoring,
and review of assumptions and factors affecting lease accounting and leasehold
improvement depreciation practices, we have revised our lease accounting
policies to conform with U.S. generally accepted accounting principles, trained
staff regarding these new policies and enhanced management oversight thereof. As
a result, management has determined that the previously disclosed material
weakness has been remediated. There have been no other 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.
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, results of operations or cash flows.
Item 5. Other Information
On February 10, 2005, the Compensation and Incentives Committee of the Board of
Directors of Denny's Corporation approved and adopted the Denny's 2005
Corporate Incentive Program (the "2005 Incentive Program"), an incentive
compensation arrangement for substantially all of Denny's, Inc. employees,
including its executive officers. Under the 2005 Incentive Program, which is
offered pursuant to the Denny's Corporation 2004 Omnibus Incentive Compensation
Plan, a participant is eligible to earn a target bonus award ("Target Award")
equal to a percentage of his or her base salary, depending on the group
classification assigned to such participant. For the executive officers, the
Target Awards range from 65% of base salary for senior vice presidents to 100%
of base salary for the chief executive officer.
Target Awards are earned by participants based on the achievement of certain
pre-established quarterly and annual performance goals, and the amount of actual
bonus earned may range from 50% of the Target Award, if certain threshold goals
are met, to 100% of the Target Award, if all targeted goals are met. Performance
goals are based on the following six (6) performance categories: (1) Company
Same Store Sales ("CSSS"), under which participants earn 15% of their Target
Awards, payable on a quarterly basis, if Denny's attains targeted CSSS; (ii)
Franchise Same Store Sales ("FSSS"), under which participants earn 15% of their
Target Awards, payable on a quarterly basis, if Denny's attains targeted FSSS;
(iii) Company Store Customer Count ("CSCC"), under which participants earn 10%
of their Target Awards, payable on a quarterly basis, if Denny's attains
targeted CSCC; (iv) Total Revenue, under which participants earn 10% of their
Target Award, payable on an annual basis, if Denny's achieves targeted Total
Revenue; (v) EBITDA (i.e., earnings before interest, taxes, depreciation and
amortization), under which participants receive 25% of their Target Award,
payable on an annual basis, if Denny's achieves targeted EBITDA; and (vi)
Department Objectives, which are set for each department based on stated
17
criteria for up to five objectives, and under which participants receive 25% of
their Target Awards, payable on an annual basis, if the Department Objectives
are achieved.
In addition, participants in the 2005 Incentive Program are eligible to
share in an Over-Performance Payout ("OP Payout"), which is a bonus pool that
will be created if Denny's exceeds targeted EBITDA for the year. The amount of
the OP Payout will be equal to 25% of the amount by which EBITDA for the year
exceeds targeted EBITDA. Each participant will receive a pro rata percentage of
any OP Payout, based on the amount of the participant's Target Award earned for
the year, not to exceed 100% of the participant's Target Award otherwise earned
for the year.
Item 6. Exhibits
a. The following are included as exhibits to this report:
Exhibit
No. Description
------- -----------
4.1 Amended and Restated Rights Agreement, dated as of January 5,
2005, between Denny's Corporation and Continental Stock
Transfer and Trust Company, as Rights Agent (incorporated by
reference to Exhibit 1 to the Form 8-A/A of Denny's
Corporation, filed with the Securities and Exchange Commission
on January 12, 2005, relating to preferred stock purchase
rights).
10.1 Written description of the Denny's 2005 Corporate Incentive
Program
31.1 Certification of Nelson J. Marchioli, President and Chief
Executive Officer of Denny's Corporation, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of 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.
18
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 9, 2005 By: /s/ RHONDA J. PARISH
-----------------------------
Rhonda J. Parish
Executive Vice President,
Chief Administrative Officer,
General Counsel and Secretary
Date: May 9, 2005 By: /s/ ANDREW F. GREEN
-----------------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer
19