Denny's Quarter 3 2006 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Quarterly Period Ended September 27, 2006
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)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ] Accelerated
filer [X] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No
[X]
As
of
November 1, 2006, 92,641,987 shares of the registrant’s common stock, par value
$.01 per share, were outstanding.
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
16
|
|
|
25
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
27
|
|
|
28
|
|
|
|
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
|
Quarter
Ended
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands, except per share amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurant sales
|
|
$
|
234,705
|
|
$
|
225,824
|
|
$
|
680,735
|
|
$
|
667,833
|
|
Franchise
and license revenue
|
|
|
23,491
|
|
|
22,898
|
|
|
68,937
|
|
|
67,513
|
|
Total
operating revenue
|
|
|
258,196
|
|
|
248,722
|
|
|
749,672
|
|
|
735,346
|
|
Costs
of company restaurant sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
costs
|
|
|
59,509
|
|
|
56,712
|
|
|
170,219
|
|
|
169,485
|
|
Payroll
and benefits
|
|
|
95,627
|
|
|
94,289
|
|
|
281,497
|
|
|
278,845
|
|
Occupancy
|
|
|
12,893
|
|
|
12,211
|
|
|
38,619
|
|
|
38,261
|
|
Other
operating expenses
|
|
|
34,250
|
|
|
38,483
|
|
|
102,576
|
|
|
100,022
|
|
Total
costs of company restaurant sales
|
|
|
202,279
|
|
|
201,695
|
|
|
592,911
|
|
|
586,613
|
|
Costs
of franchise and license revenue
|
|
|
6,772
|
|
|
7,069
|
|
|
21,220
|
|
|
21,530
|
|
General
and administrative expenses
|
|
|
16,440
|
|
|
14,654
|
|
|
49,259
|
|
|
46,873
|
|
Depreciation
and amortization
|
|
|
13,812
|
|
|
13,818
|
|
|
41,997
|
|
|
40,857
|
|
Restructuring
charges and exit costs, net
|
|
|
1,461
|
|
|
2,056
|
|
|
3,342
|
|
|
4,416
|
|
Impairment
charges
|
|
|
831
|
|
|
320
|
|
|
831
|
|
|
585
|
|
Gains
on disposition of assets and other, net
|
|
|
(38,995
|
)
|
|
(40
|
)
|
|
(47,664
|
)
|
|
(1,790
|
)
|
Total
operating costs and expenses
|
|
|
202,600
|
|
|
239,572
|
|
|
661,896
|
|
|
699,084
|
|
Operating
income
|
|
|
55,596
|
|
|
9,150
|
|
|
87,776
|
|
|
36,262
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
14,959
|
|
|
13,934
|
|
|
44,449
|
|
|
40,810
|
|
Other
nonoperating expense (income), net
|
|
|
1,499
|
|
|
(86
|
)
|
|
1,475
|
|
|
(545
|
)
|
Total
other expenses, net
|
|
|
16,458
|
|
|
13,848
|
|
|
45,924
|
|
|
40,265
|
|
Net
income (loss) before income taxes and cumulative effect of change
in
accounting
principle
|
|
|
39,138
|
|
|
(4,698
|
)
|
|
41,852
|
|
|
(4,003
|
)
|
Provision
for (benefit from) income taxes
|
|
|
13,635
|
|
|
(1,264
|
)
|
|
14,015
|
|
|
(1,178
|
)
|
Net
income (loss) before cumulative effect of change in accounting
principle
|
|
|
25,503 |
|
|
(3,434 |
) |
|
27,837 |
|
|
(2,825 |
) |
Cumulative
effect of change in accounting principle, net of tax |
|
|
--- |
|
|
--- |
|
|
232 |
|
|
--- |
|
Net
income (loss)
|
|
$
|
25,503
|
|
$
|
(3,434
|
)
|
$
|
28,069
|
|
$
|
(2,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net
income (loss) before cumulative effect of change in accounting
principle,
net of tax
|
|
$
|
0.28
|
|
$
|
(0.04
|
)
|
$
|
0.30
|
|
$
|
(0.03
|
)
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
---
|
|
|
---
|
|
|
0.00
|
|
|
---
|
|
Basic net
income (loss) per share
|
|
$
|
0.28
|
|
$
|
(0.04
|
)
|
$
|
0.30
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) before cumulative effect of change in
accounting
principle,
net of tax
|
|
$
|
0.26
|
|
$
|
(0.04
|
)
|
$
|
0.29
|
|
$
|
(0.03
|
)
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
---
|
|
|
---
|
|
|
0.00
|
|
|
---
|
|
Diluted
net income (loss) per share
|
|
$
|
0.26
|
|
$
|
(0.04
|
)
|
$
|
0.29
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
92,348
|
|
|
91,363
|
|
|
92,060
|
|
|
90,785
|
|
Diluted
|
|
|
96,498
|
|
|
91,363
|
|
|
97,184
|
|
|
90,785
|
|
See
accompanying notes
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
|
September
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
26,059
|
|
$
|
28,236
|
|
Receivables,
net
|
|
|
10,828
|
|
|
16,829
|
|
Inventories
|
|
|
8,121
|
|
|
8,207
|
|
Assets
held for sale
|
|
|
6,627 |
|
|
--- |
|
Prepaid
and other current assets
|
|
|
10,381
|
|
|
8,362
|
|
Total
Current Assets
|
|
|
62,016
|
|
|
61,634
|
|
|
|
|
|
|
|
|
|
Property,
net
|
|
|
241,584
|
|
|
288,140
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
50,127
|
|
|
50,186
|
|
Intangible
assets, net
|
|
|
68,065
|
|
|
71,664
|
|
Deferred
financing costs, net
|
|
|
11,512
|
|
|
15,761
|
|
Other
assets
|
|
|
21,034
|
|
|
23,881
|
|
Total
Assets
|
|
$
|
454,338
|
|
$
|
511,266
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Deficit
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of notes and debentures
|
|
$
|
7,906
|
|
$
|
1,871
|
|
Current
maturities of capital lease obligations
|
|
|
7,128
|
|
|
6,226
|
|
Accounts
payable
|
|
|
37,175
|
|
|
47,593
|
|
Other
|
|
|
82,584
|
|
|
92,714
|
|
Total
Current Liabilities
|
|
|
134,793
|
|
|
148,404
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
Notes
and debentures, less current maturities
|
|
|
429,507
|
|
|
516,803
|
|
Capital
lease obligations, less current maturities
|
|
|
25,351
|
|
|
28,862
|
|
Liability
for insurance claims, less current portion
|
|
|
30,790
|
|
|
31,187
|
|
Deferred
income taxes
|
|
|
12,167 |
|
|
--- |
|
Other
noncurrent liabilities and deferred credits
|
|
|
52,763
|
|
|
52,557
|
|
Total
Long-Term Liabilities
|
|
|
550,578
|
|
|
629,409
|
|
Total
Liabilities
|
|
|
685,371
|
|
|
777,813
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Deficit (note 3)
|
|
|
(231,033
|
)
|
|
(266,547
|
)
|
Total
Liabilities and Shareholders’ Deficit
|
|
$
|
454,338
|
|
$
|
511,266
|
|
See
accompanying notes
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Common
Stock
|
|
Additional
|
|
Accumulated
|
|
Comprehensive
|
|
Shareholders'
|
|
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Earnings
(Deficit)
|
|
Income
(Loss)
|
|
Deficit
|
|
|
|
(In
thousands)
|
|
Balance,
December 28, 2005
|
|
|
91,751
|
|
$
|
918
|
|
$
|
517,584
|
|
$
|
(764,631
|
)
|
$
|
(19,543
|
)
|
$
|
(265,402
|
)
|
Balance
Sheet Adjustment (note 3)
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(1,145
|
)
|
|
---
|
|
|
(1,145
|
)
|
Balance,
December 28, 2005
|
|
|
91,751
|
|
$
|
918
|
|
$
|
517,854
|
|
$
|
(765,776
|
)
|
$
|
(19,543
|
)
|
$
|
(266,547
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
28,069
|
|
|
---
|
|
|
28,069
|
|
Unrealized
loss on hedged transaction, net of tax
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(189
|
)
|
|
(189
|
)
|
Comprehensive
income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(737,707
|
)
|
|
(19,732
|
)
|
|
(238,667
|
)
|
Share-based
compensation
|
|
|
---
|
|
|
---
|
|
|
4,179
|
|
|
---
|
|
|
---
|
|
|
4,179
|
|
Reclassification
of share-based compensation in
connection
with adoption of SFAS 123(R)
(note 9)
|
|
|
---
|
|
|
---
|
|
|
2,534
|
|
|
---
|
|
|
---
|
|
|
2,534
|
|
Issuance
of common stock for share-based
compensation
|
|
|
269
|
|
|
2
|
|
|
207
|
|
|
---
|
|
|
---
|
|
|
209
|
|
Exercise
of common stock options
|
|
|
433
|
|
|
4
|
|
|
708
|
|
|
---
|
|
|
---
|
|
|
712
|
|
Balance,
September 27, 2006
|
|
|
92,453
|
|
$
|
924
|
|
$
|
525,482
|
|
$
|
(737,707
|
)
|
$
|
(19,732
|
)
|
$
|
(231,033
|
)
|
See
accompanying notes
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
28,069
|
|
$
|
(2,825
|
)
|
Adjustments
to reconcile net income (loss) to cash flows provided by operating
activities:
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
(232 |
) |
|
--- |
|
Depreciation
and amortization
|
|
|
41,997
|
|
|
40,857
|
|
Impairment
charges
|
|
|
831
|
|
|
585
|
|
Restructuring
charges and exit
costs
|
|
|
3,342
|
|
|
4,416
|
|
Amortization
of deferred financing costs
|
|
|
2,621
|
|
|
2,620
|
|
Loss
on early extinguishment of debt
|
|
|
1,629
|
|
|
--- |
|
Deferred
income tax benefit
|
|
|
12,805 |
|
|
--- |
|
Gains
on disposition of assets and other, net
|
|
|
(47,664
|
)
|
|
(1,790
|
)
|
Share-based
compensation
|
|
|
5,371
|
|
|
6,136
|
|
Changes
in assets and liabilities, net of effects of acquisitions and
dispositions:
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
Receivables
|
|
|
2,044
|
|
|
2,828
|
|
Inventories
|
|
|
86
|
|
|
537
|
|
Other
current assets
|
|
|
(2,026
|
)
|
|
(1,914
|
)
|
Other
assets
|
|
|
(2,033
|
)
|
|
(4,551
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(5,724
|
)
|
|
(3,330
|
)
|
Accrued
salaries and vacations
|
|
|
(8,384
|
)
|
|
(10,309
|
)
|
Accrued
taxes
|
|
|
2,111
|
|
|
470
|
|
Other
current liabilities
|
|
|
(5,751
|
)
|
|
6,044
|
|
Other
noncurrent liabilities and deferred credits
|
|
|
(1,872
|
)
|
|
557
|
|
Net
cash flows provided by operating activities
|
|
|
27,220
|
|
|
40,331
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Purchase
of property
|
|
|
(24,918
|
)
|
|
(28,621
|
)
|
Proceeds
from disposition of property
|
|
|
76,970
|
|
|
3,392
|
|
Acquisition
of restaurant units
|
|
|
(825 |
) |
|
--- |
|
Collection
of note receivable payments from former subsidiary
|
|
|
4,870
|
|
|
---
|
|
Net
cash flows provided by (used in) investing
activities
|
|
|
56,097
|
|
|
(25,229
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Long-term
debt payments
|
|
|
(86,484 |
) |
|
(4,707 |
) |
Deferred
financing costs paid
|
|
|
--- |
|
|
(296 |
) |
Proceeds
from exercise of stock options
|
|
|
712
|
|
|
1,909
|
|
Net
bank overdrafts
|
|
|
278 |
|
|
259
|
|
Net
cash flows used in financing activities
|
|
|
(85,494
|
)
|
|
(2,835
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(2,177
|
)
|
|
12,267
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at:
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
28,236
|
|
|
15,561
|
|
End
of period
|
|
$
|
26,059
|
|
$
|
27,828
|
|
See
accompanying notes
Denny’s
Corporation and Subsidiaries
(Unaudited)
Note
1. Introduction and Basis of Reporting
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
unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Therefore, certain information and footnotes normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. In our opinion,
all adjustments considered necessary for a fair presentation of the interim
periods presented have been included. 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 28, 2005 and the related Management’s Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our Annual Report on Form 10-K for the fiscal year ended
December 28, 2005. The results of operations for the interim periods presented
are not necessarily indicative of the results for the entire fiscal year ending
December 27, 2006.
Note
2. Summary of Significant Accounting Policies
There
have been no material changes to our significant accounting policies and
estimates from the information provided in Note 2 of our Consolidated Financial
Statements included in our Form 10-K for the fiscal year ended December 28,
2005, other than the adoption of Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised 2004), “Share-Based Payment,” or SFAS
123(R). See Note 9 to the Condensed Consolidated Financial
Statements, “Share-Based Compensation.”
Note
3. Balance Sheet Adjustments
In
June
2006, we recorded adjustments to correct an error in our accounting
for receivables and certain related payables recorded in periods prior
to December 31, 2003. Though we concluded that the adjustments
were inconsequential, we have adjusted the prior periods currently
presented to reflect the correction. The adjustments had no impact on our
results of operations for the periods presented in this Form 10-Q or for any
of
the periods presented in our most recently filed Form 10-K. The following
line items were impacted by this adjustment on the Condensed Consolidated
Balance Sheet and the Condensed Consolidated Statement of Shareholders'
Deficit as of December 28, 2005:
|
|
|
|
|
|
Adjusted
|
|
|
|
December
28, 2005
|
|
Adjustment
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Receivables,
net
|
|
$
|
18,444
|
|
$
|
(1,615
|
)
|
$
|
16,829
|
|
Accounts
payable
|
|
|
48,021
|
|
|
(428
|
)
|
|
47,593
|
|
Other
current liabilities
|
|
|
92,756
|
|
|
(42
|
)
|
|
92,714
|
|
Accumulated
earnings (deficit)
|
|
|
(764,631
|
)
|
|
(1,145
|
)
|
|
(765,776
|
)
|
Note
4. Sale of Real Estate
On
September 26, 2006, we completed and closed the sale of 60 company-owned,
franchisee-operated real estate properties to National Retail Properties,
Inc.,
a real estate investment trust, for a cash purchase price of $62
million. With the exception of five properties, this transaction
qualified for full accrual method accounting. As a result, a pretax gain
of
$34.8
million is included as a component of gains on dispositions of assets and
other,
net in the Condensed Consolidated Statements of Operations for the quarter
and
three quarters ended September 27, 2006. We have entered into put
agreements with the buyer on five properties, therefore, the $1.9 million
gain
on the sale of these properties will be deferred until the individual put
agreements expire within the next 12 months. The
sale
of up to an additional six properties may hereafter close, subject to
certain conditions,
under the terms of the master purchase agreement for the transaction.
These six properties are included as a component of assets held for sale in
the Condensed Consolidated Balance Sheet as of September 27, 2006 (see Note
5).
Note
5. Assets Held for Sale
We
continue to explore the possible sale of surplus and
company-owned, franchisee-operated real estate. These properties
include two surplus properties and 17 franchise-operated Denny's restaurant
properties. Based on discussions with the related franchisees and other
potential third parties, we expect to sell these properties within 12 months.
The net book value of these properties, approximately $6.6 million, has been
classified as assets held for sale in the Condensed Consolidated Balance
Sheet
as of September 27, 2006. As a result of the requirement in our Credit Facilities (defined in Note
7) to apply the net
cash proceeds of certain specifically identified company-owned,
franchisee-operated real estate to reduce outstanding indebtedness, we have
classified a corresponding $6.6 million of our long-term debt as a
current liability in the Condensed Consolidated Balance Sheet as of September
27, 2006.
Note
6. Restructuring Charges and Exit Costs
Restructuring
charges and exit costs were comprised of the following:
|
|
Quarter
Ended
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
Exit
costs
|
|
$
|
1,167
|
|
$
|
783
|
|
$
|
1,653
|
|
$
|
1,530
|
|
Severance
and other restructuring charges
|
|
|
294
|
|
|
1,273
|
|
|
1,689
|
|
|
2,886
|
|
Total
restructuring and exit costs
|
|
$
|
1,461
|
|
$
|
2,056
|
|
$
|
3,342
|
|
$
|
4,416
|
|
The
components of the change in accrued exit cost liabilities are as
follows:
|
|
(In
thousands)
|
|
Balance,
beginning of year
|
|
$
|
9,531
|
|
Provisions
for units closed during the year
|
|
|
643
|
|
Changes
in estimate of accrued exit costs, net
|
|
|
1,010
|
|
Payments,
net
|
|
|
(2,088
|
)
|
Interest
accretion
|
|
|
735
|
|
Balance,
end of quarter
|
|
|
9,831
|
|
Less
current portion included in other current liabilities
|
|
|
2,112
|
|
Long-term
portion included in other noncurrent liabilities
|
|
$
|
7,719
|
|
Estimated
net cash payments related to exit cost liabilities in the next five years are
as
follows:
|
|
(In
thousands)
|
|
Remainder
of 2006
|
|
$
|
699
|
|
2007
|
|
|
2,473
|
|
2008
|
|
|
2,094
|
|
2009
|
|
|
1,951
|
|
2010
|
|
|
1,605
|
|
Thereafter
|
|
|
6,487
|
|
Total
|
|
|
15,309
|
|
Less
imputed interest
|
|
|
5,478
|
|
Present
value of exit cost liabilities
|
|
$
|
9,831
|
|
At
the
beginning of fiscal 2006, the liability for severance and other restructuring
charges was $0.2 million. During the three quarters ended September 27,
2006, an additional $1.7 million of expense was recorded and $1.1 million was
paid related to these charges. The remaining balance of $0.8 million is expected
to be paid during the next 12 months.
Note
7. Credit Facility
Our
subsidiaries, Denny’s, Inc. and Denny’s Realty, LLC (formerly Denny's Realty,
Inc.) (the “Borrowers”), have senior secured credit facilities with an
aggregate principal amount of $337 million. The credit facilities consist of
a
first lien facility and a second lien facility. At September 27, 2006, the
first
lien facility consists of a $142 million five-year term loan facility (the
“Term
Loan Facility”) and a $75 million four-year revolving credit facility, of
which $55 million was 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 $0.4 million with all remaining amounts due on the maturity
date. The Revolving Facility matures on September 30, 2008. The Second Lien
Facility matures on September 30, 2010 with no amortization of principal prior
to the maturity date.
The
interest rates under the First Lien Facility are as follows: At the option
of
the Borrowers, Adjusted LIBOR plus a spread of 3.25% per annum (3.50% per annum
for the Revolving Facility) or ABR (the Alternate Base Rate, which is the higher
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 weighted-average interest rates on the First Lien
Facility and Second Lien Facility at September 27, 2006 were 8.7%
and 10.5%, respectively.
At
September 27, 2006, we had outstanding letters of credit of $42.5 million
under our Revolving Facility, leaving net availability of $32.5 million. There
were no revolving loans outstanding at September 27, 2006.
The
Credit Facilities are secured by substantially all of our assets and are
guaranteed by Denny’s Corporation, Denny’s Holdings and all of their
subsidiaries. The Credit Facilities contain certain financial covenants (i.e.,
maximum total debt to EBITDA (as defined under the Credit Facilities) ratio
requirements, maximum senior secured debt to EBITDA ratio requirements, minimum
fixed charge coverage ratio requirements and limitations on capital
expenditures), negative covenants, conditions precedent, material adverse change
provisions, events of default and other terms, conditions and provisions
customarily found in credit agreements for facilities and transactions of this
type. We were in compliance with the terms of the Credit Facilities as of
September 27, 2006.
The
indenture governing the Denny’s Holdings 10% Senior Notes due 2012 (the
“Indenture”) is fully and unconditionally guaranteed by Denny’s Corporation.
Denny’s Corporation is a holding company with no independent assets or
operations, other than as related to the ownership of the common stock of
Denny’s Holdings and its status as a holding company. Denny’s Corporation is not
subject to the restrictive covenants in the Indenture. Denny’s Holdings is
restricted from paying dividends and making distributions to Denny’s Corporation
under the terms of the Indenture.
On
July
17, 2006, the Credit Facilities were amended to allow for the sale of 84
specified properties, primarily company-owned, franchisee-operated real estate,
with the net cash proceeds from such sales to be applied to reduce outstanding
indebtedness under the Credit Facilities. In addition, the amendments increased
the limit on Letter of Credit Commitments under the Revolving Facility from
$45
million to $55 million and increased the allowance during a fiscal year for
the sale of restaurant businesses or property (excluding the specified
properties) from $5 million to $15 million, thereby requiring the proceeds
from
any asset sales greater than $15 million be used to pay down our
debt .
On
September 26, 2006, we completed and closed the sale of 60 company-owned,
franchisee-operated Denny’s restaurant properties for a cash purchase price of
$62 million (see Note 4). Consistent with the requirements
of our amended Credit Facilities, the net cash proceeds of these asset sales
were applied to reduce the outstanding balance on the
first
lien term loan. During the third quarter, we prepaid approximately $80 million
on this loan through a combination of asset sale proceeds and surplus cash,
bringing
the total debt balance, including capital lease obligations, down to
approximately $470 million as of September 27, 2006. As a result of the
prepayment, we recorded a $1.6 million loss on early extinguishment of debt
resulting from a write off of deferred financing costs, which is
included as a component of other nonoperating expense in the Condensed
Consolidated Statements of Operations for the quarter ended September 27,
2006.
In
January 2005, we entered into an interest rate swap with a notional amount
of
$75 million to hedge a portion of the cash flows of our floating rate term
loan
debt. We have designated the interest rate swap as a cash flow hedge of our
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, we will pay a
fixed
rate of 3.76% on the $75 million notional amount and receive payments from
a
counterparty based on the 3-month LIBOR rate for a term ending on September
30,
2007. Interest rate differentials paid or received under the swap agreement
are
recognized as adjustments to interest expense.
To
the
extent the swap is effective in offsetting the variability of the hedged cash
flows, changes in the fair value of the swap are not included in current
earnings but are reported as other comprehensive income. The components of
the
cash flow hedge included in accumulated other comprehensive income in the
Condensed Consolidated Statement of Shareholders’ Deficit for the three quarters
ended September 27, 2006 and September 28, 2005, are as follows:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Net
interest (income) expense recognized as a result of interest rate
swap
|
|
$
|
(697
|
)
|
$
|
313
|
|
Unrealized
gain (loss) for changes in fair value of interest swap
rates
|
|
|
508
|
|
|
740
|
|
Net
increase (decrease) in Accumulated Other Comprehensive Income, net
of
tax
|
|
$
|
(189
|
)
|
$
|
1,053
|
|
We
did
not note any ineffectiveness in the hedge during the three quarters ended
September 27, 2006. We do not enter into derivative financial instruments for
trading or speculative purposes.
Note
8. Defined Benefit 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
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$
|
91 |
|
$
|
115
|
|
$
|
---
|
|
$
|
---
|
|
Interest
cost
|
|
|
771
|
|
|
739
|
|
|
48
|
|
|
59
|
|
Expected
return on plan assets
|
|
|
(814
|
)
|
|
(757
|
)
|
|
---
|
|
|
---
|
|
Amortization
of net loss
|
|
|
251
|
|
|
221
|
|
|
7
|
|
|
8
|
|
Net
periodic benefit cost
|
|
$
|
299
|
|
$
|
318
|
|
$
|
55
|
|
$
|
67
|
|
|
|
Pension
Plan
|
|
Other
Defined Benefit Plans
|
|
|
|
Three
Quarters Ended
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$
|
274
|
|
$
|
345
|
|
$
|
---
|
|
$
|
---
|
|
Interest
cost
|
|
|
2,312
|
|
|
2,215
|
|
|
144 |
|
|
177
|
|
Expected
return on plan assets
|
|
|
(2,442
|
)
|
|
(2,270
|
)
|
|
---
|
|
|
---
|
|
Amortization
of net loss
|
|
|
754
|
|
|
662
|
|
|
19
|
|
|
24
|
|
Net
periodic benefit cost |
|
$
|
898 |
|
$ |
952 |
|
$ |
163 |
|
$ |
201 |
|
We
made
contributions of $3.1 million and $2.5 million to our pension plan during the
three quarters ended September 27, 2006 and September 28, 2005, respectively.
We
made contributions of $0.3 million and $1.1 million to our other defined benefit
plans during the three quarters ended September 27, 2006 and September 28,
2005,
respectively. We expect to contribute $0.9 million to our pension plan and
$0.1
million to our other defined benefit plans during the remainder of fiscal
2006.
Note
9. Share-Based Compensation
Share-Based
Compensation Plans
We
maintain four plans (the Denny’s Corporation 2004 Omnibus Incentive Plan (the
“2004 Omnibus Plan”), the Denny’s, Inc. Omnibus Incentive Compensation Plan for
Executives, the Advantica Stock Option Plan and the Advantica Restaurant Group
Director Stock Option Plan) under which stock options and other awards granted
to our employees, directors and consultants are outstanding. On August 25,
2004, our stockholders approved the 2004 Omnibus Plan which replaced the other
plans as the vehicle for granting share-based compensation to our employees,
officers and directors. The 2004 Omnibus Plan is administered by the
Compensation Committee of the Board of Directors or the Board of Directors
as a
whole. Ten million shares of our common stock are reserved for issuance upon
the
grant and exercise of awards pursuant to the 2004 Omnibus Plan, plus a
number of additional shares (not to exceed 1,500,000) underlying awards
outstanding as of August 25, 2004 pursuant to the other plans which
thereafter cancel, terminate or expire unexercised for any reason. The 2004
Omnibus Plan authorizes the granting of incentive awards from time to time
to
selected employees, officers, directors and consultants of Denny’s and its
affiliates. However, we reserve the right to pay discretionary bonuses, or
other
types of compensation, outside of the 2004 Omnibus Plan.
The
Compensation Committee, or the Board of Directors as a whole, has sole
discretion to determine the exercise price, term and vesting schedule of options
awarded under such plans. Under the terms of the above referenced plans,
optionees who terminate for any reason other than cause, disability, retirement
or death will be allowed 60 days after the termination date to exercise vested
options. Vested options are exercisable for one year when termination is by
a
reason of disability, retirement or death. If termination is for cause, no
option shall be exercisable after the termination date.
Additionally,
under the 2004 Omnibus Plan and the previous director plan, directors have
been
granted options under terms which are substantially similar to the terms of
the
plans noted above.
Adoption
of SFAS 123(R)
Effective
December 29, 2005, the first day of fiscal 2006, we adopted SFAS 123(R). This
standard requires all share-based compensation to be recognized in the statement
of operations based on fair value and applies to all awards granted, modified,
cancelled or repurchased after the effective date. Additionally, for awards
outstanding as of December 29, 2005 for which the requisite service has not
been
rendered, compensation expense will be recognized as the requisite service
is
rendered. The statement also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow. We adopted this accounting treatment using
the
modified-prospective-transition method, therefore, results for prior
periods have not been restated. SFAS 123(R) supersedes SFAS 123, “Accounting for
Stock Based Compensation,” or SFAS No. 123, which had allowed companies to
choose between expensing stock options or showing pro forma disclosure
only.
Under
SFAS 123(R), we are required to estimate potential forfeitures of share-based
awards and adjust the compensation cost accordingly. Our estimate of forfeitures
will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Prior to
the
adoption of SFAS 123(R), we recorded forfeitures as they occurred. As a result
of this change, we recognized a cumulative effect of change in accounting
principle in the Condensed Consolidated Statement of Operations of $0.2 million
in the first quarter of 2006. Additionally, in accordance with SFAS 123(R),
$2.5
million related to restricted stock units payable in shares, previously recorded
as liabilities, was reclassified to additional paid-in capital in the Condensed
Consolidated Balance Sheet during the first quarter of 2006. Our previous
practice was to accrue compensation expense for restricted stock units payable
in shares as a liability until such time as the shares were actually
issued.
Stock
Options
Options
granted to date generally vest evenly over 3 years, have a 10-year contractual
life and are generally issued at the market value at the date of grant.
A
summary
of our stock option plans is presented below:
|
|
Three
Quarters Ended September 27, 2006
|
|
|
|
Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life
|
|
Aggregate
Intrinsic Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
Outstanding,
beginning of year
|
|
|
9,228
|
|
$
|
2.06
|
|
|
|
|
|
|
|
Granted
|
|
|
762
|
|
|
4.25
|
|
|
|
|
|
|
|
Exercised
|
|
|
(433
|
)
|
|
1.65
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(145
|
)
|
|
2.25 |
|
|
|
|
|
|
|
Outstanding,
end of quarter |
|
|
9,412 |
|
|
2.26 |
|
|
6.18 |
|
$ |
13,944 |
|
Exercisable,
end of quarter
|
|
|
7,281
|
|
|
1.92
|
|
|
5.45
|
|
$
|
12,788
|
|
The
aggregate intrinsic value was calculated using the difference between the market
price of our stock on September 27, 2006 and the exercise price for only those
options that have an exercise price that is less than the market price of our
stock. The aggregate intrinsic value of the options exercised was $0.2 million
and $1.2 million during the quarter and three quarters ended September 27,
2006
and was $2.5 million and $4.6 million during the quarter and three quarters
ended September 28, 2005, respectively.
The
following table summarizes information about stock options outstanding at
September 27, 2006 (option amounts in thousands):
Range
of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted-Average
Remaining Contractual Life
|
|
Weighted-Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.54
- 0.92
|
|
|
2,038
|
|
|
5.45
|
|
$
|
0.72
|
|
|
2,038
|
|
$
|
0.72
|
|
1.01 - 1.03
|
|
|
1,270
|
|
|
4.38
|
|
|
1.03
|
|
|
1,270
|
|
|
1.03
|
|
1.06
- 2.00
|
|
|
810
|
|
|
4.36
|
|
|
1.93
|
|
|
810
|
|
|
1.93
|
|
2.42
|
|
|
3,267
|
|
|
7.39
|
|
|
2.42 |
|
|
2,255
|
|
|
2.42
|
|
2.65
- 4.40
|
|
|
1,250
|
|
|
7.10
|
|
|
3.87
|
|
|
573
|
|
|
3.61
|
|
4.45
- 6.31
|
|
|
638
|
|
|
7.36
|
|
|
4.65
|
|
|
196
|
|
|
4.86
|
|
7.00
|
|
|
60
|
|
|
2.20
|
|
|
7.00
|
|
|
60
|
|
|
7.00
|
|
10.00
|
|
|
79 |
|
|
1.33 |
|
|
10.00 |
|
|
79 |
|
|
10.00 |
|
|
|
|
9,412 |
|
|
6.18
|
|
|
|
|
|
7,281 |
|
|
|
|
On
November 11, 2004, we granted options under the 2004 Omnibus Plan to
certain employees with an exercise price of $2.42 (included in the table above).
These options vest 1/3 of the shares on each of December 29, 2004,
December 28, 2005 and December 27, 2006, respectively. The vesting of
these options was subject to the achievement of certain performance measures
which were met as of December 29, 2004. As a result of performance criteria
and the issuance of the options with an exercise price below the market price
at
the date of grant, prior to the adoption of SFAS 123(R), we recognized
compensation expense related to these options equal to the difference between
the exercise price of the options and the market price of $4.40 on
December 29, 2004, the measurement date, ratably over the options’ vesting
period.
There
were no options granted during the quarter ended September 27, 2006. The
weighted average fair value per option of options granted during the three
quarters ended September 27, 2006 was $3.20. The weighted average fair value
per
option of options granted during the quarter and three quarters ended September
28, 2005 was $3.23 and $3.16, respectively.
The
fair
value of the stock options granted in the periods ended September 27, 2006
and
September 28, 2005 was estimated at the date of grant using the Black-Scholes
option pricing model. Use of this option pricing model requires the
input of subjective assumptions. These assumptions include estimating the length
of time employees will retain their vested stock options before exercising
them
(“expected term”), the estimated volatility of our common stock price over the
expected term and the number of options that will ultimately not complete their
vesting requirements (“forfeitures”). Changes in the subjective assumptions can
materially affect the estimate of the fair value of share-based compensation
and
consequently, the related amount recognized in the Condensed Consolidated
Statements of Operations. We used the following weighted average
assumptions for the grants:
|
|
Quarter
Ended
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
N/A
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
volatility
|
|
|
N/A
|
|
|
90
|
%
|
|
87
|
%
|
|
90
|
%
|
Risk-free
interest rate
|
|
|
N/A
|
|
|
4.0
|
%
|
|
4.7
|
%
|
|
4.0
|
%
|
Weighted
average expected term
|
|
|
N/A
|
|
|
6.0
years
|
|
|
6.0
years
|
|
|
6.0
years
|
|
The
dividend yield assumption was based on our dividend payment history and
expectations of future dividend payments. The expected volatility was based
on
the historical volatility of our stock for a period approximating the expected
life. The risk-free interest rate was based on published U.S. Treasury spot
rates in effect at the time of grant with terms approximating the expected
life
of the option. The weighted average expected term of the options represents
the
period of time the options are expected to be outstanding based on historical
trends.
Compensation
expense for options granted prior to fiscal 2006 is recognized based on the
graded vesting attribution method. Compensation expense for options
granted subsequent to December 28, 2005 is recognized on a straight-line basis
over the requisite service period for the entire award. We recognized
compensation expense of approximately $0.8 million and $2.5 million for the
quarter and three quarters ended September 27, 2006 and $1.0 million and
$2.8 million for the quarter and three quarters ended September 28, 2005,
respectively, related to these options, which is included as a component of
general and administrative expenses in our Condensed Consolidated Statements
of
Operations. Compensation expense for the quarter and three quarters ended
September 28, 2005 related to the intrinsic value of options with an exercise
price that was below the market price on the measurement date.
As
of
September 27, 2006, there was approximately $2.7 million of unrecognized
compensation cost related to unvested stock option awards granted, which is
expected to be recognized over a weighted average of 1.3
years.
Restricted
Stock Units
The
following table summarizes information about restricted stock units outstanding
at September 27, 2006:
|
|
|
Units
|
|
|
|
|
(In
thousands)
|
|
Outstanding,
beginning of year
|
|
|
3,356
|
|
Granted
|
|
|
374
|
|
Vested
|
|
|
(443
|
)
|
Forfeited
|
|
|
(58
|
)
|
Outstanding,
end of quarter
|
|
|
3,229
|
|
We
granted approximately 3.4 million restricted stock units (half of which are
liability classified and half of which are equity classified) with a grant
date
fair value of $4.22 per share and approximately 0.6 million restricted stock
units (half of which are liability classified and half of which are equity
classified) with a grant date fair value of $4.06 per share to certain
employees. As of September 27, 2006 and December 28, 2005,
approximately 2.9 million and 3.3 million of these units were
outstanding, respectively.
These
restricted stock units will be earned in 1/3 increments (from 0% to 100% of
the
target award for each such increment) based on the “total shareholder return” of
our common stock over a 1-year performance period (measured as the increase
of
stock price plus reinvested dividends, divided by beginning stock price) as
compared with the total shareholder return of a peer group of restaurant
companies over the same period. The first such period ended on June
30, 2005. Subsequent periods end on June 30th of each year thereafter with
any amounts not earned carried over to possibly be earned over a 2-year or
3-year period. The full award will be considered earned after 5 years based
on
continued employment if not earned in the first three years based on the
performance criteria.
Once
earned, the restricted stock units will vest over a period of two years based
on
continued employment of the holder. On each of the first two anniversaries
of
the end of the performance period, 50% of the earned restricted stock units
will
be paid to the holder (half of the units will be paid in cash and half in shares
of common stock), provided that the holder is then still employed with Denny’s
or an affiliate. During the quarter ended September 27, 2006, we made payments
of $0.8 million (before taxes) in cash and issued 0.2 million shares
of common stock related to the 0.4 million units that vested as of June 30,
2006.
In
March
2006, we granted approximately 0.4 million restricted stock units (which are
equity classified) with a grant date fair value of $4.45 per share to certain
employees. These restricted stock units will be earned (from 0% to 200% of
the
target award) based on certain operating performance measures for fiscal 2006.
Once earned, the restricted stock units will vest over a period of two years
based on continued employment of the holder. Subsequent to the two-year vesting
period, the earned restricted stock units will be paid to the holder in shares
of common stock, provided the holder is then still employed with Denny's or
an
affiliate. As of September 27, 2006, approximately 0.4 million of
these units were outstanding.
Compensation
expense related to the equity classified units is based on the number of units
expected to vest, the period over which the units are expected to
vest and the fair market value of the common stock on the grant date.
Compensation expense related to the liability classified units is based on
the
number of units expected to vest, the period over which the units are expected
to vest and the fair market value of the common stock on the date of
payment. Therefore, balances related to the liability classified units are
adjusted to fair value at each balance sheet date. We recognized compensation
expense of approximately $0.8 million and $2.6 million for the quarter and
three
quarters ended September 27, 2006 and $0.4 million and $3.0 million for the
quarter and three quarters ended September 28, 2005, respectively, related
to
the restricted stock units, which is included as a component of general and
administrative expenses in our Condensed Consolidated Statements of Operations.
At
September 27, 2006, approximately $2.4 million of accrued compensation was
included as a component of other current liabilities (based on the fair value
of
the related shares for the liability classified units as of September 27,
2006) and $2.8 million was included as a component of additional paid-in capital
in the Condensed Consolidated Balance Sheet related to the equity
classified restricted stock units.
As
of
September 27, 2006, there was approximately $6.8 million of unrecognized
compensation cost (approximately $2.8 million for liability classified units
and
approximately $4.0 million for equity classified units) related to unvested
restricted stock unit awards granted, which is expected to be recognized over
a
weighted average of 3.2 years.
Board
Deferred Stock
Units
Non-employee
members of the Board of Directors are granted deferred stock units in
return for attendance at non-regularly scheduled meetings. These
awards are restricted in that they may not be exercised until the recipient
has
ceased serving as a member of the Board of Directors for Denny's
Corporation. As of September 27, 2006 and December 28, 2005, approximately
0.2 million and 0.1 million of these units were outstanding.
Share-Based
Compensation and Proforma Disclosures
Total
share-based compensation included as a component of net income was as follows
(in thousands):
|
|
Quarter
Ended
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation related to liability classified
restricted
stock units
|
|
$ |
374 |
|
$ |
56 |
|
$ |
1,192 |
|
$ |
1,443 |
|
Share-based
compensation related to equity classified
awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$
|
849
|
|
$
|
955
|
|
$
|
2,503
|
|
$ |
2,846
|
|
Restricted
stock units
|
|
|
401 |
|
|
376 |
|
|
1,434 |
|
|
1,625 |
|
Board
deferred stock units
|
|
|
74 |
|
|
56 |
|
|
242 |
|
|
222 |
|
Total
share-based compensation related to equity
classified
units
|
|
|
1,324
|
|
|
1,387
|
|
|
4,179
|
|
|
4,693
|
|
Total
share-based compensation
|
|
$
|
1,698
|
|
$
|
1,443
|
|
$
|
5,371
|
|
$
|
6,136
|
|
Prior
to
the adoption of SFAS 123(R), we accounted for our share-based compensation
plans
under the provisions of SFAS 123, while continuing to follow Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or
APB 25, and related interpretations. The following table illustrates the effect
on net income (loss) and net income (loss) per common share had we applied
the
fair value recognition provisions of SFAS 123 to share-based compensation for
the quarter and three quarters ended September 28, 2005 (in thousands, except
for per share amounts):
|
|
Quarter
Ended
|
|
Three
Quarters Ended
|
|
|
|
September
28, 2005
|
|
September
28, 2005
|
|
|
|
|
|
|
|
|
|
Reported
net loss
|
|
$
|
(3,434
|
)
|
$
|
(2,825
|
)
|
Share-based
employee compensation expense included in reported net loss, net
of
related taxes
|
|
|
977
|
|
|
3,946
|
|
Less
total share-based employee compensation expense determined under
fair
value based
method
for
all awards, net
of related tax effects
|
|
|
(1,143
|
)
|
|
(5,386
|
)
|
Pro
forma net loss
|
|
$
|
(3,600
|
)
|
$
|
(4,265
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
Basic
and diluted - proforma
|
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
Note
10. Income Taxes
The
provision
for income taxes
was
$13.6 million and $14.0 for the quarter and three quarters ended September
27, 2006. We recorded benefit from income taxes of $1.3 million and $1.2
million for the quarter and three quarters ended September 28, 2005.
The provision for and benefit from income taxes for the periods ended
September 27, 2006 and September 28, 2005 was determined using our
effective tax rate estimated for the entire fiscal year, excluding the impact
of
certain discrete items that were recognized entirely during the
quarter.
We
have
provided valuation allowances related to any benefits from income taxes
resulting from the application of a statutory tax rate to our net operating
losses generated in previous periods. In establishing our valuation allowance,
we had previously taken into consideration certain tax planning strategies
involving the sale of appreciated properties. The increased deferred tax
provision of $12.2 million in the quarter ended September 27, 2006 related
to our reevaluation of our tax planning strategies in light of management's
commitment to sell the appreciated properties during the third quarter. In
addition, we utilized certain state net operating loss carryforwards whose
valuation allowance was established in connection with fresh start reporting
on
January 7, 1998. We recorded approximately $0.6 million of state deferred
tax
expense with a corresponding reduction to the goodwill that was recorded
in
connection with fresh start reporting on January 7, 1998.
Note
11. Accumulated Other Comprehensive Income
(Loss)
The
components of Accumulated Other Comprehensive Income (Loss) in the Condensed
Consolidated Statement of Shareholder’s Deficit are as follows:
|
|
September
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Additional
minimum pension liability
|
|
$
|
(20,799
|
)
|
$
|
(20,799
|
)
|
Unrealized
gain on interest rate swap (Note 7)
|
|
|
1,067
|
|
|
1,256
|
|
Accumulated
other comprehensive income (loss)
|
|
$
|
(19,732
|
)
|
$
|
(19,543
|
)
|
Note
12. Net Income (Loss) Per Share
|
|
Quarter
Ended
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands, except for per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted net income (loss) per share -
net
income
(loss)
from continuing operations before
cumulative
effect of change in accounting principle
|
|
$
|
25,503
|
|
$
|
(3,434
|
)
|
$
|
27,837
|
|
$
|
(2,825
|
)
|
Numerator
for basic and diluted net income per share - net
income
(loss)
|
|
$
|
25,503
|
|
$
|
(3,434
|
)
|
$
|
28,069
|
|
$
|
(2,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net income (loss) per share -
weighted
average
shares
|
|
|
92,348
|
|
|
91,363
|
|
|
92,060
|
|
|
90,785
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
3,513
|
|
|
---
|
|
|
4,276
|
|
|
---
|
|
Restricted
stock units and awards
|
|
|
637
|
|
|
---
|
|
|
848
|
|
|
---
|
|
Denominator
for diluted net income (loss) per share - adjusted
weighted
average
shares and assumed conversions of dilutive securities
|
|
|
96,498
|
|
|
91,363
|
|
|
97,184
|
|
|
90,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share before cumulative effect
of
change
in accounting
principle
|
|
$
|
0.28
|
|
$
|
(0.04
|
)
|
$
|
0.30
|
|
$
|
(0.03
|
)
|
Diluted
net income (loss) per share before cumulative effect of
change
in accounting principle
|
|
$
|
0.26
|
|
$
|
(0.04
|
)
|
$
|
0.29
|
|
$
|
(0.03
|
)
|
Basic
net income (loss) per share
|
|
$ |
0.28
|
|
$ |
(0.04
|
) |
$ |
0.30
|
|
$ |
(0.03
|
) |
Diluted
net income (loss) per share |
|
$ |
0.26
|
|
$ |
(0.04
|
) |
$ |
0.29
|
|
$ |
(0.03
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options excluded (1)
|
|
|
1,570
|
|
|
9,328
|
|
|
1,442
|
|
|
9,328
|
|
Restricted
stock units and awards excluded (1)
|
|
|
---
|
|
|
2,687
|
|
|
---
|
|
|
2,687
|
|
(1)
Excluded
from diluted weighted-average shares outstanding as the impact would have been
antidilutive.
Note
13. Supplemental Cash Flow Information
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Income
taxes paid, net |
|
$ |
864 |
|
$ |
1,052 |
|
Interest
paid
|
|
$
|
36,556
|
|
$
|
30,307
|
|
Net
proceeds receivable from disposition of property |
|
$ |
595 |
|
$ |
--- |
|
Capital
leases entered into
|
|
$
|
2,890
|
|
$
|
1,952
|
|
Issuance
of common stock, pursuant to stock-based compensation
plans
|
|
$
|
1,027
|
|
$
|
1,668
|
|
Note
14. Implementation of New Accounting Standards
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 158 ("SFAS 158"),
“Employer’s Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)". SFAS
158
requires recognition of the overfunded or underfunded status of defined benefit
postretirement plans as an asset or liability in the statement of financial
position and recognition of changes in that funded status in comprehensive
income in the year in which the changes occur. SFAS 158 also requires
measurement of the funded status of a plan as of the date of the statement
of
financial position. SFAS 158 is effective for recognition of the funded status
of the benefit plans for fiscal years ending after December 15, 2006 and
is
effective for the measurement date provisions for fiscal years ending after
December 15, 2008. We are required to adopt the recognition of the funded
status of the benefit plans in the fourth quarter of fiscal 2006
and do not expect it to have a material impact on our Consolidated
Balance Sheet.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 ("SFAS 157"), “Fair Value Measurements.” SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or
permit
fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements.
SFAS No.
157 is effective for the first fiscal period beginning after November 15,
2007. We are required to adopt SFAS 157 in the first quarter
of fiscal 2008. We are currently evaluating the impact
of adopting SFAS 157 on the disclosures in our Consolidated Financial
Statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 ("SAB 108"), "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements," which
provides interpretive guidance on the consideration of the effects of prior
year
misstatements in quantifying current year misstatements for the purpose of
a
materiality assessment. SAB 108
requires
registrants to quantify misstatements using both the balance sheet and income
statement approaches and to evaluate whether either approach results in
quantifying an error that is material based on relevant quantitative and
qualitative factors. The guidance is effective for the first fiscal period
ending after November 15, 2006. We are currently evaluating the
impact of adopting SAB 108 on our Consolidated Financial
Statements.
In
July
2006, the FASB issued FASB Interpretation No. (“FIN 48"), “Accounting for
Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
income tax recognized in an entity’s financial statements in accordance with
Statement of Financial Accounting Standards No. 109 “Accounting for Income
Taxes.” FIN 48 requires companies to determine whether it is more likely than
not that a tax position will be sustained upon examination by the appropriate
taxing authorities before any part of the benefit can be recorded in the
financial statements. This interpretation also provides guidance on
derecognition, classification, accounting in interim periods, and expanded
disclosure requirements. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006. We are required to adopt FIN
48 in the first quarter of fiscal 2007, with any cumulative effect of the change
in accounting principle recorded as an adjustment to opening retained earnings.
We are currently evaluating the impact of adopting FIN 48 on our Consolidated
Financial Statements.
In
June
2006, the Emerging Issues Task Force ("EITF") ratified EITF Issue 06-3, "How
Taxes Collected From Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That Is, Gross versus Net Presentation)."
A consensus was reached that entities may adopt a policy of presenting taxes
in
the income statement on either a gross or net basis. An entity should disclose
its policy of presenting taxes and the amount of any taxes presented on a gross
basis should be disclosed, if significant. The guidance is effective for periods
beginning after December 15, 2006 and we are required to adopt it in the first
quarter of fiscal 2007. We present sales net of sales taxes. EITF 06-3 will
not
impact the method for recording these sales taxes in our Consolidated Financial
Statements.
Note
15. Commitments and Contingencies
In
the
third quarter of 2006, Denny's Corporation and its subsidiary Denny's,
Inc.
finalized a settlement of
the
proposed class action filed by a former Denny's employee in the Superior
Court of California, County of Los Angeles, which alleged, among other
things, that Denny's violated California's meal and rest break
requirements.
The
settlement provides for payments up to approximately $1.7 million in the
aggregate, which is included as a component of other current
liabilities in the accompanying Condensed Consolidated Balance Sheet at
September 27, 2006, to approximately 36,000 individuals
who were employed by Denny's, Inc. in the State of California between
April 4,
2002 and August 16, 2006. As
of
September 27, 2006, notification of the settlement was sent to putative
class
members, who are required to "opt in" in order to participate in the
distribution.
In
the
fourth quarter of 2005, Denny’s Corporation and its subsidiary Denny’s, Inc.
finalized a settlement with the Division of Labor Standards Enforcement (“DLSE”)
of the State of California’s Department of Industrial Relations regarding all
disputes related to the DLSE’s litigation against us. Pursuant to the terms of
the settlement, we agreed to pay a sum of approximately $8.1 million to former
employees, of which $3.5 million was paid in the fourth quarter of 2005.
The
remaining $4.6 million was included in other liabilities in the accompanying
Condensed Consolidated Balance Sheet at December 28, 2005 and was paid on
January 6, 2006, in accordance with the instructions of the DLSE.
There
are
various other claims and pending legal actions against or indirectly involving
us, including actions concerned with civil rights of employees and customers,
other employment related matters, taxes, sales of franchise rights and
businesses and other matters. Based on our examination of these matters and
our
experience to date, we have recorded reserves reflecting our best estimate
of
liability, if any, with respect to these matters. However, the ultimate
disposition of these matters cannot be determined with certainty.
Forward-Looking
Statements
Certain
forward-looking statements are included in Management’s Discussion and Analysis
of Financial Condition and Results of Operations. Words such
as "expects", "anticipates", "believes", "intends", "plans", and "hopes",
variations of such words and similar expressions are intended to
identify such forward-looking statements, which reflect our best
judgment based on factors currently known. These statements involve risks,
uncertainties, and other factors which may cause our actual performance to
be
materially different from the performance expressed or implied. Such
factors include, among others: our ability and the ability of our franchisees
to
open and operate additional restaurants profitably; our ability to attract
and
retain qualified franchisees; our ability to control restaurant costs; the
level
of success of our operating initiatives; the level of success of our advertising
and promotional efforts; adverse publicity; changes in business strategy or
development plans; terms and availability of capital; competitive pressures
from
within the restaurant industry; changes in minimum wage and other
employment laws; regional weather conditions; overall changes in the general
economy (including energy costs), particularly at the retail level; political
environment (including acts of war and terrorism); and other factors
included in the discussion below, or in Part II. Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations and Part I. Item
1A. Risk Factors, contained in our Annual Report on Form 10-K for the year
ended
December 28, 2005.
Statements
of Operations
The
following table contains information derived from our Condensed Consolidated
Statements of Operations expressed as a percentage of total operating revenues,
except as noted below. Percentages may not add due to
rounding.
|
|
Quarter
Ended
|
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
|
(Dollars
in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurant sales
|
|
$
|
234,705
|
|
|
90.9 |
%
|
$
|
225,824
|
|
|
90.8
|
%
|
|
$
|
680,735
|
|
|
90.8
|
%
|
$
|
667,833
|
|
|
90.8
|
%
|
Franchise
and license revenue
|
|
|
23,491 |
|
|
9.1 |
% |
|
22,898 |
|
|
9.2 |
% |
|
|
68,937 |
|
|
9.2 |
% |
|
67,513 |
|
|
9.2 |
% |
Total
operating revenue
|
|
|
258,196
|
|
|
100.0
|
%
|
|
248,722
|
|
|
100.0
|
%
|
|
|
749,672
|
|
|
100.0
|
%
|
|
735,346
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of company restaurant sales (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
costs
|
|
|
59,509
|
|
|
25.4 |
%
|
|
56,712
|
|
|
25.1
|
%
|
|
|
170,219
|
|
|
25.0
|
%
|
|
169,485
|
|
|
25.4
|
%
|
Payroll
and benefits
|
|
|
95,627
|
|
|
40.7
|
%
|
|
94,289
|
|
|
41.8
|
%
|
|
|
281,497
|
|
|
41.4 |
%
|
|
278,845
|
|
|
41.8
|
%
|
Occupancy
|
|
|
12,893
|
|
|
5.5
|
%
|
|
12,211
|
|
|
5.4
|
%
|
|
|
38,619
|
|
|
5.7
|
%
|
|
38,261
|
|
|
5.7
|
%
|
Other
operating expenses
|
|
|
34,250 |
|
|
14.6 |
% |
|
38,483 |
|
|
17.0 |
% |
|
|
102,576 |
|
|
15.1 |
% |
|
100,022 |
|
|
15.0 |
% |
Total
costs of company restaurant sales
|
|
|
202,279
|
|
|
86.2
|
%
|
|
201,695
|
|
|
89.3
|
%
|
|
|
592,911
|
|
|
87.1
|
%
|
|
586,613
|
|
|
87.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of franchise and license revenue (a)
|
|
|
6,772
|
|
|
28.8 |
%
|
|
7,069
|
|
|
30.9
|
%
|
|
|
21,220
|
|
|
30.8
|
%
|
|
21,530
|
|
|
31.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
16,440
|
|
|
6.4
|
%
|
|
14,654
|
|
|
5.9
|
%
|
|
|
49,259
|
|
|
6.6
|
%
|
|
46,873
|
|
|
6.4
|
%
|
Depreciation
and amortization
|
|
|
13,812
|
|
|
5.3
|
%
|
|
13,818
|
|
|
5.6
|
%
|
|
|
41,997
|
|
|
5.6
|
%
|
|
40,857
|
|
|
5.6
|
%
|
Restructuring
charges and exit costs, net
|
|
|
1,461
|
|
|
0.6 |
%
|
|
2,056
|
|
|
0.8
|
%
|
|
|
3,342
|
|
|
0.4
|
%
|
|
4,416
|
|
|
0.6
|
%
|
Impairment
charges
|
|
|
831
|
|
|
0.3
|
%
|
|
320
|
|
|
0.1
|
%
|
|
|
831
|
|
|
0.1
|
%
|
|
585
|
|
|
0.1
|
%
|
Gains
on disposition of assets and other, net
|
|
|
(38,995
|
)
|
|
(15.1
|
%)
|
|
(40
|
)
|
|
0.0
|
%
|
|
|
(47,664
|
)
|
|
(6.4
|
%)
|
|
(1,790
|
)
|
|
(0.2
|
%)
|
Total
operating costs and expenses
|
|
|
202,600 |
|
|
78.5 |
% |
|
239,572 |
|
|
96.3 |
% |
|
|
661,896 |
|
|
88.3 |
% |
|
699,084 |
|
|
95.1 |
% |
Operating
income |
|
|
55,596 |
|
|
21.5 |
% |
|
9,150 |
|
|
3.7 |
% |
|
|
87,776 |
|
|
11.7 |
% |
|
36,262 |
|
|
4.9 |
% |
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
14,959
|
|
|
5.8
|
%
|
|
13,934
|
|
|
5.6
|
%
|
|
|
44,449
|
|
|
5.9
|
%
|
|
40,810
|
|
|
5.5
|
%
|
Other
nonoperating expense (income), net
|
|
|
1,499 |
|
|
0.6 |
% |
|
(86 |
) |
|
0.0 |
% |
|
|
1,475 |
|
|
0.2 |
% |
|
(545 |
) |
|
(0.1 |
%) |
Total
other expenses, net
|
|
|
16,458
|
|
|
6.4
|
%
|
|
13,848
|
|
|
5.6
|
%
|
|
|
45,924
|
|
|
6.1
|
%
|
|
40,265
|
|
|
5.5
|
%
|
Net
income (loss) before income taxes and cumulative
effect
of change in accounting principle
|
|
|
39,138
|
|
|
15.2
|
%
|
|
(4,698
|
)
|
|
(1.9
|
|
|
|
41,852
|
|
|
5.6
|
%
|
|
(4,003
|
)
|
|
(0.5
|
%)
|
Provision
for (benefit from) income taxes |
|
|
13,635 |
|
|
5.3 |
% |
|
(1,264 |
) |
|
(0.5 |
%) |
|
|
14,015 |
|
|
1.9 |
% |
|
(1,178 |
) |
|
(0.2 |
%) |
Net
income (loss) before cumulative effect of change
in
accounting
principle
|
|
|
25,503 |
|
|
9.9 |
% |
|
(3,434 |
) |
|
(1.4 |
%) |
|
|
27,837 |
|
|
3.7 |
% |
|
(2,825 |
) |
|
(0.4 |
%) |
Cumulative
effect of change in accounting principle,
net
of
tax
|
|
|
--- |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
|
232 |
|
|
0.0 |
% |
|
--- |
|
|
--- |
|
Net
income (loss) |
|
$ |
25,503 |
|
|
9.9 |
% |
$ |
(3,434 |
) |
|
(1.4 |
%) |
|
$ |
28,069 |
|
|
3.7 |
% |
$ |
(2,825 |
) |
|
(0.4 |
%) |
__________________
(a)
Costs
of company restaurant sales percentages are as a percentage of company
restaurant sales. Costs of franchise and license revenue percentages are as
a
percentage of franchise and license revenue. All other percentages are as a
percentage of total operating revenue.
Quarter
Ended September 27, 2006 Compared with Quarter Ended September 28,
2005
Unit
Activity
|
|
June
28, 2006
|
|
Units
Opened
|
|
Units
Acquired
|
|
Units
Closed
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
restaurants
|
|
|
543
|
|
|
---
|
|
|
---
|
|
|
(8
|
)
|
|
535
|
|
|
546
|
|
Franchised
and licensed restaurants
|
|
|
1,023
|
|
|
6
|
|
|
---
|
|
|
(5
|
)
|
|
1,024
|
|
|
1,036
|
|
|
|
|
1,566
|
|
|
6
|
|
|
---
|
|
|
(13
|
)
|
|
1,559
|
|
|
1,582
|
|
|
|
Quarter
Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
Other
Data:
|
|
|
|
|
|
|
|
Company-owned
average unit sales
|
|
$
|
438.0
|
|
$
|
418.2
|
|
Franchise
average unit sales
|
|
|
385.8
|
|
|
364.4
|
|
Same-store
sales increase (company-owned) (a)
|
|
|
4.2
|
%
|
|
1.5
|
%
|
Guest
check average increase (a)
|
|
|
3.7
|
%
|
|
4.1
|
%
|
Guest
count (decrease) (a)
|
|
|
0.6
|
%
|
|
(2.5
|
%) |
__________________
(a)
Same-store sales include sales from restaurants that were open the same days
in
both the current year and prior year.
Company
Restaurant Operations
During
the quarter ended September 27, 2006, we realized a 4.2% increase in
same-store sales, comprised of a 3.7% increase in guest check average and
a 0.6% increase in guest counts. Company restaurant sales increased $8.9
million or 3.9%. Higher sales resulted primarily from the increase in
same-store sales for the current quarter partially offset by a four
equivalent-unit decrease in company-owned restaurants.
Total
costs of company restaurant sales as a percentage of company restaurant sales
decreased to 86.2% from 89.3%. Product costs increased to 25.4% from
25.1% due to shifts in menu mix offset by the impact of higher guest
check average. Payroll and benefits costs decreased to 40.7% from
41.8% due to improvements in worker's compensation costs. While the current
year quarter benefited by $1.1 million of positive claims development, the
prior year quarter was impacted by $1.4 million of negative claims
development. Occupancy costs increased to 5.5% from 5.4%
primarily due to an increase in general liability expense resulting from
$1.1 million of positive claims development recorded in the prior
year. Other operating expenses were comprised of the following amounts and
percentages of company restaurant sales:
|
|
Quarter
Ended
|
|
|
|
September
27, 2006
|
|
|
|
September
28, 2005
|
|
|
|
(Dollars
in Thousands)
|
|
Utilities
|
|
$
|
12,188
|
|
|
5.2
|
%
|
|
$
|
11,229
|
|
|
5.0
|
%
|
Repairs
and maintenance
|
|
|
4,962
|
|
|
2.1
|
%
|
|
|
4,745
|
|
|
2.1
|
%
|
Marketing
|
|
|
7,838
|
|
|
3.3
|
%
|
|
|
7,438
|
|
|
3.3
|
%
|
Legal
settlement costs
|
|
|
(796
|
)
|
|
(0.3
|
%)
|
|
|
6,427
|
|
|
2.8
|
%
|
Other |
|
|
10,058 |
|
|
4.3 |
% |
|
|
8,644 |
|
|
3.8 |
% |
Other
operating expenses
|
|
$
|
34,250
|
|
|
14.6
|
%
|
|
$
|
38,483
|
|
|
17.0
|
%
|
The
increase in utilities is the result of higher natural gas and electricity
costs.
The decrease in legal settlement costs is primarily the result of $5.8
million recognized in the prior year for legal settlement expenses related
to the settlement of the Division
of Labor Standards Enforcement (“DLSE”) of the State
of
California’s Department of Industrial Relations' litigation and for development
of other cases. For the quarter ended September 27, 2006, legal
settlement costs benefited from the favorable settlement of certain other
pending cases. Other expenses increased primarily due to a scheduled
reduction in coin-operated game machines in our restaurants resulting in
a
$0.6 million decrease in ancillary restaurant income.
Franchise
Operations
Franchise
and license revenues are the revenues received by Denny’s from its franchisees
and include royalties, initial franchise fees and occupancy revenue related
to
restaurants leased or subleased to franchisees. Costs of franchise and license
revenue include occupancy costs related to restaurants leased or subleased
to
franchisees and direct costs consisting primarily of payroll and benefit costs
of franchise operations personnel and bad debt expense.
Franchise
and license revenue and costs of franchise and license revenue were comprised
of
the following amounts and percentages of franchise and license revenue for
the
periods indicated:
|
|
Quarter
Ended
|
|
|
|
September
27, 2006
|
|
|
September
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
Royalties
and initial fees
|
|
$
|
15,998
|
|
|
68.1
|
%
|
|
$
|
15,137
|
|
|
66.1
|
%
|
Occupancy
revenue
|
|
|
7,493
|
|
|
31.9
|
%
|
|
|
7,761
|
|
|
33.9
|
%
|
Franchise
and license revenue
|
|
|
23,491
|
|
|
100.0
|
%
|
|
|
22,898
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
costs
|
|
|
4,860
|
|
|
20.7 |
%
|
|
|
5,333
|
|
|
23.3
|
%
|
Other
direct costs
|
|
|
1,912
|
|
|
8.1
|
%
|
|
|
1,736
|
|
|
7.6
|
%
|
Costs
of franchise and license revenue
|
|
$
|
6,772
|
|
|
28.8
|
%
|
|
$
|
7,069
|
|
|
30.9
|
%
|
Royalties
increased $0.9 million (5.7%) resulting from a 4.7% increase in
franchisee same-store sales, partially offset by the effects of a
14 equivalent-unit decrease in franchised and licensed units. The
decline in occupancy revenue is attributable to the decrease in franchised
and
licensed units.
Costs
of
franchise and license revenue decreased $0.3 million (4.2%). Occupancy
costs decreased $0.5 million due to changes in the portfolio of rental
units. Other direct costs increased $0.2 million primarily resulting from
costs
related to new store openings and an incentive award program for franchisees
who
achieve certain performance criteria in 2006.
Occupancy
revenue and occupancy costs for the real
estate properties sold during the three quarters ended September 27, 2006
were approximately $5.2 million and $0.8, respectively.
Other
Operating Costs and Expenses
Other
operating costs and expenses such as general and administrative expenses and
depreciation and amortization expense relate to both company and franchise
operations.
General
and administrative
expenses
are comprised of the following:
|
|
Quarter
Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Share-based
compensation
|
|
$
|
1,698
|
|
$
|
1,443
|
|
General
and administrative expenses
|
|
|
14,742
|
|
|
13,211
|
|
Total
general and administrative expenses
|
|
$
|
16,440
|
|
$
|
14,654
|
|
The
increase in share-based compensation expense is primarily due to the adjustment
of the liability classified restricted stock units to fair value as of the
September 27, 2006 balance sheet date. The increase in general and
administrative expenses primarily resulted from a $0.9 million increase in
incentive compensation.
Depreciation
and amortization
is
comprised of the following:
|
|
Quarter
Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Depreciation
of property and equipment
|
|
$
|
11,229
|
|
$
|
11,395
|
|
Amortization
of capital lease assets
|
|
|
1,096
|
|
|
787
|
|
Amortization
of intangible assets
|
|
|
1,487
|
|
|
1,636
|
|
Total
depreciation and amortization expense
|
|
$
|
13,812
|
|
$
|
13,818
|
|
Depreciation
and amortization expense remained essentially flat. However, lower depreciation
expense due to the sale of real estate assets was offset by higher
amortization resulting from the implementation of our new point of sale
system.
Restructuring
charges and exit costs were
comprised of the following:
|
|
Quarter
Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Exit
costs
|
|
$
|
1,167 |
|
$
|
783
|
|
Severance
and other restructuring charges
|
|
|
294
|
|
|
1,273
|
|
Total
restructuring and exit costs
|
|
$
|
1,461
|
|
$
|
2,056
|
|
Impairment
charges were $0.8 million
for the quarter ended September 27, 2006 compared with $0.3 million for the
quarter ended September 28, 2005 and relate to the identification of certain
underperforming restaurants.
Gains
on disposition of assets and other, net
increased to $39.0 million in the third quarter of 2006 from less
than $0.1 million in the third quarter of 2005. On September 26,
2006, we completed and closed the sale of 60 company-owned,
franchisee-operated real estate properties for a cash purchase price of $62
million, resulting in a gain of $34.8 million. Additional gains relate to
the
sale of surplus properties and other company-owned, franchisee-operated
properties.
Operating
income was
$55.6 million for the quarter ended September 27, 2006 compared with $9.2
million for the quarter ended September 28, 2005.
Interest
expense, net
is
comprised of the following:
|
|
Quarter
Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Interest
on senior notes
|
|
$
|
4,363
|
|
$
|
4,362
|
|
Interest
on credit facilities
|
|
|
7,610
|
|
|
6,473
|
|
Interest
on capital lease liabilities
|
|
|
1,086
|
|
|
1,110
|
|
Letters
of credit and other fees
|
|
|
768
|
|
|
738
|
|
Interest
income
|
|
|
(620
|
)
|
|
(485
|
)
|
Total
cash interest
|
|
|
13,207
|
|
|
12,198
|
|
Amortization
of deferred financing costs
|
|
|
874
|
|
|
872
|
|
Interest
accretion on other liabilities |
|
|
878 |
|
|
864 |
|
Total
interest expense, net
|
|
$
|
14,959
|
|
$
|
13,934
|
|
The
increase in interest expense primarily resulted from the effects of higher
interest rates on the variable-rate portion of our credit
facilities.
Other
nonoperating expenses, net were
$1.5
million for the quarter ended September 27, 2006 compared with other
nonoperating income of less than $0.1 million for the quarter ended September
28, 2005. The expense for the third quarter of 2006 primarily represents a
loss on early extinguishment of debt, resulting from the write-off of deferred
financing costs associated with the $80 million debt prepayment made during the
quarter.
The
provision
for income taxes
was
$13.6 million for the quarter ended September 27, 2006 compared
with a benefit from income taxes of $1.3 million for the quarter ended
September 28, 2005. The provision for and benefit from income taxes for the
quarters ended September 27, 2006 and September 28, 2005 were determined
using our effective tax rate estimated for the entire fiscal year, excluding
the
impact of certain discrete items that were recognized entirely during the
quarter.
We
have
provided valuation allowances related to any benefits from income taxes
resulting from the application of a statutory tax rate to our net operating
losses generated in previous periods. In establishing our valuation allowance,
we had previously taken into consideration certain tax planning strategies
involving the sale of appreciated properties. The increased deferred tax
provision of $12.2 million in the quarter ended September 27, 2006 related
to our reevaluation of our tax planning strategies in light of management's
commitment to sell the appreciated properties during the third quarter. In
addition, we utilized certain state net operating loss carryforwards whose
valuation allowance was established in connection with fresh start reporting
on
January 7, 1998. We recorded approximately $0.6 million of state deferred
tax
expense with a corresponding reduction to the goodwill that was recorded
in
connection with fresh start reporting on January 7, 1998.
Net
income was
$25.5 million for the quarter ended September 27, 2006 compared
with a net loss of $3.4 million for the quarter ended September 28, 2005 due
to
the factors noted above.
Three
Quarters Ended September 27, 2006 Compared with Three Quarters Ended September
28, 2005
|
|
December
28, 2005
|
|
Units
Opened
|
|
Units
Acquired
|
|
Units
Closed
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
restaurants
|
|
|
543
|
|
|
1 |
|
|
1
|
|
|
(10
|
)
|
|
535
|
|
|
546
|
|
Franchised
and licensed restaurants
|
|
|
1,035
|
|
|
13
|
|
|
(1
|
)
|
|
(23
|
)
|
|
1,024
|
|
|
1,036
|
|
|
|
|
1,578
|
|
|
14
|
|
|
---
|
|
|
(33
|
)
|
|
1,559
|
|
|
1,582
|
|
|
|
Three Quarters
Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
Other
Data:
|
|
|
|
|
|
|
|
Company-owned
average unit sales
|
|
$
|
1,270.1
|
|
$
|
1,227.6
|
|
Franchise
average unit sales
|
|
|
1,113.5
|
|
|
1,056.4
|
|
Same-store
sales increase (company-owned) (a)
|
|
|
2.8
|
%
|
|
3.9
|
%
|
Guest
check average increase (a)
|
|
|
5.2
|
%
|
|
4.1
|
%
|
Guest
count (decrease) (a)
|
|
|
(2.2
|
%)
|
|
(0.2
|
%)
|
__________________
(a)
Same-store sales include sales from restaurants that were open the same days
in
both the current year and prior year.
Company
Restaurant Operations
During
the three quarters ended September 27, 2006, we realized a 2.8% increase in
same-store sales, comprised of a 5.2% increase in guest check average and
a 2.2% decrease in guest counts. Company restaurant sales increased
$12.9 million or 1.9%. Higher sales resulted primarily from the increase in
same-store sales for the current year partially offset by an
eight equivalent-unit decrease in company-owned restaurants.
Total
costs of company restaurant sales as a percentage of company restaurant sales
decreased to 87.1% from 87.8%. Product costs decreased to 25.0% from 25.4%
due to shifts in menu mix and the impact of a higher guest check average.
Payroll and benefits decreased to 41.4% from 41.8% primarily related
to improvements in worker's compensation costs. While the first three
quarters of 2006 benefited by $1.4 million of positive claims development,
the
first three quarters of 2005 was impacted by $1.8 million of negative
claims development. In addition, decreased management incentive
compensation was offset by increased group insurance costs. Occupancy costs
remained constant at 5.7%. Other operating expenses were comprised of the
following amounts and percentages of company restaurant
sales:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
Utilities
|
|
$
|
34,510
|
|
|
5.1
|
%
|
$
|
31,227
|
|
|
4.7
|
%
|
Repairs
and maintenance
|
|
|
14,029
|
|
|
2.1
|
%
|
|
13,690
|
|
|
2.0
|
%
|
Marketing
|
|
|
22,826
|
|
|
3.4
|
%
|
|
22,221
|
|
|
3.3
|
%
|
Legal
settlement costs
|
|
|
2,364
|
|
|
0.3
|
%
|
|
7,882
|
|
|
1.2
|
%
|
Other |
|
|
28,847 |
|
|
4.2 |
% |
|
25,002 |
|
|
3.7 |
% |
Other
operating expenses
|
|
$ |
102,576 |
|
|
15.1 |
% |
$ |
100,022 |
|
|
15.0 |
% |
The
increase in utilities is the result of higher natural gas and electricity
costs. The decrease in legal settlement costs is primarily the result
of $6.0 million recognized in the prior year for legal settlement expenses
related to the settlement of the Division of Labor Standards Enforcement
("DLSE") of the State of California's Department of Industrial Relations'
litigation and the development of certain other cases. For the three
quarters ended September 27, 2006, legal settlement costs benefited from
the
favorable settlement of certain other pending cases. Other expenses included
a
scheduled reduction in coin-operated game machines in our restaurants resulting
in a $1.9 million decrease in ancillary restaurant income. In addition,
other expenses included a $0.4 million increase in pre-opening expenses,
a $0.3
million increase in credit card fees resulting from increased usage and a
$0.6
million increase in local store marketing activities.
Franchise
Operations
Franchise
and license revenue and costs of franchise and license revenue were comprised
of
the following amounts and percentages of franchise and license revenue for
the
periods indicated:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
Royalties
and initial fees
|
|
$
|
46,150
|
|
|
66.9 |
%
|
$
|
44,258
|
|
|
65.6
|
%
|
Occupancy
revenue
|
|
|
22,787
|
|
|
33.1
|
%
|
|
23,255
|
|
|
34.4
|
%
|
Franchise
and license revenue
|
|
|
68,937
|
|
|
100.0
|
%
|
|
67,513
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
costs
|
|
|
15,098
|
|
|
21.9
|
%
|
|
15,781
|
|
|
23.4
|
%
|
Other
direct costs
|
|
|
6,122
|
|
|
8.9
|
%
|
|
5,749
|
|
|
8.5
|
%
|
Costs
of franchise and license revenue
|
|
$
|
21,220
|
|
|
30.8
|
%
|
$
|
21,530
|
|
|
31.9
|
%
|
Royalties
increased $1.9 million (4.3%) resulting from a 4.1% increase in
franchisee same-store sales, partially offset by the effects of an 11
equivalent-unit decrease in franchise and licensed units. The decline in
occupancy revenue is attributable to the decrease in franchise and licensed
units.
Costs
of
franchise and license revenue decreased $0.3 million (1.4%). Occupancy
costs decreased $0.7 million due to changes in the portfolio of rental
units. Other direct costs increased $0.4 million primarily resulting from
costs
related to new store openings and an incentive award program for franchisees
who
achieve certain performance criteria in 2006.
Occupancy
revenue and occupancy costs for the real
estate properties sold during the three quarters ended September 27, 2006
were approximately $5.2 million and
$0.8, respectively.
Other
Operating Costs and Expenses
General
and administrative
expenses
are comprised of the following:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
Share-based
compensation
|
|
$
|
5,371
|
|
$
|
6,136
|
|
General
and administrative expenses
|
|
|
43,888
|
|
|
40,737
|
|
Total
general and administrative expenses
|
|
$
|
49,259
|
|
$
|
46,873
|
|
The
decrease in share-based compensation expense is primarily due to the adjustment
of the liability classified restricted stock units to fair value as of the
September 27, 2006 balance sheet date. The increase general and administrative
expenses is primarily the result of an increase in payroll costs due to
investments in corporate staffing.
Depreciation
and amortization
is
comprised of the following:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
Depreciation
of property and equipment
|
|
$
|
33,615
|
|
$
|
33,068
|
|
Amortization
of capital lease assets
|
|
|
3,665
|
|
|
2,333
|
|
Amortization
of intangible assets
|
|
|
4,717
|
|
|
5,456
|
|
Total
depreciation and amortization expense
|
|
$
|
41,997
|
|
$
|
40,857
|
|
The
overall increase in depreciation and amortization expense of $1.1 million is
primarily due to the higher amortization resulting from the implementation
of
our new point of sale system.
Restructuring
charges and exit costs
were
comprised of the following:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
Exit
costs
|
|
$
|
1,653
|
|
$
|
1,530
|
|
Severance
and other restructuring charges
|
|
|
1,689
|
|
|
2,886
|
|
Total
restructuring and exit costs
|
|
$
|
3,342
|
|
$
|
4,416
|
|
Impairment
charges were
$0.8
million for the three quarters ended September 27, 2006 compared with $0.6
million for the three quarters ended September 28, 2005 and relate to the
identification of certain underperforming restaurants.
Gains
on disposition of assets and other, net
increased to $47.7 million in the first three quarters of 2006
from $1.8 million in the first three quarters of 2005. On September
26, 2006, we completed and closed the sale of 60 company-owned,
franchisee-operated real estate properties for a cash purchase price
of $62 million, resulting in a gain of $34.8 million. Additional gains relate
to
the sale of surplus properties and other company-owned, franchisee-operated
properties.
Operating
income was
$87.8 million for the three quarters ended September 27, 2006 compared with
$36.3 million for the three quarters ended September 28, 2005.
Interest
expense, net
is
comprised of the following:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
|
Interest
on senior notes
|
|
$
|
13,089
|
|
$
|
13,087
|
|
Interest
on credit facilities
|
|
|
22,061
|
|
|
18,465
|
|
Interest
on capital lease liabilities
|
|
|
3,314
|
|
|
3,140
|
|
Letters
of credit and other fees
|
|
|
2,264
|
|
|
2,116
|
|
Interest
income
|
|
|
(1,536
|
)
|
|
(1,213
|
)
|
Total
cash interest
|
|
|
39,192
|
|
|
35,595
|
|
Amortization
of deferred financing costs
|
|
|
2,621
|
|
|
2,620
|
|
Interest
accretion on other liabilities
|
|
|
2,636
|
|
|
2,595
|
|
Total
interest expense, net
|
|
$
|
44,449
|
|
$
|
40,810
|
|
The
increase in interest expense primarily resulted from the effect of higher
interest rates on the variable-rate portion of our credit
facilities.
Other
nonoperating expense, net were
$1.5
million for the three quarters ended September 27, 2006 compared with other
nonoperating income of $0.5 million for the three quarters ended September
28, 2005. The expense for the 2006 period primarily represents a loss on
early extinguishment of debt, resulting from the write-off of deferred financing
costs associated with the $80 million debt prepayment made during the third
quarter.
The
provision
for income taxes
was
$14.0 million for three quarters ended September 27, 2006 compared
with a benefit from income taxes of $1.2 million for the three quarters
ended September 28, 2005. The provision for and benefit from income taxes
for the three quarters ended September 27, 2006 and September 28, 2005 were
determined using our effective tax rate estimated for the entire fiscal year,
excluding the impact of certain discrete items that were recognized
entirely during the quarter.
We
have
provided valuation allowances related to any benefits from income taxes
resulting from the application of a statutory tax rate to our net operating
losses generated in previous periods. In establishing our valuation allowance,
we had previously taken into consideration certain tax planning strategies
involving the sale of appreciated properties. The increased deferred tax
provision of $12.2 million in the quarter ended September 27, 2006 related
to our reevaluation of our tax planning strategies in light of management's
commitment to sell the appreciated properties during the third quarter. In
addition, we utilized certain state net operating loss carryforwards whose
valuation allowance was established in connection with fresh start reporting
on
January 7, 1998. We recorded approximately $0.6 million of state deferred
tax
expense with a corresponding reduction to the goodwill that was recorded
in
connection with fresh start reporting on January 7, 1998.
As
a
result of adopting SFAS 123(R), we recorded a cumulative
effect of change in accounting principle,
net of
tax of $0.2 million in the first quarter of 2006. See Note 9 to our
Condensed Consolidated Financial Statements.
Net
income was
$28.1 million for the three quarters ended September 27, 2006 compared with
a net loss of $2.8 million for the three quarters ended September 28, 2005
due
to the factors noted above.
Liquidity
and Capital Resources
Our
primary sources of liquidity and capital resources are cash generated
from operations, borrowing under our Credit Facilities (as defined below)
and, in recent years, cash proceeds from the sale of surplus properties and
the
sale of real estate to franchisees. Principal uses of cash are operating
expenses, capital expenditures and debt repayments. The following table
presents a summary of our sources and uses of cash and cash equivalents for
the
three quarters ended September 27, 2006 and the three quarters
ended September 28, 2005:
|
|
Three
Quarters Ended
|
|
|
|
September
27, 2006
|
|
September
28, 2005
|
|
|
|
(In
thousands)
|
Net
cash provided by operating activities
|
|
$
|
27,220
|
|
$
|
40,331
|
|
Net
cash provided by (used in) investing activities
|
|
|
56,097
|
|
|
(25,229
|
)
|
Net
cash used in financing activities
|
|
|
(85,494
|
)
|
|
(2,835
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(2,177
|
)
|
$
|
12,267
|
|
We
believe that our estimated cash flows from operations for 2006, combined with
our capacity for additional borrowing under our Credit Facilities,
will enable us to meet our anticipated cash requirements and fund capital
expenditures through the end of 2006.
Our
principal capital requirements have been largely associated with remodeling
and
maintaining our existing company-owned restaurants and facilities. Net cash
flows provided by investing activities were $56.1 million for the three
quarters ended September 27, 2006. Our capital expenditures for the three
quarters of 2006 were $27.8 million, of which $2.9 million was
financed through capital leases. Capital expenditures for the
three quarters ended September 27, 2006 were offset by net
proceeds from dispositions of surplus property and certain company-owned,
franchisee-operated real estate of $77.0 million.
Cash
flows used in financing activities were $85.5 million for the three
quarters ended September 27, 2006, primarily representing payments related
to our Credit Facilities, capital lease obligations and other long-term
debt
instruments. During the third quarter, we prepaid approximately $80 million
on
the first lien term loan through a combination of asset sale proceeds and
surplus cash, bringing the total debt balance, including capital lease
obligations, down to approximately $470 million as of September 27, 2006.
Our
subsidiaries, Denny’s, Inc. and Denny’s Realty, LLC (formerly Denny's Realty,
Inc.) (the “Borrowers”), have senior secured credit facilities with an aggregate
principal amount of $337 million. The credit facilities consist of a first
lien facility and a second lien facility. At September 27, 2006, the first
lien facility consists of a $142 million five-year term loan facility (the
“Term Loan Facility”) and a $75 million four-year revolving credit facility, of
which $55 million was 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 $0.4 million with all remaining amounts due on the maturity
date. The Revolving Facility matures on September 30, 2008. The Second Lien
Facility matures on September 30, 2010 with no amortization of principal prior
to the maturity date.
The
interest rates under the First Lien Facility are as follows: At the option
of
the Borrowers, Adjusted LIBOR plus a spread of 3.25% per annum (3.50% per annum
for the Revolving Facility) or ABR (the Alternate Base Rate, which is the higher
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 weighted-average interest rates on the First Lien
Facility and Second Lien Facility at September 27, 2006 were 8.7%
and 10.5%, respectively.
At
September 27, 2006, we had outstanding letters of credit of $42.5 million
under our Revolving Facility, leaving net availability of $32.5 million.
There were no revolving loans outstanding at September 27, 2006.
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 September 27, 2006.
On
July
17, 2006, the Credit Facilities were amended to allow for the sale of 84
specified properties, primarily company-owned, franchisee-operated real estate,
with the net cash proceeds from such sales to be applied to reduce outstanding
indebtedness under the Credit Facilities (see Note 4). In addition, the
amendments increased the limit on Letter of Credit Commitments under the
Revolving Facility from $45 million to $55 million and increased the allowance
during a fiscal year for the sale of restaurant businesses or property
(excluding the specified properties) from $5 million to $15 million, thereby
requiring the proceeds from any asset sales greater than $15 million be used
to
pay down our debt.
Our
working capital deficit was $72.8 million at September 27, 2006
compared with $86.8 million at December 28, 2005. 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
Notes
2, 9 and 14 to our Condensed Consolidated Financial
Statements.
We
have
market exposure including, but not limited to, the following
areas: interest rate risk on our debt, interest rate risk on our pension
plan, other defined benefit plans and self-insurance liabilities, and commodity
and utility rate risk.
We
have
exposure to interest rate risk related to certain instruments entered into
for
other than trading purposes. Specifically, 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 higher 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.
During
the first quarter of 2005, we entered into an interest rate swap with a notional
amount of $75 million to hedge a portion of the cash flows of our floating
rate
term loan debt. We have designated the interest rate swap as a cash flow hedge
of the 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, we 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 40% of total debt to approximately 57%. The estimated
fair value of the interest rate swap at September 27, 2006 was $1.1
million.
Based
on
the levels of borrowings under the Credit Facilities at September 27, 2006,
if
interest rates changed by 100 basis points our annual cash flow and net income
before income taxes would change by approximately $1.9 million, after
considering the impact of the interest rate swap. This computation is determined
by considering the impact of hypothetical interest rates on the variable rate
portion of the Credit Facilities at September 27, 2006. 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 lease obligations
and
revolving credit facility advances) was approximately $181.9 million,
compared with a book value of $175.8 million at September 27, 2006.
This computation is based on market quotations for the same or similar debt
issues or the estimated borrowing rates available to us. The difference between
the estimated fair value of long-term debt compared with its historical cost
reported in our consolidated balance sheets at September 27, 2006 relates
primarily to market quotations for our 10% Senior Notes due 2012.
We 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 $0.1 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 $0.1 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
exposure to the impact of commodity and utility price fluctuations related
to
unpredictable factors such as weather and various other market conditions
outside our control. Our ability to recover increased costs through higher
prices is limited by the competitive environment in which we operate. We may
from time−to−time enter into futures and option contracts to manage these
fluctuations. During the third quarter of 2006, we hedged our natural gas
exposure by entering into various derivative instruments. We recognized a
net loss of less than $0.1 million related to these instruments, which is
included in other operating expenses in the accompanying Condensed
Consolidated Statements of Operations. As of September 27, 2006, the
combined estimated fair value of natural gas hedge contracts
outstanding was $(0.1) million. The fair value of these contracts is
adjusted to market as of the balance sheet date and the related expense is
included as a component of other nonoperating expense in our Condensed
Consolidated Statement of Operations.
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.
As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), our management conducted an evaluation (under the
supervision and with the participation of our President and Chief Executive
Officer, Nelson J. Marchioli, and our Executive Vice President, Growth
Initiatives and Chief Financial Officer, F. Mark Wolfinger) as of the end
of the period covered by this report, of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act. Based on that evaluation, Messrs. Marchioli and Wolfinger
each
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by Rule 13a-15(d) of the Exchange
Act
that occurred during our last fiscal quarter that have materially affected,
or
are reasonably likely to materially affect, our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act).
In
the
third quarter of 2006, Denny's Corporation and its subsidiary Denny's, Inc.
finalized a settlement of
the
proposed class action filed by a former Denny's employee in
the
Superior Court of California, County of Los Angeles, which alleged, among
other things, that Denny's violated California's meal and rest break
requirements.
The
settlement provides for payments up to approximately $1.7 million in the
aggregate, which is included as a component of other current
liabilities in the accompanying Condensed Consolidated Balance Sheet at
September 27, 2006, to approximately 36,000 individuals
who were employed by Denny's, Inc. in the State of California between
April 4,
2002 and August 16, 2006. As
of
September 27, 2006, notification of the settlement was sent to putative class
members, who are required to "opt in" in order to participate in the
distribution.
In
the fourth quarter of 2005, Denny’s Corporation and
its subsidiary Denny’s, Inc. finalized a settlement with the Division of Labor
Standards Enforcement (“DLSE”) of the State of California’s Department of
Industrial Relations regarding all disputes related to the DLSE’s litigation
against us. Pursuant to the terms of the settlement, Denny’s agreed to pay a sum
of approximately $8.1 million to former employees, of which $3.5 million was
paid in the fourth quarter of 2005. The remaining $4.6 million was included
in
other liabilities in the accompanying Condensed Consolidated Balance Sheet
at
December 28, 2005 and was paid on January 6, 2006, in accordance with
the instructions of the DLSE.
There
are
various other claims and pending legal actions against or indirectly involving
us, including actions concerned with civil rights of employees and customers,
other employment related matters, taxes, sales of franchise rights and
businesses and other matters. Based on our examination of these matters and
our
experience to date, we have recorded reserves reflecting our best estimate
of
legal and financial liability, if any, with respect to these matters. However,
the ultimate disposition of these matters cannot be determined with
certainty.
a. The
following are included as exhibits to this report:
Exhibit
No.
|
|
Description
|
|
|
|
10.1
|
|
Master
Purchase Agreement and Escrow Instructions (incorporated by reference
to
Exhibit 2.1 to Current Report on Form 8-K of Denny's Corporation filed
with the Commission on September 28, 2006) |
|
|
|
31.1
|
|
Certification
of Nelson J. Marchioli, President and Chief Executive Officer of
Denny’s
Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of F. Mark Wolfinger, Executive Vice President, Growth
Initiatives and Chief Financial Officer of Denny’s Corporation,
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Nelson J. Marchioli, President and Chief Executive Officer of
Denny’s
Corporation and F. Mark Wolfinger, Executive Vice President, Growth
Initiatives 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.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DENNY’S
CORPORATION
Date:
November 3, 2006
|
By: |
/s/
Rhonda J. Parish |
|
|
Rhonda
J. Parish
|
|
|
Executive
Vice President,
|
|
|
Chief
Legal Officer, |
|
|
and
Secretary
|
|
|
|
Date:
November 3,
2006
|
By:
|
/s/
F. Mark Wolfinger
|
|
|
F.
Mark Wolfinger
|
|
|
Executive
Vice President,
|
|
|
Growth
Initiatives and |
|
|
Chief
Financial Officer
|