FORM 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 27, 2006
Commission
file number 0-18051
DENNY'S
CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
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13-3487402
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
employer
identification
number)
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203
East Main Street
Spartanburg,
South Carolina 29319-9966
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(Address
of principal executive offices)
(Zip
Code)
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(864)
597-8000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
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Name
of each exchange on which registered
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$.01
Par Value, Common Stock
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The
Nasdaq Stock Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
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 þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ¨
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 þ 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 þ
The
aggregate market value of the voting common stock held by non-affiliates of
the
registrant was approximately $324.7 million as of June 28, 2006 the last
business day of the registrant’s most recently completed second fiscal quarter,
based upon the closing sales price of registrant’s common stock on that date of
$3.55 per share and, for purposes of this computation only, the assumption
that all of the registrant’s directors, executive officers and beneficial owners
of 10% or more of the registrant’s common stock are affiliates.
As of March 1, 2007, 93,522,470 shares of the
registrant’s common stock, $.01 par value per share, were outstanding.
Documents incorporated by reference:
Portions of the registrant’s definitive Proxy Statement for
the 2007 Annual Meeting of Stockholders are incorporated by reference into
Part
III of this Form 10-K.
TABLE
OF CONTENTS
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F-1
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FORWARD-LOOKING
STATEMENTS
The
forward-looking statements included in the “Business,” “Risk Factors,” “Legal
Proceedings,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and “Quantitative and Qualitative Disclosures About
Market Risk” sections and elsewhere herein, which reflect our best judgment
based on factors currently known, involve risks and uncertainties. Words such
as
“expects,” “anticipates,” “believes,” “intends,” “plans,”
“hopes,” and variations of such words and similar expressions are intended
to identify such forward-looking statements. Except as may be required by law,
we expressly disclaim any obligation to update these forward-looking statements
to reflect events or circumstances after the date of this Form 10-K or to
reflect the occurrence of unanticipated events. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors including, but not limited to, the factors
discussed in such sections and, in particular, those set forth in the cautionary
statements contained in “Risk Factors.” The forward-looking information we have
provided in this Form 10-K pursuant to the safe harbor established under the
Private Securities Litigation Reform Act of 1995 should be evaluated in the
context of these factors.
Description
of Business
Denny’s
Corporation, or Denny’s, is one of America’s largest family-style restaurant
chains. Denny’s, through its wholly owned subsidiaries, Denny’s Holdings, Inc.
and Denny’s, Inc., owns and operates the Denny’s restaurant brand. At December
27, 2006, the Denny’s brand consisted of 1,545 restaurants, 521 of which are
company-owned and operated and 1,024 of which are franchised/licensed
restaurants. These Denny’s restaurants operated in 49 states, the District of
Columbia, two U.S. territories and five foreign countries, with concentrations
in California (26% of total restaurants), Florida (10%) and Texas (10%).
Debt
Reduction and Refinancing
During
2006, we successfully divested a significant
portion of our non-core real estate assets and reduced our outstanding
indebtedness. Through the proceeds generated from the real estate sales
and cash flow from operations, we reduced our debt by more than $100 million,
or
approximately 18%. During the fourth quarter of 2006, we successfully refinanced
our credit facility. As a result of the improvement in our financial
position and credit rating upgrades by both Moody's and Standard & Poor's,
we were able to obtain a new credit facility with extended maturities and lower
interest costs. Based on current interest rates, the refinancing is expected
to
save approximately $5.5 million in annual cash interest.
Operations
Denny’s
restaurants generally are open 24 hours a day, 7
days a week. This “always open” operating platform is a distinct competitive
advantage. We provide high quality menu offerings and generous portions at
reasonable prices with friendly and efficient service in a pleasant atmosphere.
Denny’s expansive menu offers traditional American-style food such as breakfast
items, appetizers, sandwiches, dinner entrees and desserts. Denny’s sales are
broadly distributed across each of its dayparts (i.e., breakfast, lunch, dinner
and late-night); however, breakfast items account for the majority of Denny’s
sales.
We
believe that the superior execution of basic restaurant operations in each
Denny’s restaurant, whether it is company-owned or franchised, is critical to
our success. To meet and exceed our customers’ expectations, we require both our
company-owned and our franchised restaurants to maintain the same strict brand
standards. These standards relate to the preparation and efficient serving
of
quality food and the maintenance, repair and cleanliness of restaurants.
We
devote
significant effort to ensuring all restaurants offer quality food served by
friendly, knowledgeable and attentive employees in a clean and well-maintained
restaurant. Through a network of division, region, area and restaurant level
managers, we seek to ensure that our company-owned restaurants meet our vision
of “Great Food and Great Service by Great People…Everytime.”
A
principal feature of Denny’s restaurant operations is the consistent focus on
improving operations at the unit level. Unit managers are hands-on and versatile
in their supervisory activities. Region and area managers spend the majority
of
their time in the restaurants. Many of our restaurant management personnel
began
as hourly associates in the restaurants and, therefore, know how to perform
restaurant functions and are able to train by example.
Denny’s
maintains a training program for associates and restaurant managers.
To
ensure
our
staff is
properly staffed when changing job function, before using new equipment or
before performing new procedures, eLearning tools are used in the restaurants
to
support on the job training. New
general managers attend customer service and leadership training at the
corporate headquarters and receive hands on training at specially designated
training units in the following areas:
• customer
interaction;
• kitchen
management and food preparation;
• data
processing and cost control techniques;
• equipment
and building maintenance; and
• leadership
skills.
Denny’s
employs a comprehensive system to ensure that the menu remains appealing to
all
customers. Our research and development group analyzes consumer trends,
competitive activity and operator input to determine new offerings. We develop
new offerings in our test kitchen and then introduce them in selected
restaurants to determine customer response and to ensure that consistency,
quality standards and profitability are maintained. If a new item proves
successful at the research and development level, it is usually tested in
selected markets. A successful menu item is then incorporated into the
restaurant system. Low selling items are periodically removed from the menu.
Information
Technology
Financial
and management control is facilitated in all of the Denny’s company-owned
restaurants by the use of point-of-sale ("POS") systems which transmit detailed
sales reports, payroll data and periodic inventory information for management
review. During 2006, we substantially completed the implementation of a new
POS
system in our company-owned restaurants. Total capital expenditures related
to the new POS system were $13.1 million, of which $7.0 million was financed
through capital leases.
Marketing &
Advertising
Our
marketing department manages contributions from both company-owned and
franchised units providing for an integrated marketing and advertising process
to promote our brand, including:
• media
advertising;
• menu
management;
• menu
pricing strategy; and
• specialized
promotions to help differentiate Denny’s from our competitors.
Media
advertising is primarily product oriented, featuring consistent, high-quality
entrees presented to communicate the message of great food at great values
to
our guests. Our advertising is conducted through:
• national
network and cable television;
• radio;
• outdoor;
and
• print.
Denny’s
integrated marketing and advertising approach reaches out to all consumers.
Community outreach programs are designed to enhance our diversity efforts.
Franchising
The
Denny’s system is approximately one-third company-operated and two-thirds
franchised. Our criteria to become a Denny’s franchisee include minimum
liquidity and net worth requirements and appropriate operational experience.
We
believe that Denny’s is an attractive financial proposition for current and
potential franchisees and that our fee structure is competitive with other
full
service brands. The initial fee for a single twenty-year Denny’s franchise
agreement is $40,000 and the royalty payment is 4% of gross sales. Additionally,
our franchisees contribute up to 4% of gross sales for advertising.
A
network
of regional franchise operations managers oversee our franchised restaurants
to
ensure compliance with brand standards, promote operational excellence, and
provide general support to our franchisees. These managers visit each franchised
unit an average of two to four times per quarter.
Site
Selection
The
success of any restaurant is influenced significantly by its location. Our
real
estate and franchise development groups work closely with franchisees and real
estate brokers to identify sites which meet specific standards. Sites are
evaluated on the basis of a variety of factors, including but not limited to:
• demographics;
• traffic
patterns;
• visibility;
• building
constraints;
• competition;
• environmental
restrictions; and
• proximity
to high-traffic consumer activities.
Facilities
Expenditures
We
invest
significantly in our restaurant facilities in order to provide a
well-maintained, comfortable environment and improve the overall customer
experience. During 2006, 2005 and 2004, we spent approximately $32 million,
$47
million and $36 million, respectively, in capital expenditures and $18 million,
$19 million and $17 million, respectively, for repair and maintenance of
company-owned units.
We
have
remodeled approximately 142 company-owned restaurants in the past three
years. In addition, our franchisees have remodeled approximately 430
restaurants in the past three years. We believe our remodel program appeals
to
existing and new franchisees, which is integral to the completion of the program
systemwide. The normal components of a remodel include, among other things,
new
signs, painting of the building exterior and interior, wallpaper, pictures,
carpet, chairs, tables and booths.
Product
Sources and Availability
Our
purchasing department administers our programs for the procurement of food
and
non-food products. Our franchisees also purchase food and non-food products
directly from the vendors under these programs. Our centralized purchasing
program is designed to ensure uniform product quality as well as to
minimize food, beverage and supply costs. Our size provides significant
purchasing power which often enables us to obtain products at favorable prices
from nationally recognized manufacturers.
While
nearly all products are contracted for by our purchasing department, the
majority are purchased and distributed through Meadowbrook Meat Company, or
MBM,
under a long-term distribution contract. MBM distributes restaurant products
and
supplies to Denny’s from nearly 300 vendors, representing approximately 85% of
our restaurant product and supply purchases. We believe that satisfactory
sources of supply are generally available for all the items regularly used
by
our restaurants, and we have not experienced any material shortages of food,
equipment, or other products which are necessary to our restaurant operations.
Seasonality
Our
business is moderately seasonal. Restaurant sales are generally greater in
the
second and third calendar quarters (April through September) than in the first
and fourth calendar quarters (October through March). Additionally, severe
weather, storms and similar conditions may impact sales volumes seasonally
in
some operating regions. Occupancy and other operating costs, which remain
relatively constant, have a disproportionately greater negative effect on
operating results during quarters with lower restaurant sales.
Trademarks
and Service Marks
Through
our wholly owned subsidiaries, we have certain trademarks and service marks
registered with the United States Patent and Trademark Office and in
international jurisdictions, including "Denny's" and "Grand Slam
Breakfast". We consider our trademarks and service marks important to the
identification of our restaurants and believe they are of material importance
to
the conduct of our business. Domestic trademark and service mark
registrations are renewable at various intervals from 10 to 20 years, while
international trademark and service mark registrations have various durations
from 5 to 20 years. We generally intend to renew trademarks and service marks
which come up for renewal. We own or have rights to all trademarks we believe
are material to our restaurant operations. In addition, we have registered
various domain names on the internet that incorporate certain of our trademarks
and service marks, and believe these domain name registrations are an integral
part of our identity. From time to time, we may resort to legal measures to
defend and protect the use of our intellectual property.
Competition
Our
restaurants operate in the full−service segment of the restaurant industry.
Full-service restaurants include the mid-scale, casual dining and upscale
(fine
dining) segments. A large portion of mid-scale business comes from three
categories—family-style, family steak and cafeteria—and is characterized by
complete meals, menu variety and moderate prices. The family-style category,
which includes Denny’s, consists of a small number of national chains, many
local and regional chains, and thousands of independent
operators.
The
restaurant industry is highly competitive. Competition among major
companies that own or operate restaurant chains is especially intense.
Restaurants compete on the basis of name recognition and advertising; the price,
quality, variety, and perceived value of their food offerings; the quality
of
their customer service; and the convenience and attractiveness of their
facilities. Denny’s
direct competition in the family-style category is primarily a collection of
national and regional chains. Denny’s also competes with quick service
restaurants as they attempt
to
upgrade their menus with premium sandwiches, entree salads, new breakfast
offerings and extended hours. We believe that Denny’s has a number of
competitive strengths, including strong brand name recognition, well-located
restaurants and market penetration.
We
benefit from economies of scale in a variety of areas, including advertising,
purchasing and distribution. Additionally, we believe that Denny’s has
competitive strengths in the value, variety, and quality of our food products,
and in the quality and training of our employees. See “Risk Factors” for certain
additional factors relating to our competition in the restaurant industry.
Economic,
Market and Other Conditions
The
restaurant industry is affected by many factors, including changes in national,
regional and local economic conditions affecting consumer spending, the
political environment (including acts of war and terrorism), changes in customer
travel patterns, changes in socio-demographic characteristics of areas where
restaurants are located, changes in consumer tastes and preferences, increases
in the number of restaurants, unfavorable trends affecting restaurant
operations, such as rising wage rates, healthcare costs and utilities expenses,
and unfavorable weather.
Government
Regulations
We
and
our franchisees are subject to local, state and federal laws and regulations
governing various aspects of the restaurant business, including, but not limited
to:
• health;
• sanitation;
• land
use,
sign restrictions and environmental matters;
• safety;
• disabled
persons’ access to facilities;
• the
sale
of alcoholic beverages; and
• hiring
and employment practices.
The
operation of our franchise system is also subject to regulations enacted by
a
number of states and rules promulgated by the Federal Trade Commission. We
believe we are in material compliance with applicable laws and regulations,
but
we cannot predict the effect on operations of the enactment of additional
regulations in the future.
We
are
also subject to federal and state laws governing matters such as minimum wage,
tip reporting, overtime and other working conditions. At
December 27, 2006, a substantial number of our employees were paid the
minimum wage. Accordingly, increases in the minimum wage or decreases in the
allowable tip credit (which reduces the minimum wage paid to tipped employees
in
certain states) increase our labor costs. This is especially true for our
operations in California, where there is no tip credit. Employers must pay
the
higher of the federal or state minimum wage. We have attempted to offset
increases in the minimum wage through pricing and various cost control efforts;
however, there can be no assurance that we will be successful in these efforts
in the future.
Environmental
Matters
Federal,
state and local environmental laws and regulations have not historically had
a
material impact on our operations; however, we cannot predict the effect of
possible future environmental legislation or regulations on our operations.
Executive
Officers of the Registrant
The
following table sets forth information with respect to each executive officer
of
Denny’s.
Name
|
Age
|
Current
Principal Occupation or Employment and Five-Year Employment
History
|
Janis
S. Emplit
|
51
|
Senior
Vice President, Company Operations (October, 2006-present); Senior
Vice
President for Strategic Services of Denny’s (2003-October, 2006); Senior
Vice President and Chief Information Officer of Denny’s (1999-January
2006).
|
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|
Margaret
L. Jenkins
|
55
|
Senior
Vice President, Chief Marketing Officer of Denny’s, Inc. (2002-present);
Vice President of Marketing of El Pollo Loco, Inc. (a subsidiary
of
Denny’s until 1999) (1998-2002).
|
|
|
|
Nelson
J. Marchioli
|
57
|
Chief
Executive Officer and President of Denny’s (2001-present); President of El
Pollo Loco, Inc. (a subsidiary of Denny’s until 1999)
(1997-2001).
|
|
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|
Rhonda
J. Parish
|
50
|
Executive
Vice President of Denny’s (1998-present); Chief Legal Officer (October,
2006-present); Secretary of Denny's (1995-present); Chief Administrative
Officer of Denny’s (2005-October, 2006), Chief Human Resources Officer of
Denny’s (2005-October, 2006); and General Counsel (1995-October,
2006).
|
|
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Samuel
M. Wilensky
|
49
|
Senior Vice
President (October, 2006-present); Acting Head of Operations (October,
2006-present); Senior Vice President, Franchise Operations of Denny’s,
Inc. (January, 2006-October, 2006); Division Vice President, Franchise
Operations of Denny’s, Inc. (2001-2006); Regional Vice President,
Franchise Operations of Denny’s, Inc. (2000-2001).
|
|
|
|
F.
Mark Wolfinger
|
51
|
Executive
Vice President, Growth Initiatives (October, 2006-present); Chief
Financial Officer of Denny’s (2005-present); Senior Vice President
(2005-October, 2006); Executive Vice President and Chief Financial
Officer
of Danka Business Systems (a document imaging company)
(1998-2005).
|
Employees
At
December 27, 2006, we had approximately 27,000 employees, none of whom are
subject to collective bargaining agreements. Many of our restaurant employees
work part-time, and many are paid at or slightly above minimum wage levels.
As
is characteristic of the restaurant industry, we experience a high level of
turnover among our restaurant employees. We have experienced no significant
work
stoppages, and we consider our relations with our employees to be satisfactory.
The
staff
for a typical restaurant consists of one general manager, two or three
restaurant managers and approximately 50 hourly employees. All managers of
company-owned restaurants receive a salary and may receive a performance
bonus
based on financial measures, guest retention and health and quality assurance
measures. As of December 27, 2006, we employed two Division Vice Presidents
of
Operations, 9 Regional Directors of Operations and 76 Area Managers.
The Area Managers' duties include regular restaurant visits and inspections,
which ensure the ongoing maintenance of our standards of quality, service,
cleanliness, value, and courtesy.
Available
Information
We
make
available free of charge through our website at www.dennys.com (in the Investor
Relations—S.E.C. Filings section) copies of materials that we file with, or
furnish to, the Securities and Exchange Commission ("SEC") including our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to those reports, as soon as reasonably practicable after
we
electronically file such materials with, or furnish them to, the SEC.
Risks
Related to Our Business
The
restaurant business is highly competitive, and if we are unable to compete
effectively, our business will be adversely affected.
We
expect
competition to continue to increase. The following are important aspects of
competition:
• restaurant
location;
• food
quality and value;
• quality
and speed of service;
• attractiveness
and repair and maintenance of facilities; and
• the
effectiveness of marketing and advertising programs.
Each
of
our restaurants competes with a wide variety of restaurants ranging from
national and regional restaurant chains (some of which have substantially
greater financial resources than we do) to locally owned restaurants. There
is
also active competition for advantageous commercial real estate sites suitable
for restaurants.
Our
business may be adversely affected by changes in consumer tastes, economic
conditions, demographic trends, bad publicity, regional weather conditions
and
increased supply and labor costs.
Food
service businesses are often adversely affected by changes in:
• consumer
tastes;
• national,
regional and local economic conditions; and
• demographic
trends.
The
performance of our individual restaurants may be adversely affected by factors
such as:
• traffic
patterns;
• demographic
consideration; and
• the
type,
number and location of competing restaurants.
Multi-unit
food service chains such as ours can also be materially and adversely affected
by publicity resulting from:
• poor
food
quality;
• illness;
• injury;
and
• other
health concerns or operating issues.
Dependence
on frequent deliveries of fresh produce and groceries subjects food service
businesses to the risk that shortages or interruptions in supply caused by
adverse weather or other conditions could adversely affect the availability,
quality and cost of ingredients. In addition, the food service industry in
general ,and our results of operations and financial condition in particular,
may also be adversely affected by unfavorable trends or developments such as:
• inflation;
• increased
food costs;
• increased
energy costs;
• labor
and
employee benefits costs (including increases in minimum hourly wage and
employment tax rates);
• regional
weather conditions; and
• the
availability of experienced management and hourly employees.
The
locations where we have restaurants may cease to be attractive as demographic
patterns change.
The
success of our owned and franchised restaurants is significantly influenced
by
location. Current locations may not continue to be attractive as demographic
patterns change. It is possible that the neighborhood or economic conditions
where our restaurants are located could decline in the future, potentially
resulting in reduced sales in those locations.
A
majority of Denny's restaurants are owned and operated by independent
franchisees, and as a result the financial performance of franchisees can
negatively impact our business.
We
receive royalties and contributions to advertising
from our franchisees. Our financial results are somewhat contingent upon the
operational and financial success of our franchisees, including implementation
of our strategic plans, as well as their ability to secure adequate financing.
If sales trends or economic conditions worsen for our franchisees, their
financial health may worsen, our collection rates may decline and we may be
required to assume the responsibility for additional lease payments on
franchised restaurants. Additionally, refusal on the part of franchisees to
renew their franchise agreements may result in decreased royalties.
Although
the loss of revenues from the closure of any one franchise restaurant may not
be
material, such revenues generate margins that may exceed those generated by
other restaurants or offset fixed costs which we continue to incur.
The
interests of franchisees, as owners of the majority of our restaurants, might
sometimes conflict with our interests. For example, whereas franchisees are
concerned with their individual business strategies and objectives, we are
responsible for ensuring the success of our entire chain of restaurants and
for
taking a longer term view with respect to system improvements.
Numerous
government regulations impact our business, and our failure to comply with
them
could adversely affect our business.
We
and
our franchisees are subject to federal, state and local laws and regulations
governing, among other things:
• health;
• sanitation;
• environmental
matters;
• safety;
• the
sale
of alcoholic beverages; and
• hiring
and employment practices, including minimum wage laws.
Our
restaurant operations are also subject to federal and state laws that prohibit
discrimination and laws regulating the design and operation of facilities,
such
as the Americans with Disabilities Act of 1990. The operation of our franchisee
system is also subject to regulations enacted by a number of states and rules
promulgated by the Federal Trade Commission. If we or our franchisees fail
to
comply with these laws and regulations, we could be subjected to restaurant
closure, fines, penalties, and litigation, which may be costly. In addition,
the
future enactment of additional legislation regulating the franchise relationship
could adversely affect our operations, particularly our relationship with
franchisees.
Negative
publicity generated by incidents at a few restaurants can adversely affect
the
operating results of our entire chain and the Denny’s brand.
Food
safety concerns, criminal activity, alleged discrimination or other operating
issues stemming from one restaurant or a limited number of restaurants do not
just impact that particular restaurant or a limited number of restaurants.
Rather, our entire chain of restaurants may be at risk from negative publicity
generated by an incident at a single restaurant. This negative publicity can
adversely affect the operating results of our entire chain and the Denny’s
brand.
As
holding companies, Denny’s Corporation and Denny’s Holdings depend on upstream
payments from their operating subsidiaries. Our ability to repay our
indebtedness depends on the performance of those subsidiaries and their ability
to make distributions to us.
A
substantial portion of our assets are owned, and a substantial percentage of
our
total operating revenues are earned, by our subsidiaries. Accordingly, Denny’s
Corporation and Denny’s Holdings depend upon dividends, loans and other
intercompany transfers from our subsidiaries to meet their debt service and
other obligations. These transfers are subject to contractual restrictions.
Our
subsidiaries are separate and distinct legal entities and they have no
obligation, contingent or otherwise, to make any funds available to meet our
debt service and other obligations, whether by dividend, distribution, loan
or
other payments. If our subsidiaries do not pay dividends or other distributions,
Denny’s Corporation and Denny’s Holdings may not have sufficient cash to fulfill
their obligations.
If
we lose the services of any of our key management personnel, our business could
suffer.
Our
future success significantly depends on the continued services and performance
of our key management personnel. Our future performance will depend on our
ability to motivate and retain these and other key officers and key team
members, particularly regional and area managers and restaurant general
managers. Competition for these employees is intense. The loss of the services
of members of our senior management or key team members or the inability to
attract additional qualified personnel as needed could materially harm our
business.
Risks
Related to our Indebtedness
Our
substantial indebtedness could have a material adverse effect on our financial
condition and operations.
We
have a
significant amount of indebtedness. As of December 27, 2006, we had total
indebtedness of approximately $453.3 million.
Our
substantial level of indebtedness could:
• make
it
more difficult for us to satisfy our obligations with respect to our
indebtedness;
• require
us to continue to dedicate a substantial portion of our cash flow from
operations to pay interest and principal on our indebtedness, which would reduce
the availability of
our cash flow to fund future working capital, capital expenditures, acquisitions
and other general corporate purposes;
• increase
our vulnerability to general adverse economic and industry conditions;
• limit
our
flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
• restrict
us from making strategic acquisitions or pursuing business opportunities;
• place
us
at a competitive disadvantage compared to our competitors that have relatively
less indebtedness; and
• limit
our
ability to borrow additional funds.
We
may
need to access the capital markets in the future to raise the funds to repay
our
indebtedness. We have no assurance that we will be able to complete a
refinancing or that we will be able to raise any additional financing,
particularly in view of our anticipated high levels of indebtedness and the
restrictions contained in the credit agreements and indenture that govern our
indebtedness. If we are unable to satisfy or refinance our current debt as
it
comes due, we may default on our debt obligations. If we default on payments
under our debt obligations, virtually all of our other debt would become
immediately due and payable.
Despite
our current level of indebtedness, we may still be able to incur substantially
more debt, which could further exacerbate the risks associated with our
substantial leverage.
Despite
our current and anticipated debt levels, we may be able to incur substantial
additional indebtedness in the future. The credit agreements and the indenture
governing our indebtedness limit, but do not fully prohibit, us from incurring
additional indebtedness. If new debt is added to our current debt levels, the
related risks that we now face could intensify.
At
December 27, 2006, we had an outstanding term loan of $245.6 million and
outstanding letters of credit of $42.6 million (comprised of $39.6 million
under
our letter of credit facility and $3.0 million under our revolving
facility). There were no revolving loans outstanding at December 27, 2006.
These
balances result in availability of $0.4 million under our letter of credit
facility and $47.0 million under the revolving facility. As
of
March 1, 2007 we had availability of $4.8 million under our letter of
credit facility and $47.1 million under the revolving facility. There were
no
revolving loans outstanding at March 1, 2007. In
addition, we have Denny's Holdings. Inc. 10% Senior Notes due in 2012 (the
"10%
Notes") with an aggregate principal amount of $175 million.
We
continue to monitor our cash flow and liquidity needs. Although we believe
that
our existing cash balances, funds from operations and amounts available under
our credit facility will be adequate to cover those needs, we may seek
additional sources of funds including additional financing sources and continued
selected asset sales, to maintain sufficient cash flow to fund our ongoing
operating needs, pay interest and scheduled debt amortization and fund
anticipated capital expenditures over the next twelve months.
Our
ability to generate cash depends on many factors beyond our control, and we
may
not be able to generate the cash required to service or repay our indebtedness.
Our
ability to make scheduled payments on our indebtedness will depend upon our
subsidiaries’ operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Our historical financial results have been, and our future
financial results are expected to be, subject to substantial fluctuations.
We
cannot be sure that our subsidiaries will generate sufficient cash flow from
operations to enable us to service or reduce our indebtedness or to fund our
other liquidity needs. Our subsidiaries’ ability to maintain or increase
operating cash flow will depend upon:
• consumer
tastes;
• the
success of our marketing initiatives and other efforts by us to increase
customer traffic in our restaurants; and
• prevailing
economic conditions and other matters, many of which are beyond our control.
If
we are
unable to meet our debt service obligations or fund other liquidity needs,
we
may need to refinance all or a portion of our indebtedness on or before maturity
or seek additional equity capital. We cannot be sure that we will be able to
pay
or refinance our indebtedness or obtain additional equity capital on
commercially reasonable terms, or at all.
Restrictive
covenants in our debt instruments restrict or prohibit our ability to engage
in
or enter into a variety of transactions, which could adversely affect us.
The
credit agreement and the indenture governing our indebtedness contain various
covenants that limit, among other things, our ability to:
• incur
additional indebtedness;
• pay
dividends or make distributions or certain other restricted payments;
• make
certain investments;
• create
dividend or other payment restrictions affecting restricted subsidiaries;
• issue
or
sell capital stock of restricted subsidiaries;
• guarantee
indebtedness;
• enter
into transactions with stockholders or affiliates;
• create
liens;
• sell
assets and use the proceeds thereof;
• engage
in
sale-leaseback transactions; and
• enter
into certain mergers and consolidations.
Our
credit agreement contains additional restrictive covenants, including financial
maintenance requirements. These covenants could have an adverse effect on our
business by limiting our ability to take advantage of financing, merger,
acquisition or other corporate opportunities and to fund our operations.
A
breach of a covenant in our debt instruments could cause acceleration of a
significant portion of our outstanding indebtedness.
A
breach
of a covenant or other provision in any debt instrument governing our current
or
future indebtedness could result in a default under that instrument and, due
to
cross-default and cross-acceleration provisions, could result in a default
under
our other debt instruments. In addition, our credit agreement requires us to
maintain certain financial ratios. Our ability to comply with these covenants
may be affected by events beyond our control, and we cannot be sure that we
will
be able to comply with these covenants. Upon the occurrence of an event of
default under any of our debt instruments, the lenders could elect to declare
all amounts outstanding to be immediately due and payable and terminate all
commitments to extend further credit. If we were unable to repay those amounts,
the lenders could proceed against the collateral granted to them, if any, to
secure the indebtedness. If the lenders under our current or future indebtedness
accelerate the payment of the indebtedness, we cannot be sure that our assets
would be sufficient to repay in full our outstanding indebtedness.
We
may not be able to repurchase the 10% Senior Notes due 2012 upon a change of
control.
Upon
the
occurrence of specific kinds of change of control events, we would be required
to offer to repurchase all outstanding 10% Notes at 101% of their principal
amount, together with any accrued and unpaid interest and liquidated damages,
if
any, from the issue date. We may not be able to repurchase the notes upon a
change of control because we may not have sufficient funds. Further, our credit
agreement restricts our ability to repurchase the notes, and also provides
that
certain change of control events will constitute a default under our credit
agreement that permits our lenders thereunder to accelerate the maturity of
related borrowings, and, if such debt is not paid, to enforce security interests
in the collateral securing such debt, thereby limiting our ability to raise
cash
to purchase the notes. Any future credit agreements or other agreements relating
to indebtedness to which we become a party may contain similar restrictions
and
provisions. In the event a change of control occurs at a time when we are
prohibited by any other indebtedness from purchasing the notes, we could
seek consent of the lenders of such indebtedness to the purchase of the
notes or could attempt to refinance the borrowings that contain such
prohibition. If we do not obtain such consent or repay such borrowings, we
will
remain prohibited from purchasing the notes. In such case, our failure to
purchase tendered notes would constitute an event of default under the indenture
governing the notes which would, in turn, constitute a default under our credit
agreement.
None.
Most
Denny’s restaurants are free-standing facilities, with property sizes averaging
approximately one acre. The restaurant buildings average 4,800 square feet,
allowing them to accommodate an average of 140 guests. The number and location
of our restaurants as of December 27, 2006 are presented below:
State/Country
|
|
|
Company
Owned
|
|
|
Franchised/Licensed
|
|
Alabama
|
|
|
3
|
|
|
—
|
|
Alaska
|
|
|
—
|
|
|
4
|
|
Arizona
|
|
|
23
|
|
|
49
|
|
Arkansas
|
|
|
—
|
|
|
9
|
|
California
|
|
|
157
|
|
|
244
|
|
Colorado
|
|
|
7
|
|
|
19
|
|
Connecticut
|
|
|
—
|
|
|
8
|
|
District
of Columbia
|
|
|
—
|
|
|
1
|
|
Delaware
|
|
|
3
|
|
|
—
|
|
Florida
|
|
|
57
|
|
|
103
|
|
Georgia
|
|
|
—
|
|
|
12
|
|
Hawaii
|
|
|
4
|
|
|
3
|
|
Idaho
|
|
|
—
|
|
|
7
|
|
Illinois
|
|
|
31
|
|
|
21
|
|
Indiana
|
|
|
3
|
|
|
30
|
|
Iowa
|
|
|
—
|
|
|
1
|
|
Kansas
|
|
|
—
|
|
|
8
|
|
Kentucky
|
|
|
6
|
|
|
6
|
|
Louisiana
|
|
|
2
|
|
|
1
|
|
Maine
|
|
|
—
|
|
|
6
|
|
Maryland
|
|
|
6
|
|
|
19
|
|
Massachusetts
|
|
|
—
|
|
|
6
|
|
Michigan
|
|
|
19
|
|
|
3
|
|
Minnesota
|
|
|
3
|
|
|
13
|
|
Mississippi
|
|
|
1
|
|
|
—
|
|
Missouri
|
|
|
5
|
|
|
31
|
|
Montana
|
|
|
—
|
|
|
4
|
|
Nebraska
|
|
|
—
|
|
|
1
|
|
Nevada
|
|
|
10
|
|
|
16
|
|
New
Hampshire
|
|
|
—
|
|
|
3
|
|
New
Jersey
|
|
|
6
|
|
|
5
|
|
New
Mexico
|
|
|
2
|
|
|
18
|
|
New
York
|
|
|
33
|
|
|
12
|
|
North
Carolina
|
|
|
4
|
|
|
13
|
|
North
Dakota
|
|
|
—
|
|
|
3
|
|
Ohio
|
|
|
21
|
|
|
13
|
|
Oklahoma
|
|
|
3
|
|
|
19
|
|
Oregon
|
|
|
—
|
|
|
23
|
|
Pennsylvania
|
|
|
30
|
|
|
7
|
|
Rhode
Island
|
|
|
—
|
|
|
2
|
|
South
Carolina
|
|
|
9
|
|
|
3
|
|
South
Dakota
|
|
|
—
|
|
|
2
|
|
Tennessee
|
|
|
2
|
|
|
1
|
|
Texas
|
|
|
35
|
|
|
117
|
|
Utah
|
|
|
—
|
|
|
20
|
|
Vermont
|
|
|
—
|
|
|
2
|
|
Virginia
|
|
|
8
|
|
|
14
|
|
Washington
|
|
|
19
|
|
|
35
|
|
West
Virginia
|
|
|
—
|
|
|
2
|
|
Wisconsin
|
|
|
9
|
|
|
8
|
|
Guam
|
|
|
—
|
|
|
2
|
|
Puerto
Rico
|
|
|
—
|
|
|
10
|
|
Canada
|
|
|
—
|
|
|
51
|
|
Other
International
|
|
|
—
|
|
|
14
|
|
Total
|
|
|
521
|
|
|
1,024
|
|
Of
the
total 1,545 company-owned and franchised units, our interest in restaurant
properties consists of the following:
|
|
|
Company-Owned Units
|
|
|
Franchised
Units
|
|
|
Total
|
|
Own
land and building
|
|
|
135
|
|
|
11
|
|
|
146
|
|
Lease
land and own building
|
|
|
30
|
|
|
—
|
|
|
30
|
|
Lease
both land and building
|
|
|
356
|
|
|
221
|
|
|
577
|
|
|
|
|
521
|
|
|
232
|
|
|
753
|
|
In
addition to the restaurants, we own an 18-story, 187,000 square foot office
building in Spartanburg, South Carolina, which serves as our corporate
headquarters. Our corporate offices currently occupy approximately 16 floors
of
the building, with a portion of the building leased to others.
See
Note
12 to our Consolidated Financial Statements for information concerning
encumbrances on substantially all of our properties.
In
the
third quarter of 2006, Denny's 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 provided for
payments up to approximately $1.7 million in the aggregate 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. Notification of the settlement
was
sent to putative class members, who were required to "opt in" by December
22,
2006 in order to participate in the distribution. As of December 27, 2006,
all
claims, approximately $0.1 million, had been paid to valid claimants.
In
the
fourth quarter of 2005, Denny’s 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 Consolidated Balance Sheet at December 28, 2005 and was paid
on January 6, 2006, in accordance with the instruction 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.
Not
applicable.
Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our
common stock is listed under the symbol “DENN” and trades on the NASDAQ Capital
Market. As of March 1, 2007, 93,522,470 shares of common stock were
outstanding, and there were approximately 17,150 record and beneficial
holders of common stock. We have never paid dividends on our common equity
securities. Furthermore, restrictions contained in the instruments governing
our
outstanding indebtedness prohibit us from paying dividends on the common stock
in the future. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources” and Note 12 to
our Consolidated Financial Statements.
The
following tables list the high and low sales prices of the common stock for
each
quarter of fiscal years 2006 and 2005, according to NASDAQ. Our common stock
began trading on the NASDAQ Capital Market on May 10, 2005.
|
|
|
High
|
|
|
Low
|
|
2006
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
5.10
|
|
$
|
3.65
|
|
Second
quarter
|
|
|
5.26
|
|
|
3.45
|
|
Third
quarter
|
|
|
3.99
|
|
|
2.49
|
|
Fourth
quarter
|
|
|
4.86
|
|
|
3.30
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
5.00
|
|
$
|
4.13
|
|
Second
quarter
|
|
|
5.80
|
|
|
3.50
|
|
Third
quarter
|
|
|
6.20
|
|
|
4.00
|
|
Fourth
quarter
|
|
|
5.22
|
|
|
3.64
|
|
The
following table summarizes the consolidated financial and operating data of
Denny’s Corporation as of and for the years ended December 27, 2006,
December 28, 2005, December 29, 2004, December 31, 2003
and December 25, 2002. The consolidated statements of operations for
the years ended December 27, 2006, December 28, 2005
and December 29, 2004 and the balance sheet data as of December 27,
2006 and December 28, 2005 are derived from our audited Consolidated
Financial Statements included in this Form 10-K. The consolidated statements
of
operations for the years ended December 31, 2003 and December 25, 2002 and
balance sheet data as of December 29, 2004, December 31, 2003
and December 25, 2002 are derived from our Consolidated Financial
Statements not included in this Form 10-K. The selected consolidated financial
and operating data set forth below should be read together with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our Consolidated Financial Statements and related notes.
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
|
December
28,
2005
|
|
|
December
29,
2004
|
|
|
December
31,
2003(a)
|
|
|
December
25,
2002
|
|
|
|
(In
millions, except ratios and per share
amounts)
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
994.0
|
|
$
|
978.7
|
|
$
|
960.0
|
|
$
|
940.9
|
|
$
|
948.6
|
|
Operating
income (e)
|
|
|
110.5
|
|
|
48.5
|
|
|
53.8
|
|
|
46.0
|
|
|
47.3
|
|
Income
(loss) from continuing operations before
cumulative
effect of change in accounting principle
(b)(e)
|
|
|
30.1
|
|
|
(7.3
|
)
|
|
(37.7
|
)
|
|
(33.8
|
)
|
|
5.2
|
|
Cumulative
effect of change in accounting principle, net of
tax
|
|
|
0.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Income
(loss) from continuing operations (b)(e) |
|
|
30.3 |
|
|
(7.3 |
) |
|
(37.7 |
) |
|
(33.8 |
) |
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) before cumulative effect of
change
in accounting principle, net of tax
|
|
$ |
0.33 |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
$ |
(0.83 |
) |
$ |
0.13 |
|
Cumulative
effect of change in accounting principle, net
of
tax
|
|
|
0.00 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Basic
net income (loss) per share from continuing
operations
|
|
$ |
0.33 |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
$ |
(0.83 |
) |
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) before cumulative effect of
change
in accounting principle, net of tax
|
|
$ |
0.31 |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
$ |
(0.83 |
) |
$ |
0.13 |
|
Cumulative
of effect of change in accounting principle,
net
of tax
|
|
|
0.00 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Diluted
net income (loss) per share from continuing
operations
|
|
$ |
0.31 |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
$ |
(0.83 |
) |
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share (c)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets (e)
|
|
$
|
62.8
|
|
$
|
61.6
|
|
$
|
41.9
|
|
$
|
30.0
|
|
$
|
31.5
|
|
Working
capital deficit (d)(e)
|
|
|
(73.0
|
)
|
|
(86.8
|
)
|
|
(93.8
|
)
|
|
(161.6
|
)
|
|
(120.2
|
)
|
Net
property and equipment
|
|
|
236.3
|
|
|
288.1
|
|
|
285.4
|
|
|
293.2
|
|
|
321.9
|
|
Total
assets (e)
|
|
|
443.9
|
|
|
511.3
|
|
|
498.9
|
|
|
495.0
|
|
|
541.0
|
|
Long-term
debt, excluding current portion
|
|
|
440.7
|
|
|
545.7
|
|
|
547.4
|
|
|
538.3
|
|
|
591.5
|
|
(a) |
The fiscal year ended
December 31, 2003 includes 53 weeks of operations as compared with 52
weeks for all other years presented. We estimate that the additional,
or
53rd, week added approximately $22.4 million of operating revenue in
2003.
|
|
|
(b) |
We classified FRD as discontinued
operations through July 2002, the divestiture date. We completed the
divestiture of FRD in 2002. |
|
|
(c) |
Our bank facilities have
prohibited, and our previous and current public debt indentures have
significantly limited, distributions and dividends on Denny’s
Corporation’s (and its predecessors’) common equity securities. See Note
12 to our Consolidated Financial Statements. |
|
|
(d) |
A negative working capital position
is not
unusual for a restaurant operating company. The decrease in working
capital deficit from December 31, 2003 to December 29, 2004 is
primarily related to the use of cash received during the recapitalization
transactions completed during the third and fourth quarters of 2004
to
repay outstanding amounts related to term loans and revolving loans
under
our previous credit facility that had a December 20, 2004 expiration
date. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources”.
The increase in working capital deficit from December 25, 2002 to
December 31, 2003 is primarily attributable to the reclassification
of the term loan of $40.0 million and revolving loans of $11.1 million
under our previous credit facility to current liabilities as a result
of
their December 20, 2004 expiration date. |
|
|
(e) |
Fiscal
years 2002 through 2005 have been adjusted from amounts previously
reported to reflect certain adjustments as discussed in “Balance Sheet
Adjustments” in Note 3 to our Consolidated Financial Statements.
|
The
following discussion should be read in conjunction with “Selected Financial
Data,” and our Consolidated Financial Statements and the notes thereto.
Overview
Denny’s
revenues are primarily derived from two sources: the sale of food and beverages
at our company-owned restaurants and the collection of royalties and fees from
restaurants operated by our franchisees under the Denny’s name.
Sales
are
affected by many factors including competition, economic conditions affecting
consumer spending, weather and changes in customer tastes and preferences.
Two
primary sales drivers are changes in same-store sales and the number of
restaurants. Same-store sales are comprised of the changes in guest
check average and guest counts.
We
continue to focus on identifying and closing low
performing units. As a result, company-owned and franchise units
decreased by 22 and 11 units, respectively, during 2006. Netted in the unit
decreases were the opening of three company-owned and 17 franchisee restaurants.
Development of company-owned restaurants will focus on flagship locations in
Denny’s core markets. We expect that the majority of new Denny’s restaurants
will be developed by our franchisees.
Our
costs of company-owned restaurant sales are exposed
to volatility in two main areas: product costs and payroll and benefit costs.
Many of the products sold in our restaurants are affected by commodity pricing
and are, therefore, subject to price volatility. This volatility is caused
by
factors that are fundamentally outside of our control and are often
unpredictable. In general, we purchase food products based on market prices,
or
we “lock in” prices in purchase agreements with our vendors. In addition, some
of our purchasing agreements contain features that minimize price volatility
by
establishing price ceilings and/or floors. While we will address commodity
cost
increases which are significant and considered long-term in nature by adjusting
menu prices, competitive circumstances can limit such actions.
Payroll
and benefit costs’ volatility results primarily
from changes in wage rates and increases in labor related expenses such as
medical benefit costs and workers’ compensation costs. A number of our employees
are paid the minimum wage. Accordingly, substantial increases in the
minimum wage increases our labor costs. Additionally, declines in guest counts
and investments in store level labor can cause payroll and benefit costs to
increase as a percentage of sales.
Franchise
and license revenues are the revenues received
by Denny’s from its franchisees and include royalties (based on a percentage of
sales of franchise operated restaurants), initial franchise fees and occupancy
revenue related to restaurants leased or subleased to franchisees. During 2006,
we sold 81 franchise-operated real estate properties. Occupancy revenue,
included in franchise and license revenue in 2006, related to the sold
properties was approximately $5.0 million. Our 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, bad debt expense and marketing
expenses net of marketing contributions received from franchisees. Occupancy
costs, included in costs of franchise and license revenue in 2006, related
to
the sold properties were approximately $0.9 million. Franchise and
licensing revenues are generally billed and collected from franchisees on a
weekly basis which minimizes the impact of bad debts on our costs of franchise
and license revenues.
Interest
expense has a significant impact on our net income (loss) as a result of our
substantial indebtedness. However, during 2006 we continued to
reduce interest expense through a series of debt repayments and a
refinancing of our credit facilities, contributing to an overall debt
reduction of more than $100 million. We are subject to the effects of interest
rate volatility since approximately 58% of our debt has variable interest
rates.
Statements
of Operations
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(Dollars
in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurant sales
|
|
$
|
904,374
|
|
|
91.0
|
%
|
$
|
888,942
|
|
|
90.8
|
%
|
$
|
871,248
|
|
|
90.8
|
%
|
Franchise
and license revenue
|
|
|
89,670
|
|
|
9.0
|
%
|
|
89,783
|
|
|
9.2
|
%
|
|
88,758
|
|
|
9.2
|
%
|
Total
operating revenue
|
|
|
994,044
|
|
|
100.0
|
%
|
|
978,725
|
|
|
100.0
|
%
|
|
960,006
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of company restaurant sales (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
costs
|
|
|
226,404
|
|
|
25.0
|
%
|
|
224,803
|
|
|
25.3
|
%
|
|
225,200
|
|
|
25.8
|
%
|
Payroll
and benefits
|
|
|
372,292
|
|
|
41.2
|
%
|
|
372,644
|
|
|
41.9
|
%
|
|
362,450
|
|
|
41.6
|
%
|
Occupancy
|
|
|
51,677
|
|
|
5.7
|
%
|
|
51,057
|
|
|
5.7
|
%
|
|
49,581
|
|
|
5.7
|
%
|
Other
operating expenses
|
|
|
131,404
|
|
|
14.5
|
%
|
|
130,883
|
|
|
14.7
|
%
|
|
117,834
|
|
|
13.5
|
%
|
Total
costs of company restaurant sales
|
|
|
781,777
|
|
|
86.4
|
%
|
|
779,387
|
|
|
87.7
|
%
|
|
755,065
|
|
|
86.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of franchise and license revenue (a)
|
|
|
27,910
|
|
|
31.1
|
%
|
|
28,758
|
|
|
32.0
|
%
|
|
28,196
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
66,426
|
|
|
6.7
|
%
|
|
62,911
|
|
|
6.4
|
%
|
|
66,922
|
|
|
7.0
|
%
|
Depreciation
and other amortization
|
|
|
55,290
|
|
|
5.6
|
%
|
|
56,126
|
|
|
5.7
|
%
|
|
56,649
|
|
|
5.9
|
%
|
Operating
gains, losses and other charges, net
|
|
|
(47,882
|
) |
|
(4.8
|
%)
|
|
3,090
|
|
|
0.3
|
%
|
|
(646
|
) |
|
(0.1
|
%)
|
Total
operating costs and expenses
|
|
|
883,521
|
|
|
88.9
|
%
|
|
930,272
|
|
|
95.0
|
%
|
|
906,186
|
|
|
94.4
|
%
|
Operating
income
|
|
|
110,523
|
|
|
11.1
|
%
|
|
48,453
|
|
|
5.0
|
%
|
|
53,820
|
|
|
5.6
|
%
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
57,720
|
|
|
5.8
|
%
|
|
55,172
|
|
|
5.6
|
%
|
|
69,428
|
|
|
7.2
|
%
|
Other
nonoperating expense (income), net
|
|
|
8,029
|
|
|
0.8
|
%
|
|
(602
|
)
|
|
(0.1
|
%)
|
|
21,265
|
|
|
2.2
|
%
|
Total
other expenses, net
|
|
|
65,749
|
|
|
6.6
|
%
|
|
54,570
|
|
|
5.6
|
%
|
|
90,693
|
|
|
9.4
|
%
|
Net
income (loss) before income taxes and cumulative
effect
of change in accounting principle
|
|
|
44,774
|
|
|
4.5
|
%
|
|
(6,117
|
)
|
|
(0.6
|
%)
|
|
(36,873
|
)
|
|
(3.8
|
%)
|
Provision
for income taxes
|
|
|
14,668
|
|
|
1.5
|
%
|
|
1,211
|
|
|
0.1
|
%
|
|
802
|
|
|
0.1
|
%
|
Net
income (loss) before cumulative effect of change
in
accounting principle
|
|
|
30,106 |
|
|
3.0 |
%
|
|
(7,328 |
) |
|
(0.7 |
%) |
|
(37,675 |
) |
|
(3.9 |
%) |
Cumulative
effect of change in accounting principle |
|
|
232 |
|
|
0.0 |
% |
|
— |
|
|
— |
% |
|
— |
|
|
— |
%
|
Net
income (loss )
|
|
$
|
30,338
|
|
|
3.1
|
%
|
$
|
(7,328
|
)
|
|
(0.7
|
%)
|
$
|
(37,675
|
)
|
|
(3.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
average unit sales
|
|
$
|
1,693
|
|
|
|
|
$
|
1,642
|
|
|
|
|
$
|
1,575
|
|
|
|
|
Franchise
average unit sales |
|
|
1,481 |
|
|
|
|
|
1,408 |
|
|
|
|
|
1,326 |
|
|
|
|
Same-store
sales increase (company-owned) (b)(c)
|
|
|
2.5
|
%
|
|
|
|
|
3.3
|
%
|
|
|
|
|
5.9
|
%
|
|
|
|
Guest
check average increase (c)
|
|
|
4.4
|
%
|
|
|
|
|
4.4
|
%
|
|
|
|
|
4.1
|
%
|
|
|
|
Guest
count increase (decrease) (c)
|
|
|
(1.8
|
%)
|
|
|
|
|
(1.0
|
%)
|
|
|
|
|
1.7
|
%
|
|
|
|
Same-store
sales increase (franchised and licensed
units)
(b)(c)
|
|
|
3.6 |
% |
|
|
|
|
5.2 |
% |
|
|
|
|
6.0 |
% |
|
|
|
(a) Costs
of
company restaurant sales percentages are as a percentage of company restaurant
sales. Costs of franchise and license revenue percentages are as a percentage
of
franchise and license revenue. All other percentages are as a percentage of
total operating revenue.
(b) Same-store
sales include sales from restaurants that were open the same period in 2006,
2005 and 2004.
(c) Prior
year amounts have not been restated for 2006 comparable units.
Unit
Activity
|
|
|
2006
|
|
|
2005
|
|
Company-owned
restaurants, beginning of period |
|
|
543 |
|
|
553 |
|
Units
opened
|
|
|
3 |
|
|
2 |
|
Units
reacquired
|
|
|
1 |
|
|
— |
|
Units
closed
|
|
|
(26 |
) |
|
(12 |
) |
End
of period total
|
|
|
521 |
|
|
543 |
|
|
|
|
|
|
|
|
|
Franchised
and licensed restaurants, beginning of period |
|
|
1,035 |
|
|
1,050 |
|
Units
opened
|
|
|
17 |
|
|
19 |
|
Units
reacquired
|
|
|
(1 |
) |
|
— |
|
Units
closed
|
|
|
(27 |
) |
|
(34 |
) |
End
of period total
|
|
|
1,024 |
|
|
1,035 |
|
|
|
|
|
|
|
|
|
Total
company-owned, franchised and licensed restaurants, end of
period |
|
|
1,545 |
|
|
1,578 |
|
2006
Compared with 2005
Company
Restaurant Operations
During
the year ended December 27, 2006, we realized a 2.5% increase in same-store
sales, comprised of a 4.4% increase in guest check average and a 1.8% decrease
in guest counts. The increase in guest check average resulted from
customers trading up to higher priced dinner entrees and cold
beverages. Company restaurant sales increased $15.4 million (1.7%). Higher
sales resulted primarily from the increase in same-store sales for the current
year, partially offset by a seven equivalent-unit decrease in company-owned
restaurants. The decrease in company-owned restaurants resulted from store
closures.
Total
costs of company restaurant sales as a percentage of company restaurant sales
decreased to 86.4% from 87.7%. Product costs decreased to 25.0% from 25.3%
due
to shifts in menu mix and the impact of a higher guest check average. Payroll
and benefits decreased to 41.2% from 41.9% primarily related to
improvements in workers' compensation costs. Fiscal 2006 benefited by $2.8
million of positive workers' compensation claims development, while 2005
was
impacted by $3.6 million of negative workers' compensation claims
development. In addition, decreased
management incentive compensation was partially offset by increased group
insurance costs. Occupancy costs remained essentially flat at 5.7%. Other
operating expenses were comprised of the following amounts and percentages
of
company restaurant sales:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(Dollars
in thousands)
|
|
Utilities
|
|
$
|
44,329
|
|
|
4.9
|
%
|
$
|
42,727
|
|
|
4.8
|
%
|
Repairs
and maintenance
|
|
|
18,252
|
|
|
2.0
|
%
|
|
18,677
|
|
|
2.1
|
%
|
Marketing
|
|
|
29,879
|
|
|
3.3
|
%
|
|
28,437
|
|
|
3.2
|
%
|
Legal
settlement costs
|
|
|
1,708
|
|
|
0.2
|
%
|
|
8,288
|
|
|
0.9
|
%
|
Other
|
|
|
37,236
|
|
|
4.1
|
%
|
|
32,754
|
|
|
3.7
|
%
|
Other
operating expenses
|
|
$
|
131,404
|
|
|
14.5
|
%
|
$
|
130,883
|
|
|
14.7
|
%
|
The
increase in utilities is the result of higher natural gas and electricity
costs.
The $6.6 million decrease in legal settlement costs is primarily the result
of
amounts recognized in the prior year for legal settlement expenses related
to
the settlement of the DLSE of the State of California's Department of Industrial
Relations' litigation and the development of certain other cases. Other
expenses included a scheduled reduction in coin-operated game machines in
our
restaurants resulting in a $2.3 million decrease in ancillary restaurant
income
and a $1.3 million increase in credit card fees primarily resulting from
$0.9 million recognized in the prior year related to the Visa Check /
Mastermoney Anti-Trust Litigation Settlement.
Franchise
and license revenue and costs of franchise and license revenue were comprised
of
the following amounts and percentages of franchise and license revenue:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(Dollars in
thousands)
|
|
Royalties
and initial fees
|
|
$
|
61,303
|
|
|
68.4
|
%
|
$
|
58,993
|
|
|
65.7
|
%
|
Occupancy
revenue
|
|
|
28,367
|
|
|
31.6
|
%
|
|
30,790
|
|
|
34.3
|
%
|
Franchise
and license revenue
|
|
|
89,670
|
|
|
100.0
|
%
|
|
89,783
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
costs
|
|
|
19,784
|
|
|
22.1
|
%
|
|
21,031
|
|
|
23.4
|
%
|
Other
direct costs
|
|
|
8,126
|
|
|
9.0
|
%
|
|
7,727
|
|
|
8.6
|
%
|
Costs
of franchise and license revenue
|
|
$
|
27,910
|
|
|
31.1
|
%
|
$
|
28,758
|
|
|
32.0
|
%
|
Royalties
increased $2.3 million (3.9%) resulting from a 3.6% increase in franchisee
same-store sales, partially offset by the effects of an eleven equivalent-unit
decrease in franchise and licensed units. The $2.4 million (7.9%) decline in
occupancy revenue is attributable to the sale of 81 franchise-operated
real estate properties during 2006. See Note 4 to our Consolidated
Financial Statements. Occupancy revenue, included in franchise and license
revenue in 2006, related to the sold properties was approximately $5.0
million, although we continue to collect royalties from the franchisees
operating restaurants at these properties.
Costs
of
franchise and license revenue decreased $0.8 million (2.9%). Occupancy costs
decreased $1.2 million due to changes in the portfolio of rental units.
Occupancy costs, included in costs of franchise and license revenue in 2006,
related to the sold properties were approximately $0.9 million. Other
direct costs increased $0.4 million primarily resulting from costs related
to
new store openings and an incentive award program for franchisees who achieved
certain performance criteria in 2006. As a percentage of franchise and license
revenue, these costs decreased to 31.1% for the year ended December 27,
2006 from 32.0% for the year ended December 28, 2005.
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:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Share-based
compensation
|
|
$
|
7,627
|
|
$
|
7,801
|
|
Other
general and administrative expenses
|
|
|
58,799
|
|
|
55,110
|
|
Total
general and administrative expenses
|
|
$
|
66,426
|
|
$
|
62,911
|
|
The
increase in 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:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Depreciation
of property and equipment
|
|
$
|
44,133
|
|
$
|
45,259
|
|
Amortization
of capital lease assets
|
|
|
4,682
|
|
|
3,582
|
|
Amortization
of intangible assets
|
|
|
6,475
|
|
|
7,285
|
|
Total
depreciation and amortization
|
|
$
|
55,290
|
|
$
|
56,126
|
|
The
overall decrease in depreciation and amortization expense is primarily due
to
the sale of real estate properties during 2006. See Note 4 to our
Consolidated Financial Statements.
Operating
gains, losses and other charges, net represent restructuring charges,
exit costs, impairment charges and gains or losses on the sale of assets
and
were comprised of the following:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Restructuring
charges and exit costs |
|
$ |
6,225 |
|
$ |
5,199 |
|
Impairment
charges |
|
|
2,694 |
|
|
1,174 |
|
Gains
on dispositions of assets and other, net |
|
|
(56,801 |
) |
|
(3,283 |
) |
Operating
gains, losses and other charges, net |
|
$ |
(47,882 |
) |
$ |
3,090 |
|
Restructuring
charges and exit costs were comprised of the
following:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Exit
costs |
|
$ |
4,254 |
|
$ |
1,898 |
|
Severance
and other restructuring charges |
|
|
1,971 |
|
|
3,301 |
|
Total
restructuring and exist costs
|
|
$ |
6,225 |
|
$ |
5,199 |
|
The
$6.2 million of restructuring charges and exit costs
for the year ended December 27, 2006 primarily resulted from the closing of
14
underperforming units, including one franchise unit for which we remain
obligated under the lease, in addition to severance and other restructuring
costs associated with the termination of approximately 41 out-of-restaurant
support staff positions. Restructuring charges and exit costs of $5.2 million
for the year ended December 28, 2005 primarily resulted from severance
and other restructuring costs associated with the termination of approximately
20 out-of-restaurant support staff positions, in addition to the closing of
eight underperforming units, including three franchise units for which we remain
obligated under leases.
Impairment
charges
of $2.7
million for the year ended December 27, 2006 and $1.2 million for the year
ended December 28, 2005 relate to either closed or certain underperforming
restaurants.
Gains
on
disposition of assets and other, net increased
to $56.8 million during 2006 from $3.3 million during 2005.
During
2006, we
completed
and closed the sale of 81 company-owned, franchisee-operated real estate
properties and five surplus real estate properties. See Note 4 to our
Consolidated Financial Statements.
Operating
income was
$110.5 million during 2006 compared with $48.5 million during 2005.
Interest
expense, net
is
comprised of the following:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Interest
on senior notes
|
|
$
|
17,452
|
|
$
|
17,449
|
|
Interest
on credit facilities
|
|
|
27,889
|
|
|
25,260
|
|
Interest
on capital lease liabilities
|
|
|
4,361
|
|
|
4,252
|
|
Letters
of credit and other fees
|
|
|
2,999
|
|
|
2,879
|
|
Interest
income
|
|
|
(1,822
|
)
|
|
(1,615
|
)
|
Total
cash interest
|
|
|
50,879
|
|
|
48,225
|
|
Amortization
of deferred financing costs
|
|
|
3,316
|
|
|
3,493
|
|
Interest
accretion on other liabilities
|
|
|
3,525
|
|
|
3,454
|
|
Total
interest expense, net
|
|
$
|
57,720
|
|
$
|
55,172
|
|
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 expenses, net were
$8.0
million for the year ended December 27, 2006 compared with other nonoperating
income of $0.6 million for the year ended
December 28, 2005. The expense for the 2006 period primarily represents an
$8.5
million loss on early extinguishment of debt, resulting primarily from
the write-off of deferred financing costs associated
with the debt prepayments made during the year and the refinancing of our
credit facilities. See Note 12 to our Consolidated Financial
Statements.
The
provision
for income taxes
was
$14.7 million compared with $1.2 million for the years ended December 27,
2006 and December 28, 2005, respectively. 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 $12.1 million for the year ended December 27, 2006 related to
our
reevaluation of our tax planning strategies in light of the sale
of appreciated properties during the year. In addition, during 2006, we
utilized certain state net operating loss carryforwards whose valuation
allowance was established in connection with fresh start reporting on January
7,
1998. As a result, we recorded approximately $0.7 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 16 to our
Consolidated Financial Statements.
Net
income was
$30.3
million for the year ended December 27, 2006 compared with a net loss of
$7.3 million for the year ended December 28, 2005 due to the factors noted
above.
2005
Compared with 2004
Company
Restaurant Operations
During
the year ended December 28, 2005, we realized a 3.3% increase in same-store
sales, comprised of a 4.4% increase in guest check average and a 1.0% decrease
in guest counts. Company restaurant sales increased $17.7 million (2.0%). Higher
sales resulted from the increase in same-store sales, partially offset by a
thirteen equivalent-unit decrease in company-owned restaurants. The decrease
in
company-owned restaurants resulted from store closures.
Total
costs of company restaurant sales as a percentage of company restaurant sales
increased to 87.7% from 86.7%. Product costs decreased to 25.3% from 25.8%
due
to shifts in menu mix and the impact of a higher guest check average. Payroll
and benefits increased slightly to 41.9% from 41.6% due to merit and minimum
wage increases. Additionally, changes in our vacation policies and higher
payroll taxes resulted in higher fringe related costs. These cost increases
were
partially offset by a reduction in incentive compensation and lower health
benefit costs. Occupancy costs remained essentially flat at 5.7%. Other
operating expenses were comprised of the following amounts and percentages
of
company restaurant sales:
|
|
Fiscal
Year Ended
|
|
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(Dollars
in thousands)
|
|
Utilities
|
|
$
|
42,727
|
|
|
4.8
|
%
|
$
|
39,511
|
|
|
4.5
|
%
|
Repairs
and maintenance
|
|
|
18,677
|
|
|
2.1
|
%
|
|
17,363
|
|
|
2.0
|
%
|
Marketing
|
|
|
28,437
|
|
|
3.2
|
%
|
|
29,003
|
|
|
3.3
|
%
|
Legal
settlement expense
|
|
|
8,288
|
|
|
0.9
|
%
|
|
1,522
|
|
|
0.2
|
%
|
Other
|
|
|
32,754
|
|
|
3.7
|
%
|
|
30,435
|
|
|
3.5
|
%
|
Other
operating expenses
|
|
$
|
130,883
|
|
|
14.7
|
%
|
$
|
117,834
|
|
|
13.5
|
%
|
During
the year ended December 28, 2005, we recorded an additional $6.6 million of
legal settlement expense related to the settlement of litigation in the state
of
California. See Note 19 to our Consolidated Financial Statements. The remaining
increase of $0.2 million relates to general developments in other pending cases.
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:
|
|
Fiscal
Year Ended
|
|
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(Dollars in
thousands)
|
|
Royalties
and initial fees
|
|
$
|
58,993
|
|
|
65.7
|
%
|
$
|
57,346
|
|
|
64.6
|
%
|
Occupancy
revenue
|
|
|
30,790
|
|
|
34.3
|
%
|
|
31,412
|
|
|
35.4
|
%
|
Franchise
and license revenue
|
|
|
89,783
|
|
|
100.0
|
%
|
|
88,758
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
costs
|
|
|
21,031
|
|
|
23.4
|
%
|
|
21,047
|
|
|
23.7
|
%
|
Other
direct costs
|
|
|
7,727
|
|
|
8.6
|
%
|
|
7,149
|
|
|
8.1
|
%
|
Costs
of franchise and license revenue
|
|
$
|
28,758
|
|
|
32.0
|
%
|
$
|
28,196
|
|
|
31.8
|
%
|
Royalties
increased $1.6 million (2.9%) resulting from a 5.2% increase in franchisee
same-store sales, partially offset by the effects of a twenty-three
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 increased $0.6 million primarily due to a $0.3
million increase in other direct costs related to incentive awards to
franchisees who achieved certain established performance criteria. As a
percentage of franchise and license revenue, these costs increased to 32.0%
for
the year ended December 28, 2005 from 31.8% for the year ended
December 29, 2004.
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:
|
|
Fiscal
Year Ended
|
|
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
|
Share-based
compensation
|
|
$
|
7,801
|
|
$
|
6,497
|
|
Transaction
costs
|
|
|
—
|
|
|
4,111
|
|
Other
general and administrative expenses
|
|
|
55,110
|
|
|
56,314
|
|
Total
general and administrative expenses
|
|
$
|
62,911
|
|
$
|
66,922
|
|
The
increase in share-based compensation costs resulted from the issuance of
additional liability classified share-based compensation awards and the
acceleration of stock-based incentives for certain terminated employees.
Transaction costs recorded in 2004 represent costs associated with the
refinancing transactions completed in the third and fourth quarters of 2004.
Other general and administrative expenses decreased slightly due to a $5.1
million reduction in incentive based compensation, partially offset by the
effects of investing in corporate staffing.
Depreciation
and amortization
is
comprised of the following:
|
|
Fiscal
Year Ended
|
|
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
|
Depreciation
of property and equipment
|
|
$
|
45,259
|
|
$
|
43,872
|
|
Amortization
of capital lease assets
|
|
|
3,582
|
|
|
3,345
|
|
Amortization
of intangible assets
|
|
|
7,285
|
|
|
9,432
|
|
Total
depreciation and amortization
|
|
$
|
56,126
|
|
$
|
56,649
|
|
The
overall decrease in depreciation and amortization expense of $0.5 million is
primarily due to certain intangible assets becoming fully depreciated during
2004, partially offset by an increase in depreciation related to property and
equipment additions.
Operating
gains, losses and other charges, net represent restructuring charges,
exit costs, impairment charges and gains or losses on the sale of assets
and
were comprised of the following:
|
|
Fiscal
Year Ended
|
|
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
|
Restructuring
charges and exit costs |
|
$ |
5,199 |
|
$ |
495 |
|
Impairment
charges |
|
|
1,174 |
|
|
1,130 |
|
Gains
on dispositions of assets and other, net |
|
|
(3,283 |
) |
|
(2,271 |
) |
Operating
gains, losses and other charges, net |
|
$ |
3,090 |
|
$ |
(646 |
) |
Restructuring
charges and exit costs were comprised of the
following:
|
|
Fiscal
Year Ended
|
|
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
|
Exit
costs |
|
$ |
1,898 |
|
$ |
213 |
|
Severance
and other restructuring charges |
|
|
3,301 |
|
|
282 |
|
Total
restructuring and exist costs
|
|
$ |
5,199 |
|
$ |
495 |
|
The
$5.2 million of restructuring charges and exit
costs for the year ended December 28, 2005 primarily resulted from
severance and other restructuring costs associated with the termination of
approximately 20 out-of-restaurant support staff positions, in addition to
the
closing of eight underperforming units, including three franchise units for
which we remain obligated under leases. Restructuring charges and exit costs
of
$0.5 million for the year ended December 29, 2004 primarily resulted from
the closing of six underperforming units. See Note 10 to our Consolidated
Financial Statements.
Impairment
charges
of $1.2
million for the year ended December 28, 2005 and $1.1 million for the year
ended December 29, 2004 relate to the identification of certain
underperforming restaurants.
Gains
on
disposition of assets and other, net of
$3.3
million during 2005 and $2.3 million during 2004 primarily represent gains
on
cash sales of surplus properties.
Operating
income was
$48.5
million during 2005 compared with $53.8 million during 2004.
Interest
expense, net
is
comprised of the following:
|
|
Fiscal
Year Ended
|
|
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
|
Interest
on senior notes
|
|
$
|
17,449
|
|
$
|
46,832
|
|
Interest
on credit facilities
|
|
|
25,260
|
|
|
8,730
|
|
Interest
on capital lease liabilities
|
|
|
4,252
|
|
|
4,274
|
|
Letters
of credit and other fees
|
|
|
2,879
|
|
|
3,615
|
|
Interest
income
|
|
|
(1,615
|
)
|
|
(1,455
|
)
|
Total
cash interest
|
|
|
48,225
|
|
|
61,996
|
|
Amortization
of deferred financing costs
|
|
|
3,493
|
|
|
5,539
|
|
Amortization
of debt premium
|
|
|
—
|
|
|
(1,369
|
) |
Interest
accretion on other liabilities
|
|
|
3,454
|
|
|
3,262
|
|
Total
interest expense, net
|
|
$
|
55,172
|
|
$
|
69,428
|
|
The
decrease in interest expense primarily resulted from the completion of our
recapitalization in the third and fourth quarters of 2004.
Other
nonoperating expenses, net
of $21.3
million for the year ended December 29, 2004 primarily represents the
payment of premiums and expenses as well as write-offs of deferred financing
costs and debt premiums associated with our recapitalization during 2004.
The
provision
for income taxes
was $1.2
million compared with $0.8 million for the years ended December 28, 2005
and December 29, 2004, respectively. We
have
provided valuation allowances related to any benefits from income taxes
resulting from the application of a statutory tax rate to our net operating
losses. Accordingly, no additional (benefit from) or provision for income taxes
has been reported for the periods presented. In establishing our valuation
allowance, we have taken into consideration certain tax planning strategies
involving the sale of appreciated properties in order to alter the timing of
the
expiration of certain net operating loss, or NOL, carryforwards in the event
they were to expire unused. Such strategies, if implemented in future periods,
are considered by us to be prudent and feasible in light of current
circumstances. Circumstances may change in future periods such that we can
no
longer conclude that such tax planning strategies are prudent and feasible,
which would require us to record additional deferred tax valuation allowances.
Without such tax planning strategies, our valuation allowance would have
increased by approximately $11 million in 2005. During 2006, such strategies
were implemented which required the recording of additional deferred tax
valuation allowance. See Note 14 to our Consolidated Financial Statements for
further explanation.
Net
loss was
$7.3
million for the year ended December 28, 2005 compared with $37.7 million
for the year ended December 29, 2004 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 described 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 periods indicated:
|
|
Fiscal
Year Ended
|
|
|
|
December 27,
2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Net
cash provided by operating activities
|
|
$
|
40,156
|
|
$
|
57,304
|
|
Net
cash provided by (used in) investing activities
|
|
|
62,358
|
|
|
(40,041
|
) |
Net
cash used in financing activities
|
|
|
(104,524
|
) |
|
(4,588
|
) |
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(2,010
|
) |
$
|
12,675
|
|
We
believe that our estimated cash flows from operations for 2007, combined with
our capacity for additional borrowings under our New Credit Facility
(defined below), will enable us to meet our anticipated cash requirements and
fund capital expenditures through the end of 2007.
Net
cash
flows provided by investing activities were $62.4 million for 2006. Our
principal capital requirements have been largely associated with remodeling
and
maintaining our existing company-owned restaurants and facilities. Our
capital expenditures for 2006 were $36.4 million, of which $4.1 million was
financed through capital leases. These capital expenditures included $2.5
million related to the rollout of our new POS system, of which $1.0 million
was
financed through capital leases. Capital expenditures in 2006 were offset by
net
proceeds of $90.6 million from the disposition of assets, including
81
company-owned franchisee-operated real estate properties and five surplus real
estate properties. As required by our credit facilities, much of the net
proceeds, in addition to cash from operations, was used to prepay balances
outstanding under our credit facilities.
Cash
flows used in financing activities were $104.5 million for 2006, which included
more than $100 million of prepayments and scheduled debt payments made
through a combination of asset sale proceeds, as noted above, and surplus
cash.
On
December 15, 2006, our subsidiaries, Denny’s,
Inc. and Denny’s Realty, LLC (formerly Denny's Realty, Inc.) (the “Borrowers”),
refinanced our previous credit facilities ("Old Credit Facilities") and
entered into a new senior secured credit agreement in an aggregate principal
amount of $350 million. The new credit facility consists of a $50 million
revolving credit facility (including a $10 million revolving letter of credit
facility), a $260 million term loan and an additional $40 million letter of
credit facility (together, the "New Credit Facility"). The revolving facility
matures on December 15, 2011. The term loan and the $40 million letter of
credit facility matures on March 31, 2012. The term loan amortizes in equal
quarterly installments at a rate equal to approximately 1% per annum with all
remaining amounts due on the maturity date. The New
Credit Facility is available for working capital, capital expenditures and
other
general corporate purposes. We will be required to make mandatory prepayments
under certain circumstances (such as the sale of specified properties) and
may make certain optional prepayments under the New Credit Facility.
The
New Credit Facility is guaranteed by Denny's and its
other subsidiaries and is secured by substantially all of the assets of Denny's
and its subsidiaries. In addition, the New Credit Facility is secured by
first-priority mortgages on 140 company-owned real estate assets. The New
Credit
Facility contains certain financial covenants (i.e., maximum total debt to
EBITDA (as defined under the New Credit Facility) 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. These covenants are substantially
similar to those that were contained in the Old Credit Facilities. We were
in
compliance with the terms of the New Credit Facility as of December 27,
2006.
Interest
on loans under the new revolving facility will
be payable, initially, at per annum rates equal to LIBOR plus 250 basis points
and will adjust over time based on our leverage ratio. Interest on the new
term
loan and letter of credit facility will be payable at per annum rates equal
to
LIBOR plus 225 basis points. The
weighted-average interest rate under the term loan was 7.60% as of December
27,
2006. The weighted average interest rate under the first lien facility and
the
second
lien facility was 7.30% and 9.39%, respectively, as of December 28,
2005.
Effective
March 8, 2007, we amended the New Credit Facility to reduce the per annum
interest rate on the term loan and letter of credit facility to LIBOR plus
200
basis points. Upon the event of a refinancing transaction, under certain
circumstances within one year of the amendment, we would be required to pay
the
term loan and letter of credit facility lenders a 1.0% prepayment premium in
the
transaction.
As
a result of the prepayments noted above and the debt
refinancing, we recorded $8.5 million of losses on early
extinguishment of debt resulting primarily from the write-off of deferred
financing costs. These losses are included as a component of other
nonoperating expense in the Consolidated Statements of Operations.
Long-term
debt consists of the following at December 27, 2006 and December 28,
2005:
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Notes
and Debentures: |
|
|
|
|
|
|
|
10%
Senior Notes due October 1, 2012, interest payable
semi-annually
|
|
$ |
175,000 |
|
$ |
175,000 |
|
New
Credit Facility:
|
|
|
|
|
|
|
|
Revolver
Loans outstanding due December 15, 2011
|
|
|
— |
|
|
— |
|
Term
Loans due March 31, 2012
|
|
|
245,596 |
|
|
— |
|
Old Credit
Facilities:
|
|
|
|
|
|
|
|
First
Lien Facility:
|
|
|
|
|
|
|
|
Revolver
Loans outstanding due September 30, 2008
|
|
|
— |
|
|
— |
|
Term
Loans due September 30, 2009
|
|
|
— |
|
|
222,752 |
|
Second
Lien Facility
|
|
|
— |
|
|
120,000 |
|
Other
note payable, maturing January 1, 2013, payable in
monthly installments with an
interest
rate of 9.17% (a)
|
|
|
446 |
|
|
498 |
|
Notes
payable secured by equipment, maturing over various terms up to
5 years,
payable in
monthly
installments with interest rates ranging from 9.0% to 11.97%
(b)
|
|
|
291 |
|
|
424 |
|
Capital
lease obligations
|
|
|
31,927 |
|
|
35,088 |
|
|
|
|
453,260 |
|
|
553,762 |
|
Less
current maturities
|
|
|
12,511 |
|
|
8,097 |
|
Total
long-term debt
|
|
$ |
440,749 |
|
$ |
545,665 |
|
_____________
(a) Includes
a note collateralized by a restaurant with a net book value of $0.2 million
at
December 27, 2006 and December 28, 2005.
(b) Includes
notes collateralized by equipment with a net book value of $0.2 million at
December 27, 2006 and December 28, 2005.
At
December 27, 2006, we had an outstanding term loan of $245.6 million and
outstanding letters of credit of $42.6 million (comprised of $39.6 million
under
our letter of credit facility and $3.0 million under our revolving
facility).
There
were no revolving loans outstanding at December 27, 2006. These
balances result in availability of $0.4 million under our letter of credit
facility and $47.0 million under the revolving
facility.
Our
future contractual obligations and commitments at December 27, 2006 consist
of the following:
|
|
Payments
Due by Period
|
|
|
Total
|
|
Less
than 1
Year
|
|
1-2
Years
|
|
3-4
Years
|
|
5
Years and
Thereafter
|
|
|
|
(In
thousands)
|
Long-term
debt
|
|
$
|
421,333
|
|
$
|
5,532
|
|
$
|
5,188
|
|
$
|
5,070
|
|
$
|
405,543
|
|
Capital
lease obligations (a)
|
|
|
51,731
|
|
|
10,790
|
|
|
14,470
|
|
|
10,431
|
|
|
16,040
|
|
Operating
lease obligations
|
|
|
264,746
|
|
|
45,854
|
|
|
78,455
|
|
|
54,832
|
|
|
85,605
|
|
Interest
obligations (a)
|
|
|
200,775
|
|
|
36,168
|
|
|
71,725
|
|
|
70,941
|
|
|
21,941
|
|
Pension
and other defined contribution
plan
obligations (b)
|
|
|
3,403
|
|
|
3,403
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase
obligations (c)
|
|
|
171,962
|
|
|
112,356
|
|
|
31,790
|
|
|
27,816
|
|
|
—
|
|
Total
|
|
$
|
1,113,950
|
|
$
|
214,103
|
|
$
|
201,628
|
|
$
|
169,090
|
|
$
|
529,129
|
|
(a)
|
Interest
obligations represent payments related to our long-term debt outstanding
at December 27, 2006. For long-term debt with variable rates, we have
used the rate applicable at December 27, 2006 to project
interest over the periods presented in the table above. See Note 12
to our
Consolidated Financial Statements for balances and terms of
the New Credit Facility and the 10% Notes due 2012 (the "10%
Notes) at December 27, 2006. The capital lease obligation
amounts above are inclusive of interest. |
|
|
(b) |
Pension
and other defined contribution plan obligations are estimates based
on
facts and circumstances at December 27, 2006. Amounts cannot
currently be estimated for more than one year. See Note 13 to our
Consolidated Financial Statements. |
|
|
(c) |
Purchase
obligations include amounts payable under purchase contracts for food
and
non-food products. In most cases, these agreements do not obligate
us to
purchase any specific volumes, and include provisions that
would allow us to cancel such agreements with appropriate notice. Amounts
included in the table above represent our estimate of purchase obligations
during the periods presented, if we were to cancel these contracts
with appropriate notice. We would likely take delivery of goods under
such
circumstances. |
At
December 27, 2006, our working capital deficit was $73.0 million compared
with $86.8 million at December 28, 2005. The working capital deficit
decrease of $13.8 million resulted primarily from a decrease in litigation
reserves of approximately $5.3 million and a decrease in accrued interest
of approximately $3.4 million due to our debt refinancing during fiscal
2006. 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.
Off-Balance
Sheet Arrangements
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 previous floating
rate term loan debt. We 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 previous term loan facility. Under the terms of the
swap,
we paid a fixed rate of 3.76% on the $75 million notional amount and received
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 were recognized as adjustments to interest
expense. To
the
extent the swap was effective in offsetting the variability of the hedged
cash
flows, changes in the fair value of the swap were not included in current
earnings but were reported as other comprehensive income (loss). See Note
12 to
our Consolidated Financial Statements.
As
a result of the extinguishment of a portion of our
debt on December 15, 2006, we discontinued hedge accounting treatment related
to
the interest rate swap. The interest rate swap was sold for a cash price of
$1.1 million, resulting in a gain of $0.9 million, which was recognized as
a
component of other nonoperating expense in the Consolidated Statements of
Operations.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our Consolidated Financial Statements, which have been prepared
in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses,
and
related disclosure of contingent assets and liabilities. On an ongoing basis,
we
evaluate our estimates, including those related to self-insurance liabilities,
impairment of long-lived assets, and restructuring and exit costs. We base
our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Consolidated Financial
Statements:
Self-insurance
liabilities. We
record
liabilities for insurance claims during periods in which we have been insured
under large deductible programs or have been self-insured for our medical and
dental claims and workers’ compensation, general/product and automobile
insurance liabilities. Maximum self-insured retention, including defense costs
per occurrence, ranges from $0.5 to $1.0 million per individual claim for
workers’ compensation and for general/product and automobile liability. The
liabilities for prior and current estimated incurred losses are discounted
to
their present value based on expected loss payment patterns determined by
independent actuaries, using our actual historical payments. These
estimates include assumptions regarding claims frequency and severity as well
as
changes in our business environment, medical costs and the regulatory
environment that could impact our overall self-insurance costs.
Total
discounted insurance liabilities at December 27, 2006 and December 28, 2005
were $41.0 million and $42.4 million, respectively, reflecting a 5% discount
rate. The related undiscounted amounts at such dates were $46.4 million and
$48.4 million, respectively.
Impairment
of long-lived assets.
We
evaluate our long-lived assets for impairment at the restaurant level on a
quarterly basis or whenever changes or events indicate that the carrying value
may not be recoverable. We assess impairment of restaurant-level assets based
on
the operating cash flows of the restaurant and our plans for restaurant
closings. Generally, all units with negative cash flows from operations for
the
most recent twelve months at each quarter end are included in our assessment.
In
performing our assessment, we must make assumptions regarding estimated future
cash flows, including estimated proceeds from similar asset sales, and other
factors to determine both the recoverability and the estimated fair value of
the
respective assets. If the long-lived assets of a restaurant are not recoverable
based upon estimated future, undiscounted cash flows, we write the assets down
to their fair value. If these estimates or their related assumptions change
in
the future, we may be required to record additional impairment charges.
During
2006, 2005 and 2004, we recorded impairment charges of $2.7 million, $1.2
million and $1.1 million, respectively, for underperforming restaurants,
including restaurants closed. These charges are included as a component of
operating gains, losses and other charges, net in the Consolidated
Statements of Operations. At December 27, 2006, we had a total
of four restaurants with an aggregate net book value of approximately $0.7
million, after taking into consideration impairment charges recorded, which
had
negative cash flows from operations for the most recent twelve months.
Restructuring
and exit costs. As
a
result of changes in our organizational structure and in our portfolio of
restaurants, we have recorded charges for restructuring and exit costs. These
costs consist primarily of the costs of future obligations related to closed
units and severance and outplacement costs for terminated employees. These
costs
are included as a component of operating gains, losses and other charges,
net in the Consolidated Statements of Operations.
Discounted
liabilities for future lease costs and the fair value of related subleases
of closed units are recorded when the units are closed. All other
costs related to closed units are expensed as incurred. In
assessing the discounted liabilities for future costs of obligations related
to
closed units, we make assumptions regarding amounts of future subleases.
If
these assumptions or their related estimates change in the future, we may
be
required to record additional exit costs or reduce exit costs previously
recorded. Exit costs recorded for each of the periods presented include the
effect of such changes in estimates.
The most
significant estimate included in our accrued exit costs liabilities relates
to
the timing and amount of estimated subleases. At December 27, 2006, our
total discounted liability for closed units was approximately $11.9 million,
net
of $7.7 million related to existing sublease agreements and $3.8 million related
to properties for which we expect to enter into sublease agreements in the
future. If any of the estimates noted above or their related assumptions change
in the future, we may be required to record additional exit costs or reduce
exit
costs previously recorded. See Note 10 to our Consolidated Financial Statements.
Implementation
of New Accounting Standards
Effective
December 29, 2005, the first day of fiscal 2006, we adopted Statement
of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment
("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.
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 adopted the recognition
of
the funded status and changes in the funded status of our benefit plans in
the
fourth quarter of 2006. The adoption had no impact on our Consolidated
Balance Sheet or Statement of Shareholders' Deficit.
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. We
adopted the
guidance in the fourth quarter of fiscal 2006. The adoption of SAB
108 did not
have an impact 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, with the 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 financial statements;
however, we do not expect the impact to be significant.
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. We
present sales net of sales taxes. EITF 06-3 does not impact the method for
recording these sales
taxes in our Consolidated Financial Statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date
are
not expected to have a material impact on the Consolidated Financial Statements
upon adoption.
Interest
Rate Risk
We
have
exposure to interest rate risk related to certain instruments entered into
for
other than trading purposes. Specifically, borrowings under the term loan and
revolving credit facility bear interest at a variable rate based on LIBOR (LIBOR
rate plus 2.25% for the term loan and letter of credit facility and LIBOR
rate plus 2.50% for the revolving credit facility; effective March 8, 2007,
LIBOR plus 2.00% for the term loan and letter of credit facility).
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 previous floating rate
term loan debt. We 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 previous term loan facility. Under the terms of the swap, we paid
a
fixed rate of 3.76% on the $75 million notional amount and received payments
from a counterparty based on the 3-month LIBOR rate for a term ending on
September 30, 2007. The swap effectively increased our ratio of fixed rate
debt to total debt. On December 15, 2006, we refinanced the Old Credit
Facilities containing the $75 million notional amount hedged and we sold the
interest rate swap. As a result of the extinguishment of debt, we are
required to discontinue hedge accounting. The amount
previously included as other comprehensive income (loss) was recognized as
a component of other nonoperating expense in the Consolidated Statements of
Operations for the year ended December 27, 2006.
Based
on
the levels of borrowings under the New Credit Facility at December 27,
2006, if interest rates changed by 100 basis points our annual cash flow and
income before income taxes would change by approximately $2.5 million. This
computation is determined by considering the impact of hypothetical interest
rates on the variable rate portion of the New Credit Facility at
December 27, 2006. However, the nature and amount of our borrowings under
the New Credit Facility may vary as a result of future business requirements,
market conditions and other factors.
Our
other
outstanding long-term debt bears fixed rates of interest. The estimated fair
value of our fixed rate long-term debt (excluding capital lease obligations
and
revolving credit facility advances) was approximately $184.5 million compared
with a book value of $175.7 million, at December 27, 2006. This computation
is based on market quotations for the same or similar debt issues or the
estimated borrowing rates available to us. Specifically, the difference between
the estimated fair value of long-term debt compared with its historical cost
reported in our Consolidated Balance Sheets at December 27, 2006 relates
primarily to market quotations for our 10% Notes. See Note 12 to our
Consolidated Financial Statements.
We
also
have exposure to interest rate risk related to our pension plan, other defined
benefit plans, and self-insurance liabilities. A 25 basis point increase in
discount rate would reduce our projected benefit obligation related to our
pension plan and other defined benefit plans by $1.9 million and $0.1 million,
respectively, and reduce our 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 $2.0 million and $0.1 million, respectively, and increase
our
net periodic benefit cost related to our pension plan by $0.1 million. The
impact of a 25 basis point increase or decrease in discount rate on periodic
benefit costs related 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.
Commodity
Price Risk
We
purchase certain food products such as beef, poultry, pork, eggs and coffee,
and
utilities such as gas and electricity, which are affected by commodity pricing
and are, therefore, subject to price volatility caused by weather, production
problems, delivery difficulties and other factors that are outside our control
and which are generally unpredictable. Changes in commodity prices affect us
and
our competitors generally and often simultaneously. In general, we purchase
food
products and utilities based upon market prices established with vendors.
Although many of the items purchased are subject to changes in commodity prices,
approximately 50% of our purchasing arrangements are structured to contain
features that minimize price volatility by establishing price ceilings and/or
floors. We use these types of purchase arrangements to control costs as an
alternative to using financial instruments to hedge commodity prices. We have
determined that our purchasing agreements do not qualify as derivative financial
instruments or contain embedded derivative instruments. In many cases, we
believe we will be able to address commodity cost increases which are
significant and appear to be long-term in nature by adjusting our menu pricing
or changing our product delivery strategy. However, competitive circumstances
could limit such actions and, in those circumstances, increases in commodity
prices could lower our margins. Because of the often short-term nature of
commodity pricing aberrations and our ability to change menu pricing or product
delivery strategies in response to commodity price increases, we believe that
the impact of commodity price risk is not significant.
We
have
established a policy to identify, control and manage market risks which may
arise from changes in interest rates, commodity prices and other relevant rates
and prices. We do not use derivative instruments for trading purposes.
See
Index
to Financial Statements which appears on page F-1 herein.
None.
A.
Disclosure Controls and Procedures.
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 Annual Report on Form 10-K, 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.
B.
Management’s Report on Internal Control Over Financial
Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Our internal control system is designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements. Because
of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has assessed the effectiveness of our internal control over financial reporting
as of December 27, 2006. Management’s assessment was based on criteria set forth
in Internal
Control - Integrated Framework,
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based upon this assessment, management concluded that, as of December 27, 2006,
our internal control over financial reporting was effective, based upon those
criteria.
The
Company’s independent registered public accounting firm, KPMG LLP, has issued an
attestation report on management’s assessment of our internal control over
financial reporting, which follows this report.
C.
Changes in Internal Control Over Financial Reporting.
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 (our fourth fiscal quarter) that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Denny’s
Corporation:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting (Item 9A.B.),
that
Denny’s Corporation’s (the Company) internal control over financial reporting
was effective as of December 27, 2006, based on criteria established
in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Denny’s Corporation maintained effective
internal control over financial reporting as of December 27, 2006, is fairly
stated, in all material respects, based on criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Also,
in
our opinion, Denny’s Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 27, 2006, based
on
criteria
established in
Internal Control—Integrated Framework issued
by
the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Denny’s
Corporation and subsidiaries as of December 27, 2006 and December 28, 2005,
and
the related consolidated statements of operations, shareholders’ deficit and
comprehensive income (loss), and cash flows for each of the fiscal years
in the
three-year period ended December 27, 2006, and our report dated March 9,
2007 expressed
an unqualified opinion on those consolidated financial
statements.
Greenville,
South Carolina
March 9,
2007
None.
Item 10. Directors,
Executive Officers and Corporate Governance
Information
required by this item with respect to our executive officers and directors,
compliance by our directors, executive officers and certain beneficial owners
of
our common stock with Section 16(a) of the Securities Exchange Act of 1934,
the committees of our Board of Directors, our Audit Committee Financial Expert
and our Code of Ethics is furnished by incorporation by reference to information
under the captions entitled “Election of Directors”, and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the proxy statement (to be filed
hereafter) in connection with Denny’s Corporation 2006 Annual Meeting of the
Shareholders and possibly elsewhere in the proxy statement (or will be filed
by
amendment to this report). The information required by this item related to
our
executive officers appears in Item 1 of Part I of this report under the
caption “Executive Officers of the Registrant.”
The
information required by this item is furnished by incorporation by reference
to
information under the captions entitled “Executive Compensation” and "Election
of Directors" in the proxy statement and possibly elsewhere in the proxy
statement (or will be filed by amendment to this report).
The
information required by this item is furnished by incorporation by reference
to
information under the caption “General—Equity Security Ownership” in the proxy
statement and possibly elsewhere in the proxy statement (or will be filed by
amendment to this report).
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
The
information required by this item is furnished by incorporation by reference
to
information under the captions “Related Party Transactions” and "Election
of Directors" in the proxy statement and possibly elsewhere in the proxy
statement (or will be filed by amendment to this report).
The
information required by this item is furnished by incorporation by reference
to
information under the caption entitled “Selection of Independent Registered
Public Accounting Firm - 2006 Audit Information” and “Audit Committee’s
Pre-approved Policies and Procedures” in the proxy statement and possibly
elsewhere in the proxy statement (or will be filed by amendment to this report).
(a)(1) Financial
Statements:
See the
Index to Financial Statements which appears on page F-1 hereof.
(a)(2) Financial
Statement Schedules:
No
schedules are filed herewith because of the absence of conditions under which
they are required or because the information called for is in our Consolidated
Financial Statements or notes thereto appearing elsewhere herein.
(a)(3) Exhibits:
Certain
of the exhibits to this Report, indicated by an asterisk, are hereby
incorporated by reference from other documents on file with the Commission
with
which they are electronically filed, to be a part hereof as of their respective
dates.
Exhibit
No. |
Description
|
*3.1 |
Restated
Certificate of Incorporation of Denny’s Corporation dated March 3, 2003 as
amended by Certificate of Amendment to Restated Certificate of
Incorporation to Increase Authorized Capitalization dated August
25, 2004
(incorporated by reference to Exhibit 3.1 to the Annual Report on
Form
10-K of Denny’s Corporation for the year ended December 29,
2004.)
|
|
|
*3.2 |
Certificate
of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock dated August 27, 2004 (incorporated by reference to
Exhibit 3.3 to Current Report on Form 8-K of Denny’s Corporation filed
with the Commission on August 27, 2004) |
|
|
*3.3 |
By-Laws
of Denny’s Corporation, as effective as of August 25, 2004 (incorporated
by reference to Exhibit 3.2 to Current Report on Form 8-K of Denny’s
Corporation filed with the Commission on August 27, 2004) |
|
|
*4.1 |
10%
Senior Notes due 2012 Indenture dated as of October 5, 2004 between
Denny’s Holdings, Inc., as Issuer, Denny’s Corporation, as Guarantor, and
U.S. Bank National Association, as Trustee (incorporated by reference
to
Exhibit 4.3 to the Quarterly Report on Form 10-Q of Denny’s Corporation
for the quarter ended September 29, 2004) |
|
|
*4.2 |
Form
of 10% Senior Note due 2012 and annexed Guarantee (included in Exhibit
4.1
hereto) |
|
|
*4.3 |
Amended
and Restated Rights Agreement, dated as of January 5, 2005, between
Denny's Corporation and Continental Stock Transfer and Trust Company,
as
Rights Agent (incorporated by reference to Exhibit 1 to the Form 8-A/A
of
Denny's Corporation, filed with the Commission January 12, 2005 relating
to preferred stock purchase rights) |
|
|
+*10.1
|
Advantica
Restaurant Group Director Stock Option Plan, as amended through January
24, 2001 (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of Denny’s Corporation (then known as Advantica) filed
with the Commission on May 14, 2001)
|
|
|
+*10.2
|
Advantica
Stock Option Plan as amended through November 28, 2001 (incorporated
by
reference to Exhibit 10.19 to the Annual Report on Form 10-K of Denny’s
Corporation (then known as Advantica) for the year ended December
26,
2001)
|
|
|
+*10.3
|
Form
of Agreement, dated February 9, 2000, providing certain retention
incentives and severance benefits for company management (incorporated
by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Denny’s
Corporation (then known as Advantica) for the quarter ended March
29,
2000)
|
|
|
*10.4
|
Stipulation
and Agreement of Settlement, dated February 19, 2002, by and among
FRD
Acquisition Co., the Creditors Committee, Advantica, Denny’s, Inc. FRI-M
Corporation, Coco’s Restaurants, Inc. and Carrows Restaurants, Inc., and
as filed with the Bankruptcy Court on February 19, 2002 (incorporated
by
reference to Exhibit 99.1 to the Current Report on Form 8-K of Denny’s
Corporation (then known as Advantica), filed with the Commission
on
February 20, 2002)
|
|
|
*10.5
|
First
Amended Plan of Reorganization of FRD Acquisition, Co., confirmed
by order
of the United States Bankruptcy Court for the District of Delaware
on June
20, 2002 (incorporated by reference to Exhibit 2.2 to the Current
Report
on Form 8-K of Denny’s Corporation (then known as Advantica) dated July
25, 2002)
|
|
|
+*10.6
|
Denny’s,
Inc. Omnibus Incentive Compensation Plan for Executives (incorporated
by
reference to Exhibit 99 to the Registration Statement on Form S-8
of
Denny’s Corporation (No. 333-103220) filed with the Commission on February
14, 2003)
|
|
|
+*10.7
|
Employment
Agreement dated November 1, 2003 between Denny’s Corporation and Nelson
J. Marchioli (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of Denny’s Corporation for the quarter ended
September 24, 2003)
|
|
|
*10.8
|
Credit
Agreement dated as of September 21, 2004, Among Denny’s, Inc., Denny’s
Realty, Inc., as Borrowers, Denny’s Corporation, Denny’s Holdings, Inc.,
DFO, Inc., as Guarantors, the Lenders named herein, Bank of America,
N.A.,
as Administrative Agent, and UBS SECURITIES LLC, as Syndication
Agent, and Banc of America Securities LLC and UBS Securities LLC,
as Joint
Lead Arrangers and Joint Bookrunners (First Lien) (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of
Denny’s
Corporation for the quarter ended September 29,
2004)
|
Exhibit
No. |
Description |
*10.9
|
Credit
Agreement dated as of September 21, 2004, Among Denny’s, Inc., Denny’s
Realty, Inc., as Borrowers, Denny’s Corporation, Denny’s Holdings, Inc.,
DFO, Inc., as Guarantors, the Lenders named herein, Bank of America,
N.A.,
as Administrative Agent, and UBS SECURITIES LLC, as Syndication Agent,
and
Banc of America Securities LLC and UBS Securities LLC, as Joint Lead
Arrangers and Joint Bookrunners (Second Lien) (incorporated by reference
to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Denny’s
Corporation for the quarter ended September 29,
2004)
|
|
|
*10.10
|
Guarantee
and Collateral Agreement dated as of September 21, 2004, among Denny’s,
Inc., Denny’s Realty, Inc., Denny’s Corporation, Denny’s Holdings, Inc.,
DFO, Inc., each other Subsidiary Loan Party and Bank of America,
N.A., as
Collateral Agent (First Lien) (incorporated by reference to Exhibit
10.3
to the Quarterly Report on Form 10-Q of Denny’s Corporation for the
quarter ended September 29, 2004)
|
|
|
*10.11
|
Guarantee
and Collateral Agreement dated as of September 21, 2004, among Denny’s,
Inc., Denny’s Realty, Inc., Denny’s Corporation, Denny’s Holdings, Inc.,
DFO, Inc., each other Subsidiary Loan Party and Bank of America,
N.A., as
Collateral Agent (Second Lien) (incorporated by reference to Exhibit
10.4
to the Quarterly Report on Form 10-Q of Denny’s Corporation for the
quarter ended September 29, 2004)
|
|
|
*10.12
|
First
Lien Amendment No. 1 effective as of July 17, 2006, to the Credit
Agreement dated as of September 21, 2004 (incorporated by reference
to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Denny's Corporation
for the quarter ended June 28, 2006)
|
|
|
*10.13
|
Second
Lien Amendment No. 1 effective as of July 17, 2006 to the Credit
Agreement
dated as of September 21, 2004 (incorporated by reference to Exhibit
10.2
to the Quarterly Report on Form 10-Q of Denny's Corporation for the
quarter ended June 28, 2006)
|
|
|
+*10.14
|
Description
of amendments to the Denny’s, Inc. Omnibus Incentive Compensation Plan for
Executives, the Advantica Stock Option Plan and the Advantica Restaurant
Group Director Stock Option Plan (incorporated by reference to Exhibit
10.7 to the Quarterly Report on Form 10-Q of Denny’s Corporation for the
quarter ended September 29, 2004)
|
|
|
+*10.15
|
Denny’s
Corporation 2004 Omnibus Incentive Plan (incorporated by reference
to
Exhibit 10.16 to the Annual Report on Form 10-K of Denny’s Corporation for
the year ended December 29, 2004)
|
|
|
+*10.16
|
Form
of stock option agreement to be used under the Denny’s Corporation 2004
Omnibus Incentive Plan (incorporated by reference to Exhibit 99.2
to the
Registration Statement on Form S-8 of Denny’s Corporation (File No.
333-120093) filed with the Commission on October 29,
2004)
|
|
|
+*10.17
|
Form
of deferred stock unit award certificate to be used under the Denny’s
Corporation 2004 Omnibus Incentive Plan (incorporated by reference
to
Exhibit 10.27 to the Annual Report on Form 10-K of Denny’s Corporation for
the year ended December 29, 2004)
|
|
|
+*10.18
|
Employment
Agreement dated May 11, 2005 between Denny’s Corporation and Nelson J.
Marchioli (incorporated by reference to Exhibit 99.1 to the Current
Report
on Form 8-K of Denny’s Corporation filed with the Commission on May 13,
2005)
|
|
|
+*10.19
|
Amendment
dated November 10, 2006 to the Employment Agreement dated May 11,
2005
between Denny’s Corporation, Denny’s Inc. and Nelson J. Marchioli
(incorporated by reference to Exhibit 10.1 to the Current Report
on Form
8-K of Denny's Corporation filed with the Commission on November
13,
2006)
|
|
|
+*10.20
|
Employment
Offer Letter dated August 16, 2005 between Denny’s Corporation and F. Mark
Wolfinger (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of Denny’s Corporation for the quarter ended September
28, 2005)
|
|
|
+*10.21
|
Description
of Denny’s 2005 Corporate Incentive Plan (incorporated by reference to
Exhibit 10.25 to the Annual Report on Form 10-K for the year ended
December 28, 2005)
|
|
|
+*10.22
|
Written
description of the 2006 Corporate Incentive Program (incorporated
by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of
Denny's
Corporation for the quarter ended March 29, 2006)
|
|
|
+*10.23
|
Written
description of the 2006 Long Term Growth Incentive Program (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
of
Denny's Corporation for the quarter ended March 29,
2006)
|
|
|
*10.24
|
Master
Purchase Agreement and Escrow Instructions (incorporated by reference
to
Exhibit 2.1 to the Current Report on Form 8-K of Denny's Corporation
filed
with the Commission on September 28, 2006)
|
|
|
10.25
|
Amended
and Restated Credit Agreement dated as of December 15, 2006, among
Denny’s
Inc. and Denny’s Realty, LLC, as Borrowers, Denny’s Corporation, Denny’s
Holdings, Inc., and DFO, LLC, as Guarantors, the Lenders named therein,
Bank of America, N.A., as Administrative Agent and
Collateral Agent, and Banc of America Securities LLC as Sole Lead
Arranger
and Sole Bookrunner
|
|
|
10.26
|
Amended
and Restated Guarantee and Collateral Agreement dated as of December
15,
2006, among Denny’s Inc., Denny’s Realty, LLC, Denny’s Corporation,
Denny’s Holdings, Inc., DFO, LLC, each other Subsidiary Loan Party
referenced therein and Bank of America, N.A., as Collateral
Agent
|
|
|
10.27 |
Employment
Offer Letter dated May 3, 2002 between Denny’s Corporation and Margaret L.
Jenkins and Addendum thereto dated June 11, 2003 between Denny's
Corporation and Margaret L. Jenkins
|
|
|
21.1
|
Subsidiaries
of Denny’s
|
|
|
23.1
|
Consent
of KPMG LLP
|
Exhibit
No.
|
Description
|
31.1
|
Certification
of Nelson J. Marchioli, President and Chief Executive Officer of
Denny’s
Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification
of 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
|
Statement
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
|
+ Management
contracts or compensatory plans or arrangements.
PLEASE
NOTE: It is inappropriate for investors to assume the accuracy of any covenants,
representations or warranties that may be contained in agreements or other
documents filed as exhibits to this Form 10-K. Any such covenants,
representations or warranties: may have been qualified or superseded by
disclosures contained in separate schedules not filed with this Form 10-K,
may
reflect the parties’ negotiated risk allocation in the particular transaction,
may be qualified by materiality standards that differ from those applicable
for
securities law purposes, and may not be true as of the date of this Form 10-K
or
any other date.
DENNY’S
CORPORATION AND SUBSIDIARIES
|
|
|
Page
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
F-2
|
Consolidated
Statements of Operations for each of the Three Fiscal Years in the
Period
Ended December 27, 2006
|
F-3
|
Consolidated
Balance Sheets as of December 27, 2006 and December 28,
2005
|
F-4
|
Consolidated
Statements of Shareholders’ Deficit and Comprehensive Income (Loss) for
each of the Three Fiscal Years in the Period Ended December 27,
2006
|
F-5
|
Consolidated
Statements of Cash Flows for each of the Three Fiscal Years in the
Period
Ended December 27, 2006
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Denny’s
Corporation:
We
have
audited the accompanying consolidated balance sheets of Denny’s Corporation and
subsidiaries as of December 27, 2006 and December 28, 2005, and the related
consolidated statements of operations, shareholders’ deficit and comprehensive
income (loss), and cash flows for each of the fiscal years in the three-year
period ended December 27, 2006. These consolidated financial statements are
the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards
of
the
Public Company Accounting Oversight Board (United
States).
Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Denny’s Corporation and
subsidiaries as of December 27, 2006 and December 28, 2005, and the results
of
their operations and their cash flows for each of the fiscal years in the
three-year period ended December 27, 2006, in conformity with U.S. generally
accepted accounting
principles.
As
discussed in note 2, the Company changed its method of accounting for
share-based payment in fiscal 2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 27, 2006, based on criteria
established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO),
and our
report dated March 9, 2007 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting.
Greenville,
South Carolina
March 9,
2007
Denny’s
Corporation and Subsidiaries
Consolidated
Statements of Operations
|
|
Fiscal
Year Ended
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands, except per share amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Company
restaurant sales
|
|
$
|
904,374
|
|
$
|
888,942
|
|
$
|
871,248
|
|
Franchise
and license revenue
|
|
|
89,670
|
|
|
89,783
|
|
|
88,758
|
|
Total
operating revenue
|
|
|
994,044
|
|
|
978,725
|
|
|
960,006
|
|
Costs
of company restaurant sales:
|
|
|
|
|
|
|
|
|
|
|
Product
costs
|
|
|
226,404
|
|
|
224,803
|
|
|
225,200
|
|
Payroll
and benefits
|
|
|
372,292
|
|
|
372,644
|
|
|
362,450
|
|
Occupancy
|
|
|
51,677
|
|
|
51,057
|
|
|
49,581
|
|
Other
operating expenses
|
|
|
131,404
|
|
|
130,883
|
|
|
117,834
|
|
Total
costs of company restaurant sales
|
|
|
781,777
|
|
|
779,387
|
|
|
755,065
|
|
Costs
of franchise and license revenue
|
|
|
27,910
|
|
|
28,758
|
|
|
28,196
|
|
General
and administrative expenses
|
|
|
66,426
|
|
|
62,911
|
|
|
66,922
|
|
Depreciation
and amortization
|
|
|
55,290
|
|
|
56,126
|
|
|
56,649
|
|
Operating
gains, losses and other charges, net
|
|
|
(47,882
|
)
|
|
3,090
|
|
|
(646
|
)
|
Total
operating costs and expenses
|
|
|
883,521
|
|
|
930,272
|
|
|
906,186
|
|
Operating
income
|
|
|
110,523
|
|
|
48,453
|
|
|
53,820
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
57,720
|
|
|
55,172
|
|
|
69,428
|
|
Other
nonoperating expense (income), net
|
|
|
8,029
|
|
|
(602
|
)
|
|
21,265
|
|
Total
other expenses, net
|
|
|
65,749
|
|
|
54,570
|
|
|
90,693
|
|
Net
income (loss) before income taxes and cumulative effect of change
in
accounting
principle
|
|
|
44,774
|
|
|
(6,117
|
)
|
|
(36,873
|
)
|
Provision
for income taxes
|
|
|
14,668
|
|
|
1,211
|
|
|
802
|
|
Net
income (loss) before cumulative effect of change in accounting
principle
|
|
|
30,106
|
|
|
(7,328
|
)
|
|
(37,675
|
)
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
232
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
30,338
|
|
$
|
(7,328
|
)
|
$
|
(37,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) before cumulative effect of change in accounting
principle, net
of
tax
|
|
$
|
0.33
|
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
0.00
|
|
|
—
|
|
|
—
|
|
Basic
net income (loss) per share
|
|
$
|
0.33
|
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) before cumulative effect of change in accounting
principle, net
of
tax
|
|
$
|
0.31
|
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
0.00
|
|
|
—
|
|
|
—
|
|
Diluted
net income (loss) per share
|
|
$
|
0.31
|
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
92,250
|
|
|
91,018
|
|
|
64,708
|
|
Diluted
|
|
|
97,364
|
|
|
91,018
|
|
|
64,708
|
|
See
notes
to consolidated financial statements.
Denny’s
Corporation and Subsidiaries
Consolidated
Balance Sheets
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Assets |
|
|
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,226 |
|
$ |
28,236 |
|
Receivables,
less allowance for doubtful accounts of: 2006 - $79; 2005 -
$450
|
|
|
14,564 |
|
|
16,829 |
|
Inventories
|
|
|
8,199 |
|
|
8,207 |
|
Assets
held for sale
|
|
|
4,735 |
|
|
— |
|
Prepaid
and other
|
|
|
9,072 |
|
|
8,362 |
|
Total
Current Assets
|
|
|
62,796 |
|
|
61,634 |
|
|
|
|
|
|
|
|
|
Property,
net |
|
|
236,264 |
|
|
288,140 |
|
|
|
|
|
|
|
|
|
Other
Assets: |
|
|
|
|
|
|
|
Goodwill
|
|
|
50,064 |
|
|
50,186 |
|
Intangible
assets, net
|
|
|
66,882 |
|
|
71,664 |
|
Deferred
financing costs, net
|
|
|
6,311 |
|
|
15,761 |
|
Other
|
|
|
21,595 |
|
|
23,881 |
|
Total
Assets
|
|
$ |
443,912 |
|
$ |
511,266 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
|
|
Current
maturities of notes and debentures
|
|
$ |
5,532 |
|
$ |
1,871 |
|
Current
maturities of capital lease obligations
|
|
|
6,979 |
|
|
6,226 |
|
Accounts
payable
|
|
|
42,148 |
|
|
47,593 |
|
Other
|
|
|
81,143 |
|
|
92,714 |
|
Total
Current Liabilities
|
|
|
135,802 |
|
|
148,404 |
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities: |
|
|
|
|
|
|
|
Notes
and debentures, less current maturities
|
|
|
415,801 |
|
|
516,803 |
|
Capital
lease obligations, less current maturities
|
|
|
24,948 |
|
|
28,862 |
|
Liability
for insurance claims, less current portion
|
|
|
28,784 |
|
|
31,187 |
|
Deferred
income taxes
|
|
|
12,126 |
|
|
— |
|
Other
noncurrent liabilities and deferred credits
|
|
|
50,469 |
|
|
52,557 |
|
Total
Long-Term Liabilities
|
|
|
532,128 |
|
|
629,409 |
|
Total
Liabilities
|
|
|
667,930 |
|
|
777,813 |
|
|
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Deficit |
|
|
|
|
|
|
|
Common
stock $0.01 par value; shares authorized - 135,000; issued and
outstanding: 2006 - 93,186; 2005 - 91,751
|
|
|
932 |
|
|
918 |
|
Paid-in
capital
|
|
|
527,911 |
|
|
517,854 |
|
Deficit
|
|
|
(735,438 |
) |
|
(765,776 |
) |
Accumulated
other comprehensive loss, net of tax
|
|
|
(17,423 |
) |
|
(19,543 |
) |
Total
Shareholders' Deficit
|
|
|
(224,018 |
) |
|
(266,547 |
) |
Total
Liabilities and Shareholders' Deficit
|
|
$ |
443,912 |
|
$ |
511,266 |
|
See
notes
to consolidated financial statements.
Denny’s
Corporation and Subsidiaries
Consolidated
Statements of Shareholders’ Deficit and Comprehensive Income
(Loss)
|
|
Common
Stock
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
Capital
|
|
|
(Deficit)
|
|
|
(Loss),
Net
|
|
|
Deficit
|
|
|
|
(In
thousands)
|
|
Balance,
December 31, 2003
|
|
|
41,003
|
|
$
|
410
|
|
$
|
417,816
|
|
$
|
(719,628
|
)
|
$
|
(17,942
|
)
|
$
|
(319,344
|
)
|
Balance
Sheet Adjustment (Note 3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,145
|
)
|
|
—
|
|
|
(1,145
|
)
|
Balance,
December 31, 2003, as adjusted
|
|
|
41,003
|
|
|
410
|
|
|
417,816
|
|
|
(720,773
|
)
|
|
(17,942
|
)
|
|
(320,489
|
)
|
Comprehensive
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,675
|
)
|
|
—
|
|
|
(37,675
|
)
|
Additional
minimum pension liability, net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,771
|
)
|
|
(1,771
|
)
|
Comprehensive
(loss)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,675
|
)
|
|
(1,771
|
)
|
|
(39,446
|
)
|
Share-based
compensation on equity classified awards
|
|
|
—
|
|
|
—
|
|
|
3,098
|
|
|
—
|
|
|
—
|
|
|
3,098
|
|
Issuance
of common stock, net of issuance costs of $2.2
million
|
|
|
48,430
|
|
|
484
|
|
|
89,311
|
|
|
—
|
|
|
—
|
|
|
89,795
|
|
Exercise
of common stock options
|
|
|
554
|
|
|
6
|
|
|
461
|
|
|
—
|
|
|
—
|
|
|
467
|
|
Balance,
December 29, 2004
|
|
|
89,987
|
|
|
900
|
|
|
510,686
|
|
|
(758,448
|
)
|
|
(19,713
|
)
|
|
(266,575
|
)
|
Comprehensive
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,328
|
)
|
|
—
|
|
|
(7,328
|
)
|
Unrealized
gain on hedged transaction, net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,256
|
|
|
1,256
|
|
Additional
minimum pension liability, net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,086
|
)
|
|
(1,086
|
)
|
Comprehensive (loss)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,328
|
)
|
|
170
|
|
|
(7,158
|
)
|
Share-based
compensation on equity classified awards
|
|
|
—
|
|
|
—
|
|
|
3,529
|
|
|
—
|
|
|
—
|
|
|
3,529
|
|
Issuance
of common stock for share-based compensation
|
|
|
382
|
|
|
4
|
|
|
1,678
|
|
|
—
|
|
|
—
|
|
|
1,682
|
|
Exercise
of common stock options
|
|
|
1,382
|
|
|
14
|
|
|
1,961
|
|
|
—
|
|
|
—
|
|
|
1,975
|
|
Balance,
December 28, 2005
|
|
|
91,751
|
|
|
918
|
|
|
517,854
|
|
|
(765,776
|
)
|
|
(19,543
|
)
|
|
(266,547
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,338
|
|
|
—
|
|
|
30,338
|
|
Recognition
of unrealized gain on hedged transactions,
net
of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,256
|
) |
|
(1,256
|
) |
Additional
minimum pension liability, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,376
|
|
|
3,376
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
30,338
|
|
|
2,120
|
|
|
32,458
|
|
Share-based
compensation on equity classified awards
|
|
|
|
|
|
|
|
|
5,316
|
|
|
|
|
|
|
|
|
5,316
|
|
Reclassification
of share-based compensation in connection
with
adoption of SFAS 123(R) (Note 16)
|
|
|
|
|
|
—
|
|
|
2,534
|
|
|
|
|
|
—
|
|
|
2,534
|
|
Issuance
of common stock for share-based compensation
|
|
|
296
|
|
|
3
|
|
|
206
|
|
|
—
|
|
|
—
|
|
|
209
|
|
Exercise
of common stock options
|
|
|
1,139
|
|
|
11
|
|
|
2,001
|
|
|
—
|
|
|
—
|
|
|
2,012
|
|
Balance,
December 27, 2006
|
|
|
93,186
|
|
$
|
932
|
|
$
|
527,911
|
|
$
|
(735,438
|
)
|
$
|
(17,423
|
)
|
$
|
(224,018
|
)
|
See
notes
to consolidated financial statements.
Denny’s
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
Fiscal
Year Ended
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December 29,
2004
|
|
|
|
(In
thousands)
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
30,338
|
|
$
|
(7,328
|
)
|
$
|
(37,675
|
)
|
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
|
|
|
55,290
|
|
|
56,126
|
|
|
56,649
|
|
Operating
gains, losses and other charges, net
|
|
|
(47,882 |
) |
|
3,090 |
|
|
(646 |
) |
Amortization
of deferred financing costs
|
|
|
3,316 |
|
|
3,493 |
|
|
5,539 |
|
Amortization
of debt premium
|
|
|
—
|
|
|
—
|
|
|
(1,369
|
)
|
Loss
on early extinguishment of debt
|
|
|
8,508
|
|
|
—
|
|
|
21,744
|
|
Deferred
income tax expense
|
|
|
12,827 |
|
|
—
|
|
|
—
|
|
Share-based
compensation
|
|
|
7,627 |
|
|
7,801
|
|
|
6,497
|
|
Changes
in assets and liabilities, net of effects of acquisitions and
dispositions:
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(2,164
|
)
|
|
(567
|
)
|
|
(1,442
|
)
|
Inventories
|
|
|
9
|
|
|
81
|
|
|
(131
|
)
|
Other
current assets
|
|
|
(719
|
)
|
|
(1,031
|
)
|
|
(1,008
|
)
|
Other
assets
|
|
|
(4,242
|
)
|
|
(5,744
|
)
|
|
(1,890
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(2,338
|
)
|
|
3,755
|
|
|
803
|
|
Accrued
salaries and vacations
|
|
|
(1,671
|
)
|
|
(4,313
|
)
|
|
8,828
|
|
Accrued
taxes
|
|
|
947
|
|
|
405
|
|
|
(1,275
|
)
|
Other
accrued liabilities
|
|
|
(11,523
|
)
|
|
798
|
|
|
(19,694
|
)
|
Other
noncurrent liabilities and deferred credits
|
|
|
(7,935
|
)
|
|
738
|
|
|
(4,861
|
)
|
Net
cash flows provided by operating activities
|
|
|
40,156
|
|
|
57,304
|
|
|
30,069
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property
|
|
|
(32,265
|
)
|
|
(47,165
|
)
|
|
(36,130
|
)
|
Proceeds
from disposition of property
|
|
|
90,578
|
|
|
6,693
|
|
|
3,584
|
|
Acquisition
of restaurant units
|
|
|
(825
|
)
|
|
—
|
|
|
—
|
|
Collection
of note receivable payments from former subsidiary
|
|
|
4,870
|
|
|
431
|
|
|
384
|
|
Net
cash flows provided by (used in) investing activities
|
|
|
62,358
|
|
|
(40,041
|
)
|
|
(32,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
borrowing under revolving credit facilities
|
|
|
|
|
|
—
|
|
|
293,900
|
|
Deferred
financing costs paid
|
|
|
(1,278
|
)
|
|
(296
|
)
|
|
(19,216
|
)
|
Long-term
debt payments
|
|
|
(104,334
|
)
|
|
(6,747
|
)
|
|
(503,850
|
)
|
Proceeds
from exercise of stock options
|
|
|
2,012
|
|
|
1,975
|
|
|
467
|
|
Proceeds
from equity issuance
|
|
|
—
|
|
|
—
|
|
|
89,795
|
|
Proceeds
from debt issuance
|
|
|
—
|
|
|
—
|
|
|
175,000
|
|
Debt
payments and other transaction costs
|
|
|
(1,095
|
)
|
|
—
|
|
|
(24,665
|
)
|
Net
bank overdrafts
|
|
|
171
|
|
|
480
|
|
|
(1,140
|
)
|
Net
cash flows provided by (used in) financing activities
|
|
|
(104,524
|
)
|
|
(4,588
|
)
|
|
10,291
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(2,010
|
)
|
|
12,675
|
|
|
8,198
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at:
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
28,236
|
|
|
15,561
|
|
|
7,363
|
|
End
of year
|
|
$
|
26,226
|
|
$
|
28,236
|
|
$
|
15,561
|
|
See
notes
to consolidated financial statements.
Denny’s
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Note 1.
Introduction and Basis of Reporting
Denny’s
Corporation, or Denny’s, is one of America’s largest family-style restaurant
chains. At December 27, 2006 the Denny’s brand consisted of 1,545
restaurants, 521 of which are company-owned and operated and 1,024 of which
are
franchised/licensed restaurants. These Denny’s restaurants are operated in 49
states, the District of Columbia, two U.S. territories and five foreign
countries, with principal concentrations in California, Florida and Texas.
Note 2.
Summary of Significant Accounting Policies
The
following accounting policies significantly affect the preparation of our
Consolidated Financial Statements:
Use
of Estimates.
The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, we believe that
our estimates are reasonable.
Consolidation
Policy.
The
Consolidated Financial Statements include the financial statements of Denny’s
Corporation and its wholly-owned subsidiaries, the most significant of which
are
Denny’s Holdings, Inc.; Denny’s, Inc. and DFO, Inc., which are subsidiaries of
Denny’s Holdings, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
Fiscal
Year.
Our
fiscal year ends on the Wednesday in December closest to December 31 of
each year. As a result, a fifty-third week is added to a fiscal year every
five
or six years. Fiscal 2004, 2005 and 2006 each include 52 weeks of
operations.
Cash
Equivalents and Investments. We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents.
Allowances
for Doubtful Accounts. We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our franchisees to make required payments for franchise
royalties, rent, advertising and notes receivable. In assessing recoverability
of these receivables, we make judgments regarding the financial condition of
the
franchisees based primarily on past and current payment trends and periodic
financial information which the franchisees are required to submit to us.
Inventories.
Inventories
are valued primarily at the lower of average cost (first-in, first-out) or
market.
Assets
Held for Sale. Assets held for sale consist of real estate properties that
we expect to sell within the next 12 months. The properties
are
reported at the lower of carrying amount or fair value
less costs to sell.
Property
and Depreciation. We
depreciate owned property over its estimated useful life using the
straight-line method. We amortize property held under capital leases (at
capitalized value) over the lesser of its estimated useful life or the initial
lease term. In certain situations, one or more option periods may be used in
determining the depreciable life of certain properties leased under operating
lease agreements, if we deem that an economic penalty will be incurred and
exercise of such option periods is reasonably assured. In either circumstance,
our policy requires lease term consistency when calculating the depreciation
period, in classifying the lease, and in computing rent expense. The following
estimated useful service lives were in effect during all periods presented
in
the financial statements:
Buildings—Five
to thirty years
Equipment—Two
to ten years
Leasehold
Improvements—Estimated useful life limited by the expected lease term, generally
between five and fifteen years.
Goodwill.
Amounts recorded as goodwill
primarily represent excess reorganization value recognized as a result of our
1998 bankruptcy. We test goodwill for impairment at each fiscal year end, and
more frequently if circumstances indicate impairment may exist.
Other
Intangible Assets. Other
intangible assets consist primarily of trademarks, trade names, franchise and
other operating agreements. Trade names and trademarks are considered
indefinite-lived intangible assets and are not amortized. Franchise and other
operating agreements are amortized using the straight-line basis over the term
of the related agreement. We test trade name and trademark assets for impairment
at each fiscal year end, and more frequently if circumstances indicate
impairment may exist. We assess impairment of franchise and other operating
agreements whenever changes or events indicate that the carrying value may
not
be recoverable.
Deferred
Financing Costs. Costs
related to the issuance of debt are deferred and amortized as a component of
interest expense using the effective interest method over the terms of the
respective debt issuances.
Cash
Overdrafts. We
have
included in accounts payable on the Consolidated Balance Sheets cash overdrafts
totaling $12.2 million and $12.0 million at December 27, 2006 and
December 28, 2005, respectively.
Self-insurance
liabilities. We
record
liabilities for insurance claims during periods in which we have been insured
under large deductible programs or have been self-insured for our medical and
dental claims and workers’ compensation, general/product and automobile
insurance liabilities. Maximum self-insured retention levels, including defense
costs per occurrence, range from $0.5 to $1.0 million per individual claim
for
workers’ compensation and for general/product and automobile liability. The
liabilities for prior and current estimated incurred losses are discounted
to
their present value based on expected loss payment patterns determined by
independent actuaries, using our actual historical payments. Total discounted
insurance liabilities at December 27, 2006 and December 28, 2005 were $41.0
million and $42.4 million, respectively, reflecting a 5% discount rate. The
related undiscounted amounts at such dates were $46.4 million and $48.4 million,
respectively.
Income
Taxes. We
record
a valuation allowance to reduce our net deferred tax assets to the amount that
is more-likely-than-not to be realized. While we have considered ongoing,
prudent and feasible tax planning strategies in assessing the need for our
valuation allowance, in the event we were to determine that we would be able
to
realize our deferred tax assets in the future in an amount in excess of the
net
recorded amount, an adjustment to the valuation allowance (except for the
valuation allowance established in connection with the adoption of fresh start
reporting on January 7, 1998—see Note 14) would decrease income tax expense
in the period such determination was made. At December 27, 2006 and
December 28, 2005, a valuation allowance was recorded for all of our
deferred tax assets.
Leases.
Our
policy requires the use of a consistent lease term for (i) calculating the
maximum depreciation period for related buildings and leasehold improvements;
(ii) classifying the lease; and (iii) computing periodic rent expense
increases where the lease terms include escalations in rent over the lease
term.
The lease term commences on the date when we become legally obligated for the
rent payments. We account for rent escalations in leases on a straight-line
basis over the expected lease term. Any rent holidays after lease commencement
are recognized on a straight-line basis over the expected lease term, which
includes the rent holiday period. Leasehold improvements that have been funded
by lessors have historically been insignificant. Any leasehold improvements
we
make that are funded by lessor incentives or allowances under operating leases
are recorded as leasehold improvement assets and amortized over the expected
lease term. Such incentives are also recorded as deferred rent and amortized
as
reductions to lease expense over the expected lease term. We record contingent
rent expense based on estimated sales for respective units over the contingency
period.
Fair
Value of Financial Instruments.
Our
significant financial instruments are cash and cash equivalents, investments,
receivables, accounts payable, accrued liabilities, long-term debt and interest
rate swaps. Except for long-term debt and interest rate swaps, the fair value
of
these financial instruments approximates their carrying values based on their
short maturities. See Note 12 for information about the fair value of long-term
debt and interest rate swaps.
Derivative
Financial Instruments.
We
record all derivative financial instruments as either assets or liabilities
in
the balance sheet at fair value. During 2006 and 2005, we had designated an
interest rate swap as a hedge of the cash flows on variable rate debt. To the
extent the derivative instrument was effective in offsetting the variability
of
the hedged cash flows, changes in the fair value of the derivative instrument
were not included in current earnings but were reported as other comprehensive
income (loss). The ineffective portion of the hedge was recorded as an
adjustment to earnings. We do not enter into derivative financial instruments
for trading or speculative purposes.
Contingencies
and Litigation. We
are
subject to legal proceedings involving ordinary and routine claims incidental
to
our business as well as legal proceedings that are nonroutine and include
compensatory or punitive damage claims. Our ultimate legal and financial
liability with respect to such matters cannot be estimated with certainty and
requires the use of estimates in recording liabilities for potential litigation
settlements.
Segment.
Denny’s
operates in only one segment. All significant revenues and pre-tax earnings
relate to retail sales of food and beverages to the general public through
either company-owned or franchised restaurants.
Company
Restaurant Sales.
Company
restaurant sales are recognized when food and beverage products are sold at
company-owned units. Proceeds from the sale of gift certificates and gift cards
are deferred and recognized as revenue when they are redeemed. We present
company restaurant sales net of sales taxes.
Franchise
and License Fees. We
recognize initial franchise and license fees when all of the material
obligations have been performed and conditions have been satisfied, typically
when operations of a new franchised restaurant have commenced. During 2006,
2005
and 2004, we recorded initial fees of $0.9 million, $0.7 million and $1.4
million, respectively, as a component of franchise and license revenue in the
accompanying Consolidated Statements of Operations. At December 27, 2006,
December 28, 2005, and December 29, 2004, deferred fees were $0.6
million, $0.6 million and $0.6 million, respectively and are included in
other accrued liabilities in the accompanying Consolidated Balance Sheets.
Continuing fees, such as royalties and rents, are recorded as income on a
monthly basis. For 2006, our ten largest franchisees accounted for approximately
28% of our franchise revenues.
Advertising
Costs. We
expense production costs for radio and television advertising in the year in
which the commercials are initially aired. Advertising expense for
2006, 2005 and 2004 was $29.9 million, $28.4 million and $29.0
million, respectively, net of contributions from franchisees of $36.7 million,
$35.2 million and $34.2 million, respectively. Advertising costs are
recorded as a component of other operating expenses in our Consolidated
Statements of Operations.
Restructuring
and exit costs. As
a
result of changes in our organizational structure and in our portfolio of
restaurants, we have recorded restructuring and exit costs. These costs consist
primarily of the costs of future obligations related to closed units and
severance and outplacement costs for terminated employees and are included
as a
component of operating gains, losses and other charges, net in the
Consolidated Statements of Operations.
We
evaluate store closures for potential disclosure as discontinued operations
based on an assessment of several quantitative and qualitative factors,
including the nature of the closure, revenue migration to other
company-owned and franchised stores, planned market development in the vicinity
of the disposed store and the impact on the relevant financial statement line
items.
Discounted
liabilities for future lease costs and the fair value of related subleases
of closed units are recorded when the units are closed. All other
costs related to closed units are expensed as incurred. In
assessing the discounted liabilities for future costs of obligations related
to
closed units, we make assumptions regarding amounts of future subleases. If
these assumptions or their related estimates change in the future, we may be
required to record additional exit costs or reduce exit costs previously
recorded. Exit costs recorded for each of the periods presented include the
effect of such changes in estimates.
Impairment
of long-lived assets. We
evaluate our long-lived assets for impairment at the restaurant level on a
quarterly basis or whenever changes or events indicate that the carrying value
may not be recoverable. We assess impairment of restaurant-level assets based
on
the operating cash flows of the restaurant and our plans for restaurant
closings. Generally, all units with negative cash flows from operations for
the
most recent twelve months at each quarter end are included in our assessment.
In
performing our assessment, we make assumptions regarding estimated future
cash flows, including estimated proceeds from similar asset sales, and other
factors to determine both the recoverability and the estimated fair value of
the
respective assets. If the long-lived assets of a restaurant are not recoverable
based upon estimated future, undiscounted cash flows, we write the assets down
to their fair value. If these estimates or their related assumptions change
in
the future, we may be required to record additional impairment charges. These
charges were $2.7 million, $1.2 million and $1.1 million for the years
ended December 27, 2006, December 28, 2005 and December 29, 2004, respectively,
and are included as a component of operating gains, losses and other
charges, net in the Consolidated Statements of Operations.
Gains
on Sales of Company-Owned Restaurants and Real Estate Properties.
Generally,
gains on sales of real estate properties and company-owned
restaurants that include real estate are recognized when the cash proceeds
from the sale exceed the minimum requirements under Statement of Financial
Accounting Standards No. 66 "Accounting for Sales of Real
Estate". Total proceeds from the sales of real estate and company-owned
restaurants were $90.2 million, $6.7 million and $3.6 million in 2006, 2005
and
2004, respectively. Total gains resulting from these
transactions were $56.7 million, $3.3 million and $2.3 million in 2006,
2005 and 2004, respectively, and are included as a component of operating gains,
losses and other charges, net in the Consolidated Statements of
Operations. We continue to collect royalties from any franchisees operating
restaurants at these properties.
Share-Based
Payment.
Effective December 29, 2005, the first day of fiscal 2006, we adopted Statement
of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment"
("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” ("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 Consolidated Statement of Operations of $0.2 million.
Additionally, in accordance with SFAS 123(R), $2.5 million related to restricted
stock units payable in shares, previously recorded as liabilities, were
reclassified to additional paid-in capital in the 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.
Share-based
compensation for fiscal years 2005 and 2004 was accounted for under
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations (i.e., the "intrinsic
method"). See Note 16.
The
following table illustrates the pro forma 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 years ended
December 28, 2005 and December 29, 2004:
|
|
Year
Ended
|
|
|
|
|
December
28, 2005
|
|
|
December
29, 2004
|
|
|
|
(In
millions, except per share data)
|
|
Report
net loss |
|
$ |
(7.3 |
) |
$ |
(37.7 |
) |
Share-based
employee compensation expense included in reported net loss, net
of
related taxes |
|
|
7.8 |
|
|
6.5 |
|
Less
total share-based employee compensation expense determined under
fair
value based method for
all
awards, net of related tax effects
|
|
|
(11.9 |
) |
|
(9.9 |
) |
Pro
forma net loss |
|
$ |
(11.4 |
) |
$ |
(41.1 |
) |
|
|
|
|
|
|
|
|
Net
loss per share: |
|
|
|
|
|
|
|
Basic
and diluted - as reported |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
Basic
and diluted - pro forma |
|
$ |
(0.13 |
) |
$ |
(0.63 |
) |
Earnings
Per Share.
Basic
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares and potential common shares outstanding
during the period. See Note 17.
Reclassification.
Certain
previously reported amounts have been reclassified to conform to the current
presentation.
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 adopted the recognition
of
the funded status and changes in the funded status of our benefit plans in
the
fourth quarter of 2006. The adoption had no impact on our Consolidated
Financial Statements.
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. We adopted
the
guidance in the fourth quarter of fiscal 2006. The adoption of SAB 108 did
not
have an impact 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, with the 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 financial statements; however, we do not expect
the impact to be significant.
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. 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.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date
are
not expected to have a material impact on the Consolidated Financial Statements
upon adoption.
Note
3. Balance Sheet Adjustments
In
June
2006, we adjusted certain amounts to correct an error in our accounting for
receivables and certain related payables impacting the Consolidated Statement
of
Operations for the year ended December 25, 2002. We identified this matter
as a
part of our internal control review process. 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 ended December 27, 2006, December
28,
2005 and December 29, 2004. The following line items were impacted on
the Consolidated Balance Sheets and the Consolidated Statements of
Shareholders' Deficit and Comprehensive Income (Loss):
|
|
|
Balance
Previously Reported
|
|
|
Adjustment
|
|
|
Adjusted
Balance
|
|
|
|
(In
thousands)
|
Accumulated
earnings (deficit) as of December 31, 2003
|
|
$
|
(719,628
|
)
|
$
|
(1,145
|
)
|
$
|
(720,773
|
)
|
Accumulated
earnings (deficit) as of December 29, 2004
|
|
|
(757,303
|
)
|
|
(1,145
|
)
|
|
(758,448
|
)
|
Balances
as of December 28, 2005:
|
|
|
|
|
|
|
|
|
|
|
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
During
fiscal 2006, we completed and closed the sale of five surplus and 81
franchised-operated real estate properties for a net cash purchase price of
$90.2 million. With
the
exception of five properties, these transactions qualified for full accrual
method accounting. We have entered into put agreements on these
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 nine
months. The deferred gain is included as a component of other
current liabilities in the Consolidate Balance Sheet as of December 27,
2006. As a result of the surplus and franchise-operated real estate
sales, a pretax gain of $56.7 million
is included as a component of operating gains, losses and other
charges, net in the Consolidated Statements of Operations for the
year
ended
December 27, 2006.
Note
5. Assets Held for Sale
Assets
held for sale include two surplus properties and ten franchise-operated
Denny's
restaurant properties, which we expect to sell within 12 months. The
net book value
of
these properties, approximately $4.7 million, has been classified as assets
held
for sale in the Consolidated Balance Sheet as of December 27, 2006.
Our
New
Credit Facility (defined in Note 12) requires us to make mandatory
prepayments to reduce outstanding indebtedness with the net cash
proceeds from the sale of the ten franchise-operated Denny's
restaurant properties. As a result, we
have classified a corresponding $3.5 million, which represents the net book
value of these properties, of our long-term debt as a current liability in
the Consolidated Balance Sheet as of December 27,
2006.
Note 6.
Property, Net
Property,
net, consists of the following:
|
|
|
December
27, 2006
|
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
Land
|
|
$
|
37,503
|
|
$
|
56,872
|
|
Buildings
and leasehold improvements
|
|
|
393,181
|
|
|
437,284
|
|
Other
property and equipment
|
|
|
145,293
|
|
|
138,136
|
|
Total
property owned
|
|
|
575,977
|
|
|
632,292
|
|
Less
accumulated depreciation
|
|
|
359,114
|
|
|
364,721
|
|
Property
owned, net
|
|
|
216,863
|
|
|
267,571
|
|
Buildings,
vehicles, and other equipment held under capital leases
|
|
|
39,552
|
|
|
37,596
|
|
Less
accumulated amortization
|
|
|
20,151
|
|
|
17,027
|
|
Property
held under capital leases, net
|
|
|
19,401
|
|
|
20,569
|
|
Total
property, net
|
|
$
|
236,264
|
|
$
|
288,140
|
|
Depreciation
expense for 2006, 2005 and 2004 was $48.8 million, $48.8 million and $47.2
million, respectively. Substantially all owned property is pledged as collateral
for our Credit Facilities. See Note 12.
Note 7.
Goodwill and Other Intangible Assets
The
changes in carrying amounts of goodwill for the year ended December 27, 2006
are
as follows:
|
|
(In
thousands) |
|
Balance
at December 28, 2005 |
|
$ |
50,186 |
|
Reversal
of valuation allowance related on deferred tax assets (Note
14)
|
|
|
(701 |
) |
Goodwill
related to acquisition of restaurant unit |
|
|
579 |
|
Balance
at December 27, 2006 |
|
$ |
50,064 |
|
The
following table reflects goodwill and intangible assets as reported at December
27, 2006 and at December 28, 2005:
|
|
December 27,
2006
|
|
December
28, 2005
|
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
|
(In
thousands)
|
|
Goodwill
|
|
$
|
50,064
|
|
$
|
—
|
|
$
|
50,186
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
$
|
42,323
|
|
$
|
—
|
|
$
|
42,323
|
|
$
|
—
|
|
Liquor
licenses
|
|
|
279
|
|
|
—
|
|
|
284
|
|
|
—
|
|
Intangible
assets with definite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
agreements
|
|
|
65,361
|
|
|
41,209
|
|
|
67,644
|
|
|
38,805
|
|
Foreign
license agreements
|
|
|
241
|
|
|
113
|
|
|
1,506
|
|
|
1,288
|
|
Intangible
assets
|
|
$
|
108,204
|
|
$
|
41,322
|
|
$
|
111,757
|
|
$
|
40,093
|
|
The
amortization expense for definite-lived intangibles for 2006, 2005 and 2004
was
$6.5 million, $7.3 million and $9.4 million, respectively.
Estimated
amortization expense for intangible assets with definite lives in the next
five
years is as follows:
|
|
(In thousands)
|
|
2007
|
|
$
|
4,303
|
|
2008
|
|
|
3,693
|
|
2009
|
|
|
3,383
|
|
2010
|
|
|
2,986
|
|
2011
|
|
|
2,722
|
|
We
performed an annual impairment test as of December 27, 2006 and determined
that none of the recorded goodwill or other intangible assets with indefinite
lives was impaired.
Note 8.
Note Receivable from Former Subsidiary
As
a
result of the divestiture of FRD Acquisition Co., ("FRD"), on July 10,
2002, Denny’s provided $5.6 million of cash collateral to support FRD’s letters
of credit, for a fee, until the letters of credit terminated or were
replaced. We
received scheduled payments of $4.9 million, $0.4 million and $0.4 million
related to the amounts due from FRD during 2006 (through the end of the
collateral agreement), 2005 and 2004, respectively. These amounts are
shown in the cash flows from investing activities section of the
Consolidated Statement of Cash Flows. At December 28, 2005, all amounts due
from FRD were classified as current assets in the Consolidated Balance
Sheet. During 2006, 2005 and 2004 we recorded interest income related to
these receivables of $0.1 million, $0.3
million and $0.3 million, respectively.
Note 9.
Other Current Liabilities
Other
current liabilities consist of the following:
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
Accrued
salaries and vacation
|
|
$
|
30,324
|
|
$
|
34,982
|
|
Accrued
insurance, primarily current portion of liability for insurance
claims
|
|
|
15,079
|
|
|
13,751
|
|
Accrued
taxes
|
|
|
11,783
|
|
|
11,165
|
|
Accrued
interest
|
|
|
4,838
|
|
|
8,199
|
|
Restructuring
charges and exit costs |
|
|
1,969 |
|
|
2,507 |
|
Other
|
|
|
17,150
|
|
|
22,110
|
|
Other
current liabilities
|
|
$
|
81,143
|
|
$
|
92,714
|
|
Note 10.
Restructuring
Charges and Exit Costs
Restructuring
charges and exit costs were comprised of the following:
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
Exit
costs
|
|
$
|
4,254
|
|
$
|
1,898
|
|
$
|
213
|
|
Severance
and other restructuring charges
|
|
|
1,971
|
|
|
3,301
|
|
|
282
|
|
Total
restructuring charges and exit costs
|
|
$
|
6,225
|
|
$
|
5,199
|
|
$
|
495
|
|
Exit
costs recorded in 2006 primarily resulted from the closing of 14 underperforming
units, including one franchise unit for which we remain obligated under the
lease. Severance and other restructuring costs in 2006 relate to the
termination of approximately 41 out-of-restaurant support staff
positions.
Exit
costs recorded in 2005 primarily resulted from the closing of eight
underperforming units, including three franchise units for which we remain
obligated under leases. Severance and other restructuring costs in 2005 relate
to the termination of approximately twenty out-of-restaurant support staff
positions.
Restructuring
charges and exit costs recorded in 2004 primarily resulted from the closing
of
six underperforming units.
The
components of the change in accrued exit cost liabilities are as follows:
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
Beginning
balance
|
|
$
|
9,531
|
|
$
|
9,841
|
|
Provisions
for units closed during the year
|
|
|
2,567
|
|
|
1,151
|
|
Changes
in estimates of accrued exit costs, net
|
|
|
1,687
|
|
|
747
|
|
Reclassification
of certain lease liabilities |
|
|
551 |
|
|
133 |
|
Payments,
net of sublease receipts
|
|
|
(3,397
|
)
|
|
(3,401
|
)
|
Interest
accretion
|
|
|
995
|
|
|
1,060
|
|
Balance,
end of fiscal year |
|
|
11,934 |
|
|
9,531 |
|
Less
current portion included in other current liabilities |
|
|
1,969 |
|
|
2,507 |
|
Long-term
portion included in other noncurrent liabilities
|
|
$
|
9,965
|
|
$
|
7,024
|
|
Estimated
cash payments related to exit cost liabilities in the next five years are as
follows:
|
|
|
(In thousands)
|
|
2007
|
|
$
|
3,360
|
|
2008
|
|
|
2,626
|
|
2009
|
|
|
2,253
|
|
2010
|
|
|
1,700
|
|
2011
|
|
|
1,490
|
|
Thereafter
|
|
|
3,581
|
|
Total
|
|
|
15,010
|
|
Less
imputed interest
|
|
|
3,076
|
|
Present
value of exit cost liabilities
|
|
$
|
11,934
|
|
The
present value of exit cost liabilities is net of $7.7 million relating to
existing sublease arrangements and $3.8 million related to properties for which
we expect to enter into sublease agreements in the future. See Note 11 for
a
schedule of future minimum lease commitments and amounts to be received as
lessor or sub-lessor for both open and closed units.
During
2006, 2005 and 2004, we recorded severance and outplacement costs related to
restructuring plans of $5.6 million. Through December 27, 2006,
approximately $5.1 million of these costs have been paid, of which
$1.6 million was paid during the year ended December 27, 2006. The
remaining balance of severance and outplacement costs of $0.5 million is
expected to be paid during 2007.
Note 11.
Leases and Related Guarantees
Our
operations utilize property, facilities, equipment and vehicles leased from
others. Buildings and facilities are primarily used for restaurants and support
facilities. Many of our restaurants are operated under lease arrangements
which
generally provide for a fixed basic rent, and, in some instances, contingent
rent based on a percentage of gross revenues. Initial terms of land and
restaurant building leases generally are not less than 15 years exclusive
of
options to renew. Leases of other equipment primarily consist of restaurant
equipment, computer systems and vehicles.
We
lease
certain owned and leased property, facilities and equipment to others. Our
net
investment in direct financing leases receivable, of which the current portion
is recorded in prepaid and other assets and the long-term portion is recorded
in
other long-term assets in our Consolidated Balance Sheets, is as follows:
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
Total
minimum rents receivable
|
|
$
|
1,392
|
|
$
|
6,751
|
|
Less
unearned income
|
|
|
871
|
|
|
4,464
|
|
Net
investment in direct financing leases receivable
|
|
$
|
521
|
|
$
|
2,287
|
|
Minimum
future lease commitments and amounts to be received as lessor or sublessor
under
non-cancelable leases, including leases for both open and closed units, at
December 27, 2006 are as follows:
|
|
Commitments
|
|
Lease
Receipts
|
|
|
|
Capital
|
|
Operating
|
|
Direct
Financing
|
|
Operating
|
|
|
|
(In
thousands)
|
2007
|
|
$
|
10,790
|
|
$
|
45,854
|
|
$
|
118
|
|
$
|
19,619
|
|
2008
|
|
|
8,682
|
|
|
41,588
|
|
|
118
|
|
|
18,878
|
|
2009
|
|
|
5,788
|
|
|
36,867
|
|
|
118
|
|
|
18,105
|
|
2010
|
|
|
5,355
|
|
|
30,590
|
|
|
118
|
|
|
17,336
|
|
2011
|
|
|
5,076
|
|
|
24,242
|
|
|
118
|
|
|
16,211
|
|
Thereafter
|
|
|
16,040
|
|
|
85,605
|
|
|
802
|
|
|
94,465
|
|
Total
|
|
|
51,731
|
|
$
|
264,746
|
|
$
|
1,392
|
|
$
|
184,614
|
|
Less
imputed interest
|
|
|
19,804
|
|
|
|
|
|
|
|
|
|
|
Present
value of capital lease obligations
|
|
$
|
31,927
|
|
|
|
|
|
|
|
|
|
|
The
total
rental expense included in the determination of income (loss) is as follows:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
Base
rents
|
|
$
|
43,548
|
|
$
|
44,240
|
|
$
|
44,212
|
|
Contingent
rents
|
|
|
7,109
|
|
|
6,984
|
|
|
5,811
|
|
Total
rental expense
|
|
$
|
50,657
|
|
$
|
51,224
|
|
$
|
50,023
|
|
Total
rental expense in the above table does not reflect lease and sublease
rental income of $24.8 million, $26.7 million and $27.1 million for 2006,
2005
and 2004, respectively, which is included as a component of franchising and
license revenue in the Consolidated Statements of Operations. Rent expense
is
recorded as a component of occupancy expense and costs of franchise and license
revenue in our Consolidated Statements of Operations.
Note 12.
Long-Term Debt
Long-term
debt consists of the following at December 27, 2006 and December 28,
2005:
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Notes
and Debentures: |
|
|
|
|
|
|
|
10%
Senior Notes due October 1, 2012, interest payable
semi-annually
|
|
$ |
175,000 |
|
$ |
175,000 |
|
New
Credit Facility:
|
|
|
|
|
|
|
|
Revolver
Loans outstanding due December 15, 2011
|
|
|
— |
|
|
— |
|
Term
Loans due March 31, 2012
|
|
|
245,596 |
|
|
— |
|
Old Credit
Facilities:
|
|
|
|
|
|
|
|
First
Lien Facility:
|
|
|
|
|
|
|
|
Revolver
Loans outstanding due September 30, 2008
|
|
|
— |
|
|
— |
|
Term
Loans due September 30, 2009
|
|
|
— |
|
|
222,752 |
|
Second
Lien Facility
|
|
|
— |
|
|
120,000 |
|
Other
note payable, maturing January 1, 2013, payable in
monthly installments with an
interest
rate of 9.17% (a)
|
|
|
446 |
|
|
498 |
|
Notes
payable secured by equipment, maturing over various terms up to 5
years,
payable in
monthly
installments with interest rates ranging from 9.0% to 11.97%
(b)
|
|
|
291 |
|
|
424 |
|
Capital
lease obligations
|
|
|
31,927 |
|
|
35,088 |
|
|
|
|
453,260 |
|
|
553,762 |
|
Less
current maturities and mandatory prepayments
|
|
|
12,511 |
|
|
8,097 |
|
Total
long-term debt
|
|
$ |
440,749 |
|
$ |
545,665 |
|
_____________
(a) Includes
a note collateralized by a restaurant with a net book value of $0.2 million
at
December 27, 2006 and December 28, 2005.
(b) Includes
notes collateralized by equipment with a net book value of $0.2 million at
December 27, 2006 and December 28, 2005.
Aggregate
annual maturities of long-term debt, excluding capital lease obligations (see
Note 11), at December 27, 2006 are as follows:
Year:
|
|
|
(In
thousands)
|
|
2007
|
|
$
|
5,532
|
|
2008
|
|
|
3,230
|
|
2009
|
|
|
1,958
|
|
2010
|
|
|
2,531
|
|
2011
|
|
|
2,539
|
|
Thereafter
|
|
|
405,543
|
|
|
|
$
|
421,333
|
|
Credit
Facility
On
December 15, 2006, our subsidiaries, Denny's, Inc. and Denny's Realty, LLC
(the
"Borrowers"), refinanced our previous credit facilities ("Old Credit
Facilities") and entered into a new senior secured credit agreement in an
aggregate principal amount of $350 million. The new credit facility consists
of
a $50 million revolving credit facility (including up to $10 million
for a revolving letter of credit facility), a $260 million term loan and an
additional $40 million letter of credit facility (together, the "New
Credit Facility"). The
revolving facility matures on December 15, 2011. The term loan and the $40
million letter of credit facility mature on March 31, 2012. The term
loan amortizes in equal quarterly installments at a rate equal to
approximately 1% per annum with all remaining amounts due on the maturity
date. The New Credit Facility will be available for working capital,
capital expenditures and other general corporate purposes. We will be required
to make mandatory prepayments under certain circumstances (such as the sale
of
specified properties) typical for this type of credit facility and may make
certain optional prepayments under the New Credit Facility.
The
New
Credit Facility is guaranteed by Denny's and its other subsidiaries and is
secured by substantially all of the assets of Denny's and its subsidiaries.
In
addition, the New Credit Facility is secured by first-priority mortgages
on 140 company-owned real estate assets. The New Credit Facility contains
certain financial covenants (i.e., maximum total debt to EBITDA (as defined
under the New Credit Facility) 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. These covenants are substantially
similar to those that were contained in the Old Credit Facilities. We were
in compliance with the terms of the New Credit Facility as of December 27,
2006.
Interest
on loans under the new revolving facility will
be payable, initially, at per annum rates equal to LIBOR plus 250 basis points
and will adjust over time based on our leverage ratio. Interest on the new
term
loan and letter of credit facility will be payable at per annum rates equal
to
LIBOR plus 225 basis points. The
weighted-average interest rate under the term loan was 7.60% as of December
27,
2006. The
weighted average interest rate under the first lien facility and the
second
lien facility was 7.30% and 9.39%, respectively, as of December 28,
2005.
Effective
March 8, 2007, we amended the New Credit Facility to reduce the per annum
interest rate on the term loan and letter of credit facility to LIBOR plus
200
basis points. Upon the event of a refinancing transaction, under certain
circumstances within one year of the amendment, we would be required to
pay the
term loan and letter of credit facility lenders a 1.0% prepayment premium
in the
transaction.
At
December 27, 2006, we had an outstanding term
loan of $245.6 million and outstanding letters of credit of $42.6 million
(comprised of $39.6 million under our letter of credit facility and
$3.0
million under our
revolving facility). There were no revolving loans outstanding at December
27,
2006. These balances result in availability of $0.4 million under our letter
of
credit facility and $47.0 million under the revolving
facility.
During
2006, we prepaid approximately $97 million on the term loan through a
combination of asset sale proceeds and surplus cash. As a result of these
prepayments and the debt refinancing, we recorded $8.5
million of losses on early extinguishment of debt resulting from the write-off
of deferred financing costs. These losses are included as a component of
other
nonoperating expense in the Consolidated Statements
of Operations.
For
the
year ended December 29, 2004, we recorded $21.7 million of losses on early
extinguishment of debt which primarily represent the payment of premiums
and
expenses as well as write-offs of deferred financing costs and debt premiums
associated with the repurchase of our previously outstanding senior
notes and the termination of our previous credit facility. These losses are
included as a component of other nonoperating expense in the Consolidated
Statements of Operations.
Interest
Rate Swap
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 previous floating rate
term loan debt. We 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 previous term loan facility. Under the terms of the swap, we paid
a
fixed rate of 3.76% on the $75 million notional amount and received 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 were recognized as adjustments to interest
expense. To
the
extent the swap was effective in offsetting the variability of the hedged cash
flows, changes in the fair value of the swap were not included in current
earnings but were reported as other comprehensive income (loss).
As
a result of the extinguishment of a portion of our
debt on December 15, 2006, we discontinued hedge accounting treatment related
to
the interest rate swap. The interest rate swap was sold for a cash price of
$1.1 million, resulting in a gain of $0.9 million, which is included as a
component of other nonoperating expense in the Consolidated Statements of
Operations.
The
components of the cash flow hedge included in accumulated other comprehensive
income (loss) in the Consolidated Statement of Shareholders’ Deficit and
Comprehensive Income (Loss) for the years ended December 27, 2006 and
December 28, 2005, are as follows:
|
|
Fiscal
Year
Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Net
interest (income) expense recognized as a result of interest rate
swap
|
|
$
|
(962
|
)
|
$
|
265
|
|
Changes
in unrealized gain in fair value of interest swap rates |
|
|
560
|
|
|
991
|
|
(Gain)
recognized on extinguishment of interest rate swap
|
|
|
(854
|
)
|
|
—
|
|
Net
increase (decrease) in Accumulated Other Comprehensive Income (Loss),
net of tax
|
|
$
|
(1,256
|
)
|
$
|
1,256
|
|
10%
Senior Notes Due 2012
On
October 5, 2004, Denny’s Holdings issued $175 million aggregate principal
amount of its 10% Senior Notes due 2012 (the “10% Notes”). The 10% Notes are
irrevocably, fully and unconditionally guaranteed on a senior basis by Denny’s
Corporation. The 10% Notes are general, unsecured senior obligations of Denny’s
Holdings, and rank equal in right of payment to all existing and future
indebtedness and other obligations that are not, by their terms, expressly
subordinated in right of payment to the 10% Notes; rank senior in right of
payment to all existing and future subordinated indebtedness; and are
effectively subordinated to all existing and future secured debt to the extent
of the value of the assets securing such debt and structurally subordinated
to
all indebtedness and other liabilities of the subsidiaries of Denny’s Holdings,
including the New Credit Facility. The 10% Notes bear interest at the rate
of
10% per year, payable semi-annually in arrears on April 1 and
October 1 of each year. The 10% Notes mature on October 1, 2012.
At
any
time on or after October 1, 2008, Denny’s Holdings may redeem all or a
portion of the 10% Notes for cash at its option, upon not less than 30 days
nor
more than 60 days notice to each holder of 10% Notes, at the following
redemption prices (expressed as percentages of the principal amount) if redeemed
during the 12-month period commencing October 1 of the years indicated
below, in each case together with accrued and unpaid interest and liquidated
damages, if any, thereon to the date of redemption of the 10% Notes (the
“Redemption Date”):
Year:
|
|
|
Percentage
|
|
2008
|
|
|
105.0
|
%
|
2009
|
|
|
102.5
|
%
|
2010
and thereafter
|
|
|
100.0
|
%
|
At
any
time on or prior to October 1, 2007, upon one or more Qualified Equity
Offerings (as defined in the indenture governing the 10% Notes (the
“Indenture”)) for cash, up to 35% of the aggregate principal amount of the 10%
Notes issued pursuant to the Indenture may be redeemed at the option of Denny’s
Holdings within 90 days of such Qualified Equity Offering, on not less than
30
days, but not more than 60 days, notice to each holder of the 10% Notes to
be
redeemed, with cash contributed to Denny’s Holdings from the cash proceeds of
such Qualified Equity Offering, at a redemption price equal to 110% of the
principal amount, together with accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Redemption Date; provided, however, that
immediately following such redemption not less than 65% of the aggregate
principal amount of the 10% Notes originally issued pursuant to the Indenture
remain outstanding.
The
Indenture contains certain covenants limiting the ability of Denny’s Holdings
and its subsidiaries (but not its parent, Denny’s Corporation) to, among other
things, incur additional indebtedness (including disqualified capital stock);
pay dividends or make distributions or certain other restricted payments;
make
certain investments; create liens on our assets to secure debt; enter into
sale
and leaseback transactions; enter into transactions with affiliates; merge
or
consolidate with another company; sell, lease or otherwise dispose of all
or
substantially all of its assets; enter into new lines of business; and guarantee
indebtedness. These covenants are subject to a number of important limitations
and exceptions.
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.
Fair
Value of Long-Term Debt
The
book
value and estimated fair value of our long-term debt, excluding capital
lease obligations, was as follows:
|
|
Book
Value
|
|
Estimated
Fair Value
|
|
|
|
(In
thousands)
|
|
Balances
as of December 27, 2006: |
|
|
|
|
|
|
|
Fixed
rate long-term debt
|
|
$ |
175,737 |
|
$ |
184,487 |
|
Variable
rate long-term debt
|
|
|
245,596 |
|
|
245,596 |
|
Long
term debt excluding capital lease obligations |
|
$ |
421,333 |
|
$ |
430,083 |
|
|
|
|
|
|
|
|
|
Balances
as of December 28, 2005: |
|
|
|
|
|
|
|
Fixed
rate long-term debt
|
|
$ |
175,922 |
|
$ |
177,672 |
|
Variable
rate long-term debt
|
|
|
342,752 |
|
|
342,752 |
|
Long
term debt excluding capital lease obligations |
|
$ |
518,674 |
|
$ |
520,424 |
|
The
fair
value computation is based on market quotations for the same or similar debt
issues or the estimated borrowing rates available to us. Specifically, the
difference between the estimated fair value of long-term debt compared with
its
historical cost reported in our Consolidated Balance Sheets at December 27,
2006 relates primarily to market quotations for our 10% Notes.
Note 13.
Employee Benefit Plans
Adoption
of SFAS 158
Effective
December 27, 2006, the last day of fiscal 2006, we adopted SFAS 158. This
standard requires recognition of the overfunded or underfunded status of
defined
benefit pension and other 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. This measurement requirement is effective
for fiscal years ending after December 15, 2008, however, the measurement
date
of our plans is already in accordance with this requirement. We adopted the
recognition of the funded status and changes in the funded status of our
benefit
plans in the fourth quarter of 2006. The adoption had no impact on our
Consolidated Balance Sheet or Statement of Shareholders' Deficit.
Employee
Benefit Plans
We
maintain several defined benefit plans which cover a
substantial number of employees. Benefits are based upon each employee’s years
of service and average salary. Our funding policy is based on the minimum
amount
required under the Employee Retirement Income Security Act of 1974. Our pension
plan was closed to new participants as of December 31, 1999. Benefits
ceased to accrue for pension plan participants as of December 31, 2004. We
also maintain defined contribution plans.
The
components of net pension cost of the pension plan and other defined benefit
plans as determined under Statement of Financial Accounting Standards
No. 87, “Employers’ Accounting for Pensions,” are as follows:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
Pension
Plan:
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
375
|
|
$
|
335
|
|
$
|
480
|
|
Interest
cost
|
|
|
3,111
|
|
|
3,054
|
|
|
2,933
|
|
Expected
return on plan assets
|
|
|
(3,250
|
)
|
|
(3,034
|
)
|
|
(2,797
|
)
|
Amortization
of net loss
|
|
|
1,078
|
|
|
1,010
|
|
|
801
|
|
Net
periodic benefit cost
|
|
$
|
1,314
|
|
$
|
1,365
|
|
$
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (income) loss
|
|
$
|
(3,304
|
)
|
$
|
1,313
|
|
$
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Defined Benefit Plans:
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
—
|
|
$
|
—
|
|
$
|
311
|
|
Interest
cost
|
|
|
192
|
|
|
224
|
|
|
227
|
|
Amortization
of net loss
|
|
|
25
|
|
|
13
|
|
|
23
|
|
Settlement
loss recognized
|
|
|
14 |
|
|
130 |
|
|
— |
|
Net
periodic benefit cost
|
|
$
|
231
|
|
$
|
367
|
|
$
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (income) loss
|
|
$
|
(73
|
)
|
$
|
(227
|
)
|
$
|
375
|
|
Net
pension and other defined benefit plan costs (including premiums paid to
the
Pension Benefit Guaranty Corporation) for 2006, 2005, and 2004 were $1.5
million
, $1.7 million and $2.0 million, respectively.
The
following table sets forth the funded status and amounts recognized in the
Consolidated Balance Sheet for our pension plan and other defined benefit
plans:
|
|
Pension
Plan
|
|
Other
Defined Benefit Plans
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Change
in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
54,793
|
|
$
|
52,917
|
|
$
|
3,457
|
|
$
|
4,208
|
|
Service
cost
|
|
|
375
|
|
|
335
|
|
|
—
|
|
|
—
|
|
Interest
cost
|
|
|
3,111
|
|
|
3,054
|
|
|
191
|
|
|
224
|
|
Actuarial
losses (gains)
|
|
|
(1,413
|
) |
|
977
|
|
|
(46
|
)
|
|
(89
|
)
|
Settlement
loss
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
Benefits
paid
|
|
|
(2,769
|
)
|
|
(2,490
|
)
|
|
(303
|
)
|
|
(900
|
)
|
Benefit
obligation at end of year
|
|
$
|
54,097
|
|
$
|
54,793
|
|
$
|
3,313
|
|
$
|
3,457
|
|
Accumulated
benefit obligation |
|
$ |
54,097
|
|
$ |
54,793 |
|
$ |
3,313 |
|
$ |
3,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
38,929
|
|
$
|
36,532
|
|
$
|
—
|
|
$
|
—
|
|
Actual
return on plan assets
|
|
|
4,063
|
|
|
1,689
|
|
|
—
|
|
|
—
|
|
Employer
contributions
|
|
|
3,940
|
|
|
3,198
|
|
|
303
|
|
|
900
|
|
Benefits
paid
|
|
|
(2,769
|
)
|
|
(2,490
|
)
|
|
(303
|
)
|
|
(900
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
44,163
|
|
$
|
38,929
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$
|
(9,934
|
)
|
$
|
(15,864
|
)
|
$
|
(3,313
|
)
|
$
|
(3,457
|
)
|
Unrecognized
losses
|
|
|
*
|
|
|
20,107
|
|
|
*
|
|
|
692
|
|
Net
amount recognized
|
|
$
|
(9,934
|
) |
$
|
4,243
|
|
$
|
(3,313
|
)
|
$
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in Accumulated Other Comprehensive
(Loss)
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) gain |
|
$ |
(16,802 |
) |
|
*
|
|
|
(620 |
) |
|
*
|
|
Accumulated
other comprehensive (loss) income |
|
$ |
(16,802 |
) |
|
* |
|
|
(620 |
) |
|
* |
|
Cumulative
employer contributions in excess of cost |
|
|
6,868 |
|
|
*
|
|
|
(2,693 |
) |
|
*
|
|
Net
amount recognized |
|
$ |
(9,934 |
) |
|
* |
|
|
(3,313 |
) |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in the Consolidated Balance Sheet
Consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
years prior to adoption of SFAS 158: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit liability
|
|
$
|
*
|
|
$
|
(15,864
|
)
|
$
|
*
|
|
$
|
(3,457
|
)
|
Accumulated
other comprehensive loss
|
|
|
*
|
|
|
20,107
|
|
|
* |
|
|
692
|
|
Net
amount recognized
|
|
$
|
*
|
|
$
|
4,243
|
|
$
|
*
|
|
$
|
(2,765
|
)
|
For
years after adoption of SFAS 158: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
|
$ |
— |
|
$ |
* |
|
$ |
— |
|
$ |
* |
|
Current
liabilities
|
|
|
— |
|
|
* |
|
|
(215 |
) |
|
* |
|
Noncurrent
liabilities
|
|
|
(9,934 |
) |
|
* |
|
|
(3,098 |
) |
|
* |
|
Net
amount recognized
|
|
$ |
(9,934 |
) |
$ |
* |
|
$ |
(3,313 |
) |
$ |
* |
|
_____________
* Not
applicable due to change in accounting standard.
Minimum
pension liability adjustments for the years ended December 27, 2006,
December 28, 2005 and December 29, 2004, were a reduction of $3.4
million and increases of $1.1 million and $1.8 million, respectively.
Accumulated other comprehensive income (loss) in the Consolidated Statement
of
Shareholders’ Deficit and Comprehensive Income (Loss) for the year ended
December 27, 2006 included a $17.4 million accumulated other comprehensive
loss related to minimum pension liability adjustments. The application of
SFAS
158, effective December 27, 2006, did not increase or decrease the amount
of
accumulated other comprehensive loss.
Because
our pension plan was closed to new participants as of December 31, 1999,
and benefits ceased to accrue for Pension Plan participants as of
December 31, 2004, an assumed rate of increase in compensation levels was
not applicable for 2006 or 2005. Weighted-average assumptions used in the
actuarial computations to determine benefit obligations as of December 27,
2006
and December 28, 2005, were as follows:
|
|
|
2006
|
|
|
2005
|
|
Discount
rate
|
|
|
5.94
|
%
|
|
5.75
|
%
|
Measurement
date
|
|
|
12/27/06
|
|
|
12/28/05
|
|
Weighted-average
assumptions used in the actuarial computations to determine net periodic
pension
cost for the three years ended December 27, 2006, were as follows:
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
5.75
|
%
|
|
6.00
|
%
|
Rate
of increase in compensation levels
|
|
|
N/A
|
|
|
N/A
|
|
|
4.00
|
%
|
Expected
long-term rate of return on assets
|
|
|
8.25
|
%
|
|
8.25
|
%
|
|
8.50
|
%
|
Measurement
date
|
|
|
12/28/05
|
|
|
12/29/04
|
|
|
12/31/03
|
|
In
determining the expected long-term rate of return on assets, we evaluated
our
asset class return expectations, as well as long-term historical asset class
returns. Projected returns are based on broad equity and bond indices.
Additionally, we considered our historical 10-year and 15-year compounded
returns, which have been in excess of our forward-looking return expectations.
In determining the discount rate, we have considered long-term bond indices
of
bonds having similar timing and amounts of cash flows as our estimated defined
benefit payments. Effective December 27, 2006, we used a yield curve based
on
high quality, long-term corporate bonds to calculate the single equivalent
discount rate that results in the same present value as the sum of each of
the
plan's estimated benefit payments discounted at their respective spot
rates.
Our
pension plan weighted-average asset allocations as a percentage of plan assets
as of December 27, 2006 and December 28, 2005, by asset category, were as
follows:
|
|
Target
|
|
2006
|
|
2005
|
|
Asset
Category |
|
|
|
|
|
|
|
|
|
|
Equity
securities |
|
|
63 |
% |
|
64 |
% |
|
65 |
% |
Debt
securities |
|
|
34 |
% |
|
34 |
% |
|
34 |
% |
Cash |
|
|
3 |
% |
|
2 |
% |
|
1 |
% |
Total
|
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
Our
investment policy for pension plan assets is to maximize the total rate of
return (income and appreciation) with a view to the long-term funding objectives
of the pension plan. Therefore, the pension plan assets are diversified to
the
extent necessary to minimize risks and to achieve an optimal balance between
risk and return and between income and growth of assets through capital
appreciation.
We
made
contributions of $3.9 million and $3.2 million to our qualified pension plan
in
2006 and 2005, respectively. We made contributions of $0.3 million and $0.9
million to our other defined benefit plans in 2006 and 2005, respectively.
In
2007, we expect to contribute $3.2 million to our qualified pension plan
and
$0.2 million to our other defined benefit plans. Benefits expected to be
paid
for each of the next five years and in the aggregate for the five fiscal
years
from 2012 through 2016 are as follows:
|
|
Pension
Plan
|
|
Other
Defined Benefit Plans
|
|
|
|
(In
thousands)
|
|
2007
|
|
$
|
2,476
|
|
$
|
215
|
|
2008
|
|
|
2,388
|
|
|
231
|
|
2009
|
|
|
2,339
|
|
|
218
|
|
2010
|
|
|
2,334
|
|
|
217
|
|
2011
|
|
|
2,414
|
|
|
233
|
|
2012
through 2016
|
|
|
14,051
|
|
|
1,350
|
|
In
addition, eligible employees can elect to contribute 1% to 15% of their
compensation to 401(k) plans or 1% to 50% under other defined contribution
plans. Under these plans, we make matching contributions, subject to certain
limitations. Amounts charged to income under these plans’ operations were $1.9
million, $1.7 million and $1.6 million for 2006, 2005 and 2004, respectively.
Note 14.
Income Taxes
A
summary
of the provision for income taxes is as follows:
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
427
|
|
$
|
129
|
|
$
|
—
|
|
State,
foreign and other
|
|
|
1,414
|
|
|
1,082
|
|
|
802
|
|
|
|
|
1,841
|
|
|
1,211
|
|
|
802
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
9,689
|
|
|
—
|
|
|
—
|
|
State,
foreign and other
|
|
|
3,138
|
|
|
—
|
|
|
—
|
|
|
|
|
12,827
|
|
|
—
|
|
|
—
|
|
Provision
for income taxes
|
|
$
|
14,668
|
|
$
|
1,211
|
|
$
|
802
|
|
The
following represents the approximate tax effect of each significant type of
temporary difference giving rise to deferred income tax assets or liabilities
from continuing operations:
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Lease
liabilities
|
|
$
|
1,934
|
|
$
|
1,875
|
|
Self-insurance
accruals
|
|
|
16,543
|
|
|
17,389
|
|
Capitalized
leases
|
|
|
5,006
|
|
|
5,808
|
|
Closed
store liabilities
|
|
|
4,774
|
|
|
3,813
|
|
Fixed
assets
|
|
|
26,313
|
|
|
21,731
|
|
Pension,
other retirement and compensation plans
|
|
|
13,912
|
|
|
17,364
|
|
Other
accruals
|
|
|
5,362 |
|
|
1,581
|
|
Capital
loss carryforwards
|
|
|
—
|
|
|
12,631
|
|
Alternative
minimum tax credit carryforwards
|
|
|
12,769
|
|
|
12,157
|
|
General
business credit carryforwards
|
|
|
44,620
|
|
|
45,727
|
|
Net
operating loss carryforwards - state
|
|
|
41,713 |
|
|
47,508 |
|
Net
operating loss carryforwards - federal
|
|
|
31,495
|
|
|
39,522
|
|
Total
deferred tax assets before valuation allowance
|
|
|
204,441
|
|
|
227,106
|
|
Less:
valuation allowance
|
|
|
(187,360
|
)
|
|
(196,697
|
)
|
Deferred
tax assets
|
|
|
17,081
|
|
|
30,409
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(29,207
|
)
|
|
(30,409
|
)
|
Total
deferred tax liabilities
|
|
|
(29,207
|
)
|
|
(30,409
|
)
|
Net
deferred tax liability
|
|
$
|
(12,126
|
)
|
$
|
—
|
|
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 ("NOL") generated in previous
periods. Approximately 84% of the state net operating loss carryforwards
are in
South Carolina, Pennsylvania and California. The South Carolina net
operating loss carryforwards represent 73% of this total. 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 $12.1 million in the year ended December 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 of fiscal 2006.
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. As a result,
we
recorded approximately $0.7 million of state deferred tax expense with a
corresponding reduction to the goodwill
(see Note 7) that was recorded in connection with fresh start reporting on
January 7, 1998.
Any
additional reversal of the valuation allowance established in connection with
fresh start reporting on January 7, 1998 (approximately $63 million at
December 27, 2006) would be applied first to goodwill that was recorded in
connection with fresh start reporting, then to reduce other identifiable
intangible assets, followed by a credit directly to equity.
The
difference between our statutory federal income tax rate and our effective
tax
rate on loss from continuing operations is as follows:
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statutory
benefit rate
|
|
|
35
|
%
|
|
(35
|
%)
|
|
(35
|
%)
|
Differences:
|
|
|
|
|
|
|
|
|
|
|
State,
foreign, and other taxes, net of federal income tax
benefit
|
|
|
9
|
|
|
12
|
|
|
2
|
|
Portion
of net operating losses, capital losses and unused income tax credits
resulting
from the establishment or reduction in the valuation
allowance
|
|
|
(11
|
)
|
|
31
|
|
|
39
|
|
Wage
addback (deductions) on income tax credits earned (expired),
net
|
|
|
—
|
|
|
17
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
(5
|
)
|
|
(4
|
)
|
Effective
tax rate
|
|
|
33
|
%
|
|
20
|
%
|
|
2
|
%
|
At
December 27, 2006, Denny’s has available, on a consolidated basis, general
business credit carryforwards of approximately $44.6 million, most of which
expire in 2007 through 2026, and alternative minimum tax, ("AMT"), credit
carryforwards of approximately $12.8 million, which never expire. Denny’s also
has available regular NOL and AMT NOL carryforwards of approximately $90 million
and $150 million, respectively, which expire in 2012 through 2025. In addition
we have capital loss carryforwards available of approximately $11.3 million
for AMT. Our AMT capital loss carryforward, which will expire in 2007, can
only
be utilized to offset certain capital gains generated by us. Prior
to
2005,
Denny’s
had
ownership changes within the meaning of Section 382 of the Internal Revenue
Code. Because of these changes, the amount of our NOL carryforwards along with
any other tax carryforward attribute, for periods prior to the dates of change,
are limited to an annual amount which may be increased by the amount of our
net
unrealized built-in gains at the time of any ownership change that are
recognized in that taxable year. Therefore, some of our tax attributes recorded
in the gross deferred tax asset inventory may expire prior to their utilization.
A valuation allowance has already been established for a significant portion
of
these deferred tax assets since it is our position that it is
more-likely-than-not that tax benefit will not be realized from these assets.
Note
15. Accumulated Other Comprehensive Income
(Loss)
The
components of Accumulated Other Comprehensive Income (Loss) in
the Consolidated Statements of Shareholders' Deficit are as
follows:
|
|
December
27, 2006
|
|
December
28, 2005
|
|
|
|
(In
thousands)
|
|
Additional
minimum pension liability (Note 13) |
|
$ |
(17,423 |
) |
$ |
(20,799 |
) |
Unrealized
gain on interest rate swap (Note 12) |
|
|
— |
|
|
1,256 |
|
Accumulated
other comprehensive income (loss) |
|
$ |
(17,423 |
) |
$ |
(19,453 |
) |
Note 16.
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,
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 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 2006 Consolidated Balance Sheet. 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.
Total
share-based compensation included as a component of net income was as
follows
(in thousands):
|
|
Year
Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation related to liability classified restricted stock
units |
|
$ |
2,311 |
|
$ |
2,033 |
|
$ |
1,582 |
|
Share-based
compensation related to equity classified awards: |
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
3,234 |
|
$ |
3,529 |
|
$ |
3,098 |
|
Restricted
stock units
|
|
|
1,766 |
|
|
1,953 |
|
|
1,688 |
|
Board
deferred stock units
|
|
|
316 |
|
|
286 |
|
|
129 |
|
Total
share-based compensation related to equity classified
awards
|
|
|
5,316 |
|
|
5,768 |
|
|
4,915 |
|
Total
share-based compensation
|
|
$ |
7,627 |
|
$ |
7,801 |
|
$ |
6,497 |
|
Stock
Options
Options
granted to date generally vest evenly over 3 years, have a 10-year contractual
life and are issued at the market value at the date of grant.
A
summary
of our stock option plans is presented below:
|
|
Year
Ended December 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
|
|
|
(1,139
|
)
|
|
1.77
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(211
|
)
|
|
2.49 |
|
|
|
|
|
|
|
Outstanding,
end of year
|
|
|
8,640
|
|
|
2.29
|
|
|
5.94
|
|
$
|
22,132
|
|
Exercisable,
end of year |
|
|
7,534 |
|
|
1.99 |
|
|
5.51 |
|
$ |
21,544 |
|
The
aggregate intrinsic value was calculated using the difference between the
market
price of our stock on December 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 $3.0
million, $4.7 million and $1.0 million during the years ended December 27,
2006
December 28, 2005 and December 29, 2004, respectively.
The
following table summarizes information about stock options outstanding at
December 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
|
|
|
1,781
|
|
|
5.11
|
|
$
|
0.72
|
|
|
1,781
|
|
$
|
0.72
|
|
1.01 - 1.03
|
|
|
1,270
|
|
|
4.13
|
|
|
1.03
|
|
|
1,270
|
|
|
1.03
|
|
1.06
- 2.00
|
|
|
810
|
|
|
4.11
|
|
|
1.93
|
|
|
810
|
|
|
1.93
|
|
2.42
|
|
|
2,795
|
|
|
7.38
|
|
|
2.42
|
|
|
2,795
|
|
|
2.42
|
|
2.65
- 4.40
|
|
|
1,226
|
|
|
6.86
|
|
|
3.88
|
|
|
548
|
|
|
3.62
|
|
4.45
- 6.31
|
|
|
623
|
|
|
7.07
|
|
|
4.66
|
|
|
195
|
|
|
4.86
|
|
7.00
|
|
|
60
|
|
|
1.95
|
|
|
7.00
|
|
|
60
|
|
|
7.00
|
|
10.00
|
|
|
75 |
|
|
1.08
|
|
|
10.00
|
|
|
75
|
|
|
10.00
|
|
|
|
|
8,640
|
|
|
5.94
|
|
|
|
|
|
7,534
|
|
|
|
|
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 vested with respect to 1/3 of the
shares on each of December 29, 2004, December 28, 2005 and December 27,
2006,
respectively and were fully vested at December 27, 2006. 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.
The
weighted average fair value per option of options granted during the years
ended
December 27, 2006, December 28, 2005 and December 29, 2004 was $3.20, $3.43
and
$3.73, respectively.
The
fair
value of the stock options granted in the periods ended December 27,
2006, December 28, 2005 and December 29, 2004 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 Consolidated Statements of Operations. We used the
following weighted average assumptions for the grants:
|
|
Year
Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield |
|
|
0.0 |
% |
|
0.0 |
% |
|
0.0 |
% |
Expected
volatility |
|
|
87.1 |
% |
|
90.0 |
% |
|
95.1 |
% |
Risk-free
interest rate |
|
|
4.7 |
% |
|
4.0 |
% |
|
4.3 |
% |
Weighted
average expected term |
|
|
6.0
years |
|
|
6.0
years |
|
|
7.6 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 $3.2 million, $3.5 million and $3.1
million for the years ended December 27, 2006, December 28, 2005 and
December 29, 2004, respectively, related to all options, which is included
as a component of general and administrative expenses in our Consolidated
Statements of Operations. Compensation expense for the years ended December
28,
2005 and December 29, 2004 related to the intrinsic value of options
granted on November 11, 2004, as noted above.
As
of
December 27, 2006, there was approximately $2.0 million of unrecognized
compensation cost related to unvested stock option awards granted, which
is
expected to be recognized over a weighted average of 1.9
years.
Restricted
Stock Units
The
following table summarizes information about restricted stock units outstanding
at December 27, 2006:
|
|
|
Units
|
|
|
|
|
(In
thousands)
|
|
Outstanding,
beginning of year
|
|
|
3,356
|
|
Granted
|
|
|
374
|
|
Vested
|
|
|
(443
|
)
|
Forfeited
|
|
|
(330
|
)
|
Outstanding,
end of year
|
|
|
2,957
|
|
We
have
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 December 27, 2006 and December 28, 2005, approximately 2.6
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 two periods ended on June
30, 2005 and June 30, 2006. 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. The first 1/3 of the award was earned on June
30,
2005. The second 1/3 of the award was not earned on June 30, 2006, but has
the potential to be earned on June 30, 2007.
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 year ended December 27, 2006, we paid $0.8 million 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 were earned at 100% of the target
award based on certain operating performance measures for fiscal 2006. 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 December 27, 2006, approximately 0.3 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 $4.1 million, $4.0 million and $0.5 million for
the
years ended December 27, 2006, December 28, 2005 and December 29, 2004,
respectively, related to the restricted stock units, which is included as
a
component of general and administrative expenses in the Consolidated
Statements of Operations.
During
the years ended December 27, 2006 and December 28, 2005 we paid $1.2 million
and
$0.1 million in cash, respectively, related to 0.6 million restricted
stock units issued in 2003. In addition we issued 0.3 million shares
of common stock related to these units during 2005. During the year ended
December 29, 2004 we recorded approximately $2.8 million of compensation
expense
related to these units.
At
December 27, 2006, approximately $0.8 million and $2.7 million of accrued
compensation was included as a component of other current liabilities and
other noncurrent liabilities, respectively (based on the fair value of the
related shares for the liability classified units as of December 27, 2006),
and $3.2 million was included as a component of additional paid-in capital
in
the Consolidated Balance Sheet related to the equity classified
restricted stock units.
As
of
December 27, 2006, there was approximately $6.4 million of unrecognized
compensation cost (approximately $2.7 million for liability classified units
and
approximately $3.7 million for equity classified units) related to unvested
restricted stock unit awards granted, which is expected to be recognized
over a
weighted average of 2.9 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. The fair value of the deferred stock units is
based
upon the fair value of the underlying common stock on the date of grant.
We
recognized compensation expense of approximately $0.3 million, $0.3 million
and
$0.1 million for the years ended December 27, 2006, December 28, 2005 and
December 29, 2004, respectively, related to the board deferred stock units,
which is included as a component of general and administrative expenses
in our
Consolidated Statements of Operations. During 2006, one board member
resigned and converted deferred stock units into shares of common stock.
The aggregate intrinsic value of the units converted was $0.1 million as
of
December 27, 2006. As of December 27, 2006 and December 28, 2005, approximately
0.1 million of these units were outstanding.
Note 17.
Net Income (Loss) Per Share
The
net
income(loss) per share for the years ending December 27, 2006, December 28,
2006
and December 29, 2004 were as follows:
|
|
Fiscal Year
Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
(In
thousands)
|
|
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
|
|
$
|
30,106
|
|
$
|
(7,328
|
)
|
$
|
(37,675
|
)
|
Numerator
for basic and diluted net income (loss) per share - net income
(loss)
|
|
$ |
30,338 |
|
$ |
(7,328 |
) |
$ |
(37,675 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net income (loss) per share—weighted average shares
|
|
|
92,250
|
|
|
91,018
|
|
|
64,708
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
4,305
|
|
|
—
|
|
|
—
|
|
Restricted
stock units and awards
|
|
|
809
|
|
|
—
|
|
|
—
|
|
Denominator
for diluted net income (loss) per share—adjusted weighted average
shares
and assumed conversions of dilutive securities
|
|
|
97,364
|
|
|
91,018
|
|
|
64,708
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share before
cumulative effect of change in accounting
principle
|
|
$
|
0.33
|
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
Diluted
net income (loss) per share before cumulative effect of change
in
accounting
principle
|
|
$ |
0.31 |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
Basic
net income (loss) per share |
|
$ |
0.33 |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
Diluted
net income (loss) per share |
|
$ |
0.31 |
|
$ |
(0.08 |
) |
$ |
(0.58 |
) |
|
|
|
|
|
|
|
|
|
|
|
Stock
options excluded (1)
|
|
|
1,468
|
|
|
9,228
|
|
|
10,603
|
|
Restricted
stock units and awards excluded (1) |
|
|
— |
|
|
3,356 |
|
|
3,406 |
|
Common
stock warrants excluded (1)
|
|
|
—
|
|
|
—
|
|
|
3,236
|
|
(1) Excluded
from diluted weighted-average shares outstanding as the impact would be
antidilutive.
Note 18.
Stockholders’ Equity
Stockholders’
Rights Plan
Our
Board
of Directors adopted a stockholders’ rights plan on December 14, 1998 which
is designed to provide protection for our shareholders against coercive
or
unfair takeover tactics. The rights plan is also designed to prevent an
acquirer
from gaining control of Denny’s without offering a fair price to all
shareholders. The rights plan was not adopted in response to any specific
proposal or inquiry to gain control of Denny’s.
In
2004,
the rights plan was amended to provide that the definition of acquiring
person
under the plan does not include any person who became the beneficial owner
of
15% or more of our then outstanding common stock as a result of the private
placement which occurred in the third quarter of 2004, unless and until
such
time thereafter as any such person becomes the beneficial owner of additional
common stock constituting an additional 1% of our outstanding shares.
The
rights, until exercised, do not entitle the holder to vote or receive dividends.
We have the option to redeem the rights at a price of $0.01 per right,
at any
time prior to the earlier of (1) the time the rights become exercisable or
(2) December 30, 2008, the date the rights expire. Until the rights
become exercisable, they have no dilutive effect on earnings per share.
Note 19.
Commitments and Contingencies
In
the
third quarter of 2006, Denny's 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 provided for
payments up to approximately $1.7 million in the aggregate 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. Notification of the settlement
was
sent to putative class members, who were required to "opt in" by December
22,
2006 in order to participate in the distribution. As of December 27, 2006,
all
claims, approximately $0.1 million, had been paid to valid claimants.
In
the
fourth quarter of 2005, Denny’s 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 Consolidated Balance Sheet at December 28, 2005 and was paid
on January 6, 2006, in accordance with the instruction 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.
We
have
amounts payable under purchase contracts for food and non-food products. In
most
cases, these agreements do not obligate us to purchase any specific volumes.
In
most cases, these agreements have provisions that would allow us to cancel
such
agreements with appropriate notice. Our future commitments at December 27,
2006
under these contracts consist of the following:
|
|
Purchase
Obligations
|
|
|
|
(In
thousands)
|
|
Payments
due by period: |
|
|
|
|
Less
than 1 year
|
|
$ |
112,356 |
|
1-2
years
|
|
|
31,790 |
|
3-4
years
|
|
|
27,816 |
|
5
years and thereafter
|
|
|
— |
|
Total
|
|
$ |
171,962 |
|
Amounts
included in the table above represent our estimate of purchase obligations
during the periods presented, if we were to cancel these contracts with
appropriate notice. We would likely take delivery of goods under such
circumstances.
Note
20. Supplemental Cash Flow
Information
|
|
|
Fiscal
Year Ended
|
|
|
|
December
27, 2006
|
|
December
28, 2005
|
|
December
29, 2004
|
|
|
|
|
(In
thousands)
|
|
Income
taxes paid, net |
|
$ |
1,292 |
|
$ |
1,278 |
|
$ |
1,412 |
|
Interest
paid |
|
$ |
56,063 |
|
$ |
47,489 |
|
$ |
81,072 |
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing activities: |
|
|
|
|
|
|
|
|
|
|
Net
proceeds receivable from disposition of property |
|
$ |
226 |
|
$ |
— |
|
$ |
— |
|
Other
investing activities |
|
$ |
1,695 |
|
$ |
4,972 |
|
$ |
3,833 |
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
financing activities: |
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock, pursuant to share-based compensation plans |
|
$ |
1,128 |
|
$ |
1,682 |
|
$ |
— |
|
Execution
of capital leases |
|
$ |
4,133 |
|
$ |
7,714 |
|
$ |
3,484 |
|
Other
financing activities |
|
$ |
— |
|
$ |
— |
|
$ |
150 |
|
Note 21.
Quarterly Data (Unaudited)
The
results for each quarter include all adjustments which, in our opinion, are
necessary for a fair presentation of the results for interim periods. All
adjustments are of a normal and recurring nature.
Selected
consolidated financial data for each quarter of 2006 and 2005 are set forth
below:
|
|
Year Ended
December 27,
2006
|
|
|
|
First Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(In
thousands, except per share data)
|
|
Company
restaurant sales
|
|
$
|
225,022
|
|
$
|
221,008
|
|
$
|
234,705
|
|
$
|
223,639
|
|
Franchise
and licensing revenue
|
|
|
22,963
|
|
|
22,483
|
|
|
23,491
|
|
|
20,733
|
|
Total
operating revenue
|
|
|
247,985
|
|
|
243,491
|
|
|
258,196
|
|
|
244,372
|
|
Total
operating costs and expenses
|
|
|
232,975
|
|
|
226,321
|
|
|
202,600
|
|
|
221,625
|
|
Operating
income
|
|
$
|
15,010
|
|
$
|
17,170
|
|
$
|
55,596
|
|
$
|
22,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before the cumulative effect of change in
accounting
principle
|
|
$ |
480 |
|
$ |
1,854 |
|
$ |
25,503 |
|
$ |
2,269 |
|
Cumulative
effect of change in accounting principle |
|
|
232 |
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
712
|
|
$
|
1,854
|
|
$
|
25,503
|
|
$
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share (a)
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.28
|
|
$
|
0.02
|
|
Diluted
net income (loss) per share (a) |
|
$ |
0.01 |
|
$ |
0.02 |
|
$ |
0.26 |
|
$ |
0.02 |
|
(a) Per
share
amounts do not necessarily sum to the total year amounts due to changes in
shares outstanding and rounding.
|
|
Year
Ended December 28, 2005
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(In
thousands, except per share data)
|
|
Company
restaurant sales
|
|
$
|
218,015
|
|
$
|
223,994
|
|
$
|
225,824
|
|
$
|
221,109
|
|
Franchise
and licensing revenue
|
|
|
22,034
|
|
|
22,581
|
|
|
22,898
|
|
|
22,270
|
|
Total
operating revenue
|
|
|
240,049
|
|
|
246,575
|
|
|
248,722
|
|
|
243,379
|
|
Total
operating costs and expenses
|
|
|
228,809
|
|
|
230,703
|
|
|
239,572
|
|
|
231,188
|
|
Operating
income
|
|
$
|
11,240
|
|
$
|
15,872
|
|
$
|
9,150
|
|
$
|
12,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,460
|
)
|
$
|
2,069
|
|
$
|
(3,434
|
)
|
$
|
(4,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share (a)
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
(a) Per
share
amounts do not necessarily sum to the total year amounts due to changes in
shares outstanding and rounding.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date:
March 9, 2007
|
|
|
DENNY'S
CORPORATION |
|
|
BY:
|
/s/
Rhonda J. Parish
|
|
Rhonda
J. Parish
|
|
Executive
Vice President,
Chief
Legal Officer,
and
Secretary
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
Signature
|
Title
|
Date
|
|
|
|
/s/
Nelson J. Marchioli
|
President,
Chief Executive Officer and Director
|
March
9, 2007
|
(Nelson
J. Marchioli)
|
(Principal
Executive Officer)
|
|
|
|
|
/s/
F. Mark Wolfinger
|
Executive
Vice President, Growth Initiatives and Chief Financial
Officer
|
March
9, 2007
|
(F.
Mark Wolfinger)
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
/s/
Robert E. Marks
|
Director
and Chairman
|
March
9, 2007
|
(Robert
E. Marks)
|
|
|
|
|
|
/s/
Vera K. Farris
|
Director
|
March
9, 2007
|
(Vera
K. Farris)
|
|
|
|
|
|
/s/
Brenda J. Lauderback
|
Director
|
March
9, 2007
|
(Brenda
J. Lauderback)
|
|
|
|
|
|
/s/
Michael Montelongo
|
Director
|
March
9, 2007
|
(Michael
Montelongo)
|
|
|
|
|
|
/s/
Henry J. Nasella
|
Director
|
March
9, 2007
|
(Henry
J. Nasella)
|
|
|
|
|
|
/s/
Debra Smithart-Oglesby
|
Director
|
March
9, 2007
|
(Debra
Smithart-Oglesby)
|
|
|
|
|
|
/s/
Donald R. Shepherd
|
Director
|
March
9, 2007
|
(Donald
R. Shepherd)
|
|
|