UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Quarterly Period Ended September 24, 2008
Commission File Number
0-18051
DENNY’S
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
13-3487402
|
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
|
incorporation
or organization
|
Identification
No.)
|
203
East Main Street
Spartanburg,
South Carolina 29319-0001
(Address
of principal executive offices)
(Zip
Code)
(864)
597-8000
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days
Yes
[X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer ¨ Accelerated
filer þ
Non-accelerated
filer ¨
(Do not check if a smaller reporting
company) Smaller reporting company
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[
] No
[X]
As of
October 24, 2008, 95,713,102 shares of the registrant’s common stock, par
value $.01 per share, were outstanding.
TABLE
OF CONTENTS
2
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
Quarter
Ended
|
Three
Quarters Ended
|
|||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||
|
Company
restaurant sales
|
$
|
160,608
|
$
|
216,792
|
$
|
493,434
|
$
|
650,909
|
||||||||
|
Franchise
and license revenue
|
28,667
|
24,617
|
82,109
|
68,193
|
||||||||||||
|
Total
operating revenue
|
189,275
|
241,409
|
575,543
|
719,102
|
||||||||||||
|
Costs
of company restaurant sales:
|
||||||||||||||||
|
Product
costs
|
38,811
|
55,520
|
119,790
|
166,969
|
||||||||||||
|
Payroll
and benefits
|
65,582
|
88,341
|
208,331
|
273,141
|
||||||||||||
|
Occupancy
|
9,475
|
13,193
|
30,003
|
39,345
|
||||||||||||
|
Other
operating expenses
|
25,384
|
33,842
|
75,322
|
95,937
|
||||||||||||
|
Total
costs of company restaurant sales
|
139,252
|
190,896
|
433,446
|
575,392
|
||||||||||||
|
Costs
of franchise and license revenue
|
8,757
|
6,858
|
25,448
|
20,266
|
||||||||||||
|
General
and administrative expenses
|
14,894
|
15,974
|
46,046
|
49,067
|
||||||||||||
|
Depreciation
and amortization
|
9,977
|
12,117
|
30,110
|
37,475
|
||||||||||||
|
Operating
gains, losses and other charges, net
|
(4,294
|
)
|
(316
|
)
|
(9,980
|
)
|
(14,890
|
)
|
||||||||
|
Total
operating costs and expenses
|
168,586
|
225,529
|
525,070
|
667,310
|
||||||||||||
|
Operating
income
|
20,689
|
15,880
|
50,473
|
51,792
|
||||||||||||
|
Other
expenses:
|
||||||||||||||||
|
Interest
expense, net
|
8,761
|
10,489
|
26,845
|
32,783
|
||||||||||||
|
Other
nonoperating expense (income), net
|
677
|
34
|
4,436
|
(391
|
)
|
|||||||||||
|
Total
other expenses, net
|
9,438
|
10,523
|
31,281
|
32,392
|
||||||||||||
|
Net
income before income taxes
|
11,251
|
5,357
|
19,192
|
19,400
|
||||||||||||
|
Provision
for income taxes
|
689
|
407
|
1,355
|
2,780
|
||||||||||||
|
Net
income
|
$
|
10,562
|
$
|
4,950
|
$
|
17,837
|
$
|
16,620
|
||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic net
income per share
|
$
|
0.11
|
$
|
0.05
|
$
|
0.19
|
$
|
0.18
|
||||||||
|
Diluted
net income per share
|
$
|
0.11
|
$
|
0.05
|
$
|
0.18
|
$
|
0.17
|
||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
95,333
|
93,915
|
95,059
|
93,674
|
||||||||||||
|
Diluted
|
98,332
|
98,605
|
99,191
|
98,770
|
||||||||||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
3
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
September
24, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Assets
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
21,422
|
$
|
21,565
|
||||
|
Receivables,
net
|
11,408
|
13,585
|
||||||
|
Inventories
|
5,419
|
6,485
|
||||||
|
Assets
held for sale
|
3,032
|
6,712
|
||||||
|
Prepaid
and other current assets
|
12,893
|
9,526
|
||||||
|
Total
Current Assets
|
54,174
|
57,873
|
||||||
|
Property,
net of accumulated depreciation of $293,770 and $307,047,
respectively
|
167,910
|
184,610
|
||||||
|
Other
Assets:
|
||||||||
|
Goodwill
|
40,634
|
42,439
|
||||||
|
Intangible
assets, net
|
59,770
|
62,657
|
||||||
|
Deferred
financing costs, net
|
4,188
|
5,078
|
||||||
|
Other
assets
|
31,003
|
24,699
|
||||||
|
Total
Assets
|
$
|
357,679
|
$
|
377,356
|
||||
|
Liabilities
and Shareholders' Deficit
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
maturities of notes and debentures
|
$
|
4,555
|
$
|
2,085
|
||||
|
Current
maturities of capital lease obligations
|
3,637
|
4,051
|
||||||
|
Accounts
payable
|
31,041
|
43,262
|
||||||
|
Other
|
73,202
|
82,069
|
||||||
|
Total
Current Liabilities
|
112,435
|
131,467
|
||||||
|
Long-Term
Liabilities:
|
||||||||
|
Notes
and debentures, less current maturities
|
307,504
|
325,971
|
||||||
|
Capital
lease obligations, less current maturities
|
22,252
|
20,845
|
||||||
|
Liability
for insurance claims, less current portion
|
24,480
|
27,148
|
||||||
|
Deferred
income taxes
|
12,115
|
11,579
|
||||||
|
Other
noncurrent liabilities and deferred credits
|
38,573
|
42,578
|
||||||
|
Total
Long-Term Liabilities
|
404,924
|
428,121
|
||||||
|
Total
Liabilities
|
517,359
|
559,588
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Total
Shareholders’ Deficit
|
(159,680
|
)
|
(182,232
|
)
|
||||
|
Total
Liabilities and Shareholders’ Deficit
|
$
|
357,679
|
$
|
377,356
|
||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
4
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
Common
Stock
|
Accumulated
Other Comprehensive
|
Total
Shareholders'
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Paid-in
Capital
|
Deficit
|
Loss,
Net
|
Deficit
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Balance,
December 26, 2007
|
94,626
|
$
|
946
|
$
|
533,612
|
$
|
(700,284
|
)
|
$
|
(13,144
|
)
|
$
|
(178,870
|
)
|
||||||||||
|
Goodwill
adjustment (Note 3)
|
—
|
—
|
—
|
(3,362
|
)
|
—
|
(3,362
|
)
|
||||||||||||||||
|
Balance,
December 26, 2007
|
94,626
|
$
|
946
|
$
|
533,612
|
$
|
(703,646
|
)
|
$
|
(13,144
|
)
|
$
|
(182,232
|
)
|
||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
17,837
|
—
|
17,837
|
||||||||||||||||||
|
Recognition
of unrealized loss on hedge
transactions,
net of tax
|
—
|
—
|
—
|
—
|
852 | 852 | ||||||||||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
17,837
|
852
|
18,689
|
||||||||||||||||||
|
Share-based
compensation on equity classified
awards
|
—
|
—
|
2,591
|
—
|
—
|
2,591
|
||||||||||||||||||
|
Issuance
of common stock for share-based
compensation
|
385
|
4
|
288
|
—
|
—
|
292
|
||||||||||||||||||
|
Exercise
of common stock options
|
675
|
7
|
973
|
—
|
—
|
980
|
||||||||||||||||||
|
Balance,
September 24, 2008
|
95,686
|
$
|
957
|
$
|
537,464
|
$
|
(685,809
|
)
|
$
|
(12,292
|
)
|
$
|
(159,680
|
)
|
||||||||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
5
Denny’s
Corporation and Subsidiaries
(Unaudited)
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
income
|
$
|
17,837
|
$
|
16,620
|
||||
|
Adjustments
to reconcile net income to cash flows provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
30,110
|
37,475
|
||||||
|
Operating
gains, losses and other charges, net
|
(9,980
|
)
|
(14,890
|
)
|
||||
|
Amortization
of deferred financing costs
|
827
|
886
|
||||||
|
Loss
(gain) on early extinguishment of debt
|
(30
|
)
|
207
|
|||||
|
Loss
on change in the fair value of interest rate swap
|
3,094
|
—
|
||||||
|
Deferred
income tax expense
|
565
|
2,381
|
||||||
|
Share-based
compensation
|
2,511
|
3,000
|
||||||
|
Changes
in assets and liabilities, net of effects of acquisitions and
dispositions:
|
||||||||
|
Decrease
(increase) in assets:
|
||||||||
|
Receivables
|
3,009
|
3,216
|
||||||
|
Inventories
|
1,066
|
506
|
||||||
|
Other
current assets
|
(3,367
|
)
|
(495
|
)
|
||||
|
Other
assets
|
(2,909
|
)
|
(2,644
|
)
|
||||
|
Increase
(decrease) in liabilities:
|
||||||||
|
Accounts
payable
|
(9,416
|
)
|
(2,530
|
)
|
||||
|
Accrued
salaries and vacations
|
(8,225
|
)
|
(5,696
|
)
|
||||
|
Accrued
taxes
|
794
|
119
|
||||||
|
Other
accrued liabilities
|
(8,310
|
)
|
2,991
|
|||||
|
Other
noncurrent liabilities and deferred credits
|
(9,622
|
)
|
(5,702
|
)
|
||||
|
Net
cash flows provided by operating activities
|
7,954
|
35,444
|
||||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Purchase
of property
|
(21,173
|
)
|
(18,807
|
)
|
||||
|
Proceeds
from disposition of property
|
31,391
|
35,017
|
||||||
|
Acquisition
of restaurant units
|
—
|
(2,208
|
)
|
|||||
|
Net
cash flows provided by investing activities
|
10,218
|
14,002
|
||||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Long-term
debt payments
|
(19,208
|
)
|
(46,468
|
)
|
||||
|
Deferred
financing costs paid
|
—
|
(401
|
)
|
|||||
|
Proceeds
from exercise of stock options
|
980
|
918
|
||||||
|
Net
bank overdrafts
|
(87
|
)
|
(646
|
)
|
||||
|
Net
cash flows used in financing activities
|
(18,315
|
)
|
(46,597
|
)
|
||||
|
Increase
(decrease) in cash and cash equivalents
|
(143
|
)
|
2,849
|
|||||
|
Cash
and Cash Equivalents at:
|
||||||||
|
Beginning
of period
|
21,565
|
26,226
|
||||||
|
End
of period
|
$
|
21,422
|
$
|
29,075
|
||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
6
Denny’s
Corporation and Subsidiaries
(Unaudited)
Note
1. Introduction and Basis of Presentation
Denny’s
Corporation, through its wholly owned subsidiaries, Denny’s Holdings, Inc. and
Denny’s, Inc., owns and operates the Denny’s restaurant brand, or
Denny’s.
Our
unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Therefore, certain information and notes normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted. In our opinion, all adjustments
considered necessary for a fair presentation of the interim periods presented
have been included. Such adjustments are of a normal and recurring nature. 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. 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.
These
interim condensed consolidated financial statements should be read in
conjunction with our consolidated financial statements and notes thereto for the
year ended December 26, 2007 and the related Management’s Discussion and
Analysis of Financial Condition and Results of Operations, both of which are
contained in our Annual Report on Form 10-K for the fiscal year ended December
26, 2007. The results of operations for the interim periods presented are not
necessarily indicative of the results for the entire fiscal year ending December
31, 2008.
Note
2. Summary of Significant Accounting Policies
Effective
December 27, 2007, the first day of fiscal 2008, we adopted Statement of
Financial Accounting Standards No. 159 ("SFAS 159"), “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments and certain other items at fair value. We
did not elect the fair value reporting option for any assets and liabilities not
previously recorded at fair value.
Effective
December 27, 2007, the first day of fiscal 2008, we adopted the provisions of
Statement of Financial Accounting Standards No. 157 ("SFAS 157"), “Fair Value
Measurements” for financial assets and liabilities, as well as any other assets
and liabilities that are carried at fair value on a recurring basis in financial
statements. SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. SFAS 157
applies under other accounting pronouncements that require or permit fair value
measurements, the Financial Accounting Standards Board ("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. We also applied the provisions of FSP FAS 157-2,
"Effective Date of FASB Statement 157," which defers the provisions of SFAS 157
for nonfinancial assets and liabilities to the first fiscal period
beginning after November 15, 2008. The deferred nonfinancial assets and
liabilities include items such as goodwill and other nonamortizable intangibles.
We are required to adopt SFAS 157 for nonfinancial assets and liabilities in the
first quarter of fiscal 2009 and are still evaluating the impact on our
Condensed Consolidated Financial Statements.
Financial assets and liabilities
measured at fair value on a recurring basis are summarized below:
|
Fair
Value Measurements as of September 24, 2008
|
|||||||||||||||||
|
September
24, 2008
|
Quoted
Prices in Active Markets for Identical Assets/Liabilities
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Valuation
Technique
|
|||||||||||||
|
(In
thousands)
|
|||||||||||||||||
|
Deferred
compensation plan
investments
|
$
|
6,132
|
$
|
6,132
|
$
|
—
|
$
|
—
|
market
approach
|
||||||||
|
Interest
rate swap liability
|
(2,603
|
)
|
—
|
(2,603
|
)
|
—
|
income
approach
|
||||||||||
|
Total
|
$
|
3,529
|
$
|
6,132
|
$
|
(2,603
|
)
|
$
|
—
|
||||||||
There
have been no other material changes to our significant accounting policies and
estimates from the information provided in Note 2 of our Consolidated Financial
Statements included in our Form 10-K for the fiscal year ended December 26,
2007, except as noted in Note 3.
Note
3. Adjustments Related to Goodwill
In March
2008, we recorded adjustments to correct an error in accounting for goodwill in
relation to the sale of restaurant operations during the quarters ending March
28, 2007, June 27 2007, September 26, 2007 and December 26, 2007. Historically,
we did not write-off goodwill when we sold restaurant units to franchisees.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" requires that a portion of the entity level goodwill
should be written off based on the relative fair values of the restaurant unit
being sold and the remaining value of the entity, in our case, Denny's. The
adjustments had no impact on previously reported cash flows.
The
following line items on the Consolidated Statements of Operations for the
quarter and three quarters ended September 26, 2007 and the fiscal year
ended December 26, 2007 were impacted by the adjustments:
|
Quarter
Ended
September
26, 2007
|
Three
Quarters Ended
September
26, 2007
|
Fiscal
Year Ended
December
26, 2007
|
||||||||||||||||||||||||||||||||||
|
Unadjusted
|
Adjustment
|
Adjusted
|
Unadjusted
|
Adjustment
|
Adjusted
|
Unadjusted
|
Adjustment
|
Adjusted
|
||||||||||||||||||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||||||||||||||||||||||
|
Operating
gains, losses and other charges, net
|
$
|
(747
|
)
|
$
|
431
|
$
|
(316
|
)
|
$
|
(16,427
|
)
|
$
|
1,537
|
$
|
(14,890
|
)
|
$
|
(34,828
|
)
|
3,746
|
(31,082
|
)
|
||||||||||||||
|
Total
operating costs and expenses
|
225,098
|
431
|
225,529
|
665,773
|
1,537
|
667,310
|
855,838
|
3,746
|
859,584
|
|||||||||||||||||||||||||||
|
Operating
income
|
16,311
|
(431
|
)
|
15,880
|
53,329
|
(1,537
|
)
|
51,792
|
83,530
|
(3,746
|
)
|
79,784
|
||||||||||||||||||||||||
|
Net
income before taxes
|
5,788
|
(431
|
)
|
5,357
|
20,937
|
(1,537
|
)
|
19,400
|
39,905
|
(3,746
|
)
|
36,159
|
||||||||||||||||||||||||
|
Provision
for income taxes
|
451
|
(44
|
)
|
407
|
2,937
|
(157
|
)
|
2,780
|
5,192
|
(384
|
)
|
4,808
|
||||||||||||||||||||||||
|
Net
income
|
5,337
|
(387
|
)
|
4,950
|
18,000
|
(1,380
|
)
|
16,620
|
34,713
|
(3,362
|
)
|
31,351
|
||||||||||||||||||||||||
|
Basic
net income per share
|
$
|
0.06
|
$
|
(0.01
|
)
|
$
|
0.05
|
$
|
0.19
|
$
|
(0.01
|
)
|
$
|
0.18
|
$
|
0.37
|
$
|
(0.04
|
)
|
$
|
0.33
|
|||||||||||||||
|
Diluted
net income per share
|
$
|
0.05
|
$
|
(0.00
|
)
|
$
|
0.05
|
$
|
0.18
|
$
|
(0.01
|
)
|
$
|
0.17
|
$
|
0.35
|
$
|
(0.03
|
)
|
$
|
0.32
|
|||||||||||||||
7
The
following line items on the Consolidated Balance Sheet as of December 26, 2007
were impacted by the adjustments:
|
December
26, 2007
|
Adjustment
|
Adjusted
December
26, 2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Goodwill
|
$
|
46,185
|
$
|
(3,746
|
)
|
$
|
42,439
|
|||||
|
Total
assets
|
381,102
|
(3,746
|
)
|
377,356
|
||||||||
|
Deferred
income taxes
|
11,963
|
(384
|
)
|
11,579
|
||||||||
|
Total
long-term liabilities
|
428,505
|
(384
|
)
|
428,121
|
||||||||
|
Total
liabilities
|
559,972
|
(384
|
)
|
559,588
|
||||||||
|
Total
shareholders' deficit
|
(178,870
|
)
|
(3,362
|
)
|
(182,232
|
)
|
||||||
|
Total
liabilities and shareholders' deficit
|
381,102
|
(3,746
|
)
|
377,356
|
||||||||
The
following reflects the adjusted quarterly data for fiscal 2007:
|
Fiscal
Year Ended December 26, 2007
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||
|
Company
restaurant sales
|
$
|
215,801
|
$
|
218,316
|
$
|
216,792
|
$
|
193,712
|
||||||||
|
Franchise
and licensing revenue
|
20,950
|
22,626
|
24,617
|
26,554
|
||||||||||||
|
Total
operating revenue
|
236,751
|
240,942
|
241,409
|
220,266
|
||||||||||||
|
Total
operating costs and expenses
|
224,165
|
217,616
|
225,529
|
192,274
|
||||||||||||
|
Operating
income
|
$
|
12,586
|
$
|
23,326
|
$
|
15,880
|
$
|
27,992
|
||||||||
|
Net
income
|
$
|
1,087
|
$
|
10,583
|
$
|
4,950
|
$
|
14,731
|
||||||||
|
Basic
net income per share (a)
|
$
|
0.01
|
$
|
0.11
|
$
|
0.05
|
$
|
0.16
|
||||||||
|
Diluted
net income per share (a)
|
$
|
0.01
|
$
|
0.11
|
$
|
0.05
|
$
|
0.15
|
||||||||
|
(a)
|
Per
share amounts do not necessarily sum to the total year amounts due to
changes in shares outstanding and
rounding.
|
Note
4. Assets Held for Sale
Assets
held for sale of $3.0 million and $6.7 million, as of September 24, 2008 and
December 26, 2007, respectively, include restaurants to be sold to
franchisees and certain real estate properties. We expect to sell each of
these assets within 12 months. Our Credit Facility (defined in Note 7) requires
us to make mandatory prepayments to reduce outstanding indebtedness with the net
cash proceeds from the sale of specified real estate properties and
restaurant operations to franchisees. As a result, we classified a corresponding
$3.0 million and $0.4 million of our
long-term debt as a current liability in our Consolidated Balance Sheet as
of September 24, 2008 and December 26, 2007, respectively. This amount
represents the net book value of the specified properties as of the balance
sheet date.
Note
5. Goodwill and Other Intangible Assets
The
changes in carrying amounts of goodwill for the three quarters ended September
24, 2008 are as follows:
|
(In
thousands)
|
||||
|
Balance
at December 26, 2007
|
$
|
42,439
|
||
|
Write-offs
associated with sale of restaurants
|
(1,777
|
)
|
||
|
Reversal
of valuation allowance related to deferred tax assets (Note
11)
|
(28
|
)
|
||
|
Balance
at September 24, 2008
|
$
|
40,634
|
||
The
following table reflects goodwill and intangible assets as of September 24, 2008
and December 26, 2007:
|
September
24, 2008
|
December
26, 2007
|
|||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Goodwill
|
$
|
40,634
|
$
|
—
|
$
|
42,439
|
$
|
—
|
||||||||
|
Intangible
assets with indefinite lives:
|
||||||||||||||||
|
Trade
names
|
$
|
42,432
|
$
|
—
|
$
|
42,395
|
$
|
—
|
||||||||
|
Liquor
licenses
|
262
|
—
|
279
|
—
|
||||||||||||
|
Intangible
assets with definite lives:
|
||||||||||||||||
|
Franchise
and license agreements
|
55,551
|
38,581
|
61,903
|
42,036
|
||||||||||||
|
Foreign
license agreements
|
241
|
135
|
241
|
125
|
||||||||||||
|
Intangible
assets
|
$
|
98,486
|
$
|
38,716
|
$
|
104,818
|
$
|
42,161
|
||||||||
|
Other
assets with definitive lives:
|
||||||||||||||||
|
Software
development costs
|
$
|
31,845
|
$
|
25,974
|
$
|
30,853
|
$
|
24,560
|
||||||||
Note
6. Operating Gains, Losses and Other Charges, Net
Operating
gains, losses and other charges, net are comprised of the
following:
|
Quarter
Ended
|
Three
Quarters Ended
|
|||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Gains
on sales of assets and other, net
|
$
|
(5,290
|
)
|
$
|
(4,197
|
)
|
$
|
(18,214
|
)
|
$
|
(20,841
|
)
|
||||
|
Restructuring
charges and exit costs
|
752
|
3,701
|
7,506
|
5,531
|
||||||||||||
|
Impairment
charges
|
244
|
180
|
728
|
420
|
||||||||||||
|
Operating
gains, losses and other charges, net
|
$
|
(4,294
|
)
|
$
|
(316
|
)
|
$
|
(9,980
|
)
|
$
|
(14,890
|
)
|
||||
8
Gains
on Sales of Assets
Proceeds
and gains on sales of assets for the quarters ended September 24, 2008 and
September 26, 2007 were comprised of the following:
|
Quarter
Ended September 24, 2008
|
Quarter
Ended September 26, 2007
|
|||||||||||||||
|
Net
Proceeds
|
Gains
|
Net
Proceeds
|
Gains
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Sales
of restaurant operations and related real estate
to
franchisees
|
$
|
8,242
|
$
|
3,496
|
$
|
8,748
|
$
|
2,394
|
||||||||
|
Sales
of other real estate assets
|
2,198
|
1,764
|
353
|
353
|
||||||||||||
|
Recognition
of deferred gains
|
—
|
30
|
—
|
1,450
|
||||||||||||
|
Total
|
$
|
10,440
|
$
|
5,290
|
$
|
9,101
|
$
|
4,197
|
||||||||
Proceeds
and gains on sales of assets for the three quarters ended September 24, 2008 and
September 26, 2007 were comprised of the following:
|
Three
Quarters Ended September 24, 2008
|
Three
Quarters Ended September 26, 2007
|
|||||||||||||||
|
Net
Proceeds
|
Gains
|
Net
Proceeds
|
Gains
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Sales
of restaurant operations and related real estate
to
franchisees
|
$
|
30,241
|
$
|
15,439
|
$
|
30,601
|
$
|
15,350
|
||||||||
|
Sales
of other real estate assets
|
3,820
|
2,683
|
5,388
|
3,495
|
||||||||||||
|
Recognition
of deferred gains
|
—
|
92
|
—
|
1,996
|
||||||||||||
|
Total
|
$
|
34,061
|
$
|
18,214
|
$
|
35,989
|
$
|
20,841
|
||||||||
Restructuring
Charges and Exit Costs
Restructuring
charges and exit costs were comprised of the following:
|
Quarter
Ended
|
Three
Quarters Ended
|
|||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Exit
costs
|
$
|
821
|
$
|
276
|
$
|
2,476
|
$
|
1,011
|
||||||||
|
Severance
and other restructuring charges
|
(69
|
)
|
3,425
|
5,030
|
4,520
|
|||||||||||
|
Total
restructuring and exit costs
|
$
|
752
|
$
|
3,701
|
$
|
7,506
|
$
|
5,531
|
||||||||
Severance
and other restructuring charges of $5.0 million for the three quarters ended
September 24, 2008 primarily resulted from severance costs of $4.3 million
recognized during the second quarter related to the reorganization to support
our ongoing transition to a franchise-focused business model, which led to the
elimination of approximately 50 positions.
The
components of the change in accrued exit cost liabilities are as
follows:
|
(In
thousands)
|
||||
|
Balance,
beginning of year
|
$
|
8,339
|
||
|
Provisions
for units closed during the year (1)
|
728
|
|||
|
Changes
in estimates of accrued exit costs, net (1)
|
1,748
|
|||
|
Payments,
net
|
(2,533
|
)
|
||
|
Interest
accretion
|
615
|
|||
|
Balance,
end of quarter
|
8,897
|
|||
|
Less
current portion included in other current
liabilities
|
2,038
|
|||
|
Long-term
portion included in other noncurrent liabilities
|
$
|
6,859
|
||
|
(1)
|
Included
as a component of operating gains, losses and other charges,
net.
|
Estimated
net cash payments related to exit cost liabilities in the next five years are as
follows:
|
(In
thousands)
|
||||
|
Remainder
of 2008
|
$
|
843
|
||
|
2009
|
2,499
|
|||
|
2010
|
1,768
|
|||
|
2011
|
1,458
|
|||
|
2012
|
1,153
|
|||
|
Thereafter
|
3,101
|
|||
|
Total
|
10,822
|
|||
|
Less
imputed interest
|
1,925
|
|||
|
Present
value of exit cost liabilities
|
$
|
8,897
|
||
As of
September 24, 2008 and December 26, 2007, we had accrued severance and other
restructuring charges of $1.5 million and $1.3 million, respectively. The
balance as of September 24, 2008 is expected to be paid during the next 12
months.
Note
7. Long-Term Debt
Credit
Facility
Our
subsidiaries, Denny's, Inc. and Denny's Realty, LLC (the "Borrowers"), have a
senior secured credit agreement consisting of a $50 million revolving credit
facility (including up to $10 million for a revolving letter of credit
facility), a $136.7 million term loan and an additional $37 million letter of
credit facility (together, the "Credit Facility"). At September 24,
2008, we had outstanding letters of credit of $35.4 million (comprised of
$35.2 million under our letter of credit facility and $0.2 million under our
revolving facility). There were no revolving loans outstanding at September 24,
2008. These balances result in availability of $1.8 million under our letter of
credit facility and $49.8 million under the revolving facility.
9
The
revolving facility matures on December 15, 2011. The term loan and the $37
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 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 required payments related to asset sales)
typical for this type of credit facility and may make certain optional
prepayments under the Credit Facility. We believe that our estimated cash flows
from operations for 2008, combined with our capacity for additional borrowings
under our Credit Facility, will enable us to meet our anticipated cash
requirements and fund capital expenditures over the next twelve months.
The
Credit Facility is guaranteed by Denny's Corporation and its other subsidiaries
and is secured by substantially all of the assets of Denny's and its
subsidiaries. In addition, the Credit Facility is secured by first-priority
mortgages on 118 company-owned real estate assets. The Credit Facility
contains certain financial covenants (i.e., maximum total debt to EBITDA (as
defined under the 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. We were in compliance with the
terms of the Credit Facility as of September 24, 2008.
A
commitment fee of 0.5% is paid on the unused portion of the revolving credit
facility. Interest on loans under the revolving facility is payable at per annum
rates equal to LIBOR plus 250 basis points and will adjust over time based on
our leverage ratio. Interest on the term loan and letter of credit facility
is payable at per annum rates equal to LIBOR plus 200 basis points. Prior
to considering the impact of the interest rate swap described below, the
weighted-average interest rate under the term loan was 4.8% and 7.1% as of
September 24, 2008 and September 26, 2007, respectively.
Interest
Rate Swap
During
the second quarter of fiscal 2007, we entered into an interest rate swap with a
notional amount of $150 million to hedge a portion of the cash flows of our
variable rate debt. We designated the interest rate swap as a cash flow hedge of
our exposure to variability in future cash flows attributable to interest
payments on the first $150 million of floating rate debt. Under the terms of the
swap, we pay a fixed rate of 4.8925% on the $150 million notional amount
and receive payments from the counterparties based on the 3-month LIBOR
rate for a term ending on March 30, 2010, effectively resulting in a fixed rate
of 6.8925% on the $150 million notional amount at the inception of the swap.
Interest rate differentials paid or received under the swap agreement are
recognized as adjustments to interest expense.
Prior to
December 26, 2007, 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 adjustments to other
comprehensive income. At December 26, 2007, we determined that a portion of the
underlying cash flows related to the swap (i.e., interest payments on $150
million of floating rate debt) were no longer probable of occurring over the
term of the interest rate swap as a result of the probability of paying the debt
down below $150 million through scheduled repayments and prepayments with cash
from the sale of company-owned restaurant operations to franchisees. As a
result, we discontinued hedge accounting treatment. The losses
related to the fair value of the swap included in accumulated other
comprehensive income as of December 26, 2007 will be amortized to other
nonoperating expense over the remaining term of the interest rate swap.
Additionally, changes in the fair value of the swap are recorded in other
nonoperating expense.
The
changes in accumulated other comprehensive income related to the swap for the
quarter and three quarters ended September 24, 2008 are as follows:
|
Quarter
Ended
September
24, 2008
|
Three
Quarters Ended
September
24, 2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Accumulated
Other Comprehensive Income, beginning of period
|
$
|
(1,794
|
)
|
$
|
(2,353
|
)
|
||
|
Amortization
of unrealized losses related to the interest rate swap (recorded in
other
nonoperating
expense)
|
293
|
852
|
||||||
|
Accumulated
Other Comprehensive Income, end of period
|
$
|
(1,501
|
)
|
$
|
(1,501
|
)
|
||
The
changes in fair value of the interest rate swap for the quarter and three
quarters ended September 24, 2008 are as follows:
|
Quarter
Ended
September
24, 2008
|
Three
Quarters Ended
September
24, 2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Fair
value of the interest rate swap, beginning of period
|
$ | (2,850 | ) | $ | (2,753 | ) | ||
|
Change
in the fair value of the interest rate swap (recorded in other
nonoperating expense)
|
247 | (2,242 | ) | |||||
|
Termination
of a portion of the swap
|
— | 2,392 | ||||||
|
Fair
value of the interest rate swap, end of period
|
$ | (2,603 | ) | $ | (2,603 | ) | ||
On March
26, 2008, we terminated $50 million notional amount of the interest rate swap.
The termination resulted in a $2.4 million cash payment, which was made during
the quarter ended June 25, 2008.
By using
a derivative instrument to hedge exposures to changes in interest rates, we
expose ourselves to credit risk. Credit risk is the failure of the counterparty
to perform under the terms of the derivative contract. We minimize the credit
risk by entering into transactions with high-quality counterparties whose credit
rating is evaluated on a quarterly basis.
Note
8. Defined Benefit Plans
The
components of net pension cost of our pension plan and other defined benefit
plans as determined under Statement of Financial Accounting Standards No. 87,
“Employers’ Accounting for Pensions,” as amended by Statement of Financial
Accounting Standards No. 158, "Employer's Accounting for Defined Benefit
Pension and Other Postretirement Plans," are as follows:
|
Pension
Plan
|
Other
Defined Benefit Plans
|
|||||||||||||||
|
Quarter
Ended
|
Quarter
Ended
|
|||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$
|
88
|
$
|
88
|
$
|
—
|
$
|
—
|
||||||||
|
Interest
cost
|
847
|
786
|
49
|
48
|
||||||||||||
|
Expected
return on plan assets
|
(969
|
)
|
(883
|
)
|
—
|
—
|
||||||||||
|
Amortization
of net loss
|
151
|
221
|
4
|
5
|
||||||||||||
|
Net
periodic benefit cost
|
$
|
117
|
$
|
212
|
$
|
53
|
$
|
53
|
||||||||
10
|
Pension
Plan
|
Other
Defined Benefit Plans
|
|||||||||||||||
|
Three
Quarters Ended
|
Three
Quarters Ended
|
|||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$
|
263
|
$
|
263
|
$
|
—
|
$
|
—
|
||||||||
|
Interest
cost
|
2,541
|
2,358
|
146
|
143
|
||||||||||||
|
Expected
return on plan assets
|
(2,908
|
)
|
(2,647
|
)
|
—
|
—
|
||||||||||
|
Amortization
of net loss
|
451
|
662
|
14
|
17
|
||||||||||||
|
Net
periodic benefit cost
|
$
|
347
|
$
|
636
|
$
|
160
|
$
|
160
|
||||||||
We made
contributions of $1.3 million and $2.8 million to our qualified pension plan
during the three quarters ended September 24, 2008 and September 26, 2007,
respectively. We made contributions of $0.7 million and $0.2 million to our other
defined benefit plans during the three quarters ended September 24, 2008 and
September 26, 2007, respectively. We expect to contribute $0.1 million to our
qualified pension plan and $0.1 million to our other
defined benefit plans during the remainder of fiscal 2008.
Additional
minimum pension liability of $10.8 million is reported as a component of
accumulated other comprehensive loss in the Condensed Consolidated
Statement of Shareholders’ Deficit and Comprehensive Loss as of September 24,
2008 and December 26, 2007.
Note
9. Share-Based Compensation
Total
share-based compensation included as a component of net income was as
follows:
|
Quarter
Ended
|
Three
Quarters Ended
|
|||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Share-based
compensation related to liability
classified
restricted
stock units
|
$
|
(119
|
)
|
$
|
(24
|
)
|
$
|
(80
|
)
|
$
|
658
|
|||||
|
Share
based compensation related to equity
classified
awards:
|
||||||||||||||||
|
Stock
options
|
$
|
396
|
$
|
448
|
$
|
1,321
|
$
|
1,067
|
||||||||
|
Restricted
stock units
|
511
|
176
|
1,086
|
1,034
|
||||||||||||
|
Board
deferred stock units
|
61
|
81
|
184
|
241
|
||||||||||||
|
Total
share-based compensation related to
equity
classified
awards
|
968
|
705
|
2,591
|
2,342
|
||||||||||||
|
Total
share-based compensation
|
$
|
849
|
$
|
681
|
$
|
2,511
|
$
|
3,000
|
||||||||
Additionally,
during the three quarters ended September 24, 2008, we issued approximately
97,000 shares of common stock in lieu of cash to pay approximately $0.3 million
of incentive compensation.
Stock
Options
During
the three quarters ended September 24, 2008, we granted approximately 1.5
million stock options to certain employees and approximately 0.2 million stock
options to the non-employee members of our Board of Directors. These
stock options vest evenly over 3 years and have a 10-year contractual
life.
The
weighted average fair value per option of options granted during the three
quarters ended September 24, 2008 was $1.18. The fair value of the stock options
granted in the period ended September 24, 2008 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 stock option grants for the
three quarters ended September 24, 2008:
|
Dividend
yield
|
0.0
|
%
|
||
|
Expected
volatility
|
50.1
|
%
|
||
|
Risk-free
interest rate
|
2.7
|
%
|
||
|
Weighted-average
expected term
|
4.6
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.
As of
September 24, 2008, there was approximately $2.4 million of unrecognized
compensation cost related to unvested stock option awards outstanding, which is
expected to be recognized over a weighted average of 2.0 years.
Restricted
Stock Units
In
July 2008, we granted approximately 0.3 million restricted stock units under the
2004 Omnibus Plan and approximately 0.9 million restricted stock units under the
2008 Omnibus Plan to certain employees. The awards (which are equity
classified) have a grant date fair value of $2.57 per share. These restricted
units will be earned and vest in 1/3 increments (from 50% to 120% of the target
award for each such increment) based on the appreciation/(depreciation) of our
common stock from the date of grant to each of three vesting periods (July
16, 2009, July 16, 2010 and July 16, 2011). Subsequent to the vesting
periods, 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 these restricted stock units contain a market condition, the
compensation expense is based on the Monte Carlo valuation method, which
utilizes multiple input variables to determine the probability of the Company
achieving the market condition and the fair value of the award. The awards
granted to our named executive officers also contain a performance condition
based on certain operating measures for the four fiscal quarters ending
prior to July 16, 2009.
During
the quarter ended September 24, 2008, we made payments of $0.5 million (before
taxes) in cash and issued 0.2 million shares of common stock related to the
restricted stock unit awards that vested as of June 30, 2008. In
addition, we made payments of less than $0.1 million (before taxes) in cash
related to the restricted stock unit awards that vested as of July 9, 2008.
During
the first quarter of 2008,
we made payments of $0.4 million (before taxes) in cash and issued 0.1 million
shares of common stock related to the restricted stock unit awards that vested
as of December
26, 2007.
11
Accrued
compensation expense included as a component of the Condensed Consolidated
Balance Sheet was as follows:
|
September
24, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Liability
classified restricted stock units:
|
||||||||
|
Other
current
liabilities
|
$
|
2,042
|
$
|
1,170
|
||||
|
Other
noncurrent liabilities
|
$
|
924
|
$
|
2,828
|
||||
|
Equity
classified restricted stock units:
|
||||||||
|
Additional
paid-in capital
|
$
|
4,179
|
$
|
3,925
|
||||
As of
September 24, 2008, we had approximately $4.7 million of unrecognized
compensation cost (approximately $0.7 million for liability classified units and
approximately $4.0 million for equity classified units) related to all unvested
restricted stock unit awards outstanding, which is expected to be recognized
over a weighted average of 1.7 years.
Board
Deferred Stock Units
During
the three quarters ended September 24, 2008, we granted approximately 0.1
million deferred stock units (which are equity classified) with a
weighted-average grant date fair value of $3.27 per unit to non-employee members
of our Board of Directors. These awards are restricted in that they may not be
converted to shares until the recipient has ceased serving as a member of
the Board of Directors for Denny's Corporation at which time the awards
automatically convert to shares. During the second quarter of 2008, one board
member did not stand for reelection. As a result, the board
member's deferred stock units were converted into shares of common
stock.
Note
10. Accumulated Other Comprehensive Income (Loss)
Total
comprehensive income was $18.7 million and $19.2 million for the three quarters
ended September 24, 2008 and September 26, 2007, respectively.
The
components of Accumulated Other Comprehensive Income (Loss) in the Condensed
Consolidated Statement of Shareholder’s Deficit are as follows:
|
September
24, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Additional
minimum pension liability
|
$
|
(10,791
|
)
|
$
|
(10,791
|
)
|
||
|
Unrealized
gain on hedged transaction
|
(1,501
|
)
|
(2,353
|
)
|
||||
|
Accumulated
other comprehensive income (loss)
|
$
|
(12,292
|
)
|
$
|
(13,144
|
)
|
||
Note
11. Income Taxes
The
provision for income taxes was $0.7 million and $1.4 million for the
quarter and three quarters ended September 24, 2008, respectively, compared with
$0.4 million and $2.8 million for the quarter and three
quarters ended September 26, 2007, respectively. The provision for income taxes
for the first three quarters of 2008 and 2007 was determined using our effective
rate estimated for the entire fiscal year. The quarter and three quarters ended
September 24, 2008 also included the recognition of $0.6 million of current tax
benefits. This item resulted from the enactment of certain federal laws that
benefited us during the third quarter of 2008. The three quarters
ended September 26, 2007 also included the recognition of $0.3 million of
current tax benefits and a $0.6 million reduction to the valuation allowance.
These items resulted from the enactment of certain federal and state laws that
benefited us during the second quarter of 2007.
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. In addition, during 2008 and 2007,
we utilized certain federal and state NOL carryforwards whose
valuation allowances were established in connection with fresh start
reporting on January 7, 1998. Accordingly, federal and state deferred tax
expense was recorded in connection with fresh start reporting on January 7, 1998
with a corresponding adjustment to
goodwill. The amounts recognized were an increase of
approximately $0.1 million and a decrease of approximately $0.0 million for the
quarter and three quarters ended September 24, 2008, respectively, and
decreases of $0.4 million and $2.9 million for the quarter and three quarters
ended September 26, 2007, respectively.
The
reduction in our effective tax rate for the three quarters ended September 24,
2008 was due primarily to the utilization of federal net operating loss
carryforwards from periods prior to fresh start reporting on January 7,
1998. These federal net operating loss carryforwards were fully utilized during
fiscal 2007. We still have certain state net operating loss carryforwards from
periods prior to fresh start reporting that have been utilized in both fiscal
2007 and 2008.
Note
12. Net Income Per Share
|
Quarter
Ended
|
Three
Quarters Ended
|
|||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||
|
(In
thousands, except for per share amounts)
|
||||||||||||||||
|
Numerator:
|
||||||||||||||||
|
Numerator
for basic and diluted net income per
share -
net
income
|
$
|
10,562
|
$
|
4,950
|
$
|
17,837
|
$
|
16,620
|
||||||||
|
Denominator:
|
||||||||||||||||
|
Denominator
for basic net income per share –
weighted
average
shares
|
95,333
|
93,915
|
95,059
|
93,674
|
||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||
|
Options
|
2,056
|
3,737
|
2,517
|
4,073
|
||||||||||||
|
Restricted
stock units and awards
|
943
|
953
|
1,615
|
1,023
|
||||||||||||
|
Denominator
for diluted net income per share -
adjusted
weighted
average shares and assumed
conversions
of dilutive
securities
|
98,332
|
98,605
|
99,191
|
98,770
|
||||||||||||
|
Basic
net income per share
|
$
|
0.11
|
$
|
0.05
|
$
|
0.19
|
$
|
0.18
|
||||||||
|
Diluted
net income per share
|
$
|
0.11
|
$
|
0.05
|
$
|
0.18
|
$
|
0.17
|
||||||||
|
Stock
options excluded (1)
|
3,670
|
2,109
|
3,409
|
1,861
|
||||||||||||
| (1) | Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive. |
12
Note
13. Supplemental Cash Flow Information
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Income
taxes paid, net
|
$
|
1,001
|
$
|
1,381
|
||||
|
Interest
paid
|
$
|
21,594
|
$
|
23,840
|
||||
|
Noncash
investing activities:
|
||||||||
|
Notes
received in connection with disposition of property
|
$
|
2,670
|
$
|
—
|
||||
|
Execution
of direct financing leases
|
$
|
3,007
|
$
|
132
|
||||
|
Net
proceeds receivable from disposition of property
|
$
|
—
|
$
|
972
|
||||
|
Noncash
financing activities:
|
||||||||
|
Net
proceeds receivable from stock option exercises
|
$
|
—
|
$
|
260
|
||||
|
Issuance
of common stock, pursuant to share-based compensation
plans
|
$
|
1,268
|
$
|
1,125
|
||||
|
Execution
of capital leases
|
$
|
4,516
|
$
|
1,430
|
||||
Note
14. Related Party Transactions
During
the quarter and three quarters ended September 24, 2008, we sold company-owned
restaurants to franchisees that are former employees. We received cash
proceeds of $1.0 million
and $2.9 million
from the sale of restaurant operations to these related parties
during the two periods, respectively.
Note
15. Implementation of New Accounting Standards
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162 ("SFAS
162"), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS
162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
This Statement is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AICPA Codification of Auditing
Standards, AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." We do not currently believe that
adopting SFAS 162 will have a material impact on our Condensed
Consolidated Financial Statements.
In April
2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3 (“FSP FAS 142-3”),
“Determination of the Useful Life of Intangible Assets.” FSP FAS
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible
Assets.” The intent of the FSP is to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141, "Business Combinations." We are required to adopt FSP FAS 142-3 in the
first quarter of 2009 and will apply it prospectively to intangible assets
acquired after the effective date. We do not currently believe that adopting FSP
FAS 142-3 will have a material impact on our Condensed Consolidated Financial
Statements.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS
161”), “Disclosures about Derivative Instruments and Hedging Activities,” which
amends and expands Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 161
requires tabular disclosure of the fair value of derivative instruments and
their gains and losses. This Statement also requires disclosure
regarding the credit-risk related contingent features in derivative agreements,
counterparty credit risk, and strategies and objectives for using derivative
instruments. We are required to adopt SFAS 161 in the first quarter of
2009. We do not currently believe that adopting SFAS 161 will have a material
impact on our Condensed Consolidated Financial Statements.
In December 2007, the FASB
issued Statement of Financial Accounting Standards No. 160 ("SFAS 160"),
"Noncontrolling Interests in Consolidated Financial Statements — an amendment of
ARB No. 51." SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements" to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as equity in our Consolidated
Financial Statements. Among other requirements, this Statement requires that the
consolidated net income attributable to the parent and the noncontrolling
interest be clearly identified and presented on the face of the consolidated
income statement. SFAS 160 is effective for the first fiscal period beginning on
or after December 15, 2008. We are required to adopt SFAS 160 in the first
quarter of 2009. We
do not currently believe that adopting SFAS 160 will
have a material impact on our Condensed Consolidated Financial
Statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007) ("SFAS 141R"), "Business Combinations." SFAS 141R establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in an acquiree and the goodwill acquired. SFAS
141R applies to business combinations for which the acquisition date is on or
after the first fiscal period beginning on or after December 15,
2008. SFAS 141R will also require that any additional reversal of deferred
tax asset valuation allowance established in connection with fresh start
reporting on January 7, 1998 be recorded as a component of income tax expense
rather than as currently reflected as a reduction to the goodwill established in
connection with the fresh start reporting. We are required to adopt
SFAS 141R in the first quarter of 2009. The impact of SFAS 141R on our Condensed Consolidated Financial
Statements will be dependent upon the extent to which we have
transactions or events occur that are within its scope.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes
a framework for measuring fair value 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. Effective December 27, 2007, the first day of fiscal 2008,
we adopted the provisions of SFAS 157 for financial assets and liabilities, as
well as any other assets and liabilities that are carried at fair value on
a recurring basis in financial statements. See Note 2 to the Condensed
Consolidated Financial Statements. We applied the provisions of FSP FAS 157-2,
"Effective Date of FASB Statement 157," which defers the provisions of SFAS 157
for nonfinancial assets and liabilities to the first fiscal period
beginning after November 15, 2008. The deferred nonfinancial assets and
liabilities include items such as goodwill and other nonamortizable intangibles.
We
are required to adopt SFAS 157 for nonfinancial assets and liabilities in the
first quarter of fiscal 2009 and are still evaluating the impact on our
Condensed 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 our Condensed Consolidated Financial
Statements upon adoption.
Note
16. Commitments and Contingencies
There are
various claims and pending legal actions against or indirectly involving us,
including actions concerned with civil rights of employees and guests, 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 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 record legal expenses and other litigation
costs as those costs are incurred.
13
The
following discussion is intended to highlight significant changes in our
financial position as of September 24, 2008 and results of operations for the
quarter and three quarters ended September 24, 2008 compared to the quarter
and three quarters ended September 26, 2007. The forward-looking statements
included in Management’s Discussion and Analysis of Financial Condition and
Results of Operations, which reflect our best judgment based on factors
currently known, involve risks, uncertainties, and other factors which may cause
our actual performance to be materially different from the performance indicated
or implied by such statements. Such factors include, among others: competitive
pressures from within the restaurant industry; the level of success of our
operating initiatives and advertising and promotional efforts; adverse
publicity; changes in business strategy or development plans; terms and
availability of capital; regional weather conditions; overall changes in the
general economy (including with regard to energy costs), particularly at the
retail level; political environment (including acts of war and terrorism); and
other factors included in the discussion below or in Part II. Item 1A. Risk Factors in this
Quarterly Report on Form 10-Q, or in Part II. Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations and
Part I. Item 1A. Risk Factors, contained in our Annual Report on Form 10-K for
the year ended December 26, 2007.
Statements of
Operations
The
following table contains information derived from our Condensed Consolidated
Statements of Operations expressed as a percentage of total operating revenues,
except as noted below. Percentages may not add due to
rounding.
|
Quarter
Ended
|
Three
Quarters Ended
|
|||||||||||||||||||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||||||||||
|
Company
restaurant sales
|
$ | 160,608 | 84.9 | % | $ | 216,792 | 89.8 | % | $ | 493,434 | 85.7 | % | $ | 650,909 | 90.5 | % | ||||||||||||||||
|
Franchise
and license revenue
|
28,667 | 15.1 | % | 24,617 | 10.2 | % | 82,109 | 14.3 | % | 68,193 | 9.5 | % | ||||||||||||||||||||
|
Total
operating revenue
|
189,275 | 100.0 | % | 241,409 | 100.0 | % | 575,543 | 100.0 | % | 719,102 | 100.0 | % | ||||||||||||||||||||
|
Costs
of company restaurant sales (a):
|
||||||||||||||||||||||||||||||||
|
Product
costs
|
38,811 | 24.2 | % | 55,520 | 25.6 | % | 119,790 | 24.3 | % | 166,969 | 25.7 | % | ||||||||||||||||||||
|
Payroll
and benefits
|
65,582 | 40.8 | % | 88,341 | 40.7 | % | 208,331 | 42.2 | % | 273,141 | 42.0 | % | ||||||||||||||||||||
|
Occupancy
|
9,475 | 5.9 | % | 13,193 | 6.1 | % | 30,003 | 6.1 | % | 39,345 | 6.0 | % | ||||||||||||||||||||
|
Other
operating expenses
|
25,384 | 15.8 | % | 33,842 | 15.6 | % | 75,322 | 15.3 | % | 95,937 | 14.7 | % | ||||||||||||||||||||
|
Total
costs of company restaurant sales
|
139,252 | 86.7 | % | 190,896 | 88.1 | % | 433,446 | 87.8 | % | 575,392 | 88.4 | % | ||||||||||||||||||||
|
Costs
of franchise and license revenue (a)
|
8,757 | 30.5 | % | 6,858 | 27.9 | % | 25,448 | 31.0 | % | 20,266 | 29.7 | % | ||||||||||||||||||||
|
General
and administrative expenses
|
14,894 | 7.9 | % | 15,974 | 6.6 | % | 46,046 | 8.0 | % | 49,067 | 6.8 | % | ||||||||||||||||||||
|
Depreciation
and amortization
|
9,977 | 5.3 | % | 12,117 | 5.0 | % | 30,110 | 5.2 | % | 37,475 | 5.2 | % | ||||||||||||||||||||
|
Operating
gains, losses and other charges
|
(4,294 | ) | (2.3 | %) | (316 | ) | (0.1 | %) | (9,980 | ) | (1.7 | %) | (14,890 | ) | (2.1 | %) | ||||||||||||||||
|
Total
operating costs and expenses
|
168,586 | 89.1 | % | 225,529 | 93.4 | % | 525,070 | 91.2 | % | 667,310 | 92.8 | % | ||||||||||||||||||||
|
Operating
income
|
20,689 | 10.9 | % | 15,880 | 6.6 | % | 50,473 | 8.8 | % | 51,792 | 7.2 | % | ||||||||||||||||||||
|
Other
expenses:
|
||||||||||||||||||||||||||||||||
|
Interest
expense, net
|
8,761 | 4.6 | % | 10,489 | 4.3 | % | 26,845 | 4.7 | % | 32,783 | 4.6 | % | ||||||||||||||||||||
|
Other
nonoperating expense (income), net
|
677 | 0.4 | % | 34 | 0.0 | % | 4,436 | 0.8 | % | (391 | ) | (0.1 | %) | |||||||||||||||||||
|
Total
other expenses, net
|
9,438 | 5.0 | % | 10,523 | 4.4 | % | 31,281 | 5.4 | % | 32,392 | 4.5 | % | ||||||||||||||||||||
|
Net
income before income taxes
|
11,251 | 5.9 | % | 5,357 | 2.2 | % | 19,192 | 3.3 | % | 19,400 | 2.7 | % | ||||||||||||||||||||
|
Provision
for income taxes
|
689 | 0.4 | % | 407 | 0.2 | % | 1,355 | 0.2 | % | 2,780 | 0.4 | % | ||||||||||||||||||||
|
Net
income
|
$ | 10,562 | 5.6 | % | $ | 4,950 | 2.1 | % | $ | 17,837 | 3.1 | % | $ | 16,620 | 2.3 | % | ||||||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||||||||||
|
Company-owned
average unit sales
|
$ | 459 | $ | 446 | $ | 1,335 | $ | 1,289 | ||||||||||||||||||||||||
|
Franchise
average unit sales
|
377 | 402 | 1,112 | 1,149 | ||||||||||||||||||||||||||||
|
Company-owned
equivalent units (b)
|
348 | 485 | 369 | 505 | ||||||||||||||||||||||||||||
|
Franchise
equivalent units (b)
|
1,195 | 1,054 | 1,177 | 1,036 | ||||||||||||||||||||||||||||
|
Same-store
sales increase (decrease) (company-
owned)
(c)(d)
|
(2.7 | )% | 1.3 | % | (0.9 | )% | 0.7 | % | ||||||||||||||||||||||||
|
Guest
check average increase (d)
|
6.7 | % | 6.0 | % | 6.3 | % | 4.1 | % | ||||||||||||||||||||||||
|
Guest
count decrease (d)
|
(8.8 | )% | (4.5 | )% | (6.7 | )% | (3.2 | )% | ||||||||||||||||||||||||
|
Same-store
sales increase (decrease) (franchised
and
licensed units)
(c) (d)
|
(6.1 | )% | 3.2 | % | (3.6 | )% | 2.2 | % | ||||||||||||||||||||||||
__________________
|
(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)
|
Equivalent
units are calculated as the weighted average number of units outstanding
during a defined time period.
|
|
(c)
|
Same-store
sales include sales from restaurants that were open the same days in both
the current year and prior year.
|
|
(d)
|
Prior
year amounts have not been adjusted for 2008 comparable
units.
|
14
Quarter
Ended September
24, 2008 Compared
with Quarter Ended September
26, 2007
|
Quarter
Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
Company-owned
restaurants, beginning of period
|
354
|
488
|
||||||
|
Units
opened
|
—
|
2
|
||||||
|
Units
acquired from franchisees
|
—
|
—
|
||||||
|
Units
sold to franchisees
|
(21
|
)
|
(22
|
)
|
||||
|
Units
closed
|
(1
|
)
|
—
|
|
||||
|
End
of period
|
332
|
468
|
||||||
|
Franchised
and licensed restaurants, beginning of period
|
1,191
|
1,051
|
||||||
|
Units
opened
|
8
|
2
|
||||||
|
Units
acquired by Company
|
—
|
—
|
||||||
|
Units
purchased from Company
|
21
|
22
|
||||||
|
Units
closed
|
(14
|
)
|
(4
|
)
|
||||
|
End
of period
|
1,206
|
1,071
|
||||||
|
Total
company-owned, franchised and licensed restaurants, end of
period
|
1,538
|
1,539
|
||||||
Company Restaurant
Operations
During
the quarter ended September 24, 2008, we incurred a 2.7% decrease in
same-store sales, comprised of a 6.7% increase in guest check average and
a 8.8% decrease in guest counts. Company restaurant sales decreased $56.2
million, or 25.9%, primarily resulting from a 137 equivalent-unit decrease
in company-owned restaurants. The decrease in equivalent-units primarily
resulted from the sale of company-owned restaurants to franchisees as part of
our Franchise Growth Initiative.
Total
costs of company restaurant sales as a percentage of company restaurant sales
decreased to 86.7% from 88.1%. Product costs decreased to 24.2% from 25.6%
due to favorable shifts in menu mix. Payroll and benefits costs
increased to 40.8% from 40.7% primarily as a result of increased
workers compensation and group insurance costs, offset by a decrease in
management labor and restaurant staffing related to improved scheduling.
Occupancy costs decreased slightly to 5.9% from 6.1% due to a
benefit in general liability expense during the current
quarter. Other operating expenses were comprised of the following
amounts and percentages of company restaurant sales:
|
Quarter
Ended
|
||||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Utilities
|
$
|
9,139
|
5.7
|
%
|
$
|
10,960
|
5.1
|
%
|
||||||||
|
Repairs
and maintenance
|
3,693
|
2.3
|
%
|
5,414
|
2.5
|
%
|
||||||||||
|
Marketing
|
5,682
|
3.5
|
%
|
7,355
|
3.4
|
%
|
||||||||||
|
Legal
|
698
|
0.4
|
%
|
1,565
|
0.7
|
%
|
||||||||||
|
Other
direct costs
|
6,172
|
3.8
|
%
|
8,548
|
3.9
|
%
|
||||||||||
|
Other operating
expenses
|
$
|
25,384
|
15.8
|
%
|
$
|
33,842
|
15.6
|
%
|
||||||||
The
overall decrease in other operating expenses primarily results from the sale of
company-owned restaurants to franchisees.
Franchise
Operations
Franchise
and license revenue and costs of franchise and license revenue were comprised of
the following amounts and percentages of franchise and license revenue for the
periods indicated:
|
Quarter
Ended
|
||||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Royalties
|
$
|
17,791
|
62.1
|
%
|
$
|
16,779
|
68.2
|
%
|
||||||||
|
Initial
and other fees
|
1,376
|
4.8
|
%
|
1,180
|
4.8
|
%
|
||||||||||
|
Occupancy
revenue
|
9,500
|
33.1
|
%
|
6,658
|
27.0
|
%
|
||||||||||
|
Franchise
and license revenue
|
28,667
|
100.0
|
%
|
24,617
|
100.0
|
%
|
||||||||||
|
Occupancy
costs
|
7,354
|
25.6
|
%
|
5,098
|
20.7
|
%
|
||||||||||
|
Other
direct costs
|
1,403
|
4.9
|
%
|
1,760
|
7.2
|
%
|
||||||||||
|
Costs
of franchise and license revenue
|
$
|
8,757
|
30.5
|
%
|
$
|
6,858
|
27.9
|
%
|
||||||||
Royalties
increased by $1.0 million, or 6.0%, primarily resulting from a 141
equivalent-unit increase in franchised and licensed units, as compared to the
prior year quarter, offset by the effects of a 6.1% decrease in same-store
sales. The increase in equivalent-units resulted from the sale of company-owned
restaurants to franchisees. The increase in occupancy revenue of $2.8 million,
or 42.7%, is also primarily the result of the sale of restaurants to
franchisees.
Costs of
franchise and license revenue increased by $1.9 million, or 27.7%. The increase
in occupancy costs of $2.3 million, or 44.3%, is primarily the result
of the sale of company-owned restaurants to franchisees. Other direct costs
decreased by $0.4 million, or 20.3%, primarily as a result of the reorganization
of the field management structure that occurred in the third quarter of 2007. As
a percentage of franchise and license revenue, costs of franchise and license
revenue increased to 30.5% for the quarter ended September 24, 2008 from 27.9%
for the quarter ended September 26, 2007.
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.
15
General and administrative
expenses are comprised of the following:
|
Quarter
Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Share-based
compensation
|
$
|
849
|
$
|
681
|
||||
|
General
and administrative expenses
|
14,045
|
15,293
|
||||||
|
Total
general and administrative expenses
|
$
|
14,894
|
$
|
15,974
|
||||
The $1.2
million decrease in general and administrative expenses is due primarily to the
reorganization to support our ongoing transition to a franchise-focused business
model.
Depreciation and amortization
is comprised of the following:
|
Quarter
Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Depreciation
of property and equipment
|
$
|
7,706
|
$
|
9,423
|
||||
|
Amortization
of capital lease assets
|
871
|
1,181
|
||||||
|
Amortization
of intangible assets
|
1,400
|
1,513
|
||||||
|
Total
depreciation and amortization expense
|
$
|
9,977
|
$
|
12,117
|
||||
The
overall decrease in depreciation and amortization expense is due primarily to
the sale of company-owned restaurants to franchisees during fiscal 2007 and
2008.
Operating gains, losses and other
charges, net are comprised of the following:
|
Quarter
Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Gains
on sales of assets and other, net
|
$
|
(5,290
|
)
|
$
|
(4,197
|
)
|
||
|
Restructuring
charges and exit costs
|
752
|
3,701
|
||||||
|
Impairment
charges
|
244
|
180
|
||||||
|
Operating
gains, losses and other charges, net
|
$
|
(4,294
|
)
|
$
|
(316
|
)
|
||
During
the quarter ended September 24, 2008, we recognized $3.5 million of gains on the
sale of 21 restaurant operations to six franchisees for net proceeds of $8.3
million compared to $2.4 million of gains on the sale of 22 restaurant
operations to eight franchisees for net proceeds of $8.7 million during the
prior year quarter. The remaining gains for the two periods resulted from the
sale of real estate related to closed restaurants and restaurants operated by
franchisees and the recognition of deferred gains.
Restructuring
charges and exit costs were comprised of the following:
|
Quarter
Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Exit
costs
|
$
|
821
|
$
|
276
|
||||
|
Severance
and other restructuring charges
|
(69
|
)
|
3,425
|
|||||
|
Total
restructuring and exit costs
|
$
|
752
|
$
|
3,701
|
||||
The $3.7
million in severance and other restructuring charges recognized during the
quarter ended September 26, 2007 primarily related to the reorganization of the
field management structure.
Operating income was $20.7
million for the quarter ended September 24, 2008 compared with $15.9 million for
the quarter ended September 26, 2007.
Interest expense, net is
comprised of the following:
|
Quarter
Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Interest
on senior notes
|
$
|
4,363
|
$
|
4,363
|
||||
|
Interest
on credit facilities
|
2,178
|
3,871
|
||||||
|
Interest
on capital lease liabilities
|
989
|
960
|
||||||
|
Letters
of credit and other fees
|
498
|
571
|
||||||
|
Interest
income
|
(232
|
)
|
(401
|
)
|
||||
|
Total
cash interest
|
7,796
|
9,364
|
||||||
|
Amortization
of deferred financing costs
|
273
|
301
|
||||||
|
Interest
accretion on other liabilities
|
692
|
824
|
||||||
|
Total
interest expense, net
|
$
|
8,761
|
$
|
10,489
|
||||
The
decrease in interest expense resulted primarily from the repayment
of $15.9 million and $100.3 million on the credit facilities during 2008
and 2007, respectively.
The provision for income taxes was
$0.7 million and $0.4 million for the quarter ended September 24, 2008 and
September 26, 2007, respectively. The provision for income taxes for the
quarters of 2008 and 2007 was determined using our effective rate estimated for
the entire fiscal year. The quarter ended September 24, 2008 also included the
recognition of $0.6 million of current tax benefits. This item resulted from the
enactment of certain federal laws that benefited us during the third quarter of
2008. 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. In addition, during 2008
and 2007, we utilized certain federal and state NOL carryforwards whose
valuation allowances were established in connection with fresh start
reporting on January 7, 1998. Accordingly, for the quarter ended September 24,
2008 and September 26, 2007, we recognized an increase of approximately $0.1
million and a decrease of $0.4 million, respectively, of federal and state
deferred tax expense with a corresponding adjustment to the goodwill that was
recorded in connection with fresh start reporting on January 7, 1998. The
reduction in our effective tax rate for the quarter ended September 24, 2008, as
compared to the quarter ended September 26, 2007, was due primarily to the
utilization of federal net operating loss carryforwards during 2007 from periods
prior to fresh start reporting on January 7, 1998. These federal net
operating loss carryforwards were fully utilized during fiscal 2007. We still
have certain state net operating loss carryforwards from periods prior to fresh
start reporting that have been utilized in both fiscal 2007 and
2008.
16
Net income was $10.6 million
for the quarter ended September 24, 2008 compared with $5.0 million for the
quarter ended September 26, 2007 due to the factors noted above.
Three Quarters Ended
September 24,
2008 Compared
with Three Quarters Ended September 26,
2007
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
Company-owned
restaurants, beginning of period
|
394
|
521
|
||||||
|
Units
opened
|
3
|
3
|
||||||
|
Units
acquired from franchisees
|
—
|
1
|
||||||
|
Units
sold to franchisees
|
(62
|
)
|
(56
|
)
|
||||
|
Units
closed
|
(3
|
)
|
(1
|
)
|
||||
|
End
of period
|
332
|
468
|
||||||
|
Franchised
and licensed restaurants, beginning of period
|
1,152
|
1,024
|
||||||
|
Units
opened
|
19
|
7
|
||||||
|
Units
acquired by Company
|
—
|
(1
|
)
|
|||||
|
Units
purchased from Company
|
62
|
56
|
||||||
|
Units
closed
|
(27
|
)
|
(15
|
)
|
||||
|
End
of period
|
1,206
|
1,071
|
||||||
|
Total
company-owned, franchised and licensed restaurants, end of
period
|
1,538
|
1,539
|
||||||
Company
Restaurant Operations
During
the three quarters ended September 24, 2008, we incurred a 0.9% decrease in
same-store sales, comprised of a 6.3% increase in guest check average and
a 6.7% decrease in guest counts. Company restaurant sales decreased $157.5
million, or 24.2%, primarily resulting from a 136 equivalent-unit decrease in
company-owned restaurants. The decrease in equivalent-units primarily resulted
from the sale of company-owned restaurants to franchisees as part of our
Franchise Growth Initiative.
Total
costs of company restaurant sales as a percentage of company restaurant sales
decreased to 87.8% from 88.4%. Product costs decreased to 24.3% from 25.7%
due to favorable shifts in menu mix. Payroll and benefits
increased to 42.2% from 42.0% primarily as a result of increased
workers compensation, group insurance and management staffing costs, offset by a
decrease in restaurant staffing related to improved scheduling. Occupancy costs
increased to 6.1% from 6.0%. Other operating expenses were comprised
of the following amounts and percentages of company restaurant
sales:
|
Three
Quarters Ended
|
||||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Utilities
|
$
|
25,484
|
5.2
|
%
|
$
|
31,755
|
4.9
|
%
|
||||||||
|
Repairs
and maintenance
|
10,959
|
2.2
|
%
|
14,179
|
2.2
|
%
|
||||||||||
|
Marketing
|
16,911
|
3.4
|
%
|
21,823
|
3.3
|
%
|
||||||||||
|
Legal
|
1,570
|
0.3
|
%
|
3,095
|
0.5
|
%
|
||||||||||
|
Other
direct costs
|
20,398
|
4.1
|
%
|
25,085
|
3.8
|
%
|
||||||||||
|
Other
operating expenses
|
$
|
75,322
|
15.3
|
%
|
$
|
95,937
|
14.7
|
%
|
||||||||
The
overall decrease in other operating expenses primarily results from the sale of
company-owned restaurants to franchisees. As a percentage of company restaurant
sales, other direct costs in fiscal 2007 benefited from $0.6 million of
insurance proceeds resulting from income lost due to hurricanes.
Franchise
Operations
Franchise
and license revenue and costs of franchise and license revenue were comprised of
the following amounts and percentages of franchise and license revenue for the
periods indicated:
|
Three
Quarters Ended
|
||||||||||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Royalties
|
$
|
51,782
|
63.1
|
%
|
$
|
47,098
|
69.1
|
%
|
||||||||
|
Initial
fees
|
3,639
|
4.4
|
%
|
2,956
|
4.3
|
%
|
||||||||||
|
Occupancy
revenue
|
26,688
|
32.5
|
%
|
18,139
|
26.6
|
%
|
||||||||||
|
Franchise
and license revenue
|
82,109
|
100.0
|
%
|
68,193
|
100.0
|
%
|
||||||||||
|
Occupancy
costs
|
20,761
|
25.3
|
%
|
14,632
|
21.4
|
%
|
||||||||||
|
Other
direct costs
|
4,687
|
5.7
|
%
|
5,634
|
8.3
|
%
|
||||||||||
|
Costs
of franchise and license revenue
|
$
|
25,448
|
31.0
|
%
|
$
|
20,266
|
29.7
|
%
|
||||||||
Royalties
increased by $4.7 million, or 9.9%, primarily resulting from a 141
equivalent-unit increase in franchised and licensed units, as compared to the
prior year period, offset by the effects of a 3.6% decrease in same-store sales.
The increase in equivalent-units resulted from the sale of company-owned
restaurants to franchisees. The increase in occupancy revenue of $8.5 million,
or 47.1%, is also primarily the result of the sale of company-owned restaurants
to franchisees.
Costs of
franchise and license revenue increased by $5.2 million, or 25.6%. The increase
in occupancy costs of $6.1 million, or 41.9%, is primarily the result
of the sale of company-owned restaurants to franchisees. Other direct costs
benefited by $0.9 million, or 16.8%, primarily as a result of the reorganization
of the field management structure that occurred in the third quarter of 2007. As
a percentage of franchise and license revenue, costs of franchise and license
revenue increased to 31.0% for the three quarters ended September 24, 2008, as
compared to 29.7% for the three quarters ended September 26, 2007.
17
Other
Operating Costs and Expenses
General and administrative
expenses are comprised of the following:
|
Three
Quarters Ended
|
||||||||
|
|
September
24, 2008
|
September
26, 2007
|
||||||
|
(In
thousands)
|
||||||||
|
Share-based
compensation
|
$
|
2,511
|
$
|
3,000
|
||||
|
General
and administrative expenses
|
43,535
|
46,067
|
||||||
|
Total
general and administrative expenses
|
$
|
46,046
|
$
|
49,067
|
||||
The
decrease in share-based compensation expense is primarily due to the adjustment
of the liability classified restricted stock units to fair value as of
September 24, 2008. The $2.5 million decrease in general and administrative
expenses is due primarily to the reorganization to support our ongoing
transition to a franchise-focused business model.
Depreciation and amortization
is comprised of the following:
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Depreciation
of property and equipment
|
$
|
23,247
|
$
|
28,860
|
||||
|
Amortization
of capital lease assets
|
2,542
|
3,605
|
||||||
|
Amortization
of intangible assets
|
4,321
|
5,010
|
||||||
|
Total
depreciation and amortization expense
|
$
|
30,110
|
$
|
37,475
|
||||
The
overall decrease in depreciation and amortization expense is due primarily to
the sale of company-owned restaurants to franchisees during fiscal 2007 and
2008.
Operating gains, losses and other
charges, net are comprised of the following:
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Gains
on sales of assets and other, net
|
$
|
(18,214
|
)
|
$
|
(20,841
|
)
|
||
|
Restructuring
charges and exit costs
|
7,506
|
5,531
|
||||||
|
Impairment
charges
|
728
|
420
|
||||||
|
Operating
gains, losses and other charges, net
|
$
|
(9,980
|
)
|
$
|
(14,890
|
)
|
||
During
the three quarters ended September 24, 2008, we recognized $15.4 million of
gains on the sale of 62 restaurant operations to 17 franchisees for net proceeds
of $30.2 million compared to $15.3 million of gains on the sale of 56
restaurant operations to 12 franchisees for net proceeds of $30.6 million during
the prior year period. The remaining gains for the two periods resulted from the
sale of real estate related to closed restaurants and restaurants operated by
franchisees and the recognition of deferred gains.
Restructuring
charges and exit costs were comprised of the following:
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Exit
costs
|
$
|
2,476
|
$
|
1,011
|
||||
|
Severance
and other restructuring charges
|
5,030
|
4,520
|
||||||
|
Total
restructuring and exit costs
|
$
|
7,506
|
$
|
5,531
|
||||
During
the three quarters ended September 24, 2008, we recognized $5.0 million in
severance and other restructuring charges related to a reorganization to support
our ongoing transition to a franchise-focused business model. The reorganization
led to the elimination of approximately 50 positions.
Operating income was $50.5
million for the three quarters ended September 24, 2008 compared with $51.8
million for the three quarters ended September 26, 2007.
Interest expense, net is
comprised of the following:
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Interest
on senior notes
|
$
|
13,089
|
$
|
13,089
|
||||
|
Interest
on credit facilities
|
7,197
|
12,724
|
||||||
|
Interest
on capital lease liabilities
|
2,847
|
2,959
|
||||||
|
Letters
of credit and other fees
|
1,495
|
1,755
|
||||||
|
Interest
income
|
(732
|
)
|
(1,073
|
)
|
||||
|
Total
cash interest
|
23,896
|
29,454
|
||||||
|
Amortization
of deferred financing costs
|
827
|
886
|
||||||
|
Interest
accretion on other liabilities
|
2,122
|
2,443
|
||||||
|
Total
interest expense, net
|
$
|
26,845
|
$
|
32,783
|
||||
The
decrease in interest expense resulted primarily from the repayment
of $15.9 million and $100.3 million on the credit facilities during 2008
and 2007, respectively.
Other nonoperating expenses, net
were $4.4 million for the three quarters ended September 24, 2008
compared with other nonoperating income of $0.4 million for the three quarters
ended September 26, 2007. Approximately $3.1 million of the increase in other
nonoperating expense resulted from the discontinuance of hedge accounting
related to the interest rate swap. The $3.1 million increase is comprised of a
$2.2 million change in the fair value of the swap and $0.9 million of
amortization of losses included in accumulated other comprehensive
income.
18
The provision for income taxes was
$1.4 million and $2.8 million for the three quarters ended September 24,
2008 and September 26, 2007, respectively. The provision for income taxes for
the three quarters of 2008 and 2007 was determined using our effective rate
estimated for the entire fiscal year. The three quarters ended September 24,
2008 also included the recognition of $0.6 million of current tax benefits. This
item resulted from the enactment of certain federal laws that benefited us
during the third quarter of 2008. The three quarters ended September 26, 2007
also included the recognition of $0.3 million of current tax benefits and a $0.6
million reduction to the valuation allowance. These items resulted from the
enactment of certain federal and state laws that benefited us during the second
quarter of 2007. 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. In addition, during
2008 and 2007, we utilized certain federal and state NOL carryforwards whose
valuation allowances were established in connection with fresh start
reporting on January 7, 1998. Accordingly, for the three quarters ended
September 24, 2008 and September 26, 2007, we recognized
approximately
$0.0 million and $2.9 million, respectively, of federal and
state deferred tax expense with a corresponding reduction to the goodwill that
was recorded in connection with fresh start reporting on January 7, 1998. The
reduction in our effective tax rate for the three quarters ended September 24,
2008, as compared to the three quarters ended September 26, 2007, was due
primarily to the utilization of federal net operating loss carryforwards during
2007 from periods prior to fresh start reporting on January 7, 1998. These
federal net operating loss carryforwards were fully utilized during fiscal 2007.
We still have certain state net operating loss carryforwards from periods prior
to fresh start reporting that have been utilized in both fiscal 2007 and
2008.
Net income was $17.8 million
for the three quarters ended September 24, 2008 compared with $16.6 million for
the three quarters ended September 26, 2007 due to the factors noted
above.
Liquidity and Capital
Resources
Our
primary sources of liquidity and capital resources are cash generated
from operations, borrowings under our Credit Facility (as defined in Note
7) and, in recent years, cash proceeds from the sale of surplus properties
and sales of restaurant operations 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:
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Net
cash provided by operating activities
|
$
|
7,954
|
$
|
35,444
|
||||
|
Net
cash provided by investing activities
|
10,218
|
14,002
|
||||||
|
Net
cash used in financing activities
|
(18,315
|
)
|
(46,597
|
)
|
||||
|
Net
increase (decrease) in cash and cash
equivalents
|
$
|
(143
|
)
|
$
|
2,849
|
|||
The
decrease in operating cash flows primarily resulted from the runoff of working
capital deficit following the sale of restaurant operations to franchisees and
the timing of certain operating expense payments. We believe that our estimated
cash flows from operations for 2008, combined with our capacity for additional
borrowings under our credit facility, will enable us to meet our anticipated
cash requirements and fund capital expenditures over the next twelve months.
Net cash
flows provided by investing activities were $10.2 million for the three quarters
ended September 24, 2008. These cash flows primarily represent net proceeds
of $31.4 million on sales of restaurant operations to franchisees, real estate
related to restaurants operated by franchisees and other assets. The proceeds
were offset by capital expenditures of $25.7 million for the three quarters
ended September 24, 2008, of which $4.5 million was financed through capital
leases. Our principal capital requirements have been largely associated with the
maintenance of our existing company-owned restaurants and facilities, new
construction, remodeling and our strategic initiatives, as follows:
|
Three
Quarters Ended
|
||||||||
|
September
24, 2008
|
September
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Facilities
|
$
|
7,393
|
$
|
9,417
|
||||
|
New
construction
|
4,567
|
5,533
|
||||||
|
Remodeling
|
6,434
|
3,288
|
||||||
|
Strategic
initiatives
|
2,502
|
24
|
||||||
|
Other
|
277
|
545
|
||||||
|
Total
capital expenditures
|
21,173
|
18,807
|
||||||
|
Acquisitions
|
—
|
2,208
|
||||||
|
Total
capital expenditures and acquisitions
|
$
|
21,173
|
$
|
21,015
|
||||
Cash
flows used in financing activities were $18.3 million for the three quarters
ended September 24, 2008, which included $14.8 million of prepayments and $4.4
million of scheduled debt payments made through a combination of asset sale
proceeds, as noted above, and surplus cash.
Our
credit facility consists of a $50 million revolving credit facility (including
up to $10 million for a revolving letter of credit facility), a $136.7 million
term loan and an additional $37 million letter of credit facility. At September
24, 2008 we had outstanding letters of credit of $35.4 million (comprised
of $35.2 million under our letter of credit facility and $0.2 million under our
revolving facility). There were no revolving loans outstanding at September 24,
2008. These balances result in availability of $1.8 million under our letter of
credit facility and $49.8 million under the revolving facility.
The
revolving facility matures on December 15, 2011. The term loan and the
$37 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 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 required payments related to asset sales)
typical for this type of credit facility and may make certain optional
prepayments under the credit facility.
The
credit facility is guaranteed by Denny's Corporation and its other subsidiaries
and is secured by substantially all of the assets of Denny's and its
subsidiaries. In addition, the credit facility is secured by first-priority
mortgages on 118 company-owned real estate assets. The credit facility contains
certain financial covenants (i.e., maximum total debt to EBITDA (as defined
under the 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. We were in compliance with the terms of the
credit facility as of September 24, 2008.
As of
September 24, 2008, interest on loans under the revolving facility is payable at
per annum rates equal to LIBOR plus 250 basis points and will adjust over
time based on our leverage ratio. Interest on the term loan and letter of credit
facility is payable at per annum rates equal to LIBOR plus 200 basis
points. Prior to considering the impact of the interest rate swap, the
weighted-average interest rate under the term loan was 4.8% as of September 24,
2008.
19
Our
working capital deficit was $58.3
million at September 24, 2008 compared with $73.6 million at December 26, 2007.
We are able to operate with a substantial working capital deficit because (1)
restaurant operations and most food service operations are conducted primarily
on a cash (and cash equivalent) basis with a low level of accounts receivable,
(2) rapid turnover allows a limited investment in inventories, and (3) accounts
payable for food, beverages and supplies usually become due after the receipt of
cash from the related sales.
Implementation of New
Accounting Standards
See Notes
2 and 15 to our Condensed Consolidated Financial Statements.
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 variable rates based on LIBOR plus a
spread of 200 basis points per annum for the term loan and letter of credit
facility and 250 basis points per annum for the revolving credit
facility.
During
the second quarter of fiscal 2007, we entered into an interest rate swap with a
notional amount of $150 million to hedge a portion of the cash flows of our
variable rate debt. The interest rate swap economically hedges our exposure to
variability in future cash flows attributable to interest payments on the first
$150 million of floating rate debt. Under the terms of the swap, through March
26, 2008, we paid a fixed rate of 4.8925% on the $150 million notional amount
and received payments from the counterparties based on the 3-month LIBOR rate
for a term ending on March 30, 2010, effectively resulting in a fixed rate of
6.8925% on the $150 million notional amount. On March 26, 2008, we terminated
$50 million of the notional amount of the interest rate swap. As of September
24, 2008, the swap effectively increases our ratio of fixed rate debt from
approximately 56% of total debt to approximately 88% of total debt.
Based on
the levels of borrowings under the credit facility at September 24, 2008, if
interest rates changed by 100 basis points our annual cash flow and income
before income taxes would change by approximately
$0.4 million. This computation is determined by considering the impact of
hypothetical interest rates on the variable rate portion of the credit facility
at September 24, 2008. However, the nature and amount of our borrowings under
the credit facility may vary as a result of future business requirements, market
conditions and other factors.
Our other
outstanding long-term debt bears fixed rates of interest. The estimated fair
value of our fixed rate long-term debt (excluding capital lease obligations and
revolving credit facility advances)
was approximately $161.4 million, compared with a book value of
$175.4 million at September
24, 2008.
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
September 24, 2008 relates primarily to market quotations for our Denny's
Holdings, Inc. 10% Senior Notes due 2012.
We also
have exposure to interest rate risk related to our pension plan, other defined
benefit plans and self-insurance liabilities. A 25 basis point increase or
decrease in discount rate would decrease or increase our projected benefit
obligation related to our pension plan and other defined benefit plans by $1.7
million and $0.1 million, respectively, and impact 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 to our
other defined benefit plans would be less than $0.1 million. A 25 basis point
increase or decrease in discount rate related to our self-insurance liabilities
would result in a decrease or increase of $0.2 million,
respectively.
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,
the majority of our purchasing arrangements are structured to contain features
that minimize price volatility by establishing fixed pricing and/or price
ceilings and 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 enter into financial instruments for trading or
speculative purposes.
As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”) our management conducted an evaluation (under the
supervision and with the participation of our President and Chief Executive
Officer, Nelson J. Marchioli, and our Executive Vice President, Growth
Initiatives, Chief Administrative Officer and Chief Financial Officer, F.
Mark Wolfinger) as of the end of the period covered by this report, of the
effectiveness of our disclosure controls and procedures as defined in Rule
13a-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 and is
accumulated and communicated to our management, including our principal
executive officer and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act
that occurred during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
20
There are
various claims and pending legal actions against or indirectly involving us,
including actions concerned with civil rights of employees and guests, 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 our best estimate of legal and financial liabilities, if
any, with respect to these matters. However, the ultimate disposition of these
matters cannot be determined with certainty.
Risks
that could have a negative impact on our business, revenues and performance
results include risks associated with the following:
· 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
· Our
growth strategy, including the Franchise Growth Initiative and Market Growth
Incentive Plan, depends on our ability and that of our franchisees to open new
restaurants. Delays or failures in opening new restaurants could materially and
adversely affect our planned growth.
· 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.
A
more detailed description of each of these risk factors can be found under the
caption “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 26, 2007. We encourage you to read these risk factors in their
entirety. Other factors may also exist that we cannot anticipate or that we do
not consider to be significant based on information that is currently
available.
a.
The following are included as exhibits to this report:
|
Exhibit
No.
|
Description
|
|
| 10.1 | Form of Performance-Based Restricted Stock Unit Award Certificate. | |
| 10.2 | 2008 Performance Restricted Stock Unit Program 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, Chief
Administrative Officer and Chief Financial Officer of Denny’s Corporation,
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Nelson J. Marchioli, President and Chief Executive Officer of Denny’s
Corporation and F. Mark Wolfinger, Executive Vice President, Growth
Initiatives, Chief Administrative Officer 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.
|
21
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
DENNY'S
CORPORATION
|
|||
|
Date:
October 28, 2008
|
By:
|
/s/
F. Mark Wolfinger
|
|
|
F.
Mark Wolfinger
|
|||
|
Executive
Vice President,
Growth
Initiatives,
Chief
Administrative Officer and
Chief
Financial Officer
|
|||
|
Date:
October 28, 2008
|
By:
|
/s/
Jay C. Gilmore
|
|
|
Jay
C. Gilmore
|
|||
|
Vice
President,
Chief
Accounting Officer and
Corporate
Controller
|
|||
22