UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Fiscal Year Ended December 31, 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
incorporation
or organization)
|
(I.R.S.
employer
identification
number)
|
|
203
East Main Street
Spartanburg,
South Carolina 29319-9966
|
|
|
(Address
of principal executive offices)
(Zip
Code)
|
|
(864)
597-8000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each
class
|
Name of each exchange on which
registered
|
|
$.01
Par Value, Common Stock
|
The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes þ
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 ¨ Smaller
reporting company ¨
(Do
not check if a 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 þ
The
aggregate market value of the voting common stock held by non-affiliates of the
registrant was approximately $264.9 million as of June 25, 2008, the last
business day of the registrant’s most recently completed second fiscal quarter,
based upon the closing sales price of registrant’s common stock on that date of
$3.21 per share and, for purposes of this computation only, the assumption
that all of the registrant’s directors, executive officers and beneficial owners
of 10% or more of the registrant’s common stock are affiliates.
As of
March 6, 2009, 96,076,172 shares of the registrant’s common stock, $.01 par
value per share, were outstanding.
Documents
incorporated by reference:
Portions
of the registrant’s definitive Proxy Statement for the 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form
10-K.
TABLE
OF CONTENTS
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F-1
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FORWARD-LOOKING
STATEMENTS
The
forward-looking statements included in the “Business,” “Risk Factors,” “Legal
Proceedings,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and “Quantitative and Qualitative Disclosures About
Market Risk” sections and elsewhere herein, which reflect our best judgment
based on factors currently known, involve risks and uncertainties. Words such as
“expects,” “anticipates,” “believes,” “intends,” “plans,”
“hopes,” and variations of such words and similar expressions are intended
to identify such forward-looking statements. Except as may be required by law,
we expressly disclaim any obligation to update these forward-looking statements
to reflect events or circumstances after the date of this Form 10-K or to
reflect the occurrence of unanticipated events. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors including, but not limited to, the factors
discussed in such sections and, in particular, those set forth in the cautionary
statements contained in “Risk Factors.” The forward-looking information we have
provided in this Form 10-K pursuant to the safe harbor established under the
Private Securities Litigation Reform Act of 1995 should be evaluated in the
context of these factors.
Description
of Business
Denny’s
Corporation, or Denny’s, is one of America’s largest family-style restaurant
chains. Denny’s, through its wholly owned subsidiaries, Denny’s Holdings, Inc.
and Denny’s, Inc., owns and operates the Denny’s restaurant brand. At
December 31, 2008, the Denny’s brand consisted of 1,541 restaurants, 1,226
(80%) of which were franchised/licensed restaurants and 315 (20%) of
which were company-owned and operated. Denny’s restaurants are operated in 49
states, the District of Columbia, two U.S. territories and five foreign
countries with concentrations in California (26% of total restaurants), Florida
(10%) and Texas (10%).
Our
restaurants generally are open 24 hours a day, 7 days a week. We provide high
quality menu offerings and generous portions at reasonable prices with friendly
and efficient service in a pleasant atmosphere. Denny’s expansive menu offers
traditional American-style food such as breakfast items, appetizers, sandwiches,
dinner entrees and desserts. Denny's restaurants are best known for
breakfast items, such as our Grand Slam®. Sales are broadly distributed across
each of the dayparts (i.e., breakfast, lunch, dinner and
late-night).
References
to "Denny's," the "Company," "we," "us," and "our" in this Form 10-K are
references to Denny's Corporation and its subsidiaries.
Restaurant
Operations
We
believe that the superior execution of basic restaurant operations in each
Denny’s restaurant, whether it is company-owned or franchised, is critical to
our success. To meet and exceed our guests’ expectations, we require both our
company-owned and our franchised restaurants to maintain the same strict brand
standards. These standards relate to the preparation and efficient serving of
quality food and the maintenance, repair and cleanliness of
restaurants.
We devote
significant effort to ensuring all restaurants offer quality food served by
friendly, knowledgeable and attentive employees in a clean and well-maintained
restaurant. We seek to ensure that our company-owned restaurants meet our high
standards through a network of Company Regional Directors of Operations, Company
Business Leaders and restaurant level managers, all of whom spend the majority
of their time in the restaurants. A network of Franchise Regional Directors of
Operations and Franchise Business Leaders oversee our franchised restaurants to
ensure compliance with brand standards, promote operational excellence, and
provide general support to our franchisees.
A
principal feature of Denny’s restaurant operations is the consistent focus on
improving operations at the unit level. Unit managers are hands-on and versatile
in their supervisory activities. Many of our restaurant management personnel
began as hourly associates in the restaurants and, therefore, know how to
perform restaurant functions and are able to train by example.
Denny’s
maintains training programs for associates and restaurant managers including
Denny's University. Denny's University is a training program conducted at
our Corporate Support Center for our company and franchise managers and general
managers. The
mission of Denny's University is to teach managers the skills needed to become
business leaders with an owner/operator mentality, operating successful Denny's
restaurants.
Franchising
and Development
The
Denny’s system is approximately 80% franchised and 20% company-operated. We
expect that the future growth of the brand will come primarily from the
development of franchise restaurants. Our criteria to become a Denny’s
franchisee include minimum liquidity and net worth requirements and appropriate
operational experience. We believe that Denny’s is an attractive financial
proposition for current and potential franchisees and that our fee structure is
competitive with other full service brands. The initial fee for a single
twenty-year Denny’s franchise agreement is $40,000 and the royalty payment is 4%
of gross sales. Additionally, our franchisees are required to contribute up to
4% of gross sales for advertising.
During
2008, we continued the Franchise Growth Initiative ("FGI") to increase franchise
restaurant development through the sale of certain geographic clusters of
company restaurants to both current and new franchisees. As a result, we
sold 79 restaurant operations and certain related real estate to 22 franchisees
for net proceeds of $35.5 million. As of December 31, 2008, the total
number of company restaurants sold since the FGI program began in early 2007 is
209.
Fulfilling
the unit growth expectations of this program, certain
franchisees
that purchased company restaurants during the year also signed development
agreements to build additional new franchise restaurants. In addition to
franchise development agreements signed under FGI, we have been negotiating
development agreements outside
of the
FGI program under our Market Growth Incentive Plan ("MGIP"). Over the last
18 months we have signed development agreements for 154 new restaurants under
the FGI and MGIP programs, 26 of which have opened, yielding a development
pipeline of 128 new restaurants as of December 31, 2008. The units in the
pipeline are expected to open over an average of approximately four
years.
1
The table
below sets forth information regarding the distribution of single-store and
multi-store franchisees as of December 31, 2008:
|
Franchisees
|
Percentage
of Franchisees
|
Restaurants
|
Percentage
of Restaurants
|
|||||||||||||
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One
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105
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39.0
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%
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105
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8.6
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%
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||||||||||
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Two
to five
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113
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42.0
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%
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324
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26.4
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%
|
||||||||||
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Six
to ten
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30
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11.2
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%
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233
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19.0
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%
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||||||||||
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Eleven
to fifteen
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4
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1.5
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%
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53
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4.3
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%
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||||||||||
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Sixteen
to thirty
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11
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4.1
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%
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249
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20.3
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%
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||||||||||
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Thirty-one and
over
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6
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2.2
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%
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262
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21.4
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%
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||||||||||
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Total
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269
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100.0
|
%
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1,226
|
100.0
|
%
|
||||||||||
Site
Selection
The
success of any restaurant is influenced significantly by its location. Our
development team works closely with franchisees and real estate brokers to
identify sites which meet specific standards. Sites are evaluated on the basis
of a variety of factors, including but not limited to:
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•
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demographics;
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•
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traffic
patterns;
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•
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visibility;
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•
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building
constraints;
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•
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competition;
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•
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environmental
restrictions; and
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•
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proximity
to high-traffic consumer
activities.
|
Competition
The
restaurant industry is highly competitive. Competition among major
companies that own or operate restaurant chains is especially intense.
Restaurants compete on the basis of name recognition and advertising; the price,
quality, variety, and perceived value of their food offerings; the quality and
speed of their guest service; and the convenience and attractiveness
of their facilities.
Denny’s
direct competition in the family-style category includes a collection of
national and regional chains, as well as thousands of independent operators.
Denny’s also competes with quick service restaurants as they attempt to upgrade
their menus with premium sandwiches, entree salads, new breakfast offerings and
extended hours.
We
believe that Denny’s has a number of competitive strengths, including strong
brand name recognition, well-located restaurants and market penetration. We
benefit from economies of scale in a variety of areas, including advertising,
purchasing and distribution. Additionally, we believe that Denny’s has
competitive strengths in the value, variety, and quality of our food products,
and in the quality and training of our employees. See “Risk Factors” for certain
additional factors relating to our competition in the restaurant
industry.
Research
and Innovation
We
continue our emphasis on being a consumer driven organization with particular
focus on our service, menu, marketing, and overall guest experience. In
2008, we integrated our Innovations department with traditional marketing to
gain economies of scale, as well as synergy of creative development. While
two separate VP's head up each area, they work seamlessly in the development of
new menu and product development, service models, and overall branding and
concept innovation.
Additionally,
both of these areas rely on consumer insights obtained through secondary and
primary qualitative and quantitative studies. These insights form the
strategic foundation for menu architecture, pricing, promotion and advertising.
The
added-value of these insights and strategic understandings also assist our
Restaurant Operations and Information Technology personnel in the evaluation and
development of new restaurant processes and upgraded restaurant equipment that
may improve our speed of service, food quality and order
accuracy.
Through
this consumer focused effort, we are successfully innovating our brand and
concept, striving for continued relevance and brand differentiation. This
allows us to protect margins, gain market share and efficiently maximize the
research investment.
2
Marketing and
Advertising
Our
marketing department manages contributions from both company-owned and
franchised units and provides integrated marketing and advertising to promote
our brand. The department includes brand and communications strategy, media
advertising, menu management, menu pricing strategy, product development,
consumer insights, public relations, field marketing and
promotions.
Our
marketing campaigns, including broadcast advertising, focus on differentiating
Denny’s real breakfast
– real ingredients, made to order, by real people, any time of the day – from
our competitors. Our advertising is conducted through national network and cable
television, radio, online media, outdoor and print.
Denny's
reaches out to all consumers through integrated marketing programs, including
community outreach. These programs are designed to enhance our brand image,
support our brand message and, in some cases, augment our diversity
efforts.
Product
Sources and Availability
Our
purchasing department administers programs for the procurement of food and
non-food products. Our franchisees also purchase food and non-food products
directly from the vendors under these programs. Our centralized purchasing
program is designed to ensure uniform product quality as well as to
minimize food, beverage and supply costs. Our size provides significant
purchasing power which often enables us to obtain products at favorable prices
from nationally recognized manufacturers.
While
nearly all products are contracted for by our purchasing department, the
majority are purchased and distributed through Meadowbrook Meat Company, or MBM,
under a long-term distribution contract. MBM distributes restaurant products and
supplies to the Denny’s system from nearly 250 vendors, representing
approximately 88% of our restaurant product and supply purchases. We believe
that satisfactory sources of supply are generally available for all the items
regularly used by our restaurants. We have not experienced any material
shortages of food, equipment, or other products which are necessary to our
restaurant operations.
Seasonality
Our
business is moderately seasonal. Restaurant sales are generally greater in the
second and third calendar quarters (April through September) than in the first
and fourth calendar quarters (October through March). Additionally, severe
weather, storms and similar conditions may impact sales volumes seasonally in
some operating regions. Occupancy and other operating costs, which remain
relatively constant, have a disproportionately greater negative effect on
operating results during quarters with lower restaurant sales.
Trademarks
and Service Marks
Through
our wholly owned subsidiaries, we have certain trademarks and service marks
registered with the United States Patent and Trademark Office and in
international jurisdictions, including "Denny's" and "Grand Slam
Breakfast". We consider our trademarks and service marks important to the
identification of our restaurants and believe they are of material importance to
the conduct of our business. Domestic trademark and service mark
registrations are renewable at various intervals from 10 to 20 years.
International trademark and service mark registrations have various durations
from 5 to 20 years. We generally intend to renew trademarks and service marks
which come up for renewal. We own or have rights to all trademarks we believe
are material to our restaurant operations. In addition, we have registered
various domain names on the internet that incorporate certain of our trademarks
and service marks, and believe these domain name registrations are an integral
part of our identity. From time to time, we may resort to legal measures to
defend and protect the use of our intellectual property.
Economic,
Market and Other Conditions
The
restaurant industry is affected by many factors, including changes in national,
regional and local economic conditions affecting consumer spending, the
political environment (including acts of war and terrorism), changes in customer
travel patterns, changes in socio-demographic characteristics of areas where
restaurants are located, changes in consumer tastes and preferences, increases
in the number of restaurants, unfavorable trends affecting restaurant
operations, such as rising wage rates, healthcare costs and utilities expenses,
and unfavorable weather. See "Risk Factors" for additional
information.
Government
Regulations
We and
our franchisees are subject to local, state and federal laws and regulations
governing various aspects of the restaurant business, including, but not limited
to:
|
•
|
health;
|
|
•
|
sanitation;
|
|
•
|
land
use, sign restrictions and environmental matters;
|
|
•
|
safety;
|
|
•
|
disabled
persons’ access to facilities;
|
|
•
|
the
sale of alcoholic beverages; and
|
|
•
|
hiring
and employment practices.
|
The
operation of our franchise system is also subject to regulations enacted by a
number of states and rules promulgated by the Federal Trade Commission. We
believe we are in material compliance with applicable laws and regulations, but
we cannot predict the effect on operations of the enactment of additional
regulations in the future.
We are
also subject to federal and state laws, including the Fair Labor Standards Act,
governing matters such as minimum wage, tip reporting, overtime, exempt
status classification and other working conditions. At December 31, 2008, a
substantial number of our employees were paid the minimum wage. Accordingly,
increases in the minimum wage or decreases in the allowable tip credit (which
reduces the minimum wage paid to tipped employees in certain states) increase
our labor costs. This is especially true for our operations in California, where
there is no tip credit. Employers must pay the higher of the federal or state
minimum wage. We have attempted to offset increases in the minimum wage through
pricing and various cost control efforts; however, there can be no assurance
that we will be successful in these efforts in the future.
3
Environmental
Matters
Federal,
state and local environmental laws and regulations have not historically had a
material impact on our operations; however, we cannot predict the effect of
possible future environmental legislation or regulations on our
operations.
Executive
Officers of the Registrant
The
following table sets forth information with respect to each executive officer of
Denny’s:
|
Name
|
Age
|
Current
Principal Occupation or Employment and Five-Year Employment
History
|
||
|
Mark
E. Chmiel
|
54
|
Executive
Vice President, Chief Marketing and Innovation Officer of Denny’s (April,
2008–present); Senior Vice President, Brand and Concept Innovation of
Denny's (April, 2007-April, 2008); Chief Marketing Strategist of
Fresh Enterprises, Inc. and the Baja Fresh Division of Wendy’s
International, Inc. (a restaurant company) (2005-2007); Chief
Marketing Officer of Prandium, Inc. (a restaurant company) (2003-2005);
Director, Marketing and Senior Consultant of Catalyst, LLC (a corporate
consulting company) (2001-2005).
|
||
|
Janis
S. Emplit
|
53
|
Executive
Vice President and Chief Operating Officer of Denny’s (April,
2008–present); Senior Vice President, Sales and Company Operations of
Denny's (October, 2006-April, 2008); Senior Vice President for
Strategic Services of Denny’s (2003-October, 2006); Senior Vice President
and Chief Information Officer of Denny’s (1999-January
2006).
|
||
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Nelson
J. Marchioli
|
59
|
Chief
Executive Officer and President of Denny’s
(2001-present).
|
||
|
F.
Mark Wolfinger
|
53
|
Executive
Vice President and Chief Administrative Officer of Denny’s (April,
2008-present); Executive Vice President, Growth Initiatives of
Denny's (October, 2006-April, 2008); Chief Financial Officer of
Denny’s (2005-present); Senior Vice President of Denny's (2005-October,
2006); Executive Vice President and Chief Financial Officer of Danka
Business Systems (a document imaging company)
(1998-2005).
|
Employees
At
December 31, 2008, we had approximately 15,000 employees, none of whom are
subject to collective bargaining agreements. Many of our restaurant employees
work part-time, and many are paid at or slightly above minimum wage levels. As
is characteristic of the restaurant industry, we experience a high level of
turnover among our restaurant employees. We have experienced no significant work
stoppages, and we consider our relations with our employees to be
satisfactory.
The staff
for a typical restaurant consists of one general manager, two or three
restaurant managers and approximately 50 hourly employees. All managers of
company-owned restaurants receive a salary and may receive a performance bonus
based on financial measures. In addition, we employ Regional Vice
Presidents, Company and Franchise Regional Directors of Operations
and Company and Franchise Business Leaders. The Directors of Operations and
Business Leaders’ duties include regular restaurant visits and inspections,
which ensure the ongoing maintenance of our standards of quality, service,
cleanliness, value, and courtesy.
Available
Information
We make
available free of charge through our website at www.dennys.com (in the Investor
Relations—S.E.C. Filings section) copies of materials that we file with, or
furnish to, the Securities and Exchange Commission ("SEC") including our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to those reports, as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the
SEC.
We
caution you that our business and operations are subject to a number of risks
and uncertainties. The factors listed below are important factors that could
cause actual results to differ materially from our historical results and from
those anticipated in forward-looking statements contained in this Form 10-K, in
our other filings with the SEC, in our news releases and in oral statements by
our representatives. However, other factors that we do not anticipate or that we
do not consider significant based on currently available information may also
have an adverse effect on our results.
Risks
Related to Our Business
Our
financial condition depends on our ability and the ability of our franchisees to
operate restaurants profitably, to generate positive cash flows and to generate
acceptable returns on invested capital. The returns and profitability
of our restaurants may be negatively impacted by a number of factors, including
those described below.
Food
service businesses are often adversely affected by changes in:
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•
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consumer
tastes;
|
|
•
|
consumer spending habits; |
|
•
|
global,
national, regional and local economic conditions; and
|
|
•
|
demographic
trends.
|
The
performance of our individual restaurants may be adversely affected by factors
such as:
|
•
|
traffic
patterns;
|
|
•
|
demographic
considerations; and
|
|
•
|
the
type, number and location of competing
restaurants.
|
4
Multi-unit
food service chains such as ours can also be adversely affected by publicity
resulting from:
|
•
|
poor
food quality;
|
|
•
|
food-related
illness;
|
|
•
|
injury;
and
|
|
•
|
other
health concerns or operating
issues.
|
Dependence
on frequent deliveries of fresh produce and groceries subjects food service
businesses to the risk that shortages or interruptions in supply caused by
adverse weather or other conditions could adversely affect the availability,
quality and cost of ingredients. In addition, the food service industry in
general, and our results of operations and financial condition in particular,
may also be adversely affected by unfavorable trends or developments such
as:
|
•
|
inflation;
|
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•
|
increased
food costs;
|
|
•
|
increased
energy costs;
|
|
•
|
labor
and employee benefits costs (including increases in minimum hourly wage
and employment tax rates and health care and workers' compensation
cost);
|
|
•
|
regional
weather conditions; and
|
|
•
|
the
availability of experienced management and hourly
employees.
|
A
decline in general economic conditions could adversely affect our financial
results.
Consumer
spending habits, including discretionary spending on dining out at restaurants
such as ours, are affected by many factors, including:
|
•
|
prevailing
economic conditions, such as the housing and credit
markets;
|
|
•
|
energy
costs, especially gasoline prices;
|
|
•
|
levels
of employment;
|
|
•
|
salaries
and wage rates;
|
|
•
|
consumer
confidence; and
|
|
•
|
consumer
perception of economic
conditions.
|
Continued
weakness or uncertainty of the United States economy as a result of reactions to
consumer credit availability, increasing energy prices, inflation, increasing
interest rates, unemployment, war, terrorist activity or other unforeseen events
could adversely affect consumer spending habits, which may result in lower
restaurant sales.
The
locations where we have restaurants may cease to be attractive as demographic
patterns change.
The
success of our owned and franchised restaurants is significantly influenced by
location. Current locations may not continue to be attractive as demographic
patterns change. It is possible that the neighborhood or economic conditions
where our restaurants are located could decline in the future, potentially
resulting in reduced sales in those locations.
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
adversely affect our planned growth.
The
development of new restaurants may be adversely affected by risks such
as:
|
•
|
costs
and availability of capital for the Company and/or
franchisee;
|
|
•
|
competition
for restaurant sites;
|
|
•
|
negotiation
of favorable purchase or lease terms for restaurant
sites;
|
|
•
|
inability
to obtain all required governmental approvals and
permits;
|
|
•
|
developed
restaurants not achieving the expected revenue or cash flow;
and
|
|
•
|
general
economic conditions.
|
A
majority of Denny's restaurants are owned and operated by independent
franchisees, and as a result the financial performance of franchisees can
negatively impact our business.
We
receive royalties and contributions to advertising and, in some cases, lease
payments from our franchisees. Our financial results are somewhat contingent
upon the operational and financial success of our franchisees, including
implementation of our strategic plans, as well as their ability to secure
adequate financing. If sales trends or economic conditions worsen for our
franchisees, their financial health may worsen and our collection rates may
decline. Additionally, refusal on the part of franchisees to continue their
franchise agreements upon expiration may result in decreased royalties and lease
income.
For 2008,
our ten largest franchisees accounted for approximately 32% of our franchise
revenue. The balance of our franchise revenue is derived from the remaining 259
franchisees. Although the loss of revenues from the closure of any one franchise
restaurant may not be material, such revenues generate margins that may exceed
those generated by other restaurants or offset fixed costs which we continue to
incur.
The
interests of franchisees, as owners of the majority of our restaurants, might
sometimes conflict with our interests. For example, whereas franchisees are
concerned with their individual business strategies and objectives, we are
responsible for ensuring the success of our entire chain of restaurants and for
taking a longer term view with respect to system improvements.
5
The
restaurant business is highly competitive, and if we are unable to compete
effectively, our business will be adversely affected.
We expect
competition to continue to increase. The following are important aspects of
competition:
|
•
|
restaurant
location;
|
|
•
|
number
and location of competing restaurants;
|
|
•
|
food
quality and value;
|
|
•
|
quality
and speed of service;
|
|
•
|
attractiveness
and repair and maintenance of facilities; and
|
|
•
|
the
effectiveness of marketing and advertising
programs.
|
Each of
our restaurants competes with a wide variety of restaurants ranging from
national and regional restaurant chains to locally owned restaurants. There is
also active competition for advantageous commercial real estate sites suitable
for restaurants.
Many factors, including those over which we have no
control, affect the trading price of our stock.
Factors such as reports on the economy or the price of
commodities, as well as negative or positive announcements by competitors,
regardless of whether the report relates directly to our business, could have an
impact of the trading price of our stock. In addition to investor expectations
about our prospects, trading activity in our stock can reflect the portfolio
strategies and investment allocation changes of institutional holders and
non-operating initiatives such as a share repurchase program. Any failure to
meet market expectations whether for sales growth rates, refranchising goals,
earnings per share or other metrics could cause our share price to
decline.
Numerous
government regulations impact our business, and our failure to comply with them
could adversely affect our business.
We and
our franchisees are subject to federal, state and local laws and regulations
governing, among other things:
|
•
|
health;
|
|
•
|
sanitation;
|
|
•
|
environmental
matters;
|
|
•
|
safety;
|
|
•
|
the
sale of alcoholic beverages; and
|
|
•
|
hiring
and employment practices, including minimum wage laws and fair labor
standards.
|
Our
restaurant operations are also subject to federal and state laws that prohibit
discrimination and laws regulating the design and operation of facilities, such
as the Americans with Disabilities Act of 1990. The operation of our franchisee
system is also subject to regulations enacted by a number of states and rules
promulgated by the Federal Trade Commission. If we or our franchisees fail to
comply with these laws and regulations, we or our franchisees could be subjected
to restaurant closure, fines, penalties, and litigation, which may be costly and
could adversely affect our results of operations and financial condition. In
addition, the future enactment of additional legislation regulating the
franchise relationship could adversely affect our operations, particularly our
relationship with franchisees.
Negative
publicity generated by incidents at a few restaurants can adversely affect the
operating results of our entire chain and the Denny’s brand.
Food
safety concerns, criminal activity, alleged discrimination or other operating
issues stemming from one restaurant or a limited number of restaurants do not
just impact that particular restaurant or a limited number of restaurants.
Rather, our entire chain of restaurants may be at risk from negative publicity
generated by an incident at a single restaurant. This negative publicity can
adversely affect the operating results of our entire chain and the Denny’s
brand.
If
we lose the services of any of our key management personnel, our business could
suffer.
Our
future success significantly depends on the continued services and performance
of our key management personnel. Our future performance will depend on our
ability to motivate and retain these and other key officers and key team
members, particularly regional and area managers and restaurant general
managers. Competition for these employees is intense. The loss of the services
of members of our senior management or key team members or the inability to
attract additional qualified personnel as needed could harm our
business.
If
our internal controls are ineffective, we may not be able to accurately report
our financial results or prevent fraud.
We
maintain a documented system of internal controls which is reviewed and tested
by the Company’s full time Internal Audit Department. The Internal Audit
Department reports to the Audit Committee of the Board of Directors. We believe
we have a well-designed system to maintain adequate internal controls on the
business, however, we cannot be certain that our controls will be adequate in
the future or that adequate controls will be effective in preventing errors or
fraud. Any failures in the effectiveness of our internal controls could have an
adverse effect on our operating results or cause us to fail to meet reporting
obligations.
As
holding companies, Denny’s Corporation and Denny’s Holdings depend on upstream
payments from their operating subsidiaries. Our ability to repay our
indebtedness depends on the performance of those subsidiaries and their ability
to make distributions to us.
A
substantial portion of our assets are owned, and a substantial percentage of our
total operating revenues are earned, by our subsidiaries. Accordingly, Denny’s
Corporation and Denny’s Holdings depend upon dividends, loans and other
intercompany transfers from these subsidiaries to meet their debt service and
other obligations. These transfers are subject to contractual
restrictions.
The
subsidiaries are separate and distinct legal entities and they have no
obligation, contingent or otherwise, to make any funds available to meet our
debt service and other obligations, whether by dividend, distribution, loan or
other payments. If the subsidiaries do not pay dividends or other distributions,
Denny’s Corporation and Denny’s Holdings may not have sufficient cash to fulfill
their obligations.
6
Risks
Related to our Indebtedness
Our
indebtedness could have an adverse effect on our financial condition and
operations.
We have a
significant amount of indebtedness. As of December 31, 2008, we had total
indebtedness of approximately $327.6 million.
Our level
of indebtedness could:
|
•
|
make
it more difficult for us to satisfy our obligations with respect to our
indebtedness;
|
|
•
|
require
us to continue to dedicate a substantial portion of our cash flow from
operations to pay interest and principal on our indebtedness, which would
reduce the availability of our cash flow to fund future working capital,
capital expenditures, acquisitions and other general corporate
purposes;
|
|
•
|
increase
our vulnerability to general adverse economic and industry
conditions;
|
|
•
|
limit
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate;
|
|
•
|
restrict
us from making strategic acquisitions or pursuing business
opportunities;
|
|
•
|
place
us at a competitive disadvantage compared to our competitors that may have
less indebtedness; and
|
|
•
|
limit
our ability to borrow additional
funds.
|
We may
need to access the capital markets in the future to raise the funds to repay our
indebtedness. We have no assurance that we will be able to complete a
refinancing or that we will be able to raise any additional financing,
particularly in view of our anticipated high levels of indebtedness and the
restrictions contained in the credit agreements and indenture that govern our
indebtedness. If we are unable to satisfy or refinance our current debt as it
comes due, we may default on our debt obligations. If we default on payments
under our debt obligations, virtually all of our other debt would become
immediately due and payable.
Despite
our current level of indebtedness, we may still be able to incur substantially
more debt, which could further exacerbate the risks associated with our
substantial leverage.
Despite
our current and anticipated debt levels, we may be able to incur substantial
additional indebtedness in the future. Our credit agreement and the indenture
governing our indebtedness limit, but do not fully prohibit, us from incurring
additional indebtedness. If new debt is added to our current debt levels, the
related risks that we now face could intensify.
At
December 31, 2008, we had an outstanding term loan of $126.7 million and
outstanding letters of credit of $35.2 million under our letter of credit
facility. There were no outstanding letters of credit under our revolver
facility and no revolving loans outstanding at December 31, 2008. These balances
result in availability of $1.8 million under our letter of credit facility
and $50.0 million under the revolving facility. As of February 25, 2009, we had
availability of $1.6 million under our letter of credit facility and $50.0
million under the revolving facility. There were no outstanding letters of
credit under our revolving facility and no revolving loans outstanding at
February 25, 2009. In addition, we have Denny's Holdings Inc. 10% Senior Notes
due in 2012 (the "10% Notes") with an aggregate principal amount of $175
million.
We
continue to monitor our cash flow and liquidity needs. Although we believe that
our existing cash balances, funds from operations and amounts available under
our credit facility will be adequate to cover those needs, we may seek
additional sources of funds including additional financing sources and continued
selected asset sales, to maintain sufficient cash flow to fund our ongoing
operating needs, pay interest and scheduled debt amortization and fund
anticipated capital expenditures over the next twelve months. There are no
material debt maturities until December 2011.
Our
ability to generate cash depends on many factors beyond our control, and we may
not be able to generate the cash required to service or repay our
indebtedness.
Our
ability to make scheduled payments on our indebtedness will depend upon our
subsidiaries’ operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Our historical financial results have been, and our future
financial results are expected to be, subject to substantial fluctuations. We
cannot be sure that our subsidiaries will generate sufficient cash flow from
operations to enable us to service or reduce our indebtedness or to fund our
other liquidity needs. Our subsidiaries’ ability to maintain or increase
operating cash flow will depend upon:
|
•
|
consumer
tastes and spending habits;
|
|
•
|
the
success of our marketing initiatives and other efforts by us to
increase guest traffic in our restaurants; and
|
|
•
|
prevailing
economic conditions and other matters discussed throughout "Risk Factors"
in this Form 10-K, many of which are beyond our
control.
|
If we are
unable to meet our debt service obligations or fund other liquidity needs, we
may need to refinance all or a portion of our indebtedness on or before maturity
or seek additional equity capital. We cannot be sure that we will be able to pay
or refinance our indebtedness or obtain additional equity capital on
commercially reasonable terms, or at all, especially in a difficult economic
environment.
7
Restrictive
covenants in our debt instruments restrict or prohibit our ability to engage in
or enter into a variety of transactions, which could adversely affect
us.
The
credit agreement and the indenture governing our indebtedness contain various
covenants that limit, among other things, our ability to:
|
•
|
incur
additional indebtedness;
|
|
•
|
pay
dividends or make distributions or certain other restricted
payments;
|
|
•
|
make
certain investments;
|
|
•
|
create
dividend or other payment restrictions affecting restricted
subsidiaries;
|
|
•
|
issue
or sell capital stock of restricted subsidiaries;
|
|
•
|
guarantee
indebtedness;
|
|
•
|
enter
into transactions with stockholders or affiliates;
|
|
•
|
create
liens;
|
|
•
|
sell
assets and use the proceeds thereof;
|
|
•
|
engage
in sale-leaseback transactions; and
|
|
•
|
enter
into certain mergers and
consolidations.
|
Our
credit agreement contains additional restrictive covenants, including financial
maintenance requirements. These covenants could have an adverse effect on our
business by limiting our ability to take advantage of financing, merger,
acquisition or other corporate opportunities and to fund our
operations.
A
breach of a covenant in our debt instruments could cause acceleration of a
significant portion of our outstanding indebtedness.
A breach
of a covenant or other provision in any debt instrument governing our current or
future indebtedness could result in a default under that instrument and, due to
cross-default and cross-acceleration provisions, could result in a default under
our other debt instruments. In addition, our credit agreement requires us to
maintain certain financial ratios. Our ability to comply with these covenants
may be affected by events beyond our control (such as uncertainties related to
the current economy), and we cannot be sure that we will be able to comply with
these covenants. Upon the occurrence of an event of default under any of our
debt instruments, the lenders could elect to declare all amounts outstanding to
be immediately due and payable and terminate all commitments to extend further
credit. If we were unable to repay those amounts, the lenders could proceed
against the collateral granted to them, if any, to secure the indebtedness. If
the lenders under our current or future indebtedness accelerate the payment of
the indebtedness, we cannot be sure that our assets would be sufficient to repay
in full our outstanding indebtedness.
We
may not be able to repurchase the 10% Senior Notes due 2012 upon a change of
control.
Upon the
occurrence of specific kinds of change of control events, we would be required
to offer to repurchase all outstanding 10% Notes at 101% of their principal
amount, together with any accrued and unpaid interest and liquidated damages, if
any, from the issue date. We may not be able to repurchase the notes upon a
change of control because we may not have sufficient funds. Further, our credit
agreement restricts our ability to repurchase the notes, and also provides that
certain change of control events will constitute a default under our credit
agreement that permits our lenders thereunder to accelerate the maturity of
related borrowings, and, if such debt is not paid, to enforce security interests
in the collateral securing such debt, thereby limiting our ability to raise cash
to purchase the notes. Any future credit agreements or other agreements relating
to indebtedness to which we become a party may contain similar restrictions and
provisions. In the event a change of control occurs at a time when we are
prohibited by any other indebtedness from purchasing the notes, we could
seek consent of the lenders of such indebtedness to the purchase of the
notes or could attempt to refinance the borrowings that contain such
prohibition. If we do not obtain such consent or repay such borrowings, we will
remain prohibited from purchasing the notes. In such case, our failure to
purchase tendered notes would constitute an event of default under the indenture
governing the notes which would, in turn, constitute a default under our credit
agreement.
None.
8
Most
Denny’s restaurants are free-standing facilities, with property sizes averaging
approximately one acre. The restaurant buildings average 4,500 square feet,
allowing them to accommodate an average of 140 guests. The number and location
of our restaurants as of December 31, 2008 and December 26, 2007 are presented
below:
|
2008
|
2007
|
|||||||||
|
State/Country
|
Company
Owned
|
Franchised/Licensed
|
Company
Owned
|
Franchised/Licensed
|
||||||
|
Alabama
|
2
|
1
|
3
|
—
|
||||||
|
Alaska
|
—
|
3
|
—
|
4
|
||||||
|
Arizona
|
18
|
57
|
18
|
56
|
||||||
|
Arkansas
|
—
|
9
|
—
|
9
|
||||||
|
California
|
102
|
304
|
131
|
272
|
||||||
|
Colorado
|
7
|
19
|
7
|
19
|
||||||
|
Connecticut
|
—
|
8
|
—
|
8
|
||||||
|
District
of Columbia
|
—
|
1
|
—
|
1
|
||||||
|
Delaware
|
2
|
—
|
2
|
—
|
||||||
|
Florida
|
22
|
137
|
25
|
132
|
||||||
|
Georgia
|
—
|
13
|
—
|
12
|
||||||
|
Hawaii
|
4
|
3
|
4
|
3
|
||||||
|
Idaho
|
—
|
7
|
—
|
7
|
||||||
|
Illinois
|
20
|
32
|
28
|
23
|
||||||
|
Indiana
|
1
|
31
|
3
|
30
|
||||||
|
Iowa
|
—
|
1
|
—
|
1
|
||||||
|
Kansas
|
—
|
8
|
—
|
8
|
||||||
|
Kentucky
|
6
|
6
|
6
|
6
|
||||||
|
Louisiana
|
1
|
1
|
2
|
1
|
||||||
|
Maine
|
—
|
6
|
—
|
6
|
||||||
|
Maryland
|
3
|
20
|
6
|
17
|
||||||
|
Massachusetts
|
—
|
6
|
—
|
6
|
||||||
|
Michigan
|
10
|
12
|
10
|
12
|
||||||
|
Minnesota
|
—
|
15
|
3
|
13
|
||||||
|
Mississippi
|
—
|
1
|
1
|
—
|
||||||
|
Missouri
|
4
|
28
|
5
|
30
|
||||||
|
Montana
|
—
|
4
|
—
|
4
|
||||||
|
Nebraska
|
—
|
1
|
—
|
1
|
||||||
|
Nevada
|
8
|
20
|
8
|
21
|
||||||
|
New
Hampshire
|
—
|
3
|
—
|
3
|
||||||
|
New
Jersey
|
3
|
8
|
6
|
5
|
||||||
|
New
Mexico
|
—
|
23
|
—
|
22
|
||||||
|
New
York
|
33
|
9
|
33
|
11
|
||||||
|
North
Carolina
|
—
|
18
|
4
|
13
|
||||||
|
North
Dakota
|
—
|
4
|
—
|
3
|
||||||
|
Ohio
|
9
|
23
|
14
|
20
|
||||||
|
Oklahoma
|
—
|
12
|
—
|
21
|
||||||
|
Oregon
|
—
|
23
|
—
|
23
|
||||||
|
Pennsylvania
|
30
|
6
|
30
|
7
|
||||||
|
Rhode
Island
|
—
|
2
|
—
|
2
|
||||||
|
South
Carolina
|
—
|
13
|
—
|
12
|
||||||
|
South
Dakota
|
—
|
2
|
—
|
2
|
||||||
|
Tennessee
|
3
|
1
|
2
|
1
|
||||||
|
Texas
|
21
|
137
|
27
|
130
|
||||||
|
Utah
|
—
|
21
|
—
|
20
|
||||||
|
Vermont
|
—
|
2
|
—
|
2
|
||||||
|
Virginia
|
6
|
18
|
7
|
16
|
||||||
|
Washington
|
—
|
51
|
—
|
52
|
||||||
|
West
Virginia
|
—
|
2
|
—
|
2
|
||||||
|
Wisconsin
|
—
|
17
|
9
|
8
|
||||||
|
Guam
|
—
|
2
|
—
|
2
|
||||||
|
Puerto
Rico
|
—
|
10
|
—
|
10
|
||||||
|
Canada
|
—
|
50
|
—
|
49
|
||||||
|
Other
International
|
—
|
15
|
—
|
14
|
||||||
|
Total
|
315
|
1,226
|
394
|
1,152
|
||||||
9
Of the
total 1,541 company-owned and franchised units, our interest in restaurant
properties consists of the following:
|
Company-Owned Units
|
Franchised
Units
|
Total
|
||||||||||
|
Own
land and building
|
80 | 39 | 119 | |||||||||
|
Lease
land and own building
|
18 | — | 18 | |||||||||
|
Lease
both land and building
|
217 | 353 | 570 | |||||||||
| 315 | 392 | 707 | ||||||||||
In
addition to the restaurants, we own an 18-story, 187,000 square foot office
building in Spartanburg, South Carolina, which serves as our corporate
headquarters. Our corporate offices currently occupy approximately 16 floors of
the building, with a portion of the building leased to others.
See Note
11 to our Consolidated Financial Statements for information concerning
encumbrances on substantially all of our properties.
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 liabilities reflecting our best estimate of loss, if any,
with respect to these matters. However, the ultimate disposition of these
matters cannot be determined with certainty.
None.
Our
common stock is listed under the symbol “DENN” and trades on the NASDAQ Capital
Market. As of February 25, 2009, 96,076,172 shares of common stock were
outstanding, and there were approximately 11,269 record and beneficial
holders of common stock. We have never paid dividends on our common equity
securities. Furthermore, restrictions contained in the instruments governing our
outstanding indebtedness prohibit us from paying dividends on our common stock
in the future. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources” and Note 11 to
our Consolidated Financial Statements.
The
following tables list the high and low sales prices of the common stock for each
quarter of fiscal years 2008 and 2007, according to NASDAQ. Our common stock
began trading on the NASDAQ Capital Market on May 10, 2005.
|
High
|
Low
|
|||||||
|
2008
|
||||||||
|
First
quarter
|
$
|
4.22
|
$
|
2.50
|
||||
|
Second
quarter
|
4.10
|
2.90
|
||||||
|
Third
quarter
|
3.20
|
1.98
|
||||||
|
Fourth
quarter
|
2.83
|
1.18
|
||||||
|
2007
|
||||||||
|
First
quarter
|
$
|
5.60
|
$
|
4.19
|
||||
|
Second
quarter
|
5.00
|
4.20
|
||||||
|
Third
quarter
|
4.66
|
3.56
|
||||||
|
Fourth
quarter
|
4.99
|
3.73
|
||||||
10
Stockholder
Return Performance Graph
The
following graph compares the cumulative total stockholders’ return on the Common
Stock for the five fiscal years ended December 31, 2008 (December 31, 2003 to
December 31, 2008) against the cumulative total return of the Russell 2000®
Index and a peer group. The graph and table assume that $100 was
invested on December 31, 2003 (the last day of fiscal year 2003) in each of the
Company’s Common Stock, the Russell 2000® Index and the peer group and that all
dividends were reinvested.
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG DENNY’S CORPORATION, RUSSELL 2000®
INDEX AND PEER GROUP
ASSUMES $100 INVESTED ON DECEMBER 31, 2003
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDED DECEMBER 31, 2008
|
Russell
2000® Index (1)
|
Peer
Group (2)
|
Denny's
Corporation
|
||||||||||
|
December
31, 2003
|
$ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||
|
December
29, 2004
|
$ | 118.32 | $ | 118.90 | $ | 1,097.67 | ||||||
|
December
28, 2005
|
$ | 123.72 | $ | 135.77 | $ | 982.99 | ||||||
|
December
27, 2006
|
$ | 146.42 | $ | 154.37 | $ | 1,148.95 | ||||||
|
December
26, 2007
|
$ | 144.16 | $ | 119.22 | $ | 914.69 | ||||||
|
December
31, 2008
|
$ | 95.44 | $ | 92.39 | $ | 485.41 | ||||||
| (1) | |
| (2) |
The
peer group consists of 20 public companies that operate in the restaurant
industry. The peer group includes the following companies:
Burger King Holdings, Inc. (BKC), Bob Evans Farms, Inc. (BOBE), Buffalo
Wild Wings, Inc. (BWLD), CBRL Group Inc. (CBRL), O’Charleys Inc. (CHUX),
CKE Restaurants, Inc. (CKR), California Pizza Kitchen, Inc. (CPKI),
Domino’s Pizza Inc. (DPZ), Darden Restaurants, Inc. (DRI), Brinker
International, Inc. (EAT), DineEquity, Inc. (formerly IHOP
Corporation) (DIN), Jack In The Box Inc. (JACK), Panera Bread Company
(PNRA), Papa John’s International, Inc. (PZZA), Red Robin Gourmet Burgers,
Inc. (RRGB), Ruby Tuesday, Inc. (RT), Steak 'n Shake Company (SNS), Sonic
Corp. (SONC), Texas Roadhouse, Inc. (TXRH) and Wendy’s/Arby’s Group, Inc.
(WEN).
|
11
The
following table summarizes the consolidated financial and operating data of
Denny’s Corporation as of and for the years ended December 31, 2008, December
26, 2007, December 27, 2006, December 28, 2005 and December 29, 2004.
The consolidated statements of operations for the years ended December 31, 2008,
December 26, 2007 and December 27, 2006 and the balance sheet data as of
December 31, 2008 and December 26, 2007 are derived from our audited
Consolidated Financial Statements included in this Form 10-K. The consolidated
statements of operations for the years ended December 28, 2005 and December 29,
2004 and balance sheet data as of December 27, 2006, December 28, 2005 and
December 29, 2004 are derived from our Audited Consolidated Financial Statements
not included in this Form 10-K. The selected consolidated financial and
operating data set forth below should be read together with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our Consolidated Financial Statements and related notes.
|
Fiscal
Year Ended
|
||||||||||||||||||||
|
December
31, 2008 (a)
|
December
26, 2007
|
December
27, 2006
|
December
28, 2005
|
December
29, 2004
|
||||||||||||||||
|
(In
millions, except ratios and per share amounts)
|
||||||||||||||||||||
|
Statement of Operations
Data:
|
||||||||||||||||||||
|
Operating
revenue
|
$
|
760.3
|
$
|
939.4
|
$
|
994.0
|
$
|
978.7
|
$
|
960.0
|
||||||||||
|
Operating
income
|
60.9
|
79.8
|
110.5
|
48.5
|
53.8
|
|||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of
change
in accounting principle
|
14.7
|
31.4
|
30.1
|
(7.3
|
)
|
(37.7
|
)
|
|||||||||||||
|
Cumulative
effect of change in accounting principle, net of tax
|
—
|
—
|
0.2
|
—
|
—
|
|||||||||||||||
|
Income
(loss) from continuing operations
|
14.7
|
31.4
|
30.3
|
(7.3
|
)
|
(37.7
|
)
|
|||||||||||||
|
Basic
net income (loss) per share:
|
||||||||||||||||||||
|
Basic
net income (loss) before cumulative effect of change in accounting
principle,
net of tax
|
$
|
0.15
|
$
|
0.33
|
$
|
0.33
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
||||||||
|
Cumulative
effect of change in accounting principle, net of tax
|
—
|
—
|
0.00
|
—
|
—
|
|||||||||||||||
|
Basic
net income (loss) per share from continuing
operations
|
$
|
0.15
|
$
|
0.33
|
$
|
0.33
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
||||||||
|
Diluted
net income (loss) per share:
|
||||||||||||||||||||
|
Diluted
net income (loss) before cumulative effect of change in
accounting
principle, net of tax
|
$
|
0.15
|
$
|
0.32
|
$
|
0.31
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
||||||||
|
Cumulative
of effect of change in accounting principle, net of
tax
|
—
|
—
|
0.00
|
—
|
—
|
|||||||||||||||
|
Diluted
net income (loss) per share from continuing operations
|
$
|
0.15
|
$
|
0.32
|
$
|
0.31
|
$
|
(0.08
|
)
|
$
|
(0.58
|
)
|
||||||||
|
Cash
dividends per common share (b)
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||||||
|
Current
assets (c)
|
$
|
53.5
|
$
|
57.9
|
$
|
63.2
|
$
|
62.1
|
$
|
42.4
|
||||||||||
|
Working
capital deficit (c)(d)
|
(53.7
|
)
|
(73.6
|
)
|
(72.6
|
)
|
(86.3
|
)
|
(93.4
|
)
|
||||||||||
|
Net
property and equipment
|
160.0
|
184.6
|
236.3
|
288.1
|
285.4
|
|||||||||||||||
|
Total
assets (c)
|
347.2
|
377.4
|
444.4
|
511.7
|
499.3
|
|||||||||||||||
|
Long-term
debt, excluding current portion
|
322.7
|
346.8
|
440.7
|
545.7
|
547.4
|
|||||||||||||||
|
(a)
|
The
fiscal year ended December 31, 2008 includes 53 weeks of operations
as compared with 52 weeks for all other years presented. We estimate that
the additional, or 53rd, week added approximately $16.6 million of
operating revenue in 2008.
|
|
(b)
|
Our
bank facilities have prohibited, and our previous and current public debt
indentures have significantly limited, distributions and dividends on
Denny’s Corporation’s common equity securities.
|
|
(c)
|
Fiscal
years 2004 through
2007 have
been adjusted from amounts previously reported to reflect certain
adjustments as discussed in “Adjustments to Equity” in Note 2 to our
Consolidated Financial Statements.
|
|
(d)
|
A negative
working capital position is not unusual for a restaurant operating
company. The
decrease in working capital deficit from December
26, 2007 to
December
31, 2008 is
primarily due to the sale of company-owned restaurants to franchisees
during 2007 and 2008.
|
12
The
following discussion should be read in conjunction with “Selected Financial
Data,” and our Consolidated Financial Statements and the notes
thereto.
Overview
At
December 31, 2008, the Denny’s brand consisted of 1,541 restaurants, 1,226 (80%)
of which were franchised/licensed restaurants and 315 (20%) of which were
company-owned and operated. Prior to the implementation of our
Franchise Growth Initiative (FGI) in 2007, the Denny’s brand consisted of 1,545
restaurants, 1,024 (66%) of which were franchised/licensed restaurants and 521
(34%) of which were company-owned and operated.
Revenues
Our
revenues are derived primarily from two sources: the sale of food and beverages
at our company-owned restaurants and the collection of royalties and fees from
restaurants operated by our franchisees under the Denny’s name.
In 2007,
we began our Franchise Growth Initiative (“FGI”), a strategic initiative to
increase franchise restaurant development through the sale of certain geographic
clusters of company restaurants to both current and new franchisees. In 2008, as
a result of FGI, we sold 79 restaurant operations and certain related real
estate to 22 franchisees for net proceeds of $35.5 million. As of December 31,
2008, the total number of company restaurants sold since FGI began is
209.
The sale
of company restaurants to franchisees has a significant impact on company
restaurant sales and the collection of royalties and fees from restaurants
operated by our franchisees. Specifically, revenues are impacted as
follows:
|
•
|
Company
restaurant sales have decreased significantly and will continue to
decrease as we sell restaurants under FGI. In general, we have
sold restaurants with below-average sales volumes, which in turn should
raise the average sales volume and average operating margin of its
remaining company restaurant portfolio.
|
|
•
|
The
decline in company restaurant revenues is partially offset by increased
royalty income derived from the growing franchise restaurant
base. This royalty income is included as a component of
franchise and license revenue. The resulting net loss in total
revenue related to FGI is generally recovered by a decrease in
depreciation and amortization from the sale of restaurant related assets
to franchisees and a reduction in interest expense resulting from the use
of FGI proceeds to reduce debt.
|
|
•
|
Additionally,
initial franchise fees, included as a component of franchise and license
revenue, are generally recorded in the period in which a restaurant is
sold to a franchisee. These initial fees are completely
dependent on the number of restaurants sold during a particular
period.
|
Certain
franchisees purchasing company restaurants under FGI have also signed
development agreements to build additional new franchise restaurants. In addition to
franchise development agreements signed under FGI, we have negotiated
development agreements outside of the FGI program under our Market Growth
Incentive Plan ("MGIP"). The positive impact of these development
programs is evident in the 31 new franchise restaurant openings in 2008, which
was the most franchise openings since 2002 and a considerable increase from 18
franchise openings in 2007.
As a
result of FGI and MGIP, we expect that the majority of new Denny’s restaurants
will be developed by our franchisees. Development of company-owned restaurants
will focus on core markets, strategic locations and nontraditional
opportunities. As a result of continued franchisee demand for Denny’s
restaurants and our desire to expand our base of franchise locations, we expect
to continue our FGI and MGIP programs during 2009. However, the
current economic environment and availability of credit to franchisees will
impact the number of restaurants we are able to sell to franchisees and the
number of restaurants our franchisees are able to develop.
In
addition to the impacts of FGI, sales and customer traffic at both
company-operated and franchised restaurants are affected by the success of our
marketing campaigns, new product introductions and customer service, as well as
external factors including competition, economic conditions affecting consumer
spending, and changes in guest tastes and preferences.
Cost
of Company Restaurant Sales
Our costs
of company restaurant sales are exposed to volatility in two main areas: product
costs and payroll and benefit costs.
Many of
the products sold in our restaurants are affected by commodity pricing and are,
therefore, subject to price volatility. This volatility is caused by factors
that are fundamentally outside of our control and are often unpredictable. In
general, we purchase food products based on market prices or we set firm prices
in purchase agreements with our vendors. During 2008, our ability to
lock in prices on several key commodities added to our favorable product costs
in an environment in which many commodity prices were on the rise.
In
addition, our continued success with menu management helped to further reduce
product costs. Starting in the second quarter of 2008, our
promotional activities focused on menu items with lower food costs that still
provided a compelling value to our customers. Increased incident
rates of menu items such as our signature Grand Slam® breakfast and a
strong reception of new items like our Sizzlin’ Skillets, our AllNighter menu
and our new Pancake Puppies contributed to favorable product costs as a
percentage of sales.
The
volatility of payroll and benefit costs results primarily from changes in
wage rates and increases in labor related expenses such as medical benefit costs
and workers’ compensation costs. A number of our employees are paid the minimum
wage. Accordingly, substantial increases in the minimum wage increase our labor
costs. Additionally, declines in guest counts and investments in
store-level labor can cause payroll and benefit costs to increase as a
percentage of sales.
Many of
our costs vary based on sales and unit count. Certain costs such as
occupancy and other operating expenses have fixed components that may not react
as directly to changes in sales and unit count. However, as noted
above, many of our below-average sales volume units are sold through
FGI. As a result, cost of company restaurant sales as a percentage of
sales have generally improved during 2008.
Costs
of Franchise and License Revenue
Our costs
of franchise and license revenue include occupancy costs related to restaurants
leased or subleased to franchisees and direct costs consisting primarily of
payroll and benefit costs of franchise operations personnel. These
costs are significantly affected by FGI. As units are sold to
franchisees, Denny’s generally leases or subleases the land and building to the
franchisee. As a result, the occupancy costs related to these
restaurants moves from costs of company restaurant sales to costs of
franchise and license revenue to match the related occupancy income from
franchisee lease payments.
Debt
and Interest
Interest
expense has a significant impact on our net income as a result of our
indebtedness. However, during 2008 and 2007, we continued to reduce interest
expense through a series of debt repayments using the proceeds generated from
FGI transactions, sales of real estate and cash flow from operations. These
repayments resulted in an overall debt reduction of more than $25 million during
2008 and $100 million in 2007.
We
continue to take a conservative approach to our cash
management. While we paid down more that $25 million in debt during
2008, we chose to maintain $21 million in cash at year end given the uncertain
outlook for the economy and the capital markets. We will continue to
balance our debt reduction goals and our commitment to maintain an ample
liquidity cushion.
We are
subject to the effects of interest rate volatility since approximately $126.7
million, or 42%, of our debt has variable interest rates. To minimize the
interest rate volatility we participate in an interest rate swap on the first
$100 million of floating rate debt. As of December 31, 2008, the swap
effectively increases our ratio of fixed rate debt from approximately 58% of
total debt to approximately 91% of total debt.
13
Statements
of Operations
|
Fiscal
Year Ended
|
||||||||||||||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
Company
restaurant sales
|
$
|
648,264
|
85.3
|
%
|
$
|
844,621
|
89.9
|
%
|
$
|
904,374
|
91.0
|
%
|
||||||||||||
|
Franchise
and license revenue
|
112,007
|
14.7
|
%
|
94,747
|
10.1
|
%
|
89,670
|
9.0
|
%
|
|||||||||||||||
|
Total
operating revenue
|
760,271
|
100.0
|
%
|
939,368
|
100.0
|
%
|
994,044
|
100.0
|
%
|
|||||||||||||||
|
Costs
of company restaurant sales (a):
|
||||||||||||||||||||||||
|
Product
costs
|
157,545
|
24.3
|
%
|
215,943
|
25.6
|
%
|
226,404
|
25.0
|
%
|
|||||||||||||||
|
Payroll
and benefits
|
271,933
|
41.9
|
%
|
355,710
|
42.1
|
%
|
372,292
|
41.2
|
%
|
|||||||||||||||
|
Occupancy
|
40,415
|
6.2
|
%
|
50,977
|
6.0
|
%
|
51,677
|
5.7
|
%
|
|||||||||||||||
|
Other
operating expenses
|
100,182
|
15.5
|
%
|
123,310
|
14.6
|
%
|
131,404
|
14.5
|
%
|
|||||||||||||||
|
Total
costs of company restaurant sales
|
570,075
|
87.9
|
%
|
745,940
|
88.3
|
%
|
781,777
|
86.4
|
%
|
|||||||||||||||
|
Costs
of franchise and license revenue (a)
|
34,933
|
31.2
|
%
|
28,005
|
29.6
|
%
|
27,910
|
31.1
|
%
|
|||||||||||||||
|
General
and administrative expenses
|
60,970
|
8.0
|
%
|
67,374
|
7.2
|
%
|
66,426
|
6.7
|
%
|
|||||||||||||||
|
Depreciation
and amortization
|
39,766
|
5.2
|
%
|
49,347
|
5.3
|
%
|
55,290
|
5.6
|
%
|
|||||||||||||||
|
Operating
gains, losses and other charges, net
|
(6,384
|
)
|
(0.8
|
%)
|
(31,082
|
)
|
(3.3
|
%)
|
(47,882
|
)
|
(4.8
|
%)
|
||||||||||||
|
Total
operating costs and expenses
|
699,360
|
92.0
|
%
|
859,584
|
91.5
|
%
|
883,521
|
88.9
|
%
|
|||||||||||||||
|
Operating
income
|
60,911
|
8.0
|
%
|
79,784
|
8.5
|
%
|
110,523
|
11.1
|
%
|
|||||||||||||||
|
Other
expenses:
|
||||||||||||||||||||||||
|
Interest
expense, net
|
35,457
|
4.7
|
%
|
42,957
|
4.6
|
%
|
57,720
|
5.8
|
%
|
|||||||||||||||
|
Other
nonoperating expense (income), net
|
9,190
|
1.2
|
%
|
668
|
0.1
|
%
|
8,029
|
0.8
|
%
|
|||||||||||||||
|
Total
other expenses, net
|
44,647
|
5.9
|
%
|
43,625
|
4.6
|
%
|
65,749
|
6.6
|
%
|
|||||||||||||||
|
Net
income before income taxes and cumulative
effect
of change in accounting principle
|
16,264
|
2.1
|
%
|
36,159
|
3.8
|
%
|
44,774
|
4.5
|
%
|
|||||||||||||||
|
Provision
for income taxes
|
1,602
|
0.2
|
%
|
4,808
|
0.5
|
%
|
14,668
|
1.5
|
%
|
|||||||||||||||
|
Net
income before cumulative effect of change in
accounting
principle
|
14,662
|
1.9
|
%
|
31,351
|
3.3
|
%
|
30,106
|
3.0
|
%
|
|||||||||||||||
|
Cumulative
effect of change in accounting
principle
|
—
|
—
|
%
|
—
|
—
|
%
|
232
|
0.0
|
%
|
|||||||||||||||
|
Net
income
|
$
|
14,662
|
1.9
|
%
|
$
|
31,351
|
3.3
|
%
|
$
|
30,338
|
3.1
|
%
|
||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||
|
Company-owned
average unit sales
|
$
|
1,813
|
$
|
1,716
|
$
|
1,693
|
||||||||||||||||||
|
Franchise
average unit sales
|
$
|
1,490
|
$
|
1,523
|
$
|
1,481
|
||||||||||||||||||
|
Company-owned
equivalent units (b)
|
357
|
492
|
534
|
|||||||||||||||||||||
|
Franchise
equivalent units (b)
|
1,186
|
1,049
|
1,027
|
|||||||||||||||||||||
|
Same-store
sales increase (decrease) (company-
owned)
(c)(d)
|
(1.4
|
%)
|
0.3
|
%
|
2.5
|
%
|
||||||||||||||||||
|
Guest
check average increase (d)
|
5.9
|
%
|
4.6
|
%
|
4.4
|
%
|
||||||||||||||||||
|
Guest
count decrease (d)
|
(6.9
|
%)
|
(4.1
|
%)
|
(1.8
|
%)
|
||||||||||||||||||
|
Same-store
sales increase (decrease) (franchised
and
licensed units) (c)(d)
|
(4.6
|
%)
|
1.7
|
%
|
3.6
|
%
|
||||||||||||||||||
|
(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 period in the
prior year. For purposes of calculating same-store sales, the 53rd
week of 2008 was compared to the 1st
week of 2008.
|
|
(d)
|
Prior
year amounts have not been restated for 2008 comparable
units.
|
14
2008
Compared with 2007
Unit
Activity
|
2008
|
2007
|
|||||||
|
Company-owned
restaurants, beginning of period
|
394
|
521
|
||||||
|
Units
opened
|
3
|
5
|
||||||
|
Units
acquired from franchisees
|
—
|
1
|
||||||
|
Units
sold to franchisees
|
(79
|
)
|
(130
|
)
|
||||
|
Units
closed
|
(3
|
)
|
(3
|
)
|
||||
|
End
of period
|
315
|
394
|
||||||
|
Franchised
and licensed restaurants, beginning of period
|
1,152
|
1,024
|
||||||
|
Units
opened
|
31
|
18
|
||||||
|
Units
acquired by Company
|
—
|
(1
|
)
|
|||||
|
Units
purchased from Company
|
79
|
130
|
||||||
|
Units
closed
|
(36
|
)
|
(19
|
)
|
||||
|
End
of period
|
1,226
|
1,152
|
||||||
|
Total
company-owned, franchised and licensed restaurants, end of
period
|
1,541
|
1,546
|
||||||
Company
Restaurant Operations
During
the year ended December 31, 2008, we incurred a 1.4% decrease in same-store
sales, comprised of a 5.9% increase in guest check average and a 6.9%
decrease in guest counts. Company restaurant sales decreased $196.4 million, or
23.2%, primarily resulting from a 135 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 87.9% from 88.3%. Product costs decreased to 24.3% from
25.6% due to
favorable shifts in menu mix. Payroll
and benefits costs decreased to 41.9% from 42.1% primarily as a result
of a decrease in management labor and restaurant staffing related to improved
scheduling (0.8%), partially offset by the impact of unfavorable workers'
compensation claims development (0.3%) and higher incentive compensation (0.2%).
Occupancy costs increased slightly to 6.2% from 6.0% primarily
due
to base rent increases. Other operating expenses were comprised of
the following amounts and percentages of company restaurant sales:
|
Fiscal
Year Ended
|
||||||||||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Utilities
|
$
|
33,160
|
5.1
|
%
|
$
|
40,898
|
4.8
|
%
|
||||||||
|
Repairs
and maintenance
|
14,592
|
2.3
|
%
|
18,300
|
2.2
|
%
|
||||||||||
|
Marketing
|
23,243
|
3.6
|
%
|
27,469
|
3.3
|
%
|
||||||||||
|
Legal
|
2,283
|
0.4
|
%
|
3,621
|
0.4
|
%
|
||||||||||
|
Other direct
costs
|
26,904
|
4.2
|
%
|
33,022
|
3.9
|
%
|
||||||||||
|
Other
operating expenses
|
$
|
100,182
|
15.5
|
%
|
$
|
123,310
|
14.6
|
%
|
||||||||
The
increase in utilities expense as a percentage of company restaurant
sales is primarily the result of higher natural gas costs. The increase in
marketing expense as a percentage of company restaurant sales results from
incremental advertising expenses during the fourth quarter of 2008. 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:
|
Fiscal
Year Ended
|
||||||||||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||||||||||
|
(Dollars in
thousands)
|
||||||||||||||||
|
Royalties
|
$
|
70,081
|
62.6
|
%
|
$
|
63,127
|
66.6
|
%
|
||||||||
|
Initial
and other fees
|
4,949
|
4.4
|
%
|
6,349
|
6.7
|
%
|
||||||||||
|
Occupancy
revenue
|
36,977
|
33.0
|
%
|
25,271
|
26.7
|
%
|
||||||||||
|
Franchise
and license revenue
|
112,007
|
100.0
|
%
|
94,747
|
100.0
|
%
|
||||||||||
|
Occupancy
costs
|
28,451
|
25.4
|
%
|
20,225
|
21.4
|
%
|
||||||||||
|
Other
direct costs
|
6,482
|
5.8
|
%
|
7,780
|
8.2
|
%
|
||||||||||
|
Costs
of franchise and license revenue
|
$
|
34,933
|
31.2
|
%
|
$
|
28,005
|
29.6
|
%
|
||||||||
15
Royalties
increased by $7.0 million, or 11.0%, primarily resulting from a 137 equivalent
unit increase in franchised and licensed units, as compared to the prior year,
offset by the effects of a 4.6% decrease in same-store sales. The increase in
equivalent units resulted from the sale of company-owned restaurants to
franchisees. The decrease in initial fees of $1.4 million, or 22.1% primarily
results from the sale of 79 restaurants to franchisees during fiscal
2008 as compared to 130 restaurants sold to franchisees during fiscal 2007. The
increase in occupancy revenue of $11.7 million, or 46.3%, is also primarily the
result of the sale of restaurants to franchisees.
Costs of
franchise and license revenue increased by $6.9 million, or 24.7%. The increase
in occupancy costs of $8.2 million, or 40.7%, is primarily the result
of the sale of company-owned restaurants to franchisees. Other direct costs
benefited by $1.3 million, or 16.7%, 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 31.2% for the year ended December 31, 2008 from 29.6% for
the year ended December 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.
General and administrative
expenses are comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Share-based
compensation
|
$
|
4,117
|
$
|
4,774
|
||||
|
General
and administrative expenses
|
56,853
|
62,600
|
||||||
|
Total
general and administrative expenses
|
$
|
60,970
|
$
|
67,374
|
||||
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
December 31, 2008. The $5.7 million decrease in general and administrative
expenses is primarily due to a reorganization to support our ongoing transition
to a franchise-focused business model.
Depreciation and amortization
is comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Depreciation
of property and equipment
|
$
|
30,609
|
$
|
37,994
|
||||
|
Amortization
of capital lease assets
|
3,420
|
4,703
|
||||||
|
Amortization
of intangible assets
|
5,737
|
6,650
|
||||||
|
Total
depreciation and amortization
|
$
|
39,766
|
$
|
49,347
|
||||
The
overall decrease in depreciation and amortization expense is due 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:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Gains
on sales of assets and other, net
|
$
|
(18,701
|
)
|
$
|
(39,028
|
)
|
||
|
Restructuring
charges and exit costs
|
9,022
|
6,870
|
||||||
|
Impairment
charges
|
3,295
|
1,076
|
||||||
|
Operating
gains, losses and other charges, net
|
$
|
(6,384
|
)
|
$
|
(31,082
|
)
|
||
During
the year ended December 31, 2008, we recognized $15.2 million of gains on the
sale of 79 restaurant operations to 22 franchisees for net proceeds of $35.5
million (which
includes notes receivable of $2.7 million) compared to $32.8 million of
gains on the sale of 130 restaurant operations to 30 franchisees for net
proceeds of $73.2 million during the prior year. The remaining gains for the two
periods resulted from the sale of real estate related to closed restaurants and
restaurants leased to franchisees as well as the recognition of deferred
gains.
Restructuring
charges and exit costs are comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Exit
costs
|
$
|
3,435
|
$
|
1,665
|
||||
|
Severance
and other restructuring charges
|
5,587
|
5,205
|
||||||
|
Total
restructuring and exist costs
|
$
|
9,022
|
$
|
6,870
|
||||
Exit
costs for the year ended December 31, 2008 increased by $1.8 million, resulting
primarily from changes in sublease assumptions related to closed stores.
Severance and other restructuring charges for the year ended December 31, 2008
increased by $0.4 million. The $5.6 million of severance and other
restructuring charges for the year ended December 31, 2008 resulted
primarily from a reorganization to support our ongoing transition to a
franchise-focused business model. The reorganization led to the elimination of
approximately 70 positions. The $5.2 million of severance and other
restructuring charges for the year ended December 26, 2007 resulted primarily
from the reorganization of our field management structure, which led to the
elimination of 80 to 90 out-of-restaurant operational positions. Of these
eliminations, approximately 30 employees were reassigned to other positions
within the Company.
16
Impairment
charges of $3.3 million for the year ended December 31, 2008 and $1.1 million
for the year ended December 26, 2007 relate to closed and underperforming
restaurants as well as restaurants identified as held for sale.
Operating income was $60.9
million during 2008 compared with $79.8 million during 2007.
Interest expense, net is
comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Interest
on senior notes
|
$
|
17,740
|
$
|
17,452
|
||||
|
Interest
on credit facilities
|
9,278
|
16,296
|
||||||
|
Interest
on capital lease liabilities
|
3,804
|
3,868
|
||||||
|
Letters
of credit and other fees
|
2,019
|
2,280
|
||||||
|
Interest
income
|
(1,289
|
)
|
(1,372
|
)
|
||||
|
Total
cash interest
|
31,552
|
38,524
|
||||||
|
Amortization
of deferred financing costs
|
1,100
|
1,177
|
||||||
|
Interest
accretion on other liabilities
|
2,805
|
3,256
|
||||||
|
Total
interest expense, net
|
$
|
35,457
|
$
|
42,957
|
||||
The
decrease in interest expense resulted primarily from the repayment
of $25.9 million and $100.3 million
on the credit facilities during the years ended December 31, 2008 and December
26, 2007, respectively. The
decrease from fiscal 2007 is partially offset by
a 53rd week of
interest in 2008.
Other nonoperating expenses, net
were $9.2 million for the year ended December 31, 2008 compared with $0.7
million for the year ended December 26, 2007. Of the
2008 amount, approximately $5.4 million resulted from the discontinuance of
hedge accounting related to our interest rate swap. The $5.4 million of expense
is comprised of a $4.2 million change in the fair value of the swap and $1.2
million of amortization of losses included in accumulated other comprehensive
income. The remainder of the increase in other nonoperating expenses relates
primarily to losses on investments included in our deferred compensation
plan.
The provision for income taxes was
$1.6 million compared with $4.8 million for the years ended December 31,
2008 and December 26, 2007, respectively. The provision for income taxes
for the year ended December 31, 2008 included the recognition of $0.7 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 year ended December
26, 2007 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 years ended December 31, 2008
and December 26, 2007, we recognized approximately $0.1 million and $4.5
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 year ended December 31, 2008, as compared to the year
ended December 26, 2007, was primarily due 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 $14.7 million
for the year ended December 31, 2008 compared with $31.4 million for the year
ended December 26, 2007 due to the factors noted above.
2007
Compared with 2006
Unit
Activity
|
2007
|
2006
|
|||||||
|
Company-owned
restaurants, beginning of period
|
521
|
543
|
||||||
|
Units
opened
|
5
|
3
|
||||||
|
Units
acquired from franchisees
|
1
|
1
|
||||||
|
Units
sold to franchisees
|
(130
|
)
|
—
|
|||||
|
Units
closed
|
(3
|
)
|
(26
|
)
|
||||
|
End
of period
|
394
|
521
|
||||||
|
Franchised
and licensed restaurants, beginning of period
|
1,024
|
1,035
|
||||||
|
Units
opened
|
18
|
17
|
||||||
|
Units
acquired by Company
|
(1
|
)
|
(1
|
)
|
||||
|
Units
purchased from Company
|
130
|
—
|
||||||
|
Units
closed
|
(19
|
)
|
(27
|
)
|
||||
|
End
of period
|
1,152
|
1,024
|
||||||
|
Total
company-owned, franchised and licensed restaurants, end of
period
|
1,546
|
1,545
|
||||||
17
Company
Restaurant Operations
During
the year ended December 26, 2007, we realized a 0.3% increase in same-store
sales, comprised of a 4.6% increase in guest check average and a 4.1%
decrease in guest counts. Company restaurant sales decreased $59.8 million, or
6.6%, primarily from a 42 equivalent-unit decrease in company-owned
restaurants. The decrease in equivalent units primarily resulted from the sale
of 130 company-owned restaurants to franchisees as part of our Franchise Growth
Initiative which began in fiscal 2007.
Total
costs of company restaurant sales as a percentage of company restaurant sales
increased to 88.3% from 86.4%. Product costs increased to 25.6% from 25.0% due
to modest changes in commodity costs and shifts in menu mix. Payroll and
benefits increased to 42.1% from 41.2% primarily as a result of increased
management staffing and wage increases (1.1%), offset by a 0.1% benefit from
favorable workers' compensation claims development. Occupancy costs
increased to 6.0% from 5.7% primarily due to increased property tax
expense. Other operating expenses were comprised of the following amounts and
percentages of company restaurant sales:
|
Fiscal
Year Ended
|
||||||||||||||||
|
December
26, 2007
|
December
27, 2006
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Utilities
|
$
|
40,898
|
4.8
|
%
|
$
|
44,329
|
4.9
|
%
|
||||||||
|
Repairs
and maintenance
|
18,300
|
2.2
|
%
|
18,252
|
2.0
|
%
|
||||||||||
|
Marketing
|
27,469
|
3.3
|
%
|
29,879
|
3.3
|
%
|
||||||||||
|
Legal
|
3,621
|
0.4
|
%
|
1,708
|
0.2
|
%
|
||||||||||
|
Other
|
33,022
|
3.9
|
%
|
37,236
|
4.1
|
%
|
||||||||||
|
Other
operating expenses
|
$
|
123,310
|
14.6
|
%
|
$
|
131,404
|
14.5
|
%
|
||||||||
The
decrease in utilities is primarily the result of lower natural gas costs. The
increase in legal expense is due to the unfavorable development of certain legal
matters during the year ended December 26, 2007.
Franchise
Operations
Franchise
and license revenue and costs of franchise and license revenue were comprised of
the following amounts and percentages of franchise and license
revenue:
|
Fiscal
Year Ended
|
||||||||||||||||
|
December
26, 2007
|
December
27, 2006
|
|||||||||||||||
|
(Dollars in
thousands)
|
||||||||||||||||
|
Royalties
|
$
|
63,127
|
66.6
|
%
|
$
|
60,217
|
67.2
|
%
|
||||||||
|
Initial
and other fees
|
6,349
|
6.7
|
%
|
1,086
|
1.2
|
%
|
||||||||||
|
Occupancy
revenue
|
25,271
|
26.7
|
%
|
28,367
|
31.6
|
%
|
||||||||||
|
Franchise
and license revenue
|
94,747
|
100.0
|
%
|
89,670
|
100.0
|
%
|
||||||||||
|
Occupancy
costs
|
20,225
|
21.4
|
%
|
19,784
|
22.1
|
%
|
||||||||||
|
Other
direct costs
|
7,780
|
8.2
|
%
|
8,126
|
9.0
|
%
|
||||||||||
|
Costs
of franchise and license revenue
|
$
|
28,005
|
29.6
|
%
|
$
|
27,910
|
31.1
|
%
|
||||||||
Royalties
increased by $2.9 million, or 4.8%, and initial fees increased $5.3 million,
primarily resulting from the sale of 130 company-owned restaurants to
franchisees. The sale of restaurants to franchisees resulted in a 22
equivalent-unit increase in franchised and licensed units compared to the prior
year. Additionally, franchised and licensed units realized a 1.7% increase
in same-store sales. The decline in occupancy revenue of $3.1 million, or 10.9%,
is comprised of a $5.4 million decrease attributable to the sale of
franchisee-operated real estate properties during 2006 and 2007, offset by a
$2.3 million increase in occupancy revenue primarily related to the sale of
company-owned restaurants to franchisees. We continue to collect royalties
from the franchisees operating restaurants at the properties sold during 2007
and 2006.
Costs of
franchise and license revenue increased by $0.1 million, or 0.3%. The increase
in occupancy costs of $0.4 million, or 2.2%, is comprised primarily of
a $1.5 million increase resulting from the sale of 130 company-owned
restaurants to franchisees, offset by a $1.0 million decrease in
occupancy costs resulting from the sale of franchisee-operated real estate
properties during 2006 and 2007. As a percentage of franchise and license
revenue, costs of franchise and license revenue decreased to 29.6% for the year
ended December 26, 2007 from 31.1% for the year ended December 27,
2006.
Other
Operating Costs and Expenses
Other
operating costs and expenses such as general and administrative expenses and
depreciation and amortization expense relate to both company and franchise
operations.
General and administrative
expenses are comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
26, 2007
|
December
27, 2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Share-based
compensation
|
$
|
4,774
|
$
|
7,627
|
||||
|
Other
general and administrative expenses
|
62,600
|
58,799
|
||||||
|
Total
general and administrative expenses
|
$
|
67,374
|
$
|
66,426
|
||||
The
increase in general and administrative expenses is primarily the result of
investments in corporate staffing and incentive compensation programs related to
strategic initiatives. The decrease in share-based compensation expense is
primarily the result of the vesting of certain restricted stock units and stock
options during 2007 and 2006.
18
Depreciation and amortization
is comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
26, 2007
|
December
27, 2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Depreciation
of property and equipment
|
$
|
37,994
|
$
|
44,133
|
||||
|
Amortization
of capital lease assets
|
4,703
|
4,682
|
||||||
|
Amortization
of intangible assets
|
6,650
|
6,475
|
||||||
|
Total
depreciation and amortization
|
$
|
49,347
|
$
|
55,290
|
||||
The
overall decrease in depreciation and amortization expense is due to the sale of
real estate properties during 2007 and 2006 and the sale of 130 company-owned
restaurants to franchisees during 2007.
Operating gains, losses and other
charges, net represent gains or losses on the sale of assets,
restructuring charges, exit costs and impairment charges and were comprised of
the following:
|
Fiscal
Year Ended
|
||||||||
|
December
26, 2007
|
December
27, 2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Gains
on dispositions of assets and other, net
|
$
|
(39,028
|
)
|
$
|
(56,801
|
)
|
||
|
Restructuring
charges and exit costs
|
6,870
|
6,225
|
||||||
|
Impairment
charges
|
1,076
|
2,694
|
||||||
|
Operating
gains, losses and other charges, net
|
$
|
(31,082
|
)
|
$
|
(47,882
|
)
|
||
Gains on
sales of assets and other, net of $39.0 million for the year ended December 26,
2007 include gains on sales of restaurant operations to franchisees, real estate
and other assets. During 2007, we sold 130 restaurant operations and
certain related real estate to 30 franchisees for net proceeds of $73.2
million as part of FGI. During 2006, we sold 81 company-owned,
franchisee-operated real estate properties and five surplus real estate
properties.
Restructuring
charges and exit costs were comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
26, 2007
|
December
27, 2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Exit
costs
|
$
|
1,665
|
$
|
4,254
|
||||
|
Severance
and other restructuring charges
|
5,205
|
1,971
|
||||||
|
Total
restructuring and exist costs
|
$
|
6,870
|
$
|
6,225
|
||||
Severance
and other restructuring charges for the year ended December 26, 2007 increased
by $3.2 million, resulting primarily from $1.9 million of severance
costs related to the reorganization of our field management structure, which led
to the elimination of 80 to 90 out-of-restaurant operational positions. Of these
eliminations, approximately 30 employees were reassigned to other positions
within the Company. The $6.2 million of restructuring charges and exit costs for
the year ended December 27, 2006 resulted primarily from the closing of 14
underperforming units, in addition to severance and other restructuring costs
associated with the termination of approximately 41 out-of-restaurant support
staff positions.
Impairment
charges of $1.1 million for the year ended December 26, 2007 and $2.7 million
for the year ended December 27, 2006 relate to either closed or underperforming
restaurants.
Operating income was $79.8
million during 2007 compared with $110.5 million during 2006.
Interest expense, net is
comprised of the following:
|
Fiscal
Year Ended
|
||||||||
|
December
26, 2007
|
December
27, 2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Interest
on senior notes
|
$
|
17,452
|
$
|
17,452
|
||||
|
Interest
on credit facilities
|
16,296
|
27,889
|
||||||
|
Interest
on capital lease liabilities
|
3,868
|
4,361
|
||||||
|
Letters
of credit and other fees
|
2,280
|
2,999
|
||||||
|
Interest
income
|
(1,372
|
)
|
(1,822
|
)
|
||||
|
Total
cash interest
|
38,524
|
50,879
|
||||||
|
Amortization
of deferred financing costs
|
1,177
|
3,316
|
||||||
|
Interest
accretion on other liabilities
|
3,256
|
3,525
|
||||||
|
Total
interest expense, net
|
$
|
42,957
|
$
|
57,720
|
||||
The
decrease in interest expense resulted primarily from the repayment
of $100.3 million and $100.5 million of debt during the years ended
December 26, 2007 and December 27, 2006, respectively, as well as lower interest
rates resulting from the refinancing of our credit facilities during
2006.
Other nonoperating expenses, net
were $0.7 million for the year ended December 26, 2007 compared
with $8.0 million for the year ended December 27, 2006. The expense for the
2006 period primarily represents an $8.5 million loss on early
extinguishment of debt from the write-off of deferred financing costs associated
with the debt prepayments made during the year and the refinancing of our
credit facilities.
19
The provision for income taxes was
$4.8 million compared with $14.7 million for the years ended December 26, 2007
and December 27, 2006, respectively. The provision for income taxes for the
year ended December 26, 2007 also included 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 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 generated in previous periods. In establishing
our valuation allowance, we had previously taken into consideration certain tax
planning strategies involving the sale of appreciated properties.
The deferred tax provision of $12.1 million for the year ended December 27,
2006 related to our reevaluation of our tax planning strategies in light of the
sale of appreciated properties during 2006. In addition, during 2006 and
2007, we utilized certain federal and state net operating loss carryforwards
whose valuation allowance was established in connection with fresh start
reporting on January 7, 1998. Accordingly, for the years ended December 26, 2007
and December 27, 2006, we recognized approximately $4.5 million and $0.7
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.
Net income was $31.4 million
for the year ended December 26, 2007 compared with $30.3 million for the year
ended December 27, 2006 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
11) and, in recent years, cash proceeds from the sale of surplus
properties and sales of restaurant operations to franchisees, to the extent
allowed by our Credit Facility. Principal uses of cash are operating expenses,
capital expenditures and debt repayments.
The
following table presents a summary of our sources and uses of cash and cash
equivalents for the periods indicated:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Net
cash provided by operating activities
|
$
|
20,483
|
$
|
50,295
|
||||
|
Net
cash provided by investing activities
|
9,661
|
47,661
|
||||||
|
Net
cash used in financing activities
|
(30,667
|
)
|
(102,617
|
)
|
||||
|
Net
decrease in cash and cash equivalents
|
$
|
(523
|
)
|
$
|
(4,661
|
)
|
||
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 2009, 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 $9.7 million for the year ended
December 31, 2008. These cash flows primarily represent net proceeds of
$37.5 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 $33.1 million for the year ended
December 31, 2008, of which $5.2 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:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Facilities
|
$
|
10,432
|
$
|
12,447
|
||||
|
New
construction
|
4,992
|
8,325
|
||||||
|
Remodeling
|
8,306
|
7,057
|
||||||
|
Strategic
initiatives
|
3,175
|
1,107
|
||||||
|
Other
|
975
|
1,916
|
||||||
|
Total
capital expenditures
|
27,880
|
30,852
|
||||||
|
Acquisitions
|
—
|
2,208
|
||||||
|
Total
capital expenditures and acquisitions
|
$
|
27,880
|
$
|
33,060
|
||||
We generally expect our capital requirements to trend downward as we
reduce our company-owned restaurant portfolio and remain selective in our new
restaurant investments.
Cash
flows used in financing activities were $30.7 million for the year ended
December 31, 2008, which included $24.4 million of term loan prepayments and
$1.5 million of scheduled term loan payments made through a combination of asset
sale proceeds, as noted above, and cash generated from operations.
Our
Credit Facility consists of a $50 million revolving credit facility (including
up to $10 million for a revolving letter of credit facility), a $126.7 million
term loan and an additional $37 million letter of credit facility. At December
31, 2008, we had outstanding letters of credit of $35.2 million under our letter
of credit facility. There were no outstanding letters of credit under our
revolving facility and no revolving loans outstanding at December 31, 2008.
These balances result in availability of $1.8 million under our letter of
credit facility and $50.0 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 revolving
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 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 December 31, 2008.
20
As of
December 31, 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. As
of December 31, 2008, the weighted-average interest rate under the term loan,
inclusive of our interest rate swap on $100 million of the term loan,
was 6.36%. Exclusive of our interest rate swap, the weighted-average
interest rate under the term loan as of December 31, 2008 was
4.35%.
Our
future contractual obligations and commitments at December 31, 2008 consist of
the following:
|
Payments
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
than 1 Year
|
1-2
Years
|
3-4
Years
|
5
Years and Thereafter
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Long-term
debt
|
$
|
302,020
|
$
|
1,403
|
$
|
2,743
|
$
|
297,874
|
$
|
—
|
||||||||||
|
Capital
lease obligations
(a)
|
43,844
|
7,282
|
13,518
|
10,712
|
12,332
|
|||||||||||||||
|
Operating
lease obligations
|
361,617
|
43,976
|
78,553
|
63,251
|
175,837
|
|||||||||||||||
|
Interest
obligations (a)
|
98,639
|
26,422
|
52,548
|
19,669
|
—
|
|||||||||||||||
|
Pension
and other defined contribution
plan
obligations (b)
|
1,573
|
1,573
|
—
|
—
|
—
|
|||||||||||||||
|
Purchase
obligations (c)
|
199,763
|
184,834
|
14,929
|
—
|
—
|
|||||||||||||||
|
Total
|
$
|
1,007,456
|
$
|
265,490
|
$
|
162,291
|
$
|
391,506
|
$
|
188,169
|
||||||||||
|
(a)
|
Interest
obligations represent payments related to our long-term debt outstanding
at December 31, 2008. For long-term debt with variable rates, we have used
the rate applicable at December 31, 2008 to project interest over the
periods presented in the table above. The capital lease obligation amounts
above are inclusive of interest.
|
|
|
(b)
|
Pension
and other defined contribution plan obligations are estimates based on
facts and circumstances at December 31, 2008. Amounts cannot currently be
estimated for more than one year.
|
|
|
(c)
|
Purchase
obligations include amounts payable under purchase contracts for food and
non-food products. In most cases, these agreements do not obligate us to
purchase any specific volumes and include provisions that
would allow us to cancel such agreements with appropriate notice. Amounts
included in the table above represent our estimate of purchase obligations
during the periods presented if we were to cancel these contracts
with appropriate notice. We would likely take delivery of goods under such
circumstances.
|
As
discussed in Note 14 to our Consolidated Financial Statements, effective
December 28, 2006, we adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN 48"). At December
31,
2008, we had
a reserve for unrecognized tax benefits including potential interest and
penalties totaling $1.3 million.
Due to the uncertainties related to these tax matters, we are unable to make a
reasonably reliable estimate when cash settlement with a taxing authority will
occur.
At
December 31, 2008, our working capital deficit was $53.7 million compared with
$73.6 million at December 26, 2007. The decrease in working capital deficit
resulted primarily from the sale of company-owned restaurants to franchisees
during 2007 and 2008. We are able to operate with a substantial working capital
deficit because (1) restaurant operations and most food service operations
are conducted primarily on a cash (and cash equivalent) basis with a low level
of accounts receivable, (2) rapid turnover allows a limited investment in
inventories, and (3) accounts payable for food, beverages and supplies
usually become due after the receipt of cash from the related
sales.
Off-Balance
Sheet Arrangements
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 our 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. Interest rate
differentials paid or received under the swap agreement will be recognized as
adjustments to interest expense.
Prior to
December 26, 2007, gains and losses on the swap were recorded as a component of
accumulated other comprehensive income in our Consolidated Statement of
Shareholders' Deficit and Comprehensive Income (Loss) in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." At December 26, 2007, we determined that a
portion of the underlying cash flows related to the swap (i.e., interest
payments on the first $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 restaurant
operations to franchisees. As a result, we discontinued hedge accounting
treatment and recorded approximately $0.4 million of losses as a component of
other nonoperating expense (income), net in our Consolidated Statement of
Operations for the year ended December 26, 2007. The losses related to the
fair value of the swap included in accumulated other comprehensive income as of
December 26, 2007 are 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.
During
the year ended December 31, 2008, we amortized $1.2 million of the losses
related to the fair value of the swap included in accumulated other
comprehensive income and recorded changes in the fair value of the swap of $4.2
million to other nonoperating expense.
21
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our Consolidated Financial Statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to self-insurance liabilities,
impairment of long-lived assets, and restructuring and exit costs. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Consolidated Financial
Statements:
Self-insurance liabilities.
We record liabilities for insurance claims during periods in which we
have been insured under large deductible programs or have been self-insured for
our medical and dental claims and workers’ compensation, general/product and
automobile insurance liabilities. Maximum self-insured retention, including
defense costs per occurrence, ranges from $0.5 million to $1.0 million per
individual claim for workers’ compensation and for general/product and
automobile liability. The liabilities for prior and current estimated incurred
losses are discounted to their present value based on expected loss payment
patterns determined by independent actuaries using our actual historical
payments. These estimates include assumptions regarding claims frequency and
severity as well as changes in our business environment, medical costs and the
regulatory environment that could impact our overall self-insurance
costs.
Total
discounted workers' compensation and general liability insurance liabilities at
December 31, 2008 and December 26, 2007 were $37.1 million reflecting
a 3.5% discount rate and $39.4 million reflecting a 4.5% discount
rate, respectively. The related undiscounted amounts at such dates were $40.5
million and $44.0 million, respectively.
Impairment of long-lived
assets. We evaluate our long-lived assets for impairment at the
restaurant level on a quarterly basis or whenever changes or events indicate
that the carrying value may not be recoverable. We assess impairment of
restaurant-level assets based on the operating cash flows of the restaurant and
our plans for restaurant closings. Generally, all units with negative cash flows
from operations for the most recent twelve months at each quarter end are
included in our assessment. In performing our assessment, we must make
assumptions regarding estimated future cash flows, including estimated proceeds
from similar asset sales, and other factors to determine both the recoverability
and the estimated fair value of the respective assets. If the long-lived assets
of a restaurant are not recoverable based upon estimated future, undiscounted
cash flows, we write the assets down to their fair value. If these estimates or
their related assumptions change in the future, we may be required to record
additional impairment charges.
During
2008, 2007 and 2006, we recorded impairment charges of $3.3 million, $1.1
million and $2.7 million, respectively, for underperforming restaurants,
including restaurants closed and company-owned restaurants classified as held
for sale. These charges are included as a component of operating gains,
losses and other charges, net in our Consolidated Statements of
Operations. At December 31, 2008, we had a total of five restaurants
with an aggregate net book value of approximately $0.5 million, after taking
into consideration impairment charges recorded, which had negative cash flows
from operations for the most recent twelve months.
Restructuring and exit costs.
As a result of changes in our organizational structure and in our
portfolio of restaurants, we have recorded charges for restructuring and exit
costs. These costs consist primarily of the costs of future obligations related
to closed units and severance and other restructuring charges for terminated
employees. These costs are included as a component of operating gains,
losses and other charges, net in our Consolidated Statements of
Operations.
Discounted
liabilities for future lease costs and the fair value of related subleases
of closed units are recorded when the units are closed. All other
costs related to closed units are expensed as incurred. In assessing the
discounted liabilities for future costs of obligations related to closed units,
we make assumptions regarding amounts of future subleases. If these assumptions
or their related estimates change in the future, we may be required to record
additional exit costs or reduce exit costs previously recorded. Exit costs
recorded for each of the periods presented include the effect of such changes in
estimates.
The most
significant estimate included in our accrued exit costs liabilities relates to
the timing and amount of estimated subleases. At December 31, 2008, our total
discounted liability for closed units was approximately $9.2 million, net of
$3.8 million related to existing sublease agreements and $1.6 million related to
properties for which we expect to enter into sublease agreements in the future.
If any of the estimates noted above or their related assumptions change in the
future, we may be required to record additional exit costs or reduce exit costs
previously recorded.
Income taxes. We record
valuation allowances against our deferred tax assets, when necessary, in
accordance with SFAS No. 109, "Accounting for Income Taxes." Realization of
deferred tax assets is dependent on future taxable earnings and is therefore
uncertain. We assess the likelihood that our deferred tax assets in each of the
jurisdictions in which we operate will be recovered from future taxable income.
Deferred tax assets do not include future tax benefits that we deem likely not
to be realized.
Share-based
compensation. As required by Statement of Financial Accounting
Standards No. 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment",
stock-based compensation is estimated for equity awards at fair value at the
grant date. We determine the fair value of stock options 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”). The fair
value of restricted stock units containing a market condition is determined
using the Monte Carlo valuation method, which utilizes multiple input variables
to determine the probability of the Company achieving the market condition.
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.
Recent Accounting
Pronouncements
See the New Accounting Standards section of Note 2 to our
Consolidated Financial Statements included in Part II, Item 8 of this report for
further details of recent accounting pronouncements
22
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 hedged 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 December 31,
2008, the swap effectively increased our ratio of fixed rate debt from
approximately 58% of total debt to approximately 91% of total debt.
Based on
the levels of borrowings under the credit facility at December 31, 2008 and
taking into consideration our interest rate swap, if interest rates changed by
100 basis points our annual cash flow and income before income taxes would
change by approximately $0.3 million. This computation is determined by
considering the impact of hypothetical interest rates on the variable rate
portion of the credit facility at December 31, 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 $122.9 million compared
with a book value of $175.4 million at December 31, 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 December 31, 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 by approximately $1.8 million and
would impact the pension plan's net periodic benefit cost by $0.1
million. The impact of a 25 basis point increase or decrease in discount rate
would decrease or increase our projected benefit obligation related to our other
defined benefit plans by less than $0.1 million and would impact the
plans' net periodic benefit cost by 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. In many cases, we believe we will be able to address
commodity cost increases which are significant and appear to be long-term in
nature by adjusting our menu pricing or changing our product delivery strategy.
However, competitive circumstances could limit such actions and, in those
circumstances, increases in commodity prices could lower our margins. Because of
the often short-term nature of commodity pricing aberrations and our ability to
change menu pricing or product delivery strategies in response to commodity
price increases, we believe that the impact of commodity price risk is not
significant.
We have
established a policy to identify, control and manage market risks which may
arise from changes in interest rates, commodity prices and other relevant rates
and prices. We do not use derivative instruments for trading
purposes.
See Index
to Financial Statements which appears on page F-1 herein.
23
None.
A. Disclosure Controls and
Procedures. As required by Rule 13a-15(b) under the Securities Exchange
Act of 1934, as amended, (the “Exchange Act”) our management conducted an
evaluation (under the supervision and with the participation of our President
and Chief Executive Officer, Nelson J. Marchioli, and our Executive Vice
President, Chief Administrative Officer and Chief Financial Officer, F.
Mark Wolfinger) as of the end of the period covered by this Annual Report on
Form 10-K, of the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on
that evaluation, Messrs. Marchioli and Wolfinger each concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Exchange Act, (i) is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and (ii) is accumulated and communicated to our management, including
Messrs. Marchioli and Wolfinger, as appropriate to allow timely decisions
regarding required disclosure.
B. Management’s Report on Internal
Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our
internal control system is designed to provide reasonable assurance to our
management and Board of Directors regarding the reliability of financial
reporting and the preparation and fair presentation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Management
has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2008. Management’s assessment was based on criteria set forth
in Internal Control -
Integrated Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based upon this assessment, management
concluded that, as of December 31, 2008, our internal control over financial
reporting was effective, based upon those criteria.
The
Company’s independent registered public accounting firm, KPMG LLP, has issued an
attestation report on our internal control over financial reporting, which
follows this report.
C. Changes in Internal Control Over
Financial Reporting. There have been no changes in our internal control
over financial reporting identified in connection with the evaluation required
by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal
quarter (our fourth fiscal quarter) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting
24
Report of Independent Registered
Public Accounting Firm
The Board
of Directors
Denny's
Corporation
We have
audited Denny’s Corporation’s (the Company) internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting
(Item 9A.B.). Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Denny’s Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Denny’s
Corporation and subsidiaries as of December 31, 2008 and December 26, 2007, and
the related consolidated statements of
operations, shareholders’ deficit and comprehensive income (loss), and cash
flows for each of the fiscal years in the three-year period ended December 31,
2008, and our report dated March 12, 2009 expressed an
unqualified opinion on those consolidated financial statements.
Greenville,
South Carolina
March 12,
2009
25
None.
Information
required by this item with respect to our executive officers and directors;
compliance by our directors, executive officers and certain beneficial owners of
our common stock with Section 16(a) of the Securities Exchange Act of 1934;
the committees of our Board of Directors; our Audit Committee Financial Expert;
and our Code of Ethics is furnished by incorporation by reference to information
under the captions entitled “Election of Directors”, “Section 16(a)
Beneficial Ownership Reporting Compliance”, and "Code of Ethics" in the
proxy statement (to be filed hereafter) in connection with Denny’s Corporation
2009 Annual Meeting of the Shareholders and possibly elsewhere in the proxy
statement (or will be filed by amendment to this report). The information
required by this item related to our executive officers appears in Item 1
of Part I of this report under the caption “Executive Officers of the
Registrant.”
The
information required by this item is furnished by incorporation by reference to
information under the captions entitled “Executive Compensation” and "Election
of Directors" in the proxy statement and possibly elsewhere in the proxy
statement (or will be filed by amendment to this report).
The
information required by this item is furnished by incorporation by reference to
information under the caption “General—Equity Security Ownership” in the proxy
statement and possibly elsewhere in the proxy statement (or will be filed by
amendment to this report).
The
information required by this item is furnished by incorporation by reference to
information under the captions “Related Party Transactions” and "Election
of Directors" in the proxy statement and possibly elsewhere in the proxy
statement (or will be filed by amendment to this report).
The
information required by this item is furnished by incorporation by reference to
information under the caption entitled “Selection of Independent Registered
Public Accounting Firm - 2008 Audit Information” and “Audit Committee’s
Pre-approved Policies and Procedures” in the proxy statement and possibly
elsewhere in the proxy statement (or will be filed by amendment to this
report).
(a)(1)
Financial Statements:
See the Index to Financial Statements which appears on page F-1
hereof.
(a)(2) Financial Statement
Schedules: No schedules are filed herewith because of the absence of
conditions under which they are required or because the information called for
is in our Consolidated Financial Statements or notes thereto appearing elsewhere
herein.
(a)(3) Exhibits: Certain of the
exhibits to this Report, indicated by an asterisk, are hereby incorporated by
reference from other documents on file with the Commission with which they are
electronically filed, to be a part hereof as of their respective
dates.
|
Exhibit
No.
|
Description
|
|
*3.1
|
Restated
Certificate of Incorporation of Denny’s Corporation dated March 3, 2003 as
amended by Certificate of Amendment to Restated Certificate of
Incorporation to Increase Authorized Capitalization dated August 25, 2004
(incorporated by reference to Exhibit 3.1 to the Annual Report on Form
10-K of Denny’s Corporation for the year ended December 29,
2004)
|
|
*3.2
|
Certificate
of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock dated August 27, 2004 (incorporated by reference to
Exhibit 3.3 to Current Report on Form 8-K of Denny’s Corporation filed
with the Commission on August 27, 2004)
|
| *3.2.1 |
Certificate
of Elimination of the Series A Junior Participating Preferred Stock of
Denny’s Corporation dated January 5, 2009 (incorporated by reference
to Exhibit 3.2 to Current Report on Form 8-K of Denny’s Corporation filed
with the Commission on January 6, 2009)
|
|
*3.3
|
By-Laws
of Denny’s Corporation, as effective as of November 12, 2008 (incorporated
by reference to Exhibit 3.1 to Current Report on Form 8-K of Denny’s
Corporation filed with the Commission on November 17,
2008)
|
|
*4.1
|
10%
Senior Notes due 2012 Indenture dated as of October 5, 2004 between
Denny’s Holdings, Inc., as Issuer, Denny’s Corporation, as Guarantor, and
U.S. Bank National Association, as Trustee (incorporated by reference to
Exhibit 4.3 to the Quarterly Report on Form 10-Q of Denny’s Corporation
for the quarter ended September 29, 2004)
|
|
*4.2
|
Form
of 10% Senior Note due 2012 and annexed Guarantee (included in Exhibit 4.1
hereto)
|
|
*4.3
|
Amended
and Restated Rights Agreement, dated as of January 5, 2005, between
Denny's Corporation and Continental Stock Transfer and Trust Company, as
Rights Agent (incorporated by reference to Exhibit 1 to the Form 8-A/A of
Denny's Corporation, filed with the Commission January 12, 2005 relating
to preferred stock purchase
rights)
|
26
|
Exhibit
No.
|
Description
|
| +*10.1 |
Advantica
Restaurant Group Director Stock Option Plan, as amended through January
24, 2001 (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of Denny’s Corporation (then known as Advantica) filed
with the Commission on May 14, 2001)
|
| +*10.2 |
Advantica
Stock Option Plan as amended through November 28, 2001 (incorporated by
reference to Exhibit 10.19 to the Annual Report on Form 10-K of Denny’s
Corporation (then known as Advantica) for the year ended December 26,
2001)
|
|
+*10.3
|
Form
of Agreement, dated February 9, 2000, providing certain retention
incentives and severance benefits for company management (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Denny’s
Corporation (then known as Advantica) for the quarter ended March 29,
2000)
|
|
+*10.4
|
Denny’s,
Inc. Omnibus Incentive Compensation Plan for Executives (incorporated by
reference to Exhibit 99 to the Registration Statement on Form S-8 of
Denny’s Corporation (No. 333-103220) filed with the Commission on February
14, 2003)
|
|
+*10.5
|
Description
of amendments to the Denny’s, Inc. Omnibus Incentive Compensation Plan for
Executives, the Advantica Stock Option Plan and the Advantica Restaurant
Group Director Stock Option Plan (incorporated by reference to Exhibit
10.7 to the Quarterly Report on Form 10-Q of Denny’s Corporation for the
quarter ended September 29, 2004)
|
|
+*10.6
|
Form
of stock option agreement to be used under the Denny’s Corporation 2004
Omnibus Incentive Plan (incorporated by reference to Exhibit 99.2 to the
Registration Statement on Form S-8 of Denny’s Corporation (File No.
333-120093) filed with the Commission on October 29,
2004)
|
|
+*10.7
|
Form
of deferred stock unit award certificate to be used under the Denny’s
Corporation 2004 Omnibus Incentive Plan (incorporated by reference to
Exhibit 10.27 to the Annual Report on Form 10-K of Denny’s Corporation for
the year ended December 29, 2004)
|
|
+*10.8
|
Employment
Agreement dated May 11, 2005 between Denny’s Corporation and Nelson J.
Marchioli (incorporated by reference to Exhibit 99.1 to the Current Report
on Form 8-K of Denny’s Corporation filed with the Commission on May 13,
2005)
|
|
+*10.9
|
Amendment
dated November 10, 2006 to the Employment Agreement dated May 11, 2005
between Denny’s Corporation, Denny’s Inc. and Nelson J. Marchioli
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K of Denny's Corporation filed with the Commission on November 13,
2006)
|
| +10.10 |
Amendment
dated December 12, 2008 to the Employment Agreement dated May 11, 2005 and
amended November 10, 2006, between Denny’s Corporation, Denny’s Inc. and
Nelson J. Marchioli
|
| +10.11 |
Amendment
dated December 10, 2008 to the letter agreement dated February 09, 2000
between Denny’s Corporation, then known as Advantica, and Janis S.
Emplit
|
|
+*10.12
|
Employment
Offer Letter dated August 16, 2005 between Denny’s Corporation and F. Mark
Wolfinger (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of Denny’s Corporation for the quarter ended September
28, 2005)
|
|
+*10.13
|
Written
description of the 2006 Long Term Growth Incentive Program (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Denny's Corporation for the quarter ended March 29,
2006)
|
|
*10.14
|
Master
Purchase Agreement and Escrow Instructions (incorporated by reference to
Exhibit 2.1 to the Current Report on Form 8-K of Denny's Corporation filed
with the Commission on September 28, 2006)
|
| *10.15 |
Amended
and Restated Credit Agreement dated as of December 15, 2006, among Denny’s
Inc. and Denny’s Realty, LLC, as Borrowers, Denny’s Corporation, Denny’s
Holdings, Inc., and DFO, LLC, as Guarantors, the Lenders named therein,
Bank of America, N.A., as Administrative Agent and Collateral Agent, and
Banc of America Securities LLC as Sole Lead Arranger and Sole Bookrunner
(incorporated by reference to Exhibit 10.25 to the Annual Report on Form
10-K of Denny's Corporation for the year ended December 27,
2006)
|
| *10.16 |
Amended
and Restated Guarantee and Collateral Agreement dated as of December 15,
2006, among Denny’s Inc., Denny’s Realty, LLC, Denny’s Corporation,
Denny’s Holdings, Inc., DFO, LLC, each other Subsidiary Loan Party
referenced therein and Bank of America, N.A., as Collateral Agent
(incorporated by reference to Exhibit 10.26 to the Annual Report on Form
10-K of Denny's Corporation for the year ended December 27,
2006)
|
|
+*10.17
|
Written
Description of Denny’s 2007 Corporate Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Denny’s
Corporation for the quarter ended March 28, 2007)
|
|
+*10.18
|
Written
Description of 2007 Long-Term Growth Incentive Program (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Denny’s
Corporation for the quarter ended March 28, 2007)
|
|
*10.19
|
Amendment
No. 1 dated as of March 8, 2007 to the Amended and Restated Credit
Agreement dated as of December 15, 2006 (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of Denny’s Corporation
filed with the Commission on March 14,
2007)
|
27
|
Exhibit
No.
|
Description
|
|
+*10.20
|
Award
certificate evidencing restricted stock unit award to F. Mark Wolfinger,
effective July 9, 2007 (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Denny’s Corporation filed with the
Commission on July 12, 2007)
|
|
+*10.21
|
Written
Description of Denny's Paradigm Shift Incentive Program (incorporated by
reference to the Current Reports on Form 8-K of Denny's Corporation
filed with the Commission on December 4, 2007 and May 27,
2008)
|
|
+*10.22
|
Written
Description of Denny's 2008 Corporate Incentive Program
(incorporated by reference to the Current Report on Form 8-K of Denny's
Corporation filed with the Commission on January 11,
2008)
|
|
+*10.23
|
Denny's
Corporation Executive Severance Pay Plan (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of Denny's Corporation
filed with the Commission on February 4, 2008)
|
| +*10.24 |
Denny's
Corporation 2008 Omnibus Incentive Plan (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of Denny's Corporation
filed with the Commission on May 27, 2008)
|
| +*10.25 |
Denny's
Corporation Amended and Restated 2004 Omnibus Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Denny's Corporation for the quarter ended June 25,
2008)
|
| +*10.26 |
Form
of Performance-Based Restricted Stock Unit Award Certificate (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of
Denny's Corporation for the quarter ended September 24,
2008)
|
| +*10.27 |
2008
Performance Restricted Stock Unit Program Description (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Denny's
Corporation for the quarter ended September 24, 2008)
|
| +10.28 |
Written
Description of Denny's 2009 Corporate Incentive
Program
|
|
21.1
|
Subsidiaries
of Denny’s
|
|
23.1
|
Consent
of KPMG LLP
|
|
31.1
|
Certification
of Nelson J. Marchioli, President and Chief Executive Officer of Denny’s
Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of F. Mark Wolfinger, Executive Vice President, Growth Initiatives and
Chief Financial Officer of Denny’s Corporation, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Statement
of Nelson J. Marchioli, President and Chief Executive Officer of Denny’s
Corporation, and F. Mark Wolfinger, Executive Vice President, Growth
Initiatives and Chief Financial Officer of Denny’s Corporation,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002
|
|
+
|
Management
contracts or compensatory plans or
arrangements.
|
PLEASE
NOTE: It is inappropriate for investors to assume the accuracy of any covenants,
representations or warranties that may be contained in agreements or other
documents filed as exhibits to this Form 10-K. Any such covenants,
representations or warranties: may have been qualified or superseded by
disclosures contained in separate schedules not filed with this Form 10-K, may
reflect the parties’ negotiated risk allocation in the particular transaction,
may be qualified by materiality standards that differ from those applicable for
securities law purposes, and may not be true as of the date of this Form 10-K or
any other date.
28
DENNY’S
CORPORATION AND SUBSIDIARIES
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
|
F-2
|
|
Consolidated
Statements of Operations for each of the Three Fiscal Years in the Period
Ended December 31, 2008
|
F-3
|
|
Consolidated
Balance Sheets as of December 31, 2008 and December 26,
2007
|
F-4
|
|
Consolidated
Statements of Shareholders’ Deficit and Comprehensive Income (Loss) for
each of the Three Fiscal Years in the Period Ended December 31,
2008
|
F-5
|
|
Consolidated
Statements of Cash Flows for each of the Three Fiscal Years in the Period
Ended December 31, 2008
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
Report
of Independent Registered Public Accounting Firm
The Board
of Directors
Denny's
Corporation
We have
audited the accompanying consolidated balance sheets of Denny’s Corporation and
subsidiaries as of December 31, 2008 and December 26, 2007, and the related
consolidated statements of operations, shareholders’ deficit and comprehensive
income (loss), and cash flows for each of the fiscal years in the three-year
period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Denny’s Corporation and
subsidiaries as of December 31, 2008 and December 26, 2007, and the results of
their operations and their cash flows for each of the fiscal years in the
three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 12, 2009 expressed an
unqualified opinion on the effectiveness of the Company's internal control
over financial reporting.
Greenville,
South Carolina
March 12,
2009
F-2
Denny’s
Corporation and Subsidiaries
Consolidated
Statements of Operations
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In thousands, except per share
amounts)
|
||||||||||||
|
Revenue:
|
||||||||||||
|
Company
restaurant sales
|
$
|
648,264
|
$
|
844,621
|
$
|
904,374
|
||||||
|
Franchise
and license revenue
|
112,007
|
94,747
|
89,670
|
|||||||||
|
Total
operating revenue
|
760,271
|
939,368
|
994,044
|
|||||||||
|
Costs
of company restaurant sales:
|
||||||||||||
|
Product
costs
|
157,545
|
215,943
|
226,404
|
|||||||||
|
Payroll
and benefits
|
271,933
|
355,710
|
372,292
|
|||||||||
|
Occupancy
|
40,415
|
50,977
|
51,677
|
|||||||||
|
Other
operating expenses
|
100,182
|
123,310
|
131,404
|
|||||||||
|
Total
costs of company restaurant sales
|
570,075
|
745,940
|
781,777
|
|||||||||
|
Costs
of franchise and license revenue
|
34,933
|
28,005
|
27,910
|
|||||||||
|
General
and administrative expenses
|
60,970
|
67,374
|
66,426
|
|||||||||
|
Depreciation
and amortization
|
39,766
|
49,347
|
55,290
|
|||||||||
|
Operating
gains, losses and other charges, net
|
(6,384
|
)
|
(31,082
|
)
|
(47,882
|
)
|
||||||
|
Total
operating costs and expenses
|
699,360
|
859,584
|
883,521
|
|||||||||
|
Operating
income
|
60,911
|
79,784
|
110,523
|
|||||||||
|
Other
expenses:
|
||||||||||||
|
Interest
expense, net
|
35,457
|
42,957
|
57,720
|
|||||||||
|
Other
nonoperating expense, net
|
9,190
|
668
|
8,029
|
|||||||||
|
Total
other expenses, net
|
44,647
|
43,625
|
65,749
|
|||||||||
|
Net
income before income taxes and cumulative effect of change in accounting
principle
|
16,264
|
36,159
|
44,774
|
|||||||||
|
Provision
for income taxes
|
1,602
|
4,808
|
14,668
|
|||||||||
|
Net
income before cumulative effect of change in accounting
principle
|
14,662
|
31,351
|
30,106
|
|||||||||
|
Cumulative
effect of change in accounting principle, net of tax
|
—
|
—
|
232
|
|||||||||
|
Net
income
|
$
|
14,662
|
$
|
31,351
|
$
|
30,338
|
||||||
|
Basic
net income per share:
|
||||||||||||
|
Basic
net income before cumulative effect of change in accounting principle, net
of tax
|
$
|
0.15
|
$
|
0.33
|
$
|
0.33
|
||||||
|
Cumulative
effect of change in accounting principle, net of tax
|
—
|
—
|
0.00
|
|||||||||
|
Basic
net income per share
|
$
|
0.15
|
$
|
0.33
|
$
|
0.33
|
||||||
|
Diluted
net income per share:
|
||||||||||||
|
Diluted
net income before cumulative effect of change in accounting principle, net
of tax
|
$
|
0.15
|
$
|
0.32
|
$
|
0.31
|
||||||
|
Cumulative
effect of change in accounting principle, net of tax
|
—
|
—
|
0.00
|
|||||||||
|
Diluted
net income per share
|
$
|
0.15
|
$
|
0.32
|
$
|
0.31
|
||||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
95,230
|
93,855
|
92,250
|
|||||||||
|
Diluted
|
98,842
|
98,844
|
97,364
|
|||||||||
See notes
to consolidated financial statements.
F-3
Denny’s
Corporation and Subsidiaries
Consolidated
Balance Sheets
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Assets
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
21,042
|
$
|
21,565
|
||||
|
Receivables,
less allowance for doubtful accounts of $475 and $75,
respectively
|
15,146
|
13,585
|
||||||
|
Inventories
|
5,455
|
6,485
|
||||||
|
Assets
held for sale
|
2,285
|
6,712
|
||||||
|
Prepaid
and other current assets
|
9,531
|
9,526
|
||||||
|
Total
Current Assets
|
53,459
|
57,873
|
||||||
|
Property,
net of accumulated depreciation of $284,933 and $307,047,
respectively
|
159,978
|
184,610
|
||||||
|
Other
Assets:
|
||||||||
|
Goodwill
|
40,006
|
42,439
|
||||||
|
Intangible
assets, net
|
58,832
|
62,657
|
||||||
|
Deferred
financing costs, net
|
3,879
|
5,078
|
||||||
|
Other
noncurrent assets
|
31,041
|
24,699
|
||||||
|
Total
Assets
|
$
|
347,195
|
$
|
377,356
|
||||
|
Liabilities
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
maturities of notes and debentures
|
$
|
1,403
|
$
|
2,085
|
||||
|
Current
maturities of capital lease obligations
|
3,535
|
4,051
|
||||||
|
Accounts
payable
|
25,255
|
43,262
|
||||||
|
Other
current liabilities
|
76,924
|
82,069
|
||||||
|
Total
Current Liabilities
|
107,117
|
131,467
|
||||||
|
Long-Term
Liabilities:
|
||||||||
|
Notes
and debentures, less current maturities
|
300,617
|
325,971
|
||||||
|
Capital
lease obligations, less current maturities
|
22,084
|
20,845
|
||||||
|
Liability
for insurance claims, less current portion
|
25,832
|
27,148
|
||||||
|
Deferred
income taxes
|
12,345
|
11,579
|
||||||
|
Other
noncurrent liabilities and deferred credits
|
53,237
|
42,578
|
||||||
|
Total
Long-Term Liabilities
|
414,115
|
428,121
|
||||||
|
Total
Liabilities
|
521,232
|
559,588
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders'
Deficit
|
||||||||
|
Common
stock $0.01 par value; shares authorized - 135,000; issued and
outstanding: 2008 – 95,713; 2007 – 94,626
|
957
|
946
|
||||||
|
Paid-in
capital
|
538,911
|
533,612
|
||||||
|
Deficit
|
(688,984
|
)
|
(703,646
|
)
|
||||
|
Accumulated
other comprehensive loss, net of tax
|
(24,921
|
)
|
(13,144
|
)
|
||||
|
Total
Shareholders' Deficit
|
(174,037
|
)
|
(182,232
|
)
|
||||
|
Total
Liabilities and Shareholders' Deficit
|
$
|
347,195
|
$
|
377,356
|
||||
See notes to
consolidated financial statements.
F-4
Denny’s
Corporation and Subsidiaries
Consolidated
Statements of Shareholders’ Deficit and Comprehensive Income (Loss)
|
Common
Stock
|
Accumulated
Other
Comprehensive
|
Total
Shareholders’
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Paid-in
Capital
|
(Deficit)
|
(Loss),
Net
|
Deficit
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Balance,
December 28, 2005
|
91,751
|
$ |
918
|
$ |
517,854
|
$ |
(765,335
|
)
|
$ |
(19,543
|
)
|
$ |
(266,106
|
)
|
||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
30,338
|
—
|
30,338
|
||||||||||||||||||
|
Recognition
of unrealized gain on hedged
transactions,
net of tax
|
—
|
—
|
—
|
—
|
(1,256
|
)
|
(1,256
|
)
|
||||||||||||||||
|
Minimum
pension liability adjustment, net of tax
|
—
|
—
|
—
|
—
|
3,376
|
3,376
|
||||||||||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
30,338
|
2,120
|
32,458
|
||||||||||||||||||
|
Share-based
compensation on equity classified
awards
|
—
|
—
|
5,316
|
—
|
—
|
5,316
|
||||||||||||||||||
|
Reclassification
of share-based compensation in
connection
with adoption of SFAS 123(R) (Note 15)
|
—
|
—
|
2,534
|
—
|
—
|
2,534
|
||||||||||||||||||
|
Issuance
of common stock for share-based
compensation
|
296
|
3
|
206
|
—
|
—
|
209
|
||||||||||||||||||
|
Exercise
of common stock options
|
1,139
|
11
|
2,001
|
—
|
—
|
2,012
|
||||||||||||||||||
|
Balance,
December 27, 2006
|
93,186
|
932
|
527,911
|
(734,997
|
)
|
(17,423
|
)
|
(223,577
|
)
|
|||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income (Note 2)
|
—
|
—
|
—
|
31,351
|
—
|
31,351
|
||||||||||||||||||
|
Recognition
of unrealized loss on hedged
transactions,
net of tax
|
—
|
—
|
—
|
—
|
(2,753
|
)
|
(2,753
|
)
|
||||||||||||||||
|
Reclassification
of unrealized loss on hedged
transactions
resulting from the loss of hedge accounting (Note 11)
|
—
|
—
|
—
|
—
|
400
|
400
|
||||||||||||||||||
|
Minimum
pension liability adjustment, net of tax
|
—
|
—
|
—
|
—
|
6,632
|
6,632
|
||||||||||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
31,351
|
4,279
|
35,630
|
||||||||||||||||||
|
Share-based
compensation on equity classified
awards
|
—
|
—
|
3,367
|
—
|
—
|
3,367
|
||||||||||||||||||
|
Issuance
of common stock for share-based
compensation
|
247
|
2
|
220
|
—
|
—
|
222
|
||||||||||||||||||
|
Exercise
of common stock options
|
1,193
|
12
|
2,114
|
—
|
—
|
2,126
|
||||||||||||||||||
|
Balance,
December 26, 2007
|
94,626
|
|
946
|
|
533,612
|
|
(703,646
|
)
|
|
(13,144
|
)
|
|
(182,232
|
)
|
||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
14,662
|
—
|
14,662
|
||||||||||||||||||
|
Amortization of
unrealized loss on hedged
transactions,
net of tax
|
—
|
—
|
—
|
—
|
1,166
|
1,166
|
||||||||||||||||||
|
Minimum
pension liability adjustment, net of tax
|
—
|
—
|
—
|
—
|
(12,943
|
)
|
(12,943
|
)
|
||||||||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
14,662
|
(11,777
|
)
|
2,885
|
|||||||||||||||||
|
Share-based
compensation on equity classified
awards
|
—
|
—
|
4,025
|
—
|
—
|
4,025
|
||||||||||||||||||
|
Issuance
of common stock for share-based
compensation
|
385
|
4
|
286
|
—
|
—
|
290
|
||||||||||||||||||
|
Exercise
of common stock options
|
702
|
7
|
988
|
—
|
—
|
995
|
||||||||||||||||||
|
Balance
December 31, 2008
|
95,713
|
$ |
957
|
$ |
538,911
|
$ |
(688,984
|
)
|
$ |
(24,921
|
)
|
$ |
(174,037
|
)
|
||||||||||
See notes
to consolidated financial statements.
F-5
Denny’s
Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
income
|
$
|
14,662
|
$
|
31,351
|
$
|
30,338
|
||||||
|
Adjustments
to reconcile net income to cash flows provided by operating
activities:
|
||||||||||||
|
Cumulative
effect of change in accounting principle, net of tax
|
—
|
—
|
(232
|
)
|
||||||||
|
Depreciation
and amortization
|
39,766
|
49,347
|
55,290
|
|||||||||
|
Operating
gains, losses and other charges, net
|
(6,384
|
)
|
(31,082
|
)
|
(47,882
|
)
|
||||||
|
Amortization
of deferred financing costs
|
1,100
|
1,177
|
3,316
|
|||||||||
|
Loss
on early extinguishment of debt
|
6
|
545
|
8,508
|
|||||||||
|
Loss
on interest rate swap
|
5,351
|
400
|
—
|
|||||||||
|
Deferred
income tax expense
|
837
|
3,921
|
12,827
|
|||||||||
|
Share-based
compensation
|
4,117
|
4,774
|
7,627
|
|||||||||
|
Changes
in assets and liabilities, net of effects of acquisitions and
dispositions:
|
||||||||||||
|
Decrease
(increase) in assets:
|
||||||||||||
|
Receivables
|
(727
|
)
|
1,420
|
(2,164
|
)
|
|||||||
|
Inventories
|
1,030
|
1,714
|
9
|
|||||||||
|
Other
current assets
|
(5
|
)
|
(447
|
)
|
(719
|
)
|
||||||
|
Other
assets
|
(2,148
|
)
|
(3,338
|
)
|
(4,242
|
)
|
||||||
|
Increase
(decrease) in liabilities:
|
||||||||||||
|
Accounts
payable
|
(14,838
|
)
|
2,329
|
(2,338
|
)
|
|||||||
|
Accrued
salaries and vacations
|
(6,408
|
)
|
(2,514
|
)
|
(1,671
|
)
|
||||||
|
Accrued
taxes
|
(861
|
)
|
(2,076
|
)
|
947
|
|||||||
|
Other
accrued liabilities
|
(5,406
|
)
|
1,184
|
(11,523
|
)
|
|||||||
|
Other
noncurrent liabilities and deferred credits
|
(9,609
|
)
|
(8,410
|
)
|
(7,935
|
)
|
||||||
|
Net
cash flows provided by operating activities
|
20,483
|
50,295
|
40,156
|
|||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Purchase
of property
|
(27,880
|
)
|
(30,852
|
)
|
(32,265
|
)
|
||||||
|
Proceeds
from disposition of property
|
37,541
|
80,721
|
90,578
|
|||||||||
|
Acquisition
of restaurant units
|
—
|
(2,208
|
)
|
(825
|
)
|
|||||||
|
Collection
of note receivable payments from former subsidiary
|
—
|
—
|
4,870
|
|||||||||
|
Net
cash flows provided by investing activities
|
9,661
|
47,661
|
62,358
|
|||||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Long-term
debt payments
|
(30,200
|
)
|
(102,104
|
)
|
(104,334
|
)
|
||||||
|
Deferred
financing costs paid
|
—
|
(401
|
)
|
(1,278
|
)
|
|||||||
|
Proceeds
from exercise of stock options
|
995
|
2,126
|
2,012
|
|||||||||
|
Debt
transaction costs
|
—
|
—
|
(1,095
|
)
|
||||||||
|
Net
bank overdrafts
|
(1,462
|
)
|
(2,238
|
)
|
171
|
|||||||
|
Net
cash flows used in financing activities
|
(30,667
|
)
|
(102,617
|
)
|
(104,524
|
)
|
||||||
|
Decrease
in cash and cash equivalents
|
(523
|
)
|
(4,661
|
)
|
(2,010
|
)
|
||||||
|
Cash
and Cash Equivalents at:
|
||||||||||||
|
Beginning
of year
|
21,565
|
26,226
|
28,236
|
|||||||||
|
End
of year
|
$
|
21,042
|
$
|
21,565
|
$
|
26,226
|
||||||
See notes
to consolidated financial statements.
F-6
Denny’s
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
Note
1. Introduction and Basis of Reporting
Denny’s
Corporation, or Denny’s, is one of America’s largest family-style restaurant
chains. At December 31, 2008, the Denny’s brand consisted of 1,541
restaurants, 1,226 (80%) of which were franchised/licensed restaurants
and 315 (20%) of which were company-owned and operated. Denny’s restaurants are
operated in 49 states, the District of Columbia, two U.S. territories and five
foreign countries with principal concentrations in California (26% of total
restaurants), Florida (10%) and Texas (10%).
Note
2. Summary of Significant Accounting
Policies
The
following accounting policies significantly affect the preparation of our
Consolidated Financial Statements:
Use of Estimates. In
preparing our Consolidated Financial Statements in conformity with
U.S. generally accepted accounting principles, management is required to
make certain assumptions and estimates that affect reported amounts of assets,
liabilities, revenues, expenses and the disclosure of contingencies. In making
these assumptions and estimates, management may from time to time seek advice
and consider information provided by actuaries and other experts in a particular
area. Actual amounts could differ materially from these estimates.
Consolidation Policy. Our
Consolidated Financial Statements include the financial statements of Denny’s
Corporation and its wholly-owned subsidiaries, the most significant of which are
Denny’s Holdings, Inc.; and Denny’s, Inc. and DFO, LLC, which are subsidiaries
of Denny’s Holdings, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
Fiscal Year. Our fiscal year
ends on the Wednesday in December closest to December 31 of each year. As a
result, a fifty-third week is added to a fiscal year every five or six
years. Fiscal 2008 included 53 weeks of operations, whereas 2007 and 2006
each included 52 weeks of operations.
Cash Equivalents and Short-term
Investments. We consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and
cash equivalents include short-term investments of $16.2 million and $15.9
million at December
31, 2008 and
December
26, 2007,
respectively. On December
31, 2008, the $16.2
million was held overnight in Denny's main bank account due to earnings credits
and asset security provided under the FDIC Transaction Account Guarantee Program
(TAGP). On December
26, 2007, the $15.9
million was invested overnight in Eurodollar Time
Deposits.
Allowances for Doubtful Accounts.
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our franchisees to make required payments for
franchise royalties, rent, advertising and notes receivable. In assessing
recoverability of these receivables, we make judgments regarding the financial
condition of the franchisees based primarily on past and current payment trends
and periodic financial information, which the franchisees are required to submit
to us.
Inventories. Inventories
consist of food and beverages and are valued primarily at the lower of average
cost (first-in, first-out) or market.
Assets Held for Sale. Assets held for sale
consist of real estate properties and restaurant operations that we expect to
sell within the next 12 months. The assets are reported at the lower of carrying
amount or fair value less costs to sell. We cease recording
depreciation on assets that are classified as held for sale. If the
determination is made that we no longer expect to sell an asset within the next
12 months, the asset is reclassified out of held for
sale.
Property and Depreciation.
Owned property is stated at cost. Property under capital leases is stated
at the present value of the minimum lease payments. We depreciate owned
property over its estimated useful life using the straight-line
method. We amortize property held under capital leases (at capitalized value)
over the lesser of its estimated useful life or the initial lease term. In
certain situations, one or more option periods may be used in determining the
depreciable life of certain properties leased under operating lease agreements
if we deem that an economic penalty will be incurred and exercise of such option
periods is reasonably assured. In either circumstance, our policy requires lease
term consistency when calculating the depreciation period, in classifying the
lease and in computing rent expense. The following estimated useful service
lives were in effect during all periods presented in the financial
statements:
Buildings—Five
to thirty years
Equipment—Two
to ten years
Leasehold
Improvements—Estimated useful life limited by the expected lease term, generally
between five and fifteen years.
Goodwill. Amounts recorded as
goodwill primarily represent excess reorganization value recognized as a result
of our 1998 bankruptcy. We test goodwill for impairment at each fiscal year end,
and more frequently if circumstances indicate impairment may exist. Such
indicators include, but are not limited to, a significant decline in our
expected future cash flows; a significant adverse decline in our stock price;
significantly adverse legal developments; and a significant change in the
business climate.
Other Intangible Assets.
Other intangible assets consist primarily of trademarks, trade
names, franchise and other operating agreements and capitalized software
development costs. Trade names and trademarks are considered indefinite-lived
intangible assets and are not amortized. Franchise and other operating
agreements are amortized using the straight-line basis over the term of the
related agreement. Capitalized software development costs are amortized over the
estimated useful life of the software. We test trade name and trademark
assets for impairment at each fiscal year end, and more frequently if
circumstances indicate impairment may exist. We assess impairment of franchise
and other operating agreements and capitalized software development costs
whenever changes or events indicate that the carrying value may not be
recoverable.
F-7
Note
2. Summary of Significant Accounting Policies
(Continued)
Long-term Investments. Long-term
investments include nonqualified deferred compensation plan assets held in a
rabbi trust. Each plan participant's account is comprised of their contribution,
our matching contribution and each participant's share of earnings or losses in
the plan. The investments of the rabbi trust are considered trading securities
and are reported at fair value in other noncurrent assets with an offsetting
liability included in other noncurrent liabilities and deferred credits in our
Consolidated Balance Sheets. The realized and unrealized holding gains and
losses related to the investments are recorded in other income (expense) with an
offsetting amount recorded in general and administrative expenses in our
Consolidated Statement of Operations. For the years ended December 31, 2008,
December 26, 2007 and December 27, 2006, we incurred a net loss of $1.7 million
and net gains of $0.5 million and $0.5 million, respectively. The fair
value of the investments of the deferred compensation plan were $5.4
million and $6.3 million at December 31, 2008 and December 26, 2007,
respectively.
Deferred Financing Costs.
Costs related to the issuance of debt are deferred and amortized as a
component of interest expense using the effective interest method over the terms
of the respective debt issuances.
Cash Overdrafts. We have
included in accounts payable in our Consolidated Balance Sheets cash overdrafts
totaling $8.5 million and $10.0 million at December 31, 2008 and December 26,
2007, respectively. Changes in such amounts are reflected in the cash flows from
financing activities in the Consolidated Statements of Cash Flows.
Self-insurance liabilities.
We record liabilities for insurance claims during periods in which we
have been insured under large deductible programs or have been self-insured for
our medical and dental claims and workers’ compensation, general/product and
automobile insurance liabilities. Maximum self-insured retention levels,
including defense costs per occurrence, range from $0.5 million to $1.0 million
per individual claim for workers’ compensation and for general/product and
automobile liability. The liabilities for prior and current estimated incurred
losses are discounted to their present value based on expected loss payment
patterns determined by independent actuaries using our actual historical
payments.
Total
discounted insurance liabilities at December 31, 2008 and December 26, 2007 were
$37.1 million reflecting a 3.5% discount rate and $39.4 million
reflecting a 4.5% discount rate, respectively. The related undiscounted amounts
at such dates were $40.5 million and $44.0 million, respectively.
Income Taxes. We account for
income taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. We record a valuation allowance to reduce our net deferred tax
assets to the amount that is more-likely-than-not to be realized. While we have
considered ongoing, prudent and feasible tax planning strategies in assessing
the need for our valuation allowance, in the event we were to determine that we
would be able to realize our deferred tax assets in the future in an amount in
excess of the net recorded amount, an adjustment to the valuation allowance
(except for the valuation allowance established in connection with the adoption
of fresh start reporting on January 7, 1998—see Note 14) would decrease income
tax expense in the period such determination was made. Interest and penalties
accrued in relation to unrecognized tax benefits are recognized in income tax
expense.
Leases and Subleases. Our
policy requires the use of a consistent lease term for (i) calculating the
maximum depreciation period for related buildings and leasehold improvements;
(ii) classifying the lease; and (iii) computing periodic rent expense
increases where the lease terms include escalations in rent over the lease term.
The lease term commences on the date when we become legally obligated for the
rent payments. We account for rent escalations in leases on a straight-line
basis over the expected lease term. Any rent holidays after lease commencement
are recognized on a straight-line basis over the expected lease term, which
includes the rent holiday period. Leasehold improvements that have been funded
by lessors have historically been insignificant. Any leasehold improvements we
make that are funded by lessor incentives or allowances under operating leases
are recorded as leasehold improvement assets and amortized over the expected
lease term. Such incentives are also recorded as deferred rent and amortized as
reductions to lease expense over the expected lease term. We record contingent
rent expense based on estimated sales for respective units over the contingency
period.
Fair Value Measurements. The carrying amount of cash and cash
equivalents, investments, accounts receivables, accounts payable and accrued
expenses is deemed to approximate fair value due to the immediate or
short-term maturity of these instruments. The fair value of notes
receivable approximates the carrying value after consideration of recorded
allowances. The fair value of our debt is based on market quotations for the
same or similar debt issues or the estimated borrowing rates available to us.
The difference between the estimated fair value of long-term debt compared
with its historical cost reported in our Consolidated Financial Statements
relates to the market quotations for our 10% Notes. See Note
10.
Derivative Instruments. We
record all derivative instruments as either assets or liabilities in the balance
sheet at fair value. If we elect to apply hedge accounting, we formally document
all hedging relationships, our risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the hedged item, the nature of
the risk being hedged, how the hedging instrument's effectiveness in offsetting
the hedged risk will be assessed prospectively and retrospectively and a
description of the method of measuring ineffectiveness. We assess, both at the
hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting cash flows of hedged
items. To the extent the derivative instrument is effective in offsetting the
variability of the hedged cash flows, changes in the fair value of the
derivative instrument are not included in current earnings but are reported as
other comprehensive income (loss). The ineffective portion of the hedge is
recorded as an adjustment to earnings. If hedge accounting is not elected for a
derivative instrument, we carry the derivative at its fair value on the balance
sheet and recognize and subsequent changes in its fair value in
earnings.
During
various periods within the years ended December 31, 2008, December 26, 2007 and
December 27, 2006, we utilized derivative financial instruments to manage our
exposure to interest rate risk and commodity risk in relation to natural gas
costs. We do not enter into derivative instruments for trading or speculative
purposes. See Note 11.
Contingencies and Litigation. We are subject to legal proceedings involving ordinary and routine claims incidental to our business, as well as legal proceedings that are nonroutine and include compensatory or punitive damage claims. Our ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. We record legal expenses and other litigation costs as other operating expenses in our Consolidated Statements of Operations as those costs are incurred.
F-8
Note
2. Summary of Significant Accounting Policies
(Continued)
Comprehensive Income
(Loss). Comprehensive income (loss) includes net income (loss)
and other comprehensive income (loss) items that are excluded from net income
(loss) under U.S. generally accepted accounting principles. Other comprehensive
income (loss) items include additional minimum pension liability adjustments and
the effective unrealized portion of changes in the fair value of cash flow
hedges. See Note 13.
Segment. Denny’s operates in
only one segment. All significant revenues and pre-tax earnings relate to retail
sales of food and beverages to the general public through either company-owned
or franchised restaurants.
Company Restaurant Sales.
Company restaurant sales are recognized when food and beverage products are sold
at company-owned units. We present company restaurant sales net of sales
taxes.
Gift cards. We sell gift
cards which have no stated expiration dates. Proceeds from the sale of gift
cards are deferred and recognized as revenue when they are redeemed. We do not
recognize breakage on gift cards until, among other things, sufficient gift card
history is available to estimate our potential breakage. We do not believe
gift card breakage will have a material impact on our future
operations.
Franchise and License Fees.
We recognize initial franchise and license fees when all of the material
obligations have been performed and conditions have been satisfied, typically
when operations of a new franchised restaurant have commenced. During 2008, 2007
and 2006, we recorded initial fees of $4.6 million, $6.0 million and $0.9
million, respectively, as a component of franchise and license revenue in our
Consolidated Statements of Operations. At December 31, 2008 and December 26,
2007, deferred fees were $1.3 million and $1.2 million, respectively and are
included in other accrued liabilities in the accompanying Consolidated Balance
Sheets. Continuing fees, such as royalties and rents, are recorded as income on
a monthly basis. For 2008, our ten largest franchisees accounted for
approximately 32% of our franchise revenues.
Advertising Costs. We expense
production costs for radio and television advertising in the year in which the
commercials are initially aired. Advertising expense for 2008, 2007 and 2006 was
$23.2 million, $27.5 million and $29.9 million, respectively, net of
contributions from franchisees of $44.7 million, $39.0 million and $36.7
million, respectively. Advertising costs are recorded as a component of other
operating expenses in our Consolidated Statements of Operations.
Restructuring and exit costs.
As a result of changes in our organizational structure and in our
portfolio of restaurants, we have recorded restructuring and exit costs. These
costs consist primarily of the costs of future obligations related to closed
units, severance and other restructuring charges for terminated employees and
are included as a component of operating gains, losses and other charges,
net in our Consolidated Statements of Operations.
Discounted
liabilities for future lease costs and the fair value of related subleases
of closed units are recorded when the units are closed. All other
costs related to closed units are expensed as incurred. In assessing the
discounted liabilities for future costs of obligations related to closed units,
we make assumptions regarding amounts of future subleases. If these assumptions
or their related estimates change in the future, we may be required to record
additional exit costs or reduce exit costs previously recorded. Exit costs
recorded for each of the periods presented include the effect of such changes in
estimates.
We
evaluate store closures for potential disclosure as discontinued operations
based on an assessment of several quantitative and qualitative factors,
including the nature of the closure, revenue migration to other
company-owned and franchised stores and planned market development in the
vicinity of the disposed store.
Impairment of long-lived assets.
We evaluate our long-lived assets for impairment at the restaurant level
on a quarterly basis, when assets are identified as held for sale or
whenever changes or events indicate that the carrying value may not be
recoverable. We assess impairment of restaurant-level assets based on the
operating cash flows of the restaurant, expected proceeds from the sale of
assets and our plans for restaurant closings. Generally, all units with
negative cash flows from operations for the most recent twelve months at each
quarter end are included in our assessment. In performing our assessment,
we make assumptions regarding estimated future cash flows, including
estimated proceeds from similar asset sales, and other factors to determine both
the recoverability and the estimated fair value of the respective assets. If the
long-lived assets of a restaurant are not recoverable based upon estimated
future, undiscounted cash flows, we write the assets down to their fair value.
If these estimates or their related assumptions change in the future, we may be
required to record additional impairment charges. These charges are
included as a component of operating gains, losses and other charges, net
in our Consolidated Statements of Operations.
Gains on Sales of Restaurants
Operations to Franchisees, Real Estate and Other Assets. Generally, gains
on sales of restaurant operations to franchisees (which may include real
estate), real estate properties and other assets, are recognized when the sales
are consummated and certain other gain recognition criteria are met. Total
gains are included as a component of operating gains, losses and other
charges, net in our Consolidated Statements of Operations.
Share-Based Payment.
Effective December 29, 2005, the first day of fiscal 2006, we adopted Statement
of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment"
("SFAS 123(R)"). This standard requires all share-based compensation to be
recognized in the statement of operations based on fair value and applies to all
awards granted, modified, cancelled or repurchased after the effective date.
Additionally, for awards outstanding as of December 29, 2005 for which the
requisite service has not been rendered, compensation expense will be recognized
as the requisite service is rendered. The statement also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow.
Under
SFAS 123(R), we are required to estimate potential forfeitures of share-based
awards and adjust the compensation cost accordingly. Our estimate of forfeitures
will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Prior to the
adoption of SFAS 123(R), we recorded forfeitures as they occurred. As a result
of this change, we recognized a cumulative effect of change in accounting
principle in our Consolidated Statement of Operations of $0.2 million
during 2006. Additionally, in accordance with SFAS 123(R), $2.5 million related
to restricted stock units payable in shares, previously recorded as liabilities,
were reclassified to additional paid-in capital in the Consolidated Balance
Sheet during 2006. Our previous practice was to accrue compensation expense for
restricted stock units payable in shares as a liability until such time as the
shares were actually issued.
Earnings Per Share. Basic
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares and potential common shares outstanding
during the period.
F-9
Note
2. Summary of Significant Accounting Policies
(Continued)
Adjustments to Equity.
Certain previously reported amounts have been reclassified to conform to the
current presentation. During fiscal 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. In addition, during fiscal 2007, we recorded a $0.4 million
adjustment to receivables and the beginning balance of retained earnings for
items related to periods prior to December 29, 2004. The adjustment had no
impact on our results of operations for the periods ended December 26, 2007 and
December 27, 2006.
The
following line items on the Consolidated Statements of Operations for the
fiscal year ended December 26, 2007 were impacted by the
adjustments:
|
Fiscal
Year Ended December
26, 2007
|
||||||||||||
|
Unadjusted
|
Adjustment
|
Adjusted
|
||||||||||
|
(In
thousands, except per share data)
|
||||||||||||
|
Operating
gains, losses and other charges, net
|
$
|
(34,828
|
)
|
3,746
|
(31,082
|
)
|
||||||
|
Total
operating costs and expenses
|
855,838
|
3,746
|
859,584
|
|||||||||
|
Operating
income
|
83,530
|
(3,746
|
)
|
79,784
|
||||||||
|
Net
income before taxes
|
39,905
|
(3,746
|
)
|
36,159
|
||||||||
|
Provision
for income taxes
|
5,192
|
(384
|
)
|
4,808
|
||||||||
|
Net
income
|
34,713
|
(3,362
|
)
|
31,351
|
||||||||
|
Basic
net income per share
|
$
|
0.37
|
$
|
(0.04
|
)
|
$
|
0.33
|
|||||
|
Diluted
net income per share
|
$
|
0.35
|
$
|
(0.03
|
)
|
$
|
0.32
|
|||||
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
|
||||||||
See Note 21 for the adjusted quarterly data for 2007.
New
Accounting Standards.
In
October 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 157-3 ("FSP FAS 157-3"), "Determining the Fair Value of a Financial Asset in a
Market That Is Not Active," which clarifies the application of
Statement of Financial Accounting Standard 157 ("SFAS 157") in an
inactive market and illustrates how an entity would determine fair value when
the market for a financial
asset is not active. FSP FAS 157-3 is effective immediately and applies to
prior periods for which financial
statements have not been issued, including interim or annual periods ending on
or before December
30, 2008. The implementation of FAS 157-3 did not have a material impact on the
our Consolidated Financial Statements.
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).
The adoption of SFAS 162, effective November 15, 2008, did not impact our
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 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 Consolidated Financial Statements.
In February 2008, the FASB issued FASB Staff Position No. 157-2 ("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 applied the provisions of FSP FAS 157-2 and are required to
adopt SFAS 157 for nonfinancial assets and liabilities in the first quarter of
fiscal 2009. We do not expect adoption to have a material impact on our
Consolidated Financial Statements.
F-10
Note
2. Summary of Significant Accounting Policies
(Continued)
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 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 Consolidated Financial Statements will depend upon the extent
to which we have transactions or events occur that are within its
scope.
In February, 2007, the FASB issued 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
adopted SFAS 159 effective December 27, 2007, the first day of fiscal 2008. We
did not elect the fair value reporting option for any assets and liabilities not
previously recorded at fair value.
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 10 to the 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
3. Assets Held for Sale
Assets
held for sale of $2.3 million and $6.7 million as of December 31, 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 11) 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, net of a
voluntary $10.0
million
annual exclusion related to proceeds from the sale of restaurant operations to
franchisees. As a result, there was
no reclassification of long-term debt to current liabilities required as of
December
31, 2008. As of December 26, 2007, as a result of the mandatory prepayment
requirements, we
classified $0.4 million of our long-term debt as a current liability in our
Consolidated Balance Sheet. These amounts represent the net book value of the
specified properties as of the balance sheet dates. As a result of classifying
certain assets as held for sale, we recognized impairment charges of $2.4
million and $0.2 million for the years ended December 31, 2008 and December
26, 2007, respectively. This expense is included as a component of operating
gains, losses and other charges, net in our Consolidated Statements of
Operations.
Note
4. Property, Net
Property,
net, consists of the following:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Land
|
$
|
33,885
|
$
|
33,953
|
||||
|
Buildings
and leasehold improvements
|
276,745
|
312,117
|
||||||
|
Other
property and equipment
|
102,168
|
114,806
|
||||||
|
Total
property owned
|
412,798
|
460,876
|
||||||
|
Less
accumulated depreciation
|
266,462
|
288,364
|
||||||
|
Property
owned, net
|
146,336
|
172,512
|
||||||
|
Buildings,
vehicles, and other equipment held under capital
leases
|
32,113
|
30,780
|
||||||
|
Less
accumulated amortization
|
18,471
|
18,682
|
||||||
|
Property
held under capital leases, net
|
13,642
|
12,098
|
||||||
|
Total
property, net
|
$
|
159,978
|
$
|
184,610
|
||||
The following table reflects the property assets, included in the
table above, which are leased to franchisees:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Land
|
$
|
10,209
|
$
|
5,195
|
||||
|
Buildings
and leasehold improvements
|
33,553
|
32,728
|
||||||
|
Total
property owned, leased to franchisees
|
43,762
|
37,923
|
||||||
|
Less
accumulated depreciation
|
29,017
|
28,610
|
||||||
|
Property
owned, leased to franchisees, net
|
14,745
|
9,313
|
||||||
|
Buildings
held under capital leases, leased to franchisees
|
12,779
|
10,152
|
||||||
|
Less
accumulated amortization
|
7,955
|
6,484
|
||||||
|
Property
held under capital leases, leased to franchisees,
net
|
4,824
|
3,668
|
||||||
|
Total
property leased to franchisees, net
|
$
|
19,569
|
$
|
12,981
|
||||
Depreciation
expense, including amortization of property under capital leases, for 2008,
2007 and 2006 was $34.0 million, $42.7 million and $48.8 million, respectively.
Substantially all owned property is pledged as collateral for our Credit
Facility. See Note 11.
F-11
Note 5.
Goodwill and Other Intangible Assets
The
following table reflects the changes in carrying amounts of goodwill for the
years ended December 31, 2008 and December 26, 2007:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Balance,
beginning of year
|
$ | 42,439 | $ | 50,064 | ||||
|
Write-offs
associated with sale of restaurants
|
(2,362 | ) | (3,746 | ) | ||||
|
Reversal
of valuation allowance related to deferred tax assets (Note
14)
|
(71 | ) | (4,467 | ) | ||||
|
Goodwill
related to acquisition of restaurant
|
— | 588 | ||||||
|
Balance,
end of year
|
$ | 40,006 | $ | 42,439 | ||||
The
following table reflects goodwill and intangible assets as reported at December
31, 2008 and December 26, 2007:
|
December
31, 2008
|
December
26, 2007
|
|||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Goodwill
|
$
|
40,006
|
$
|
—
|
$
|
42,439
|
$
|
—
|
||||||||
|
Intangible
assets with indefinite lives:
|
||||||||||||||||
|
Trade
names
|
$
|
42,438
|
$
|
—
|
$
|
42,395
|
$
|
—
|
||||||||
|
Liquor
licenses
|
262
|
—
|
279
|
—
|
||||||||||||
|
Intangible
assets with definite lives:
|
||||||||||||||||
|
Franchise
and license agreements
|
55,332
|
39,303
|
61,903
|
42,036
|
||||||||||||
|
Foreign
license agreements
|
241
|
138
|
241
|
125
|
||||||||||||
|
Intangible
assets
|
$
|
98,273
|
$
|
39,441
|
$
|
104,818
|
$
|
42,161
|
||||||||
|
Other
assets with definite lives:
|
||||||||||||||||
|
Software
development costs
|
$
|
31,979
|
$ |
26,446
|
$ |
30,853
|
$ |
24,560
|
||||||||
The $6.6
million decrease in franchise agreements resulted from the removal of fully
amortized agreements and the write-off of agreements related to closed
units. The amortization expense for definite-lived intangibles and other
assets for 2008, 2007 and 2006 was $5.7 million, $6.7 million and $6.5
million, respectively.
Estimated
amortization expense for intangible assets with definite lives in the next five
years is as follows:
|
(In thousands)
|
||||
|
2009
|
$
|
3,310
|
||
|
2010
|
2,949
|
|||
|
2011
|
2,712
|
|||
|
2012
|
2,349
|
|||
|
2013
|
2,029
|
|||
We
performed an annual impairment test as of December 31, 2008 and determined that
none of the recorded goodwill or other intangible assets with indefinite lives
were impaired.
Note
6. Notes Receivable from Former Subsidiary
As a
result of the divestiture of FRD Acquisition Co., ("FRD"), on July 10,
2002, Denny’s provided $5.6 million of cash collateral to support FRD’s letters
of credit, for a fee, until the letters of credit terminated or were
replaced. We received scheduled payments of $4.9 million related to the
amounts due from FRD during 2006 (through the end of the collateral
agreement). This amount is shown in the cash flows from investing
activities section of our Consolidated Statement of Cash Flows. During 2006, we
recorded interest income related to these receivables of $0.1
million.
Note
7. Other
Current Liabilities
Other
current liabilities consist of the following:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Accrued
salaries and vacation
|
$
|
23,954
|
$
|
28,842
|
||||
|
Accrued
insurance, primarily current portion of liability for insurance
claims
|
13,591
|
14,913
|
||||||
|
Accrued
taxes
|
8,846
|
9,707
|
||||||
|
Accrued
interest
|
4,945
|
6,962
|
||||||
|
Restructuring
charges and exit costs
|
3,253
|
3,169
|
||||||
| Accrued advertising | 6,425 | 4,908 | ||||||
|
Other
|
15,910
|
13,568
|
||||||
|
Other
current liabilities
|
$
|
76,924
|
$
|
82,069
|
||||
F-12
Note 8.
Operating Gains, Losses and Other Charges, Net
Operating
gains, losses and other charges, net are comprised of the
following:
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Gains
on sales of assets and other, net
|
$
|
(18,701
|
)
|
$
|
(39,028
|
)
|
$
|
(56,801
|
)
|
|||
|
Restructuring
charges and exit costs
|
9,022
|
6,870
|
6,225
|
|||||||||
|
Impairment
charges
|
3,295
|
1,076
|
2,694
|
|||||||||
|
Operating
gains, losses and other charges, net
|
$
|
(6,384
|
)
|
$
|
(31,082
|
)
|
$
|
(47,882
|
)
|
|||
Gains
on Sales of Assets
Proceeds
and gains on sales of assets were comprised of the following:
|
Fiscal
Year Ended
|
||||||||||||||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||||||||||||||
|
Net
Proceeds
|
Gains
|
Net
Proceeds
|
Gains
|
Net
Proceeds
|
Gains
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Sales
of restaurant operations and
related
real estate to franchisees
|
$
|
35,520
|
$
|
15,224
|
$
|
73,202
|
$
|
32,835
|
$
|
—
|
$
|
—
|
||||||||||||
|
Sales
of other real estate assets
|
4,691
|
3,354
|
7,519
|
4,166
|
90,578
|
56,678
|
||||||||||||||||||
|
Recognition
of deferred gains
|
—
|
123
|
—
|
2,027
|
—
|
123
|
||||||||||||||||||
|
Total
|
$
|
40,211
|
$
|
18,701
|
$
|
80,721
|
$
|
39,028
|
$
|
90,578
|
$
|
56,801
|
||||||||||||
During
2008, as part of our Franchise Growth Initiative ("FGI"), we recognized $15.2
million of gains on the sale of 79 restaurant operations to 22 franchisees for
net proceeds of $35.5 million, which includes notes receivable of $2.7 million.
During 2007, as part of FGI, we recognized $32.8 million of gains on the sale
of 130 restaurant operations and certain related real estate to 30
franchisees for net proceeds of $73.2 million. 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.
During 2006, we sold five surplus and 81 franchisee-operated real estate
properties. Gains of $1.9 million were deferred on the 2006 sales
of franchisee-operated real estate properties and were recognized during
fiscal 2007.
The balance, net of any allowance for doubtful
accounts, and classification of notes receivable in the Consolidated
Balance Sheets related to the sale of restaurants to franchisees as of
December 31, 2008 and December 26, 2007 are as follows:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Current
assets:
|
||||||||
|
Receivables,
less allowance for doubtful accounts of $339 and $0,
respectively
|
$ | 1,366 | $ | — | ||||
|
Noncurrent
assets:
|
||||||||
|
Other
noncurrent assets, less allowance for doubtful accounts of $0 and $339,
respectively
|
2,060 | 339 | ||||||
|
Total
receivables related to sale of restaurants to franchisees
|
3,426 | 339 | ||||||
Restructuring
Charges and Exit Costs
Restructuring
charges and exit costs consist primarily of the costs of future obligations
related to closed units and severance and other restructuring charges for
terminated employees and were comprised of the following:
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Exit
costs
|
$
|
3,435
|
$
|
1,665
|
$
|
4,254
|
||||||
|
Severance
and other restructuring charges
|
5,587
|
5,205
|
1,971
|
|||||||||
|
Total
restructuring charges and exit costs
|
$
|
9,022
|
$
|
6,870
|
$
|
6,225
|
||||||
Severance
and other restructuring charges of $5.6 million for the year ended December 31,
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 70 positions. The $5.2 million of severance and other
restructuring charges for the year ended December 26, 2007 resulted primarily
from the reorganization of our field management structure, which led to the
elimination of 80 to 90 out-of-restaurant operational positions. Of these
eliminations, approximately 30 employees were reassigned to other positions
within the Company.
F-13
Note 8.
Operating Gains, Losses and Other Charges, Net (Continued)
The
components of the change in accrued exit cost liabilities are as
follows:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Balance,
beginning of year
|
$
|
8,339
|
$
|
11,934
|
||||
|
Provisions
for units closed during the year (1)
|
1,021
|
187
|
||||||
|
Provisions
for sublease losses related to the sale of restaurant operations to
franchisees
|
—
|
710
|
||||||
|
Changes
in estimates of accrued exit costs, net (1)
|
2,414
|
1,478
|
||||||
|
Reclassification
of certain lease liabilities, net
|
—
|
(2,284
|
)
|
|||||
|
Payments,
net
|
(3,366
|
)
|
(4,620
|
)
|
||||
|
Interest
accretion
|
831
|
934
|
||||||
|
Balance,
end of year
|
9,239
|
8,339
|
||||||
|
Less
current portion included in other current
liabilities
|
2,079
|
1,869
|
||||||
|
Long-term
portion included in other noncurrent liabilities
|
$
|
7,160
|
$
|
6,470
|
||||
|
(1)
|
Included
as a component of operating gains, losses and other charges,
net
|
Estimated
cash payments related to exit cost liabilities in the next five years are as
follows:
|
(In thousands)
|
||||
|
2009
|
$
|
2,611
|
||
|
2010
|
2,051
|
|||
|
2011
|
1,718
|
|||
|
2012
|
1,415
|
|||
|
2013
|
1,019
|
|||
|
Thereafter
|
2,341
|
|||
|
Total
|
11,155
|
|||
|
Less
imputed interest
|
1,916
|
|||
|
Present
value of exit cost liabilities
|
$
|
9,239
|
||
The
present value of exit cost liabilities is net of $3.8 million relating to
existing sublease arrangements and $1.6 million related to properties for which
we expect to enter into sublease agreements in the future. See Note 9 for a
schedule of future minimum lease commitments and amounts to be received as
lessor or sub-lessor for both open and closed units.
As of
December 31, 2008 and December 26, 2007, we had accrued severance and other
restructuring charges of $1.2 million and $1.3 million, respectively. The
balance at the end of fiscal 2008 is expected to be paid during
2009.
Note
9. Leases and Related Guarantees
Our
operations utilize property, facilities, equipment and vehicles leased from
others. Buildings and facilities are primarily used for restaurants and support
facilities. Many of our restaurants are operated under lease arrangements which
generally provide for a fixed basic rent, and, in some instances, contingent
rent based on a percentage of gross revenues. Initial terms of land and
restaurant building leases generally are not less than 15 years exclusive of
options to renew. Leases of other equipment consist primarily of restaurant
equipment, computer systems and vehicles.
We lease
certain owned and leased property, facilities and equipment to others. Our net
investment in direct financing leases receivable, of which the current portion
is recorded in prepaid and other current assets and the long-term portion is
recorded in other noncurrent assets in our Consolidated Balance Sheets, is as
follows:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Total
minimum rents receivable
|
$
|
24,886
|
$
|
9,981
|
||||
|
Less
unearned income
|
18,506
|
7,858
|
||||||
|
Net
investment in direct financing leases receivable
|
$
|
6,380
|
$
|
2,123
|
||||
Minimum
future lease commitments and amounts to be received as lessor or sublessor under
non-cancelable leases, including leases for both open and closed units, at
December 31, 2008 are as follows:
|
Commitments
|
Lease
Receipts
|
|||||||||||||||
|
Capital
|
Operating
|
Direct
Financing
|
Operating
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
2009
|
$
|
7,282
|
$
|
43,976
|
$
|
1,301
|
$
|
30,078
|
||||||||
|
2010
|
6,929
|
41,363
|
1,301
|
29,543
|
||||||||||||
|
2011
|
6,589
|
37,190
|
1,301
|
27,458
|
||||||||||||
|
2012
|
6,013
|
33,504
|
1,301
|
26,356
|
||||||||||||
|
2013
|
4,699
|
29,747
|
1,301
|
24,989
|
||||||||||||
|
Thereafter
|
12,332
|
175,837
|
18,381
|
183,334
|
||||||||||||
|
Total
|
43,844
|
$
|
361,617
|
$
|
24,886
|
$
|
321,758
|
|||||||||
|
Less
imputed interest
|
18,225
|
|||||||||||||||
|
Present
value of capital lease obligations
|
$
|
25,619
|
||||||||||||||
F-14
Note 9.
Leases and Related Guarantees (Continued)
Rent expense
and lease and sublease rental income are recorded as components of
occupancy expense and costs of franchise and license revenue in our Consolidated
Statements of Operations and are comprised of the following:
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
| Rent expense: | ||||||||||||
|
Base
rents
|
$
|
43,903
|
$
|
43,494
|
$
|
43,548
|
||||||
|
Contingent
rents
|
5,884
|
6,524
|
7,109
|
|||||||||
|
Total
rental expense
|
$
|
49,787
|
$
|
50,018
|
$
|
50,657
|
||||||
| Rental income: | ||||||||||||
|
Base
rents
|
$ |
28,705
|
$ |
18,651
|
$ |
20,390
|
||||||
|
Contingent
rents
|
3,660
|
3,565
|
4,392
|
|||||||||
|
Total
rental income
|
$ |
32,365
|
$ |
22,216
|
$ |
24,782
|
||||||
| Net rent expense: | ||||||||||||
|
Base
rents
|
$ |
15,198
|
$ |
24,843
|
$ |
23,158
|
||||||
|
Contingent
rents
|
2,224
|
2,959
|
2,717
|
|||||||||
|
Net
rental expense
|
$ |
17,422
|
$ |
27,802
|
$ |
25,875
|
||||||
Note
10. Fair Value of Financial Instruments
Effective
December 27, 2007, the first day of fiscal 2008, we adopted the provisions of
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, but does not change existing guidelines as to whether
or not an instrument is carried at fair value. We also
applied the provisions of FSP FAS 157-2, "Effective Date of FASB Statement 157,"
which defers the adoption of SFAS 157 for nonfinancial assets
and liabilities to the first quarter of fiscal 2009. The deferred nonfinancial
assets and liabilities include items such as goodwill and other nonamortizable
intangibles.
Fair Value of
Assets and Liabilities Measured on a Recurring Basis
Financial
assets and liabilities measured at fair value on a recurring basis are
summarized below:
|
Fair
Value Measurements as of December 31, 2008
|
|||||||||||||||||
|
December
31, 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
|
$
|
5,430
|
$
|
5,430
|
$
|
—
|
$
|
—
|
market
approach
|
||||||||
| Natural gas contract liability |
(933
|
) |
—
|
(933
|
) |
—
|
market
approach
|
||||||||||
|
Interest
rate swap liability
|
(4,545
|
)
|
—
|
(4,545
|
)
|
—
|
income
approach
|
||||||||||
|
Total
|
$
|
(48
|
) |
$
|
5,430
|
$
|
(5,478
|
)
|
$
|
—
|
|||||||
Fair
Value of Long-Term Debt
The book
value and estimated fair value of our long-term debt, excluding capital
lease obligations, was as follows:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Book
value:
|
||||||||
|
Fixed
rate long-term debt
|
$
|
175,368
|
$
|
175,533
|
||||
|
Variable
rate long-term debt
|
126,652
|
152,523
|
||||||
|
Long
term debt excluding capital lease obligations
|
$
|
302,020
|
$
|
328,056
|
||||
|
Estimate
fair value:
|
||||||||
|
Fixed
rate long-term debt
|
$
|
122,868
|
$
|
168,533
|
||||
|
Variable
rate long-term debt
|
126,652
|
152,523
|
||||||
|
Long
term debt excluding capital lease obligations
|
$
|
249,520
|
$
|
321,056
|
||||
The
difference between the estimated fair value of long-term debt compared with its
historical cost reported in our Consolidated Balance Sheets at December 31, 2008
and December 26, 2007 relates primarily to market quotations for our 10%
Notes.
F-15
Note
11. Long-Term Debt
Long-term
debt consists of the following at December 31, 2008 and December 26,
2007:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Notes
and Debentures:
|
||||||||
|
10%
Senior Notes due October 1, 2012, interest payable
semi-annually
|
$
|
175,000
|
$
|
175,000
|
||||
|
Credit
Facility:
|
||||||||
|
Revolver
Loans outstanding due December 15, 2011
|
—
|
—
|
||||||
|
Term
Loans due March 31, 2012
|
126,652
|
152,523
|
||||||
|
Other
notes payable, maturing over various terms up to 5 years, payable in
monthly installments with interest rates ranging from 9.0% to
9.17%
|
368
|
533
|
||||||
|
Capital
lease obligations
|
25,619
|
24,896
|
||||||
|
327,639
|
352,952
|
|||||||
|
Less
current maturities and mandatory prepayments
|
4,938
|
6,136
|
||||||
|
Total
long-term debt
|
$
|
322,701
|
$
|
346,816
|
||||
Aggregate
annual maturities of long-term debt, excluding capital lease obligations (see
Note 9), at December 31, 2008 are as follows:
|
Year:
|
(In
thousands)
|
|||
|
2009
|
$
|
1,403
|
||
|
2010
|
1,368
|
|||
|
2011
|
1,375
|
|||
|
2012
|
297,866
|
|||
|
2013
|
8
|
|||
|
Thereafter
|
—
|
|||
|
Total
long-term debt, excluding capital lease obligations
|
$
|
302,020
|
||
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 $126.7 million term loan and an additional $37 million letter of
credit facility (together, the "Credit Facility"). At December 31, 2008, we
had outstanding letters of credit of $35.2 million under our letter of
credit facility. There were no outstanding letters of credit under our revolving
facility and no revolving loans outstanding at December 31, 2008. These balances
result in availability of $1.8 million under our letter of credit facility and
$50.0 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. We believe that our estimated cash flows
from operations for 2009, 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 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 December 31, 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 our interest rate swap described below, the
weighted-average interest rate under the term loan was 4.35% and 7.20% as of
December 31, 2008 and December 26, 2007, respectively. Taking into consideration
our interest rate swap, described below, the weighted-average interest rate
under the term loan was 6.36% and 6.90% as of December 31, 2008 and December 26,
2007, respectively.
During
2008, we paid $25.9 million (which included $24.4 million of prepayments and
$1.5 million of scheduled payments) on the term loan through a combination
of proceeds on sales of restaurant operations to franchisees, real estate and
other assets, as well as cash generated from operations. As a result of these
prepayments, we recorded $0.1 million of losses on early extinguishment of debt
resulting from the write-off of deferred financing costs. These losses are
included as a component of other nonoperating expense in our Consolidated
Statements of Operations.
Interest
Rate Swaps
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.
F-16
Note 11.
Long-Term Debt (Continued)
In
January 2005, we entered into an interest rate swap with a notional amount of
$75 million to hedge a portion of the cash flows of our previous floating rate
term loan debt. We designated the interest rate swap as a cash flow hedge of our
exposure to variability in future cash flows attributable to payments of LIBOR
plus a fixed 3.25% spread due on a related $75 million notional debt obligation
under the previous term loan facility. Under the terms of the swap, we paid a
fixed rate of 3.76% on the $75 million notional amount and received payments
from a counterparty based on the 3-month LIBOR rate for a term ending on
September 30, 2007. Interest rate differentials paid or received under the
swap agreement were recognized as adjustments to interest expense.
As a
result of the extinguishment of a portion of our debt on December 15, 2006, we
discontinued hedge accounting treatment related to this interest rate
swap. The interest rate swap was sold for a cash price of $1.1 million
resulting in a gain of $0.9 million which is included as a component of other
nonoperating expense in our Consolidated Statements of Operations.
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. Interest rate differentials paid
or received under the swap agreement will be 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 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 and recorded approximately $0.4 million
of losses related to the fair value of the swap as a component of other
nonoperating expense (income), net in our Consolidated Statement of Operations
for the year ended December 26, 2007. The losses related to the fair value
of the swap included in accumulated other comprehensive income as of December
26, 2007 are 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 in our
Consolidated Statement of Shareholders’ Deficit and Comprehensive Income
(Loss) for the years ended December 31, 2008, December 26, 2007 and
December 27, 2006 are as follows:
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Accumulated
other comprehensive income, beginning of period
|
(2,353
|
)
|
—
|
1,256
|
||||||||
|
Amortization
of unrealized losses related to the interest rate swap
(recorded
in other nonoperating expense)
|
1,166
|
—
|
—
|
|||||||||
|
Net
interest income recognized as a result of interest rate
swap
|
—
|
(464
|
)
|
(962
|
)
|
|||||||
|
Unrealized
gain(loss) for changes in fair value of interest swap
rates
|
—
|
(2,289
|
)
|
560
|
||||||||
|
(Gain)
loss recognized on de-designation or extinguishment of
interest
rate swap
|
—
|
400
|
(854
|
)
|
||||||||
|
Accumulated
other comprehensive income, end of period
|
(1,187
|
)
|
(2,353
|
)
|
—
|
|||||||
The
changes in fair value of the interest rate swap for the years ended December 31,
2008 and December 26, 2007 are as follows:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Fair
value of the interest rate swap, beginning of period
|
$
|
(2,753
|
)
|
$
|
—
|
|||
|
Change
in the fair value of the interest rate swap (recorded in other
nonoperating expense)
|
(4,184
|
)
|
(400
|
)
|
||||
|
Change
in the fair value of the interest rate swap (recorded in accumulated other
comprehensive
income)
|
—
|
(2,353
|
)
|
|||||
|
Termination
of a portion of the swap
|
2,392
|
—
|
||||||
|
Fair
value of the interest rate swap, end of period
|
$
|
(4,545
|
)
|
$
|
(2,753
|
)
|
||
The fair value of the interest rate swap is recorded as a component
of other noncurrent liabilities and deferred credits in our Consolidated Balance
Sheets.
10%
Senior Notes Due 2012
On
October 5, 2004, Denny’s Holdings issued $175 million aggregate principal
amount of its 10% Senior Notes due 2012 (the “10% Notes”). The 10% Notes are
irrevocably, fully and unconditionally guaranteed on a senior basis by Denny’s
Corporation. The 10% Notes are general, unsecured senior obligations of Denny’s
Holdings, and rank equal in right of payment to all existing and future
indebtedness and other obligations that are not, by their terms, expressly
subordinated in right of payment to the 10% Notes; rank senior in right of
payment to all existing and future subordinated indebtedness; and are
effectively subordinated to all existing and future secured debt to the extent
of the value of the assets securing such debt and structurally subordinated to
all indebtedness and other liabilities of the subsidiaries of Denny’s Holdings,
including the Credit Facility. The 10% Notes bear interest at the rate of
10% per year, payable semi-annually in arrears on April 1 and
October 1 of each year. The 10% Notes mature on October 1,
2012.
F-17
Note 11.
Long-Term Debt (Continued)
Denny’s
Holdings may redeem all or a portion of the 10% Notes for cash at its option,
upon not less than 30 days nor more than 60 days notice to each holder of 10%
Notes, at the following redemption prices (expressed as percentages of the
principal amount) with accrued and unpaid interest and liquidated damages, if
any, thereon to the date of redemption of the 10% Notes (the “Redemption
Date”):
|
Year:
|
Percentage
|
|||
|
January
1, 2009 through September 30, 2009
|
105.0
|
%
|
||
|
October
1, 2009 through September 30, 2010
|
102.5
|
%
|
||
|
October
1, 2010 and thereafter
|
100.0
|
%
|
||
The
indenture governing the 10% Notes (the "Indenture") contains certain
covenants limiting the ability of Denny’s Holdings and its subsidiaries (but not
its parent, Denny’s Corporation) to, among other things, incur additional
indebtedness (including disqualified capital stock); pay dividends or make
distributions or certain other restricted payments; make certain investments;
create liens on our assets to secure debt; enter into sale and leaseback
transactions; enter into transactions with affiliates; merge or consolidate with
another company; sell, lease or otherwise dispose of all or substantially all of
its assets; enter into new lines of business; and guarantee indebtedness. These
covenants are subject to a number of limitations and exceptions.
The
Indenture is fully and unconditionally guaranteed by Denny’s Corporation.
Denny’s Corporation is a holding company with no independent assets or
operations, other than as related to the ownership of the common stock of
Denny’s Holdings and its status as a holding company. Denny’s Corporation is not
subject to the restrictive covenants in the Indenture. Denny’s Holdings is
restricted from paying dividends and making distributions to Denny’s Corporation
under the terms of the Indenture.
Note 12.
Employee Benefit Plans
Adoption
of SFAS 158
Effective
December 27, 2006, the last day of fiscal 2006, we adopted SFAS 158. This
standard requires recognition of the overfunded or underfunded status of defined
benefit pension and other postretirement plans as an asset or liability in the
statement of financial position and recognition of changes in that funded status
in comprehensive income in the year in which the changes occur. SFAS 158 also
requires measurement of the funded status of a plan as of the date of the
statement of financial position. This measurement requirement was effective
for fiscal years ending after December 15, 2008, however, the measurement date
of our plans was already in accordance with this requirement. We adopted the
recognition of the funded status and changes in the funded status of our benefit
plans in the fourth quarter of 2006. The adoption had no impact on our
Statement of Shareholders' Deficit.
Employee
Benefit Plans
We
maintain several defined benefit plans which cover a substantial number of
employees. Benefits are based upon each employee’s years of service and average
salary. Our funding policy is based on the minimum amount required under the
Employee Retirement Income Security Act of 1974. Our pension plan was closed to
new participants as of December 31, 1999. Benefits ceased to accrue for
pension plan participants as of December 31, 2004. We also maintain defined
contribution plans.
The
components of net pension cost of the pension plan and other defined benefit
plans as determined under Statement of Financial Accounting Standards No. 87,
“Employers’ Accounting for Pensions,” as amended by Statement of Financial
Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension
and Other Postretirement Plans,"
are as follows:
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Pension
Plan:
|
||||||||||||
|
Service
cost
|
$
|
350
|
$
|
350
|
$
|
375
|
||||||
|
Interest
cost
|
3,388
|
3,145
|
3,111
|
|||||||||
|
Expected
return on plan assets
|
(3,877
|
)
|
(3,529
|
)
|
(3,250
|
)
|
||||||
|
Amortization
of net loss
|
601
|
882
|
1,078
|
|||||||||
|
Net
periodic benefit cost
|
$
|
462
|
$
|
848
|
$
|
1,314
|
||||||
|
Other
comprehensive (income) loss
|
$
|
12,982
|
$
|
(6,478
|
)
|
$
|
(3,304
|
)
|
||||
|
Other
Defined Benefit Plans:
|
||||||||||||
|
Service
cost
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Interest
cost
|
194
|
190
|
192
|
|||||||||
|
Amortization
of net loss
|
19
|
23
|
25
|
|||||||||
|
Settlement
loss recognized
|
58
|
—
|
14
|
|||||||||
|
Net
periodic benefit cost
|
$
|
271
|
$
|
213
|
$
|
231
|
||||||
|
Other
comprehensive (income) loss
|
$
|
(39
|
)
|
$
|
(154
|
)
|
$
|
(73
|
)
|
|||
Net
pension and other defined benefit plan costs (including premiums paid to the
Pension Benefit Guaranty Corporation) for 2008, 2007 and 2006 were $0.7 million,
$1.1 million and $1.5 million, respectively.
F-18
Note 12.
Employee Benefit Plans (Continued)
The
following table sets forth the funded status and amounts recognized in our
Consolidated Balance Sheet for our pension plan and other defined benefit
plans:
|
Pension
Plan
|
Other
Defined Benefit Plans
|
|||||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
31, 2008
|
December
26, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Change
in Benefit Obligation
|
||||||||||||||||
|
Benefit
obligation at beginning of year
|
$
|
50,209
|
$
|
54,097
|
$
|
3,096
|
$
|
3,313
|
||||||||
|
Service
cost
|
350
|
350
|
—
|
—
|
||||||||||||
|
Interest
cost
|
3,388
|
3,145
|
194
|
190
|
||||||||||||
|
Actuarial
losses (gains)
|
6,389
|
(4,487
|
)
|
(38
|
)
|
(132
|
)
|
|||||||||
|
Settlement
loss
|
—
|
—
|
75
|
—
|
||||||||||||
|
Benefits
paid
|
(3,038
|
)
|
(2,896
|
)
|
(774
|
)
|
(275
|
)
|
||||||||
|
Benefit
obligation at end of year
|
$
|
57,298
|
$
|
50,209
|
$
|
2,553
|
$
|
3,096
|
||||||||
|
Accumulated
benefit obligation
|
$
|
57,298
|
$
|
50,209
|
$
|
2,553
|
$
|
3,096
|
||||||||
|
Change
in Plan Assets
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
$
|
49,410
|
$
|
44,163
|
$
|
—
|
$
|
—
|
||||||||
|
Actual
return on plan assets
|
(3,317
|
)
|
4,637
|
—
|
—
|
|||||||||||
|
Employer
contributions
|
1,396
|
3,506
|
774
|
275
|
||||||||||||
|
Benefits
paid
|
(3,038
|
)
|
(2,896
|
)
|
(774
|
)
|
(275
|
)
|
||||||||
|
Fair
value of plan assets at end of year
|
$
|
44,451
|
$
|
49,410
|
$
|
—
|
$
|
—
|
||||||||
|
Reconciliation of Funded
Status
|
||||||||||||||||
|
Funded
status
|
$
|
(12,847
|
)
|
$
|
(799
|
)
|
$
|
(2,553
|
)
|
$
|
(3,096
|
)
|
||||
|
Amounts
Recognized in Accumulated Other
Comprehensive Income
|
||||||||||||||||
|
Net
loss
|
$
|
(23,307
|
)
|
(10,325
|
)
|
(426
|
)
|
(466
|
)
|
|||||||
|
Accumulated
other comprehensive loss
|
$
|
(23,307
|
)
|
(10,325
|
)
|
(426
|
)
|
(466
|
)
|
|||||||
|
Cumulative
employer contributions in excess of cost
|
10,460
|
9,526
|
(2,127
|
)
|
(2,630
|
)
|
||||||||||
|
Net
amount recognized
|
$
|
(12,847
|
)
|
(799
|
)
|
(2,553
|
)
|
(3,096
|
)
|
|||||||
|
Amounts
in Accumulated Other Comprehensive
Income
to be Recognized in Fiscal 2009
|
||||||||||||||||
|
Amortization
of net loss
|
$
|
1,359
|
|
$
|
15
|
|
||||||||||
|
Amounts
Recognized in the Consolidated Balance
Sheet
|
||||||||||||||||
|
Other
current liabilities
|
$
|
—
|
$
|
—
|
$
|
(215
|
)
|
$
|
(231
|
)
|
||||||
|
Other
noncurrent liabilities and deferred credits
|
(12,847
|
)
|
(799
|
)
|
(2,338
|
)
|
(2,865
|
)
|
||||||||
|
Net
amount recognized
|
$
|
(12,847
|
)
|
$
|
(799
|
)
|
$
|
(2,553
|
)
|
$
|
(3,096
|
)
|
||||
Minimum
pension liability adjustments for the years ended December 31, 2008, December
26, 2007 and December 27, 2006 were an addition of $12.9 million and
reductions of $6.6 million and $3.4 million, respectively. Accumulated
other comprehensive losses of $23.7 million and $10.8 million related to minimum
pension liability adjustments are included as a component of accumulated other
comprehensive income (loss) in our Consolidated Statement of Shareholders'
Deficit and Comprehensive Income (Loss) for the years ended December 31, 2008
and December 26, 2007, respectively. The application of SFAS 158, effective
December 27, 2006, did not increase or decrease the amount of accumulated other
comprehensive loss.
F-19
Note 12.
Employee Benefit Plans (Continued)
The
components of the change in accumulated other comprehensive loss are as
follows:
|
Fiscal
Year Ended
|
||||||||
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Pension
Plan:
|
||||||||
|
Balance,
beginning of year
|
$
|
(10,325
|
)
|
$
|
(16,802
|
)
|
||
|
Benefit
obligation actuarial gain (loss)
|
(6,389
|
)
|
4,487
|
|||||
|
Net
gain (loss)
|
(7,194
|
)
|
1,108
|
|||||
|
Amortization
of net loss
|
601
|
882
|
||||||
|
Balance,
end of year
|
$
|
(23,307
|
)
|
$
|
(10,325
|
)
|
||
|
Other
Defined Benefit Plans:
|
||||||||
|
Balance,
beginning of year
|
$
|
(466
|
)
|
$
|
(621
|
)
|
||
|
Benefit
obligation actuarial gain
|
38
|
132
|
||||||
|
Net
gain (loss)
|
(18
|
)
|
—
|
|||||
|
Amortization
of net loss
|
19
|
23
|
||||||
|
Balance,
end of year
|
$
|
(427
|
)
|
$
|
(466
|
)
|
||
Because
our pension plan was closed to new participants as of December 31, 1999,
and benefits ceased to accrue for Pension Plan participants as of
December 31, 2004, an assumed rate of increase in compensation levels was
not applicable for 2008, 2007 or 2006. Weighted-average assumptions used in the
actuarial computations to determine benefit obligations as of December 31, 2008
and December 26, 2007, were as follows:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
Discount
rate
|
6.19
|
%
|
6.57
|
%
|
||||
|
Measurement
date
|
12/31/08
|
12/26/07
|
||||||
Weighted-average
assumptions used in the actuarial computations to determine net periodic pension
cost for the most recent three fiscal year periods were as follows:
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
Discount
rate
|
6.57
|
%
|
5.94
|
%
|
5.75
|
%
|
||||||
|
Rate
of increase in compensation levels
|
N/A
|
N/A
|
N/A
|
|||||||||
|
Expected
long-term rate of return on assets
|
8.00
|
%
|
8.00
|
%
|
8.25
|
%
|
||||||
|
Measurement
date
|
12/31/08
|
12/26/07
|
12/27/06
|
|||||||||
In
determining the expected long-term rate of return on assets, we evaluated our
asset class return expectations, as well as long-term historical asset class
returns. Projected returns are based on broad equity and bond indices.
Additionally, we considered our historical 10-year and 15-year compounded
returns, which have been in excess of our forward-looking return expectations.
In determining the discount rate, we have considered long-term bond indices of
bonds having similar timing and amounts of cash flows as our estimated defined
benefit payments. We use a yield curve based on high quality, long-term
corporate bonds to calculate the single equivalent discount rate that results in
the same present value as the sum of each of the plan's estimated benefit
payments discounted at their respective spot rates.
Our
pension plan weighted-average asset allocations as a percentage of plan assets
as of December 31, 2008 and December 26, 2007, by asset category, were as
follows:
|
Target
|
December
31, 2008
|
December
26, 2007
|
||||||||||
|
Asset
Category
|
||||||||||||
|
Equity
securities
|
57
|
%
|
55
|
%
|
55
|
%
|
||||||
|
Debt
securities
|
43
|
%
|
44
|
%
|
44
|
%
|
||||||
|
Cash
|
0
|
%
|
1
|
%
|
1
|
%
|
||||||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||
Our
investment policy for pension plan assets is to maximize the total rate of
return (income and appreciation) with a view to the long-term funding objectives
of the pension plan. Therefore, the pension plan assets are diversified to the
extent necessary to minimize risks and to achieve an optimal balance between
risk and return and between income and growth of assets through capital
appreciation.
We made
contributions of $1.4 million and $3.5 million to our qualified pension plan
during the years ended December 31, 2008 and December 26, 2007, respectively. We
made contributions of $0.8 million and $0.3 million to our other defined benefit
plans during the years ended December 31, 2008 and December 26, 2007. In 2009 we
expect to contribute $1.4 million to our qualified pension plan and $0.2 million
to our other defined benefit plans. Benefits expected to be paid for each of the
next five years and in the aggregate for the five fiscal years from 2014 through
2018 are as follows:
|
Pension
Plan
|
Other
Defined Benefit Plans
|
|||||||
|
(In
thousands)
|
||||||||
|
2009
|
$
|
2,882
|
$
|
215
|
||||
|
2010
|
2,806
|
216
|
||||||
|
2011
|
2,739
|
267
|
||||||
|
2012
|
2,855
|
197
|
||||||
|
2013
|
2,850
|
238
|
||||||
|
2014
through 2018
|
15,530
|
1,030
|
||||||
F-20
Note 12.
Employee Benefit Plans (Continued)
In
addition, eligible employees can elect to contribute 1% to 15% of their
compensation to our 401(k) plan. As a result of certain IRS
limitations, participation in a non-qualified deferred compensation plan is
offered to certain employees. Under this deferred compensation plan,
participants are allowed to defer 1% to 50% of their annual salary and 1% to
100% of their incentive compensation. Under both plans, we make
matching contributions of up to 3% of compensation. Participants in
the deferred compensation plan are eligible to participate in the 401(k) plan,
however, due to the above referenced IRS limitations, are not eligible to
receive the matching contributions under the 401(k) plan. Under these
plans, we made contributions of $1.9 million, $2.2 million and $2.0 million for
2008, 2007 and 2006, respectively.
Note
13. Accumulated Other Comprehensive Income
(Loss)
The
components of Accumulated Other Comprehensive Income (Loss) in
our Consolidated Statements of Shareholders' Deficit and Comprehensive
Income (Loss) are as follows:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Additional
minimum pension liability (Note 12)
|
$
|
(23,734
|
)
|
$
|
(10,791
|
)
|
||
|
Unrealized
loss on interest rate swap (Note 11)
|
(1,187
|
)
|
(2,353
|
)
|
||||
|
Accumulated
other comprehensive income (loss)
|
$
|
(24,921
|
)
|
$
|
(13,144
|
)
|
||
Note
14. Income Taxes
A summary
of the provision for income taxes is as follows:
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$
|
(542
|
) |
$
|
(301
|
)
|
$
|
427
|
||||
|
State,
foreign and other
|
1,307
|
1,188
|
1,414
|
|||||||||
|
765
|
887
|
1,841
|
||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
601
|
4,238
|
9,689
|
|||||||||
|
State,
foreign and other
|
236
|
(317
|
)
|
3,138
|
||||||||
|
837
|
3,921
|
12,827
|
||||||||||
|
Provision
for income taxes
|
$
|
1,602
|
$
|
4,808
|
$
|
14,668
|
||||||
The
provision for income taxes for the year ended December 31, 2008 included the
recognition of $0.7 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 year ended December 26, 2007 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.
The
following represents the approximate tax effect of each significant type of
temporary difference giving rise to deferred income tax assets or liabilities
from continuing operations:
|
December
31, 2008
|
December
26, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Lease
liabilities
|
$
|
947
|
$
|
1,514
|
||||
|
Self-insurance
accruals
|
15,076
|
15,881
|
||||||
|
Capitalized
leases
|
4,789
|
5,113
|
||||||
|
Closed
store liabilities
|
4,765
|
4,444
|
||||||
|
Fixed
assets
|
24,304
|
22,674
|
||||||
|
Pension,
other retirement and compensation plans
|
18,761
|
13,286
|
||||||
|
Other
accruals
|
5,047
|
4,029
|
||||||
|
Alternative
minimum tax credit carryforwards
|
12,629
|
12,941
|
||||||
|
General
business credit carryforwards
|
43,945
|
44,406
|
||||||
|
Net
operating loss carryforwards - state
|
31,346
|
34,520
|
||||||
|
Net
operating loss carryforwards - federal
|
15,059
|
22,021
|
||||||
|
Total
deferred tax assets before valuation allowance
|
176,668
|
180,829
|
||||||
|
Less:
valuation allowance
|
(161,803
|
)
|
(164,857
|
)
|
||||
|
Deferred
tax assets
|
14,865
|
15,972
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Intangible
assets
|
(27,210
|
)
|
(27,551
|
)
|
||||
|
Total
deferred tax liabilities
|
(27,210
|
)
|
(27,551
|
)
|
||||
|
Net
deferred tax liability
|
$
|
(12,345
|
)
|
$
|
(11,579
|
)
|
||
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. The valuation allowance decreased
$3.1 million during the year ended December 31, 2008. The South
Carolina net operating loss carryforwards represent 76% of the total state net
operating loss carryforwards. 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 years ended December 31, 2008
and December 26, 2007, we recognized approximately $0.1 million and $4.5
million, respectively, of federal and state deferred tax expense with a
corresponding reduction to goodwill (see Note 5) in connection with fresh start
reporting.
F-21
Note 14.
Income Taxes (Continued)
Any
additional reversal of the valuation allowance established in connection with
fresh start reporting on January 7, 1998 (approximately $41.4 million at
December 31, 2008) would be applied first to goodwill recorded in
connection with fresh start reporting, then to reduce other identifiable
intangible assets, followed by a credit directly to equity. Effective first
quarter of 2009, SFAS 141R will require any additional reversal of deferred tax
asset valuation allowance established in connection with fresh start reporting
be recorded as a component of income tax expense.
The
difference between our statutory federal income tax rate and our effective tax
rate on loss from continuing operations is as follows:
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
Statutory
provision (benefit) rate
|
35
|
%
|
35
|
%
|
35
|
%
|
||||||
|
Differences:
|
||||||||||||
|
State,
foreign, and other taxes, net of federal income tax
benefit
|
6
|
3
|
9
|
|||||||||
|
Portion
of net operating losses, capital losses and unused
income
tax
credits
resulting from the establishment or reduction in the valuation
allowance
|
(31
|
)
|
(23
|
)
|
(11
|
)
|
||||||
|
Other
|
—
|
|
(2
|
)
|
—
|
|||||||
|
Effective
tax rate
|
10
|
%
|
13
|
%
|
33
|
%
|
||||||
At
December 31, 2008, Denny’s has available, on a consolidated basis, general
business credit carryforwards of approximately $43.9 million, most of which
expire in 2009 through 2028, and alternative minimum tax, ("AMT"), credit
carryforwards of approximately $12.6 million, which never expire. Denny’s also
has available regular NOL and AMT NOL carryforwards of approximately $43.0
million and $125.2 million, respectively, which expire in 2012 through 2028.
Prior to 2005, Denny’s had ownership changes within the meaning of
Section 382 of the Internal Revenue Code. Because of these changes, the
amount of our NOL carryforwards along with any other tax carryforward attribute,
for periods prior to the dates of change, are limited to an annual amount which
may be increased by the amount of our net unrealized built-in gains at the time
of any ownership change recognized in that taxable year. Therefore, some of our
tax attributes recorded in the gross deferred tax asset inventory may expire
prior to their utilization. A valuation allowance has already been established
for a significant portion of these deferred tax assets since it is our position
it is more-likely-than-not the tax benefit will not be realized from these
assets.
Adoption
of FIN 48
Effective
December 28, 2006, the first day of fiscal 2007, we adopted FIN 48. This
interpretation clarifies the accounting for uncertainty in income tax recognized
in an entity’s financial statements in accordance with Statement of Financial
Accounting Standards No. 109 “Accounting for Income Taxes.” FIN 48 requires
companies to determine whether it is more-likely-than-not that a tax position
will be sustained upon examination by the appropriate taxing authorities before
any part of the benefit can be recorded in the financial statements. This
interpretation also provides guidance on derecognition, classification,
accounting in interim periods, and expanded disclosure requirements. FIN 48 does
not require or permit retrospective application, thus the cumulative effect of
the change in accounting principle, if any, is recorded as an adjustment to
opening retained earnings.
We file
income tax returns in the U.S. federal jurisdictions and various state
jurisdictions. With few exceptions, we are no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for
years before 2005. We remain subject to examination for U.S. federal taxes
for 2005-2008 and in the following major state jurisdictions: California
(2004-2008); Florida (2005-2008) and Texas (2004-2008).
As a
result of the implementation of FIN 48, we did not recognize any change to our
liability for unrecognized tax benefits. The total amount of unrecognized tax
benefits as of the date of adoption was approximately $0.7 million. These
benefits affect our effective tax rate when recognized.
We
recognize interest and penalties accrued related to unrecognized tax benefits in
income tax expense. The total amount of accrued interest and penalties at
the date of adoption was less than $0.1 million. For the years ending
December 31, 2008 and December 26, 2007, no amount of interest and penalties was
recognized in our Consolidated Balance Sheet and Consolidated Statement of
Operations.
The
components of the change in unrecognized tax benefits are as
follows:
|
December
31, 2008
|
||||
|
(In
thousands)
|
||||
|
Balance,
as of December 26, 2007
|
$
|
226
|
||
|
Change
resulting from tax positions taken during a prior
year:
|
||||
|
Increase
|
1,045
|
|||
|
Decrease
|
—
|
|||
|
Change
resulting from tax positions taken during the current
year:
|
||||
|
Increase
|
—
|
|||
|
Decrease
|
—
|
|||
|
Decrease from
settlements with taxing authorities
|
—
|
|
||
|
Decrease from
a lapse of the applicable statute of
limitations
|
—
|
|||
|
Balance,
as of December 31, 2008
|
$
|
1,271
|
||
$0.2
million of the $1.3 million of unrecognized benefits as of December 31, 2008
will impact our effective rate. We expect the unrecognized tax benefits will
increase over the next twelve months by less than $1.0 million, of which less
than $0.3 million of this change is expected to impact our effective rate. This
change is due to the timing of recognition on certain income items.
F-22
Note
15. Share-Based Compensation
Share-Based
Compensation Plans
We
maintain five share-based compensation plans (the Denny’s Corporation 2008 Omnibus Incentive Plan (the
“2008 Omnibus Plan”), the Denny’s Corporation Amended and Restated 2004
Omnibus Incentive Plan (the “2004 Omnibus Plan”), the Denny’s, Inc. Omnibus
Incentive Compensation Plan for Executives, the Advantica Stock Option Plan and
the Advantica Restaurant Group Director Stock Option Plan) under which stock
options and other awards granted to our employees and directors are
outstanding.
On May 21,
2008, our stockholders approved the 2008
Omnibus Plan which, in addition to the 2004 Omnibus Plan, will be used to grant
share-based compensation to our employees, officers and directors. Four and a
half million shares of our common stock are reserved for issuance upon the grant
and exercise of awards pursuant to the 2008 Omnibus Plan. The 2008 Omnibus Plan
authorizes the granting of incentive awards from time to time to selected
employees, officers and directors of Denny’s and its affiliates. However, we
reserve the right to pay discretionary bonuses, or other types of compensation,
outside of the 2008 Omnibus Plan. We will not grant any awards under the 2008 Omnibus Plan
to our current President and Chief Executive Officer, but may continue to grant
awards to him under the 2004 Omnibus Plan.
On August
25, 2004, our stockholders approved the 2004 Omnibus Plan which replaced the
other plans existing at that time as the vehicle for granting share-based
compensation to our employees, officers and directors. Ten million shares of our
common stock are reserved for issuance upon the grant and exercise of awards
pursuant to the 2004 Omnibus Plan, plus a number of additional shares (not to
exceed 1,500,000) underlying awards outstanding as of August 25, 2004 pursuant
to the other plans which thereafter cancel, terminate or expire unexercised for
any reason. The 2004 Omnibus Plan authorizes the granting of incentive awards
from time to time to selected employees, officers and directors of Denny’s and
its affiliates. However, we reserve the right to pay discretionary bonuses, or
other types of compensation, outside of the 2004 Omnibus Plan.
The
Compensation Committee, or the Board of Directors as a whole, has sole
discretion to determine the exercise price, term and vesting schedule of options
awarded under such plans. Under the terms of the above referenced plans,
generally, optionees who terminate for any reason other than cause, disability,
retirement or death will be allowed 60 days after the termination date to
exercise vested options. Vested options are exercisable for one year when
termination is by a reason of disability, retirement or death. If termination is
for cause, no option shall be exercisable after the termination
date.
Additionally,
under the 2008 Omnibus Plan, the 2004
Omnibus Plan and the previous director plan, directors have been granted options
under terms which are substantially similar to the terms of the plans noted
above.
Adoption
of SFAS 123(R)
Effective
December 29, 2005, the first day of fiscal 2006, we adopted SFAS 123(R). This
standard requires all share-based compensation to be recognized in the statement
of operations based on fair value and applies to all awards granted, modified,
cancelled or repurchased after the effective date. Additionally, for awards
outstanding as of December 29, 2005 for which the requisite service had not been
rendered, compensation expense was recognized as the requisite service is
rendered. The statement also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow.
Under
SFAS 123(R), we are required to estimate potential forfeitures of share-based
awards and adjust the compensation cost accordingly. Our estimate of forfeitures
will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Prior to the
adoption of SFAS 123(R), we recorded forfeitures as they occurred. As a result
of this change, we recognized a cumulative effect of change in accounting
principle in our Consolidated Statement of Operations for the year ended
December 27, 2006 of $0.2 million. Additionally, in accordance with SFAS
123(R), $2.5 million related to restricted stock units payable in shares,
previously recorded as liabilities, was reclassified to additional paid-in
capital in our Consolidated Balance Sheet for the year ended December 27, 2006.
Our previous practice was to accrue compensation expense for restricted stock
units payable in shares as a liability until such time as the shares were
actually issued.
Total
share-based compensation included as a component of net income was as follows
(in thousands):
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
Share-based
compensation related to liability classified restricted
stock
units
|
$
|
92
|
$
|
1,407
|
$
|
2,311
|
||||||
|
Share-based
compensation related to equity classified awards:
|
||||||||||||
|
Stock
options
|
$
|
1,817
|
$
|
1,386
|
$
|
3,234
|
||||||
|
Restricted
stock units
|
1,980
|
1,657
|
1,766
|
|||||||||
|
Board
deferred stock units
|
228
|
324
|
316
|
|||||||||
|
Total
share-based compensation related to equity classified
awards
|
4,025
|
3,367
|
5,316
|
|||||||||
|
Total
share-based compensation
|
$
|
4,117
|
$
|
4,774
|
$
|
7,627
|
||||||
F-23
Note
15. Share-Based Compensation (Continued)
Stock
Options
Options
granted to date generally vest evenly over 3 years, have a 10-year contractual
life and are issued at the market value at the date of grant.
The
following tables summarizes information about stock option outstanding and
exercisable at December 31, 2008:
|
Options
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Life
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
(In
thousands)
|
(In
thousands)
|
|||||||||||||||
|
Outstanding,
beginning of year
|
7,978
|
$
|
2.55
|
|||||||||||||
|
Granted
|
1,674
|
2.65
|
||||||||||||||
|
Exercised
|
(702
|
)
|
1.42
|
|||||||||||||
| Forfeited | (639 | ) | 3.46 | |||||||||||||
|
Expired
|
(386
|
)
|
4.21
|
|||||||||||||
|
Outstanding,
end of year
|
7,925
|
2.51
|
4.80
|
$
|
2,252
|
|||||||||||
|
Exercisable,
end of year
|
6,203
|
2.33
|
3.67
|
$
|
2,252
|
|||||||||||
The
aggregate intrinsic value was calculated using the difference between the market
price of our stock on December 31, 2008 and the exercise price for only those
options that have an exercise price that is less than the market price of our
stock. The aggregate intrinsic value of the options exercised was $1.1
million, $3.3 million and $3.0 million during the years ended December 31, 2008,
December 26, 2007 and December 27, 2006, respectively.
The
following table summarizes information about stock options outstanding at
December 31, 2008 (option amounts in thousands):
|
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted-Average
Remaining
Contractual
Life
|
Weighted-Average
Exercise Price
|
Number
Exercisable
|
Weighted-Average
Exercise Price
|
|||||||||||||||||
| $ | 0.54 – 0.92 |
796
|
3.18
|
$
|
0.74
|
796
|
$
|
0.74
|
||||||||||||||
| 1.03 – 1.03 |
1,250
|
2.10
|
1.03
|
1,250
|
1.03
|
|||||||||||||||||
| 1.06 – 2.00 |
810
|
2.10
|
1.93
|
810
|
1.93
|
|||||||||||||||||
| 2.42 – 2.42 |
1,662
|
4.88
|
2.42
|
1,662
|
2.42
|
|||||||||||||||||
| 2.59 – 2.59 |
1,229
|
8.71
|
2.59
|
92
|
2.59
|
|||||||||||||||||
| 2.65 – 4.10 |
816
|
4.03
|
3.57
|
646
|
3.60
|
|||||||||||||||||
| 4.34 – 4.61 |
1,142
|
6.80
|
4.49
|
804
|
4.45
|
|||||||||||||||||
| 4.75 – 5.40 |
175
|
7.58
|
5.38
|
98
|
5.37
|
|||||||||||||||||
| 6.31 – 6.31 |
10
|
0.01
|
6.31
|
10
|
6.31
|
|||||||||||||||||
| 7.00 – 7.00 |
35
|
0.09
|
7.00
|
35
|
7.00
|
|||||||||||||||||
|
7,925
|
4.80
|
6,203
|
||||||||||||||||||||
On
November 11, 2004, we granted options under the 2004 Omnibus Plan to certain
employees with an exercise price of $2.42 (included in the table above). These
options vested with respect to 1/3 of the shares on each of December 29,
2004, December 28, 2005 and December 27, 2006, respectively, and were fully
vested at December 27, 2006. The vesting of these options was subject to the
achievement of certain performance measures which were met as of December 29,
2004. As a result of performance criteria and the issuance of the options with
an exercise price below the market price at the date of grant, prior to the
adoption of SFAS 123(R), we recognized compensation expense related to these
options equal to the difference between the exercise price of the options and
the market price of $4.40 on December 29, 2004, the measurement date, ratably
over the options’ vesting period.
The
weighted average fair value per option of options granted during the years ended
December 31, 2008, December 26, 2007 and December 27, 2006 was $1.18, $3.07 and
$3.20, respectively.
The fair
value of the stock options granted in the periods ended December 31, 2008,
December 26, 2007 and December 27, 2006 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 our Consolidated Statements of Operations. We used the
following weighted average assumptions for the grants:
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
Dividend
yield
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||
|
Expected
volatility
|
50.1
|
%
|
67.5
|
%
|
87.1
|
%
|
||||||
|
Risk-free
interest rate
|
2.7
|
%
|
4.6
|
%
|
4.7
|
%
|
||||||
|
Weighted
average expected term
|
4.6
years
|
6.0
years
|
6.0 years
|
|||||||||
The
dividend yield assumption was based on our dividend payment history and
expectations of future dividend payments. The expected volatility was based on
the historical volatility of our stock for a period approximating the expected
life. The risk-free interest rate was based on published U.S. Treasury spot
rates in effect at the time of grant with terms approximating the expected life
of the option. The weighted average expected term of the options represents the
period of time the options are expected to be outstanding based on historical
trends.
F-24
Note 15.
Share-Based Compensation (Continued)
Compensation
expense for options granted prior to fiscal 2006 is recognized based on the
graded vesting attribution method. Compensation expense for options
granted subsequent to December 28, 2005 is recognized on a straight-line basis
over the requisite service period for the entire award. We recognized
compensation expense of approximately $1.8 million, $1.4 million and $3.2
million for the years ended December 31, 2008, December 26, 2007 and December
27, 2006, respectively, related to all options, which is included as a
component of general and administrative expenses in our Consolidated
Statements of Operations.
As of
December 31, 2008, we had approximately $2.0 million of unrecognized
compensation cost related to unvested stock option awards granted, which is
expected to be recognized over a weighted average of 1.9 years.
Restricted
Stock Units
The
following table summarizes information about restricted stock units outstanding
at December 31, 2008:
|
Units
|
Weighted-Average
Grant Date
Fair
Value
|
|||||||
|
(In
thousands)
|
||||||||
|
Outstanding,
beginning of year
|
2,828
|
$
|
4.32
|
|||||
|
Granted
|
1,204
|
2.57
|
||||||
|
Vested
|
(452
|
)
|
4.30
|
|||||
|
Forfeited
|
(485
|
)
|
4.07
|
|||||
|
Outstanding,
end of year
|
3,095
|
3.68
|
||||||
In July
2008, we granted approximately 1.2 million restricted stock units to certain
employees. The awards (which are equity classified) have a grant date fair
value of $2.56 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. As of December 31, 2008,
approximately 1.1 million of the restricted stock units were
outstanding.
During
fiscal 2007, we granted approximately 0.6 million performance shares (which are
equity classified) and 0.6 million performance units (which are liability
classified) with a grant date fair value of $4.61 per share to certain
employees. The awards were earned at 100% of the target award based on certain
operating performance measures for fiscal 2007. The performance shares and units
vest 15% as of December 26, 2007, 35% as of December 31, 2008 and 50% as of
December 30, 2009. Subsequent to the vesting periods, the earned performance
shares will be paid to the holder in shares of common stock and the earned
performance units will be paid to the holder in cash, provided the holder is
then still employed with Denny’s or an affiliate. During the year ended December
31, 2008, we paid $0.4 million in cash and issued 0.1 million shares of common
stock related to the 0.1 million performance units and 0.1 million performance
shares that vested on December 26, 2007. Compensation expense related to the
awards is based on the number of shares and units expected to vest, the
period over which they are expected to vest and the fair market value of the
common stock on the date of grant. As of December 31, 2008, approximately
0.4 million and 0.4 million of the performance shares and units were
outstanding, respectively.
In
addition, during fiscal 2007, we granted approximately 0.1 million stock-settled
restricted stock units (which are equity classified) and 0.1
million cash-settled restricted stock units (which are liability
classified) with a grant date fair value of $4.55 per share to the
Company's Chief Financial Officer. The stock-settled and cash-settled units
will vest in 20% annual increments between July 9, 2008 and July 9, 2012.
The vested stock-settled units will be paid in shares of common stock on July 9,
2012 and the vested cash-settled units will be paid in cash as of each
vesting period, provided that he is then still employed with Denny's or an
affiliate, previously terminated due to death or disability or previously
terminated within two years following a change in control by the Company without
cause or by grantee for good reason. During the year ended December 31,
2008, we paid less then $0.1 million in cash related to the cash-settled
restricted stock units that vested on July 9, 2008. Compensation expense related
to the equity classified restricted stock units is based on the number of shares
expected to vest, the period over which the shares are expected to
vest and the fair market value of the common stock on the grant date.
Compensation expense related to the liability classified restricted stock units
is based on the number of units expected to vest, the period over which the
units are expected to vest and the fair market value of the common stock on
the date of payment. Therefore, balances related to the liability classified
units are adjusted to fair value at each balance sheet date. As of
December 31, 2008, approximately 0.1 million and less than 0.1 million of
the stock-settled restricted stock units and cash-settled restricted stock units
were outstanding, respectively.
During
fiscal 2006, we granted approximately 0.4 million performance shares (which
are equity classified) and 0.4 million performance units (which are liability
classified) with a grant date fair value of $4.45 per share to certain
employees. The awards were earned at 100% of the target award based on
certain operating performance measures for fiscal 2006. The performance shares
and units will vest over a period of two years based on continued
employment of the holder. Subsequent to the two-year vesting period, the earned
performance shares restricted stock units will be paid to the holder in
shares of common stock and the performance units will be paid to the holder in
cash, provided the holder is then still employed with Denny's or an affiliate.
Compensation expense related to the awards is based on the number of shares and
units expected to vest, the period over which they are expected to vest and
the fair market value of the common stock on the date of grant. As of
December 31, 2008, approximately 0.2 million and 0.2 million of the
performance shares and units were outstanding, respectively.
F-25
Note 15.
Share-Based Compensation (Continued)
During
fiscal 2005, we granted approximately 0.3 million performance shares (which
are equity classified) and 0.3 million performance units (which are liability
classified) with a grant date fair value of $4.06 per share to certain
employees. The awards will be earned in 1/3 increments (from 0% to 100% of the
target award for each such increment) based on the “total shareholder return” of
our common stock over a 1-year performance period (measured as the increase of
stock price plus reinvested dividends, divided by beginning stock price) as
compared with the total shareholder return of a peer group of restaurant
companies over the same period. The annual periods ended June 30, 2006,
2007 and 2008. The first two incremental portions of the awards were
not earned during the three annual periods, but will be considered earned after
5 years based on continued employment. The third incremental portion of the
awards was earned on June 30, 2008. Once earned, the performance shares and
units will vest over a period of two years based on continued employment of
the holder. On each of the first two anniversaries of the end of the performance
period, 50% of the earned performance shares will be paid to the holder in
shares of common stock and 50% of the earned performance units will be paid
to the holder in cash, provided that the holder is then still employed with
Denny’s or an affiliate. Compensation expense related to the equity classified performance
shares is based on the number of shares expected to vest,
the period over which the shares are expected to vest and the
fair market value of the common stock on the grant date. Compensation expense
related to the liability classified performance units is based on the number of
units expected to vest, the period over which the units are expected to
vest and the fair market value of the common stock on the date of payment.
Therefore, balances related to the liability classified units are adjusted
to fair value at each balance sheet date. As of December 31, 2008,
approximately 0.2 million and 0.2 million of the performance shares and
units were outstanding, respectively.
During
fiscal 2004, we granted approximately 1.7 million performance shares (which are
equity classified) and 1.7 million performance units (which are liability
classified) with a grant date fair value of $4.22 per share to certain
employees. These awards will be earned in 1/3 increments (from 0% to 100% of the
target award for each such increment) based on the “total shareholder return” of
our common stock over a 1-year performance period (measured as the increase of
stock price plus reinvested dividends, divided by beginning stock price) as
compared with the total shareholder return of a peer group of restaurant
companies over the same period. The annual periods ended on June 30, 2005,
2006 and 2007. The first 1/3 of the award was earned on June 30, 2005. The
second 1/3 of the award was not earned on June 30, 2006, but was cumulatively
earned on June 30, 2007. The third 1/3 of the award was not earned on June 30,
2007, but will be considered earned after 5 years based on continued employment.
Once earned, the performance shares and units will vest over a period of two
years based on continued employment of the holder. On each of the first two
anniversaries of the end of the performance period, 50% of the earned
performance shares will be paid to the holder in shares of common stock and 50%
of the earned performance units will be paid to the holder in cash, provided
that the holder is then still employed with Denny’s or an affiliate. During the
year ended December 31, 2008, we paid $0.5 million in cash and issued 0.2
million shares of common stock related to the 0.2 million performance units and
0.2 million performance shares that vested as of June 30, 2008. During the year
ended December 26, 2007, we paid $0.9 million in cash and issued 0.2 million
shares of common stock related to the 0.2 million performance units and 0.2
million performance shares that vested as of June 30, 2007. During the year
ended December 27, 2006, we paid $0.8 million in cash and issued 0.2 million
shares of common stock related to the 0.2 million performance units and 0.2
million performance shares that vested as of June 30, 2006. Compensation expense
related to the equity classified performance shares is based on the
number of shares expected to vest, the period over which the
shares are expected to vest and the fair market value of the common
stock on the grant date. Compensation expense related to the liability
classified performance units is based on the number of units expected to vest,
the period over which the units are expected to vest and the fair market
value of the common stock on the date of payment. Therefore, balances related to
the liability classified units are adjusted to fair value at each balance sheet
date. As of December 31, 2008, approximately 0.4 million and 0.4 million of
the performance shares and units were outstanding, respectively.
We
recognized compensation expense of approximately $2.1 million, $3.1 million and
$4.1 million for the years ended December 31, 2008, December 26, 2007 and
December 27, 2006, respectively, related to the restricted stock units, which is
included as a component of general and administrative expenses in
our Consolidated Statements of Operations.
At
December 31, 2008, approximately $2.0 million and $1.1 million of accrued
compensation was included as a component of other current liabilities and other
noncurrent liabilities in our Consolidated Balance Sheet, respectively, (based
on the fair value of the related shares for the liability classified units as of
December 31, 2008) and $5.1 million was included as a component of additional
paid-in-capital in our Consolidated Balance Sheet related to the equity
classified restricted stock units. At December 26, 2007, approximately $1.2
million and $2.8 million of accrued compensation was included as a component of
other current liabilities and other noncurrent liabilities in our
Consolidated Balance Sheet, respectively, (based on the fair value of the
related shares for the liability classified units as of December 26, 2007)
and $3.9 million was included as a component of additional paid-in capital in
our Consolidated Balance Sheet related to the equity classified restricted
stock units.
As of
December 31, 2008, we had approximately $3.6 million of unrecognized
compensation cost (approximately $0.4 million for liability classified units and
approximately $3.2 million for equity classified units) related to unvested
restricted stock unit awards granted, which is expected to be recognized over a
weighted average of 1.4 years.
Board
Deferred Stock Units
Non-employee
members of the Board of Directors are granted deferred stock units in return for
attendance at non-regularly scheduled meetings. These awards are restricted in
that they may not be exercised until the recipient has ceased serving as a
member of the Board of Directors for Denny's. The fair value of the deferred
stock units is based upon the fair value of the underlying common stock on the
date of grant. We recognized compensation expense of approximately $0.2 million,
$0.3 million and $0.3 million for the years ended December 31, 2008, December
26, 2007 and December 27, 2006, respectively, related to the board deferred
stock units, which is included as a component of general and administrative
expenses in our Consolidated Statements of Operations. During 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. As of December 31, 2008
and December 26, 2007, approximately 0.2 million and 0.2 million of these units
were outstanding, respectively. As of December 31, 2008, there was no
unrecognized compensation cost related to deferred stock units.
F-26
Note
16. Net Income Per Share
The net
income per share for the years ending December 31, 2008, December 26, 2007 and
December 27, 2006 were as follows:
|
Fiscal Year
Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Numerator
for basic and diluted net income per share - net
income
from continuing operations before cumulative effect of change in
accounting principle
|
$
|
14,662
|
$
|
31,351
|
$
|
30,106
|
||||||
|
Numerator
for basic and diluted net income per share - net
income
|
$
|
14,662
|
$
|
31,351
|
$
|
30,338
|
||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic net income per share—weighted average
shares
|
95,230
|
93,855
|
92,250
|
|||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Options
|
2,141
|
3,948
|
4,305
|
|||||||||
|
Restricted
stock units and awards
|
1,471
|
1,041
|
809
|
|||||||||
|
Denominator
for diluted net income per share—adjusted weighted
average
shares and assumed conversions of dilutive
securities
|
98,842
|
98,844
|
97,364
|
|||||||||
|
Basic
net income per share before cumulative effect of change in
accounting
principle
|
$
|
0.15
|
$
|
0.33
|
$
|
0.33
|
||||||
|
Diluted
net income per share before cumulative effect of change in
accounting
principle
|
$
|
0.15
|
$
|
0.32
|
$
|
0.31
|
||||||
|
Basic
net income per share
|
$
|
0.15
|
$
|
0.33
|
$
|
0.33
|
||||||
|
Diluted
net income per share
|
$
|
0.15
|
$
|
0.32
|
$
|
0.31
|
||||||
|
Stock
options excluded (1)
|
3,413
|
1,839
|
1,468
|
|||||||||
|
(1)
|
Excluded
from diluted weighted-average shares outstanding as the impact would be
antidilutive.
|
Note 17.
Stockholders’ Equity
Stockholders’
Rights Plan
Our Board
of Directors adopted a stockholders’ rights plan on December 14, 1998 which
was designed to provide protection for our shareholders against coercive or
unfair takeover tactics. The rights plan was also designed to prevent an
acquirer from gaining control of Denny’s without offering a fair price to all
shareholders. The rights plan was not adopted in response to any specific
proposal or inquiry to gain control of Denny’s. The rights plan expired on
December 30, 2008 pursuant to its own terms.
Note
18. 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 liabilities
reflecting our best estimate of loss, 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 other operating expenses in our
Consolidated Statements of Operations as those costs are
incurred.
We have
amounts payable under purchase contracts for food and non-food products. In most
cases, these agreements do not obligate us to purchase any specific volumes and
include provisions that would allow us to cancel such agreements with
appropriate notice. Our future commitments at December 31, 2008 under these
contracts consist of the following:
|
Purchase
Obligations
|
||||
|
(In
thousands)
|
||||
|
Payments due by
period:
|
||||
|
Less
than 1 year
|
$
|
184,834
|
||
|
1-2
years
|
14,929
|
|||
|
3-4
years
|
—
|
|||
|
5
years and thereafter
|
—
|
|||
|
Total
|
$
|
199,763
|
||
Amounts
included in the table above represent our estimate of purchase obligations
during the periods presented if we were to cancel these contracts with
appropriate notice. We would likely take delivery of goods under such
circumstances.
F-27
Note 19.
Supplemental Cash Flow Information
|
Fiscal
Year Ended
|
||||||||||||
|
December
31, 2008
|
December
26, 2007
|
December
27, 2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Income
taxes paid, net
|
$
|
1,067
|
$
|
2,257
|
$
|
1,292
|
||||||
|
Interest
paid
|
$
|
34,858
|
$
|
37,772
|
$
|
56,063
|
||||||
|
Noncash
investing activities:
|
||||||||||||
|
Notes
received in connection with disposition of property
|
$
|
2,670
|
$
|
—
|
$
|
—
|
||||||
|
Accrued
purchase of property
|
$
|
1,011
|
$
|
2,718
|
$
|
1,695
|
||||||
|
Execution
of direct financing leases
|
$
|
4,287
|
1,906
|
—
|
||||||||
|
Net
proceeds receivable from disposition of property
|
$
|
—
|
$
|
—
|
$
|
226
|
||||||
|
Noncash
financing activities:
|
||||||||||||
|
Issuance
of common stock, pursuant to share-based compensation
plans
|
$
|
1,268
|
$
|
1,125
|
$
|
1,128
|
||||||
|
Execution
of capital leases
|
$
|
5,242
|
$
|
2,065
|
$
|
4,133
|
||||||
Note
20. Related Party Transactions
During
fiscal 2008 and 2007, we sold company-owned restaurants to franchisees
that are former employees, including two former executives. We
received cash proceeds of $5.1 million and recognized losses of $2.0 million
from these related party sales during the year ended December 31, 2008. We
received cash proceeds of $9.1
million and recognized gains of $0.6 million from these related party sales
during the year ended December 26, 2007. There were no sales of
company-owned restaurants to former employees during the year ended December 27,
2006. In relation to these sales, we may enter into leases or subleases
with the franchisees. These leases and subleases are entered into at fair market
value.
Note 21.
Quarterly Data (Unaudited)
The
results for each quarter include all adjustments which, in our opinion, are
necessary for a fair presentation of the results for interim periods. All
adjustments are of a normal and recurring nature.
Selected
consolidated financial data for each quarter of fiscal 2008 and 2007 are set
forth below:
|
Fiscal
Year Ended December 31, 2008
|
||||||||||||||||
|
First Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter (a)
|
|||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||
|
Company
restaurant sales
|
$
|
169,593
|
$
|
163,233
|
$
|
160,608
|
$
|
154,830
|
||||||||
|
Franchise
and licensing revenue
|
26,403
|
27,039
|
28,667
|
29,898
|
||||||||||||
|
Total
operating revenue
|
195,996
|
190,272
|
189,275
|
184,728
|
||||||||||||
|
Total
operating costs and expenses
|
176,749
|
179,735
|
168,586
|
174,290
|
||||||||||||
|
Operating
income
|
$
|
19,247
|
$
|
10,537
|
$
|
20,689
|
$
|
10,438
|
||||||||
|
Net
income (loss)
|
$
|
4,124
|
$
|
3,151
|
$
|
10,562
|
$
|
(3,175
|
)
|
|||||||
|
Basic
and diluted net income (loss) per share (b)
|
$
|
0.04
|
$
|
0.03
|
$
|
0.11
|
$
|
(0.03
|
)
|
|||||||
|
(a)
|
The
fiscal year ended December 31, 2008 includes 53 weeks of operations as
compared to 52 weeks for all other years presented.
|
|
(b)
|
Per
share amounts do not necessarily sum to the total year amounts due to
changes in shares outstanding and
rounding.
|
|
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.
|
The
fluctuations in net income during the fiscal 2008 and 2007 quarters relate
primarily to the timing of the sale of company-owned restaurants to
franchisees.
F-28
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date:
March 12, 2009
|
DENNY'S
CORPORATION
|
|
|
BY:
|
/s/ F. Mark
Wolfinger
|
|
F.
Mark Wolfinger
|
|
|
Executive
Vice President,
Chief
Administrative Officer and
Chief
Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Nelson J.
Marchioli
|
President,
Chief Executive Officer and Director
|
March
12, 2009
|
|
(Nelson
J. Marchioli)
|
(Principal
Executive Officer)
|
|
|
/s/ F. Mark
Wolfinger
|
Executive
Vice President, Chief Administrative Officer and Chief Financial
Officer
|
March
12, 2009
|
|
(F.
Mark Wolfinger)
|
(Principal
Financial Officer)
|
|
|
/s/ Jay C.
Gilmore
|
Vice
President, Chief Accounting Officer and Corporate
Controller
|
March
12, 2009
|
|
(Jay
C. Gilmore)
|
(Principal
Accounting Officer)
|
|
|
/s/ Debra
Smithart-Oglesby
|
Director
and Chair of the Board of Directors
|
March
12, 2009
|
|
(Debra
Smithart-Oglesby)
|
||
|
/s/ Vera K.
Farris
|
Director
|
March
12, 2009
|
|
(Vera
K. Farris)
|
||
|
/s/ Brenda J.
Lauderback
|
Director
|
March
12, 2009
|
|
(Brenda
J. Lauderback)
|
||
|
/s/ Robert E.
Marks
|
Director
|
March
12, 2009
|
|
(Robert
E. Marks)
|
||
|
/s/ Michael
Montelongo
|
Director
|
March
12, 2009
|
|
(Michael
Montelongo)
|
||
|
/s/ Louis P.
Neeb
|
Director
|
March
12, 2009
|
|
(Louis
P. Neeb)
|
||
|
/s/ Donald C.
Robinson
|
Director
|
March
12, 2009
|
|
(Donald
C. Robinson)
|
||
|
/s/ Donald R.
Shepherd
|
Director
|
March
12, 2009
|
|
(Donald
R. Shepherd)
|