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
|
|||||||