Annual Statements Open main menu

DENNY'S Corp - Quarter Report: 2011 September (Form 10-Q)

q3-2011_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 28, 2011

 DENNY'S CORPORATION LOGO
 
Commission File Number 0-18051
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
13-3487402
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization
 
Identification No.)

203 East Main Street
Spartanburg, South Carolina 29319-0001
(Address of principal executive offices)
(Zip Code)

(864) 597-8000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes  þ    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
       
(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
 
As of October 31, 2011, 96,362,731 shares of the registrant’s common stock, par value $.01 per share, were outstanding.
 

 
 
 
 

 
 
TABLE OF CONTENTS
 
   
 Page
   
     
   
   
 
3
 
4
 
5
 
6
 
7
 
15
 
23
 
23
     
   
     
 
23
 
24
 
24
 
25
     

 

 
 
 
2

 
 
 
PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

   
Quarter Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands, except per share amounts)
 
Revenue:
                       
Company restaurant sales
 
$
104,659
   
$
107,171
   
$
313,235
   
$
320,255
 
Franchise and license revenue
   
32,023
     
32,761
     
95,105
     
92,326
 
Total operating revenue
   
136,682
     
139,932
     
408,340
     
412,581
 
Costs of company restaurant sales:
                               
Product costs
   
25,847
     
25,405
     
77,095
     
75,597
 
Payroll and benefits
   
41,261
     
41,533
     
127,876
     
129,072
 
Occupancy
   
6,928
     
7,097
     
20,581
     
21,406
 
Other operating expenses
   
15,851
     
17,158
     
46,437
     
49,016
 
Total costs of company restaurant sales
   
89,887
     
91,193
     
271,989
     
275,091
 
Costs of franchise and license revenue
   
10,747
     
12,009
     
33,397
     
35,498
 
General and administrative expenses
   
13,335
     
14,375
     
41,566
     
40,560
 
Depreciation and amortization
   
6,955
     
7,320
     
21,377
     
21,984
 
Operating (gains), losses and other charges, net
   
1,791
     
(1,900
)
   
843
     
(1,594
)
Total operating costs and expenses
   
122,715
     
122,997
     
369,172
     
371,539
 
Operating income
   
13,967
     
16,935
     
39,168
     
41,042
 
Other expenses:
                               
Interest expense, net
   
4,796
     
6,394
     
15,390
     
19,306
 
Other nonoperating expense, net
   
780
     
188
     
2,526
     
746
 
Total other expenses, net
   
5,576
     
6,582
     
17,916
     
20,052
 
Net income before income taxes
   
8,391
     
10,353
     
21,252
     
20,990
 
Provision for income taxes
   
406
     
419
     
1,013
     
1,010
 
Net income
 
$
7,985
   
$
9,934
   
$
20,239
   
$
19,980
 
                                 
Net income per share:
                               
Basic
 
$
0.08
   
$
0.10
   
$
0.21
   
$
0.20
 
Diluted
 
$
0.08
   
$
0.10
   
$
0.20
   
$
0.20
 
                                 
Weighted average shares outstanding:
                               
Basic
   
96,997
     
99,579
     
98,132
     
98,646
 
Diluted
   
98,746
     
101,305
     
100,203
     
101,264
 
 
See accompanying notes
 


 
 
 
3

 
 

Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
   
September 28, 2011
   
December 29, 2010
 
   
(In thousands)
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
14,947
   
$
29,074
 
Receivables, less allowance for doubtful accounts of $5 and $207, respectively
   
13,523
     
17,280
 
Inventories
   
3,520
     
4,037
 
Assets held for sale
   
2,380
     
1,933
 
Prepaid and other current assets
   
9,979
     
10,162
 
Total current assets
   
44,349
     
62,486
 
                 
Property, net of accumulated depreciation of $239,809 and $247,492, respectively
   
120,652
     
129,518
 
                 
Other assets:
               
Goodwill
   
31,023
     
31,308
 
Intangible assets, net
   
50,092
     
52,054
 
Deferred financing costs, net
   
6,457
     
5,286
 
Other noncurrent assets
   
28,063
     
30,554
 
Total assets
 
$
280,636
   
$
311,206
 
                 
Liabilities
               
Current liabilities:
               
Current maturities of long-term debt
 
$
2,589
   
$
2,583
 
Current maturities of capital lease obligations
   
4,548
     
4,109
 
Accounts payable
   
20,280
     
25,957
 
Other current liabilities
   
57,040
     
57,685
 
Total current liabilities
   
84,457
     
90,334
 
                 
Long-term liabilities:
               
Long-term debt, less current maturities, net of discount of $2,509 and $3,455, respectively
   
205,023
     
234,143
 
Capital lease obligations, less current maturities
   
19,269
     
18,988
 
Liability for insurance claims, less current portion
   
18,190
     
18,810
 
Deferred income taxes
   
13,396
     
13,339
 
Other noncurrent liabilities and deferred credits
   
35,780
     
39,304
 
Total long-term liabilities
   
291,658
     
324,584
 
Total liabilities
   
376,115
     
414,918
 
                 
Commitments and contingencies
               
                 
Shareholders' deficit
               
Common stock $0.01 par value; authorized - 135,000; September 28, 2011: 102,546 shares issued and 96,484 shares
outstanding; December 29, 2010: 100,073 shares issued and 99,036 shares outstanding
   
1,026
     
 1,001
 
Paid-in capital
   
555,852
     
 548,490
 
Deficit
   
 (609,875
)
   
 (630,114
)
Accumulated other comprehensive loss, net of tax
   
 (19,199
)
   
 (19,199
)
    Shareholders’ deficit before treasury stock
   
(72,196
)
   
(99,822
)
    Treasury stock, at cost, 6,062 and 1,037 shares, respectively
   
(23,283
)
   
(3,890
)
Total Shareholders' Deficit
   
(95,479
)
   
(103,712
)
Total Liabilities and Shareholders' Deficit
 
$
280,636
   
$
311,206
 

See accompanying notes
 

 
 
 
4

 
 
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss
 (Unaudited)

 
   
Common Stock
   
Treasury Stock
   
Paid-in
         
Accumulated
Other
Comprehensive
   
Total
Shareholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
Loss, Net
   
Deficit
 
   
(In thousands)
 
Balance, December 29, 2010
   
100,073
   
$
1,001
     
(1,037
)
 
$
(3,890
)
 
$
548,490
   
$
(630,114
)
 
$
(19,199
)
 
$
(103,712
)
Comprehensive income:
                                                               
Net income
   
     
     
     
     
     
20,239
     
     
20,239
 
Comprehensive income
   
     
     
     
     
     
20,239
     
     
20,239
 
Share-based compensation on
equity classified awards
   
     
     
     
     
2,594
     
     
     
2,594
 
Purchase of treasury stock
   
     
     
(5,025
)
   
(19,393
)
   
     
     
     
(19,393
)
Issuance of common stock for
share-based compensation
   
391
     
4
     
     
     
(4
)
   
     
     
 
Exercise of common stock
options
   
2,082
     
21
     
     
     
4,772
     
     
     
4,793
 
Balance, September 28, 2011
   
102,546
   
$
1,026
     
(6,062
)
 
$
(23,283
)
 
$
555,852
   
$
(609,875
)
 
$
(19,199
)
 
$
(95,479
)
 
See accompanying notes
 

 
 
 
5

 
 
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net income
 
$
20,239
   
$
19,980
 
Adjustments to reconcile net income to cash flows provided by operating activities:
               
Depreciation and amortization
   
21,377
     
21,984
 
Operating (gains), losses and other charges, net
   
843
     
(1,594
)
Amortization of deferred financing costs
   
1,023
     
771
 
Amortization of debt discount
   
418
     
 
Loss on early extinguishment of debt
   
2,287
     
221
 
Loss on interest rate swap
   
     
 167
 
Deferred income tax expense
   
57
     
105
 
Share-based compensation
   
3,180
     
2,010
 
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
               
Decrease (increase) in assets:
               
Receivables
   
4,167
     
1,704
 
Inventories
   
517
     
422
 
Other current assets
   
182
     
(1,716
)
Other assets
   
965
     
(2,117
)
Increase (decrease) in liabilities:
               
Accounts payable
   
(2,145
)
   
(977
)
Accrued salaries and vacations
   
2,003
     
(5,600
)
Accrued taxes
   
1,520
     
1,932
 
Other accrued liabilities
   
(4,722
)
   
(1,496
)
Other noncurrent liabilities and deferred credits
   
(5,304
)
   
(4,203
)
Net cash flows provided by operating activities
   
46,607
     
31,593
 
                 
Cash flows from investing activities:
               
Purchase of property
   
(12,927
)
   
(13,202
)
Proceeds from disposition of property
   
4,986
     
9,917
 
Collections on notes receivable
   
756
     
3,151
 
Net cash flows used in investing activities
   
(7,185
)
   
(134
)
                 
Cash flows from financing activities:
               
Long-term debt payments
   
 (33,212
)
   
 (17,747
)
Proceeds from exercise of stock options
   
4,793
     
3,339
 
Tax withholding on share-based payments
   
(377
)
   
(154
)
Deferred financing costs
   
(3,414
)
   
(58
)
Debt transaction costs
   
 (814
)
   
 (10
)
Purchase of treasury stock
   
(19,170
)
   
 
Net bank overdrafts
   
 (1,355
)
   
 (2,716
)
Net cash flows used in financing activities
   
 (53,549
)
   
 (17,346
)
                 
(Decrease) increase in cash and cash equivalents
   
(14,127
)
   
14,113
 
                 
Cash and cash equivalents at:
               
Beginning of period
   
29,074
     
26,525
 
End of period
 
$
14,947
   
$
40,638
 
 
See accompanying notes
 

 
 
 
6

 

 
Denny’s Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s, is one of America’s largest family-style restaurant chains. At September 28, 2011, the Denny’s brand consisted of 1,677 restaurants, 1,454 (87%) of which were franchised/licensed restaurants and 223 (13%) of which were company-owned and operated.
 
The following table shows the unit activity for the quarter and three quarters ended September 28, 2011 and September 29, 2010:

   
Quarter Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
Company-owned restaurants,
beginning of period
   
225
     
228
     
232
     
233
 
Units opened
   
2
     
 6
     
8
     
10
 
Units sold to franchisees
   
(3
)
   
(2
)
   
 (13
)
   
 (11
)
Units closed
   
(1
)
   
     
 (4)
     
 —
 
End of period
   
223
     
232
     
223
     
232
 
                                 
Franchised and licensed
restaurants, beginning of period
   
1,452
     
1,328
     
1,426
     
1,318
 
Units opened
   
9
     
55
     
39
     
68
 
Units relocated
   
     
2
     
1
     
3
 
Units purchased from Company
   
3
     
2
     
13
     
11
 
Units closed (including units relocated)
   
(10
)
   
(7
)
   
(25
)
   
  (20
)
End of period
   
1,454
     
  1,380
     
1,454
     
  1,380
 
Total restaurants, end of
period
   
1,677
     
1,612
     
1,677
     
1,612
 

Of the 48 units opened and relocated during the three quarters ended September 28, 2011, eight company-owned and 15 franchise units represent conversions and openings of restaurants at Pilot Flying J Travel Centers. Of the 81 units opened and relocated during the three quarters ended September 29, 2010, ten company-owned and 43 franchise unit represent conversions and openings of restaurants at Pilot Flying J Travel Centers.

Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 29, 2010 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 29, 2010. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 28, 2011.

Note 2.     Summary of Significant Accounting Policies
 
Newly Adopted Accounting Standards
 
Fair Value
 
ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”
 
Effective December 30, 2010, the first day of fiscal 2011, we adopted the disclosure requirements of ASU No. 2010-06 about purchases, sales, issuances and settlements relating to Level 3 measurements. The adoption did not have any impact on the disclosures included in our Condensed Consolidated Financial Statements.

Receivables
 
ASU  No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”
 
Effective December 30, 2010, we adopted the disclosure provisions of ASU No. 2010-20 requiring a rollforward of the allowance for credit losses and new disclosures about modifications. The adoption resulted in increased notes receivable disclosure, but did not have any impact on our Condensed Consolidated Financial Statements.
 
Goodwill
 
ASU  No. 2010-28, “ Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)”
 
Effective December 30, 2010, we adopted ASU No. 2010-28, which modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance requires an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The adoption did not have a material impact on our Condensed Consolidated Financial Statements.
 
 
7

 
 
Accounting Standards to be Adopted
 
Fair Value
 
ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”

In May 2011, the FASB issued ASU 2011-04 to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We are required to adopt the provisions of this ASU in the first quarter of 2012. We do not believe the adoption will have a material impact on our Condensed Consolidated Financial Statements.
 
Comprehensive Income
 
ASU No. 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income"
 
In May 2011, the FASB issued ASU 2011-05, which amends existing guidance to allow only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive financial statements consisting of an income statement followed by a statement of other comprehensive income. ASU No. 2011-05 requires retrospective application. We are required to adopt the provisions of this ASU in the first quarter of 2012.  We do not believe the adoption will have a material impact on our Condensed Consolidated Financial Statements.

Goodwill
 
ASU No. 2011-08, " Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment”

In September 2011, the FASB issued ASU 2011-08, which modifies the impairment test for goodwill. Under the new guidance, an entity is permitted to make a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than the carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that a reporting unit's fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. We are required to adopt the provision of this ASU in the first quarter of 2012. We do not believe the adoption will have a material impact on our Condensed Consolidated Financial Statements.
 
Note 3.     Receivables
 
Receivables were comprised of the following:
 
   
September 28, 2011
   
December 29, 2010
 
   
(In thousands)
 
Current assets:
           
Receivables:
           
Trade accounts receivable from franchisees
 
$
9,377
   
$
11,538
 
Notes receivable from franchisees and third parties
   
1,479
     
1,020
 
Vendor receivables
   
999
     
2,571
 
Credit card receivables
   
840
     
1,206
 
Other
   
833
     
1,152
 
Allowance for doubtful accounts
   
(5
)
   
(207
)
Total receivables
 
$
13,523
   
$
17,280
 
Direct financing lease receivables (included as a component of prepaid
and other current assets)
 
$
74
   
$
74
 
                 
Noncurrent assets (included as a component of other noncurrent assets):
               
Notes receivable from franchisees and third parties
 
$
663
   
$
1,329
 
Direct financing lease receivables
   
5,522
     
5,119
 
Total noncurrent receivables
 
$
6,185
   
$
6,448
 

During the quarters ended September 28, 2011 and September 29, 2010, we reversed provisions for credit losses of $0.1 million and recorded provisions for credit losses of less than $0.1 million, respectively. During both the three quarters ended September 28, 2011 and September 29, 2010, we recorded provisions for credit losses of less than $0.1 million.

 Note 4.     Assets Held for Sale

Assets held for sale of $2.4 million and $1.9 million as of September 28, 2011 and December 29, 2010, respectively, include restaurants to be sold to franchisees. We expect to sell each of these assets within 12 months. Our credit facility (as described in Note 8) requires us to make mandatory prepayments to reduce outstanding indebtedness with the net cash proceeds from the sale of restaurant assets and restaurant operations to franchisees, net of a voluntary $25.0 million annual exclusion. As of September 28, 2011 and December 29, 2010, no reclassification of long-term debt to current liabilities was necessary pursuant to this requirement. As a result of classifying certain assets as held for sale, we recognized impairment charges of $0.8 million for the quarter and three quarters ended September 28, 2011 and $0.1 million for the quarter and three quarters ended September 29, 2010. This expense is included as a component of operating (gains), losses and other charges, net in our Condensed Consolidated Statements of Operations.

 
8

 
 
Note 5.    Goodwill and Other Intangible Assets

 The following table reflects the changes in carrying amounts of goodwill:
 
   
September 28, 2011
 
   
(In thousands)
Balance, beginning of year
 
$
31,308
 
Adjustments associated with sale of restaurants
   
(46
)
Reclassification to assets held for sale
   
(239
)
Balance, end of period
 
$
31,023
 
 
Goodwill and intangible assets were comprised of the following:
 
   
September 28, 2011
   
December 29, 2010
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Gross Carrying Amount
   
Accumulated Amortization
 
   
(In thousands)
 
Goodwill
 
$
31,023
   
$
   
$
31,308
   
$
 
                                 
Intangible assets with indefinite lives:
                               
Trade names
 
$
42,500
   
$
   
$
42,493
   
$
 
Liquor licenses
   
164
     
     
164
     
 
Intangible assets with definite lives:
                               
Franchise and license agreements
   
43,155
     
35,796
     
46,088
     
36,769
 
Foreign license agreements
   
241
     
172
     
241
     
163
 
Intangible assets
 
$
86,060
   
$
35,968
   
$
88,986
   
$
36,932
 
                                 
Other assets with definite lives:
                               
Software development costs
 
$
33,817
   
$
31,732
   
$
33,673
   
$
30,426
 
 
Note 6.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net are comprised of the following:
 
   
Quarter Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Gains on sales of assets and
other, net
 
$
(867
)
 
$
(3,757
)
 
$
(2,742
)
 
$
(5,233
)
Restructuring charges and exit
costs
   
490
     
1,778
     
1,359
     
3,560
 
Impairment charges
   
2,168
     
79
     
2,226
     
79
 
Operating (gains), losses and
other charges, net
 
$
1,791
   
$
(1,900
)
 
$
843
   
$
(1,594
)
 
Gains on Sales of Assets
 
During the quarter ended September 28, 2011, we recognized $0.6 million of gains on the sale of three restaurant operations to two franchisees for net proceeds of $0.9 million. During the quarter ended September 29, 2010, we recognized $0.1 million of gains on the sale of two restaurant operations to two franchisees for net proceeds of $0.8 million. In addition, during the quarter ended September 29, 2010, we recognized $3.7 million of gains on real estate sold to franchisees.
  
During the three quarters ended September 28, 2011, we recognized $1.4 million of gains on the sale of 13 restaurant operations to five franchisees for net proceeds of $4.1 million (which included a note receivable of $0.5 million). In addition, during the three quarters ended September 28, 2011, we recognized $0.9 million of gains on the sale of real estate and $0.4 million of deferred gains, primarily related to a restaurant sold to a franchisee during a prior period. During the three quarters ended September 29, 2010, we recognized $1.4 million of gains on the sale of 11 restaurant operations to six franchisees for net proceeds of $3.8 million (which included a note receivable of $0.2 million). In addition, during the three quarters ended September 29, 2010, we recognized $3.6 million of gains on real estate sold to franchisees.  
 
Restructuring Charges and Exit Costs
 
Restructuring charges and exit costs were comprised of the following: 
 
   
Quarter Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Exit costs
 
$
465
   
$
(45
)
 
$
1,078
   
$
818
 
Severance and other restructuring charges
   
25
     
1,823
     
281
     
2,742
 
Total restructuring and exit
costs
 
$
490
   
$
1,778
   
$
1,359
   
$
3,560
 
 
 
9

 
 
The components of the change in accrued exit cost liabilities are as follows:
 
   
(In thousands)
 
Balance at December 29, 2010
 
$
4,948
 
Provisions for units closed during the year (1)
   
420
 
Changes in estimates of accrued exit costs, net (1) 
   
658
 
Payments, net of sublease receipts
   
(1,712
)
Reclassification of certain lease liabilities
   
(166
)
Interest accretion
   
333
 
Balance at September 28, 2011
   
4,481
 
Less current portion included in other current liabilities
   
1,377
 
Long-term portion included in other noncurrent liabilities
 
$
3,104
 
 
(1)
 Included as a component of operating (gains), losses and other charges, net.
 
Estimated net cash payments related to exit cost liabilities in the next five years are as follows:
 
   
(In thousands)
 
Remainder of 2011
 
$
531
 
2012
   
1,294
 
2013
   
873
 
2014
   
718
 
2015
   
457
 
Thereafter
   
1,125
 
Total
   
4,998
 
Less imputed interest
   
517
 
Present value of exit cost liabilities
 
$
4,481
 
 
As of both September 28, 2011 and December 29, 2010, we had accrued severance and other restructuring charges of $0.1 million or less.  The balance as of September 28, 2011 is expected to be paid during the next 12 months.
 
Note 7.     Fair Value of Financial Instruments

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
 
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
   
Fair Value Measurements as of September 28, 2011
   
Total
   
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 
 
$
4,602
   
$
4,602
   
$
   
$
 
market approach
Total
 
$
4,602
   
$
4,602
   
$
   
$
 —
   
 
   
Fair Value Measurements as of December 29, 2010
   
Total
   
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 
 
$
5,926
   
$
5,926
   
$
   
$
 
market approach
Total
 
$
5,926
   
$
 5,926
   
$
   
$
 —
   
 
Those assets and liabilities measured at fair value on a nonrecurring basis are summarized below:
 
   
Fair Value Measurements as of September 28, 2011
   
Total
   
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)
   
Assets held for sale (1)
 
$
2,380
   
$
   
$
2,380
   
$
 
market approach
Total
 
$
2,380
   
$
   
$
2,380
   
$
   
 
(1) During the third quarter of 2011, assets held for sale with a carrying amount of $3.2 million were written down to their fair value of $2.4 million. Impairment charges of $0.8 million were recognized as a component of operating (gains), losses and other charges, net in our Condensed Consolidated Statements of Operations.
 
In addition to the assets measured at fair value on a nonrecurring basis shown above, as of September 28, 2011 and December 29, 2010, impaired assets related to underperforming units were written down to a fair value of $0 based on the income approach.   
 
 
10

 
 
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:
 
   
September 28, 2011
   
December 29, 2010
 
   
(In thousands)
 
Book value:
           
Fixed rate long-term debt
 
$
121
   
$
181
 
Variable rate long-term debt
   
210,000
     
240,000
 
Long-term debt excluding capital lease obligations
 
$
210,121
   
$
240,181
 
                 
Estimate fair value:
               
Fixed rate long-term debt
 
$
120
   
$
181
 
Variable rate long-term debt
   
209,475
     
243,000
 
Long-term debt excluding capital lease obligations
 
$
209,595
   
$
243,181
 
 
The difference between the estimated fair value of long-term debt compared with its historical cost reported in our Condensed Consolidated Balance Sheets at September 28, 2011 and December 29, 2010 relates to market quotations for our senior secured term loan.

Note 8.     Long-Term Debt

Our subsidiaries, Denny's, Inc. and Denny's Realty, LLC, have a credit facility consisting of a $60 million senior secured revolver (with a $30 million letter of credit sublimit) and a senior secured term loan in an original principal amount of $240 million. As of September 28, 2011, we had an outstanding term loan of $207.5 million ($210.0 million less unamortized OID of $2.5 million) and outstanding letters of credit of $27.0 million under our revolving letter of credit facility. There were no revolving loans outstanding at September 28, 2011. These balances resulted in availability of $33.0 million under the revolving facility. The weighted-average interest rate under the term loan was 5.25% and 6.50%, as of September 28, 2011 and December 29, 2010, respectively.
 
During the first quarter of 2011, we amended our credit facility principally to take advantage of lower interest rates available in the senior secured debt market. Additionally, during the first quarter of 2011, we used the credit facility’s accordion feature, which allows us to increase the size of the facility by up to $25 million subject to lender approval, to increase the amount available under the revolver from $50 million to $60 million.
 
A commitment fee of 0.625% is paid on the unused portion of the revolving credit facility. Interest on the credit facility is payable at per annum rates equal to LIBOR plus 375 basis points with a LIBOR floor of 1.50% for the term loan and no LIBOR floor for the revolver. The term loan was originally issued at 98.5% reflecting an original issue discount (“OID”) of $3.8 million. The OID is being amortized into interest expense over the life of the term loan using the effective interest rate method. The maturity date for the revolver is September 30, 2015 and the maturity date for the term loan is September 30, 2016. The term loan amortizes in equal quarterly installments of $625,000 with all remaining amounts due on the maturity date. Mandatory prepayments will be required under certain circumstances and we have the option to make certain prepayments under the credit facility.
 
The credit facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company’s subsidiaries. The credit facility includes certain financial covenants with respect to a maximum leverage ratio, a maximum lease-adjusted leverage ratio, a minimum fixed charged coverage ratio and limitations on capital expenditures.
 
As a result of the debt amendment, during the first quarter of 2011, we recorded $1.4 million of losses on early extinguishment of debt, consisting primarily of $0.8 million of transaction costs, $0.4 million from the write-off of deferred financing costs and $0.2 million from the write-off of OID. These losses are included as a component of other nonoperating expense in the condensed Consolidated Statements of Operations.
 
During the quarter and three quarters ended September 28, 2011, we paid $10.0 million (which included $9.4 million of prepayments and $0.6 million of scheduled payments) and $30.0 million (which included $28.1 million of prepayments and $1.9 million of scheduled payments), respectively on the term loan under the credit facility through a combination of cash generated from operations and proceeds on sales of restaurant operations to franchisees, real estate and other assets. As a result of these prepayments, during the quarter ended September 28, 2011, we recorded $0.3 million of losses on early extinguishment of debt resulting from the write-off of $0.2 million in deferred financing costs and $0.1 million in OID. As a result of these prepayments, during the three quarters ended September 28, 2011, we recorded $1.0 million of losses on early extinguishment of debt resulting from the write-off of $0.6 million in deferred financing costs and $0.4 million in OID. These losses are included as a component of other nonoperating expense in our condensed Consolidated Statements of Operations.
 
We believe that our estimated cash flows from operations for 2011, 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.
  
 
11

 
 
Note 9.     Defined Benefit Plans
 
The components of net periodic benefit cost were as follows:

   
Pension Plan
   
Other Defined Benefit Plans
 
   
Quarter Ended
   
Quarter Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Service cost
 
$
84
   
$
94
   
$
   
$
 
Interest cost
   
841
     
858
     
32
     
35
 
Expected return on plan assets
   
(1,046
)
   
(982
)
   
     
 
Amortization of net loss
   
251
     
229
     
8
     
5
 
Net periodic benefit cost
 
$
130
   
$
199
   
$
40
   
$
40
 

   
Pension Plan
   
Other Defined Benefit Plans
 
   
Three Quarters Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Service cost
 
$
251
   
$
282
   
$
   
$
 
Interest cost
   
2,523
     
2,574
     
95
     
104
 
Expected return on plan assets
   
(3,137
)
   
(2,946
)
   
     
 
Amortization of net loss
   
753
     
686
     
24
     
16
 
Net periodic benefit cost
 
$
390
   
$
596
   
$
119
   
$
120
 

We made contributions of $1.5 million to our qualified pension plan during the three quarters ended September 28, 2011. We did not make any contributions to our qualified pension plan during the three quarters ended September 29, 2010. We made contributions of $0.1 million to our other defined benefit plans during both the three quarters ended September 28, 2011 and September 29, 2010. We expect to contribute an additional $0.3 million to our qualified pension plan and an additional $0.1 million to our other defined benefit plans over the remainder of fiscal 2011.

Additional minimum pension liability of $19.2 million is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss as of September 28, 2011 and December 29, 2010.
 
Note 10.     Share-Based Compensation

Total share-based compensation included as a component of net income was as follows:

   
Quarter Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Share-based compensation
related to liability classified restricted stock units
 
$
326
   
$
211
   
$
586
   
$
422
 
Share based compensation
related to equity classified awards:
                               
Stock options
 
$
266
   
$
347
   
$
788
   
$
882
 
Restricted stock units
   
186
     
93
     
1,262
     
501
 
Board deferred stock units
   
253
     
110
     
544
     
205
 
Total share-based
compensation related to equity classified awards
   
705
     
550
     
2,594
     
1,588
 
Total share-based
compensation
 
$
1,031
   
$
761
   
$
3,180
   
$
2,010
 

Stock Options

During the three quarters ended September 28, 2011, we granted approximately 0.9 million stock options to certain employees. These stock options vest evenly over 3 years and have a 10-year contractual life.
 
The weighted average fair value per option for options granted during the three quarters ended September 28, 2011 was $1.98. The fair value of these stock options 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 (i.e., forfeitures). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Condensed Consolidated Statements of Operations.
 
We used the following weighted average assumptions for the stock option grants for the three quarters ended September 28, 2011:
 
Dividend yield
   
0.0
%
Expected volatility
   
60.3
%
Risk-free interest rate
   
2.02
%
Weighted average expected term
 
4.7 years
 
 
12

 
 
The dividend yield assumption was based on our dividend payment history and expectations of future dividend payments. The expected volatility was based on the historical volatility of our stock for a period approximating the expected life. The risk-free interest rate was based on published U.S. Treasury spot rates in effect at the time of grant with terms approximating the expected life of the option. The weighted average expected term of the options represents the period of time the options are expected to be outstanding based on historical trends.
 
As of September 28, 2011, we had approximately $1.8 million of unrecognized compensation cost related to unvested stock option awards outstanding, which is expected to be recognized over a weighted average of 1.9 years.
 
Restricted Stock Units
 
In February 2011, we granted approximately 0.2 million performance shares and related performance-based target cash awards of $0.7 million to certain employees. Since these awards contain a market condition, a Monte Carlo valuation was used to determine the performance shares' grant date fair value of $4.63 per share and the payout probability of the target cash awards. The awards granted to our named executive officers also contain a performance condition based on certain operating measures for the fiscal year ended December 28, 2011. The performance period is the three year fiscal period beginning December 30, 2010 and ending December 25, 2013. The performance shares and cash awards will vest and be earned (from 0% to 150% of the target award for each such increment) at the end of the performance period based on the Total Shareholder Return of our stock compared to the Total Shareholder Returns of a group of peer companies.
 
Also in February 2011, we granted approximately 0.2 million performance-based restricted stock units as an employment incentive related to the hiring of our new Chief Executive Officer. Since these awards contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value. The weighted average fair value per share was $3.29. The units will vest and be earned if the closing price of Denny’s common stock meets or exceeds set price hurdles for 20 consecutive days. The performance period is the five year period beginning February 1, 2011 and ending February 1, 2016.  

During the three quarters ended September 28, 2011, we made payments of $0.6 million (before taxes) in cash and issued 0.3 million shares of common stock, net of 0.1 million shares that were used to pay for taxes, related to restricted stock unit awards.
 
Accrued compensation expense included as a component of the Condensed Consolidated Balance Sheet was as follows:
 
   
September 28, 2011
   
December 29, 2010
 
   
(In thousands)
 
Liability classified restricted stock units:
           
Other current liabilities
 
$
487
   
$
414
 
Other noncurrent liabilities
 
$
284
   
$
365
 
                 
Equity classified restricted stock units:
               
Additional paid-in capital
 
$
4,418
   
$
4,259
 
 
As of September 28, 2011, we had approximately $1.9 million of unrecognized compensation cost (approximately $0.5 million for liability classified units and approximately $1.4 million for equity classified units) related to all unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of 0.8 years.
 
Board Deferred Stock Units

During the three quarters ended September 28, 2011, we granted 0.2 million deferred stock units (which are equity classified) with a weighted average grant date fair value of $4.00 per unit to non-employee members of our Board of Directors. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of the Board of Directors) or upon termination as a member of the Board of Directors. During the three quarters ended September 28, 2011, 0.1 million deferred stock units were converted into shares of common stock.
 
Note 11.     Comprehensive Income and Accumulated Other Comprehensive Loss 
 
Total comprehensive income was $20.2 million and $20.1 million for the three quarters ended September 28, 2011 and September 29, 2010, respectively.

Accumulated Other Comprehensive Loss, Net in the Condensed Consolidated Statement of Shareholder’s Deficit and Comprehensive Loss was comprised of additional minimum pension liability of $19.2 million as of both September 28, 2011 and December 29, 2010.
 
Note 12.     Income Taxes

The provision for income taxes was $0.4 and $1.0 million for the quarter and three quarters ended September 28, 2011, respectively, and $0.4 million and $1.0 million for the quarter and three quarters ended September 29, 2010, respectively. The provision for income taxes for the first three quarters of 2011 and 2010 was determined using our effective rate estimated for the entire fiscal year. 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 conjunction with our ongoing review of our actual results and anticipated future earnings, we have reassessed the possibility of releasing all or a portion of the valuation allowance currently in place for our deferred tax assets. Based upon this assessment, a release of the valuation allowance is not appropriate as of September 28, 2011, but may occur during 2011 or 2012. The required accounting for a release of the valuation allowance may result in a significant tax benefit and impact earnings in the quarter in which it is deemed appropriate to release all or a portion of the reserve. 
 
 
13

 
 
Note 13.     Net Income Per Share
 
   
Quarter Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands, except for per share amounts)
 
Numerator:
                       
Numerator for basic and
diluted net income per share – net income
 
$
7,985
   
$
9,934
   
$
20,239
   
$
19,980
 
                                 
Denominator:
                               
Denominator for basic net
income per share – weighted average shares
   
96,997
     
99,579
     
98,132
     
98,646
 
Effect of dilutive securities:
                               
Options
   
803
     
627
     
1,022
     
1,248
 
Restricted stock units and
awards
   
946
     
1,099
     
1,049
     
1,370
 
Denominator for diluted
net income per share – adjusted weighted average shares and assumed conversions of dilutive securities
   
98,746
     
101,305
     
100,203
     
101,264
 
                                 
Basic net income per share
 
$
0.08
   
$
0.10
   
$
0.21
   
$
0.20
 
Dluted net income per share
 
$
0.08
   
$
0.10
   
$
0.20
   
$
0.20
 
                                 
Stock options excluded (1)
   
2,070
     
3,206
     
2,177
     
2,232
 
Restricted stock units and awards
excluded (1)
   
538
     
     
747
     
 


(1)
Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive.
 
Note 14.     Supplemental Cash Flow Information

   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Income taxes paid, net
 
$
988
   
$
389
 
Interest paid
 
$
17,057
   
$
14,426
 
                 
Noncash investing activities:
               
Notes received in connection with disposition of property
 
$
500
   
$
200
 
Execution of direct financing leases
 
$
458
   
$
 
                 
Noncash financing activities:
               
Issuance of common stock, pursuant to share-based compensation plans
 
$
1,482
   
$
1,120
 
Execution of capital leases
 
$
4,094
   
$
2,173
 
Treasury stock payable
 
$
223
   
$
 
Accrued deferred financing costs
 
$
   
$
841
 
 
Note 15.     Share Repurchase
 
Our credit facility permits the payment of cash dividends and the purchase of Denny’s stock subject to certain limitations. In November 2010, the Board of Directors approved a share repurchase program authorizing us to repurchase up to 3.0 million shares of our Common Stock. Under the program, we could, from time to time, purchase shares through December 31, 2011 in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. During the first quarter of 2011, we repurchased 2.0 million shares for approximately $7.6 million. As of March 30, 2011, we had repurchased 3.0 million shares of Common Stock for approximately $11.5 million under this share repurchase program, thus completing the program.
 
On April 4, 2011, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to an additional 6.0 million shares of our Common Stock. Under the program, we could, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of September 28, 2011, we had repurchased 3.1 million shares of Common Stock for approximately $11.8 million under this share repurchase program.
 
Repurchased shares are included as treasury stock in the condensed Consolidated Balance Sheets and the condensed Consolidated Statements of Shareholders' Deficit and Comprehensive Loss.

Note 16.     Related Party Transactions
 
During the three quarters ended September 28, 2011, we sold a company-owned restaurant to a franchisee that is a former employee. We received cash proceeds of $0.3 million and recognized a gain of $0.2 million from this related party sale. In relation to this sale, we entered into a sublease with the franchisee at normal market rates.
 
 
14

 

Note 17.     Commitments and Contingencies
  
There are various claims and pending legal actions against or indirectly involving us, including actions involving 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 reserves reflecting our best estimate of liability, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty. We record legal expenses and other litigation costs as those costs are incurred.
 
Note 18.     Subsequent Events

We performed an evaluation of subsequent events and determined that no events required disclosure.

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion is intended to highlight significant changes in our financial position as of September 28, 2011 and results of operations for the quarter and three quarters ended September 28, 2011 compared to the quarter and three quarters ended September 29, 2010. The forward-looking statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which reflect our best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors included in the discussion below, or in Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part I. Item 1A. Risk Factors, contained in our Annual Report on Form 10-K for the year ended December 29, 2010.
 

 
 
 
15

 
 
 
Statements of Operations
 
The following table contains information derived from our Condensed Consolidated Statements of Operations expressed as a percentage of total operating revenues, except as noted below.  Percentages may not add due to rounding.
 
   
Quarter Ended
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
   
September 28, 2011
   
September 29, 2010
 
   
(Dollars in thousands)
 
Revenue:
                                               
Company restaurant sales
  $ 104,659       76.6 %   $ 107,171       76.6 %   $ 313,235       76.7 %   $ 320,255       77.6 %
Franchise and license revenue
    32,023       23.4 %     32,761       23.4 %     95,105       23.3 %     92,326       22.4 %
Total operating revenue
    136,682       100.0 %     139,932       100.0 %     408,340       100.0 %     412,581       100.0 %
                                                                 
Costs of company restaurant sales (a):
                                                               
Product costs
    25,847       24.7 %     25,405       23.7 %     77,095       24.6 %     75,597       23.6 %
Payroll and benefits
    41,261       39.4 %     41,533       38.8 %     127,876       40.8 %     129,072       40.3 %
Occupancy
    6,928       6.6 %     7,097       6.6 %     20,581       6.6 %     21,406       6.7 %
Other operating expenses
    15,851       15.1 %     17,158       16.0 %     46,437       14.8 %     49,016       15.3 %
Total costs of company restaurant sales
    89,887       85.9 %     91,193       85.1 %     271,989       86.8 %     275,091       85.9 %
                                                                 
Costs of franchise and license revenue (a)
    10,747       33.6 %     12,009       36.7 %     33,397       35.1 %     35,498       38.4 %
                                                                 
General and administrative expenses
    13,335       9.8 %     14,375       10.3 %     41,566       10.2 %     40,560       9.8 %
Depreciation and amortization
    6,955       5.1 %     7,320       5.2 %     21,377       5.2 %     21,984       5.3 %
Operating (gains), losses and other charges
    1,791       1.3 %     (1,900 )     (1.4 %)     843       0.2 %     (1,594 )     (0.4 %)
Total operating costs and expenses
    122,715       89.8 %     122,997       87.9 %     369,172       90.4 %     371,539       90.1 %
Operating income
    13,967       10.2 %     16,935       12.1 %     39,168       9.6 %     41,042       9.9 %
Other expenses:
                                                               
Interest expense, net
    4,796       3.5 %     6,394       4.6 %     15,390       3.8 %     19,306       4.7 %
Other nonoperating expense, net
    780       0.6 %     188       0.1 %     2,526       0.6 %     746       0.2 %
Total other expenses, net
    5,576       4.1 %     6,582       4.7 %     17,916       4.4 %     20,052       4.9 %
Net income before income taxes
    8,391       6.1 %     10,353       7.4 %     21,252       5.2 %     20,990       5.1 %
Provision for income taxes
    406       0.3 %     419       0.3 %     1,013       0.2 %     1,010       0.2 %
Net income
  $ 7,985       5.8 %   $ 9,934       7.1 %   $ 20,239       5.0 %   $ 19,980       4.8 %
                                                                 
Other Data:
                                                               
Company-owned average unit sales
  $ 468             $ 462             $ 1,383             $ 1,368          
Franchise average unit sales
  $ 355             $ 348             $ 1,043             $ 1,029          
Company-owned equivalent units (b)
    224               232               226               234          
Franchise equivalent units (b)
    1,451               1,348               1,441               1,330          
Same-store sales increase (decrease) (company-owned)
(c)(d)
    1.1 %             (0.7 %)             0.7 %             (4.2 %)        
Guest check average increase (decrease) (d)
    1.3 %             (2.9 %)             0.8             (1.8 %)        
Guest count increase (decrease) (d)
    (0.2 %)             2.3 %             0.0             (2.4 %)         
Same-store sales increase (decrease) (franchised
and licensed units) (c)(d)
    0.8 %             (1.2 %)             0.3 %             (4.5 %)        
_________________
(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.
   
(d)
Prior year amounts have not been restated for 2011 comparable units.
 
 
16

 

Quarter Ended September 28, 2011 Compared with Quarter Ended September 29, 2010
 
Unit Activity
 
   
Quarter Ended
 
   
September 28, 2011
   
September 29, 2010
 
Company-owned restaurants, beginning of period
   
225
     
228
 
Units opened
   
2
     
 6
 
Units sold to franchisees
   
(3
)
   
(2
)
Units closed
   
(1
)
   
 
End of period
   
223
     
232
 
                 
Franchised and licensed restaurants, beginning of period
   
1,452
     
1,328
 
Units opened 
   
9
     
55
 
Units relocated
   
     
2
 
Units purchased from Company
   
3
     
2
 
Units closed (including units relocated)
   
(10
)
   
(7
)
End of period
   
1,454
     
  1,380
 
Total restaurants, end of period
   
 1,677
     
1,612
 

Of the 11 units opened and relocated during the quarter ended September 28, 2011, two company-owned units and one franchise unit represent conversions and openings of restaurants at Pilot Flying J Travel Centers. Of the 63 units opened and relocated during the quarter ended September 29, 2010, six company-owned and 42 franchise units represents the conversion of a restaurant at a Pilot Flying J Travel Center.
 
Company Restaurant Operations
 
During the quarter ended September 28, 2011, we realized a 1.1% increase in same-store sales, comprised of a 1.3% increase in guest check average, partially offset by a 0.2% decrease in guest counts. Company restaurant sales decreased $2.5 million, or 2.3%, primarily resulting from an eight equivalent unit decrease in company-owned restaurants, partially offset by the increase in same-store sales for the quarter. The decrease in equivalent units primarily resulted from the sale of company-owned restaurants to franchisees.
 
Total costs of company restaurant sales as a percentage of company restaurant sales increased to 85.9% from 85.1%. Product costs increased to 24.7% from 23.7% primarily due to the impact of increased commodity costs. Payroll and benefits increased to 39.4% from 38.8% primarily due to $2.1 million, or 2.0%, of favorable workers’ compensation claims development in the prior year period, partially offset by improved scheduling of restaurant staff. Occupancy costs remained constant at 6.6%. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales: 

   
Quarter Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(Dollars in thousands)
 
Utilities
 
$
4,762
     
4.6
%
 
$
4,926
     
4.6
%
Repairs and maintenance
   
1,754
     
1.7
%
   
1,767
     
1.6
%
Marketing
   
3,926
     
3.8
%
   
4,645
     
4.3
%
Legal settlement costs
   
607
     
0.6
%
   
602
     
0.6
%
Other direct costs
   
4,802
     
4.6
%
   
5,218
     
4.9
%
Other operating expenses
 
$
15,851
     
15.1
%
 
$
17,158
     
16.0
%

Marketing decreased 0.5 percentage points primarily as a result of additional corporate investment in media in the prior year period.
 
Franchise Operations
 
Franchise and license revenue and related costs were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:
 
   
Quarter Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(Dollars in thousands)
 
Royalties  
 
$
20,449
     
63.9
%
 
$
18,670
     
57.0
%
Initial and other fees
   
437
     
1.3
%
   
2,760
     
 8.4
%
Occupancy revenue 
   
11,137
     
34.8
%
   
11,331
     
34.6
%
Franchise and license revenue 
 
$
32,023
     
100.0
%
 
$
32,761
     
100.0
%
                                 
Occupancy costs 
   
8,349
     
26.1
%
   
8,743
     
26.7
%
Other direct costs 
   
2,398
     
7.5
%
   
3,266
     
10.0
%
Costs of franchise and license revenue 
 
$
10,747
     
33.6
%
 
$
12,009
     
36.7
%

Royalties increased by $1.8 million, or 9.5%, primarily resulting from a 103 equivalent unit increase in franchised and licensed units, as compared to the prior year, and a 0.8% increase in same-store sales. The increase in equivalent units primarily resulted from the conversion of restaurants at Pilot Flying J Travel Centers during 2010 and 2011. Initial fees decreased by $2.3 million, or 84.2%. The decrease in initial fees resulted from the higher number of restaurants opened by franchisees during the prior year period. Occupancy revenue remained relatively constant, as the increase due to the sale of restaurants to franchisees over the last 12 months was offset by the impact of lease expirations and terminations.
 
 
17

 
 
Costs of franchise and license revenue decreased by $1.3 million, or 10.5%. The decrease in occupancy costs of $0.4 million, or 4.5%, is primarily the result of lease expirations and terminations. Other direct costs decreased by $0.9 million, or 26.6%, primarily resulting from lower opening and training costs related to the higher number of openings by franchisees during the prior year period. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 33.6% for the quarter ended September 28, 2011 from 36.7% for the quarter ended September 29, 2010.

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 were comprised of the following:

 
Quarter Ended
 
 
September 28, 2011
 
September 29, 2010
 
 
(In thousands)
 
Share-based compensation
 
$
1,031
   
$
761
 
Other general and administrative expenses
   
12,304
     
13,614
 
Total general and administrative expenses
 
$
13,335
   
$
14,375
 

The $0.3 million increase in share-based compensation expense is primarily due to the issuance of employment inducement awards to certain employees. Other general and administrative expenses decreased $1.3 million. This decrease is primarily the result of a decrease in performance-based and deferred compensation.
 
Depreciation and amortization was comprised of the following:

 
Quarter Ended
 
 
September 28, 2011
 
September 29, 2010
 
 
(In thousands)
 
Depreciation of property and equipment
 
$
5,228
   
$
5,384
 
Amortization of capital lease assets
   
833
     
710
 
Amortization of intangible assets
   
894
     
1,226
 
Total depreciation and amortization expense
 
$
6,955
   
$
7,320
 
 
Operating (gains), losses and other charges, net were comprised of the following:

 
Quarter Ended
 
 
September 28, 2011
 
September 29, 2010
 
 
(In thousands)
 
Gains on sales of assets and other, net
 
$
(867
)
 
$
(3,757
)
Restructuring charges and exit costs
   
490
     
1,778
 
Impairment charges
   
2,168
     
79
 
Operating (gains), losses and other charges, net
 
$
1,791
   
$
(1,900
)

During the quarter ended September 28, 2011, we recognized gains of $0.9 million, primarily resulting from the sale of three restaurant operations to two franchisees. During the quarter ended September 29, 2010, we recognized gains of $3.8 million, primarily resulting from the sale of real estate to franchisees.
 
Restructuring charges and exit costs were comprised of the following:
 
 
Quarter Ended
 
 
September 28, 2011
 
September 29, 2010
 
 
(In thousands)
 
Exit costs
 
$
465
   
$
(45
)
Severance and other restructuring charges
   
25
     
1,823
 
Total restructuring and exit costs
 
$
490
   
$
1,778
 

Severance and other restructuring charges for the quarter ended September 29, 2010 includes $1.5 million related to the departure of the Company's former Chief Executive Officer.
 
Impairment charges of $2.2 million for the quarter ended September 28, 2011 resulted from the impairment of assets of one underperforming unit and two units identified as assets held for sale during the quarter.

Operating income was $14.0 million for the quarter ended September 28, 2011 compared with $16.9 million for the quarter ended September 29, 2010.
 
 
18

 
 
Interest expense, net was comprised of the following:
 
   
Quarter Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Interest on credit facilities
 
$
2,917
   
$
4,363
 
Interest on senior notes
   
     
402
 
Interest on capital lease liabilities
   
977
     
964
 
Letters of credit and other fees
   
457
     
397
 
Interest income
   
(324
)
   
(345
)
Total cash interest
   
4,027
     
5,781
 
Amortization of deferred financing costs
   
361
     
254
 
Amortization of debt discount
   
134
     
 
Interest accretion on other liabilities
   
274
     
359
 
Total interest expense, net
 
$
4,796
   
$
6,394
 
 
The decrease in interest expense resulted from a decrease in interest rates related to the 2010 refinancing and 2011 re-pricing of our credit facility, as well as debt reductions during both years.
 
Other nonoperating expense, net was $0.8 million for the quarter ended September 28, 2011 compared with $0.2 million for the quarter ended September 29, 2010.
 
The provision for income taxes was $0.4 million for both the quarters ended September 28, 2011 and September 29, 2010. The provision for income taxes for the third quarters of 2011 and 2010 was determined using our effective rate estimated for the entire fiscal year. 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 conjunction with our ongoing review of our actual results and anticipated future earnings, we have reassessed the possibility of releasing all or a portion of the valuation allowance currently in place for our deferred tax assets. Based upon this assessment, a release of the valuation allowance is not appropriate as of September 28, 2011, but may occur during 2011 or 2012. The required accounting for a release of the valuation allowance may result in a significant tax benefit and impact earnings in the quarter in which it is deemed appropriate to release all or a portion of the reserve.

Net income was $8.0 million for the quarter ended September 28, 2011 compared with $9.9 million for the quarter ended September 29, 2010 due to the factors noted above.
 
Three Quarters Ended September 28, 2011 Compared with Three Quarters Ended September 29, 2010
  
Unit Activity

   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
Company-owned restaurants, beginning of period
   
232
     
233
 
Units opened
   
8
     
10
 
Units sold to franchisees
   
(13
)
   
 (11
)
Units closed
   
(4
)
   
 
End of period
   
223
     
232
 
                 
Franchised and licensed restaurants, beginning of period
   
1,426
     
1,318
 
Units opened 
   
39
     
68
 
Units relocated
   
1
     
3
 
Units purchased from Company
   
13
     
11
 
Units closed (including units relocated)
   
(25
)
   
  (20
)
End of period
   
1,454
     
  1,380
 
Total restaurants, end of period
   
1,677
     
1,612
 
 
Of the 48 units opened and relocated during the three quarters ended September 28, 2011, eight company-owned and 15 franchise units represent conversions and openings of restaurants at Pilot Flying J Travel Centers. Of the 81 units opened and relocated during the three quarters ended September 29, 2010, ten company-owned and 43 franchise units represent conversions and openings of restaurants at Pilot Flying J Travel Centers.
 
Company Restaurant Operations

During the three quarters ended September 28, 2011, we realized a 0.7% increase in same-store sales, comprised of a 0.8% increase in guest check average and essentially flat guest counts. Company restaurant sales decreased $7.0 million, or 2.2%, primarily resulting from an eight equivalent unit decrease in company-owned restaurants. The decrease in equivalent units primarily resulted from the sale of company-owned restaurants to franchisees.

Total costs of company restaurant sales as a percentage of company restaurant sales increased to 86.8% from 85.9%. Product costs increased to 24.6% from 23.6% primarily due to the impact of increased commodity costs. Payroll and benefits increased to 40.8% from 40.3% primarily due to $2.8 million, or 0.9%, of favorable workers’ compensation claims development in the prior year period and higher incentive compensation, partially offset by improved scheduling of restaurant staff. Occupancy costs decreased to 6.6% from 6.7%. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:
 
 
19

 
 
 
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(Dollars in thousands)
 
Utilities
 
$
13,741
     
4.4
%
 
$
13,968
     
4.4
%
Repairs and maintenance
   
5,485
     
1.8
%
   
5,711
     
1.8
%
Marketing
   
11,738
     
3.7
%
   
13,469
     
4.2
%
Legal settlement costs
   
671
     
0.2
%
   
802
     
0.3
%
Other direct costs
   
14,802
     
4.7
%
   
15,066
     
4.7
%
Other operating expenses
 
$
46,437
     
14.8
%
 
$
49,016
     
15.3
%

Marketing decreased 0.5 percentage points primarily as a result of additional corporate investment in media in the prior year period.
 
Franchise Operations

Franchise and license revenue and costs of franchise and license revenue were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:

   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(Dollars in thousands)
 
Royalties
 
$
59,669
     
62.7
%
 
$
54,488
     
59.0
%
Initial fees
   
2,050
     
2.2
%
   
 3,872
     
  4.2
%
Occupancy revenue
   
33,386
     
35.1
%
   
33,966
     
36.8
%
Franchise and license revenue
 
$
95,105
     
100.0
%
 
$
92,326
     
100.0
%
                                 
Occupancy costs
   
25,567
     
26.9
%
   
26,062
     
28.2
%
Other direct costs
   
7,830
     
8.2
%
   
9,436
     
10.2
%
Costs of franchise and license revenue
 
$
33,397
     
35.1
%
 
$
35,498
     
38.4
%
 
Royalties increased by $5.2 million, or 9.5%, primarily resulting from the effects of a 111 equivalent unit increase in franchised and licensed units, as compared to the prior year, and a 0.3% increase in same-store sales. The increase in equivalent units primarily resulted from the conversion of restaurants at Pilot Flying J Travel Centers during 2010 and 2011. Initial fees decreased by $1.8 million, or 47.1%. The decrease in initial fees resulted from the higher number of restaurants opened by franchisees during the prior year period. The decrease in occupancy revenue of $0.6 million, or 1.7%, is primarily the result of lease expirations and terminations where the franchisee has obtained their own lease with the landlord and we are no longer party to the lease.

Costs of franchise and license revenue decreased by $2.1 million, or 5.9%. The decrease in occupancy costs of $0.5 million, or 1.9%, is primarily the result of lease expirations and terminations as described above. Other direct costs decreased by $1.6 million, or 17.0%, primarily resulting from lower opening and training costs related to the higher number of openings by franchisees in the prior year period and the franchise-related costs associated with our Super Bowl promotion in the prior year, partially offset by a $0.5 million franchisee settlement. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 35.1% for the three quarters ended September 28, 2011 from 38.4% for the three quarters ended September 29, 2010.
 
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:

   
Three Quarters Ended
 
  
 
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Share-based compensation
 
$
3,180
   
$
2,010
 
General and administrative expenses
   
38,386
     
38,550
 
Total general and administrative expenses
 
$
41,566
   
$
40,560
 

The $1.2 million increase in share-based compensation expense is primarily due to the issuance of employment inducement awards to certain employees and reductions in the prior year related to forfeitures. Other general and administrative expenses decreased $0.2 million.  This decrease is primarily the result of $2.0 million in proxy contest costs incurred during the 2010 period and a decrease in deferred compensation.  These decreases were partially offset by an increase in performance-based compensation and an increase in headcount, including executive positions that were vacant in the prior year period.
 
Depreciation and amortization is comprised of the following:

   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Depreciation of property and equipment
 
$
15,772
   
$
16,180
 
Amortization of capital lease assets
   
2,330
     
2,055
 
Amortization of intangible assets
   
3,275
     
3,749
 
Total depreciation and amortization expense
 
$
21,377
   
$
21,984
 
 
 
 
20

 
 
Operating gains, losses and other charges, net are comprised of the following:

   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Gains on sales of assets and other, net
 
$
(2,742
)
 
$
(5,233
)
Restructuring charges and exit costs
   
1,359
     
3,560
 
Impairment charges
   
2,226
     
79
 
Operating (gains), losses and other charges, net
 
$
843
   
$
(1,594
)

During the three quarters ended September 28, 2011, we recognized gains of $2.7 million, primarily resulting from the sale of 13 restaurant operations to five franchisees, the sale of real estate and the recognition of deferred gains related to a restaurant sold to a franchisee during a prior period. During the three quarters ended September 29, 2010, we recognized gains of $5.2 million, primarily resulting from the sale of real estate to franchisees and the sale of 11 restaurant operations to six franchisees.
 
Restructuring charges and exit costs were comprised of the following:
 
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Exit costs 
 
$
1,078
   
$
818
 
Severance and other restructuring charges
   
281
     
2,742
 
Total restructuring and exit costs
 
$
1,359
   
$
3,560
 
        
Severance and other restructuring charges for the three quarters ended September 29, 2010 includes $2.3 million related to the departure of the Company's former Chief Executive Officer.

Impairment charges of $2.2 million for the three quarters ended September 28, 2011 resulted primarily from the impairment of assets of one underperforming unit and two units identified as assets held for sale during the third quarter.
 
Operating income was $39.2 million for the three quarters ended September 28, 2011 and $41.0 million for the three quarters ended September 29, 2010.
 
Interest expense, net is comprised of the following:

   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Interest on credit facilities
 
$
9,666
   
$
1,329
 
Interest on senior notes
   
     
13,089
 
Interest on capital lease liabilities
   
2,929
     
2,943
 
Letters of credit and other fees
   
1,471
     
1,173
 
Interest income
   
(954
)
   
(1,183
)
Total cash interest
   
13,112
     
17,351
 
Amortization of deferred financing costs
   
1,023
     
771
 
Amortization of debt discount
   
418
     
 
Interest accretion on other liabilities
   
837
     
1,184
 
Total interest expense, net
 
$
15,390
   
$
19,306
 
 
The decrease in interest expense resulted from a decrease in interest rates related to the 2010 refinancing and 2011 re-pricing of our credit facility, as well as debt reductions during both years.
 
Other nonoperating expense, net was $2.5 million for the three quarters ended September 28, 2011 compared with $0.7 million for the three quarters ended September 29, 2010. The increase in other nonoperating expense resulted primarily from the $1.4 million of losses on early extinguishment of debt related to the debt amendment in the first quarter of 2011 and the $1.0 million of losses on early extinguishment of debt related to prepayments made during 2011. These increases were partially offset by a $0.7 million decrease in valuation adjustments related to changes in the discount rate applied to workers' compensation and general liability insurance liabilities. 
 
 
 
21

 
 
The provision for income taxes was $1.0 million for both the three quarters ended September 28, 2011 and the three quarters ended September 29, 2010. The provision for income taxes for the first three quarters of 2011 and 2010 was determined using our effective rate estimated for the entire fiscal year. We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our NOL generated in previous periods. In conjunction with our ongoing review of our actual results and anticipated future earnings, we have reassessed the possibility of releasing all or a portion of the valuation allowance currently in place for our deferred tax assets. Based upon this assessment, a release of the valuation allowance is not appropriate as of September 28, 2011, but may occur during 2011 or 2012. The required accounting for a release of the valuation allowance may result in a significant tax benefit and impact earnings in the quarter in which it is deemed appropriate to release all or a portion of the reserve.
 
Net income was $20.2 million for the three quarters ended September 28, 2011 compared with $20.0 million for the three quarters ended September 29, 2010 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 described below) and, in recent years, cash proceeds from sales of restaurant operations to franchisees and sales of surplus properties, to the extent allowed by our credit facility. Principal uses of cash are operating expenses, capital expenditures, debt repayments and, recently, the repurchasing of shares of our Common Stock.
 
The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:
 
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Net cash provided by operating activities
 
$
46,607
   
$
31,593
 
Net cash used in investing activities
   
(7,185
)
   
(134
)
Net cash used in financing activities
   
(53,549
)
   
(17,346
)
Net (decrease) increase in cash and cash equivalents
 
$
(14,127
 
$
14,113
 
 
We believe that our estimated cash flows from operations for 2011, 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 used in investing activities were $7.2 million for the three quarters ended September 28, 2011. These cash flows include capital expenditures of $12.9 million, partially offset by $5.0 million in proceeds from asset sales and $0.8 million of notes receivable collections. Our principal capital requirements have been largely associated with the following:
  
   
Three Quarters Ended
 
   
September 28, 2011
   
September 29, 2010
 
   
(In thousands)
 
Facilities
 
$
4,175
   
$
3,932
 
New construction 
   
7,031
     
6,806
 
Remodeling
   
698
     
1,187
 
Information technology
   
452
     
622
 
Strategic initiatives
   
226
     
6
 
Other
   
345
     
649
 
Capital expenditures
 
$
12,927
   
$
13,202
 

The increase in new construction is primarily the result of the conversion of restaurants at Pilot Flying J Travel Centers. 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. Capital expenditures for fiscal 2011 are expected to be approximately $17 million, comprised primarily of costs related to the conversion of Pilot Flying J Travel Centers, facilities and new construction.

Cash flows used in financing activities were $53.5 million for the three quarters ended September 28, 2011, which included long-term debt payments of $33.2 million, stock repurchases of $19.2 million and deferred financing costs of $3.4 million.

Our working capital deficit was $40.1 million at September 28, 2011 compared with $27.8 million at December 29, 2010. The increase in working capital deficit primarily related to a decrease in cash resulting from $28.1 million in term loan prepayments and $19.2 million in stock repurchases, made during 2011. 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.
 
Credit Facility

During the first quarter of 2011, we amended our credit facility principally to take advantage of lower interest rates available in the senior secured debt market. Additionally, during the first quarter of 2011, we used the credit facility’s accordion feature, which allows us to increase the size of the facility by up to $25 million subject to lender approval, to increase the amount available under the revolver from $50 million to $60 million.
 
A commitment fee of 0.625% is paid on the unused portion of the revolving credit facility. Interest on the credit facility is payable at per annum rates equal to LIBOR plus 375 basis points with a LIBOR floor of 1.50% for the term loan and no LIBOR floor for the revolver. The term loan was originally issued at 98.5% reflecting an original issue discount (“OID”) of $3.8 million. The OID is being amortized into interest expense over the life of the term loan using the effective interest rate method. The maturity date for the revolver is September 30, 2015 and the maturity date for the term loan is September 30, 2016. The term loan amortizes in equal quarterly installments of $625,000 with all remaining amounts due on the maturity date. Mandatory prepayments will be required under certain circumstances and we  have the option to make certain prepayments under the credit facility.
 
 
22

 
 
The credit facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company’s subsidiaries. The credit facility includes certain financial covenants with respect to a maximum leverage ratio, a maximum lease-adjusted leverage ratio, a minimum fixed charged coverage ratio and limitations on capital expenditures. We were in compliance with the terms of the credit facility as of September 28, 2011.

As of September 28, 2011, we had an outstanding term loan of $207.5 million ($210.0 million less unamortized OID of $2.5 million) and outstanding letters of credit of $27.0 million under our revolving letter of credit facility. There were no revolving loans outstanding at September 28, 2011. These balances resulted in availability of $33.0 million under the revolving facility. As of September 28, 2011, the weighted-average interest rate under the term loan was 5.25%. 
 
Implementation of New Accounting Standards

See Note 2 to our Condensed Consolidated Financial Statements.
 
 
Interest Rate Risk
 
We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, as of September 28, 2011, borrowings under the term loan and revolver bear interest at variable rates based on LIBOR plus a spread of 375 basis points per annum with a LIBOR floor of 1.50% for the term loan and no LIBOR floor for the revolver.
 
Based on the levels of borrowings under the credit facility at September 28, 2011, if interest rates changed by 100 basis points, there would be no impact to our annual cash flow or our income before income taxes. This computation is determined by considering the impact of hypothetical interest rates on the credit facility at September 28, 2011, taking into consideration the 1.50% LIBOR floor for the term loan. 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. The estimated fair value of our borrowings under the credit facility was approximately $209.5 million compared with a book value of $210.0 million at September 28, 2011. This computation is based on market quotations for the same or similar debt issues or the estimated borrowing rates available to us. Our other outstanding long-term debt bears fixed rates of interest.
 
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 $1.9 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 while the plans' net periodic benefit cost would remain flat. 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.
 

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, John C. Miller, 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 report, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Messrs. Miller and Wolfinger each concluded that our disclosure controls and procedures are effective to provide reasonable assurance 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. Miller and Wolfinger, as appropriate to allow timely decisions regarding required disclosure. 
 
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 


There are various claims and pending legal actions against or indirectly involving us, including actions involving 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 reserves reflecting our best estimate of liability, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty. 
 
 
23

 
 
 
Purchases of Equity Securities by the Issuer
 
The table below provides information concerning repurchases of shares of our Common Stock during the quarter ended September 28, 2011. 
 
Period
 
 
Total Number of Shares Purchased
   
 
 
Average Price Paid Per Share (1)
   
Total Number of Shares Purchased as Part of Publicly Announced Programs (2)(3)
   
Maximum Number of Shares that May Yet be Purchased Under the Program (3)
 
   
(In thousands, except per share amounts)
   
June 30, 2011 – July 27, 2011
   
274
   
$
3.90
     
274
     
3,958
 
July 28, 2011 – August 24, 2011
   
699
     
3.71
     
699
     
3,259
 
August 25, 2011 – September 28, 2011
   
321
     
3.48
     
321
     
2,939
 
   Total
   
1,294
   
$
3.69
     
1,294
         
 
(1)
Average price paid per share excludes commissions.
(2)
On April 4, 2011, we announced that our Board of Directors had approved the repurchase of up to 6 million shares of Common Stock (in addition to a previous 3 million share authorization completed in the first quarter), which may take place from time to time on the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or through negotiated transactions, subject to market and business conditions.
(3)
During the quarter ended September 28, 2011, we purchased 1,293,900 shares of Common Stock for an aggregate consideration of approximately $4.8 million, pursuant to the share repurchase program.
 
 
The following are included as exhibits to this report:
 
Exhibit No.
 
Description 
     
31.1
 
Certification of John C. Miller, 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, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of John C. Miller, President and Chief Executive Officer of Denny’s Corporation and F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*
 
XBRL Instance Document
     
101.SCH*
 
XBRL Taxonomy Extension Schema Document
     
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
     
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
 
*
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" and not "filed."

 
 
 
24

 
 

 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
 
DENNY'S CORPORATION
 
       
Date:  November 4, 2011
By:    
/s/  F. Mark Wolfinger
 
   
F. Mark Wolfinger
 
   
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
 
       
Date:  November 4, 2011
By:    
/s/  Jay C. Gilmore
 
   
Jay C. Gilmore
 
   
Vice President,
Chief Accounting Officer and
Corporate Controller
 
 
 
 
 
 
 
25