Edgar Filing: DENNYS CORP

q3-2007_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 26, 2007

Commission File Number 0-18051

DENNY’S CORPORATION

(Exact name of registrant as specified in its charter)

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

203 East Main Street

Spartanburg, South Carolina 29319-0001

(Address of principal executive offices)

(Zip Code)

(864) 597-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of October 26, 2007, 94,248,232 shares of the registrant’s common stock, par value $.01 per share, were outstanding.

TABLE OF CONTENTS

		Page
Part I - FINANCIAL INFORMATION

Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Quarter Ended September 26, 2007 and September 27, 2006		3
Three Quarters Ended September 26, 2007 and September 27, 2006		3
Condensed Consolidated Balance Sheets		4
Condensed Consolidated Statement of Shareholders' Deficit and Comprehensive Loss		5
Condensed Consolidated Statements of Cash Flows		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		24
Item 6. Exhibits		24
Signatures		25

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 26, 2007			September 27, 2006			September 26, 2007			September 27, 2006
	(In thousands, except per share amounts)
Revenue:
Company restaurant sales	$	216,792		$	234,705		$	650,909		$	680,735
Franchise and license revenue		24,617			23,491			68,193			68,937
Total operating revenue		241,409			258,196			719,102			749,672
Costs of company restaurant sales:
Product costs		55,520			59,509			166,969			170,219
Payroll and benefits		88,341			95,627			273,141			281,497
Occupancy		13,193			12,893			39,345			38,619
Other operating expenses		33,842			34,250			95,937			102,576
Total costs of company restaurant sales		190,896			202,279			575,392			592,911
Costs of franchise and license revenue		6,858			6,772			20,266			21,220
General and administrative expenses		15,974			16,440			49,067			49,259
Depreciation and amortization		12,117			13,812			37,475			41,997
Operating gains, losses and other charges, net		(747	)		(36,703	)		(16,427	)		(43,491	)
Total operating costs and expenses		225,098			202,600			665,773			661,896
Operating income		16,311			55,596			53,329			87,776
Other expenses:
Interest expense, net		10,489			14,959			32,783			44,449
Other nonoperating expense (income), net		34			1,499			(391	)		1,475
Total other expenses, net		10,523			16,458			32,392			45,924
Net income before income taxes and cumulative effect of change in accounting principle		5,788			39,138			20,937			41,852
Provision for income taxes		451			13,635			2,937			14,015
Net income before cumulative effect of change in accounting principle		5,337			25,503			18,000			27,837
Cumulative effect of change in accounting principle, net of tax		—			—			—			232
Net income	$	5,337		$	25,503		$	18,000		$	28,069

Basic net income per share:
Basic net income before cumulative effect of change in accounting principle, net of tax	$	0.06		$	0.28		$	0.19		$	0.30
Cumulative effect of change in accounting principle, net of tax		—			—			—			0.00
Basic net income per share	$	0.06		$	0.28		$	0.19		$	0.30

Diluted net income per share:
Diluted net income before cumulative effect of change in accounting principle, net of tax	$	0.05		$	0.26		$	0.18		$	0.29
Cumulative effect of change in accounting principle, net of tax		—			—			—			0.00
Diluted net income per share	$	0.05		$	0.26		$	0.18		$	0.29

Weighted average shares outstanding:
Basic		93,915			92,348			93,674			92,060
Diluted		98,605			96,498			98,770			97,184

See accompanying notes

Denny’s Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

	September 26, 2007			December 27, 2006
	(In thousands)
Assets
Current Assets:
Cash and cash equivalents	$	29,075		$	26,226
Receivables, net		12,580			14,564
Inventories		7,693			8,199
Assets held for sale		4,421			4,735
Prepaid and other current assets		9,567			9,072
Total Current Assets		63,336			62,796

Property, net of accumulated depreciation of $340.3 million and $352.7 million, respectively		208,455			236,264

Other Assets:
Goodwill		47,779			50,064
Intangible assets, net		63,812			66,882
Deferred financing costs, net		5,619			6,311
Other assets		23,929			21,595
Total Assets	$	412,930		$	443,912

Liabilities and Shareholders' Deficit
Current Liabilities:
Current maturities of notes and debentures	$	3,121		$	5,532
Current maturities of capital lease obligations		6,198			6,979
Accounts payable		37,278			42,148
Other		82,119			81,143
Total Current Liabilities		128,716			135,802

Long-Term Liabilities:
Notes and debentures, less current maturities		377,479			415,801
Capital lease obligations, less current maturities		21,294			24,948
Liability for insurance claims, less current portion		27,637			28,784
Deferred income taxes		11,792			12,126
Other noncurrent liabilities and deferred credits		47,117			50,469
Total Long-Term Liabilities		485,319			532,128
Total Liabilities		614,035			667,930

Commitments and contingencies

Total Shareholders’ Deficit		(201,105	)		(224,018	)
Total Liabilities and Shareholders’ Deficit	$	412,930		$	443,912

See accompanying notes

Denny’s Corporation and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss

(Unaudited)

	Common Stock									Accumulated Other Comprehensive			Total Shareholders'
	Shares		Amount		Paid-in Capital		Deficit			Loss, Net			Deficit
	(In thousands)
Balance, December 27, 2006		93,186	$	932	$	527,911	$	(735,438	)	$	(17,423	)	$	(224,018	)
Comprehensive income:
Net income		—		—		—		18,000			—			18,000
Recognition of unrealized gain on hedged transactions, net of tax		—		—		—		—			1,172			1,172
Comprehensive income		—		—		—		18,000			1,172			19,172
Share-based compensation on equity classified awards		—		—		2,342		—			—			2,342
Issuance of common stock for share-based compensation		247		2		220		—			—			222
Exercise of common stock options		709		7		1,170		—			—			1,177
Balance, September 26, 2007		94,142	$	941	$	531,643	$	(717,438	)	$	(16,251	)	$	(201,105	)

See accompanying notes

Denny’s Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Quarters Ended
	September 26, 2007			September 27, 2006
	(In thousands)
Cash Flows from Operating Activities:
Net income	$	18,000		$	28,069
Adjustments to reconcile net income to cash flows provided by operating activities:
Cumulative effect of change in accounting principle, net of tax		—			(232	)
Depreciation and amortization		37,475			41,997
Operating gains, losses and other charges, net		(16,427	)		(43,491	)
Amortization of deferred financing costs		886			2,621
Loss on early extinguishment of debt		207			1,629
Deferred income tax benefit		2,539			12,805
Share-based compensation		3,000			5,371
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease (increase) in assets:
Receivables		3,216			2,044
Inventories		506			86
Other current assets		(495	)		(2,026	)
Other assets		(2,644	)		(2,033	)
Increase (decrease) in liabilities:
Accounts payable		(2,530	)		(5,724	)
Accrued salaries and vacations		(5,696	)		(8,384	)
Accrued taxes		119			2,111
Other accrued liabilities		2,990			(5,751	)
Other noncurrent liabilities and deferred credits		(5,702	)		(1,872	)
Net cash flows provided by operating activities		35,444			27,220

Cash Flows from Investing Activities:
Purchase of property		(18,807	)		(24,918	)
Proceeds from disposition of property		35,017			76,970
Acquisition of restaurant units		(2,208	)		(825	)
Collection of note receivable payments from former subsidiary		—			4,870
Net cash flows provided by investing activities		14,002			56,097

Cash Flows from Financing Activities:
Long-term debt payments		(46,468	)		(86,484	)
Deferred financing costs paid		(401	)		—
Proceeds from exercise of stock options		918			712
Net bank overdrafts		(646	)		278
Net cash flows used in financing activities		(46,597	)		(85,494	)

Increase (decrease) in cash and cash equivalents		2,849			(2,177	)

Cash and Cash Equivalents at:
Beginning of period		26,226			28,236
End of period	$	29,075		$	26,059

See accompanying notes

Denny’s Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Introduction and Basis of Presentation

Denny’s Corporation, through its wholly owned subsidiaries, Denny’s Holdings, Inc. and Denny’s, Inc., owns and operates the Denny’s restaurant brand, or Denny’s.

Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable. These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 27, 2006 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 27, 2006. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 26, 2007.

Note 2. Summary of Significant Accounting Policies

Effective December 28, 2006, the first day of fiscal 2007, we adopted the Financial Accounting Standards Board's ("FASB") Interpretation No. 48 “Accounting for Uncertainty in Income Taxes,” or FIN 48. See Note 10 to the Condensed Consolidated Financial Statements, “Income Taxes.”

There have been no other material changes to our significant accounting policies and estimates from the information provided in Note 2 of our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 27, 2006.

Note 3. Assets Held for Sale

Assets held for sale of $4.4 million and $4.7 million, as of September 26, 2007 and December 27, 2006, respectively, include restaurants to be sold to franchisees and cetain real estate properties. We expect to sell each of these assets within 12 months. Our Credit Facility (defined in Note 6) requires us to make mandatory prepayments to reduce outstanding indebtedness with the net cash proceeds from the sale of the real estate related to certain restaurants operated by franchisees. As a result, we have classified a corresponding $1.4 million and $3.5 million of our long-term debt as a current liability in the Condensed Consolidated Balance Sheet as of September 26, 2007 and December 27, 2006, respectively. These amounts represent the net book value of the specified properties as of the balance sheet dates. As a result of classifying certain assets as held for sale, we recognized impairment charges of $0.2 million for the quarter and three quarters ended September 26, 2007. This expense is included as a component of operating gains, losses and other charges, net in the Condensed Consolidated Statement of Operations. See Note 5 to our Condensed Consolidated Financial Statements.

Note 4. Goodwill and Other Intangible Assets

The changes in carrying amounts of goodwill for the three quarters ended September 26, 2007 are as follows:

	(In thousands)
Balance at December 27, 2006	$	50,064
Reversal of valuation allowance related to deferred tax assets (Note 10)		(2,873	)
Goodwill related to acquisition of restaurant unit		588
Balance at September 26, 2007	$	47,779

The following table reflects goodwill and intangible assets as of September 26, 2007 and December 27, 2006:

	September 26, 2007				December 27, 2006
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Goodwill	$	47,779	$	—	$	50,064	$	—

Intangible assets with indefinite lives:
Trade names	$	42,381	$	—	$	42,323	$	—
Liquor licenses		279		—		279		—
Intangible assets with definite lives:
Franchise and license agreements		62,477		41,325		65,602		41,322
Intangible assets	$	105,137	$	41,325	$	108,204	$	41,322

Note 5. Operating Gains, Losses and Other Charges, Net

Operating gains, losses and other charges, net represent gains or losses on the sale of assets, restructuring charges, exit costs and impairment charges and were comprised of the following:

	Quarter Ended						Three Quarters Ended
	September 26, 2007			September 27, 2006			September 26, 2007			September 27, 2006
	(In thousands)
Gains on sales of assets and other, net	$	(4,628	)	$	(38,995	)	$	(22,378	)	$	(47,664	)
Restructuring charges and exit costs		3,701			1,461			5,531			3,342
Impairment charges		180			831			420			831
Operating gains, losses and other charges, net	$	(747	)	$	(36,703	)	$	(16,427	)	$	(43,491	)

Gains on Sales of Assets

Proceeds and gains on sales of assets were comprised of the following:

	Quarter Ended September 26, 2007				Quarter Ended September 27, 2006
	Net Proceeds		Gains		Net Proceeds		Gains
	(In thousands)
Sales of restaurant operations and related real estate to franchisees	$	8,748	$	2,825	$	—	$	—
Sales of other real estate assets		353		353		65,800		38,964
Recognition of deferred gains		—		1,450		—		31
Total	$	9,101	$	4,628	$	65,800	$	38,995

	Three Quarters Ended September 26, 2007				Three Quarters Ended September 27, 2006
	Net Proceeds		Gains		Net Proceeds		Gains
	(In thousands)
Sales of restaurant operations and related real estate to franchisees	$	30,601	$	16,887	$	—	$	—
Sales of other real estate assets		5,388		3,495		77,565		47,572
Recognition of deferred gains		—		1,996		—		92
Total	$	35,989	$	22,378	$	77,565	$	47,664

During the quarter and three quarters ended September 26, 2007, we completed and closed the sale of 22 and 56 restaurant operations and certain related real estate, respectively, as part of our Franchise Growth Initiative.

Restructuring Charges and Exit Costs

Restructuring charges and exit costs were comprised of the following:

	Quarter Ended				Three Quarters Ended
	September 26, 2007		September 27, 2006		September 26, 2007		September 27, 2006
	(In thousands)
Exit costs	$	276	$	1,167	$	1,011	$	1,653
Severance and other restructuring charges		3,425		294		4,520		1,689
Total restructuring and exit costs	$	3,701	$	1,461	$	5,531	$	3,342

Severance and other restructuring charges of $3.4 million for the quarter ended September 26, 2007 primarily resulted from $1.9 million in severance costs related to the reorganization of the field management structure, which led to the elimination of 80 to 90 out-of-restaurant operational positions. Of these eliminations, approximately 30 employees were reassigned to other positions within the Company.

The components of the change in accrued exit cost liabilities are as follows:

	(In thousands)
Balance, beginning of year	$	11,934
Provisions for units closed during the year		50
Changes in estimate of accrued exit costs, net (1)		961
Provisions for sublease losses related to the sale of restaurant operations to franchisees		740
Payments, net		(3,811	)
Interest accretion		743
Balance, end of quarter		10,617
Less current portion included in other current liabilities		2,033
Long-term portion included in other noncurrent liabilities	$	8,584

(1) Included as a component of gains on sales of assets.

Estimated net cash payments related to exit cost liabilities in the next five years are as follows:

	(In thousands)
Remainder of 2007	$	609
2008		2,714
2009		2,094
2010		1,786
2011		1,570
Thereafter		4,926
Total		13,699
Less imputed interest		3,082
Present value of exit cost liabilities	$	10,617

At the beginning of fiscal 2007, the liability for severance and other restructuring charges was $0.5 million. During the three quarters ended September 26, 2007, an additional $4.5 million of expense was recorded and $2.4 million was paid related to these charges. The remaining balance of $2.6 million is expected to be paid during the next 12 months.

Note 6. Long-Term Debt

Credit Facility

Our subsidiaries, Denny's, Inc. and Denny's Realty, LLC (the "Borrowers"), have a senior secured credit agreement consisting of a $50 million revolving credit facility (including up to $10 million for a revolving letter of credit facility), a $205.0 million term loan and an additional $40 million letter of credit facility (together, the "Credit Facility"). At September 26, 2007, we had outstanding letters of credit of $37.8 million (comprised of $37.6 million under our letter of credit facility and $0.2 million under our revolving facility). There were no revolving loans outstanding at September 26, 2007. These balances result in availability of $2.4 million under our letter of credit facility and $49.8 million under the revolving facility.

The revolving facility matures on December 15, 2011. The term loan and the $40 million letter of credit facility mature on March 31, 2012. The term loan amortizes in equal quarterly installments at a rate equal to approximately 1% per annum with all remaining amounts due on the maturity date. The Credit Facility is available for working capital, capital expenditures and other general corporate purposes. We will be required to make mandatory prepayments under certain circumstances (such as required payments related to asset sales) typical for this type of credit facility and may make certain optional prepayments under the Credit Facility. Upon the event of a refinancing transaction, under certain circumstances before March 8, 2008, we would be required to pay the term loan and letter of credit facility lenders a 1.0% prepayment premium.

The Credit Facility is guaranteed by Denny's and its other subsidiaries and is secured by substantially all of the assets of Denny's and its subsidiaries. In addition, the Credit Facility is secured by first-priority mortgages on 130 company-owned real estate assets. The Credit Facility contains certain financial covenants (i.e., maximum total debt to EBITDA (as defined under the Credit Facility) ratio requirements, maximum senior secured debt to EBITDA ratio requirements, minimum fixed charge coverage ratio requirements and limitations on capital expenditures), negative covenants, conditions precedent, material adverse change provisions, events of default and other terms, conditions and provisions customarily found in credit agreements for facilities and transactions of this type. We were in compliance with the terms of the Credit Facility as of September 26, 2007.

Interest on loans under the revolving facility is payable at per annum rates equal to LIBOR plus 250 basis points and will adjust over time based on our leverage ratio. Effective March 8, 2007, interest on the term loan and letter of credit facility is payable at per annum rates equal to LIBOR plus 200 basis points. The weighted-average interest rate under the term loan was 7.1% as of September 26, 2007. The weighted average interest rate under our previous term loan facility was 9.1% as of September 27, 2006.

Interest Rate Swap

During the second quarter of fiscal 2007, we entered into an interest rate swap with a notional amount of $150 million to hedge a portion of the cash flows of our variable rate debt. We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on $150 million of floating rate debt. Under the terms of the swap, we will pay a fixed rate of 4.8925% on the $150 million notional amount and receive payments from the counterparties based on the 3-month LIBOR rate for a term ending on March 30, 2010, effectively resulting in a fixed rate of 6.8925% on the $150 million notional amount. Interest rate differentials paid or received under the swap agreement will be recognized as adjustments to interest expense.

To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). The components of the cash flow hedge included in accumulated other comprehensive loss, net in the Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss for the three quarters ended September 26, 2007 and September 27, 2006, are as follows:

	Three Quarters Ended
	September 26, 2007			September 27, 2006
	(In thousands)
Net interest (income) expense recognized as a result of interest rate swap	$	(347	)	$	(697	)
Unrealized gain (loss) for changes in fair value of interest swap rates		1,519			508
Net increase in Accumulated Other Comprehensive Income, net of tax	$	1,172		$	(189	)

We did not note any ineffectiveness in the hedge during the three quarters ended September 26, 2007. We do not enter into derivative financial instruments for trading or speculative purposes.

Note 7. Defined Benefit Plans

The components of net pension cost of the pension plan and other defined benefit plans as determined under Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” as amended by Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans," are as follows:

	Pension Plan						Other Defined Benefit Plans
	Quarter Ended						Quarter Ended
	September 26, 2007			September 27, 2006			September 26, 2007		September 27, 2006
	(In thousands)
Service cost	$	88		$	91		$	—	$	—
Interest cost		786			771			48		48
Expected return on plan assets		(883	)		(814	)		—		—
Amortization of net loss		221			251			5		7
Net periodic benefit cost	$	212		$	299		$	53	$	55

	Pension Plan						Other Defined Benefit Plans
	Three Quarters Ended						Three Quarters Ended
	September 26, 2007			September 27, 2006			September 26, 2007		September 27, 2006
	(In thousands)
Service cost	$	263		$	274		$	—	$	—
Interest cost		2,358			2,312			143		144
Expected return on plan assets		(2,647	)		(2,442	)		—		—
Amortization of net loss		662			754			17		19
Net periodic benefit cost	$	636		$	898		$	160	$	163

We made contributions of $2.8 million and $3.1 million to our pension plan during the three quarters ended September 26, 2007 and September 27, 2006, respectively. We made contributions of $0.2 million and $0.3 million to our other defined benefit plans during the three quarters ended September 26, 2007 and September 27, 2006, respectively. We expect to contribute $0.7 million to our pension plan and $0.1 million to our other defined benefit plans during the remainder of fiscal 2007.

Additional minimum pension liability of $17.4 million is reported as a component of accumulated other comprehensive loss, net in the Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss as of September 26, 2007 and December 27, 2006.

Note 8. Share-Based Compensation

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

	Quarter Ended					Three Quarters Ended
	September 26, 2007			September 27, 2006		September 26, 2007		September 27, 2006

Share-based compensation related to liability classified restricted stock units	$	(24	)	$	374	$	658	$	1,192
Share-based compensation related to equity classified awards:
Stock options	$	448		$	849	$	1,067	$	2,503
Restricted stock units		176			401		1,034		1,434
Board deferred stock units		81			74		241		242
Total share-based compensation related to equity classified awards		705			1,324		2,342		4,179
Total share-based compensation	$	681		$	1,698	$	3,000	$	5,371

Stock Options

During the three quarters ended September 26, 2007, we granted approximately 0.7 million stock options to certain employees. The options granted 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 26, 2007 was $3.07.

The fair value of the stock options granted in the period ended September 26, 2007 was estimated at the date of grant using the Black-Scholes option pricing model. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Condensed Consolidated Statements of Operations.

We used the following weighted average assumptions for the stock option grants for the three quarters ended September 26, 2007:

Dividend yield		0.0	%
Expected volatility		67.5	%
Risk-free interest rate		4.6	%
Weighted-average expected term	6.0 years

The dividend yield assumption was based on our dividend payment history and expectations of future dividend payments. The expected volatility was based on the historical volatility of our stock for a period approximating the expected life. The risk-free interest rate was based on published U.S. Treasury spot rates in effect at the time of grant with terms approximating the expected life of the option. The weighted average expected term of the options represents the period of time the options are expected to be outstanding based on historical trends.

As of September 26, 2007, we had approximately $2.3 million of unrecognized compensation cost related to unvested stock option awards granted, which is expected to be recognized over a weighted average of 2.0 years.

Restricted Stock Units

During the three quarters ended September 26, 2007, we granted approximately 0.5 million performance shares (which are equity classified) and 0.5 million performance units (which are liability classified) with a grant date fair value of $4.61 per share to certain employees. The award will be earned (from 0% to 200% of the target award) based on certain operating performance measures for fiscal 2007. Once earned, the performance shares and units will vest 15% as of December 26, 2007, 35% as of December 31, 2008 and 50% as of December 30, 2009. Subsequent to the vesting periods, the earned performance shares will be paid to the holder in shares of common stock and the earned performance units will be paid to the holder in cash, provided the holder is then still employed with Denny’s or an affiliate. Compensation expense related to the award is based on the number of shares and units expected to vest, the period over which they are expected to vest and the fair market value of the common stock on the date of grant.

In addition, during the quarter ended September 26, 2007, we granted approximately 0.1 million stock-settled restricted stock units (which are equity classified) and 0.1 million cash-settled restricted stock units (which are liability classified) with a grant date fair value of $4.55 per share to the Company's Chief Financial Officer. The stock-settled and cash-settled units will vest in 20% annual increments between July 9, 2008 and July 9, 2012. The vested stock-settled units will be paid in shares of common stock on July 9, 2012 and the vested cash-settled units will be paid in cash as of each vesting period, provided that he is then still employed with Denny's or an affiliate, previously terminated due to death or disability or previously terminated within two years following a change in control by the Company without cause or by grantee for good reason.

During the quarter ended September 26, 2007, we made payments of $0.9 million (before taxes) in cash and issued 0.2 million shares of common stock related to the 0.4 million restricted stock units that vested as of June 30, 2007.

Accrued compensation expense included as a component of the Condensed Consolidated Balance Sheet was as follows:

	September 26, 2007		December 27, 2006
	(In thousands)
Liability classified restricted stock units:
Other current liabilities	$	1,087	$	848
Other noncurrent liabilities	$	2,162	$	2,675

Equity classified restricted stock units:
Additional paid-in capital	$	3,301	$	3,170

As of September 26, 2007, we had approximately $5.5 million of unrecognized compensation cost (approximately $1.8 million for liability classified units and approximately $3.7 million for equity classified units) related to all unvested restricted stock unit awards granted, which is expected to be recognized over a weighted average of 2.3 years.

Board Deferred Stock Units

During the three quarters ended September 26, 2007, we granted approximately 0.1 million deferred stock units (which are equity classified) with a weighted-average grant date fair value of $5.35 per unit to non-employee members of the Board of Directors. These awards are restricted in that they may not be exercised until the recipient has ceased serving as a member of the Board of Directors for Denny's.

Note 9. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

Total comprehensive income was $5.0 million and $19.2 million for the quarter and three quarters ended September 26, 2007. Total comprehensive income was $24.9 million and $27.9 million for the quarter and three quarters ended September 27, 2006.

The components of Accumulated Other Comprehensive Loss, Net in the Condensed Consolidated Statement of Shareholder’s Deficit and Comprehensive Loss are as follows:

	September 26, 2007			December 27, 2006
	(In thousands)
Additional minimum pension liability	$	(17,423	)	$	(17,423	)
Unrealized gain on hedged transaction		1,172			—
Accumulated other comprehensive income (loss)	$	(16,251	)	$	(17,423	)

Note 10. Income Taxes

The provision for income taxes was $0.5 million and $2.9 million for the quarter and three quarters ended September 26, 2007, respectively, compared with $13.6 million and $14.0 million for the quarter and three quarters ended September 27, 2006, respectively. The provision for income taxes for the three quarters ended September 26, 2007 and September 27, 2006 were determined using our effective tax rate estimated for the entire fiscal year, excluding the impact of certain discrete items that were recognized entirely during the quarter ended September 27, 2006. The provision for income taxes for the three quarters ended September 26, 2007 also included recognition of $0.3 million of current tax benefits and a $0.6 million reduction to the valuation allowance. These items resulted from the enactment of certain federal and state laws that benefited us during the second quarter of 2007.

We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses generated in previous periods. In establishing our valuation allowance, we had previously taken into consideration certain tax planning strategies involving the sale of appreciated properties. These tax planning strategies were discontinued in the third quarter of 2006 in light of the sale of appreciated properties during 2006. In addition, during 2007, we utilized certain federal and state net operating loss carryforwards whose valuation allowance was established in connection with fresh start reporting on January 7, 1998. Accordingly, for the quarter and three quarters ended September 26, 2007, we recognized approximately $0.4 million and $2.9 million, respectively, of federal and state deferred tax expense with a corresponding reduction to the goodwill that was recorded in connection with fresh start reporting on January 7, 1998.

Adoption of FIN 48

Effective December 28, 2006, the first day of fiscal 2007, we adopted FIN 48. This interpretation clarifies the accounting for uncertainty in income tax recognized in an entity’s financial statements in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes.” FIN 48 requires companies to determine whether it is more-likely-than-not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. This interpretation also provides guidance on derecognition, classification, accounting in interim periods, and expanded disclosure requirements. FIN 48 does not require or permit retrospective application, thus the cumulative effect of the change in accounting principle, if any, is recorded as an adjustment to opening retained earnings.

We file income tax returns in the U.S. federal jurisdictions and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004.

As a result of the implementation of FIN 48, we did not recognize any change to our liability for unrecognized tax benefits. The total amount of unrecognized tax benefits as of the date of adoption was approximately $0.7 million. These benefits, if recognized, would also affect our effective tax rate.

We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties at the date of adoption was less than $0.1 million.

We expect that, during the next twelve months, the liability for unrecognized tax benefits will be settled in full. We remain subject to examination for U.S. federal taxes for 2004-2006 and in the following major state jurisdictions: California (2003-2006); Florida (2004-2006) and Texas (2002-2006).

Note 11. Net Income (Loss) Per Share

	Quarter Ended				Three Quarters Ended
	September 26, 2007		September 27, 2006		September 26, 2007		September 27, 2006
	(In thousands, except for per share amounts)
Numerator:
Numerator for basic and diluted net income per share - net income from continuing operations before cumulative effect of change in accounting principle	$	5,337	$	25,503	$	18,000	$	27,837
Numerator for basic and diluted net income per share - net income	$	5,337	$	25,503	$	18,000	$	28,069

Denominator:
Denominator for basic net income per share - weighted average shares		93,915		92,348		93,674		92,060
Effect of dilutive securities:
Options		3,737		3,513		4,073		4,276
Restricted stock units and awards		953		637		1,023		848
Denominator for diluted net income per share - adjusted weighted average shares and assumed conversions of dilutive securities		98,605		96,498		98,770		97,184

Basic net income per share before cumulative effect of change in accounting principle	$	0.06	$	0.28	$	0.19	$	0.30
Diluted net income per share before cumulative effect of change in accounting principle	$	0.05	$	0.26	$	0.18	$	0.29
Basic net income per share	$	0.06	$	0.28	$	0.19	$	0.30
Diluted net income per share	$	0.05	$	0.26	$	0.18	$	0.29

Stock options excluded (1)		2,109		1,570		1,861		1,442

(1) Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive.

Note 12. Supplemental Cash Flow Information

	Three Quarters Ended
	September 26, 2007		September 27, 2006
	(In thousands)
Income taxes paid, net	$	1,381	$	864
Interest paid	$	23,840	$	36,556

Noncash investing activities:
Net proceeds receivable from disposition of property	$	972	$	595

Noncash financing activities:
Net proceeds receivable from stock option exercises	$	260	$	—
Issuance of common stock, pursuant to stock-based compensation plans	$	1,125	$	1,027
Execution of capital leases	$	1,430	$	2,890

Note 13. Implementation of New Accounting Standards

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 ("SFAS 159"), “The Fair Value Options for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the first fiscal period beginning after November 15, 2007. We may choose to apply SFAS 159 to eligible items, existing as of the effective date, in the first quarter of fiscal 2008. While we continue to review the provisions of SFAS 159, we have not yet identified any assets or liabilities for which we currently believe we will elect the fair value reporting option.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for the first fiscal period beginning after November 15, 2007. We are required to adopt SFAS 157 in the first quarter of fiscal 2008. We are currently evaluating the impact of adopting SFAS 157 on our Condensed Consolidated Financial Statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Condensed Consolidated Financial Statements upon adoption.

Note 14. Commitments and Contingencies

There are various claims and pending legal actions against or indirectly involving us, including actions concerned with civil rights of employees and customers, other employment related matters, taxes, sales of franchise rights and businesses and other matters. Based on our examination of these matters and our experience to date, we have recorded our best estimate of liabilities, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty.

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 26, 2007 and results of operations for the quarter and three quarters ended September 26, 2007 compared to the quarter and three quarters ended September 27, 2006. The forward-looking statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which reflect our best judgment based on factors currently known, involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors included in the discussion below, or in Part II. Item 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 27, 2006.

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 26, 2007					September 27, 2006					September 26, 2007					September 27, 2006
	(Dollars in thousands)											(Dollars in thousands)
Revenue:
Company restaurant sales	$	216,792		89.8	%	$	234,705		90.9	%	$	650,909		90.5	%	$	680,735		90.8	%
Franchise and license revenue		24,617		10.2	%		23,491		9.1	%		68,193		9.5	%		68,937		9.2	%
Total operating revenue		241,409		100.0	%		258,196		100.0	%		719,102		100.0	%		749,672		100.0	%

Costs of company restaurant sales (a):
Product costs		55,520		25.6	%		59,509		25.4	%		166,969		25.7	%		170,219		25.0	%
Payroll and benefits		88,341		40.7	%		95,627		40.7	%		273,141		42.0	%		281,497		41.4	%
Occupancy		13,193		6.1	%		12,893		5.5	%		39,345		6.0	%		38,619		5.7	%
Other operating expenses		33,842		15.6	%		34,250		14.6	%		95,937		14.7	%		102,576		15.1	%
Total costs of company restaurant sales		190,896		88.1	%		202,279		86.2	%		575,392		88.4	%		592,911		87.1	%

Costs of franchise and license revenue (a)		6,858		27.9	%		6,772		28.8	%		20,266		29.7	%		21,220		30.8	%

General and administrative expenses		15,974		6.6	%		16,440		6.4	%		49,067		6.8	%		49,259		6.6	%
Depreciation and amortization		12,117		5.0	%		13,812		5.3	%		37,475		5.2	%		41,997		5.6	%
Operating gains, losses and other charges		(747	)	(0.3	%)		(36,703	)	(14.2	%)		(16,427	)	(2.3	%)		(43,491	)	(5.8	%)
Total operating costs and expenses		225,098		93.2	%		202,600		78.5	%		665,773		92.6	%		661,896		88.3	%
Operating income		16,311		6.8	%		55,596		21.5	%		53,329		7.4	%		87,776		11.7	%
Other expenses: