Edgar Filing: DENNYS CORP

form10-k_2007.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 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 incorporation or organization)	(I.R.S. employer identification number)

203 East Main Street Spartanburg, South Carolina 29319-9966
(Address of principal executive offices) (Zip Code)

(864) 597-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
$.01 Par Value, Common Stock	The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No þ

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

Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 definition of “accelerated filer," "large accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company ¨

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

Yes ¨ No þ

The aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $411.1 million as of June 27, 2007 the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of registrant’s common stock on that date of $4.43 per share and, for purposes of this computation only, the assumption that all of the registrant’s directors, executive officers and beneficial owners of 10% or more of the registrant’s common stock are affiliates.

As of February 29, 2008, 94,976,325 shares of the registrant’s common stock, $.01 par value per share, were outstanding.

Documents incorporated by reference:

Portions of the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I

	Item 1. Business	1

	Item 1A. Risk Factors	4

	Item 1B. Unresolved Staff Comments	7

	Item 2. Properties	8

	Item 3. Legal Proceedings	9

	Item 4. Submission of Matters to a Vote of Security Holders	9

PART II

	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	9

	Item 6. Selected Financial Data	11

	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 7A. Quantitative and Qualitative Disclosures About Market Risk	21

	Item 8. Financial Statements and Supplementary Data	22

	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22

	Item 9A. Controls and Procedures	22

	Item 9B. Other Information	24

PART III

	Item 10. Directors, Executive Officers and Corporate Governance	24

	Item 11. Executive Compensation	24

	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24

	Item 13. Certain Relationships and Related Transactions, and Director Independence	24

	Item 14. Principal Accounting Fees and Services	24

PART IV

	Item 15. Exhibits and Financial Statement Schedules	24

Index to Consolidated Financial Statements		F-1

Signatures

FORWARD-LOOKING STATEMENTS

The forward-looking statements included in the “Business,” “Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk” sections and elsewhere herein, which reflect our best judgment based on factors currently known, involve risks and uncertainties. Words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “hopes,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections and, in particular, those set forth in the cautionary statements contained in “Risk Factors.” The forward-looking information we have provided in this Form 10-K pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.

PART I

Item 1.

Business

Description of Business

Denny’s Corporation, or Denny’s, is one of America’s largest family-style restaurant chains. Denny’s, through its wholly owned subsidiaries, Denny’s Holdings, Inc. and Denny’s, Inc., owns and operates the Denny’s restaurant brand. At December 26, 2007, the Denny’s brand consisted of 1,546 restaurants, 1,152 (75%) of which were franchised/licensed restaurants and 394 (25%) of which were company-owned and operated. These Denny’s restaurants operated in 49 states, the District of Columbia, two U.S. territories and five foreign countries with concentrations in California (26% of total restaurants), Florida (10%) and Texas (10%).

Our restaurants generally are open 24 hours a day, 7 days a week. We provide high quality menu offerings and generous portions at reasonable prices with friendly and efficient service in a pleasant atmosphere. Denny’s expansive menu offers traditional American-style food such as breakfast items, appetizers, sandwiches, dinner entrees and desserts. Denny's restaurants are best known for their real breakfast items, such as our Grand Slam®. Sales are broadly distributed across each of the its dayparts (i.e., breakfast, lunch, dinner and late-night).

References to "Denny's," "the Company," "we," "us," and "our" in the Form 10-K are references to Denny's Corporation and it's subsidiaries.

Restaurant Operations

We believe that the superior execution of basic restaurant operations in each Denny’s restaurant, whether it is company-owned or franchised, is critical to our success. To meet and exceed our guests’ expectations, we require both our company-owned and our franchised restaurants to maintain the same strict brand standards. These standards relate to the preparation and efficient serving of quality food and the maintenance, repair and cleanliness of restaurants.

We devote significant effort to ensuring all restaurants offer quality food served by friendly, knowledgeable and attentive employees in a clean and well-maintained restaurant. We seek to ensure that our company-owned restaurants meet our high standards, through a network of region, area and restaurant level managers. Region and area managers spend the majority of their time in the restaurants. A network of regional franchise business leaders oversee our franchised restaurants to ensure compliance with brand standards, promote operational excellence, and provide general support to our franchisees.

A principal feature of Denny’s restaurant operations is the consistent focus on improving operations at the unit level. Unit managers are hands-on and versatile in their supervisory activities. Many of our restaurant management personnel began as hourly associates in the restaurants and, therefore, know how to perform restaurant functions and are able to train by example.

Denny’s maintains a training program for associates and restaurant managers. New company general managers attend guest service and leadership training in the following areas:

•	guest interaction;

•	kitchen management and food preparation;

•	data processing and cost control techniques;

•	equipment and building maintenance; and

•	leadership skills.

Franchising and Development

The Denny’s system is approximately three-quarters franchised and one-quarter company-operated. We expect that the future growth of the brand will come primarily from the development of franchise restaurants. Our criteria to become a Denny’s franchisee include minimum liquidity and net worth requirements and appropriate operational experience. We believe that Denny’s is an attractive financial proposition for current and potential franchisees and that our fee structure is competitive with other full service brands. The initial fee for a single twenty-year Denny’s franchise agreement is $40,000 and the royalty payment is 4% of gross sales. Additionally, our franchisees contribute up to 4% of gross sales for advertising.

During 2007, we began a strategic initiative, referred to as the Franchise Growth Initiative ("FGI"), to increase franchise restaurant development through the sale of certain geographic clusters of company restaurants to both current and new franchisees. As a result, we sold 130 restaurant operations and certain related real estate to 30 franchisees for net proceeds of $73.2 million. Fulfilling the unit growth expectations of this program, certain franchisees that purchased company restaurants during the year signed development agreements to build an additional 67 new franchise restaurants. In addition to franchise development agreements signed under FGI, we have been negotiating development agreements outside of the FGI program under our Market Growth Incentive Plan (MGIP). During the year ended December 26, 2007, franchisees signed MGIP agreements to build an additional 53 franchise restaurants. Of the 120 units to be opened under these development agreements, eight opened during fiscal 2007. The remaining 112 units will open over an average of approximately three years.

The table below sets forth information regarding the distribution of single-store and multi-store franchisees as of December 26, 2007:

	Franchisees		Percentage of Franchisees			Restaurants		Percentage of Restaurants
One		112		41.6	%		112		9.7	%
Two to Five		110		40.9	%		319		27.7	%
Six to Ten		27		10.0	%		209		18.1	%
Eleven to Fifteen		5		1.9	%		64		5.6	%
Sixteen to Thirty		10		3.7	%		226		19.6	%
Thirty-one and over		5		1.9	%		222		19.3	%
Total		269		100.0	%		1,152		100.0	%

Site Selection

The success of any restaurant is influenced significantly by its location. Our development team works closely with franchisees and real estate brokers to identify sites which meet specific standards. Sites are evaluated on the basis of a variety of factors, including but not limited to:

•	demographics;

•	traffic patterns;

•	visibility;

•	building constraints;

•	competition;

•	environmental restrictions; and

•	proximity to high-traffic consumer activities.

Competition

The restaurant industry is highly competitive. Competition among major companies that own or operate restaurant chains is especially intense. Restaurants compete on the basis of name recognition and advertising; the price, quality, variety, and perceived value of their food offerings; the quality and speed of their guest service; and the convenience and attractiveness of their facilities.

Denny’s direct competition in the family-style category includes a collection of national and regional chains, as well as thousands of independent operators. Denny’s also competes with quick service restaurants as they attempt to upgrade their menus with premium sandwiches, entree salads, new breakfast offerings and extended hours.

We believe that Denny’s has a number of competitive strengths, including strong brand name recognition, well-located restaurants and market penetration. We benefit from economies of scale in a variety of areas, including advertising, purchasing and distribution. Additionally, we believe that Denny’s has competitive strengths in the value, variety, and quality of our food products, and in the quality and training of our employees. See “Risk Factors” for certain additional factors relating to our competition in the restaurant industry.

Research and Innovation

Our investment in a dynamic research and development program extends beyond our menu. During 2007, we formed our concept innovation department and hired the Senior Vice President of Brand and Concept Innovation. In addition to responsibilities for menu development, this group is focused on new restaurant models and alternative business approaches. Our restaurant operations and information technology departments are also evaluating new restaurant processes and upgraded restaurant equipment for the purpose of improving speed of service, food quality and order accuracy.

Denny’s employs a comprehensive system to ensure that the menu remains appealing to all guests. Our research and innovation group analyzes consumer trends, competitive activity and operator input to determine new offerings. We develop new offerings in our test kitchen and then introduce them in selected restaurants to determine guest response and to ensure that consistency, quality standards and profitability are maintained. If a new item proves successful at the research and development level, it is usually tested in selected markets. A successful menu item is then incorporated into the restaurant system. Low selling items are periodically removed from the menu.

Marketing & Advertising

Our marketing department manages contributions from both company-owned and franchised units providing for an integrated marketing and advertising process to promote our brand, which includes brand and communications strategy, media advertising, menu management, menu pricing strategy, public relations and specialized promotions to help differentiate Denny’s from our competitors.

Media advertising is primarily product oriented, featuring consistent, high-quality entrees presented to communicate the message that Denny's provides Real Breakfast 24/7 including great food at great values to our guests. Our advertising is conducted through national network and cable television, radio, online media, outdoor and print.

Denny’s integrated marketing and advertising approach reaches out to all consumers. Community outreach programs are designed to enhance our brand image, support our brand message and, in some cases, augment our diversity efforts.

Product Sources and Availability

Our purchasing department administers our programs for the procurement of food and non-food products. Our franchisees also purchase food and non-food products directly from the vendors under these programs. Our centralized purchasing program is designed to ensure uniform product quality as well as to minimize food, beverage and supply costs. Our size provides significant purchasing power which often enables us to obtain products at favorable prices from nationally recognized manufacturers.

While nearly all products are contracted for by our purchasing department, the majority are purchased and distributed through Meadowbrook Meat Company, or MBM, under a long-term distribution contract. MBM distributes restaurant products and supplies to Denny’s from nearly 300 vendors, representing approximately 85% of our restaurant product and supply purchases. We believe that satisfactory sources of supply are generally available for all the items regularly used by our restaurants, and we have not experienced any material shortages of food, equipment, or other products which are necessary to our restaurant operations.

Seasonality

Our business is moderately seasonal. Restaurant sales are generally greater in the second and third calendar quarters (April through September) than in the first and fourth calendar quarters (October through March). Additionally, severe weather, storms and similar conditions may impact sales volumes seasonally in some operating regions. Occupancy and other operating costs, which remain relatively constant, have a disproportionately greater negative effect on operating results during quarters with lower restaurant sales.

Trademarks and Service Marks

Through our wholly owned subsidiaries, we have certain trademarks and service marks registered with the United States Patent and Trademark Office and in international jurisdictions, including "Denny's" and "Grand Slam Breakfast". We consider our trademarks and service marks important to the identification of our restaurants and believe they are of material importance to the conduct of our business. Domestic trademark and service mark registrations are renewable at various intervals from 10 to 20 years, while international trademark and service mark registrations have various durations from 5 to 20 years. We generally intend to renew trademarks and service marks which come up for renewal. We own or have rights to all trademarks we believe are material to our restaurant operations. In addition, we have registered various domain names on the internet that incorporate certain of our trademarks and service marks, and believe these domain name registrations are an integral part of our identity. From time to time, we may resort to legal measures to defend and protect the use of our intellectual property.

Economic, Market and Other Conditions

The restaurant industry is affected by many factors, including changes in national, regional and local economic conditions affecting consumer spending, the political environment (including acts of war and terrorism), changes in customer travel patterns, changes in socio-demographic characteristics of areas where restaurants are located, changes in consumer tastes and preferences, increases in the number of restaurants, unfavorable trends affecting restaurant operations, such as rising wage rates, healthcare costs and utilities expenses, and unfavorable weather.

Government Regulations

We and our franchisees are subject to local, state and federal laws and regulations governing various aspects of the restaurant business, including, but not limited to:

•	health;

•	sanitation;

•	land use, sign restrictions and environmental matters;

•	safety;

•	disabled persons’ access to facilities;

•	the sale of alcoholic beverages; and

•	hiring and employment practices.

The operation of our franchise system is also subject to regulations enacted by a number of states and rules promulgated by the Federal Trade Commission. We believe we are in material compliance with applicable laws and regulations, but we cannot predict the effect on operations of the enactment of additional regulations in the future.

We are also subject to federal and state laws, including the Fair Labor Standards Act, governing matters such as minimum wage, tip reporting, overtime, exempt status classification and other working conditions. At December 26, 2007, a substantial number of our employees were paid the minimum wage. Accordingly, increases in the minimum wage or decreases in the allowable tip credit (which reduces the minimum wage paid to tipped employees in certain states) increase our labor costs. This is especially true for our operations in California, where there is no tip credit. Employers must pay the higher of the federal or state minimum wage. We have attempted to offset increases in the minimum wage through pricing and various cost control efforts; however, there can be no assurance that we will be successful in these efforts in the future.

Environmental Matters

Federal, state and local environmental laws and regulations have not historically had a material impact on our operations; however, we cannot predict the effect of possible future environmental legislation or regulations on our operations.

Executive Officers of the Registrant

The following table sets forth information with respect to each executive officer of Denny’s:

Name	Age	Current Principal Occupation or Employment and Five-Year Employment History
Mark E. Chmiel	53	Senior Vice President, Brand and Concept Innovation of Denny's (April, 2007-present); Chief Marketing Strategist of Fresh Enterprises, Inc. and the Baja Fresh Division of Wendy’s International, Inc. (a restaurant company) (2005-2007); Chief Marketing Officer of Prandium, Inc. (a restaurant company) (2003-2005); Director, Marketing and Senior Consultant of Catalyst, LLC (a corporate consulting company) (2001-2005).

Janis S. Emplit	52	Senior Vice President, Sales and Company Operations of Denny's (October, 2006-present); Senior Vice President for Strategic Services of Denny’s (2003-October, 2006); Senior Vice President and Chief Information Officer of Denny’s (1999-January 2006).

Louis M. Laguardia	59	Senior Vice President, Human Resources and Diversity of Denny's (March, 2007-present); Vice President and Acting Chief People Officer of Denny's (January 2007-March 2007); Vice President of Talent Acquisition and Diversity of Denny's (November, 2006-January, 2007); Vice President, Staffing and Diversity of Frito Lay, Inc. North America (a snack food division of PepsiCo, Inc.) (2003-2006); Senior Vice President and Global Diversity Officer of Blockbuster, Inc. (an in-home movie entertainment provider) (2002-2003).

Nelson J. Marchioli	58	Chief Executive Officer and President of Denny’s (2001-present).

Rhonda J. Parish	51	Executive Vice President of Denny’s (1998-present); Chief Legal Officer (October, 2006-present); Secretary of Denny's (1995-present); Chief Administrative Officer of Denny’s (2005-October, 2006); Chief Human Resources Officer of Denny’s (2005-October, 2006); and General Counsel of Denny's (1995-October, 2006).

Samuel M. Wilensky	50	Senior Vice President, Sales and Franchise Operations of Denny's (October, 2006-present); Acting Head of Operations of Denny's (October, 2006-present); Senior Vice President, Franchise Operations of Denny’s, Inc. (January, 2006-October, 2006); Division Vice President, Franchise Operations of Denny’s, Inc. (2001-2006).

F. Mark Wolfinger	52	Executive Vice President, Growth Initiatives of Denny's (October, 2006-present); Chief Financial Officer of Denny’s (2005-present); Senior Vice President of Denny's (2005-October, 2006); Executive Vice President and Chief Financial Officer of Danka Business Systems (a document imaging company) (1998-2005).

Employees

At December 26, 2007, we had approximately 21,000 employees, none of whom are subject to collective bargaining agreements. Many of our restaurant employees work part-time, and many are paid at or slightly above minimum wage levels. As is characteristic of the restaurant industry, we experience a high level of turnover among our restaurant employees. We have experienced no significant work stoppages, and we consider our relations with our employees to be satisfactory.

The staff for a typical restaurant consists of one general manager, two or three restaurant managers and approximately 50 hourly employees. All managers of company-owned restaurants receive a salary and may receive a performance bonus based on financial measures. As of December 26, 2007, we employed eight Regional Directors of Operations and 54 Area Managers. The Area Managers' duties include regular restaurant visits and inspections, which ensure the ongoing maintenance of our standards of quality, service, cleanliness, value, and courtesy.

Available Information

We make available free of charge through our website at www.dennys.com (in the Investor Relations—S.E.C. Filings section) copies of materials that we file with, or furnish to, the Securities and Exchange Commission ("SEC") including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

Item 1A.

Risk Factors

Risks Related to Our Business

The restaurant business is highly competitive, and if we are unable to compete effectively, our business will be adversely affected.

We expect competition to continue to increase. The following are important aspects of competition:

•	restaurant location;

•	number and location of competing restaurants;

•	food quality and value;

•	quality and speed of service;

•	attractiveness and repair and maintenance of facilities; and

•	the effectiveness of marketing and advertising programs.

Each of our restaurants competes with a wide variety of restaurants ranging from national and regional restaurant chains to locally owned restaurants. There is also active competition for advantageous commercial real estate sites suitable for restaurants.

Our business may be adversely affected by changes in consumer tastes, economic conditions, demographic trends, bad publicity, regional weather conditions and increased supply and labor costs.

Food service businesses are often adversely affected by changes in:

•	consumer tastes;

•	national, regional and local economic conditions; and

•	demographic trends.

The performance of our individual restaurants may be adversely affected by factors such as:

•	traffic patterns;

•	demographic consideration; and

•	the type, number and location of competing restaurants.

Multi-unit food service chains such as ours can also be materially and adversely affected by publicity resulting from:

•	poor food quality;

•	illness;

•	injury; and

•	other health concerns or operating issues.

Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could adversely affect the availability, quality and cost of ingredients. In addition, the food service industry in general, and our results of operations and financial condition in particular, may also be adversely affected by unfavorable trends or developments such as:

•	inflation;

•	increased food costs;

•	increased energy costs;

•	labor and employee benefits costs (including increases in minimum hourly wage and employment tax rates);

•	regional weather conditions; and

•	the availability of experienced management and hourly employees.

The locations where we have restaurants may cease to be attractive as demographic patterns change.

The success of our owned and franchised restaurants is significantly influenced by location. Current locations may not continue to be attractive as demographic patterns change. It is possible that the neighborhood or economic conditions where our restaurants are located could decline in the future, potentially resulting in reduced sales in those locations.

Our growth strategy, including the Franchise Growth Initiative and Market Growth Incentive Plan, depends on our ability and that of our franchisees to open new restaurants. Delays or failures in opening new restaurants could materially and adversely affect our planned growth.

The development of new restaurants may be adversely affected by risks such as:

•	costs and availability of capital for the Company and/or franchisee;

•	competition for restaurant sites;

•	negotiation of favorable purchase or lease terms for restaurant sites;

•	timely development of new restaurants;

•	inability to obtain all required governmental approvals and permits;

•	developed restaurants not achieving the expected revenue or cash flow; and

•	general economic conditions;

A majority of Denny's restaurants are owned and operated by independent franchisees, and as a result the financial performance of franchisees can negatively impact our business.

We receive royalties and contributions to advertising from our franchisees. Our financial results are somewhat contingent upon the operational and financial success of our franchisees, including implementation of our strategic plans, as well as their ability to secure adequate financing. If sales trends or economic conditions worsen for our franchisees, their financial health may worsen and our collection rates may decline. Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties.

Although the loss of revenues from the closure of any one franchise restaurant may not be material, such revenues generate margins that may exceed those generated by other restaurants or offset fixed costs which we continue to incur.

The interests of franchisees, as owners of the majority of our restaurants, might sometimes conflict with our interests. For example, whereas franchisees are concerned with their individual business strategies and objectives, we are responsible for ensuring the success of our entire chain of restaurants and for taking a longer term view with respect to system improvements.

Numerous government regulations impact our business, and our failure to comply with them could adversely affect our business.

We and our franchisees are subject to federal, state and local laws and regulations governing, among other things:

•	health;

•	sanitation;

•	environmental matters;

•	safety;

•	the sale of alcoholic beverages; and

•	hiring and employment practices, including minimum wage laws.

Our restaurant operations are also subject to federal and state laws that prohibit discrimination and laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990. The operation of our franchisee system is also subject to regulations enacted by a number of states and rules promulgated by the Federal Trade Commission. If we or our franchisees fail to comply with these laws and regulations, we or our franchisees could be subjected to restaurant closure, fines, penalties, and litigation, which may be costly. In addition, the future enactment of additional legislation regulating the franchise relationship could adversely affect our operations, particularly our relationship with franchisees.

Negative publicity generated by incidents at a few restaurants can adversely affect the operating results of our entire chain and the Denny’s brand.

Food safety concerns, criminal activity, alleged discrimination or other operating issues stemming from one restaurant or a limited number of restaurants do not just impact that particular restaurant or a limited number of restaurants. Rather, our entire chain of restaurants may be at risk from negative publicity generated by an incident at a single restaurant. This negative publicity can adversely affect the operating results of our entire chain and the Denny’s brand.

As holding companies, Denny’s Corporation and Denny’s Holdings depend on upstream payments from their operating subsidiaries. Our ability to repay our indebtedness depends on the performance of those subsidiaries and their ability to make distributions to us.

A substantial portion of our assets are owned, and a substantial percentage of our total operating revenues are earned, by our subsidiaries. Accordingly, Denny’s Corporation and Denny’s Holdings depend upon dividends, loans and other intercompany transfers from our subsidiaries to meet their debt service and other obligations. These transfers are subject to contractual restrictions.

Our subsidiaries are separate and distinct legal entities and they have no obligation, contingent or otherwise, to make any funds available to meet our debt service and other obligations, whether by dividend, distribution, loan or other payments. If our subsidiaries do not pay dividends or other distributions, Denny’s Corporation and Denny’s Holdings may not have sufficient cash to fulfill their obligations.

If we lose the services of any of our key management personnel, our business could suffer.

Our future success significantly depends on the continued services and performance of our key management personnel. Our future performance will depend on our ability to motivate and retain these and other key officers and key team members, particularly regional and area managers and restaurant general managers. Competition for these employees is intense. The loss of the services of members of our senior management or key team members or the inability to attract additional qualified personnel as needed could materially harm our business.

If our internal controls are ineffective, we may not be able to accurately report our financial results or prevent fraud.

We maintain a documented system of internal controls which is reviewed and tested by the Company’s full time Internal Audit Department. The Internal Audit Department reports to the Audit Committee of the Board of Directors. We believe we have a well-designed system to maintain adequate internal controls on the business, however, we cannot be certain that our controls will be adequate in the future or that adequate controls will be effective in preventing errors or fraud. Any failures in the effectiveness of our internal controls could have a material adverse effect on our operating results or cause us to fail to meet reporting obligations.

Risks Related to our Indebtedness

Our indebtedness could have a material adverse effect on our financial condition and operations.

We have a significant amount of indebtedness. As of December 26, 2007, we had total indebtedness of approximately $353.0 million.

Our level of indebtedness could:

•	make it more difficult for us to satisfy our obligations with respect to our indebtedness;

•	require us to continue to dedicate a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which would reduce the availability of our cash flow to fund future working capital, capital expenditures, acquisitions and other general corporate purposes;

•	increase our vulnerability to general adverse economic and industry conditions;

•	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•	restrict us from making strategic acquisitions or pursuing business opportunities;

•	place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness; and

•	limit our ability to borrow additional funds.

We may need to access the capital markets in the future to raise the funds to repay our indebtedness. We have no assurance that we will be able to complete a refinancing or that we will be able to raise any additional financing, particularly in view of our anticipated high levels of indebtedness and the restrictions contained in the credit agreements and indenture that govern our indebtedness. If we are unable to satisfy or refinance our current debt as it comes due, we may default on our debt obligations. If we default on payments under our debt obligations, virtually all of our other debt would become immediately due and payable.

Despite our current level of indebtedness, we may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

Despite our current and anticipated debt levels, we may be able to incur substantial additional indebtedness in the future. Our credit agreement and the indenture governing our indebtedness limit, but do not fully prohibit, us from incurring additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify.

At December 26, 2007, we had an outstanding term loan of $152.5 million and outstanding letters of credit of $37.3 million (comprised of $36.6 million under our letter of credit facility and $0.7 million under our revolving facility). There were no revolving loans outstanding at December 26, 2007. These balances result in availability of $0.4 million under our letter of credit facility and $49.3 million under the revolving facility. As of February 29, 2008, we had availability of $2.0 million under our letter of credit facility and $49.9 million under the revolving facility. There were no revolving loans outstanding at February 29, 2008. In addition, we have Denny's Holdings. Inc. 10% Senior Notes due in 2012 (the "10% Notes") with an aggregate principal amount of $175 million.

We continue to monitor our cash flow and liquidity needs. Although we believe that our existing cash balances, funds from operations and amounts available under our credit facility will be adequate to cover those needs, we may seek additional sources of funds including additional financing sources and continued selected asset sales, to maintain sufficient cash flow to fund our ongoing operating needs, pay interest and scheduled debt amortization and fund anticipated capital expenditures over the next twelve months.

Our ability to generate cash depends on many factors beyond our control, and we may not be able to generate the cash required to service or repay our indebtedness.

Our ability to make scheduled payments on our indebtedness will depend upon our subsidiaries’ operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our historical financial results have been, and our future financial results are expected to be, subject to substantial fluctuations. We cannot be sure that our subsidiaries will generate sufficient cash flow from operations to enable us to service or reduce our indebtedness or to fund our other liquidity needs. Our subsidiaries’ ability to maintain or increase operating cash flow will depend upon:

•	consumer tastes;

•	the success of our marketing initiatives and other efforts by us to increase guest traffic in our restaurants; and

•	prevailing economic conditions and other matters, many of which are beyond our control.

If we are unable to meet our debt service obligations or fund other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before maturity or seek additional equity capital. We cannot be sure that we will be able to pay or refinance our indebtedness or obtain additional equity capital on commercially reasonable terms, or at all.

Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely affect us.

The credit agreement and the indenture governing our indebtedness contain various covenants that limit, among other things, our ability to:

•	incur additional indebtedness;

•	pay dividends or make distributions or certain other restricted payments;

•	make certain investments;

•	create dividend or other payment restrictions affecting restricted subsidiaries;

•	issue or sell capital stock of restricted subsidiaries;

•	guarantee indebtedness;

•	enter into transactions with stockholders or affiliates;

•	create liens;

•	sell assets and use the proceeds thereof;

•	engage in sale-leaseback transactions; and

•	enter into certain mergers and consolidations.

Our credit agreement contains additional restrictive covenants, including financial maintenance requirements. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger, acquisition or other corporate opportunities and to fund our operations.

A breach of a covenant in our debt instruments could cause acceleration of a significant portion of our outstanding indebtedness.

A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other debt instruments. In addition, our credit agreement requires us to maintain certain financial ratios. Our ability to comply with these covenants may be affected by events beyond our control, and we cannot be sure that we will be able to comply with these covenants. Upon the occurrence of an event of default under any of our debt instruments, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them, if any, to secure the indebtedness. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we cannot be sure that our assets would be sufficient to repay in full our outstanding indebtedness.

We may not be able to repurchase the 10% Senior Notes due 2012 upon a change of control.

Upon the occurrence of specific kinds of change of control events, we would be required to offer to repurchase all outstanding 10% Notes at 101% of their principal amount, together with any accrued and unpaid interest and liquidated damages, if any, from the issue date. We may not be able to repurchase the notes upon a change of control because we may not have sufficient funds. Further, our credit agreement restricts our ability to repurchase the notes, and also provides that certain change of control events will constitute a default under our credit agreement that permits our lenders thereunder to accelerate the maturity of related borrowings, and, if such debt is not paid, to enforce security interests in the collateral securing such debt, thereby limiting our ability to raise cash to purchase the notes. Any future credit agreements or other agreements relating to indebtedness to which we become a party may contain similar restrictions and provisions. In the event a change of control occurs at a time when we are prohibited by any other indebtedness from purchasing the notes, we could seek consent of the lenders of such indebtedness to the purchase of the notes or could attempt to refinance the borrowings that contain such prohibition. If we do not obtain such consent or repay such borrowings, we will remain prohibited from purchasing the notes. In such case, our failure to purchase tendered notes would constitute an event of default under the indenture governing the notes which would, in turn, constitute a default under our credit agreement.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Most Denny’s restaurants are free-standing facilities, with property sizes averaging approximately one acre. The restaurant buildings average 4,800 square feet, allowing them to accommodate an average of 140 guests. The number and location of our restaurants as of December 26, 2007 and December 27, 2006 are presented below:

	2007				2006
State/Country	Company Owned		Franchised/Licensed		Company Owned		Franchised/Licensed
Alabama		3		—		3		—
Alaska		—		4		—		4
Arizona		18		56		23		49
Arkansas		—		9		—		9
California		131		272		157		244
Colorado		7		19		7		19
Connecticut		—		8		—		8
District of Columbia		—		1		—		1
Delaware		2		—		3		—
Florida		25		132		57		103
Georgia		—		12		—		12
Hawaii		4		3		4		3
Idaho		—		7		—		7
Illinois		28		23		31		21
Indiana		3		30		3		30
Iowa		—		1		—		1
Kansas		—		8		—		8
Kentucky		6		6		6		6
Louisiana		2		1		2		1
Maine		—		6		—		6
Maryland		6		17		6		19
Massachusetts		—		6		—		6
Michigan		10		12		19		3
Minnesota		3		13		3		13
Mississippi		1		—		1		—
Missouri		5		30		5		31
Montana		—		4		—		4
Nebraska		—		1		—		1
Nevada		8		21		10		16
New Hampshire		—		3		—		3
New Jersey		6		5		6		5
New Mexico		—		22		2		18
New York		33		11		33		12
North Carolina		4		13		4		13
North Dakota		—		3		—		3
Ohio		14		20		21		13
Oklahoma		—		21		3		19
Oregon		—		23		—		23
Pennsylvania		30		7		30		7
Rhode Island		—		2		—		2
South Carolina		—		12		9		3
South Dakota		—		2		—		2
Tennessee		2		1		2		1
Texas		27		130		35		117
Utah		—		20		—		20
Vermont		—		2		—		2
Virginia		7		16		8		14
Washington		—		52		19		35
West Virginia		—		2		—		2
Wisconsin		9		8		9		8
Guam		—		2		—		2
Puerto Rico		—		10		—		10
Canada		—		49		—		51
Other International		—		14		—		14
Total		394		1,152		521		1,024

Of the total 1,546 company-owned and franchised units, our interest in restaurant properties consists of the following:

	Company-Owned Units	Franchised Units	Total
Own land and building	102	22	124
Lease land and own building	21	—	21
Lease both land and building	271	305	576
	394	327	721

In addition to the restaurants, we own an 18-story, 187,000 square foot office building in Spartanburg, South Carolina, which serves as our corporate headquarters. Our corporate offices currently occupy approximately 16 floors of the building, with a portion of the building leased to others.

See Note 10 to our Consolidated Financial Statements for information concerning encumbrances on substantially all of our properties.

Item 3.

Legal Proceedings

There are various claims and pending legal actions against or indirectly involving us, including actions concerned with civil rights of employees and guests, other employment related matters, taxes, sales of franchise rights and businesses and other matters. Based on our examination of these matters and our experience to date, we have recorded 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.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed under the symbol “DENN” and trades on the NASDAQ Capital Market. As of February 29, 2008, 94,976,325 shares of common stock were outstanding, and there were approximately 12,445 record and beneficial holders of common stock. We have never paid dividends on our common equity securities. Furthermore, restrictions contained in the instruments governing our outstanding indebtedness prohibit us from paying dividends on our common stock in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 10 to our Consolidated Financial Statements.

The following tables list the high and low sales prices of the common stock for each quarter of fiscal years 2007 and 2006, according to NASDAQ. Our common stock began trading on the NASDAQ Capital Market on May 10, 2005.

	High		Low
2007
First quarter	$	5.60	$	4.19
Second quarter		5.00		4.20
Third quarter		4.66		3.56
Fourth quarter		4.99		3.73

2006
First quarter	$	5.10	$	3.65
Second quarter		5.26		3.45
Third quarter		3.99		2.49
Fourth quarter		4.86		3.30

Stockholder Return Performance Graph

The following graph compares the cumulative total stockholders’ return on the Common Stock for the five fiscal years ended December 26, 2007 (December 25, 2002 to December 26, 2007) against the cumulative total return of the Russell 2000® Index and a peer group. The graph and table assume that $100 was invested on December 25, 2002 (the last day of fiscal year 2002) in each of the Company’s Common Stock, the Russell 2000® Index and the peer group and that all dividends were reinvested.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG DENNY’S CORPORATION, RUSSELL 2000® INDEX AND PEER GROUP

ASSUMES $100 INVESTED ON DECEMBER 25, 2002

ASSUMES DIVIDENDS REINVESTED

FISCAL YEAR ENDED DECEMBER 26, 2007

	Russell 2000® Index (1)		Peer Group (2)		Denny's Corporation
December 25, 2002	$	100.00	$	100.00	$	100.00
December 31, 2003	$	147.25	$	125.70	$	64.05
December 29, 2004	$	174.25	$	145.23	$	703.05
December 28, 2005	$	182.20	$	172.17	$	629.60
December 27, 2006	$	215.62	$	198.44	$	735.89
December 26, 2007	$	212.29	$	154.95	$	585.85

(1)

The Russell 2000 Index is a broad equity market index of 2,000 companies that measures the performance of the small-cap segment of the U.S. equity universe. As of January 31, 2008, the average market capitalization of companies within the index was approximately $1.3 billion with the median market capitalization being approximately $0.5 billion.

(2)

The peer group consists of 20 public companies that operate in the restaurant industry. This peer group has been revised from the prior year to account for companies that are no longer publicly-held and to include a broader range of competitive restaurants and restaurant operating models. The peer group includes the following companies: Burger King Holdings, Inc. (BKC), Bob Evans Farms, Inc. (BOBE), Buffalo Wild Wings, Inc. (BWLD), CBRL Group Inc. (CBRL), O’Charleys Inc. (CHUX), CKE Restaurants, Inc. (CKR), California Pizza Kitchen, Inc. (CPKI), Domino’s Pizza Inc. (DPZ), Darden Restaurants, Inc. (DRI), Brinker International, Inc. (EAT), IHOP Corporation (IHP), Jack In The Box Inc. (JBX), Panera Bread Company (PNRA), Papa John’s International, Inc. (PZZA), Red Robin Gourmet Burgers, Inc. (RRGB), Ruby Tuesday, Inc. (RT), Steak 'n Shake Company (SNS), Sonic Corp. (SONC), Texas Roadhouse, Inc. (TXRH) and Wendy’s International, Inc. (WEN).

Item 6.

Selected Financial Data

The following table summarizes the consolidated financial and operating data of Denny’s Corporation as of and for the years ended December 26, 2007, December 27, 2006, December 28, 2005, December 29, 2004 and December 31, 2003. The consolidated statements of operations for the years ended December 26, 2007, December 27, 2006 and December 28, 2005 and the balance sheet data as of December 26, 2007 and December 27, 2006 are derived from our audited Consolidated Financial Statements included in this Form 10-K. The consolidated statements of operations for the years ended December 29, 2004 and December 31, 2003 and balance sheet data as of December 28, 2005, December 29, 2004 and December 31, 2003 are derived from our Consolidated Financial Statements not included in this Form 10-K. The selected consolidated financial and operating data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes.

	Fiscal Year Ended
	December 26, 2007			December 27, 2006			December 28, 2005			December 29, 2004			December 31, 2003(a)
	(In millions, except ratios and per share amounts)
Statement of Operations Data:
Operating revenue	$	939.4		$	994.0		$	978.7		$	960.0		$	940.9
Operating income		83.5			110.5			48.5			53.8			46.0
Income (loss) from continuing operations before cumulative effect of change in accounting principle		34.7			30.1			(7.3	)		(37.7	)		(33.8	)
Cumulative effect of change in accounting principle, net of tax		—			0.2			—			—			—
Income (loss) from continuing operations		34.7			30.3			(7.3	)		(37.7	)		(33.8	)

Basic net income (loss) per share:
Basic net income (loss) before cumulative effect of change in accounting principle, net of tax	$	0.37		$	0.33		$	(0.08	)	$	(0.58	)	$	(0.83	)
Cumulative effect of change in accounting principle, net of tax		—			0.00			—			—			—
Basic net income (loss) per share from continuing operations	$	0.37		$	0.33		$	(0.08	)	$	(0.58	)	$	(0.83	)

Diluted net income (loss) per share:
Diluted net income (loss) before cumulative effect of change in accounting principle, net of tax	$	0.35		$	0.31		$	(0.08	)	$	(0.58	)	$	(0.83	)
Cumulative of effect of change in accounting principle, net of tax		—			0.00			—			—			—
Diluted net income (loss) per share from continuing operations	$	0.35		$	0.31		$	(0.08	)	$	(0.58	)	$	(0.83	)

Cash dividends per common share (b)		—			—			—			—			—

Balance Sheet Data (at end of period):
Current assets (d)	$	57.9		$	63.2		$	62.1		$	42.4		$	30.4
Working capital deficit (c)(d)		(73.6	)		(72.6	)		(86.3	)		(93.4	)		(161.2	)
Net property and equipment		184.6			236.3			288.1			285.4			293.2
Total assets (d)		381.1			444.4			511.7			499.3			495.4
Long-term debt, excluding current portion		346.8			440.7			545.7			547.4			538.3

(a)	The fiscal year ended December 31, 2003 includes 53 weeks of operations as compared with 52 weeks for all other years presented. We estimate that the additional, or 53rd, week added approximately $22.4 million of operating revenue in 2003.

(b)	Our bank facilities have prohibited, and our previous and current public debt indentures have significantly limited, distributions and dividends on Denny’s Corporation’s (and its predecessors’) common equity securities. See Note 10 to our Consolidated Financial Statements.

(c)	A negative working capital position is not unusual for a restaurant operating company. The decrease in working capital deficit from December 31, 2003 to December 29, 2004 is related primarily to the use of cash received during the recapitalization transactions completed during the third and fourth quarters of 2004 to repay outstanding amounts related to term loans and revolving loans under our previous credit facility that had a December 20, 2004 expiration date.

(d)	Fiscal years 2003 through 2006 have been adjusted from amounts previously reported to reflect certain adjustments as discussed in “Adjustments to Equity” in Note 2 to our Consolidated Financial Statements.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with “Selected Financial Data,” and our Consolidated Financial Statements and the notes thereto.

Overview

Denny’s revenues are derived primarily from two sources: the sale of food and beverages at our company-owned restaurants and the collection of royalties and fees from restaurants operated by our franchisees under the Denny’s name.

Sales are affected by many factors including competition, economic conditions affecting consumer spending, weather and changes in guest tastes and preferences. Two primary sales drivers are changes in same-store sales and the number of restaurants. Same-store sales are comprised of the changes in guest check average and guest counts.

The Franchise Growth Initiative (“FGI”) is a strategic initiative to increase franchise restaurant development through the sale of certain geographic clusters of company restaurants to both current and new franchisees. As a result of the FGI, company-owned units decreased by 127 units and franchise units increased by 128 units during 2007. Included in the unit changes were the opening of five company-owned and 18 franchise restaurants. We expect that the majority of new Denny’s restaurants will be developed by our franchisees. Development of company-owned restaurants will focus on flagship locations in Denny’s core markets.

Our costs of company-owned restaurant sales are exposed to volatility in two main areas: product costs and payroll and benefit costs. Many of the products sold in our restaurants are affected by commodity pricing and are, therefore, subject to price volatility. This volatility is caused by factors that are fundamentally outside of our control and are often unpredictable. In general, we purchase food products based on market prices, or we “lock in” prices in purchase agreements with our vendors. In addition, some of our purchasing agreements contain features that minimize price volatility by establishing price ceilings and/or floors. While we will address commodity cost increases which are significant and considered long-term in nature by adjusting menu prices, competitive circumstances can limit such actions.

Payroll and benefit costs’ volatility results primarily from changes in wage rates and increases in labor related expenses such as medical benefit costs and workers’ compensation costs. A number of our employees are paid the minimum wage. Accordingly, substantial increases in the minimum wage increase our labor costs. Additionally, declines in guest counts and investments in store-level labor can cause payroll and benefit costs to increase as a percentage of sales.

Many of our costs vary based on sales and unit count. However, certain costs such as occupancy, other operating expenses and general and administrative expenses have fixed components that may not react as directly to changes in sales and unit count.

Franchise and license revenues are the revenues received by Denny’s from its franchisees and include royalties (based on a percentage of sales of franchisee-operated restaurants), initial franchise fees and occupancy revenue related to restaurants leased or subleased to franchisees. The sale of restaurants to franchisees can result in an increase in occupancy revenue, regardless of whether we own or lease the underlying real estate. Where feasible, when restaurant operations are sold to franchisees, we intend to sell the underlying owned real estate to either the franchisees or other interested parties. The sale of owned real estate properties that are leased to franchisees results in a decline in occupancy revenue. Generally, we remain obligated for rent payments related to properties that are subleased to franchisees.

Our costs of franchise and license revenue include occupancy costs related to restaurants leased or subleased to franchisees and direct costs consisting primarily of payroll and benefit costs of franchise operations personnel and bad debt expense. Franchise and licensing revenues are generally billed and collected from franchisees on a weekly basis which minimizes the impact of bad debts on our costs of franchise and license revenues.

Interest expense has a significant impact on our net income (loss) as a result of our indebtedness. However, during 2007 and 2006, we continued to reduce interest expense through a series of debt repayments using the proceeds generated from the FGI transactions, sale of real estate and cash flow from operations. These repayments resulted in an overall debt reduction of more than $100 million in both 2007 and 2006. We are subject to the effects of interest rate volatility since approximately 46% of our debt has variable interest rates. To minimize the interest rate volatility, during 2007, we entered into an interest rate swap on the first $150 million of floating rate debt. As of December 26, 2007, the swap effectively increases our ratio of fixed rate debt from approximately 54% of total debt to approximately 99% of total debt.

Statements of Operations

	Fiscal Year Ended
	December 26, 2007					December 27, 2006					December 28, 2005
	(Dollars in thousands)
Revenue:
Company restaurant sales	$	844,621		89.9	%	$	904,374		91.0	%	$	888,942		90.8	%
Franchise and license revenue		94,747		10.1	%		89,670		9.0	%		89,783		9.2	%
Total operating revenue		939,368		100.0	%		994,044		100.0	%		978,725		100.0	%

Costs of company restaurant sales (a):
Product costs		215,943		25.6	%		226,404		25.0	%		224,803		25.3	%
Payroll and benefits		355,710		42.1	%		372,292		41.2	%		372,644		41.9	%
Occupancy		50,977		6.0	%		51,677		5.7	%		51,057		5.7	%
Other operating expenses		123,310		14.6	%		131,404		14.5	%		130,883		14.7	%
Total costs of company restaurant sales		745,940		88.3	%		781,777		86.4	%		779,387		87.7	%

Costs of franchise and license revenue (a)		28,005		29.6	%		27,910		31.1	%		28,758		32.0	%

General and administrative expenses		67,374		7.2	%		66,426		6.7	%		62,911		6.4	%
Depreciation and other amortization		49,347		5.3	%		55,290		5.6	%		56,126		5.7	%
Operating gains, losses and other charges, net		(34,828	)	(3.7	%)		(47,882	)	(4.8	%)		3,090		0.3	%
Total operating costs and expenses		855,838		91.1	%		883,521		88.9	%		930,272		95.0	%
Operating income		83,530		8.9	%		110,523		11.1	%		48,453		5.0	%
Other expenses:
Interest expense, net		42,957		4.6	%		57,720		5.8	%		55,172		5.6	%
Other nonoperating expense (income), net		668		0.1	%		8,029		0.8	%		(602	)	(0.1	%)
Total other expenses, net		43,625		4.6	%		65,749		6.6	%		54,570		5.6	%
Net income (loss) before income taxes and cumulative effect of change in accounting principle		39,905		4.2	%		44,774		4.5	%		(6,117	)	(0.6	%)
Provision for income taxes		5,192		0.6	%		14,668		1.5	%		1,211		0.1	%
Net income (loss) before cumulative effect of change in accounting principle		34,713		3.7	%		30,106		3.0	%		(7,328	)	(0.7	%)
Cumulative effect of change in accounting principle		—		—	%		232		0.0	%		—		—	%
Net income (loss)	$	34,713		3.7	%	$	30,338		3.1	%	$	(7,328	)	(0.7	%)

Other Data:
Company-owned average unit sales	$	1,716				$	1,693				$	1,642
Franchise average unit sales	$	1,523				$	1,481				$	1,408
Company-owned equivalent units (b)		492					534					541
Franchise equivalent units (b)		1,049					1,027					1,038
Same-store sales increase (company-owned) (c)(d)		0.3	%				2.5	%				3.3	%
Guest check average increase (d)		4.6	%				4.4	%				4.4	%
Guest count decrease (d)		(4.1	%)				(1.8	%)				(1.0	%)
Same-store sales increase (franchised and licensed (units) (c)(d)		1.7	%				3.6	%				5.2	%

(a)	Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.

(b)	Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.

(c)	Same-store sales include sales from restaurants that were open the same period in 2007, 2006 and 2005.

(d)	Prior year amounts have not been restated for 2007 comparable units.

Unit Activity

	2007			2006
Company-owned restaurants, beginning of period		521			543
Units opened		5			3
Units acquired from franchisees		1			1
Units sold to franchisees		(130	)		—
Units closed		(3	)		(26	)
End of period		394			521

Franchised and licensed restaurants, beginning of period		1,024			1,035
Units opened		18			17
Units acquired by Company		(1	)		(1	)
Units purchased from Company		130			—
Units closed		(19	)		(27	)
End of period		1,152			1,024

Total company-owned, franchised and licensed restaurants, end of period		1,546			1,545

2007 Compared with 2006

Company Restaurant Operations

During the year ended December 26, 2007, we realized a 0.3% increase in same-store sales, comprised of a 4.6% increase in guest check average and a 4.1% decrease in guest counts. Company restaurant sales decreased $59.8 million or 6.6%. Decreased sales resulted primarily from a 42 equivalent-unit decrease in company-owned restaurants, offset by the increase in same-store sales for the current year. The decrease in company-owned restaurants primarily resulted from the sale of 130 company-owned restaurants to franchisees under FGI during fiscal 2007.

Total costs of company restaurant sales as a percentage of company restaurant sales increased to 88.3% from 86.4%. Product costs increased to 25.6% from 25.0% due to modest changes in commodity costs and shifts in menu mix. Payroll and benefits increased to 42.1% from 41.2% primarily as a result of increased management staffing and wage increases, offset by a 0.1% benefit from favorable workers' compensation claims development. Occupancy costs increased to 6.0% from 5.7% due primarily to increased property tax expense. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

	Fiscal Year Ended
	December 26, 2007				December 27, 2006
	(Dollars in thousands)
Utilities	$	40,898	4.8	%	$	44,329	4.9	%
Repairs and maintenance		18,300	2.2	%		18,252	2.0	%
Marketing		27,469	3.3	%		29,879	3.3	%
Legal		3,621	0.4	%		1,708	0.2	%
Other		33,022	3.9	%		37,236	4.1	%
Other operating expenses	$	123,310	14.6	%	$	131,404	14.5	%

The decrease in utilities is primarily the result of lower natural gas costs. The increase in legal expense is due to the unfavorable development of certain legal matters during the year ended December 26, 2007.

Franchise Operations

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

	Fiscal Year Ended
	December 26, 2007				December 27, 2006
	(Dollars in thousands)
Royalties	$	63,127	66.6	%	$	60,217	67.2	%
Initial and other fees		6,349	6.7	%		1,086	1.2	%
Occupancy revenue		25,271	26.7	%		28,367	31.6	%
Franchise and license revenue		94,747	100.0	%		89,670	100.0	%

Occupancy costs		20,225	21.4	%		19,784	22.1	%
Other direct costs		7,780	8.2	%		8,126	9.0	%
Costs of franchise and license revenue	$	28,005	29.6	%	$	27,910	31.1	%

Royalties increased by $2.9 million, or 4.8%, and initial fees increased $5.3 million primarily resulting from the sale of 130 company-owned restaurants to franchisees. The sale of restaurants to franchisees resulted in a 22 equivalent-unit increase in franchised and licensed units compared to the prior year. Additionally, franchised and licensed units realized a 1.7% increase in same-store sales. The decline in occupancy revenue of $3.1 million, or 10.9%, is comprised of a $5.4 million decrease attributable to the sale of franchisee-operated real estate properties during 2006 and 2007, offset by a $2.3 million increase in occupancy revenue primarily related to the sale of company-owned restaurants to franchisees. We continue to collect royalties from the franchisees operating restaurants at the properties sold during 2007 and 2006.

Costs of franchise and license revenue increased by $0.1 million, or 0.3%. The increase in occupancy costs of $0.4 million, or 2.2%, is comprised primarily of a $1.5 million increase resulting from the sale of 130 company-owned restaurants to franchisees, offset by a $1.0 million decrease in occupancy costs resulting from the sale of franchisee-operated real estate properties during 2006 and 2007. As a percentage of franchise and license revenue, costs of franchise and license revenue decreased to 29.6% for the year ended December 26, 2007 from 31.1% for the year ended December 27, 2006.

Other Operating Costs and Expenses

Other operating costs and expenses such as general and administrative expenses and depreciation and amortization expense relate to both company and franchise operations.

General and administrative expenses are comprised of the following:

	Fiscal Year Ended
	December 26, 2007		December 27, 2006
	(In thousands)
Share-based compensation	$	4,774	$	7,627
Other general and administrative expenses		62,600		58,799
Total general and administrative expenses	$	67,374	$	66,426

The increase in general and administrative expenses is primarily the result of investments in corporate staffing and incentive compensation programs related to strategic initiatives. The decrease in share-based compensation expense is primarily the result of the vesting of certain restricted stock units and stock options during 2007 and 2006.

Depreciation and amortization is comprised of the following:

	Fiscal Year Ended
	December 26, 2007		December 27, 2006
	(In thousands)
Depreciation of property and equipment	$	37,994	$	44,133
Amortization of capital lease assets		4,703		4,682
Amortization of intangible assets		6,650		6,475
Total depreciation and amortization	$	49,347	$	55,290

The overall decrease in depreciation and amortization expense is due primarily to the sale of real estate properties during 2007 and 2006 and the sale of 130 company-owned restaurants to franchisees during 2007.

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

	Fiscal Year Ended
	December 26, 2007			December 27, 2006
	(In thousands)
Gains on dispositions of assets and other, net	$	(42,774	)	$	(56,801	)
Restructuring charges and exit costs		6,870			6,225
Impairment charges		1,076			2,694
Operating gains, losses and other charges, net	$	(34,828	)	$	(47,882	)

Gains on sales of assets and other, net of $42.8 million for the year ended December 26, 2007 include gains on sales of restaurant operations to franchisees, real estate and other assets. During 2007, we sold 130 restaurant operations and certain related real estate to 30 franchisees for net proceeds of $73.2 million as part of FGI. During 2006, we sold 81 company-owned, franchisee-operated real estate properties and five surplus real estate properties. See Note 8 to our Consolidated Financial Statements.

Restructuring charges and exit costs were comprised of the following:

	Fiscal Year Ended
	December 26, 2007		December 27, 2006
	(In thousands)
Exit costs	$	1,665	$	4,254
Severance and other restructuring charges		5,205		1,971
Total restructuring and exist costs	$	6,870	$	6,225

Severance and other restructuring charges for the year ended December 26, 2007 increased by $3.2 million, resulting primarily from $1.9 million of severance costs related to the reorganization of our field management structure, which led to the elimination of 80 to 90 out-of-restaurant operational positions. Of these eliminations, approximately 30 employees were reassigned to other positions within the Company. The $6.2 million of restructuring charges and exit costs for the year ended December 27, 2006 resulted primarily from the closing of 14 underperforming units, in addition to severance and other restructuring costs associated with the termination of approximately 41 out-of-restaurant support staff positions.

Impairment charges of $1.1 million for the year ended December 26, 2007 and $2.7 million for the year ended December 27, 2006 relate to either closed or underperforming restaurants.

Operating income was $83.5 million during 2007 compared with $110.5 million during 2006.

Interest expense, net is comprised of the following:

	Fiscal Year Ended
	December 26, 2007			December 27, 2006
	(In thousands)
Interest on senior notes	$	17,452		$	17,452
Interest on credit facilities		16,296			27,889
Interest on capital lease liabilities		3,868			4,361
Letters of credit and other fees		2,280			2,999
Interest income		(1,372	)		(1,822	)
Total cash interest		38,524			50,879
Amortization of deferred financing costs		1,177			3,316
Interest accretion on other liabilities		3,256			3,525
Total interest expense, net	$	42,957		$	57,720

The decrease in interest expense resulted primarily from the repayment of $100.3 million and $100.5 million of debt during the years ended December 26, 2007 and December 27, 2006, respectively, as well as lower interest rates resulting from the refinancing of our credit facilities during 2006.

Other nonoperating expenses, net were $0.7 million for the year ended December 26, 2007 compared with $8.0 million for the year ended December 27, 2006. The expense for the 2006 period primarily represents an $8.5 million loss on early extinguishment of debt from the write-off of deferred financing costs associated with the debt prepayments made during the year and the refinancing of our credit facilities. See Note 10 to our Consolidated Financial Statements.

The provision for income taxes was $5.2 million compared with $14.7 million for the years ended December 26, 2007 and December 27, 2006, respectively. The provision for income taxes for the year ended December 26, 2007 also included recognition of $0.3 million of current tax benefits and a $0.6 million reduction to the valuation allowance. These items resulted from the enactment of certain federal and state laws that benefited us during 2007. We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses generated in previous periods. In establishing our valuation allowance, we had previously taken into consideration certain tax planning strategies involving the sale of appreciated properties. The deferred tax provision of $12.1 million for the year ended December 27, 2006 related to our reevaluation of our tax planning strategies in light of the sale of appreciated properties during 2006. In addition, during 2006 and 2007, we utilized certain federal and state net operating loss carryforwards whose valuation allowance was established in connection with fresh start reporting on January 7, 1998. Accordingly, for the years ended December 26, 2007 and December 27, 2006, we recognized approximately $4.5 million and $0.7 million, respectively, of federal and state deferred tax expense with a corresponding reduction to the goodwill that was recorded in connection with fresh start reporting on January 7, 1998.

Net income was $34.7 million for the year ended December 26, 2007 compared with $30.3 million for the year ended December 27, 2006 due to the factors noted above.

2006 Compared with 2005

Company Restaurant Operations

During the year ended December 27, 2006, we realized a 2.5% increase in same-store sales, comprised of a 4.4% increase in guest check average and a 1.8% decrease in guest counts. The increase in guest check average resulted from customers trading up to higher priced dinner entrees and cold beverages. Company restaurant sales increased $15.4 million or 1.7%. Higher sales resulted primarily from the increase in same-store sales for the current year, partially offset by a seven equivalent-unit decrease in company-owned restaurants. The decrease in company-owned restaurants resulted from store closures.

Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 86.4% from 87.7%. Product costs decreased to 25.0% from 25.3% due to shifts in menu mix and the impact of a higher guest check average. Payroll and benefits decreased to 41.2% from 41.9% related primarily to improvements in workers' compensation costs. Fiscal 2006 benefited by $2.8 million of positive workers' compensation claims development, while 2005 was impacted by $3.6 million of negative workers' compensation claims development. In addition, decreased management incentive compensation was partially offset by increased group insurance costs. Occupancy costs remained essentially flat at 5.7%. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

	Fiscal Year Ended
	December 27, 2006				December 28, 2005
	(Dollars in thousands)
Utilities	$	44,329	4.9	%	$	42,727	4.8	%
Repairs and maintenance		18,252	2.0	%		18,677	2.1	%
Marketing		29,879	3.3	%		28,437	3.2	%
Legal settlement costs		1,708	0.2	%		8,288	0.9	%
Other		37,236	4.1	%		32,754	3.7	%
Other operating expenses	$	131,404	14.5	%	$	130,883	14.7	%

The increase in utilities is the result of higher natural gas and electricity costs. The $6.6 million decrease in legal settlement costs is primarily the result of amounts recognized in the prior year for legal settlement expenses related to the settlement of the DLSE of the State of California's Department of Industrial Relations' litigation and the development of certain other cases. Other expenses included a scheduled reduction in coin-operated game machines in our restaurants resulting in a $2.3 million decrease in ancillary restaurant income and a $1.3 million increase in credit card fees resulting primarily from $0.9 million recognized in the prior year related to the Visa Check / Mastermoney Anti-Trust Litigation Settlement.

Franchise Operations

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

	Fiscal Year Ended
	December 27, 2006				December 28, 2005
	(Dollars in thousands)
Royalties	$	60,217	67.2	%	$	58,142	64.8	%
Initial and other fees		1,086	1.2	%		851	0.9	%
Occupancy revenue		28,367	31.6	%		30,790	34.3	%
Franchise and license revenue		89,670	100.0	%		89,783	100.0	%

Occupancy costs		19,784	22.1	%		21,031	23.4	%
Other direct costs		8,126	9.0	%		7,727	8.6	%
Costs of franchise and license revenue	$	27,910	31.1	%	$	28,758	32.0	%

Royalties increased $2.1 million or 3.6% resulting from a 3.6% increase in franchisee same-store sales, partially offset by the effects of an eleven equivalent-unit decrease in franchise and licensed units. The $2.4 million or 7.9% decline in occupancy revenue is attributable to the sale of 81 franchisee-operated real estate properties during 2006. Occupancy revenue related to the sold properties was approximately $5.0 million, although we continue to collect royalties from the franchisees operating restaurants at these properties.

Costs of franchise and license revenue decreased $0.8 million or 2.9%. Occupancy costs decreased $1.2 million due to changes in the portfolio of rental units. Occupancy costs related to the sold properties were approximately $0.9 million. Other direct costs increased $0.4 million resulting primarily from costs related to new store openings and an incentive award program for franchisees who achieved certain performance criteria in 2006. As a percentage of franchise and license revenue, these costs decreased to 31.1% for the year ended December 27, 2006 from 32.0% for the year ended December 28, 2005.

Other Operating Costs and Expenses

Other operating costs and expenses such as general and administrative expenses and depreciation and amortization expense relate to both company and franchise operations.

General and administrative expenses are comprised of the following:

	Fiscal Year Ended
	December 27, 2006		December 28, 2005
	(In thousands)
Share-based compensation	$	7,627	$	7,801
Other general and administrative expenses		58,799		55,110
Total general and administrative expenses	$	66,426	$	62,911

The increase in general and administrative expenses is primarily the result of an increase in payroll costs due to investments in corporate staffing.

Depreciation and amortization is comprised of the following:

	Fiscal Year Ended
	December 27, 2006		December 28, 2005
	(In thousands)
Depreciation of property and equipment	$	44,133	$	45,259
Amortization of capital lease assets		4,682		3,582
Amortization of intangible assets		6,475		7,285
Total depreciation and amortization	$	55,290	$	56,126

The overall decrease in depreciation and amortization expense is due primarily to the sale of real estate properties during 2006.

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

	Fiscal Year Ended
	December 27, 2006			December 28, 2005
	(In thousands)
Gains on dispositions of assets and other, net	$	(56,801	)	$	(3,283	)
Restructuring charges and exit costs		6,225			5,199
Impairment charges		2,694			1,174
Operating gains, losses and other charges, net	$	(47,882	)	$	3,090

Gains on disposition of assets and other, net increased to $56.8 million during 2006 from $3.3 million during 2005. During 2006, we sold 81 company-owned, franchisee-operated real estate properties and five surplus real estate properties. See Note 8 to our Consolidated Financial Statements.

Restructuring charges and exit costs were comprised of the following:

	Fiscal Year Ended
	December 27, 2006		December 28, 2005
	(In thousands)
Exit costs	$	4,254	$	1,898
Severance and other restructuring charges		1,971		3,301
Total restructuring and exist costs