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 31, 2008.

 

Note 3.     Assets Held for Sale

Assets held for sale of $4.2 million and $2.3 million as of April 1, 2009 and December 31, 2008, respectively, include restaurants to be sold to franchisees. We expect to sell each of these assets within 12 months. Our Credit Facility (defined in Note 7) requires us to make mandatory prepayments to reduce outstanding indebtedness with the net cash proceeds from the sale of specified real estate properties and restaurant operations to franchisees, net of a voluntary $10.0 million annual exclusion related to proceeds from the sale of restaurant operations to franchisees. As of April 1, 2009, as a result of the mandatory prepayment requirements, we classified $0.4 million of our long-term debt as a current liability in our Condensed Consolidated Balance Sheet. This amount represents the required prepayment based on the net book value of the specified properties as of the balance sheet date less the remaining balance of the annual exclusion. As of December 31, 2008, no reclassification of long-term debt to current liabilities required. As a result of classifying certain assets as held for sale, we recognized impairment charges of $0.3 million for the quarter ended April 1, 2009. This expense is included as a component of operating gains, losses and other charges, net in our Condensed Consolidated Statements of Operations. There were no impairment charges recognized related to assets held for sale for the quarter ended March 26, 2008.

 

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Note 4.    Goodwill and Other Intangible Assets

 

The changes in carrying amounts of goodwill for the quarter ended April 1, 2009 are as follows:

 

		(In thousands)
Balance at December 31, 2008		$	40,006
Write-offs associated with sale of restaurants			(530	)
Balance at April 1, 2009		$	39,476

 

The following table reflects goodwill and intangible assets as of April 1, 2009 and December 31, 2008:

 

		April 1, 2009								December 31, 2008
		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
		(In thousands)
Goodwill		$	39,476			$	—			$	40,006			$	—
Intangible assets with indefinite lives:
Trade names		$	42,442			$	—			$	42,438			$	—
Liquor licenses			262				—				262				—
Intangible assets with definite lives:
Franchise and license agreements			51,344				36,245				55,332				39,303
Foreign license agreements			241				141				241				138
Intangible assets		$	94,289			$	36,386			$	98,273			$	39,441
Other assets with definite lives:
Software development costs		$	32,253				26,931			$	31,979				26,446

 

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

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

 

	Quarter Ended
	April 1, 2009				March 26, 2008
	(In thousands)
Gains on sales of assets and other, net		$	(524	)		$	(9,748	)
Restructuring charges and exit costs			429				1,035
Impairment charges			393				—
Operating gains, losses and other charges, net		$	298			$	(8,713	)

 

Gains on Sales of Assets

 

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

 

		Quarter Ended April 1, 2009								Quarter Ended March 26, 2008
		Net Proceeds				Gains				Net Proceeds				Gains
		(In thousands)
Sales of restaurant operations and related real estate to franchisees		$	4,791			$	460			$	16,455			$	9,717
Recognition of deferred gains			—				64				—				31
Total		$	4,791			$	524			$	16,455			$	9,748

 

During the quarter ended April 1, 2009, as part of our Franchise Growth Initiative ("FGI"), we recognized $0.5 million of gains on the sale of 30 restaurant operations to three franchisees for net proceeds of $4.8 million, which included a note receivable of $1.4 million. During the quarter ended March 26, 2008, we recognized $9.7 million of gains on the sale of 21 restaurant operations to four franchisees for net proceeds of $16.5 million, which included a note receivable of $2.1 million and a $12.7 million receivable related to proceeds of a transaction that were collected immediately after the end of the period. 

 

Restructuring Charges and Exit Costs

Restructuring charges and exit costs were comprised of the following: 

 

	Quarter Ended
	April 1, 2009				March 26, 2008
	(In thousands)
Exit costs		$	50			$	840
Severance and other restructuring charges			379				195
Total restructuring and exit costs		$	429			$	1,035

 

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

 

		(In thousands)
Balance at December 31, 2008		$	9,239
Provisions for units closed during the year (1)			—
Changes in estimates of accrued exit costs, net (1)			50
Payments, net of sublease receipts			(967	)
Interest accretion			219
Balance at April 1, 2009			8,541
Less current portion included in other current liabilities			2,388
Long-term portion included in other noncurrent liabilities		$	6,153

 

(1)	Included as a component of operating gains, losses and other charges, net.

 

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

 

		(In thousands)
Remainder of 2009		$	1,893
2010			2,015
2011			1,722
2012			1,418
2013			1,022
Thereafter			2,349
Total			10,419
Less imputed interest			1,878
Present value of exit cost liabilities		$	8,541

 

As of April 1, 2009 and December 31, 2008, we had accrued severance and other restructuring charges of $0.8 million and $1.2 million, respectively.  The balance as of April 1, 2009 is expected to be paid during the next 12 months.

Note 6.     Fair Value of Financial Instruments

Effective December 27, 2007, the first day of fiscal 2008, we adopted the provisions of SFAS 157, “Fair Value Measurements,” for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. Effective January 1, 2009, the first day of fiscal 2009, we applied the provisions of FSP FAS 157-2, "Effective Date of FASB Statement 157," which deferred the adoption of SFAS 157 for nonfinancial assets and liabilities.

 

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

 

		Fair Value Measurements as of April 1, 2009
		April 1, 2009				Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)			Valuation Technique
		(In thousands)
Deferred compensation plan investments		$	5,545			$	5,545			$	—			$	—		market approach
Natural gas contract liability			(998	)			—				(998	)			—		market approach
Interest rate swap liability			(3,745	)			—				(3,745	)			—		income approach
Total		$	802			$	5,545			$	(4,743	)		$	—

 

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

 

		Fair Value Measurements as of April 1, 2009
		April 1, 2009				Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)			Valuation Technique
		(In thousands)
Impaired assets (1)		$	—			$	—			$	—			$	—		income approach
Assets held for sale (2)			873				—				873				—		market approach
Total		$	873			$	—			$	873			$	—

 

(1)	The assets measured for impairment were written down to a fair value of $0.
(2)	In addition to the $0.9 million in assets held for sale recorded at fair value, we classified an additional $3.3 million as assets held for sale, which are recorded at their carrying amount. See Note 3.

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Fair Value of Long-Term Debt

 

The book value and estimated fair value of our long-term debt, excluding capital lease obligations, was as follows:

 

		April 1, 2009				December 31, 2008
		(In thousands)
Book value:
Fixed rate long-term debt		$	175,333			$	175,368
Variable rate long-term debt			126,329				126,652
Long term debt excluding capital lease obligations		$	301,662			$	302,020
Estimate fair value:
Fixed rate long-term debt		$	150,833			$	122,868
Variable rate long-term debt			126,329				126,652
Long term debt excluding capital lease obligations		$	277,162			$	249,520

 

The difference between the estimated fair value of long-term debt compared with its historical cost reported in our Condensed Consolidated Balance Sheets at April 1, 2009 and December 31, 2008 relates primarily to market quotations for our Denny's Holdings, Inc. 10% Senior Notes due 2012 (the "10% Notes").

 

Note 7.     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 $126.3 million term loan and an additional $37 million letter of credit facility (together, the "Credit Facility"). At April 1, 2009, we had outstanding letters of credit of $31.3 million under our letter of credit facility. There were no outstanding letters of credit under our revolving facility and no revolving loans outstanding at April 1, 2009. These balances result in availability of $5.7 million under our letter of credit facility and $50.0 million under the revolving facility.

 

The revolving facility matures on December 15, 2011. The term loan and the $37 million letter of credit facility mature on March 31, 2012. The term loan amortizes in equal quarterly installments at a rate equal to approximately 1% per annum with all remaining amounts due on the maturity date. The Credit Facility is available for working capital, capital expenditures and other general corporate purposes. We will be required to make mandatory prepayments under certain circumstances (such as required payments related to asset sales) typical for this type of credit facility and may make certain optional prepayments under the Credit Facility. We believe that our estimated cash flows from operations for 2009, combined with our capacity for additional borrowings under our Credit Facility, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next twelve months.

The Credit Facility is guaranteed by Denny's and its other subsidiaries and is secured by substantially all of the assets of Denny's and its subsidiaries. In addition, the Credit Facility is secured by first-priority mortgages on 117 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 April 1, 2009.

A commitment fee of 0.5% is paid on the unused portion of the revolving credit facility. Interest on loans under the revolving facility is payable at per annum rates equal to LIBOR plus 250 basis points and will adjust over time based on our leverage ratio. Interest on the term loan and letter of credit facility is payable at per annum rates equal to LIBOR plus 200 basis points. Prior to considering the impact of our interest rate swap described below, the weighted-average interest rate under the term loan was 4.0% and 6.8% as of April 1, 2009 and March 26, 2008, respectively. Taking into consideration our interest rate swap, described below, the weighted-average interest rate under the term loan was 6.3% and 6.9% as of April 1, 2009 and March 26, 2008, respectively.

 

Note 8.     Derivative Financial Instruments

We utilize derivative financial instruments to manage our exposure to interest rate risk and commodity risk in relation to natural gas costs. We do not enter into derivative instruments for trading or speculative purposes.

 

Interest Rate Swap

 

We manage our exposure to fluctuations in interest rates on our variable rate debt by entering into interest rate swaps. The fair value of the swaps is estimated based on quoted market prices and is subject to market risk as the instruments may become less valuable in case of changes in market conditions or interest rates.  We manage our exposure to counterparty credit risk by entering into derivative financial instruments with high-quality financial institutions that can be expected to fully perform under the terms of such agreements.  We monitor the credit rating of these institutions on a quarterly basis. We do not require collateral or other security to support derivative financial instruments, if any, with credit risk.  The interest rate swap is considered an obligation under the Credit Facility, as it was entered into with counterparties that are also lenders under the Credit Facility. The security interest and collateral provided by the Credit Facility is also available to the swap counterparties.  Our counterparty credit exposure is limited to the positive fair value of contracts at the reporting date. Notional amounts of derivative financial instruments do not represent exposure to credit loss.

 

In 2007, we entered into an interest rate swap with a notional amount of $150 million and designated it as a cash flow hedge of our interest rate exposure on the first $150 million of floating rate debt. Under the terms of the swap, we pay a fixed rate of 4.8925% on the $150 million notional amount and receive payments from the counterparties based on the 3-month LIBOR rate for a term ending on March 30, 2010, effectively resulting in a fixed rate of 6.8925% on the $150 million notional amount at the inception of the swap. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense.

 

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In accordance with hedge accounting, to the extent the swap was effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap were reported as adjustments to other comprehensive income. At December 26, 2007, we determined that a portion of the underlying cash flows related to the swap (i.e., interest payments on $150 million of floating rate debt) were no longer probable of occurring over the term of the swap as a result of the probability of paying the debt down below $150 million. As a result, we discontinued hedge accounting treatment. The losses included in accumulated other comprehensive income as of December 26, 2007 are amortized to other nonoperating expense over the remaining term of the interest rate swap. Additionally, changes in the fair value of the swap are recorded in other nonoperating expense.

 

On March 26, 2008, we terminated $50 million notional amount of the interest rate swap. The termination resulted in a $2.4 million cash payment, which was made during the second quarter of 2008.

 

Natural Gas Hedge Contracts