XNAS:DENN Denny's Corporation Quarterly Report 10-Q Filing - 6/27/2012

Effective Date 6/27/2012

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

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 27, 2012
 
 
Commission File Number 0-18051
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-3487402
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization
 
Identification No.)

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

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

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

Yes  þ    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  þ
 
As of July 26, 2012, 94,886,401 shares of the registrant’s common stock, par value $.01 per share, were outstanding.




TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
June 27, 2012
 
December 28, 2011
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,997

 
$
13,740

Receivables
13,781

 
14,971

Inventories
2,967

 
3,438

Assets held for sale
486

 
2,351

Current deferred tax asset
20,324

 
15,519

Prepaid and other current assets
5,524

 
11,274

Total current assets
64,079

 
61,293

Property, net of accumulated depreciation of $232,677 and $241,102, respectively
102,626

 
112,772

Goodwill
30,476

 
30,764

Intangible assets, net
49,804

 
50,921

Deferred financing costs, net
2,300

 
5,884

Noncurrent deferred tax asset
49,137

 
60,636

Other noncurrent assets
30,458

 
28,231

Total assets
$
328,880

 
$
350,501

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
12,054

 
$
2,591

Current maturities of capital lease obligations
4,368

 
4,380

Accounts payable
17,035

 
25,935

Other current liabilities
50,971

 
54,289

Total current liabilities
84,428

 
87,195

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
171,000

 
193,257

Capital lease obligations, less current maturities
16,996

 
18,077

Liability for insurance claims, less current portion
17,081

 
18,552

Other noncurrent liabilities and deferred credits
42,147

 
43,096

Total long-term liabilities
247,224

 
272,982

Total liabilities
331,652

 
360,177

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Shareholders' deficit
 

 
 

Common stock $0.01 par value; authorized - 135,000; June 27, 2012: 102,966 shares issued and 94,846 shares outstanding; December 28, 2011: 102,668 shares issued and 95,972 shares outstanding
$
1,030

 
$
1,027

Paid-in capital
559,160

 
557,396

Deficit
(507,361
)
 
(517,827
)
Accumulated other comprehensive loss, net of tax
(24,277
)
 
(24,813
)
Shareholders’ deficit before treasury stock
28,552

 
15,783

Treasury stock, at cost, 8,120 and 6,696 shares, respectively
(31,324
)
 
(25,459
)
Total shareholders' deficit
(2,772
)
 
(9,676
)
Total liabilities and shareholders' deficit
$
328,880

 
$
350,501

See accompanying notes

3



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Quarter Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
91,239

 
$
104,021

 
$
185,402

 
$
208,576

Franchise and license revenue
33,492

 
31,832

 
66,067

 
63,082

Total operating revenue
124,731

 
135,853

 
251,469

 
271,658

Costs of company restaurant sales:
 
 
 
 
 
 
 
Product costs
22,702

 
25,613

 
46,235

 
51,248

Payroll and benefits
36,617

 
42,419

 
74,370

 
86,615

Occupancy
6,222

 
6,793

 
11,996

 
13,653

Other operating expenses
12,202

 
15,329

 
25,097

 
30,586

Total costs of company restaurant sales
77,743

 
90,154

 
157,698

 
182,102

Costs of franchise and license revenue
11,386

 
11,085

 
22,698

 
22,650

General and administrative expenses
14,785

 
14,092

 
30,448

 
28,231

Depreciation and amortization
5,827

 
7,234

 
11,887

 
14,422

Operating (gains), losses and other charges, net
(4,009
)
 
(419
)
 
(4,174
)
 
(948
)
Total operating costs and expenses, net
105,732

 
122,146

 
218,557

 
246,457

Operating income
18,999

 
13,707

 
32,912

 
25,201

Other expenses:
 
 
 
 
 
 
 
Interest expense, net
2,993

 
4,901

 
7,449

 
10,594

Other nonoperating expense, net
8,198

 
268

 
7,903

 
1,746

Total other expenses, net
11,191

 
5,169

 
15,352

 
12,340

Net income before income taxes
7,808

 
8,538

 
17,560

 
12,861

Provision for income taxes
3,207

 
408

 
7,094

 
607

Net income
$
4,601

 
$
8,130

 
$
10,466

 
$
12,254

 
 
 
 
 
 
 
 
Basic and diluted net income per share
$
0.05

 
$
0.08

 
$
0.11

 
$
0.12

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
95,637

 
98,421

 
95,856

 
98,700

Diluted
97,408

 
100,602

 
97,651

 
100,976

 
 
 
 
 
 
 
 
Comprehensive income
$
4,869

 
$
8,130

 
$
11,002

 
$
12,254

 
See accompanying notes

4



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

 
Common Stock
 
Treasury Stock
 
Paid-in
 
 
 
Accumulated
Other
Comprehensive
 
Total
Shareholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
(Deficit)
 
Loss, Net
 
Deficit
 
(In thousands)
Balance, December 28, 2011
102,668

 
$
1,027

 
(6,696
)
 
$
(25,459
)
 
$
557,396

 
$
(517,827
)
 
$
(24,813
)
 
$
(9,676
)
Net income

 

 

 

 

 
10,466

 

 
10,466

Minimum pension liability adjustment, net of tax benefits of $345

 

 

 

 

 

 
536

 
536

Share-based compensation on equity classified awards

 

 

 

 
1,060

 

 

 
1,060

Purchase of treasury stock

 

 
(1,424
)
 
(5,865
)
 

 

 

 
(5,865
)
Issuance of common stock for share-based compensation
71

 
1

 

 

 
(1
)
 

 

 

Exercise of common stock options
227

 
2

 

 

 
647

 

 

 
649

Tax benefit from stock options exercised

 

 

 

 
58

 

 

 
58

Balance, June 27, 2012
102,966

 
$
1,030

 
(8,120
)
 
$
(31,324
)
 
$
559,160

 
$
(507,361
)
 
$
(24,277
)
 
$
(2,772
)
 
See accompanying notes

5



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
10,466

 
$
12,254

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
11,887

 
14,422

Operating (gains), losses and other charges, net
(4,174
)
 
(948
)
Amortization of deferred financing costs
503

 
662

Amortization of debt discount
137

 
284

Loss on early extinguishment of debt
8,152

 
1,984

Loss on change in the fair value of interest rate cap
41

 

Deferred income tax expense
6,349

 
34

Share-based compensation
1,666

 
2,149

Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
791

 
1,929

Inventories
471

 
393

Other current assets
5,697

 
39

Other assets
(2,046
)
 
182

Increase (decrease) in liabilities:
 
 
 
Accounts payable
(5,781
)
 
137

Accrued salaries and vacations
(361
)
 
553

Accrued taxes
(135
)
 
79

Other accrued liabilities
(4,917
)
 
(5,897
)
Other noncurrent liabilities and deferred credits
(2,518
)
 
(3,321
)
Net cash flows provided by operating activities
26,228

 
24,935

Cash flows from investing activities:
 
 
 
Purchase of property
(4,279
)
 
(8,854
)
Proceeds from disposition of property
12,929

 
3,893

Collections on notes receivable
1,490

 
450

Issuance of notes receivable
(1,124
)
 

Net cash flows provided by (used in) investing activities
9,016

 
(4,511
)
Cash flows from financing activities:
 
 
 
Net borrowings under new credit agreement
190,000

 

Long-term debt payments
(207,407
)
 
(22,084
)
Proceeds from exercise of stock options
649

 
4,621

Tax withholding on share-based payments
(145
)
 

Tax benefit of stock options exercised
58

 

Debt transaction costs
(1,095
)
 
(795
)
Deferred financing costs
(1,809
)
 
(3,247
)
Purchase of treasury stock
(5,470
)
 
(14,280
)
Net bank overdrafts
(2,768
)
 
(776
)
Net cash flows used in financing activities
(27,987
)
 
(36,561
)
Increase (decrease) in cash and cash equivalents
7,257

 
(16,137
)
Cash and cash equivalents at beginning of period
13,740

 
29,074

Cash and cash equivalents at end of period
$
20,997

 
$
12,937

 
See accompanying notes

6



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

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s, is one of America’s largest family-style restaurant chains. At June 27, 2012, the Denny’s brand consisted of 1,684 restaurants, 1,507 (89%) of which were franchised/licensed restaurants and 177 (11%) of which were company-owned and operated.
 
The following table shows the unit activity for the quarter and two quarters ended June 27, 2012 and June 29, 2011:

 
Quarter Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
Company-owned restaurants, beginning of period
197

 
226

 
206

 
232

Units opened

 
1

 

 
6

Units sold to franchisees
(17
)
 
(1
)
 
(23
)
 
(10
)
Units closed
(3
)
 
(1
)
 
(6
)
 
(3
)
End of period
177

 
225

 
177

 
225

 
 
 
 
 
 
 
 
Franchised and licensed restaurants, beginning of period
1,483

 
1,439

 
1,479

 
1,426

Units opened
9

 
17

 
15

 
30

Units relocated

 
1

 

 
1

Units purchased from Company
17

 
1

 
23

 
10

Units closed (including units relocated)
(2
)
 
(6
)
 
(10
)
 
(15
)
End of period
1,507

 
1,452

 
1,507

 
1,452

Total restaurants, end of period
1,684

 
1,677

 
1,684

 
1,677


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

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 28, 2011 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2011. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 26, 2012.




7



Note 2.     Summary of Significant Accounting Policies
 
Newly Adopted Accounting Standards
 
Fair Value
 
ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”

Effective December 29, 2011, we adopted ASU 2011-04, which provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The adoption did not have a material impact on the disclosures included in our Condensed Consolidated Financial Statements.

 Comprehensive Income
 
ASU No. 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income"
 
Effective December 29, 2011, we adopted ASU 2011-05, which amends existing guidance to allow only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive financial statements consisting of an income statement followed by a statement of other comprehensive income. ASU No. 2011-05 requires retrospective application. The adoption concerns presentation and disclosure only and did not have an impact on our financial position or results of operations.

ASU No. 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05"
 
Effective December 29, 2011, we adopted ASU 2011-12, which effectively defers the changes in ASU 2011-05 that relate to the presentation of reclassification out of accumulated other comprehensive income. All other requirements of ASU 2011-05 are not affected by this update. The adoption did not have a material impact on our Condensed Consolidated Financial Statements.
 
Goodwill
 
ASU No. 2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”

Effective December 29, 2011, we adopted ASU 2011-08, which modifies the impairment test for goodwill. Under the new guidance, an entity is permitted to make a qualitative assessment of whether it is more likely than not that the reporting unit's fair value is less than the carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that a reporting unit's fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. The adoption did not have any impact on our Condensed Consolidated Financial Statements.

Accounting Standards to be Adopted
 
We reviewed newly issued accounting pronouncements and concluded that they are either not applicable to our business or that no material effect is expected on the financial statements as a result of future adoption.  
 



8



Note 3.     Receivables
 
Receivables were comprised of the following:
 
 
June 27, 2012
 
December 28, 2011
 
(In thousands)
Current assets:
 
 
 
Receivables:
 
 
 
Trade accounts receivable from franchisees
$
9,663

 
$
9,452

Notes receivable from franchisees and third parties
593

 
992

Vendor receivables
1,157

 
2,311

Credit card receivables
895

 
1,137

Other
1,495

 
1,087

Allowance for doubtful accounts
(22
)
 
(8
)
 
$
13,781

 
$
14,971

Direct financing lease receivables (included as a component of prepaid and other current assets)
$
82

 
$
82

 
 
 
 
Noncurrent assets (included as a component of other noncurrent assets):
 
 
 
Notes receivable from franchisees and third parties
$
593

 
$
560

Direct financing lease receivables
6,201

 
5,496

 
$
6,794

 
$
6,056


We recognized interest income on notes receivable from franchisees of less than $0.1 million for the quarter and two quarters ended June 27, 2012 and $0.1 million for the quarter and two quarters ended June 29, 2011, respectively. These amounts are included as a component of interest expense, net on our Condensed Consolidated Statements of Comprehensive Income. We recognized interest income on direct financing leases of $0.3 million and $0.6 million for the quarter and two quarters ended June 27, 2012 and $0.3 million and $0.5 million for the quarter and two quarters ended June 29, 2011, respectively. These amounts are included as a component of interest expense, net on our Condensed Consolidated Statements of Comprehensive Income.
 
 Note 4.     Assets Held for Sale

Assets held for sale of $0.5 million and $2.4 million as of June 27, 2012 and December 28, 2011, respectively, consist of restaurants to be sold to franchisees. As a result of classifying certain assets as held for sale, we recognized impairment charges of $0.1 million and $0.1 million for the quarter and two quarters ended June 27, 2012, respectively. This expense is included as a component of operating (gains), losses and other charges, net in our Consolidated Statements of Comprehensive Income. There were no impairment charges recognized related to assets held for sale for the quarter and two quarters ended June 29, 2011.

Note 5.    Goodwill and Other Intangible Assets

The following table reflects the changes in carrying amounts of goodwill:
 
 
June 27, 2012
 
(In thousands)
Balance, beginning of year
$
30,764

Write-offs and reclassifications associated with sale of restaurants
(288
)
Balance, end of period
$
30,476

 

9



Goodwill and intangible assets were comprised of the following:
 
 
June 27, 2012
 
December 28, 2011
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Goodwill
$
30,476

 
$

 
$
30,764

 
$

 
 
 
 
 
 
 
 
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,048

 
$

 
$
44,046

 
$

Liquor licenses
164

 

 
164

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Franchise and license agreements
37,688

 
32,155

 
42,778

 
36,132

Foreign license agreements
241

 
182

 
241

 
176

Intangible assets
$
82,141

 
$
32,337

 
$
87,229

 
$
36,308

 
 
 
 
 
 
 
 
Other assets with definite lives:
 
 
 
 
 
 
 
Software development costs
$
34,146

 
$
32,465

 
$
33,937

 
$
31,973

 
Note 6.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Gains on sales of assets and other, net
$
(4,908
)
 
$
(879
)
 
$
(6,863
)
 
$
(1,875
)
Restructuring charges and exit costs
882

 
402

 
2,149

 
869

Impairment charges
17

 
58

 
540

 
58

Operating (gains), losses and other charges, net
$
(4,009
)
 
$
(419
)
 
$
(4,174
)
 
$
(948
)
 
Restructuring Charges and Exit Costs
 
Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Exit costs
$
327

 
$
251

 
$
906

 
$
613

Severance and other restructuring charges
555

 
151

 
1,243

 
256

Total restructuring and exit costs
$
882

 
$
402

 
$
2,149

 
$
869



10



The components of the change in accrued exit cost liabilities are as follows:
 
 
(In thousands)
Balance at December 28, 2011
$
3,863

Exit costs (1)
906

Payments, net of sublease receipts
(1,045
)
Reclassification of certain lease liabilities, net
77

Interest accretion
172

Balance at June 27, 2012
3,973

Less current portion included in other current liabilities
1,318

Long-term portion included in other noncurrent liabilities
$
2,655

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

Estimated net cash payments related to exit cost liabilities are as follows:
 
 
(In thousands)
Remainder of 2012
$
975

2013
1,053

2014
771

2015
394

2016
275

Thereafter
1,559

Total
5,027

Less imputed interest
1,054

Present value of exit cost liabilities
$
3,973

 
As of June 27, 2012 and December 28, 2011, we had accrued severance and other restructuring charges of $1.0 million and less than $0.1 million, respectively.  The balance as of June 27, 2012 is expected to be paid during the next 12 months.
 
Note 7.     Fair Value of Financial Instruments

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
 
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
 
Fair Value Measurements as of June 27, 2012
 
Total
 
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Valuation Technique
 
(In thousands)
 
 
Deferred compensation plan investments 
$
5,858

 
$
5,858

 
$

 
$

 
market approach
Interest rate caps
$
28

 
$

 
$
28

 
$

 
income approach
Total
$
5,886

 
$
5,858

 
$
28

 
$

 
 
 

11



 
Fair Value Measurements as of December 28, 2011
 
Total
 
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Valuation Technique
 
(In thousands)
 
 
Deferred compensation plan investments 
$
4,935

 
$
4,935

 
$

 
$

 
market approach
Total
$
4,935

 
$
4,935

 
$

 
$

 
 
 
In addition to the financial assets and liabilities that are measured at fair value on a recurring basis, we measure certain assets and liabilities at fair value on a nonrecurring basis. As of June 27, 2012, impaired assets related to underperforming units were written down to a fair value of $0 based on the income approach. As of June 29, 2011, there were no such nonrecurring measurements.

Disclosures of Fair Value of Other Assets and Liabilities
 
The liabilities under our credit facility and capital leases are carried at historical cost in our Condensed Consolidated Balance Sheets. The estimated fair values of our senior secured term loan and capital lease obligations approximated their carrying values as of June 27, 2012.

Note 8.     Long-Term Debt

On April 12, 2012, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new five-year senior secured credit agreement in an aggregate principal of $250 million (the “New Credit Facility”). The New Credit Facility is comprised of a $190 million senior secured term loan and a $60 million senior secured revolver (with a $30 million letter of credit sublimit). A commitment fee of 50 basis points is paid on the unused portion of the revolving credit facility. Borrowings for the term loan will bear a tiered interest rate based on the Company's consolidated leverage ratio and was initially set at LIBOR plus 300 basis points. The New Credit Facility does not contain an interest rate floor for either the term loan or the revolver. It includes an accordion feature that would allow us to increase the size of the facility to $300 million. The maturity date for the New Credit Facility is April 12, 2017. 

The New Credit Facility was used to refinance the Old Credit Facility and is available for working capital, capital expenditures and other general corporate purposes. The New Credit Facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The New Credit Facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charged coverage ratio and maximum capital expenditures.
 
The term loan under the New Credit Facility amortizes $19.0 million annually, payable in quarterly installments, with all remaining amounts due on the maturity date. We will be required to make certain mandatory prepayments under certain circumstances and will have the option to make certain prepayments under the New Credit Facility. The optional prepayments can be applied against future amortization. The New Credit Facility includes events of default (and related remedies, including acceleration and increased interest rates following an event of default) that are usual for facilities and transactions of this type.
 
On April 13, 2012, we entered into interest rate hedges that cap the LIBOR rate on borrowings for the term loan under the New Credit Facility during the first two years of the term loan. The 200 basis point LIBOR cap applies to $150 million of term loan borrowings during the first year and $125 million of term loan borrowings during the second year.
 
As a result of the debt refinancing, we recorded $7.9 million of losses on early extinguishment of debt, consisting primarily of $1.1 million of transaction costs, $4.7 million from the write-off of deferred financing costs and $2.0 million from the write-off of an original issue discount ("OID") related to the Old Credit Facility. These losses are included as a component of other nonoperating expense in the condensed Consolidated Statements of Comprehensive Income.


12



As of June 27, 2012, under the New Credit Facility, we had outstanding term loan borrowings of $183.0 million and outstanding letters of credit under the revolving letter of credit facility of $26.5 million. There were no revolving loans outstanding at June 27, 2012. These balances resulted in availability of $33.5 million under the revolving facility. The weighted-average interest rate under the term loan was 3.25% and 5.25%, as of June 27, 2012 and December 28, 2011.

During the two quarters ended June 27, 2012, prior to the April 12, 2012 refinancing, we paid $8.0 million (which included $7.4 million of prepayments and $0.6 million of scheduled payments) on the term loan under the Old Credit Facility. As a result of these prepayments, during the two quarters ended June 27, 2012, we recorded $0.2 million of losses on early extinguishment of debt resulting from the write-off of $0.1 million in deferred financing costs and $0.1 million in OID related to the Old Credit Facility. These losses are included as a component of other nonoperating expense in our condensed Consolidated Statements of Comprehensive Income.
 
During the quarter ended June 27, 2012, subsequent to the April 12, 2012 refinancing, we paid $7.0 million (which included $2.3 million of prepayments and $4.8 million of scheduled payments) on the term loan under the New Credit Facility.

Aggregate annual maturities of long-term debt, excluding capital lease obligations, at June 27, 2012 are as follows:
 
(In thousands)
Remainder of 2012
$
7,304

2013
19,000

2014
19,000

2015
19,000

2016 and thereafter
118,750

Total long-term debt, excluding capital lease obligations
$
183,054

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

 
Pension Plan
 
Other Defined Benefit Plans
 
Quarter Ended
 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Service cost
$
106

 
$
73

 
$

 
$

Interest cost
811

 
850

 
29

 
31

Expected return on plan assets
(1,006
)
 
(1,046
)
 

 

Amortization of net loss
453

 
263

 
13

 
8

Net periodic benefit cost
$
364

 
$
140

 
$
42

 
$
39

 
 
Pension Plan
 
Other Defined Benefit Plans
 
Two Quarters Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Service cost
$
190

 
$
167

 
$

 
$

Interest cost
1,600

 
1,682

 
58

 
63

Expected return on plan assets
(2,018
)
 
(2,091
)
 

 

Amortization of net loss
881

 
502

 
26

 
16

Net periodic benefit cost
$
653

 
$
260

 
$
84

 
$
79

 

13



We made contributions of $0.8 million and $0.4 million to our qualified pension plan during the two quarters ended June 27, 2012 and June 29, 2011, respectively. We made contributions of $0.1 million to our other defined benefit plans during both the two quarters ended June 27, 2012 and June 29, 2011. We expect to contribute an additional $1.1 million to our qualified pension plan and an additional $0.1 million to our other defined benefit plans over the remainder of fiscal 2012.

Additional minimum pension liability of $24.3 million and $24.8 million is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Deficit as of June 27, 2012 and December 28, 2011.
 
Note 10.     Share-Based Compensation

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

 
Quarter Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Stock options
$
164

 
$
264

 
$
492

 
$
522

Restricted stock units
531

 
729

 
974

 
1,336

Board deferred stock units
181

 
183

 
200

 
291

Total share-based compensation
$
876

 
$
1,176

 
$
1,666

 
$
2,149

 
Stock Options

As of June 27, 2012, we had approximately $1.0 million of unrecognized compensation cost related to unvested stock option awards outstanding, which is expected to be recognized over a weighted average of 1.3 years.
 
Restricted Stock Units
 
In February 2012, we granted approximately 0.4 million performance shares and related performance-based target cash awards of $2.0 million to certain employees. As these awards contain a market condition, a Monte Carlo valuation was used to determine the performance shares' grant date fair value of $6.05 per share and the payout probability of the target cash awards. The awards granted to our named executive officers also contain a performance condition based on certain operating measures for the fiscal year ended December 26, 2012. The performance period is the three year fiscal period beginning December 29, 2011 and ending December 31, 2014. The performance shares and cash awards will vest and be earned (from 0% to 200% of the target award for each such increment) at the end of the performance period based on the Total Shareholder Return of our stock compared to the Total Shareholder Returns of a group of peer companies.
 
During the two quarters ended June 27, 2012, we made payments of $0.4 million in cash and issued 0.1 million shares of common stock related to restricted stock unit awards.
 
As of June 27, 2012, we had approximately $3.7 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of 1.6 years.
 
Board Deferred Stock Units

During the two quarters ended June 27, 2012, we granted 0.1 million deferred stock units (which are equity classified) with a weighted average grant date fair value of $4.05 per unit to non-employee members of our Board of Directors. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of the Board of Directors) or upon termination as a member of the Board of Directors. During the two quarters ended June 27, 2012, less than 0.1 million deferred stock units were converted into shares of common stock. As of June 27, 2012, we had approximately $0.4 million of unrecognized compensation cost related to all unvested deferred stock unit awards outstanding, which is expected to be recognized over a weighted average of 0.8 years.
 


14



Note 11.     Income Taxes

The provision for income taxes was $3.2 million and $7.1 million for both the quarter and two quarters ended June 27, 2012, respectively. The provision for income taxes was $0.4 million and $0.6 million for the quarter and two quarters ended June 29, 2011. For the 2012 periods, the difference in the overall effective tax rate from the U.S. statutory rate was due to discrete tax items, including a $1.3 million out of period adjustment related to the reversal of a portion of the income tax benefit recorded in fourth quarter of 2011. We do not believe the out of period adjustment was material to any prior or current year financial statements or on earnings trends. In addition, a $0.8 million current and deferred tax benefit was recorded. This benefit arose from additional state credits generated during the quarter ending June 27, 2012 related to prior years' activity. The provision for income taxes for the first two quarters of 2011 was determined using our effective rate estimated for the entire fiscal year.

Note 12.     Net Income Per Share
 
 
Quarter Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(In thousands, except for per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
4,601

 
$
8,130

 
$
10,466

 
$
12,254

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares - basic
95,637

 
98,421

 
95,856

 
98,700

Effect of dilutive securities:
 
 
 
 
 
 
 
Options
878

 
998

 
889

 
1,139

Restricted stock units and awards
893

 
1,183

 
906

 
1,137

Weighted average shares - diluted
97,408

 
100,602

 
97,651

 
100,976

 
 
 
 
 
 
 
 
Basic and diluted net income per share
$
0.05

 
$
0.08

 
$
0.11

 
$
0.12

 
 
 
 
 
 
 
 
Stock options excluded (1)
1,643

 
2,372

 
1,686

 
2,230

Restricted stock units and awards excluded (1)
702

 
538

 
702

 
747

(1)
Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive.
        
Note 13.     Supplemental Cash Flow Information

 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Income taxes paid, net
$
1,365

 
$
737

Interest paid
$
7,657

 
$
12,705

 
 
 
 
Noncash investing and financing activities:
 
 
 
Notes received in connection with disposition of property
$

 
$
500

Execution of direct financing leases
$
747

 
$
218

Issuance of common stock, pursuant to share-based compensation plans
$
296

 
$
450

Execution of capital leases
$
1,281

 
$
2,674

Treasury stock payable
$
395

 
$
294

 


15



Note 14.     Share Repurchase
 
Our Old Credit Facility permitted and our New Credit Facility permits the payment of cash dividends and the purchase of Denny’s stock subject to certain limitations. In April, 2011, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to an additional 6.0 million shares of our Common Stock. Under the program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of June 27, 2012, we had repurchased 5.1 million shares of Common Stock for approximately $19.9 million and there were 0.9 million shares remaining to be repurchased under this share repurchase program.

On May 18, 2012, we announced that our Board of Directors approved a new share repurchase program authorizing us to repurchase up to an additional 6.0 million shares of our Common Stock. Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. There were no shares repurchased under this program as of June 27, 2012.

Note 15.     Commitments and Contingencies
  
There are various claims and pending legal actions against or indirectly involving us incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company's consolidated results of operations or financial position. We record legal settlement costs as other operating expenses in our Condensed Consolidated Statements of Comprehensive Income as those costs are incurred.
 
Note 16.     Subsequent Events

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

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

Forward-Looking Statements

The following discussion is intended to highlight significant changes in our financial position as of June 27, 2012 and results of operations for the quarter and two quarters ended June 27, 2012 compared to the quarter and two quarters ended June 29, 2011. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflect our best judgment based on factors currently known and are intended to speak only as of the date such statements are made, involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors included in the discussion below, or in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I. Item 1A. Risk Factors, contained in our Annual Report on Form 10-K for the year ended December 28, 2011.



16



Statements of Income
 
The following table contains information derived from our Condensed Consolidated Statements of Comprehensive Income expressed as a percentage of total operating revenues, except as noted below.  Percentages may not add due to rounding.
 
 
Quarter Ended
 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
 
June 27, 2012
 
June 29, 2011
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
91,239

 
73.1
 %
 
$
104,021

 
76.6
 %
 
$
185,402

 
73.7
 %
 
$
208,576

 
76.8
 %
Franchise and license revenue
33,492

 
26.9
 %
 
31,832

 
23.4
 %
 
66,067

 
26.3
 %
 
63,082

 
23.2
 %
Total operating revenue
124,731

 
100.0
 %
 
135,853

 
100.0
 %
 
251,469

 
100.0
 %
 
271,658

 
100.0
 %
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Product costs
22,702

 
24.9
 %
 
25,613

 
24.6
 %
 
46,235

 
24.9
 %
 
51,248

 
24.6
 %
Payroll and benefits
36,617

 
40.1
 %
 
42,419

 
40.8
 %
 
74,370

 
40.1
 %
 
86,615

 
41.5
 %
Occupancy
6,222

 
6.8
 %
 
6,793

 
6.5
 %
 
11,996

 
6.5
 %
 
13,653

 
6.5
 %
Other operating expenses
12,202

 
13.4
 %
 
15,329

 
14.7
 %
 
25,097

 
13.5
 %
 
30,586

 
14.7
 %
Total costs of company restaurant sales
77,743

 
85.2
 %
 
90,154

 
86.7
 %
 
157,698

 
85.1
 %
 
182,102

 
87.3
 %
Costs of franchise and license revenue (a)
11,386

 
34.0
 %
 
11,085

 
34.8
 %
 
22,698

 
34.4
 %
 
22,650

 
35.9
 %
General and administrative expenses
14,785

 
11.9
 %
 
14,092

 
10.4
 %
 
30,448

 
12.1
 %
 
28,231

 
10.4
 %
Depreciation and amortization
5,827

 
4.7
 %
 
7,234

 
5.3
 %
 
11,887

 
4.7
 %
 
14,422

 
5.3
 %
Operating (gains), losses and other charges, net
(4,009
)
 
(3.2
)%
 
(419
)
 
(0.3
)%
 
(4,174
)
 
(1.7
)%
 
(948
)
 
(0.3
)%
Total operating costs and expenses
105,732

 
84.8
 %
 
122,146

 
89.9
 %
 
218,557

 
86.9
 %
 
246,457

 
90.7
 %
Operating income
18,999

 
15.2
 %
 
13,707

 
10.1
 %
 
32,912

 
13.1
 %
 
25,201

 
9.3
 %
Other expenses:
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Interest expense, net
2,993

 
2.4
 %
 
4,901

 
3.6
 %
 
7,449

 
3.0
 %
 
10,594

 
3.9
 %
Other nonoperating expense, net
8,198

 
6.6
 %
 
268

 
0.2
 %
 
7,903

 
3.1
 %
 
1,746

 
0.6
 %
Total other expenses, net
11,191

 
9.0
 %
 
5,169

 
3.8
 %
 
15,352

 
6.1
 %
 
12,340

 
4.5
 %
Net income before income taxes
7,808

 
6.3
 %
 
8,538

 
6.3
 %
 
17,560

 
7.0
 %
 
12,861

 
4.7
 %
Provision for income taxes
3,207

 
2.6
 %
 
408

 
0.3
 %
 
7,094

 
2.8
 %
 
607

 
0.2
 %
Net income
$
4,601

 
3.7
 %
 
$
8,130

 
6.0
 %
 
$
10,466

 
4.2
 %
 
$
12,254

 
4.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Company-owned average unit sales
$
484

 
 

 
$
463

 
 

 
$
954

 
 

 
$
915

 
 

Franchise average unit sales
$
354

 
 

 
$
349

 
 

 
$
703

 
 

 
$
688

 
 

Company-owned equivalent units (b)
188

 
 

 
224

 
 

 
194

 
 

 
228

 
 

Franchise equivalent units (b)
1,493

 
 

 
1,442

 
 

 
1,487

 
 

 
1,436

 
 

Same-store sales increase  (company-owned) (c)(d)
0.0
 %
 
 

 
2.6
%
 
 

 
0.4
 %
 
 

 
0.6
%
 
 

Guest check average increase (d)
1.7
 %
 
 

 
1.2
%
 
 

 
2.0
 %
 
 

 
0.5
%
 
 

Guest count (decrease) increase (d)
(1.6
)%
 
 

 
1.4
%
 
 

 
(1.6
)%
 
 

 
0.1
%
 
 

Same-store sales increase (franchised and licensed units) (c)(d)
0.9
 %
 
 

 
1.8
%
 
 

 
1.8
 %
 
 

 
0.0
%
 
 

            
(a)
Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.
(b)
Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.
(c)
Same-store sales include sales from restaurants that were open the same period in the prior year.
(d)
Prior year amounts have not been restated for 2011 comparable units.

17




Quarter Ended June 27, 2012 Compared with Quarter Ended June 29, 2011
 
Unit Activity
 
 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
Company-owned restaurants, beginning of period
197

 
226

Units opened

 
1

Units sold to franchisees
(17
)
 
(1
)
Units closed
(3
)
 
(1
)
End of period
177

 
225

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,483

 
1,439

Units opened 
9

 
17

Units relocated

 
1

Units purchased from Company
17

 
1

Units closed (including units relocated)
(2
)
 
(6
)
End of period
1,507

 
1,452

Total restaurants, end of period
1,684

 
1,677


Company Restaurant Operations
 
During the quarter ended June 27, 2012, same-store sales were flat, comprised of a 1.7% increase in guest check average, offset by a 1.6% decrease in guest counts. Company restaurant sales decreased $12.8 million, or 12.3%, primarily resulting from a 36 equivalent-unit decrease in company-owned restaurants. The decrease in equivalent units primarily resulted from the sale of company-owned restaurants to franchisees.
 
Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 85.2% from 86.7%. Product costs increased to 24.9% from 24.6% primarily due to the impact of increased commodity costs. Payroll and benefits decreased to 40.1% from 40.8% primarily due to improved labor efficiency and favorable workers' compensation claims development. Occupancy costs increased to 6.8% from 6.5% primarily as a result of the negative development of certain general liability claims. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales: 

 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
(Dollars in thousands)
Utilities
$
3,592

 
3.9
%
 
$
4,590

 
4.4
%
Repairs and maintenance
1,634

 
1.8
%
 
1,890

 
1.8
%
Marketing
3,389

 
3.7
%
 
3,971

 
3.8
%
Legal settlement costs
71

 
0.1
%
 
(14
)
 
0.0
%
Other direct costs
3,516

 
3.9
%
 
4,892

 
4.7
%
Other operating expenses
$
12,202

 
13.4
%
 
$
15,329

 
14.7
%
 
Utilities decreased 0.5 percentage points, primarily due to lower natural gas rates in the 2012 period. Other direct costs decreased 0.8 percentage points primarily as a result of higher new store opening expenses in the prior period.


18



Franchise Operations
 
Franchise and license revenue and related costs were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:
 
 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
(Dollars in thousands)
Royalties  
$
20,874

 
62.3
%
 
$
19,926

 
62.6
%
Initial and other fees
1,003

 
3.0
%
 
708

 
2.2
%
Occupancy revenue 
11,615

 
34.7
%
 
11,198

 
35.2
%
Franchise and license revenue 
$
33,492

 
100.0
%
 
$
31,832

 
100.0
%
 
 
 
 
 
 
 
 
Occupancy costs 
8,705

 
26.0
%
 
8,658

 
27.2
%
Other direct costs 
2,681

 
8.0
%
 
2,427

 
7.6
%
Costs of franchise and license revenue 
$
11,386

 
34.0
%
 
$
11,085

 
34.8
%

Royalties increased by $0.9 million, or 4.8%, primarily resulting from a 0.9% increase in same-store sales and a 51 equivalent unit increase in franchised and licensed units, as compared to the prior year. The increase in equivalent units primarily resulted from the sale of company-owned restaurants to franchisees and the conversion of restaurants at Pilot Flying J Travel Centers during 2011. Initial fees increased by $0.3 million, or 41.7%. The increase in initial fees resulted from the higher number of restaurants sold to franchisees during the current year period, partially offset by the higher number of restaurants opened by franchisees during the prior year period. The increase in occupancy revenue of $0.4 million, or 3.7%, is primarily the result of the sale of restaurants to franchisees over the last 12 months.

Costs of franchise and license revenue increased by $0.3 million, or 2.7%. Occupancy costs remained relatively constant. Other direct costs increased by $0.3 million, or 10.5%, primarily as a result of an increase in performance-based compensation. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 34.0% for the quarter ended June 27, 2012 from 34.8% for the quarter ended June 29, 2011.

Other Operating Costs and Expenses

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

General and administrative expenses were comprised of the following:

 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Share-based compensation
$
876

 
$
1,176

Other general and administrative expenses
13,909

 
12,916

Total general and administrative expenses
$
14,785

 
$
14,092

 
The $0.7 million increase in general and administrative expenses is primarily the result of a $1.0 million increase in performance-based compensation, partially offset by a $0.3 million decrease in share-based compensation.
 

19



Depreciation and amortization was comprised of the following:

 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Depreciation of property and equipment
$
4,194

 
$
5,263

Amortization of capital lease assets
827

 
778

Amortization of intangible assets
806

 
1,193

Total depreciation and amortization expense
$
5,827

 
$
7,234


The overall decrease in depreciation and amortization expense is primarily due to the sale of company-owned restaurants to franchisees during fiscal 2011 and 2012.
 
Operating (gains), losses and other charges, net were comprised of the following:

 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Gains on sales of assets and other, net
$
(4,908
)
 
$
(879
)
Restructuring charges and exit costs
882

 
402

Impairment charges
17

 
58

Operating (gains), losses and other charges, net
$
(4,009
)
 
$
(419
)
 
During the quarter ended June 27, 2012, we recognized gains of $4.9 million, primarily resulting from the sale of restaurant operations to franchisees and the sale of two real estate assets. During the quarter ended June 29, 2011, we recognized gains of $0.9 million, primarily resulting from the sale of a restaurant operation to a franchisee and the sale of one real estate asset.
 
Restructuring charges and exit costs were comprised of the following:
 
 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Exit costs
$
327

 
$
251

Severance and other restructuring charges
555

 
151

Total restructuring and exit costs
$
882

 
$
402

 
Operating income was $19.0 million for the quarter ended June 27, 2012 compared with $13.7 million for the quarter ended June 29, 2011.
 

20



Interest expense, net was comprised of the following:
 
 
Quarter Ended
 
June 27, 2012
 
June 29, 2011
 
(In thousands)
Interest on credit facilities
$
1,708

 
$
3,034

Interest on capital lease liabilities
818

 
944

Letters of credit and other fees
390

 
461

Interest income
(337
)
 
(328
)
Total cash interest
2,579

 
4,111

Amortization of deferred financing costs
163

 
370

Amortization of debt discount
16

 
140

Interest accretion on other liabilities
235

 
280

Total interest expense, net
$
2,993

 
$
4,901


The decrease in interest expense resulted from a decrease in interest rates related to the 2012 refinancing of our credit facility, as well as debt reductions during 2011 and 2012.
 
Other nonoperating expense, net was $8.2 million for the quarter ended June 27, 2012 compared with $0.3 million for the quarter ended June 29, 2011. The change was primarily the result of $7.9 million of expenses and write-offs of deferred financing costs and original issue discount related to our debt refinancing.
 
The provision for income taxes was $3.2 million for the quarter ended June 27, 2012 compared to $0.4 million for the quarter ended June 29, 2011. For the quarter ended June 27, 2012, the difference in the overall effective tax rate from the U.S. statutory rate was due to discrete tax items, including a $1.3 million out-of-period adjustment related to the reversal of a portion of the income tax benefit recorded in fourth quarter of 2011. We do not believe the out-of-period adjustment was material to any prior or current year financial statements or on earnings trends. In addition, a $0.8 million current and deferred tax benefit was recorded. This benefit arose from additional state credits generated during the quarter ending June 27, 2012 related to prior years' activity. The provision for income taxes for the quarter ended June 29, 2011 was determined using our effective rate estimated for the entire fiscal year.
 
Net income was $4.6 million for the quarter ended June 27, 2012 compared with $8.1 million for the quarter ended June 29, 2011 due to the factors noted above.
 
Two Quarters Ended June 27, 2012 Compared with Two Quarters Ended June 29, 2011
  
Unit Activity

 
Two Quarters Ended
 
June 27, 2012
 
June 29, 2011
Company-owned restaurants, beginning of period
206

 
232

Units opened

 
6

Units sold to franchisees
(23
)
 
(10
)
Units closed
(6
)
 
(3
)
End of period
177

 
225

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,479

 
1,426

Units opened 
15

 
30

Units relocated

 
1

Units purchased from Company
23

 
10

Units closed (including units relocated)
(10
)