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EX-10.1 - FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT - DENNYS CORPdenn-9242014xex101.htm


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

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 24, 2014


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
¨
Smaller reporting company
¨
 
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨   No  þ

 As of October 23, 2014, 84,727,048 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)
 
September 24, 2014
 
December 25, 2013
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,450

 
$
2,943

Receivables
14,759

 
17,321

Inventories
2,743

 
2,881

Current deferred tax asset
22,021

 
23,264

Prepaid and other current assets
6,329

 
7,417

Total current assets
47,302

 
53,826

Property, net of accumulated depreciation of $253,252 and $255,966, respectively
109,268

 
105,620

Goodwill
31,451

 
31,451

Intangible assets, net
46,683

 
47,925

Deferred financing costs, net
1,734

 
2,097

Noncurrent deferred tax asset
21,604

 
28,290

Other noncurrent assets
26,237

 
26,568

Total assets
$
284,279

 
$
295,777

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
3,750

 
$
3,000

Current maturities of capital lease obligations
3,802

 
4,150

Accounts payable
16,408

 
14,237

Other current liabilities
50,220

 
52,698

Total current liabilities
74,180

 
74,085

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
148,750

 
150,000

Capital lease obligations, less current maturities
15,422

 
15,923

Liability for insurance claims, less current portion
17,748

 
18,249

Other noncurrent liabilities and deferred credits
25,752

 
29,089

Total long-term liabilities
207,672

 
213,261

Total liabilities
281,852

 
287,346

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity
 

 
 

Common stock $0.01 par value; shares authorized - 135,000; September 24, 2014: 105,498 shares issued and 84,845 shares outstanding; December 25, 2013: 105,014 shares issued and 89,232 shares outstanding
$
1,055

 
$
1,050

Paid-in capital
570,705

 
567,505

Deficit
(447,899
)
 
(470,946
)
Accumulated other comprehensive loss, net of tax
(17,138
)
 
(16,842
)
Shareholders’ equity before treasury stock
106,723

 
80,767

Treasury stock, at cost, 20,653 and 15,782 shares, respectively
(104,296
)
 
(72,336
)
Total shareholders' equity
2,427

 
8,431

Total liabilities and shareholders' equity
$
284,279

 
$
295,777

See accompanying notes

3



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

 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
82,827

 
$
83,371

 
$
243,269

 
$
247,242

Franchise and license revenue
34,205

 
33,904

 
100,297

 
101,094

Total operating revenue
117,032

 
117,275

 
343,566

 
348,336

Costs of company restaurant sales:
 
 
 
 
 
 
 
Product costs
21,364

 
21,722

 
63,274

 
64,270

Payroll and benefits
32,507

 
33,746

 
97,584

 
98,512

Occupancy
5,418

 
5,598

 
15,445

 
16,339

Other operating expenses
12,514

 
12,022

 
35,322

 
34,538

Total costs of company restaurant sales
71,803

 
73,088

 
211,625

 
213,659

Costs of franchise and license revenue
11,309

 
11,599

 
32,639

 
34,586

General and administrative expenses
13,439

 
13,704

 
41,623

 
42,948

Depreciation and amortization
5,185

 
5,198

 
15,704

 
15,774

Operating (gains), losses and other charges, net
587

 
161

 
1,049

 
1,779

Total operating costs and expenses, net
102,323

 
103,750

 
302,640

 
308,746

Operating income
14,709

 
13,525

 
40,926

 
39,590

Interest expense, net
2,284

 
2,452

 
6,880

 
7,800

Other nonoperating (income) expense, net
(33
)
 
(276
)
 
(465
)
 
1,056

Net income before income taxes
12,458

 
11,349

 
34,511

 
30,734

Provision for income taxes
4,115

 
4,318

 
11,464

 
10,424

Net income
$
8,343

 
$
7,031

 
$
23,047

 
$
20,310

 
 
 
 
 
 
 
 
Basic net income per share
$
0.10

 
$
0.08

 
$
0.27

 
$
0.22

Diluted net income per share
$
0.10

 
$
0.08

 
$
0.26

 
$
0.22

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
85,061

 
90,035

 
86,882

 
91,348

Diluted weighted average shares outstanding
86,983

 
91,967

 
88,844

 
93,377

 
See accompanying notes

4


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

 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Net income
$
8,343

 
$
7,031

 
$
23,047

 
$
20,310

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax expense of $90, $162, $271 and $487
141

 
251

 
422

 
752

Recognition of unrealized gain (loss) on hedge transaction, net of tax expense (benefit) of $103, $(459), $(460) and $1,063
159

 
(708
)
 
(718
)
 
1,640

Other comprehensive income (loss)
300

 
(457
)
 
(296
)
 
2,392

Total comprehensive income
$
8,643

 
$
6,574

 
$
22,751

 
$
22,702


See accompanying notes



5



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

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
(Deficit)
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, December 25, 2013
105,014

 
$
1,050

 
(15,782
)
 
$
(72,336
)
 
$
567,505

 
$
(470,946
)
 
$
(16,842
)
 
$
8,431

Net income

 

 

 

 

 
23,047

 

 
23,047

Other comprehensive loss

 

 

 

 

 

 
(296
)
 
(296
)
Share-based compensation on equity classified awards

 

 

 

 
1,608

 

 

 
1,608

Purchase of treasury stock

 

 
(4,871
)
 
(31,960
)
 

 

 

 
(31,960
)
Issuance of common stock for share-based compensation
151

 
2

 

 

 
(2
)
 

 

 

Exercise of common stock options
333

 
3

 

 

 
967

 

 

 
970

Tax benefit from share-based compensation

 

 

 

 
627

 

 

 
627

Balance, September 24, 2014
105,498

 
$
1,055

 
(20,653
)
 
$
(104,296
)
 
$
570,705

 
$
(447,899
)
 
$
(17,138
)
 
$
2,427

 
See accompanying notes

6



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
23,047

 
$
20,310

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
15,704

 
15,774

Operating (gains), losses and other charges, net
1,049

 
1,779

Amortization of deferred financing costs
362

 
376

(Gain) loss on early extinguishments of debt
(54
)
 
1,798

Loss on change in the fair value of interest rate caps
11

 
28

Deferred income tax expense
8,118

 
8,241

Share-based compensation
2,993

 
3,434

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
2,325

 
3,519

Inventories
138

 

Other current assets
1,089

 
2,291

Other assets
(1,668
)
 
(1,399
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
1,797

 
(3,461
)
Accrued salaries and vacations
(620
)
 
(3,089
)
Accrued taxes
1,753

 
1,823

Other accrued liabilities
(5,437
)
 
(4,015
)
Other noncurrent liabilities and deferred credits
(2,366
)
 
(2,693
)
Net cash flows provided by operating activities
48,241

 
44,716

Cash flows from investing activities:
 
 
 
Capital expenditures
(17,880
)
 
(9,461
)
Acquisition of restaurant and real estate

 
(3,980
)
Proceeds from disposition of property
61

 
1,591

Collections on notes receivable
1,788

 
3,653

Issuance of notes receivable
(1,167
)
 
(1,232
)
Net cash flows used in investing activities
(17,198
)
 
(9,429
)
Cash flows from financing activities:
 
 
 
Net revolver borrowings under new credit agreement
1,750

 
97,000

Term loan borrowings under new credit agreement

 
60,000

Long-term debt payments
(5,340
)
 
(174,820
)
Proceeds from exercise of stock options
970

 
2,077

Tax withholding on share-based payments
(419
)
 
(464
)
Tax benefit (expense) for share-based compensation
627

 
(204
)
Debt transaction costs

 
(366
)
Deferred financing costs

 
(1,372
)
Purchase of treasury stock
(32,073
)
 
(21,952
)
Net bank overdrafts
1,949

 
(2,421
)
Net cash flows used in financing activities
(32,536
)
 
(42,522
)
Decrease in cash and cash equivalents
(1,493
)
 
(7,235
)
Cash and cash equivalents at beginning of period
2,943

 
13,565

Cash and cash equivalents at end of period
$
1,450

 
$
6,330

 
See accompanying notes

7



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 full-service restaurant chains based on number of restaurants. At September 24, 2014, the Denny's brand consisted of 1,689 restaurants, 1,529 of which were franchised/licensed restaurants and 160 of which were company operated.

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 25, 2013 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 25, 2013. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 31, 2014.

Note 2.     Summary of Significant Accounting Policies
 
Accounting Standards to be Adopted

Discontinued Operations

ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity"

In April 2014, the FASB issued ASU 2014-08, which raises the threshold for a disposal to qualify as a discontinued operation and modifies the related disclosure requirements. Under the new guidance, only disposals resulting in a strategic shift that will have a major effect on an entity's operations and financial results will be reported as discontinued operations. ASU 2014-08 also removes the requirement that an entity not have any significant continuing involvement in the operations of the component after disposal to qualify for reporting of the disposal as a discontinued operation. The guidance is effective for annual and interim periods beginning after December 15, 2014 (our fiscal 2015), with early adoption permitted for any disposal transaction not previously reported. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

Revenue Recognition

ASU 2014-09, "Revenue from Contracts with Customers"

In May 2014, the FASB issued ASU 2014-09, which clarifies the principles used to recognize revenue for all entities. The new guidance requires companies to recognize revenue when it transfers goods or service to a customer in an amount that reflects the consideration to which a company expects to be entitled. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016 (our fiscal 2017). The guidance allows for either a "full retrospective" adoption or a "modified retrospective" adoption, however early adoption is not permitted. We are currently evaluating the adoption methods and the impact the adoption of this guidance will have on our consolidated financial statements.


8



Going Concern

ASU 2014-15, "Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern"

In August 2014, the FASB issued ASU 2014-15, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016 (our fiscal 2017) with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on the financial statements as a result of future adoption.

Note 3.     Receivables
 
Receivables were comprised of the following:
 
 
September 24, 2014
 
December 25, 2013
 
(In thousands)
Current assets:
 
 
 
Receivables:
 
 
 
Trade accounts receivable from franchisees
$
9,886

 
$
10,072

Notes receivable from franchisees
1,563

 
1,800

Vendor receivables
1,141

 
2,516

Credit card receivables
1,004

 
2,162

Other
1,454

 
1,002

Allowance for doubtful accounts
(289
)
 
(231
)
Total current receivables, net
$
14,759

 
$
17,321

 
 
 
 
Noncurrent assets (included as a component of other noncurrent assets):
 
 
 
Notes receivable from franchisees
$
382

 
$
766

 
Note 4.    Goodwill and Other Intangible Assets

Goodwill had a carrying value of $31.5 million as of September 24, 2014 and December 25, 2013.

Other intangible assets were comprised of the following:
 
 
September 24, 2014
 
December 25, 2013
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,061

 
$

 
$
44,055

 
$

Liquor licenses
126

 

 
126

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Franchise and license agreements
22,406

 
21,146

 
31,248

 
29,007

Reacquired franchise rights
1,857

 
621

 
1,857

 
354

Intangible assets
$
68,450

 
$
21,767

 
$
77,286

 
$
29,361

 
The $8.8 million decrease in franchise and license agreements primarily resulted from the removal of fully amortized agreements.

9




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

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
(Gains) losses on sales of assets and other, net
$
(33
)
 
$
(68
)
 
$
(74
)
 
$
(83
)
Restructuring charges and exit costs
300

 
229

 
775

 
1,005

Impairment charges
320

 

 
348

 
857

Operating (gains), losses and other charges, net
$
587

 
$
161

 
$
1,049

 
$
1,779

 
Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Exit costs
$
291

 
$
198

 
$
380

 
$
435

Severance and other restructuring charges
9

 
31

 
395

 
570

Total restructuring charges and exit costs
$
300

 
$
229

 
$
775

 
$
1,005


The components of the change in accrued exit cost liabilities are as follows:
 
 
(In thousands)
Balance, December 25, 2013
$
3,149

Exit costs (1)
380

Payments, net of sublease receipts
(1,050
)
Reclassification of certain lease assets and liabilities, net
(95
)
Interest accretion
141

Balance, September 24, 2014
2,525

Less current portion included in other current liabilities
914

Long-term portion included in other noncurrent liabilities
$
1,611


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

Impairment charges of $0.3 million for the three quarters ended September 24, 2014 resulted primarily from the impairment of an underperforming unit. Impairment charges of $0.9 million for the three quarters ended September 25, 2013 resulted primarily from the impairment of two units identified as assets held for sale.


10



Note 6.     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:
 
 
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)
 
 
Fair value measurements as of September 24, 2014:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
8,880

 
$
8,880

 
$

 
$

 
market approach
Interest rate swaps (2)
1,854

 

 
1,854

 

 
income approach
Interest rate caps (2)
0

 

 
0

 

 
income approach
Total
$
10,734

 
$
8,880

 
$
1,854

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements as of December 25, 2013:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
8,168

 
$
8,168

 
$

 
$

 
market approach
Interest rate swaps (2)
3,032

 

 
3,032

 

 
income approach
Interest rate caps (2)
11

 

 
11

 

 
income approach
Total
$
11,211

 
$
8,168

 
$
3,043

 
$

 
 
 
(1)
The fair values of our deferred compensation plan investments are based on the closing market prices of the participants’ elected investments.
(2)
The fair values of our interest rate swaps and interest rate caps are based upon Level 2 inputs, which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. See Note 7 for details on the interest rate swaps and interest rate caps.
 
Those assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

 
 
Significant Unobservable Inputs
(Level 3)
 
Impairment Charges
 
Valuation Technique
 
 
 
 
 
 
Fair value measurements as of September 24, 2014:
 
 
 
 
 
 
Assets held and used (1)
 
$

 
$
320

 
income approach
 
 
 
 
 
 
 
Fair value measurements as of December 25, 2013:
 
 
 
 
 
 
Assets held and used (1)
 
$
1,198

 
$
4,795

 
income approach

(1)
As of both September 24, 2014 and December 25, 2013, impaired assets related to an underperforming restaurant were written down to their fair value. To determine fair value, we used the income approach, which assumes that the future cash flows reflect current market expectations. These fair value measurements require significant judgment using Level 3 inputs, such as discounted cash flows from operations, which are not observable from the market, directly or indirectly.


11



Note 7.     Long-Term Debt

Denny's Corporation and certain of its subsidiaries have a credit facility comprised of a senior secured term loan in an original principal amount of $60 million and a $190 million senior secured revolver (with a $30 million letter of credit sublimit). As of September 24, 2014, we had outstanding term loan borrowings under the credit facility of $55.5 million and outstanding letters of credit under the senior secured revolver of $25.7 million. There were $97.0 million of revolving loans outstanding at September 24, 2014. These balances resulted in availability of $67.3 million under the revolving facility. The weighted-average interest rate under the term loan and on outstanding revolver loans was 2.16% and 2.17% as of September 24, 2014 and December 25, 2013, respectively.

The revolving credit facility includes an accordion feature that would allow us to increase the size of the revolver to $240 million. A commitment fee of 0.35% is paid on the unused portion of the revolving credit facility. Borrowings under the credit facility bear a tiered interest rate based on the Company's consolidated leverage ratio and was initially set at LIBOR plus 200 basis points. The maturity date for the credit facility is April 24, 2018.

The credit facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and maximum capital expenditures.
The term loan under the credit facility requires amortization of the original term loan balance of 5% per year in the first two years (April 2013 through April 2015), 7.5% in the subsequent two years (April 2015 through April 2017) and 10% in the fifth year (April 2017 through April 2018) with the balance due at maturity. We are required to make certain mandatory prepayments under certain circumstances and have the option to make certain prepayments under the credit facility. The 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.
During the three quarters ended September 24, 2014, we paid $2.3 million on the term loan under the credit facility.
   
Interest Rate Hedges
We have entered into interest rate hedges that cap the LIBOR rate on borrowings under our credit facility. The 200 basis point LIBOR cap applied to $125 million of borrowings from April 14, 2013 through April 13, 2014 and applies to $150 million of borrowings from April 14, 2014 through March 31, 2015.

We also have entered into interest rate swaps to hedge a portion of the cash flows of our floating rate debt from March 31, 2015 through March 29, 2018. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on a related $150 million notional debt obligation from March 31, 2015 through March 31, 2017 and a related $140 million notional debt obligation from April 1, 2017 through March 29, 2018. Under the terms of the swaps, we will pay an average fixed rate of 3.12% on the notional amounts and receive payments from a counterparty based on the 30-day LIBOR rate. As of September 24, 2014, the fair value of the interest rate swaps was $1.9 million, which is recorded as a component of other noncurrent assets on our Condensed Consolidated Balance Sheets. See Note 13 for the amounts recorded in accumulated other comprehensive loss related to the interest rate swaps.

We believe that our estimated cash flows from operations for 2014, 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.


12



Note 8.     Defined Benefit Plans
 
The components of net periodic benefit cost were as follows:

 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Pension Plan:
 
 
 
 
 
 
 
Service cost
$
95

 
$
100

 
$
285

 
$
300

Interest cost
775

 
745

 
2,325

 
2,233

Expected return on plan assets
(988
)
 
(1,122
)
 
(2,965
)
 
(3,366
)
Amortization of net loss
231

 
413

 
693

 
1,240

Net periodic benefit cost
$
113

 
$
136

 
$
338

 
$
407

 
 
 
 
 
 
 
 
Other Defined Benefit Plans:
 
 
 
 
 
 
 
Interest cost
$
31

 
$
28

 
$
93

 
$
84

Amortization of net loss
15

 
17

 
46

 
53

Settlement loss recognized
33

 

 
58

 

Net periodic benefit cost
$
79

 
$
45

 
$
197

 
$
137

 
We made contributions of $2.5 million and $2.8 million to our qualified pension plan during the three quarters ended September 24, 2014 and September 25, 2013, respectively. We made contributions of $0.4 million and $0.1 million to our other defined benefit plans during the three quarters ended September 24, 2014 and September 25, 2013, respectively. We expect to contribute less than $0.1 million to our other defined benefit plans over the remainder of fiscal 2014.

Additional minimum pension liability of $18.3 million and $18.7 million is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Equity as of September 24, 2014 and December 25, 2013, respectively.

On September 17, 2014, our Board of Directors approved the termination of the Advantica Pension Plan as of December 31, 2014, effective upon confirmation of compliance with any requirements under the terms of our credit facility. See Note 15. We currently expect that termination of such plan will be completed by the end of fiscal 2015 or early 2016. Settlement gain or loss, if any, resulting from the termination will be recognized at that time. During fiscal 2015 or early 2016, we will be required to make contributions to the Advantica Pension Plan as a result of the termination, dependent upon market conditions and participant elections. We currently expect that these contributions will be between $5 million and $7 million
 
Note 9.     Share-Based Compensation

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

 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Stock options
$

 
$
136

 
$
52

 
$
433

Performance share awards
446

 
735

 
2,358

 
2,377

Restricted stock units for board members
203

 
182

 
583

 
624

Total share-based compensation
$
649

 
$
1,053

 
$
2,993

 
$
3,434

 

13



Stock Options

As of September 24, 2014, there was no unrecognized compensation cost related to unvested stock option awards outstanding.
 
Performance Share Awards
 
In February 2014, we granted approximately 0.2 million performance shares and related performance-based target cash awards of $2.2 million to certain employees. In April 2014, we granted less than 0.1 million performance shares and related performance-based target cash awards of $0.3 million to additional employees under the same award plan. As these awards contain a market condition, a Monte Carlo valuation was used to determine the performance shares' grant date fair values of $7.65 per share (February 2014) and $6.80 per share (April 2014) and the payout probabilities 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 31, 2014. The performance period is the three year fiscal period beginning December 26, 2013 and ending December 28, 2016. 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 three quarters ended September 24, 2014, we made payments of $1.1 million in cash and issued 0.1 million shares of common stock related to performance share awards.
 
As of September 24, 2014, we had approximately $4.6 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which is expected to be recognized over a weighted average of 1.8 years.
 
Restricted Stock Units for Board Members

During the three quarters ended September 24, 2014, we granted 0.1 million restricted stock units (which are equity classified) with a weighted average grant date fair value of $6.56 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 our Board of Directors) or upon termination as a member of our Board of Directors. During the three quarters ended September 24, 2014, less than 0.1 million restricted stock units were converted into shares of common stock. As of September 24, 2014, we had approximately $0.4 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 0.6 years.
 
Note 10.     Income Taxes

The provision for income taxes was $11.5 million and $10.4 million for the three quarters ended September 24, 2014 and September 25, 2013, respectively. For the 2014 period, the difference in the overall effective rate from the U.S. Statutory rate was primarily due to the generation of employment tax credits and two discrete tax items. State job tax credits of $0.3 million were claimed during 2014 for current year’s hiring activity. State job tax credits of $0.5 million were also claimed during the 2014 period resulting from the prior year's hiring activity. In addition, share-based compensation adjustments resulted in an out-of-period tax benefit of $0.5 million. We do not believe the out-of-period adjustment was material to any prior or current year financial statements or on earnings trends.

For the 2013 period, the difference in the overall effective rate from the U.S. Statutory rate was due to state and foreign taxes, employment tax credits, and discrete tax items. The passage of the American Tax Payer Relief Act of 2012 resulted in deferred tax benefits of $0.3 million related to work opportunity credits generated in 2012, which were allowed retroactively during 2013. In addition, state jobs tax credits of $0.8 million were claimed during the 2013 period resulting from the prior year's hiring activity. A valuation allowance of $0.5 million was recorded against certain state jobs tax credits during the 2013 period related to changes in California law enacted during the period.


14



Note 11.     Net Income Per Share
 
The amounts used for the basic and diluted net income per share calculation are summarized below:
 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(In thousands, except for per share amounts)
Net income
$
8,343

 
$
7,031

 
$
23,047

 
$
20,310

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
85,061

 
90,035

 
86,882

 
91,348

Effect of dilutive share-based compensation awards
1,922

 
1,932

 
1,962

 
2,029

Weighted average shares outstanding - diluted
86,983

 
91,967

 
88,844

 
93,377

 
 
 
 
 
 
 
 
Basic net income per share
$
0.10

 
$
0.08

 
$
0.27

 
$
0.22

Diluted net income per share
$
0.10

 
$
0.08

 
$
0.26

 
$
0.22

 
 
 
 
 
 
 
 
Anti-dilutive share-based compensation awards
252

 
331

 
549

 
331

    
Note 12.     Supplemental Cash Flow Information

 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Income taxes paid, net
$
3,070

 
$
1,831

Interest paid
$
6,145

 
$
7,121

 
 
 
 
Noncash investing and financing activities:
 
 
 
Issuance of common stock, pursuant to share-based compensation plans
$
1,030

 
$
1,590

Execution of capital leases
$
2,489

 
$
4,038

Treasury stock payable
$
108

 
$
186

 
Note 13.     Shareholders' Equity

Share Repurchase
 
Our credit facility permits the payment of cash dividends and the purchase of Denny’s stock subject to certain limitations. In April 2013, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to an additional 10.0 million shares of our common stock (in addition to prior authorizations). 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. During the three quarters ended September 24, 2014, we repurchased 4.9 million shares of our common stock for approximately $32.0 million. This brings the total amount repurchased under this program to 5.7 million shares of our common stock for approximately $37.0 million, leaving 4.3 million shares that can be repurchased as of September 24, 2014. Repurchased shares are included as treasury stock in the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statement of Shareholders' Equity.

15




Accumulated Other Comprehensive Loss

The components of the change in accumulated other comprehensive loss were as follows:

 
Pensions
 
Derivatives
 
Accumulated Other Comprehensive Loss
 
(In thousands)
Balance as of December 25, 2013
$
(18,690
)
 
$
1,848

 
$
(16,842
)
Amortization of net loss (1)
693

 

 
693

Net change in fair value of derivatives

 
(1,178
)
 
(1,178
)
Income tax (expense) benefit related to items of other comprehensive income
(271
)
 
460

 
189

Balance as of September 24, 2014
$
(18,268
)
 
$
1,130

 
$
(17,138
)

(1)
Before-tax amount that was reclassified from accumulated other comprehensive loss and included as a component of pension expense within general and administrative expenses in our Condensed Consolidated Statements of Income during the three quarters ended September 24, 2014. See Note 8 for additional details.

Note 14.     Commitments and Contingencies

We have guarantees related to certain franchisee leases and loans. Payments under these guarantees would result from the inability of a franchisee to fund required payments when due. Through September 24, 2014, no events had occurred that caused us to make payments under the guarantees. There were $10.1 million and $6.1 million of loans outstanding under these programs as of September 24, 2014 and December 25, 2013, respectively. As of September 24, 2014, the maximum amounts payable under the lease guarantee and loan guarantees were $2.0 million and $1.7 million, respectively. As a result of these guarantees, we have recorded liabilities of approximately $0.1 million as of September 24, 2014 and December 25, 2013, which are included as a component of other noncurrent liabilities and deferred credits in our Condensed Consolidated Balance Sheets and other nonoperating expense in our Condensed Consolidated Statements of Income.
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. 
Note 15.     Subsequent Events
 
On October 14, 2014, we amended our credit facility to permit the planned termination of the Advantica Pension Plan and to modify certain financial covenants in connection therewith. See Note 8.

16




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

Forward-Looking Statements

The following discussion is intended to highlight significant changes in our financial position as of September 24, 2014 and results of operations for the quarter and three quarters ended September 24, 2014 compared to the quarter and three quarters ended September 25, 2013, respectively. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 25, 2013.


17



Statements of Income
 
The following table contains information derived from our Condensed Consolidated Statements of Income expressed as a percentage of total operating revenues, except as noted below. Percentages may not add due to rounding.
 
 
Quarter Ended
 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
September 24, 2014
 
September 25, 2013
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
82,827

 
70.8
 %
 
$
83,371

 
71.1
 %
 
$
243,269

 
70.8
 %
 
$
247,242

 
71.0
%
Franchise and license revenue
34,205

 
29.2
 %
 
33,904

 
28.9
 %
 
100,297

 
29.2
 %
 
101,094

 
29.0
%
Total operating revenue
117,032

 
100.0
 %
 
117,275

 
100.0
 %
 
343,566

 
100.0
 %
 
348,336

 
100.0
%
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Product costs
21,364

 
25.8
 %
 
21,722

 
26.1
 %
 
63,274

 
26.0
 %
 
64,270

 
26.0
%
Payroll and benefits
32,507

 
39.2
 %
 
33,746

 
40.5
 %
 
97,584

 
40.1
 %
 
98,512

 
39.8
%
Occupancy
5,418

 
6.5
 %
 
5,598

 
6.7
 %
 
15,445

 
6.3
 %
 
16,339

 
6.6
%
Other operating expenses
12,514

 
15.1
 %
 
12,022

 
14.4
 %
 
35,322

 
14.5
 %
 
34,538

 
14.0
%
Total costs of company restaurant sales
71,803

 
86.7
 %
 
73,088

 
87.7
 %
 
211,625

 
87.0
 %
 
213,659

 
86.4
%
Costs of franchise and license revenue (a)
11,309

 
33.1
 %
 
11,599

 
34.2
 %
 
32,639

 
32.5
 %
 
34,586

 
34.2
%
General and administrative expenses
13,439

 
11.5
 %
 
13,704

 
11.7
 %
 
41,623

 
12.1
 %
 
42,948

 
12.3
%
Depreciation and amortization
5,185

 
4.4
 %
 
5,198

 
4.4
 %
 
15,704

 
4.6
 %
 
15,774

 
4.5
%
Operating (gains), losses and other charges, net
587

 
0.5
 %
 
161

 
0.1
 %
 
1,049

 
0.3
 %
 
1,779

 
0.5
%
Total operating costs and expenses, net
102,323

 
87.4
 %
 
103,750

 
88.5
 %
 
302,640

 
88.1
 %
 
308,746

 
88.6
%
Operating income
14,709

 
12.6
 %
 
13,525

 
11.5
 %
 
40,926

 
11.9
 %
 
39,590

 
11.4
%
Interest expense, net
2,284

 
2.0
 %
 
2,452

 
2.1
 %
 
6,880

 
2.0
 %
 
7,800

 
2.2
%
Other nonoperating (income) expense, net
(33
)
 
0.0
 %
 
(276
)
 
(0.2
)%
 
(465
)
 
(0.1
)%
 
1,056

 
0.3
%
Net income before income taxes
12,458

 
10.6
 %
 
11,349

 
9.7
 %
 
34,511

 
10.0
 %
 
30,734

 
8.8
%
Provision for income taxes
4,115

 
3.5
 %
 
4,318

 
3.7
 %
 
11,464

 
3.3
 %
 
10,424

 
3.0
%
Net income
$
8,343

 
7.1
 %
 
$
7,031

 
6.0
 %
 
$
23,047

 
6.7
 %
 
$
20,310

 
5.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Company average unit sales
$
519

 
 

 
$
510

 
 

 
$
1,528

 
 

 
$
1,509

 
 

Franchise average unit sales
$
375

 
 

 
$
365

 
 

 
$
1,097

 
 

 
$
1,073

 
 

Company equivalent units (b)
159

 
 

 
163

 
 

 
159

 
 

 
164

 
 

Franchise equivalent units (b)
1,532

 
 

 
1,520

 
 

 
1,534

 
 

 
1,524

 
 

Company same-store sales increase (decrease) (c)(d)
4.1
%
 
 

 
0.7
%
 
 

 
3.7
%
 
 

 
(0.4
)%
 
 

Domestic franchise same-store sales increase (c)(d)
2.1
%
 
 

 
1.3
%
 
 

 
1.8
%
 
 

 
0.5
 %
 
 

            
(a)
Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.
(b)
Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.
(c)
Same-store sales include sales from restaurants that were open the same period in the prior year.
(d)
Prior year amounts have not been restated for 2014 comparable units.


18



Quarter Ended September 24, 2014 Compared with Quarter Ended September 25, 2013
 
Unit Activity
 
 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
Company restaurants, beginning of period
160

 
165

Units opened

 

Units acquired from franchisees

 
1

Units sold to franchisees

 
(2
)
Units closed

 

End of period
160

 
164

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,533

 
1,525

Units opened 
9

 
9

Units purchased from Company

 
2

Units acquired by Company

 
(1
)
Units closed
(13
)
 
(13
)
End of period
1,529

 
1,522

Total restaurants, end of period
1,689

 
1,686


Company Restaurant Operations
 
During the quarter ended September 24, 2014, we realized a 4.1% increase in company same-store sales. However, company restaurant sales decreased $0.5 million, or 0.7%, primarily resulting from a four equivalent-unit decrease in company-owned restaurants, which includes the temporary closure of our highest volume restaurant in Las Vegas, Nevada and temporary closures for remodeling restaurants.
 
Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 86.7% from 87.7%. Product costs decreased to 25.8% from 26.1% primarily due to the leveraging effect of higher sales. Payroll and benefits decreased to 39.2% from 40.5% primarily due to a 1.2 percentage point decrease in workers' compensation costs. The current year period included $0.4 million in unfavorable workers' compensation claims development, as compared to $1.5 million in unfavorable claims development in the prior year period. Occupancy costs decreased to 6.5% from 6.7%. The occupancy decrease is primarily related to an increase in the number of capital leases and a decrease in rent caused by certain lease amendments. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales: 

 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
 
(Dollars in thousands)
Utilities
$
3,728

 
4.5
%
 
$
3,592

 
4.3
%
Repairs and maintenance
1,496

 
1.8
%
 
1,550

 
1.9
%
Marketing
3,141

 
3.8
%
 
3,116

 
3.7
%
Legal
454

 
0.5
%
 
157

 
0.2
%
Other direct costs
3,695

 
4.5
%
 
3,607

 
4.3
%
Other operating expenses
$
12,514

 
15.1
%
 
$
12,022

 
14.4
%
 



19



Franchise Operations
 
Franchise and license revenue and costs of franchise and license revenue were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:
 
 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
 
(Dollars in thousands)
Royalties  
$
22,705

 
66.4
%
 
$
21,777

 
64.2
%
Initial fees
391

 
1.1
%
 
434

 
1.3
%
Occupancy revenue 
11,109

 
32.5
%
 
11,693

 
34.5
%
Franchise and license revenue 
$
34,205

 
100.0
%
 
$
33,904

 
100.0
%
 
 
 
 
 
 
 
 
Occupancy costs 
8,292

 
24.3
%
 
8,616

 
25.4
%
Other direct costs 
3,017

 
8.8
%
 
2,983

 
8.8
%
Costs of franchise and license revenue 
$
11,309

 
33.1
%
 
$
11,599

 
34.2
%

Royalties increased by $0.9 million, or 4.3%, primarily resulting from a 2.1% increase in domestic same-store sales and a twelve equivalent unit increase in franchised and licensed units, as compared to the prior year. Initial fees decreased by less than $0.1 million, or 9.9%. The decrease in occupancy revenue of $0.6 million, or 5.0%, is primarily the result of lease expirations.

Costs of franchise and license revenue decreased by $0.3 million, or 2.5%. The decrease in occupancy costs of $0.3 million, or 3.8%, is primarily the result of lease expirations. Other direct costs increased by less than $0.1 million, or 1.1%. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 33.1% for the quarter ended September 24, 2014 from 34.2% for the quarter ended September 25, 2013.

Other Operating Costs and Expenses

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

General and administrative expenses were comprised of the following:

 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Share-based compensation
$
649

 
$
1,053

Other general and administrative expenses
12,790

 
12,651

Total general and administrative expenses
$
13,439

 
$
13,704

 
The $0.4 million decrease in share-based compensation is primarily related to forfeitures resulting from the departure of our former Chief Brand Officer.


20



Depreciation and amortization was comprised of the following:

 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Depreciation of property and equipment
$
3,870

 
$
3,595

Amortization of capital lease assets
833

 
884

Amortization of intangible and other assets
482

 
719

Total depreciation and amortization expense
$
5,185

 
$
5,198

 
Operating (gains), losses and other charges, net were comprised of the following:

 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Gains on sales of assets and other, net
$
(33
)
 
$
(68
)
Restructuring charges and exit costs
300

 
229

Impairment charges
320

 

Operating (gains), losses and other charges, net
$
587

 
$
161


Restructuring charges and exit costs were comprised of the following:
 
 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Exit costs
$
291

 
$
198

Severance and other restructuring charges
9

 
31

Total restructuring and exit costs
$
300

 
$
229


Impairment charges of $0.3 million for the quarter ended September 24, 2014 resulted primarily from the impairment of an underperforming unit.

Operating income was $14.7 million for the quarter ended September 24, 2014 compared with $13.5 million for the quarter ended September 25, 2013.
 
Interest expense, net was comprised of the following:
 
 
Quarter Ended
 
September 24, 2014
 
September 25, 2013
 
(In thousands)
Interest on credit facilities
$
892

 
$
910

Interest on capital lease liabilities
828

 
907

Letters of credit and other fees
329

 
359

Interest income
(21
)
 
(20
)
Total cash interest
2,028

 
2,156

Amortization of deferred financing costs
120

 
120

Interest accretion on other liabilities
136

 
176

Total interest expense, net
$
2,284

 
$
2,452


The decrease in interest expense resulted primarily from the expiration of capital leases.

21



 
Other nonoperating income, net was less than $0.1 million for the quarter ended September 24, 2014 compared with other nonoperating income, net of $0.3 million for the quarter ended September 25, 2013.

The provision for income taxes was $4.1 million for the quarter ended September 24, 2014 compared to $4.3 million for the quarter ended September 25, 2013. For the 2014 period, the difference in the overall effective rate from the U.S. Statutory rate was primarily due to the generation of employment tax credits. State job tax credits of $0.3 million were claimed during 2014 for current year’s hiring activity. For the 2013 period, a valuation allowance of $0.5 million was recorded against certain state jobs tax credits related to changes in California law enacted during the period. The provision for income taxes for the third quarter of 2013 was determined using our effective rate estimated for the entire fiscal year.

Net income was $8.3 million for the quarter ended September 24, 2014 compared with $7.0 million for the quarter ended September 25, 2013.

Three Quarters Ended September 24, 2014 Compared with Three Quarters Ended September 25, 2013
  
Unit Activity

 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
Company restaurants, beginning of period
163

 
164

Units opened

 

Units acquired from franchisees

 
2

Units sold to franchisees

 
(2
)
Units closed
(3
)
 

End of period
160

 
164

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,537

 
1,524

Units opened 
16

 
27

Units purchased from Company

 
2

Units acquired by Company

 
(2
)
Units closed
(24
)
 
(29
)
End of period
1,529

 
1,522

Total restaurants, end of period
1,689

 
1,686


Company Restaurant Operations

During the three quarters ended September 24, 2014, we realized a 3.7% increase in company same-store sales. However, company restaurant sales decreased $4.0 million, or 1.6%, primarily resulting from a five equivalent-unit decrease in company restaurants, which includes the temporary closure of our highest volume restaurant in Las Vegas, Nevada and temporary closures for remodeling restaurants.
 
Total costs of company restaurant sales as a percentage of company restaurant sales increased to 87.0% from 86.4%. Product costs remained constant at 26.0%. Payroll and benefits increased to 40.1% from 39.8% primarily due to a 0.3 percentage point increase in group insurance and a 0.3 percentage point increase in incentive compensation costs, partially offset by a 0.2 percentage point decrease in workers' compensation costs. The increase in group insurance relates to the costs of implementing the Affordable Care Act during the current year period. The incentive compensation increase is primarily due to increased same-store sales performance. The current year period included $0.8 million in unfavorable workers' compensation claims development, as compared to $1.5 million in unfavorable claims development in the prior year period. Occupancy costs decreased to 6.3% from 6.6%. The occupancy decrease is primarily related to an increase in the number of capital leases and a decrease in rent caused by certain lease amendments. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:


22



 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
(Dollars in thousands)
Utilities
$
10,385

 
4.3
%
 
$
9,897

 
4.0
%
Repairs and maintenance
4,428

 
1.8
%
 
4,423

 
1.8
%
Marketing
9,003

 
3.7
%
 
9,245

 
3.7
%
Legal
708

 
0.3
%
 
671

 
0.3
%
Other direct costs
10,798

 
4.4
%
 
10,302

 
4.2
%
Other operating expenses
$
35,322

 
14.5
%
 
$
34,538

 
14.0
%

Franchise Operations

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

 
Three Quarters Ended
 
September 24, 2014
 
September 25, 2013
 
(Dollars in thousands)
Royalties
$
66,311

 
66.1
%
 
$
64,205

 
63.5
%
Initial fees
840

 
0.9
%
 
1,164

 
1.2
%
Occupancy revenue
33,146

 
33.0
%
 
35,725

 
35.3
%
Franchise and license revenue
$
100,297

 
100.0
%
 
$
101,094

 
100.0
%
 
 
 
 
 
 
 
 
Occupancy costs
24,773

 
24.7
%
 
26,235

 
25.9
%
Other direct costs
7,866

 
7.8
%
 
8,351

 
8.3
%
Costs of franchise and license revenue
$
32,639

 
32.5
%
 
$
34,586

 
34.2
%
 
Royalties increased by $2.1 million, or 3.3%, primarily resulting from a 1.8%