10-K 1 denn-12312014x10k.htm 10-K DENN-12.31.2014-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 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 incorporation or organization)
(I.R.S. employer identification number)
203 East Main Street, Spartanburg, South Carolina
29319-9966
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
(Registrant’s telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
           Title of each class         
Name of each exchange on which registered
$.01 Par Value, Common Stock
The Nasdaq Stock Market
 Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  ¨    No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ    No  ¨
Indicate by check mark 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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
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
o
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
The aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $494.5 million as of June 25, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of registrant’s common stock on that date of $6.60 per share and, for purposes of this computation only, the assumption that all of the registrant’s directors, executive officers and beneficial owners of 10% or more of the registrant’s common stock are affiliates.
As of March 11, 201584,853,855 shares of the registrant’s common stock, $.01 par value per share, were outstanding.
Documents incorporated by reference:
Portions of the registrant’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.





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





PART I


Item 1.     Business
 
Description of Business
 
Denny’s Corporation (Denny’s) is one of America’s largest franchised full-service restaurant chains. Denny’s, through its wholly-owned subsidiary, Denny’s, Inc., owns and operates the Denny’s brand. At December 31, 2014, the Denny’s brand consisted of 1,702 franchised, licensed and company operated restaurants around the world with combined sales of $2.6 billion, including 1,596 restaurants in the United States and 106 international locations. As of December 31, 2014, 1,541 of our restaurants were franchised or licensed, representing 91% of the total restaurants, and 161 were company operated.

Denny’s is known as America's Diner, or in the case of our international locations, “the local diner.” Open 24/7 in most locations, we provide our guests quality food that emphasizes everyday value and new products through our compelling limited time only offerings, delivered in a warm, friendly “come as you are” atmosphere. Denny's is best known for its breakfast fare, which is available around the clock. The Original Grand Slam, introduced in 1977, remains one of our most popular menu items. In addition to our breakfast-all-day items, Denny's offers a wide selection of lunch and dinner items including burgers, sandwiches, salads and skillet entrées, along with an assortment of beverages, appetizers and desserts.

In 2014, Denny's average annual restaurant sales were $2.1 million for company restaurants and $1.5 million for franchised restaurants (taking into consideration that 2014 was a 53 week year). At our company restaurants, the guest check average was $9.19 with an approximate average of 4,300 guests served per week. Because our restaurants are open 24 hours, we have four dayparts (breakfast, lunch, dinner and late night), accounting for 24%, 35%, 22% and 19%, respectively, of average daily sales at company restaurants. Weekends have traditionally been the most popular time for guests to visit our restaurants. In 2014, 36% of an average week of sales at company restaurants occurred between Friday late night and Sunday lunch.

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

Franchising
 
Our criteria to become a Denny’s franchisee include minimum liquidity and net worth requirements and appropriate operational experience. We believe that Denny’s is an attractive financial proposition for current and potential franchisees and that our fee structure is competitive with other full-service brands. Traditional twenty-year Denny’s franchise agreements have an initial fee of up to $40,000 and the royalty payment is up to 4.5% of gross sales. Additionally, our franchisees are required to contribute up to 3% of gross sales for brand promotion and may make additional advertising contributions as part of a local marketing co-operative. Franchise agreements for nontraditional locations, such as university campuses and military bases, may contain higher royalty and lower advertising contribution rates than the traditional franchise agreements. For 2014, our average royalty rate was approximately 3.98%.

We work closely with our franchisees to plan and execute many aspects of the business. The Denny's Franchisee Association ("DFA") was created to promote communication among our franchisees and between the Company and our franchise community. DFA board members and Company management primarily work together through Brand Advisory Councils relating to Development, Marketing and Operations matters, as well as through a Supply Chain Oversight Committee for procurement and distribution matters.

1



 Site Selection

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

demographics;
traffic patterns;
visibility;
building constraints;
competition;
environmental restrictions; and
proximity to high-traffic consumer activities.

Domestic Development
 
To accelerate the growth of the brand in certain under-penetrated markets, we offer certain incentive programs. These programs provide significant incentives for franchisees to develop multiple locations in areas where Denny's does not have the top market share. The benefits to franchisees include reduced franchise fees, lower royalties for a limited time period and credits towards certain development services, such as architecture and training fees.

In recent years, we have opened restaurant locations within travel centers, primarily with Pilot and Pilot Flying J Travel Centers. Additionally, we have opened nontraditional locations on university campuses and military bases operating under the Denny's Fresh Express®, Denny's AllNighter® or The Den® names.
 
Through our various development efforts, we currently have 77 domestic franchised restaurants in our development pipeline. The majority of these restaurants are expected to open over the next five years. While we anticipate the majority of the restaurants to be opened under these agreements, generally as scheduled, from time to time some of our franchisees' ability to grow and meet their development commitments may be hampered by the economy and the lending environment.
  
International Development
 
In addition to the development agreements signed for domestic restaurants, we have 71 international franchised restaurants in our development pipeline. This number includes a franchise agreement we signed during 2014 for the development of 30 new Denny’s restaurants in nine countries in the Middle East over the next ten years. During 2014, we opened six franchised international locations, including five in Canada and one in the Dominican Republic.

During 2015, we expect to open a total of 35 to 45 franchised restaurants in domestic and international markets, resulting in single digit net restaurant growth.
 
Franchise Focused Business Model

Through our development and refranchising efforts we have achieved a restaurant portfolio mix of 91% franchised and 9% company operated. We expect that our percentage of company restaurants will gradually decrease. The majority of our restaurant openings and the future growth of the brand will come primarily from the development of franchised restaurants. The following table summarizes the changes in the number of company restaurants and franchised and licensed restaurants during the past five years (excluding relocations):


2



 
2014
 
2013
 
2012
 
2011
 
2010
Company restaurants, beginning of period
163

 
164

 
206

 
232

 
233

Units opened
1

 

 
1

 
8

 
24

Units acquired from franchisees

 
2

 
1

 

 

Units sold to franchisees

 
(2
)
 
(36
)
 
(30
)
 
(24
)
Units closed
(3
)
 
(1
)
 
(8
)
 
(4
)
 
(1
)
End of period
161

 
163

 
164

 
206

 
232

 
 
 
 
 
 
 
 
 
 
Franchised and licensed restaurants, beginning of period
1,537

 
1,524

 
1,479

 
1,426

 
1,318

Units opened
37

 
46

 
39

 
53

 
112

Units purchased from Company

 
2

 
36

 
30

 
24

Units acquired by Company

 
(2
)
 
(1
)
 

 

Units closed
(33
)
 
(33
)
 
(29
)
 
(30
)
 
(28
)
End of period
1,541

 
1,537

 
1,524

 
1,479

 
1,426

Total restaurants, end of period
1,702

 
1,700

 
1,688

 
1,685

 
1,658

 
The table below sets forth information regarding the distribution of single-store and multi-store franchisees as of December 31, 2014:
 
  
Franchisees
 
Percentage of Franchisees
 
Restaurants
 
Percentage of Restaurants
One
89

 
33.2
%
 
89

 
5.8
%
Two to five
114

 
42.6
%
 
341

 
22.1
%
Six to ten
29

 
10.8
%
 
223

 
14.5
%
Eleven to fifteen
10

 
3.7
%
 
123

 
8.0
%
Sixteen to thirty
18

 
6.7
%
 
370

 
24.0
%
Thirty-one and over
8

 
3.0
%
 
395

 
25.6
%
Total
268

 
100.0
%
 
1,541

 
100.0
%

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

We devote significant effort to ensuring all restaurants offer quality food served by friendly, knowledgeable and attentive employees in a clean and well-maintained restaurant. We seek to ensure that our company restaurants meet our high standards through a network of Directors of Company Operations, Company District Managers and restaurant level managers, all of whom spend the majority of their time in the restaurants. A network of Regional Directors of Franchise Operations and Franchise Business Leaders provide oversight of our franchised restaurants to ensure compliance with brand standards, promote operational excellence and provide general support to our franchisees. 

A principal feature of our restaurant operations is the consistent focus on improving operations at the restaurant level. Each company and franchised restaurant receives regular reviews and coaching to assess and continually improve restaurant operations. In addition, Denny’s maintains training programs for hourly employees and restaurant management. Hourly employee training programs (including eLearning) are position-specific and focus on skills and tasks necessary to successfully fulfill the responsibilities assigned to them, while continually enhancing guest satisfaction. Denny's Manager In Training (“MIT”) program provides managers with the knowledge and leadership skills needed to successfully operate a Denny's restaurant. The MIT program is required for all new management hires and those promoted internally and is also available to Denny's franchisees to train their managers. 


3



Product Development and Marketing

Menu Offerings

We are leveraging our heritage with our “America’s Diner" brand positioning, which provides the promise of Everyday Value with craveable, indulgent products served in a friendly and welcoming atmosphere. This positioning provides the framework for our four primary marketing strategies: (1) supporting our core "breakfast all day" platform, (2) delivering everyday affordability, primarily through our $2 $4 $6 $8 Value Menu®, (3) creating compelling limited-time-only products and (4) driving relevance beyond breakfast. The Denny’s menu offers a large selection of high-quality, moderately priced products designed to appeal to all types of guests. We offer a wide variety of items for breakfast, lunch, dinner and late night dining, in addition to appetizers, desserts and beverages. Our Fit Fare® menu helps our guests identify items best suited to their dietary needs. Most Denny’s restaurants offer special items for children and seniors at reduced prices.

Product Development
 
Denny’s is a consumer-driven brand focusing on hospitality, menu choices and the overall guest experience. Our Product Development team works closely with consumer insights obtained through primary and secondary qualitative and quantitative studies. Input and ideas from our franchisees, vendors and operators are also integrated into this process. These insights form the strategic foundation for menu architecture, pricing, promotion and advertising. Before a new menu item can be brought to fruition, it is rigorously tested against consumer expectations, standards of culinary discipline, food science and technology, nutritional analysis, financial benefit and operational execution. This testing process ensures that new menu items are not only appealing, competitive, profitable and marketable, but can be prepared and delivered with excellence in our restaurants.

The added value of these insights and strategic understandings also assists our Restaurant Operations and Information Technology staffs in the evaluation and development of new restaurant processes and upgraded restaurant equipment that may enhance our speed of service, food quality and order accuracy.
 
We continually evolve our menu through new additions, deletions or improvements to meet the needs of a changing consumer and market place.

Product Sources and Availability
 
Our purchasing department administers programs for the procurement of food and non-food products. Our franchisees also purchase food and non-food products directly from the vendors under these programs. Our centralized purchasing program is designed to ensure uniform product quality as well as to minimize food, beverage and supply costs. Our size provides significant purchasing power, which often enables us to obtain products at favorable prices from nationally recognized manufacturers.
 
While nearly all products are contracted for by our purchasing department, the majority are purchased and distributed through Meadowbrook Meat Company ("MBM") under a long-term distribution contract. MBM distributes restaurant products and supplies to the Denny’s system from approximately 200 vendors, representing approximately 90% of our restaurant product and supply purchases. We believe that satisfactory alternative sources of supply are generally available for all the items regularly used by our restaurants. We have not experienced any material shortages of food, equipment, or other products which are necessary to our restaurant operations.

Marketing and Advertising
 
Denny’s marketing team employs integrated marketing and advertising strategies that promote the Denny’s brand. Brand and communications strategy, advertising, broadcast media, social media, digital media, menu management, product innovation and development, consumer insights, target segment marketing, public relations, field marketing and national/local promotions and partnerships all fall under the marketing umbrella.
 
Our marketing campaigns focus on amplifying Denny's brand strengths as America's Diner, promoting the various breakfast, lunch, dinner, late night and Fit Fare® menu offerings in addition to both value and premium limited time only offerings. Denny's deploys comprehensive marketing strategies on a national level and through local co-operatives, targeting customers through network, cable and local television, radio, online, digital, social, outdoor and print media.
 

4



Brand Protection & Quality

Denny’s will only serve our guests food that is safe and wholesome and that meets our quality standards. Our systems, from "farm to fork," are based on Hazard Analysis and Critical Control Points ("HACCP"), whereby we prevent, eliminate or reduce hazards to a safe level to protect the health of the employees and guests. To ensure this basic expectation to our guests, Denny’s also has risk-based systems in place to validate only approved vendors and distributors which meet and follow our product specifications and food handling procedures. Vendors, distributors and restaurant employees follow regulatory requirements (federal, state and local), industry “best practices” and Denny’s Brand Standards.
 
We use multiple approaches to quality including third-party unannounced restaurant inspections (utilizing Denny’s Brand Protection Reviews), health department reviews and employee/manager training in their respective roles. It is a brand standard that all regulatory reviews/inspections be submitted to the Brand Protection department within 24 hours. We follow-up on all inspections received, and assist Operations, Facilities and franchisees, where applicable, to bring resolution to regulatory issues or concerns. If operational brand standard expectations are not met, a remediation process is immediately initiated. Our HACCP program uses nationally recognized food safety training courses and American National Standards Institute accredited certification programs.
 
All Denny’s restaurants are required to have a person certified in food protection on duty for all hours of operation. Our Food Safety/HACCP program has been recognized nationally by regulatory departments, the restaurant industry and our peers as one of the best. We continuously work toward improving our processes and procedures. We are advocates for the advancement of food safety within the industry’s organizations, such as the National Council of Chain Restaurants, the National Restaurant Association (NRA) and the NRA's Quality Assurance Executive Study Groups.
 
Seasonality
 
Restaurant sales are generally higher in the second and third calendar quarters (April through September) than in the first and fourth calendar quarters (October through March). Additionally, severe weather, storms and similar conditions may impact sales volumes seasonally in some operating regions.
 
Trademarks and Service Marks
 
Through our wholly-owned subsidiaries, we have certain trademarks and service marks registered with the United States Patent and Trademark Office and in international jurisdictions, including "Denny's®", "Grand Slam®", "$2 $4 $6 $8 Value Menu®" and "Fit Fare®". We consider our trademarks and service marks important to the identification of our restaurants and believe they are of material importance to the conduct of our business. Domestic trademark and service mark registrations are renewable at various intervals from 10 to 20 years. International trademark and service mark registrations have various durations from 5 to 20 years. We generally intend to renew trademarks and service marks which come up for renewal. We own or have rights to all trademarks we believe are material to our restaurant operations in the United States and other jurisdictions where we do business. In addition, we have registered various domain names on the internet that incorporate certain of our trademarks and service marks, and believe these domain name registrations are an integral part of our identity. From time to time, we may resort to legal measures to defend and protect the use of our intellectual property.
 
Competition
 
The restaurant industry is highly competitive. Restaurants compete on the basis of name recognition and advertising; the price, quality, variety and perceived value of their food offerings; the quality and speed of their guest service; and the convenience and attractiveness of their facilities.
 
Denny’s direct competition in the full-service category includes a collection of national and regional chains, as well as thousands of independent operators. We also compete with quick service restaurants as they attempt to upgrade their menus with premium sandwiches, entrée salads, new breakfast offerings and extended hours.
 
We believe that Denny’s has a number of competitive strengths, including strong brand recognition, well-located restaurants and market penetration. We benefit from economies of scale in a variety of areas, including advertising, purchasing and distribution. Additionally, we believe that Denny’s has competitive strengths in the value, variety and quality of our food products, and in the quality and training of our employees. See “Risk Factors” for certain additional factors relating to our competition in the restaurant industry.
 

5



Economic, Market and Other Conditions
 
The restaurant industry is affected by many factors, including changes in national, regional and local economic conditions affecting consumer spending, the political environment (including acts of war and terrorism), changes in customer travel patterns, changes in socio-demographic characteristics of areas where restaurants are located, changes in consumer tastes and preferences, increases in the number of restaurants, unfavorable trends affecting restaurant operations, such as rising wage rates, healthcare costs, utilities expenses and unfavorable weather. See "Risk Factors" for additional information.
 
Government Regulations
 
We and our franchisees are subject to local, state, federal and international laws and regulations governing various aspects of the restaurant business.

We are subject to Federal Trade Commission regulation and a number of state laws which regulate the offer and sale of franchises. We also are subject to a number of state laws which regulate substantive aspects of the franchisor-franchisee relationship. We believe we are in material compliance with applicable laws and regulations, but we cannot predict the effect on operations of the enactment of additional regulations in the future.

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

The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act required that most individuals obtain health insurance coverage beginning in 2014 and also required that certain large employers offer coverage to their employees or pay a financial penalty beginning in 2015. We began complying with the laws in 2014. Although we cannot predict with certainty the financial and operational impacts the laws will have on us, we expect that our expenses related to employee health benefits will increase over the long term as a result of this legislation. Any such increases could adversely affect our business, cash flows, financial condition and results of operations. Additionally, the health care legislation will require restaurant companies such as ours to disclose calorie information on their menus effective December 1, 2015. We do not expect to incur any material costs from compliance with this provision of the law.

We are subject to governmental regulations in our international markets impacting the way we do business with our international franchisees. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act.

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

6



Executive Officers of the Registrant
 
The following table sets forth information with respect to each executive officer of both Denny’s Corporation and Denny's Inc.:

 Name
 
Age
 
Positions
Christopher D. Bode
 
52
 
Senior Vice President, Chief Operating Officer
 
 
 
 
 
John W. Dillon
 
43
 
Senior Vice President, Chief Marketing Officer
 
 
 
 
 
Stephen C. Dunn
 
50
 
Senior Vice President, Global Development
 
 
 
 
 
Timothy E. Flemming
 
54
 
Senior Vice President, General Counsel and Chief Legal Officer
 
 
 
 
 
John C. Miller
 
59
 
Chief Executive Officer and President
 
 
 
 
 
Jill A. Van Pelt
 
46
 
Senior Vice President, Chief People Officer
 
 
 
 
 
F. Mark Wolfinger
 
59
 
Executive Vice President, Chief Administrative Officer and Chief Financial Officer

Mr. Bode has been Senior Vice President, Chief Operating Officer since October 2014. He previously served as Senior Vice President, Operations from January 2013 to October 2014, as Divisional Vice President, Franchise Operations from January 2012 to January 2013 and as Vice President, Operations Initiatives from March 2011 to January 2012. Prior to joining the Company, Mr. Bode served as Chief Operating Officer of QSR Management, LLC (a franchisee of Dunkin’ Donuts) from 2008 to 2010.

Mr. Dillon has been Senior Vice President, Chief Marketing Officer since October 2014. He previously served as Vice President, Brand and Field Marketing from June 2013 to October 2014 and as Vice President, Marketing from July 2008 to June 2013.

Mr. Dunn has been Senior Vice President, Global Development since April 2011. He previously served as Vice President, Company and Franchise Development from September 2005 to April 2011.
Mr. Flemming has been Senior Vice President, General Counsel and Chief Legal Officer since March 2009. He previously served as Vice President, General Counsel and Chief Legal Officer from June 2008 to March 2009.
Mr. Miller has been Chief Executive Officer and President since February 2011. Prior to joining the Company, he served as Chief Executive Officer and President of Taco Bueno Restaurants, Inc. (an operator and franchisor of quick service Mexican eateries) from 2005 to February 2011.

Ms. Van Pelt has been Senior Vice President and Chief People Officer since October 2014. She previously served as Vice President, Human Resources from October 2008 to October 2014.

Mr. Wolfinger has been Executive Vice President and Chief Administrative Officer since April 2008 and Chief Financial Officer since September 2005. He previously served as Executive Vice President, Growth Initiatives from October 2006 to April 2008.

Employees
 
At December 31, 2014, we had approximately 8,300 employees, of whom 7,900 were restaurant employees, 100 were field support employees and 300 were corporate personnel. None of our employees are subject to collective bargaining agreements. Many of our restaurant employees work part-time, and many are paid at or above minimum wage levels. As is characteristic of the restaurant industry, we experience a high level of turnover among our restaurant employees. We have experienced no significant work stoppages, and we consider relations with our employees to be satisfactory.


7



The staff for a typical restaurant consists of one General Manager, two or three Restaurant Managers and approximately 45 hourly employees. The Chief Operating Officer, along with the VP, Company Operations and the VP, Franchise Operations, establish the strategic direction and key initiatives for the Operations Teams. In addition, we employ two Directors of Company Operations, four Regional Directors of Franchise Operations and a team of Company District Managers and Franchise Business Leaders to guide and support the franchisees and in-restaurant teams. The duties of the Directors of Operations, District Managers and Franchise Business Leaders include regular restaurant visits and inspections, as well as frequent interactions with our franchisees, employees and guests, which ensure the ongoing adherence to our standards of quality, service, cleanliness, value and hospitality.
 
Available Information
 
We make available free of charge through our website at investor.dennys.com (in the Investor Relations—SEC Filings section) copies of materials that we file with, or furnish to, the Securities and Exchange Commission ("SEC"), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

Item 1A.     Risk Factors
 
We caution you that our business and operations are subject to a number of risks and uncertainties. The factors listed below could cause actual results to differ materially from our historical results and from projections in forward-looking statements contained in this Form 10-K, in our other filings with the SEC, in our news releases and in public statements made orally by our representatives.
 
A decline in general economic conditions could adversely affect our financial results.
 
Consumer spending habits, including discretionary spending on dining at restaurants such as ours, are affected by many factors including:
 
prevailing economic conditions;
energy costs, especially gasoline prices;
levels of employment;
salaries and wage rates;
consumer confidence; and
consumer perception of economic conditions.

Weakness or uncertainty regarding the United States economy, as a result of reactions to consumer credit availability, increasing energy prices, inflation, increasing interest rates, unemployment, war, terrorist activity or other unforeseen events could adversely affect consumer spending habits, which may result in lower restaurant sales.
 
Our financial condition depends on our ability and the ability of our franchisees to operate restaurants profitably, to generate positive cash flows and to generate acceptable returns on invested capital. The returns and profitability of our restaurants may be negatively impacted by a number of factors, including those described below.
 
Food service businesses are often adversely affected by changes in:
 
consumer tastes, including nutritional concerns;
consumer spending habits;
global, national, regional and local economic conditions; and
demographic trends.

The performance of our individual restaurants may be adversely affected by factors such as:
 
traffic patterns;
demographic considerations; and
the type, number and location of competing restaurants.


8



Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could adversely affect the availability, quality and cost of ingredients. In addition, the food service industry in general, and our results of operations and financial condition in particular, may be adversely affected by unfavorable trends or developments such as:
 
inflation;
increased food costs;
increased energy costs;
labor and employee benefits costs (including increases in minimum hourly wage, employment tax rates, health care costs and workers’ compensation costs);
regional weather conditions; and
the availability of experienced management and hourly employees.

Operating results that are lower than our current estimates may cause us to incur impairment charges on certain long-lived assets and potentially close certain restaurants.

 The financial performance of our franchisees can negatively impact our business.
 
As we are heavily franchised, our financial results are contingent upon the operational and financial success of our franchisees. We receive royalties, contributions to advertising and, in some cases, lease payments from our franchisees. We have established operational standards, guidelines and strategic plans for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are responsible for ensuring the success of our entire chain of restaurants and for taking a longer term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may have business interests outside of their Denny’s restaurants, making them subject to business and financial risks unrelated to the operation of our restaurants. These unrelated risks could adversely affect a franchisee's ability to make payments to us or their ability to secure adequate financing to open or continue operating their Denny’s restaurants. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, it could result in financial distress or even bankruptcy. Our franchisees are impacted by the implementation of The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act. If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalties and lease income.
 
For 2014, our ten largest franchisees accounted for 32% of our franchise revenue. The balance of our franchise revenue is derived from the remaining 258 franchisees. Although the loss of revenues from the closure of any one franchised restaurant may not be material, such revenues generate margins that may exceed those generated by other restaurants or offset fixed costs which we continue to incur.

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 December 31, 2014, no events had occurred that caused us to make payments under the guarantees. There were $9.8 million and $6.1 million of loans outstanding under these programs as of December 31, 2014 and December 25, 2013, respectively. As of December 31, 2014, the maximum amounts payable under the lease guarantee and loan guarantees were $2.0 million and $1.7 million, respectively.


9



Our growth strategy depends on our ability and that of our franchisees to open new restaurants. Delays or failures in opening new restaurants could adversely affect our planned growth.
 
The development of new restaurants may be adversely affected by risks such as:
 
costs and availability of capital for the company and/or franchisees;
competition for restaurant sites;
inability to identify suitable franchisees;
negotiation of favorable purchase or lease terms for restaurant sites;
inability to obtain all required governmental approvals and permits;
delays in completion of construction;
challenge of identifying, recruiting and training qualified restaurant managers;
developed restaurants not achieving the expected revenue or cash flow;
challenges specific to the growth of international operations and nontraditional restaurants that are different from traditional domestic development; and
general economic conditions.

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

Our expansion into international markets may present increased risks due to lower customer awareness of our brand, our unfamiliarity with those markets and other factors.

The international markets in which our franchisees currently operate and any additional markets our franchisees may enter outside of the United States, have many differences as compared to our domestic markets. There may be lower consumer familiarity with the Denny’s brand in these markets, as well as different competitive conditions, consumer tastes and economic conditions. As a result, our franchised international restaurants may take longer to reach expected sales and profit levels, and may never do so, thereby affecting the brand’s overall growth and profitability. Building brand awareness may take longer than expected, which could negatively impact our profitability in those markets.
We are subject to governmental regulations in our international markets impacting the way we do business with our international franchisees. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could adversely impact our results of operations and financial condition.

The restaurant business is highly competitive, and if we are unable to compete effectively, our business will be adversely affected.
 
Each of our restaurants competes with a wide variety of restaurants ranging from national and regional restaurant chains to locally owned restaurants. We expect competition to continue to increase. The following are important aspects of competition:
 
restaurant location;
advantageous commercial real estate suitable for restaurants;
number and location of competing restaurants;
attractiveness and repair and maintenance of facilities;
food quality, new product development and value;
dietary trends, including nutritional content;
training, courtesy and hospitality standards;
ability to attract and retain high quality staff;
quality and speed of service; and
the effectiveness of marketing and advertising programs.


10



Our reputation and business could be materially harmed as a result of the failure to protect the integrity and security of guest information or employees' personal data.
 
We receive and maintain certain personal information about our guests and employees. Our use of this information is regulated at the federal and state levels, as well as by certain third-party contracts. If our security and information systems are compromised as a result of a cyber attack or any other failures or our business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, operations, results of operations and financial condition, and could result in litigation against us or the imposition of penalties. As privacy and information security laws and regulations change or cyber risks evolve pertaining to this data, we may incur additional costs to ensure we remain in compliance.
 
Numerous government regulations impact our business, and our failure to comply with them could adversely affect our business.
 
We and our franchisees are subject to federal, state and local laws and regulations governing, among other things:
 
preparation, labeling, advertising and sale of food;
sanitation and safety;
land use, sign restrictions and environmental matters;
employee health care requirements, including the implementation and uncertain legal, regulatory and cost implications of the health care reform law;
payment card regulation and related industry rules;
the sale of alcoholic beverages;
hiring and employment practices, including minimum wage and tip credit laws and fair labor standards; and
Americans with Disabilities Act.

The operation of our franchisee system is also subject to regulations enacted by a number of states and rules promulgated by the Federal Trade Commission. Due to our international franchising, we are also subject to governmental regulations throughout the world impacting the way we do business with our international franchisees. If we or our franchisees fail to comply with these laws and regulations, we or our franchisees could be subjected to restaurant closure, fines, penalties and litigation, which may be costly and could adversely affect our results of operations and financial condition. In addition, the future enactment of additional legislation regulating the franchise relationship could adversely affect our operations.

We began complying with The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act in 2014. Because of the breadth and complexity of this legislation and the phased-in nature of implementation, we cannot predict with certainty the financial and operational impacts the laws will have on us. However, we expect that our expenses related to employee health benefits will increase over the long term as a result of this legislation. Any such increases could adversely affect our business, cash flows, financial condition and results of operations.

Additionally, the health care legislation will require restaurant companies such as ours to disclose calorie information on their menus effective December 1, 2015. We do not expect to incur any material costs from compliance with this provision of the law, but cannot anticipate the changes in guest behavior that could result from the implementation of this provision, which could have an adverse effect on our sales or results of operations.

We are also subject to federal, state and international laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises, and may contain provisions that supersede the terms of franchise agreements, including limitations on the ability of franchisors to terminate franchises and alter franchise arrangements.

Litigation may adversely affect our business, financial condition and results of operations.
 
We are subject to complaints or litigation brought by former, current or prospective employees, customers, franchisees, vendors, landlords, shareholders or others. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued if it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Because lawsuits are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review contingencies to determine the adequacy of the accruals and related disclosures. However, the amount of ultimate loss may differ from these estimates. A judgment that is not covered by insurance or that is significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations. In

11



addition, regardless of whether any claims against us are valid or whether we are found to be liable, claims may be expensive to defend, and may divert management’s attention away from operations and hurt our performance. Further, adverse publicity resulting from claims may harm our business or that of our franchisees.

Negative publicity generated by incidents at a few restaurants can adversely affect the operating results of our entire chain and the Denny’s brand.
 
Food safety concerns, criminal activity, alleged discrimination or other operating issues stemming from one restaurant or a limited number of restaurants do not just impact that particular restaurant or a limited number of restaurants. Rather, our entire chain of restaurants may be at risk from the negative publicity generated by an incident at a single restaurant. The increasing use of social media platforms has increased the speed and scope of adverse publicity and could hinder our ability to quickly and effectively respond to such reports. This negative publicity can adversely affect the operating results of our entire chain and the Denny’s brand.
 
If we lose the services of any of our key management personnel, our business could suffer.
 
Our future success significantly depends on the continued services and performance of our key management personnel. Our future performance will depend on our ability to attract, motivate and retain these and other key officers and key team members, particularly regional and area managers and restaurant general managers. Competition for these employees is intense.
 
If our internal controls are ineffective, we may not be able to accurately report our financial results or prevent fraud.
 
We maintain a documented system of internal controls which is reviewed and tested by the company’s full time Internal Audit Department. The Internal Audit Department reports directly to the Audit and Finance Committee of the Board of Directors. We believe we have a well-designed system to maintain adequate internal controls on the business; however, we cannot be certain that our controls will be adequate in the future or that adequate controls will be effective in preventing errors or fraud. Any failures in the effectiveness of our internal controls could have an adverse effect on our operating results or cause us to fail to meet reporting obligations.

As a holding company, Denny’s Corporation depends on upstream payments from its operating subsidiaries.
 
Almost all our assets are owned, and all of our operating revenues are earned, by our subsidiaries, which are also the primary obligors for substantially all of the indebtedness, obligations and liabilities related to our business. Accordingly, our ability to repurchase shares of our Common Stock and to make any distributions to our shareholders depends on the performance of those subsidiaries and their ability to make distributions to Denny’s Corporation. Their ability to make such distributions may be subject to contractual and other restrictions.
 
Many factors, including those over which we have no control, affect the trading price of our stock.
 
Factors such as reports on the economy or the price of commodities, as well as negative or positive announcements by competitors, regardless of whether the report directly relates to our business, could have an impact on the trading price of our stock. In addition to investor expectations about our prospects, trading activity in our stock can reflect the portfolio strategies and investment allocation changes of institutional holders, as well as non-operating initiatives such as our share repurchase program. Any failure to meet market expectations whether for same-store sales, restaurant unit growth, earnings per share or other metrics could cause our share price to decline.

Our indebtedness could have an adverse effect on our financial condition and operations.
 
As of December 31, 2014, we had total indebtedness of $158.8 million, including capital leases.
 
We continually monitor our cash flow and liquidity needs. Although we believe that our existing cash balances, funds from operations and amounts available under our credit facility will be adequate to cover those needs, we could seek additional sources of funds, including incurring additional debt and selling selected assets, to maintain sufficient cash flow to fund our ongoing operating needs, pay interest and scheduled debt amortization and fund anticipated capital expenditures over the next twelve months. We have no material debt maturities scheduled until April 2018. If we are unable to satisfy or refinance our current debt as it comes due, we may default on our debt obligations.
 
For additional information concerning our indebtedness see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

12



 
Our debt instruments include restrictive covenants. These covenants may restrict or prohibit our ability to engage in or enter a variety of transactions. A breach of these covenants could cause acceleration of a significant portion of our outstanding indebtedness.
 
The credit agreement governing our indebtedness contains various covenants that limit, among other things, our ability to:
 
incur additional indebtedness;
pay dividends, repurchase shares of our Common Stock or make distributions or certain other restricted payments;
make certain investments;
create dividend or other payment restrictions affecting restricted subsidiaries;
issue or sell capital stock of restricted subsidiaries;
guarantee indebtedness;
enter into transactions with stockholders or affiliates;
create liens;
sell assets and use the proceeds thereof;
engage in sale-leaseback transactions; and
enter into certain mergers and consolidations.

These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger, acquisition or other corporate opportunities and to fund our operations. If we incur additional debt in the future, covenant limitations on our activities (and risks associated with such increased debt levels generally) could increase.

Though we currently participate in a share repurchase program, such program is subject to restrictions under our credit agreement and there can be no assurance that we will repurchase our Common Stock pursuant to the program. Our credit agreement contains additional restrictive covenants, including financial maintenance requirements. Our ability to comply with these covenants may be affected by events beyond our control, such as uncertainties related to the current economy, and we cannot be sure that we will be able to comply with these covenants.

Upon the occurrence of an event of default under any of our debt instruments, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them, if any, to secure the indebtedness. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we cannot be sure that our assets would be sufficient to repay in full our outstanding indebtedness.
 
Item 1B.     Unresolved Staff Comments
 
None.

Item 2.     Properties
 
Most Denny’s restaurants are free-standing facilities with property sizes averaging approximately one acre. The restaurant buildings average between 3,800 - 4,800 square feet, allowing them to accommodate an average of 130-150 guests. The number and location of our restaurants as of December 31, 2014 and December 25, 2013 are presented below:
 

13



 
 
2014
 
2013
State/Country
 
Company
 
Franchised / Licensed
 
Total
 
Company
 
Franchised / Licensed
 
Total
Alabama
 
2

 
5

 
7

 
2

 
5

 
7

Alaska 
 

 
3

 
3

 

 
3

 
3

Arizona 
 
8

 
68

 
76

 
8

 
72

 
80

Arkansas 
 

 
9

 
9

 

 
9

 
9

California 
 
58

 
343

 
401

 
59

 
350

 
409

Colorado 
 

 
29

 
29

 

 
30

 
30

Connecticut 
 

 
11

 
11

 

 
10

 
10

Delaware 
 

 
1

 
1

 

 
1

 
1

District of Columbia 
 

 
2

 
2

 

 
2

 
2

Florida 
 
18

 
125

 
143

 
18

 
130

 
148

Georgia 
 
1

 
17

 
18

 
1

 
17

 
18

Hawaii 
 
2

 
5

 
7

 
3

 
5

 
8

Idaho 
 

 
11

 
11

 

 
10

 
10

Illinois 
 
7

 
48

 
55

 
7

 
48

 
55

Indiana 
 

 
37

 
37

 

 
37

 
37

Iowa 
 

 
2

 
2

 

 
3

 
3

Kansas 
 

 
8

 
8

 

 
9

 
9

Kentucky 
 
2

 
15

 
17

 
2

 
15

 
17

Louisiana 
 
1

 
3

 
4

 
1

 
3

 
4

Maine 
 

 
7

 
7

 

 
7

 
7

Maryland 
 
3

 
22

 
25

 
3

 
19

 
22

Massachusetts 
 

 
6

 
6

 

 
6

 
6

Michigan 
 
4

 
18

 
22

 
4

 
17

 
21

Minnesota 
 

 
14

 
14

 

 
13

 
13

Mississippi 
 
1

 
3

 
4

 
1

 
2

 
3

Missouri 
 
4

 
36

 
40

 
4

 
35

 
39

Montana 
 

 
4

 
4

 

 
4

 
4

Nebraska 
 

 
5

 
5

 

 
5

 
5

Nevada 
 
6

 
28

 
34

 
6

 
28

 
34

New Hampshire 
 

 
3

 
3

 

 
3

 
3

New Jersey 
 

 
9

 
9

 

 
9

 
9

New Mexico 
 

 
28

 
28

 

 
27

 
27

New York 
 
1

 
54

 
55

 
1

 
50

 
51

North Carolina 
 

 
27

 
27

 

 
25

 
25

North Dakota 
 

 
4

 
4

 

 
4

 
4

Ohio 
 
4

 
38

 
42

 
4

 
37

 
41

Oklahoma 
 

 
15

 
15

 

 
15

 
15

Oregon 
 

 
25

 
25

 

 
24

 
24

Pennsylvania 
 
11

 
29

 
40

 
11

 
28

 
39

Rhode Island 
 

 
4

 
4

 

 
3

 
3

South Carolina 
 

 
16

 
16

 

 
16

 
16

South Dakota 
 

 
3

 
3

 

 
3

 
3

Tennessee 
 
2

 
6

 
8

 
2

 
5

 
7

Texas 
 
17

 
173

 
190

 
17

 
174

 
191

Utah 
 

 
25

 
25

 

 
24

 
24

Vermont 
 

 
2

 
2

 

 
2

 
2

Virginia 
 
9

 
19

 
28

 
9

 
19

 
28

Washington 
 

 
44

 
44

 

 
45

 
45

West Virginia 
 

 
2

 
2

 

 
2

 
2

Wisconsin 
 

 
21

 
21

 

 
23

 
23

Wyoming
 

 
3

 
3

 

 
3

 
3

Canada
 

 
68

 
68

 

 
64

 
64

Chile
 

 
1

 
1

 

 
1

 
1

Costa Rica
 

 
3

 
3

 

 
3

 
3

Curacao N.V.
 

 
1

 
1

 

 
1

 
1

Dominican Republic
 

 
2

 
2

 

 
1

 
1

El Salvador
 

 
1

 
1

 

 
1

 
1

Guam 
 

 
2

 
2

 

 
2

 
2

Honduras
 

 
3

 
3

 

 
3

 
3

Mexico
 

 
6

 
6

 

 
6

 
6

New Zealand
 

 
7

 
7

 

 
7

 
7

Puerto Rico
 

 
12

 
12

 

 
12

 
12

Total 
 
161

 
1,541

 
1,702

 
163

 
1,537

 
1,700


14



Of the total 1,702 restaurants in the Denny's brand, our interest in restaurant properties consists of the following:

 
Company Restaurants
 
Franchised Restaurants
 
Total
Owned properties
35

 
56

 
91

Leased properties
126

 
294

 
420

 
161

 
350

 
511

 
We have generally been able to renew our restaurant leases as they expire at then-current market rates. The remaining terms of leases range from less than one to approximately 38 years, including optional renewal periods. In addition to the restaurant properties, we own an 18-story, 187,000 square foot office building in Spartanburg, South Carolina, which serves as our corporate headquarters. Our corporate offices currently occupy 17 floors of the building, with a portion of the building leased to others.
 
See Note 10 to our Consolidated Financial Statements for information concerning encumbrances on substantially all of our properties.
 
Item 3.     Legal Proceedings

There are various claims and pending legal actions against or indirectly involving us, 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 Consolidated Statements of Income as those costs are incurred.
 
Item 4.     Mine Safety Disclosures
 
Not applicable.
 
PART II
 
Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our Common Stock is listed under the symbol “DENN” and trades on the NASDAQ Capital Market ("NASDAQ"). The following table lists the high and low sales prices of the Common Stock for each quarter of fiscal years 2014 and 2013, according to NASDAQ.
 
 
 
High
 
Low
2014
 
 
 
 
First quarter 
 
$
7.49

 
$
6.27

Second quarter 
 
6.93

 
6.13

Third quarter 
 
7.28

 
6.18

Fourth quarter 
 
10.73

 
6.92

2013
 
 
 
 
First quarter 
 
$
5.86

 
$
4.68

Second quarter 
 
6.24

 
5.27

Third quarter 
 
6.37

 
5.41

Fourth quarter 
 
7.51

 
6.01

 

15



Stockholders
 
As of March 11, 2015, there were 84,853,855 shares of Common Stock outstanding and approximately 13,300 record and beneficial holders of Common Stock.
 
Dividends and Share Repurchases
 
Our credit facility allows for the payment of cash dividends and/or the repurchase of our Common Stock, subject to certain limitations and continued maintenance of all relevant covenants before and after any such payment of any dividend or stock purchase. An aggregate amount of $44.6 million is available for such dividends or stock repurchases as follows:
 
not to exceed $40.0 million if the Consolidated Leverage Ratio (as defined in the Credit Agreement) is 2.0x or greater and unlimited if the Consolidated Leverage Ratio is below 2.0x, provided that, in each case, at least $20.0 million of availability is maintained under the revolving credit facility after such payment; and
an additional annual aggregate amount equal to $0.05 times the number of outstanding shares of Common Stock, as of March 27, 2013, plus each additional share of our Common Stock that is issued after such date.

Though we have not historically paid cash dividends, we have in recent years undertaken share repurchases. The table below provides information concerning repurchases of shares of our Common Stock during the quarter ended December 31, 2014.

Period
 
 
Total Number of Shares Purchased
 
 
 
Average Price Paid Per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Programs (2)
 
Maximum Number of Shares that May Yet be Purchased Under the Program (2)
 
 
(In thousands, except per share amounts)
 
 
September 25, 2014 – October 22, 2014
 
113

 
$
7.31

 
113

 
4,234

October 23, 2014 – November 19, 2014
 
175

 
8.76

 
175

 
4,059

November 20, 2014 – December 31, 2014
 
170

 
9.79

 
170

 
3,889

Total
 
458

 
$
8.79

 
458

 
 
 
(1)
Average price paid per share excludes commissions.
(2)
On April 25, 2013, we announced that our Board of Directors had approved a new share repurchase program, authorizing us to repurchase up to an additional 10 million shares of our Common Stock (in addition to a previous 6 million share authorization completed in the third quarter of 2013). Such repurchases may take place from time to time on the open market (including in 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 quarter ended December 31, 2014, we purchased 457,600 shares of Common Stock for an aggregate consideration of approximately $4.0 million, pursuant to the share repurchase program.


16



Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table sets forth information as of December 31, 2014 with respect to our compensation plans under which equity securities of Denny’s Corporation are authorized for issuance.
 
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
 
 
Weighted average exercise price of outstanding options, warrants and rights (2)
 
Number of securities remaining available for future issuance under equity compensation plans
 
 
Equity compensation plans approved by security holders
 
3,794,151

 
(1)
 
$
3.17

 
3,028,426

 
(3)
Equity compensation plans not approved by security holders
 
200,000

 
(4)
 
3.89

 
827,589

 
(5)
Total
 
3,994,151

 
 
 
$
3.26

 
3,856,015

 
 
 
(1)
Includes shares issuable in connection with our outstanding stock options, performance share awards and restricted stock units awards.
(2)
Includes the weighted-average exercise price of stock options only.
(3)
Includes shares of Common Stock available for issuance as awards of stock options, restricted stock, restricted stock units, deferred stock units and performance awards under the 2012 Omnibus Plan.
(4)
Includes shares of Common Stock issuable pursuant to the grant or exercise of employment inducement awards of stock options and restricted stock units granted outside of the Denny's Incentive Plans in accordance with NASDAQ Listing Rule 5635(c)(4).
(5)
Includes shares of Common Stock available for issuance as awards of stock options and restricted stock units outside of the Denny's Incentive Plans in accordance with NASDAQ Listing Rule 5635(c)(4).

Performance Graph
 
The following graph compares the cumulative total stockholders’ return on our Common Stock for the five fiscal years ended December 31, 2014 (December 30, 2009 to December 31, 2014) against the cumulative total return of the Russell 2000® Index and a peer group. The graph and table assume that $100 was invested on December 30, 2009 (the last day of fiscal year 2009) in each of the Company’s Common Stock, the Russell 2000® Index and the peer group and that all dividends were reinvested.

17




COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
ASSUMES $100 INVESTED ON DECEMBER 30, 2009
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDED DECEMBER 31, 2014
 
 
 
Russell 2000®
Index (1)
 
Peer Group (2)
 
Denny's Corporation
December 30, 2009
$
100.00

 
$
100.00

 
$
100.00

December 29, 2010
$
126.30

 
$
153.09

 
$
158.82

December 28, 2011
$
119.09

 
$
190.28

 
$
172.85

December 26, 2012
$
137.84

 
$
207.46

 
$
217.65

December 25, 2013
$
193.44

 
$
334.40

 
$
334.84

December 31, 2014
$
203.33

 
$
401.61

 
$
466.52

 
(1)
The Russell 2000 Index is a broad equity market index of 2,000 companies that measures the performance of the small-cap segment of the U.S. equity universe. As of December 31, 2014, the weighted average market capitalization of companies within the index was approximately $1.9 billion with the median market capitalization being approximately $0.7 billion.
(2)
The peer group consists of 20 public companies that operate in the restaurant industry. The peer group includes the following companies: Einstein Noah Restaurant Group, Inc. (BAGL) (through its last public trading day of November 4, 2014), BJ's Restaurants, Inc. (BJRI), Bob Evans Farms, Inc. (BOBE), Buffalo Wild Wings, Inc. (BWLD), The Cheesecake Factory Incorporated (CAKE), Cracker Barrel Old Country Store, Inc. (CBRL), Chipotle Mexican Grill, Inc. (CMG), DineEquity, Inc. (DIN), Dunkin' Brands Group, Inc. (DNKN), Domino’s Pizza, Inc. (DPZ), Brinker International, Inc. (EAT), Jack In The Box Inc. (JACK), Krispy Kreme Doughnuts, Inc. (KKD), Panera Bread Company (PNRA), Papa John’s International, Inc. (PZZA), Red Robin Gourmet Burgers, Inc. (RRGB), Ruby Tuesday, Inc. (RT), Sonic Corp. (SONC), Texas Roadhouse, Inc. (TXRH) and The Wendy’s Company (WEN).










18






Item 6.     Selected Financial Data
 
The following table provides selected financial data that was extracted or derived from our audited financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes included elsewhere in this report.
 
 
 
Fiscal Year Ended
 
 
December 31, 2014 (a)
 
December 25, 2013
 
December 26, 2012
 
December 28, 2011 (b)
 
December 29, 2010
 
 
(In millions, except ratios and per share amounts)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
 
Operating revenue 
 
$
472.3

 
$
462.6

 
$
488.4

 
$
538.5

 
$
548.5

Operating income
 
$
57.3

 
$
47.5

 
$
56.4

 
$
51.0

 
$
55.2

Income from continuing operations
 
$
32.7

 
$
24.6

 
$
22.3

 
$
112.3

 
$
22.7

Basic net income per share:
 
$
0.38

 
$
0.27

 
$
0.23

 
$
1.15

 
$
0.23

Diluted net income per share:
 
$
0.37

 
$
0.26

 
$
0.23

 
$
1.13

 
$
0.22

 
 
 
 
 
 
 
 
 
 
 
Cash dividends per common share (c)
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of period):
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
56.1

 
$
53.8

 
$
64.6

 
$
61.3

 
$
62.5

Working capital deficit (d)
 
$
(24.3
)
 
$
(20.3
)
 
$
(27.2
)
 
$
(25.9
)
 
$
(27.8
)
Net property and equipment 
 
$
109.8

 
$
105.6

 
$
107.0

 
$
112.8

 
$
129.5

Total assets 
 
$
289.9

 
$
295.8

 
$
324.9

 
$
350.5

 
$
311.2

Long-term debt and capital lease obligations, excluding current portion 
 
$
151.1

 
$
165.9

 
$
177.5

 
$
211.3

 
$
253.1

 
(a)
The fiscal year ended December 31, 2014 includes 53 weeks of operations as compared with 52 weeks for all other years presented. We estimate that the additional operating week added approximately $10.7 million of operating revenue in 2014.
(b)
During 2011, we concluded that it was more likely than not that certain of our deferred tax assets would be utilized. As a result, we released the majority of our valuation allowance, recognizing a tax benefit of $89.1 million.
(c)
Prior to the 2010 refinancing of our credit facility and repurchase and redemption of our public debt securities, distributions and dividends on Denny’s Corporation’s common equity securities were prohibited. Our current credit facility allows for the payment of cash dividends and/or the purchase of Common Stock subject to certain limitations. See Part II Item 5.
(d)
A negative working capital position is not unusual for a restaurant operating company. 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with “Selected Financial Data,” and our Consolidated Financial Statements and the notes thereto.

Overview

Nature of Our Business

Denny’s Corporation (Denny’s) is one of America’s largest franchised full-service restaurant chains. Denny’s, through its wholly-owned subsidiary, Denny’s, Inc., owns and operates the Denny’s brand. At December 31, 2014, the Denny’s brand consisted of 1,702 franchised, licensed and company operated restaurants. Of this amount, 1,541 of our restaurants were franchised or licensed, representing 91% of the total restaurants, and 161 were company operated.

19




Our revenues are derived primarily from two sources: the sale of food and beverages at our company restaurants and the collection of royalties and fees from restaurants operated by our franchisees under the Denny’s name. Sales and customer traffic at both company and franchised restaurants are affected by the success of our marketing campaigns, new product introductions, customer service and menu pricing, as well as external factors including competition, economic conditions affecting consumer spending and changes in guest tastes and preferences. Sales at company restaurants and royalty income from franchise restaurants are also impacted by the opening of new restaurants, the closing of existing restaurants and the sale of company restaurants to franchisees.

Our operating costs are exposed to volatility in two main areas: payroll and benefit costs and product costs. The volatility of payroll and benefit costs results primarily from changes in wage rates and increases in labor related expenses, such as medical benefit costs and workers' compensation costs. Additionally, changes in guest counts and investments in store-level labor impact payroll and benefit costs as a percentage of sales. Many of the products sold in our restaurants are affected by commodity pricing and are, therefore, subject to price volatility. This volatility is caused by factors that are fundamentally outside of our control and are often unpredictable. In general, we purchase food products based on market prices or we set firm prices in purchase agreements with our vendors. Our ability to lock in prices on certain key commodities is imperative to control food costs in an environment in which many commodity prices are on the rise. In addition, our continued success with menu management helps us to offer menu items that provide a compelling value to our customers while maintaining consistent product costs and appropriate profitability.

2014 Summary of Operations

During 2014, we achieved domestic system-wide same-stores sales growth of 2.8%, comprised of a 4.2% increase at company restaurants and a 2.5% increase at domestic franchised restaurants. This growth represents the strongest annual same-store sales since 2004 for company restaurants and since 2006 for franchised restaurants. We have had positive system-wide same-store sales in 14 of the last 15 quarters. The system-wide same-store sales increases during 2014 included benefits from both product mix and price increases of around 2%. Company restaurant same-store sales also benefited from traffic increases primarily resulting from remodels.

We completed 171 remodels, comprised of 44 company restaurants and 127 franchised restaurants during 2014. Most of these remodels were in our new Heritage image, which we launched late in 2013. This updated look reflects a more contemporary diner feel to further reinforce our America's Diner positioning. During 2015, we will continue to accelerate the timing of remodels at company restaurants with a target of completing 45 to 50. Franchisees typically remodel their restaurants as required every seven years. We expect the number of remodels at franchised restaurants to be similar to the number remodeled in 2014.

We also implemented a new franchise agreement during 2014, which includes an increased royalty rate of 4.5% and a reduced advertising contribution of 3%, excluding any incentives. There were approximately 230 franchised restaurants operating under this agreement as of December 31, 2014 and we expect there to be 360 to 390 franchised restaurants operating under this agreement by the end of 2015. We anticipate that existing franchisees will elect to migrate to the new fee structure over the next decade as incentives under the previous franchise agreements expire. Due to the long-term migration of existing franchisees, we won’t see the full benefit from the higher royalty rate for some time. For 2014, our average royalty rate was approximately 3.98%.

Operating income increased $9.8 million to $57.3 million in 2014 from $47.5 million in 2013. Net income increased $8.2 million to $32.7 million, or $0.37 per diluted share, in 2014 compared to $24.6 million, or $0.26 per diluted share in 2013.

We had a 53 week year in 2014, which impacts the comparison of our financial information to the prior year periods. We estimate that the additional operating week added approximately $8.3 million of company restaurant sales and $2.4 million of franchise and license revenue and resulted in approximately $0.6 million of additional general and administrative expenses, $3.6 million of additional operating income and $2.2 million of additional net income.

Growing the Brand

Over the last five years our growth initiatives have led to 321 new restaurant openings. During 2014, we had net restaurant growth of two restaurants, with 38 openings and 36 closures. Our openings included the reopening of our Las Vegas Casino Royale location, six franchised international locations and three franchised nontraditional locations.


20



Our goal is to increase net restaurant growth through all avenues: domestic, international and nontraditional. Domestic growth will focus in markets where we have modest penetration. During 2014, we saw traction in under-penetrated areas such as Charlotte, Atlanta and New York, including our first restaurant in Manhattan. We anticipate continued growth in these areas.

Internationally, we are the largest U.S. based, full-service brand operating in Canada and expect additional growth in this country. During 2015, we anticipate the opening of our first restaurant in the United Arab Emirates. The franchise partner opening this restaurant plans to develop 30 new Denny’s restaurants in nine countries in the Middle East over the next ten years.

We opened our first nontraditional location under the new The Den® format located adjacent to San Diego State University in early 2015. We expect that future non-traditional restaurants will be in this new format and our other existing non-traditional locations will be converted to this new format over time.

Balancing the Use of Cash

We are focused on balancing the use of cash between reinvesting in our base of company restaurants, growing and strengthening the brand and returning cash to shareholders. As noted above, we are accelerating the timing of remodels at our company restaurants under our new Heritage image. During 2014, approximately $12.2 million of our $22.1 million of capital expenditures were from remodels.

During 2014, we repurchased 5.3 million shares of Common Stock for $36.0 million. Since initiating our share repurchase programs in November 2010, we have repurchased a total of 21.1 million shares of Common Stock for $108.3 million. As of December 31, 2014, there are 3.9 million shares remaining to be repurchased under the current repurchase program.

Factors impacting comparability

For 2014, 2013 and 2012, the following items impact the comparability of our results:

Company restaurant sales have decreased from $353.7 million in 2012 to $334.7 million in 2014, primarily as a result of the sale of restaurants to franchisees in 2012.
The decline in company restaurant revenues is partially offset by increased royalty income derived from the growth in the franchised restaurant base resulting from both traditional development and the sale of restaurants to franchisees. As a result, royalty income, which is included as a component of franchise and license revenue, has increased from $83.8 million in 2012 to $90.8 million in 2014
The resulting net reduction in total revenue related to the sale of restaurants is generally recovered by the benefits of a lower cost structure related to franchise and license revenues.
Initial franchise fees, included as a component of franchise and license revenue, are generally recognized in the period in which a restaurant is sold to a franchisee or when a new restaurant is opened. These initial fees are completely dependent on the number of restaurants sold to or opened by franchisees during a particular period and, as a result, can cause fluctuations in our total franchise and license revenue from year to year.
Occupancy revenues, also included as a component of franchise and license revenue, result from leasing or subleasing restaurants to franchisees. When restaurants are sold and leased or subleased to franchisees, the occupancy costs related to these restaurants move from costs of company restaurant sales to costs of franchise and license revenue to match the related occupancy revenue. As leases or subleases with franchisees end over time, franchise occupancy revenue and costs could decrease if franchisees enter into direct leases with landlords. At the end of 2014, we had 350 franchise restaurants that are leased or subleased from Denny’s.
Our fiscal year ends on the last Wednesday in December. As a result, a fifty-third week is added to a fiscal year every five or six years. As noted above, the year ended December 31, 2014 includes 53 weeks of operations.

21



Statements of Income
 
 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(Dollars in thousands)
Revenue: 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
334,684

 
70.9
 %
 
$
328,334

 
71.0
%
 
$
353,710

 
72.4
%
Franchise and license revenue
137,611

 
29.1
 %
 
134,259

 
29.0
%
 
134,653

 
27.6
%
Total operating revenue 
472,295

 
100.0
 %
 
462,593

 
100.0
%
 
488,363

 
100.0
%
Costs of company restaurant sales (a): 
 

 
 
 
 

 
 
 
 
 
 
Product costs 
86,825

 
25.9
 %
 
85,540

 
26.1
%
 
88,473

 
25.0
%
Payroll and benefits 
133,280

 
39.8
 %
 
131,305

 
40.0
%
 
141,303

 
39.9
%
Occupancy 
20,845

 
6.2
 %
 
21,519

 
6.6
%
 
23,405

 
6.6
%
Other operating expenses 
47,858

 
14.3
 %
 
45,192

 
13.8
%
 
49,025

 
13.9
%
Total costs of company restaurant sales
288,808

 
86.3
 %
 
283,556

 
86.4
%
 
302,206

 
85.4
%
Costs of franchise and license revenue (a) 
44,761

 
32.5
 %
 
46,109

 
34.3
%
 
46,675

 
34.7
%
General and administrative expenses 
58,907

 
12.5
 %
 
56,835

 
12.3
%
 
60,307

 
12.3
%
Depreciation and amortization 
21,218

 
4.5
 %
 
21,501

 
4.6
%
 
22,304

 
4.6
%
Operating (gains), losses and other charges, net
1,270

 
0.3
 %
 
7,071

 
1.5
%
 
482

 
0.1
%
Total operating costs and expenses, net
414,964

 
87.9
 %
 
415,072

 
89.7
%
 
431,974

 
88.5
%
Operating income 
57,331

 
12.1
 %
 
47,521

 
10.3
%
 
56,389

 
11.5
%
Interest expense, net 
9,182

 
1.9
 %
 
10,282

 
2.2
%
 
13,369

 
2.7
%
Other nonoperating (income) expense, net
(612
)
 
(0.1
)%
 
1,139

 
0.2
%
 
7,926

 
1.6
%
Net income before income taxes
48,761

 
10.3
 %
 
36,100

 
7.8
%
 
35,094

 
7.2
%
Provision for income taxes
16,036

 
3.4
 %
 
11,528

 
2.5
%
 
12,785

 
2.6
%
Net income
$
32,725

 
6.9
 %
 
$
24,572

 
5.3
%
 
$
22,309

 
4.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

 
 

 
 

Company average unit sales
$
2,100

 
 

 
$
2,012

 
 
 
$
1,936

 
 

Franchise average unit sales
$
1,506

 
 

 
$
1,427

 
 
 
$
1,410

 
 

Company equivalent units (b)
159

 
 

 
163

 
 
 
183

 
 

Franchise equivalent units (b)
1,534

 
 

 
1,525

 
 
 
1,501

 
 

Company same-store sales increase (c)(d)
4.2

%
 

 
0.0

%
 
 
0.2

%
 

Domestic franchised same-store sales increase (c)
2.5

%
 

 
0.6

%
 
 
1.7

%
 

 
(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 restaurants.


22



Unit Activity

 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
Company restaurants, beginning of period
163

 
164

 
206

Units opened
1

 

 
1

Units acquired from franchisees

 
2

 
1

Units sold to franchisees

 
(2
)
 
(36
)
Units closed
(3
)
 
(1
)
 
(8
)
End of period
161

 
163

 
164

 
 
 
 
 
 
Franchised and licensed restaurants, beginning of period
1,537

 
1,524

 
1,479

Units opened 
37

 
46

 
39

Units purchased from Company

 
2

 
36

Units acquired by Company

 
(2
)
 
(1
)
Units closed
(33
)
 
(33
)
 
(29
)
End of period
1,541

 
1,537

 
1,524

Total restaurants, end of period
1,702

 
1,700

 
1,688


Company Restaurant Operations

Company same-store sales increased 4.2% in 2014 and remained essentially flat in 2013, as compared with the respective prior year. Company restaurant sales for 2014 increased $6.4 million, or 1.9%, primarily resulting from the additional operating week and the increase in same-store sales. These increases were partially offset by a 4 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. Company restaurant sales for 2013 decreased $25.4 million, or 7.2%, primarily resulting from a 20 equivalent unit decrease in company restaurants. The decrease in equivalent units reflects the impact of our refranchising program that was completed at the end of 2012.

Total costs of company restaurant sales as a percentage of company restaurant sales were 86.3% in 2014, 86.4% in 2013 and 85.4% in 2012.

Product costs were 25.9% in 2014, 26.1% in 2013 and 25.0% in 2012. The decrease in 2014 was primarily due to the leveraging effect of higher sales. The increase in 2013 was primarily due to the unfavorable impact of product mix as well as increased commodity costs.

Payroll and benefits were 39.8% in 2014, 40.0% in 2013 and 39.9% in 2012. The decrease in 2014 was primarily due to a 0.5 percentage point decrease in labor costs and a 0.3 percentage point decrease in workers' compensation costs, partially offset by a 0.3 percentage point increase in group insurance and a 0.3 percentage point increase in incentive compensation costs. The current year period included $0.6 million in unfavorable workers' compensation claims development, as compared to $2.0 million in unfavorable claims development in the prior year period. 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 slight increase in 2013 was primarily due to increased workers' compensation costs that were partially offset by decreased labor costs.

Occupancy costs were 6.2% in 2014, 6.6% in 2013 and 6.6% in 2012. The 2014 decrease is primarily related to an increase in the number of capital leases and a decrease in rent caused by certain lease amendments.


23



Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(Dollars in thousands)
Utilities
$
13,915

 
4.2
%
 
$
13,051

 
4.0
%
 
$
14,358

 
4.1
%
Repairs and maintenance
5,971

 
1.8
%
 
5,943

 
1.8
%
 
6,259

 
1.8
%
Marketing
12,329

 
3.7
%
 
11,696

 
3.6
%
 
13,397

 
3.8
%
Legal
830

 
0.2
%
 
773

 
0.2
%
 
682

 
0.2
%
Other direct costs
14,813

 
4.4
%
 
13,729

 
4.2
%
 
14,329

 
4.1
%
Other operating expenses
$
47,858

 
14.3
%
 
$
45,192

 
13.8
%
 
$
49,025

 
13.9
%

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:

 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(Dollars in thousands)
Royalties
$
90,835

 
66.0
%
 
$
85,508

 
63.7
%
 
$
83,774

 
62.2
%
Initial fees
1,893

 
1.4
%
 
1,666

 
1.2
%
 
3,092

 
2.3
%
Occupancy revenue
44,883

 
32.6
%
 
47,085

 
35.1
%
 
47,787

 
35.5
%
Franchise and license revenue
$
137,611

 
100.0
%
 
$
134,259

 
100.0
%
 
$
134,653

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Occupancy costs
33,134

 
24.1
%
 
34,631

 
25.8
%
 
35,401

 
26.3
%
Other direct costs
11,627

 
8.4
%
 
11,478

 
8.5
%
 
11,274

 
8.4
%
Costs of franchise and license revenue
$
44,761

 
32.5
%
 
$
46,109

 
34.3
%
 
$
46,675

 
34.7
%
 
Royalties increased by $5.3 million, or 6.2%, in 2014 primarily resulting from the additional operating week and a 2.5% increase in domestic same-store sales, as compared to 2013. In addition, there was a 9 equivalent unit increase in franchised and licensed restaurants, as compared to 2013, and an increase in royalties as certain restaurants moved to our new rate structure. Royalties increased by $1.7 million, or 2.1%, in 2013 primarily resulting from a 24 equivalent unit increase in franchised and licensed restaurants and a 0.6% increase in domestic same-store sales, as compared to 2012. The increase in equivalent units reflects the impact of our refranchising program that was completed at the end of 2012.

Initial fees increased by $0.2 million, or 13.6%, in 2014 primarily resulting from an increase in the number of assignments between franchisees. Initial fees decreased by $1.4 million, or 46.1%, in 2013 primarily resulting from fewer restaurants being opened by or sold to franchisees compared to the respective prior year period. Occupancy revenue decreased by $2.2 million, or 4.7%, in 2014 and by $0.7 million, or 1.5%, in 2013 primarily resulting from lease expirations.

Occupancy costs decreased by $1.5 million, or 4.3%, in 2014 and by $0.8 million, or 2.2%, in 2013 primarily resulting from lease expirations. Other direct costs increased by $0.1 million, or 1.3%, in 2014 and by $0.2 million, or 1.8%, in 2013. As a result, costs of franchise and license revenue decreased by $1.3 million, or 2.9%, in 2014 and by $0.6 million, or 1.2%, in 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.
 

24



General and administrative expenses are comprised of the following:

 
Fiscal Year Ended
  
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(In thousands)
Share-based compensation
$
5,846

 
$
4,852

 
$
3,496

Other general and administrative expenses
53,061

 
51,983

 
56,811

Total general and administrative expenses
$
58,907

 
$
56,835

 
$
60,307

 
General and administrative expenses increased by $2.1 million in 2014 primarily resulting from increases of $1.6 million in incentive compensation, $1.0 million in share-based compensation and the impact of an additional operating week, partially offset by a reduction in deferred compensation of $0.6 million. General and administrative expenses decreased by $3.5 million in 2013 primarily resulting from reductions in incentive compensation of $2.2 million, professional fees of $1.2 million and other general and administrative expense of $1.8 million, partially offset by an increase in share-based compensation of $1.4 million. The increases in share-based compensation over the past two years are primarily due to the total shareholder return performance of our stock as compared to that of our competitor peer group within our share-based award plans.

Depreciation and amortization is comprised of the following:

 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(In thousands)
Depreciation of property and equipment
$
15,627

 
$
15,062

 
$
15,819

Amortization of capital lease assets
3,536

 
3,527

 
3,282

Amortization of intangible and other assets
2,055

 
2,912

 
3,203

Total depreciation and amortization expense
$
21,218

 
$
21,501

 
$
22,304


The 2013 decrease in depreciation and amortization expense is due primarily to the sale of company restaurants to franchisees during fiscal 2012.
 
Operating (gains), losses and other charges, net are comprised of the following:

 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(In thousands)
Gains on sales of assets and other, net
$
(112
)
 
$
(66
)
 
$
(7,090
)
Restructuring charges and exit costs
981

 
1,389

 
3,912

Impairment charges
401

 
5,748

 
3,660

Operating (gains), losses and other charges, net
$
1,270

 
$
7,071

 
$
482


The gains recognized during 2012 primarily resulting from the sale of restaurant operations to franchisees and the sale of real estate.
 

25



Restructuring charges and exit costs were comprised of the following:
         
 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(In thousands)
Exit costs 
$
335

 
$
630

 
$
1,926

Severance and other restructuring charges
646

 
759

 
1,986

Total restructuring and exit costs
$
981

 
$
1,389

 
$
3,912

 
Severance and other restructuring charges for 2012 include charges related to the departure of the company's former Chief Operating Officer.

Impairment charges for 2014 resulted primarily from the impairment of an underperforming restaurant. Impairment charges for 2013 resulted primarily from the $4.8 million impairment of an underperforming restaurant and the impairment of two restaurants and real estate identified as assets held for sale. Impairment charges for 2012 resulted primarily from the impairment of seven restaurants identified as held for sale and the impairment of an underperforming restaurant.
 
Operating income was $57.3 million in 2014, $47.5 million in 2013 and $56.4 million in 2012.
 
Interest expense, net is comprised of the following:

 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
December 26, 2012
 
(In thousands)
Interest on credit facilities
$
3,519

 
$
4,067

 
$
7,074

Interest on capital lease liabilities
3,319

 
3,708

 
3,580

Letters of credit and other fees
1,381

 
1,391

 
1,539

Interest income
(80
)
 
(82
)
 
(640
)
Total cash interest
8,139

 
9,084

 
11,553

Amortization of deferred financing costs
483

 
497

 
775

Amortization of debt discount

 

 
137

Interest accretion on other liabilities
560

 
701

 
904

Total interest expense, net
$
9,182

 
$
10,282

 
$
13,369

 
The decrease in interest expense resulted from a decrease in interest rates related to the 2013 refinancing of our credit facility, as well as debt reductions made during the years presented.

Other nonoperating (income) expense, net was income of $0.6 million for 2014, expense of $1.1 million for 2013 and expense of $7.9 million for 2012. The income for the 2014 period consisted primarily of $0.5 million of gains on deferred compensation plan investments. The expense for the 2013 period consisted primarily of $1.2 million in expenses and write-offs of deferred financing costs incurred related to our 2013 debt refinancing and $1.0 million of write-offs related to lease terminations and amendments, partially offset by $1.1 million of gains on deferred compensation plan investments. The expense for the 2012 period consisted primarily of expenses and write-offs of deferred financing costs and original issue discount incurred related to our 2012 debt refinancing.

The provision for income taxes was $16.0 million for 2014, $11.5 million for 2013 and $12.8 million for 2012. For the 2014 period, the difference in the overall effective rate from the U.S. statutory rate was primarily due to state and foreign taxes, the generation of employment tax credits and two discrete tax items. State job tax credits of $0.7 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.


26



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. In addition, state job tax credits of $0.8 million were claimed during the 2013 period resulting from the prior year's hiring activity. A valuation allowance of $0.2 million was recorded against certain state jobs tax credits during the 2013 period related to changes in California law enacted during the period.

For the 2012 period, the difference in the overall effective tax rate from the U.S. statutory rate was due to state and foreign taxes and discrete tax items, including a $1.7 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 $1.6 million tax benefit was recorded in 2012 relating to additional state credits generated during 2012 from prior years' activity.
 
Net income was $32.7 million for 2014, $24.6 million for 2013 and $22.3 million for 2012.

Liquidity and Capital Resources
 
Summary of Cash Flows
 
Our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit facility (as described below). Principal uses of cash are operating expenses, capital expenditures, debt repayments and the repurchase of shares of our common stock.
 
The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:
  
 
Fiscal Year Ended
 
December 31, 2014
 
December 25, 2013
 
(In thousands)
Net cash provided by operating activities
$
74,911

 
$
57,042

Net cash used in investing activities
(21,289
)
 
(16,470
)
Net cash used in financing activities
(53,491
)
 
(51,194
)
Net increase (decrease) in cash and cash equivalents
$
131

 
$
(10,622
)

We believe that our estimated cash flows from operations for 2015, 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.
 
Net cash flows used in investing activities were $21.3 million for the year ended December 31, 2014. These cash flows include capital expenditures of $22.1 million and issuances of notes receivable of $1.6 million, partially offset by collections of notes receivable of $2.3 million and $0.1 million in proceeds from asset sales. Our principal capital requirements have been largely associated with the following: