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

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 23, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________

Commission File Number 0-18051

DENN-20200923_G1.JPG
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 No.)
203 East Main Street
Spartanburg, South Carolina 29319-0001
(Address of principal executive offices) (Zip Code)
(864) 597-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s)   Name of each exchange on which registered
$.01 Par Value, Common Stock DENN   The Nasdaq Stock Market LLC
 
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  ý No  ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ý  No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ý Accelerated Filer Non-Accelerated Filer Smaller Reporting Company Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐   No  ý

As of October 22, 2020, 63,768,120 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.





TABLE OF CONTENTS
 
2


PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
  September 23, 2020 December 25, 2019
  (In thousands)
Assets    
Current assets:    
Cash and cash equivalents $ 11,217  $ 3,372 
Investments 2,266  3,649 
Receivables, net 20,637  27,488 
Inventories 1,017  1,325 
Assets held for sale 3,206  1,925 
Prepaid and other current assets 18,838  14,974 
Total current assets 57,181  52,733 
Property, net of accumulated depreciation of $147,510 and $147,445, respectively
89,466  97,626 
Financing lease right-of-use assets, net of accumulated amortization of $9,484 and $8,468, respectively
10,284  11,720 
Operating lease right-of-use assets, net 145,302  158,550 
Goodwill 36,884  36,832 
Intangible assets, net 52,100  53,956 
Deferred financing costs, net 2,119  1,727 
Deferred income taxes, net 27,047  14,718 
Other noncurrent assets 30,414  32,525 
Total assets $ 450,797  $ 460,387 
Liabilities    
Current liabilities:    
Current finance lease liabilities $ 1,963  $ 1,674 
Current operating lease liabilities 18,253  16,344 
Accounts payable 10,898  20,256 
Other current liabilities 41,346  57,307 
Total current liabilities 72,460  95,581 
Long-term liabilities:    
Long-term debt 230,000  240,000 
Noncurrent finance lease liabilities 13,805  14,779 
Noncurrent operating lease liabilities 142,110  152,750 
Liability for insurance claims, less current portion 10,572  11,454 
Other noncurrent liabilities 120,221  83,887 
Total long-term liabilities 516,708  502,870 
Total liabilities 589,168  598,451 
Shareholders' deficit    
Common stock $0.01 par value; 135,000 shares authorized; September 23, 2020: 117,778 shares issued and 63,768 shares outstanding; December 25, 2019: 109,415 shares issued and 57,095 shares outstanding
$ 1,178  $ 1,094 
Paid-in capital 672,502  603,980 
Deficit (196,873) (189,398)
Accumulated other comprehensive loss, net of tax (61,205) (33,960)
Treasury stock, at cost, 54,010 and 52,320 shares, respectively
(553,973) (519,780)
Total shareholders' deficit (138,371) (138,064)
Total liabilities and shareholders' deficit $ 450,797  $ 460,387 

See accompanying notes
3


Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands, except per share amounts)
Revenue:        
Company restaurant sales $ 27,849  $ 63,582  $ 85,268  $ 257,574 
Franchise and license revenue 43,795  60,676  123,232  169,979 
Total operating revenue 71,644  124,258  208,500  427,553 
Costs of company restaurant sales, excluding depreciation and amortization:
       
Product costs 7,106  15,603  21,541  62,871 
Payroll and benefits 11,925  23,777  37,070  100,475 
Occupancy 2,638  4,301  8,529  15,583 
Other operating expenses 5,701  10,625  15,954  39,320 
Total costs of company restaurant sales 27,370  54,306  83,094  218,249 
Costs of franchise and license revenue, excluding depreciation and amortization
24,073  31,136  68,487  87,065 
General and administrative expenses 13,694  16,395  34,589  53,659 
Depreciation and amortization 4,048  4,338  12,252  15,619 
Operating (gains), losses and other charges, net
(781) (50,091) 2,319  (85,459)
Total operating costs and expenses, net
68,404  56,084  200,741  289,133 
Operating income 3,240  68,174  7,759  138,420 
Interest expense, net 4,422  4,188  13,320  14,977 
Other nonoperating expense (income), net (8,477) (415) 3,851  (2,111)
Income (loss) before income taxes 7,295  64,401  (9,412) 125,554 
Provision for (benefit from) income taxes 818  15,279  (1,937) 26,703 
Net income (loss) $ 6,477  $ 49,122  $ (7,475) $ 98,851 
Basic net income (loss) per share $ 0.10  $ 0.83  $ (0.13) $ 1.64 
Diluted net income (loss) per share $ 0.10  $ 0.80  $ (0.13) $ 1.58 
Basic weighted average shares outstanding
63,793  59,430  59,350  60,457 
Diluted weighted average shares outstanding
64,027  61,189  59,350  62,370 
 
See accompanying notes
4


Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands)
Net income (loss) $ 6,477  $ 49,122  $ (7,475) $ 98,851 
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment, net of tax of $5, $6, $17 and $17, respectively
17  16  50  48 
Changes in the fair value of cash flow derivatives, net of tax of $151, $(5,251), $(12,416) and $(13,574), respectively
435  (15,067) (34,723) (37,838)
Reclassification of cash flow derivatives to interest expense, net of tax of $121, $21, $541 and $11, respectively
350  57  1,556  29 
Reclassification of loss related to dedesignation of derivatives to other nonoperating expense (income), net of tax of $0, $0, $1,892 and $0, respectively
—  —  5,462  — 
Amortization of unrealized losses related to dedesignated derivatives to interest expense, net of tax of $73, $0, $142 and $0, respectively
210  —  410  — 
Other comprehensive income (loss) 1,012  (14,994) (27,245) (37,761)
Total comprehensive income (loss) $ 7,489  $ 34,128  $ (34,720) $ 61,090 

See accompanying notes
5


Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended September 23, 2020 and September 25, 2019
(Unaudited)
  Common Stock Treasury Stock Paid-in Capital Deficit Accumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
  Shares Amount Shares Amount
  (In thousands)
Balance, June 24, 2020 109,719  $ 1,097  (54,010) $ (553,973) $ 600,936  $ (203,350) $ (62,217) $ (217,507)
Net income —  —  —  —  —  6,477  —  6,477 
Other comprehensive income —  —  —  —  —  —  1,012  1,012 
Issuance of common stock 8,000  80  —  —  69,491  —  —  69,571 
Share-based compensation on equity classified awards, net of withholding tax —  —  —  —  1,930  —  —  1,930 
Issuance of common stock for share-based compensation 22  —  —  —  —  —  —  — 
Exercise of common stock options 37  —  —  145  —  —  146 
Balance, September 23, 2020 117,778  $ 1,178  (54,010) $ (553,973) $ 672,502  $ (196,873) $ (61,205) $ (138,371)

  Common Stock Treasury Stock Paid-in Capital Deficit Accumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
  Shares Amount Shares Amount
  (In thousands)
Balance, June 26, 2019 109,291  $ 1,093  (49,484) $ (461,575) $ 601,902  $ (257,079) $ (26,913) $ (142,572)
Net income —  —  —  —  —  49,122  —  49,122 
Other comprehensive loss —  —  —  —  —  —  (14,994) (14,994)
Share-based compensation on equity classified awards, net of withholding tax —  —  —  —  2,089  —  —  2,089 
Purchase of treasury stock —  —  (589) (12,807) —  —  —  (12,807)
Issuance of common stock for share-based compensation —  —  —  —  —  —  — 
Exercise of common stock options 119  —  —  415  —  —  416 
Balance, September 25, 2019 109,413  $ 1,094  (50,073) $ (474,382) $ 604,406  $ (207,957) $ (41,907) $ (118,746)


See accompanying notes


6


Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Three Quarters Ended September 23, 2020 and September 25, 2019
(Unaudited)
  Common Stock Treasury Stock Paid-in Capital Deficit Accumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
  Shares Amount Shares Amount
  (In thousands)
Balance, December 25, 2019 109,415  $ 1,094  (52,320) $ (519,780) $ 603,980  $ (189,398) $ (33,960) $ (138,064)
Net loss —  —  —  —  —  (7,475) —  (7,475)
Other comprehensive loss —  —  —  —  —  —  (27,245) (27,245)
Issuance of common stock 8,000  80  —  —  69,491  —  —  69,571 
Share-based compensation on equity classified awards, net of withholding tax
—  —  —  —  (1,177) —  —  (1,177)
Purchase of treasury stock —  —  (1,690) (34,193) —  —  —  (34,193)
Issuance of common stock for share-based compensation 309  —  —  (3) —  —  — 
Exercise of common stock options 54  —  —  211  —  —  212 
Balance, September 23, 2020
117,778  $ 1,178  (54,010) $ (553,973) $ 672,502  $ (196,873) $ (61,205) $ (138,371)

  Common Stock Treasury Stock Paid-in Capital Deficit Accumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
  Shares Amount Shares Amount
  (In thousands)
Balance, December 26, 2018 108,585  $ 1,086  (47,052) $ (416,815) $ 592,944  $ (306,414) $ (4,146) $ (133,345)
Cumulative effect adjustment —  —  —  —  —  (394) —  (394)
Net income —  —  —  —  —  98,851  —  98,851 
Other comprehensive loss —  —  —  —  —  —  (37,761) (37,761)
Share-based compensation on equity classified awards, net of withholding tax
—  —  —  —  3,741  —  —  3,741 
Purchase of treasury stock —  —  (2,632) (50,804) —  —  —  (50,804)
Equity forward contract settlement —  —  (389) (6,763) 6,763  —  —  — 
Issuance of common stock for share-based compensation 468  —  —  (5) —  —  — 
Exercise of common stock options 360  —  —  963  —  —  966 
Balance, September 25, 2019
109,413  $ 1,094  (50,073) $ (474,382) $ 604,406  $ (207,957) $ (41,907) $ (118,746)
 
See accompanying notes

7


Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
  Three Quarters Ended
  September 23, 2020 September 25, 2019
  (In thousands)
Cash flows from operating activities:    
Net income (loss) $ (7,475) $ 98,851 
Adjustments to reconcile net income (loss) to cash flows provided by (used in) operating activities:    
Depreciation and amortization 12,252  15,619 
Operating (gains), losses and other charges, net 2,319  (85,459)
Loss on interest rate swap derivatives 4,185  — 
Amortization of deferred financing costs 591  456 
Gains on investments (117) (179)
Losses (gains) on termination of leases 43  (157)
Deferred income tax expense (benefit) (2,505) 9,594 
Share-based compensation expense 1,972  7,142 
Changes in assets and liabilities:    
Receivables 7,465  8,095 
Inventories 265  1,525 
Other current assets (3,865) (168)
Other noncurrent assets 474  (3,081)
   Operating lease assets and liabilities 1,231  (577)
Accounts payable (8,540) (9,411)
Accrued payroll (8,739) (6,224)
Accrued taxes 971  (524)
Other accrued liabilities (6,512) (5,544)
Other noncurrent liabilities (5,625) 2,068 
Net cash flows provided by (used in) operating activities (11,610) 32,026 
Cash flows from investing activities:    
Capital expenditures (5,476) (12,646)
Acquisitions of real estate —  (9,456)
Deposits on acquisitions of real estate —  (1,538)
Proceeds from sales of restaurants, real estate and other assets 4,536  118,370 
Investment purchases (1,400) (1,300)
Proceeds from sale of investments 2,900  — 
Collections on notes receivable 1,385  3,027 
Issuance of notes receivable (670) (822)
Net cash flows provided by investing activities 1,275  95,635 
Cash flows from financing activities:    
Revolver borrowings 140,500  102,500 
Revolver payments (150,500) (176,000)
Long-term debt payments (1,115) (2,044)
Proceeds from exercise of stock options 212  966 
Tax withholding on share-based payments (3,049) (3,206)
Deferred financing costs (982) — 
Purchase of treasury stock (36,008) (50,649)
Proceeds from issuance of common stock 69,571  — 
Net bank overdrafts (449) (2,234)
Net cash flows provided by (used in) financing activities 18,180  (130,667)
Increase (decrease) in cash and cash equivalents 7,845  (3,006)
Cash and cash equivalents at beginning of period 3,372  5,026 
Cash and cash equivalents at end of period $ 11,217  $ 2,020 
See accompanying notes
8


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

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At September 23, 2020, the Denny's brand consisted of 1,664 restaurants, 1,598 of which were franchised/licensed restaurants and 66 of which were company operated.

The global crisis resulting from the spread of coronavirus ("COVID-19") has had a substantial impact on our restaurant operations for the three quarters ended September 23, 2020, which is expected to continue with the timing of a recovery uncertain. During the three quarters ended September 23, 2020, many of our company and franchised and licensed restaurants were temporarily closed and most of the restaurants that remained open had limited operations. This has continued into the fourth quarter of 2020. Our operating results substantially depend upon the sales volumes, restaurant profitability, and financial stability of our company and franchised and licensed restaurants.

We cannot currently estimate the duration or future negative financial impact of the COVID-19 pandemic on our business; however, we expect that the COVID-19 pandemic will continue to impact our results of operations for the balance of 2020. Ongoing material adverse effects of the COVID-19 pandemic for an extended period could negatively affect our business, results of operations, liquidity and financial condition and could impact our impairment assessments of accounts receivable, intangible assets, long-lived assets and goodwill.

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

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the fiscal year ended December 25, 2019 which are contained in our audited Annual Report on Form 10-K for the fiscal year ended December 25, 2019. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 30, 2020. Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective rate.

Note 2.     Summary of Significant Accounting Policies
 
Newly Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform financial statement users of credit loss estimates. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 (our fiscal 2020). The adoption of this guidance on December 26, 2019 did not have a material impact on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new guidance provides optional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 is effective for a limited time, from March 12, 2020 through December 31, 2022. The Company adopted this ASU on March 12, 2020. The adoption of ASU 2020-04 did not have a significant impact on the Company’s consolidated financial position or results of operations.

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In April 2020, the FASB staff issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under ASU 2016-02, Leases (Topic 842): Targeted Improvements, as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance in Topic 842 to those contracts. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee.

We have elected to apply this interpretive guidance to the rent relief we have secured, and have assumed that enforceable rights and obligations for those concessions exist in the lease contract. As such, starting in April 2020, we began recognizing abatements or deferrals in rents received from landlords as reductions in variable lease payments. This election will continue while these abatement or deferrals are in effect.

Accounting Standards to be Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies Topic 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for financial statements issued for annual periods beginning after December 15, 2020, and for the interim periods therein. The adoption of ASU 2019-12 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

Note 3.     Receivables
 
Receivables consisted of the following:
 
  September 23, 2020 December 25, 2019
  (In thousands)
Receivables, net:    
Trade accounts receivable from franchisees $ 17,306  $ 14,551 
Financing receivables from franchisees 1,283  2,230 
Vendor receivables 894  3,260 
Credit card receivables 587  6,806 
Other 2,266  915 
Allowance for doubtful accounts (1,699) (274)
Total receivables, net $ 20,637  $ 27,488 
Other noncurrent assets:
   
Financing receivables from franchisees $ 188  $ 364 

We recorded $0.5 million and $1.4 million of bad debt expense during the quarter and three quarters ended September 23, 2020, respectively, based on actual and expected losses on franchise-related receivables, primarily as a result of uncertainties related to the impacts of the COVID-19 pandemic.

Note 4.    Goodwill and Other Intangible Assets
(In thousands)
Balance, December 25, 2019 $ 36,832 
Reclassification from assets held for sale 52 
Balance, September 23, 2020 $ 36,884 





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Other intangible assets consisted of the following:

  September 23, 2020 December 25, 2019
  Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
  (In thousands)
Intangible assets with indefinite lives:
       
Trade names $ 44,087  $ —  $ 44,087  $ — 
Liquor licenses 120  —  120  — 
Intangible assets with definite lives:
       
Reacquired franchise rights 15,064  7,171  15,516  5,767 
Intangible assets, net $ 59,271  $ 7,171  $ 59,723  $ 5,767 

Due to the impact of the COVID-19 pandemic to the global economy, including but not limited to the volatility of the Company's stock price as well as that of its competitors, the negative impact on sales at company and franchised and licensed restaurants and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the three quarters ended September 23, 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite-lived intangible assets and concluded that the fair value of these assets substantially exceeded their carrying values. However, we recorded less than $0.1 million and approximately $0.1 million of impairment related to reacquired franchise rights during the quarter and three quarters ended September 23, 2020, respectively. See Note 9.

Note 5.     Other Current Liabilities
 
Other current liabilities consisted of the following:
  September 23, 2020 December 25, 2019
  (In thousands)
Accrued payroll $ 11,116  $ 19,689 
Current portion of liability for insurance claims
5,488  6,515 
Accrued taxes 6,595  5,624 
Accrued advertising 3,348  6,753 
Gift cards 4,758  6,469 
Other 10,041  12,257 
Other current liabilities $ 41,346  $ 57,307 

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Note 6.     Fair Value of Financial Instruments

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
  Total Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
 
(In thousands)
Fair value measurements as of September 23, 2020:
Deferred compensation plan investments (1)
$ 11,958  $ 11,958  $ —  $ — 
Interest rate swaps (2)
(85,054) —  (85,054) — 
Investments (3)
2,266  —  2,266  — 
Total $ (70,830) $ 11,958  $ (82,788) $ — 
Fair value measurements as of December 25, 2019:
Deferred compensation plan investments (1)
$ 13,517  $ 13,517  $ —  $ — 
Interest rate swaps (2)
(44,670) —  (44,670) — 
Investments (3)
3,649  —  3,649  — 
Total $ (27,504) $ 13,517  $ (41,021) $ — 

(1)    The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments.
(2)    The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. See Note 7 for details on the interest rate swaps.
(3)    The fair values of our investments are valued using a readily determinable net asset value per share based on the fair value of the underlying securities. There are no significant redemption restrictions associated with these investments.

Those assets and liabilities measured at fair value on a nonrecurring basis are summarized below:
 
  Significant Unobservable Inputs
(Level 3)
Impairment Charges
  (In thousands)
Fair value measurements for the three quarters ended September 23, 2020:
Assets held and used (1)
$ 2,575  $ 2,519 

(1)During the first and third quarters of 2020, impaired assets were written down to their fair value. To determine fair value, we used the income approach, which assumes that the future cash flows reflect current market expectations. These fair value measurements require significant judgment using Level 3 inputs, such as discounted cash flows from operations, which are not observable from the market, directly or indirectly. There is uncertainty in the projected future cash flows used in the Company's impairment analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods.

Assets that are measured at fair value on a non-recurring basis include property, operating right-of-use assets, finance right-of-use assets and reacquired franchise rights. During the quarter and three quarters ended September 23, 2020, we recognized impairment charges of $0.3 million and $2.5 million, respectively, related to certain of these assets. See Note 9.

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses are deemed to approximate fair value due to the immediate or short-term maturity of these instruments. The fair value of notes receivable approximates the carrying value after consideration of recorded allowances and related risk-based interest rates. The outstanding revolver loans are carried at historical cost, which approximates fair value. The fair value of our senior secured revolver approximates its carrying value since it is a variable rate facility (Level 2).

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Note 7.     Long-Term Debt

Denny's and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $30 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million, subject to approval. As of September 23, 2020, we had outstanding revolver loans of $230.0 million and outstanding letters of credit under the credit facility of $17.3 million. These balances resulted in availability of $152.7 million under the credit facility prior to considering the liquidity covenant in our credit facility. Factoring in the liquidity covenant, our availability was $92.7 million. The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny's and its material subsidiaries and is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries (other than our insurance captive subsidiary).

On May 13, 2020, we entered into an amendment (the "Second Amendment") to our credit agreement. As a result of the Second Amendment, beginning May 13, 2020 until the date of delivery of our financial statements for the fiscal quarter ending June 30, 2021, the interest rate of the amended credit agreement was increased to LIBOR plus 3.00% and the commitment fee, which is paid on the unused portion of the credit facility, was increased to 0.40%. During this period, we will also have supplemental monthly reporting obligations to our lenders and will be prohibited from paying dividends and making stock repurchases and other general investments. Additionally, capital expenditures will be restricted to $10 million in the aggregate from May 13, 2020 through the fiscal quarter ending March 31, 2021.

The Second Amendment temporarily waives certain financial covenants. The consolidated fixed charge coverage ratio is waived until the fiscal quarter ending March 31, 2021, at which point the covenant level will revert to a minimum of 1.50x. The consolidated leverage ratio covenant is waived until the fiscal quarter ending March 31, 2021, at which point the covenant level will increase from 4.00x to 4.50x, stepping down to 4.25x in the second quarter of 2021 and 4.00x in the third fiscal quarter of 2021 and thereafter. In addition, the Second Amendment adds a monthly minimum liquidity covenant, defined as the sum of unrestricted cash and revolver availability, ranging from $60 million to $70 million, commencing on May 13, 2020 to May 26, 2021. We were in compliance with all financial covenants as of September 23, 2020.

Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 3.16% and 3.47% as of September 23, 2020 and December 25, 2019, respectively. Taking into consideration our interest rate swaps that are designated as cash flow hedges, the weighted-average interest rate of outstanding revolver loans was 4.85% and 3.99% as of September 23, 2020 and December 25, 2019, respectively.

Interest Rate Hedges
We have receive-variable, pay-fixed interest rate swaps to hedge the forecasted cash flows of our floating rate debt. We initially designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to variable interest payments due on forecasted notional amounts. A summary of our interest rate swaps as of September 23, 2020 is as follows:
Trade Date Effective Date Maturity Date Notional Amount Fixed Rate
(In thousands)
Swaps designated as cash flow hedges
March 20, 2015 March 29, 2018 March 31, 2025 $ 120,000  2.44  %
October 1, 2015 March 29, 2018 March 31, 2026 50,000  2.46  %
Dedesignated swaps
February 15, 2018 March 31, 2020 December 31, 2033 80,000  (1) 3.19  %

(1)     The notional amounts of the swaps entered into on February 15, 2018 increase annually beginning September 30, 2020 until they reach the maximum notional amount of $425.0 million on September 28, 2029.

To the extent the swaps are highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps are not included in the Consolidated Statements of Operations but are reported as a component of accumulated other comprehensive loss, net. The interest rate swaps entered into in 2015 are designated as cash flow hedges with unrealized gain and losses recorded as a component of accumulated other comprehensive loss, net.

13


As of September 23, 2020, the fair value of swaps designated as cash flow hedges was $17.2 million and was recorded as a component of other noncurrent liabilities with an offsetting amount (before taxes) recorded as a component of accumulated other comprehensive income, net in our Condensed Consolidated Balance Sheets. We expect to reclassify approximately $3.9 million from accumulated other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to swaps designated as cash flow hedges during the next twelve months.

Dedesignated Interest Rate Hedges

During the quarter ended June 24, 2020, we determined that a portion of the underlying cash flows related to our hedging relationship entered into in 2018 (“2018 Swaps”) were no longer probable of occurring over the term of the interest rate swaps as a result of the ongoing impacts of the COVID-19 pandemic and using proceeds from our share offering described in Note 13 to repay a portion of our long-term debt. Accordingly, during the quarter ended June 24, 2020, we dedesignated the cash flow relationship and discontinued hedge accounting treatment for the 2018 Swaps. As a result, we reclassified approximately $7.4 million of losses from accumulated other comprehensive loss, net to other nonoperating expense (income), net in our Consolidated Statements of Operations for the three quarters ended September 23, 2020 related to the portion of the forecasted transaction no longer considered probable of occurring. The remaining amounts of unrealized losses related to the 2018 Swaps are included in accumulated other comprehensive loss, net and are amortized into the Consolidated Statements of Operations as a component of interest expense, net over the remaining term of the 2018 Swaps. For the quarter and three quarters ended September 23, 2020, we reclassified unrealized losses of approximately $0.3 million and $0.6 million, respectively, to interest expense, net related to the 2018 Swaps. At September 23, 2020, approximately $64.6 million (before taxes) of unrealized losses remained in accumulated other comprehensive loss, net.

As a result of the dedesignated cash flow relationship related to the 2018 Swaps, changes in the fair value of the 2018 Swaps are recorded as a component of other nonoperating expense (income), net in our Consolidated Statements of Operations. For the quarter and three quarters ended September 23, 2020, we recorded income of approximately $7.8 million and $3.7 million, respectively, as a component of nonoperating expense (income) related to the 2018 Swaps resulting from changes in fair value.

As of September 23, 2020, the fair value of the dedesignated interest rate swaps was $67.8 million and was recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets. We expect to amortize approximately $0.4 million from accumulated other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to dedesignated interest rate swaps during the next twelve months.

Note 8.     Revenues

Our revenues are derived primarily from two sales channels, which we operate as one segment: company restaurants and franchised and licensed restaurants. The following table disaggregates our revenue by sales channel and type of good or service:
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands)
Company restaurant sales $ 27,849  $ 63,582  $ 85,268  $ 257,574 
Franchise and license revenue:
Royalties 17,896  27,830  48,462  79,742 
Advertising revenue 13,927  20,756  38,685  59,582 
Initial and other fees 1,890  1,356  4,933  4,250 
Occupancy revenue  10,082  10,734  31,152  26,405 
Franchise and license revenue 
43,795  60,676  123,232  169,979 
Total operating revenue $ 71,644  $ 124,258  $ 208,500  $ 427,553 



14


Franchise occupancy revenue consisted of the following:
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands)
Operating lease revenue $ 8,277  $ 7,964  $ 24,959  $ 19,235 
Variable lease revenue
1,805  2,770  6,193  7,170 
Total occupancy revenue
$ 10,082  $ 10,734  $ 31,152  $ 26,405 

Balances related to contracts with customers consist of receivables, deferred franchise revenue and deferred gift card revenue. See Note 3 for details on our receivables.
Deferred franchise revenue consists primarily of the unamortized portion of initial franchise fees that are currently being amortized into revenue and amounts related to development agreements and unopened restaurants that we will begin amortizing into revenue when the related restaurants are opened. Initial franchise fees are amortized over the term of the related franchise agreement, generally 10-20 years. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sales-based royalties and advertising. The components of the change in deferred franchise revenue are as follows:
  (In thousands)
Balance, December 25, 2019 $ 23,256 
Fees received from franchisees 535 
Revenue recognized (1)
(2,474)
Balance, September 23, 2020 21,317 
Less current portion included in other current liabilities 2,112 
Deferred franchise revenue included in other noncurrent liabilities $ 19,205 

(1) Of this amount $2.4 million was included in the deferred franchise revenue balance as of December 25, 2019.

Gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. The balance of gift card liabilities represents our remaining performance obligations to our customers. The balance of gift card liabilities as of September 23, 2020 and December 25, 2019 was $4.8 million and $6.5 million, respectively. During the three quarters ended September 23, 2020, we recognized revenue of $0.3 million from gift card redemptions at company restaurants.

Note 9.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net consisted of the following:
 
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands)
Gains on sales of assets and other, net $ (1,202) $ (51,183) $ (2,260) $ (87,497)
Restructuring charges and exit costs
83  1,092  2,060  2,038 
Impairment charges 338  —  2,519  — 
Operating (gains), losses and other charges, net
$ (781) $ (50,091) $ 2,319  $ (85,459)
 
Gains on sales of assets and other, net were primarily related to the sale of three parcels of real estate during the quarter and five parcels of real estate during the three quarters ended September 23, 2020. During the quarter ended September 25, 2019, gains on sale of assets and other, net included $50.4 million in gains on the sale of 56 company restaurants and $1.3 million in gains on the sales of two parcels of real estate. During the three quarters ended September 25, 2019, gains on sales of assets and other, net included $76.8 million in gains on the sales of 96 company restaurants and $11.9 million on the sale of six parcels of real estate.

15


As of September 23, 2020, we had recorded assets held for sale at their carrying amount of $3.2 million (consists of property of $2.5 million and other assets of $0.7 million) related to seven parcels of real estate. As of December 25, 2019, we had recorded assets held for sale at their carrying amount of $1.9 million (comprised of property of $1.6 million, other assets of $0.2 million and goodwill of $0.1 million) related to four company restaurants and two pieces of real estate. During the three quarters ended September 23, 2020, five pieces of real estate were sold and the four company restaurants were reclassified out of assets held for sale, as they were no longer expected to be sold in the next 12 months.

Restructuring charges and exit costs consisted of the following:
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands)
Exit costs $ 75  $ 20  $ 169  $ 194 
Severance and other restructuring charges
1,072  1,891  1,844 
Total restructuring charges and exit costs
$ 83  $ 1,092  $ 2,060  $ 2,038 

Exit cost liabilities were $0.1 million as of September 23, 2020 and $0.2 million as of December 25, 2019. Exit cost liabilities related to lease costs are included as a component of operating lease liabilities in our Condensed Consolidated Balance Sheets.

As of September 23, 2020 and December 25, 2019, we had accrued severance and other restructuring charges of $0.7 million and $0.9 million, respectively. The balance as of September 23, 2020 is expected to be paid during the next 12 months.

We review our property, right-of-use assets ("ROU assets") and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. Based on our review, we recorded impairment charges of $0.3 million and $2.5 million, respectively, for the quarter and three quarters ended September 23, 2020 resulting from the impacts of the COVID-19 pandemic. The $2.5 million included $1.3 million related to property, $1.1 million related to operating lease ROU assets and less than $0.1 million related to each of finance lease ROU assets and reacquired franchise rights.

Note 10.     Share-Based Compensation

Total share-based compensation included as a component of general and administrative expenses was as follows:
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands)
Employee share awards $ 1,784  $ 1,957  $ 1,364  $ 6,418 
Restricted stock units for board members
214  219  608  724 
Total share-based compensation
$ 1,998  $ 2,176  $ 1,972  $ 7,142 
 
Employee Share Awards

Employee share awards consist of performance share units and restricted stock units (which are equity classified). During the three quarters ended September 23, 2020, as a component of our annual compensation program, we granted certain employees approximately 0.8 million restricted stock units with a grant date fair value of $10.46 per share that vest over a two-year period, as defined under the terms of the award. The vesting period for these restricted stock units is the two-year period beginning May 20, 2020 through May 20, 2022.

During the three quarters ended September 23, 2020, we issued 0.3 million shares of common stock related to vested performance share units. In addition, 0.2 million shares of common stock were withheld in lieu of taxes related to vested performance share units.
 
As of September 23, 2020, we had approximately $9.8 million of unrecognized compensation cost related to unvested performance share awards and restricted share awards outstanding, which have a weighted average remaining contractual term of 1.5 years.
 
Subsequent to the end of the quarter ended September 23, 2020, certain employee share awards were modified. See Note 16.
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Restricted Stock Units for Board Members

During the three quarters ended September 23, 2020, we granted less than 0.1 million restricted stock units (which are equity classified) with a weighted average grant date fair value of $10.46 per unit to non-employee members of our Board of Directors. The restricted stock units vest after a one year service period. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of our Board of Directors), upon termination as a member of our Board of Directors, or in three equal annual installments commencing after termination of service as a member of our Board.

During the three quarters ended September 23, 2020, less than 0.1 million restricted stock units were converted into shares of common stock.

As of September 23, 2020, we had approximately $0.6 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which have a weighted average remaining contractual term of 0.7 years.

Note 11.     Income Taxes

The effective income tax rate was 11.2% for the quarter ended and 20.6% for the three quarters ended September 23, 2020, compared to 23.7% and 21.3% for the prior year periods, respectively. The 2020 year-to-date rate included a net benefit of 22.2% from the reclassification of cash flow derivatives from accumulated other comprehensive loss. The 2019 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 1.0% and 1.8%, respectively.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law as a response to the economic impacts of the COVID-19 pandemic. There is no significant impact on the Company's tax rate from the CARES Act for the quarter and three quarters ended September 23, 2020.

Note 12.     Net Income (Loss) Per Share
 
The amounts used for the basic and diluted net income (loss) per share calculations are summarized below:
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (In thousands, except for per share amounts)
Net income (loss)
$ 6,477  $ 49,122  $ (7,475) $ 98,851 
Weighted average shares outstanding - basic
63,793  59,430  59,350  60,457 
Effect of dilutive share-based compensation awards (1)
234  1,759  —  1,913 
Weighted average shares outstanding - diluted
64,027  61,189  59,350  62,370 
Basic net income (loss) per share
$ 0.10  $ 0.83  $ (0.13) $ 1.64 
Diluted net income (loss) per share
$ 0.10  $ 0.80  $ (0.13) $ 1.58 
Anti-dilutive share-based compensation awards(1)
568  274  1,975  226 
    
(1) For the three quarters ended September 23, 2020, share-based compensation awards have been omitted from the calculations because they have an anti-dilutive effect on loss per share.

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Note 13.     Shareholders' Deficit

Share Repurchases

We suspended share repurchases as of February 27, 2020 and terminated our previously approved Rule 10b5-1 Repurchase Plan effective March 16, 2020 in light of uncertain market conditions arising from the COVID-19 pandemic. Under our amended credit agreement, we are prohibited, until the date of delivery of our financial statements for the fiscal quarter ending June 30, 2021, from making any stock repurchases.

Prior to entering into our amended credit agreement, during the quarter ended March 25, 2020, we repurchased a total of 1.7 million shares of our common stock for approximately $34.2 million. During the quarter ended March 25, 2020, we completed the $200 million share repurchase program that was approved by the Board of Directors in October 2017. In December 2019, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $250 million of our common stock (in addition to the October 2017 authorization). At September 23, 2020, there was approximately $248.0 million remaining that can be used to repurchase our common stock under the current program. Repurchased shares are included as treasury stock in our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statement of Shareholders' Deficit.

In November 2018, as part of our previously authorized share repurchase programs, we entered into a $25 million accelerated share repurchase (the "ASR") agreement with MUFG Securities EMEA plc (“MUFG”). We paid $25 million in cash and received approximately 1.1 million shares of our common stock (which represents the minimum shares to be delivered based on the cap price) and recorded $18.2 million of treasury stock related to these shares. The remaining balance of $6.8 million was recorded as additional paid-in capital in shareholders’ deficit as of December 26, 2018 as an equity forward contract.

During the quarter ended March 27, 2019, we settled the ASR agreement with MUFG. As a result, we received final delivery of an additional 0.4 million shares of our common stock. The total number of shares repurchased was based on a combined discounted volume-weighted average price (“VWAP”) of $17.04 per share, which was determined based on the average of the daily VWAP of our common stock, less a fixed discount, over the term of the ASR agreement. As a result of settling the ASR agreement, we recorded $6.8 million of treasury stock related to the settlement of the equity forward contract related to the ASR agreement.

Issuance and Sale of Common Stock

On July 1, 2020, the Company entered into an underwriting agreement with Wells Fargo Securities, LLC, as representative of the several underwriters named therein, for the issuance and sale by the Company of 8,000,000 shares of its common stock, par value $0.01 per share, in an underwritten public offering at a price to the public of $9.15 per share. On July 6, 2020, the Company received net proceeds of $69.6 million from the sale of shares, after deducting the underwriters' discounts and commissions and offering expenses.


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Accumulated Other Comprehensive Loss, Net

The components of the change in accumulated other comprehensive loss, net were as follows:
Defined Benefit Plans Derivatives Accumulated Other Comprehensive Loss, Net
(In thousands)
Balance as of December 25, 2019 $ (781) $ (33,179) $ (33,960)
Amortization of net loss (1)
67  —  67 
Changes in the fair value of cash flow derivatives —  (47,139) (47,139)
Reclassification of cash flow derivatives to interest expense, net (2)
—  2,097  2,097 
Reclassification of loss related to dedesignation of derivatives to other nonoperating expense (income)(3)
—  7,354  7,354 
Amortization of unrealized losses related to dedesignated derivatives to interest expense, net(3)
—  552  552 
Income tax (expense) benefit related to items of other comprehensive loss
(17) 9,841  9,824 
Balance as of September 23, 2020 $ (731) $ (60,474) $ (61,205)

(1)    Amount related to our defined benefit plans that was reclassified from accumulated other comprehensive loss, net and included as a component of pension expense within general and administrative expenses in our Condensed Consolidated Statements of Operations during the three quarters ended September 23, 2020.
(2)    Amounts reclassified from accumulated other comprehensive loss, net into interest expense, net in our Condensed Consolidated Statements of Operations represent payments either received from or made to the counterparty for the interest rate swaps. See Note 7 for additional details.
(3)    During the quarter ended June 24, 2020, we dedesignated the cash flow relationship and discontinued hedge accounting treatment for the 2018 Swaps. As a result, we reclassified approximately $7.4 million of losses from accumulated other comprehensive loss, net to other nonoperating expense (income), net in our Condensed Consolidated Statements of Operations related to the portion of forecasted transaction no longer considered probable of occurring. The remaining losses related to the 2018 Swaps will continue to be included in accumulated other comprehensive loss, net and will be amortized as a component of interest expense, net in our Condensed Consolidated Statements of Operations over the remaining term of the 2018 Swaps. For the three quarters ended September 23, 2020, we amortized approximately $0.6 million of losses to interest expense, net related to the 2018 Swaps. See Note 7 for additional details.


Note 14.     Commitments and Contingencies

We have guarantees related to certain franchisee loans. Payments under these guarantees would result from the inability of a franchisee to fund required payments when due. Through September 23, 2020, no events had occurred that caused us to make payments under these guarantees. There were $0.4 million and $0.6 million of loans outstanding under these programs as of September 23, 2020 and December 25, 2019, respectively. As of September 23, 2020, the maximum amount payable under the loan guarantees was $0.4 million. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both September 23, 2020 and December 25, 2019, which are included as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets.

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 our consolidated results of operations or financial position. 

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Note 15.     Supplemental Cash Flow Information
  Three Quarters Ended
  September 23, 2020 September 25, 2019
  (In thousands)
Income taxes paid, net $ 545  $ 17,853 
Interest paid $ 11,851  $ 14,393 
Noncash investing and financing activities:    
Issuance of common stock, pursuant to share-based compensation plans $ 6,042  $ 7,522 
Noncash consideration received in connection with the sale of real estate $ —  $ 3,000 
Execution of finance leases $ 95  $ 305 
Treasury stock payable $ —  $ 228 
Receivables in connection with disposition of property $ —  $ 3,446 
Insurance proceeds receivable $ —  $ 48 
 

Note 16. Subsequent Events

Modification of Performance Share Units

On September 30, 2020, the Company’s Board of Directors (the "Board") approved adjustments to certain performance share units (“PSUs”) granted to employees as part of the Company’s Long-Term Incentive Program.

Awards for 2018 and 2019 were originally made 100% in the form of PSUs with three-year performance periods (2018-2020 for the 2018 PSUs and 2019-2021 for the 2019 PSUs). The PSUs are earned based 50% on growth in earnings per share over the performance period (“EPS Growth”) and 50% on the relative total stockholder return of the Company for the performance period against a peer group for the 2018 awards and against the S&P 600 Consumer Discretionary Index for the 2019 awards (“Relative TSR”).

The full service dining sector in which the Company operates has been severely negatively impacted by business disruptions resulting from the COVID-19 pandemic. These business disruptions, which could not have been foreseen when the 2018 and 2019 PSUs were awarded, have caused the EPS Growth goals for the PSUs to be unattainable. To address the loss of retentive and incentive value due to these unforeseen events, the Board approved the following adjustments to the 2018 and 2019 PSUs:

2018 PSUs

The EPS Growth goal for the 2018 PSUs was measured in accordance with the methodology established at the time of grant for the first two years of the performance period, 2018-2019, before the onset of the COVID-19 pandemic. That performance was above the maximum goal that had been set. That portion of the award was then prorated by two-thirds (since two-thirds of the performance period had been completed before the pandemic). The modification impacts approximately 0.2 million PSUs with a fair value of approximately $2.4 million at the modification date based on the grant date fair value of $10.00, the market value of our stock on the date of grant. The modified award equals 100% of target (i.e., 150% performance times two-thirds). The modified award will vest and be expensed over the three-month period ending December 30, 2020 (the remaining term of the original award), subject to continued employment. Prior to the modification, the fair value of the award was zero.

2019 PSUs

The Board removed the 2019-2021 EPS Growth goal and will instead apply the 2019-2021 Relative TSR goal to that portion of the award. The modification impacts approximately 0.3 million PSUs with an estimated fair value of approximately $2.4 million to $3.2 million at the modification date. The fair value will be based on a Monte Carlo valuation, which will be completed during the fourth quarter of 2020, as the modified awards contain a market condition. The modified award will vest and be expensed over the fifteen-month period ending December 29, 2021 (the remaining term of the original award), subject to continued employment. Prior to the modification, the fair value of the award was zero.

The Board did not change the existing Relative TSR portion of either award. These adjustments will be accounted for as modifications beginning in the fourth quarter of 2020.
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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. The Company urges caution in considering its current trends and any outlook on its operations and financial results disclosed in this report. In addition, certain matters discussed in this report may constitute forward-looking statements. These forward-looking statements, which reflect management's best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny’s Corporation, its subsidiaries, and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as “expect”, “anticipate”, “believe”, “intend”, “plan”, “hope”, "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the rapidly evolving COVID-19 pandemic and related containment measures, including the potential for further operational disruption from government mandates affecting restaurants; economic, public health and political conditions that impact consumer confidence and spending, including COVID-19; competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; health concerns arising from food-related pandemics, outbreaks of flu viruses, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors from time to time set forth in the Company’s SEC reports and other filings, including but not limited to the discussion in Management’s Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 25, 2019, the Company's Quarterly Reports on Form 10-Q for the quarters ended March 25, 2020 and June 24, 2020, this report on Form 10-Q and in the Company’s subsequent quarterly reports on Form 10-Q.
Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. Following the pandemic declaration, federal, state and local governments responded by implementing restrictions on travel, "stay at home" directives, "social distancing" guidance, limitations of dine-in food service, and mandated dining room closures, which collectively had a significant adverse impact on the Company’s business performance, results of operations and cash flows for the quarter and three quarters ended September 23, 2020.

Operating Initiatives

In response to various government orders restricting dine-in restaurant food service, the Company implemented a number of initiatives to support Denny’s restaurants including: free delivery when guests place orders through the Company’s website or mobile app, a contactless delivery option, streamlined menus to facilitate greater operational efficiency, a platform of shareable family meal packs, a curb-side ordering and pick up option, selling grocery items where permitted, highlighting value products, and evolving our dining service to include outdoor seating options.

The Company remains focused on the safety and wellbeing of its guests, restaurant teams, franchisees, employees, and suppliers. Retraining materials and communications have been distributed to the entire system of restaurants, reinforcing strict food safety procedures, handwashing and personal hygiene standards, and enhanced daily deep cleaning protocols. Restaurant teams are subject to daily temperature checks, are expected to wear face masks and gloves, and must wash their hands with alcohol-based sanitizer at regular intervals throughout their shift. The Company has remained in close contact with public health officials and government agencies to ensure all public health concerns are appropriately addressed. The current restrictions and the Company's related enhanced safety protocols are expected largely to continue and may have an adverse impact on our operating costs.

The Company has also worked closely with its suppliers to address contingency plans and has not experienced any significant supply chain disruptions.



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Current Trends

Domestic system-wide same-store sales1 sequentially improved during the third quarter ended September 23, 2020, as compared to the equivalent periods during 2019, despite approximately 25% of the domestic system in California being limited to off-premise only sales channels.

Average unit volumes of off-premise sales have increased over 95% since the beginning of the COVID-19 pandemic, supported by temporarily waived delivery fees, curbside service programs, and shareable family meal packs.

The following table presents monthly sales results compared to the equivalent fiscal months in 2019:

Domestic System-Wide Same-Store Sales1 for 2020 Fiscal Periods:
Q1 2020: (6%) Q2 2020: (57%) Q3 2020: (34%) Q4 2020
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
3% 2% (19%) (76%) (65%) (41%) (39%) (35%) (28%)
(26%)*
*Preliminary results

The following table presents domestic capacity restrictions:

Average Domestic Capacity Restrictions for Fiscal October 2020*:

Number of Units % of Domestic System
25% Capacity 229 84%
50-75% Capacity 667
Social Distancing 378
Off-Premise Only 207 14%
No Restrictions 15 1%
Temporarily Closed 19 1%
Total 1515 100%
*Preliminary results

Franchisee Support

Direct financial relief to Denny’s franchise partners has included: deferral of remodels until January 2022, and deferral of most of our domestic development commitments for one year from their original due date, both of which will be reviewed to determine if an additional extension is appropriate; deferral of royalty and advertising fees for week 11 of the 2020 fiscal year; abatement of such fees for weeks 12 and 13 of the 2020 fiscal year; a $3 million royalty abatement in the second fiscal quarter of 2020; and a 12-week lease deferral for franchisees operating in properties owned by the Company. Fiscal weeks 11, 12 and 13 were all within the Company’s first quarter ended March 25, 2020.

Additionally, the Company has secured rent relief in the form of abatements or deferrals for over 78% of the leases in which the Company is a lessee, including those instances in which the Company subleases to franchisees and will be extending the same relief to the franchisees as a pass through.

Furthermore, the Company has worked closely with key vendors and primary third-party franchise lenders to help secure additional relief on behalf of franchisees. Substantially all of Denny’s franchisees pursued available forms of relief under federal stimulus programs, and franchisees representing approximately 99% of total domestic franchise restaurants have received funding under the Paycheck Protection Program.

Cost Savings Initiatives and Capital Allocation

In response to the COVID-19 pandemic, the Company implemented the following cost savings measures: suspended travel, canceled in-person field meetings, placed holds on all open corporate and field positions, significantly reduced restaurant level staffing across the Company portfolio, meaningfully reduced compensation for the Company’s board of directors and multiple levels of management, and furloughed over 25% of the employees at its corporate office, approximately half of which were
22


subsequently separated from the Company. The Company subsequently eased certain of these cost savings measures. For example, the Company has resumed recruiting for certain corporate and field positions. In addition, the compensation reductions expired on June 25, 2020.

The Company is also analyzing whether federal tax credits available in connection with the COVID-19 pandemic apply to wages paid to retained employees during the crisis. In addition, the Company suspended share repurchases as of February 27, 2020, and terminated its Rule 10b5-1 Plan effective March 16, 2020, in light of uncertain market conditions arising from the COVID-19 pandemic.

For the quarter ended March 25, 2020, the Company was in compliance with its financial covenants related to its credit facility, but projected that it would not be in compliance with certain financial covenants beginning for the quarter ended June 24, 2020 due to the impact of the COVID-19 pandemic. Effective May 13, 2020, the Company and certain of its subsidiaries entered into a second amendment to the current credit facility which amended the current credit agreement dated as of October 26, 2017. See Liquidity and Capital Resources - Credit Facility. As of September 23, 2020, the Company was in compliance with its financial covenants related to the amended credit facility.

On July 6, 2020, the Company closed on the issuance and sale of 8,000,000 shares of common stock. Net proceeds of $69.6 million were received after deducting the underwriters’ discounts and commissions and offering expenses payable by the Company and disbursed to pay down the outstanding balance on the credit facility.
______________

(1)     Domestic system-wide same-store sales include sales at company restaurants and non-consolidated franchised and licensed restaurants that were open the same period in the prior year. Total operating revenue is limited to company restaurant sales and royalties, advertising revenue, fees and occupancy revenue from non-consolidated franchised and licensed restaurants. Accordingly, domestic system-wide same-store sales should be considered as a supplement to, not a substitute for, the Company's results as reported under GAAP.





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Statements of Operations
 
The following table contains information derived from our Condensed Consolidated Statements of Operations expressed as a percentage of total operating revenue, except as noted below. Percentages may not add due to rounding.
 
  Quarter Ended Three Quarters Ended
  September 23, 2020 September 25, 2019 September 23, 2020 September 25, 2019
  (Dollars in thousands)
Revenue:                
Company restaurant sales $ 27,849  38.9  % $ 63,582  51.2  % $ 85,268  40.9  % $ 257,574  60.2  %
Franchise and license revenue 43,795  61.1  % 60,676  48.8  % 123,232  59.1  % 169,979  39.8  %
Total operating revenue 71,644  100.0  % 124,258  100.0  % 208,500  100.0  % 427,553  100.0  %
Costs of company restaurant sales, excluding depreciation and amortization (a):
       
Product costs 7,106  25.5  % 15,603  24.5  % 21,541  25.3  % 62,871  24.4  %
Payroll and benefits 11,925  42.8  % 23,777  37.4  % 37,070  43.5  % 100,475  39.0  %
Occupancy 2,638  9.5  % 4,301