Fourth Quarter Results

For the fourth quarter of 2012, franchise and license revenue increased 7.5% to $34.2 million compared with $31.8 million in the prior year quarter.  The $2.4 million increase in franchise revenue was primarily driven by a $1.5 million increase in royalties and a $1.1 million increase in occupancy revenue due to 55 additional equivalent franchise restaurants.  Company restaurant sales of $81.7 million decreased $16.6 million due to 49 fewer equivalent company restaurants. This decrease reflects the continuing impact of selling company restaurants to franchisees as part of our FGI refranchising strategy that was completed at the end of 2012.

Denny's opened 12 new franchised restaurants in the fourth quarter of this year, including the third location in Honduras.  The Company opened one company restaurant in the quarter in downtown Las Vegas and acquired one franchised restaurant location in the San Diego market for $1.4 million.  During the quarter, Denny's closed 11 franchised restaurants, one company restaurant and sold eight company restaurants to franchisees.

Franchise operating margin increased $1.5 million to $22.3 million primarily due to the increases in franchise royalties and occupancy margin.  Franchise operating margin (as a percentage of franchise and license revenue) was 65.2%, a decrease of 0.3 percentage points. The decrease was primarily due to lower initial fee revenue from refranchising fewer restaurants.

Company restaurant operating margin decreased $1.6 million primarily due to the impact of selling company restaurants to franchisees.  However, company restaurant operating margin (as a percentage of company restaurant sales) was 13.5%, an increase of 0.7 percentage points.  The increase was primarily driven by lower payroll and benefits costs and lower other operating costs, partially offset by increases in product costs.

Total general and administrative expenses increased $1.4 million primarily due to higher performance-based compensation expenses.  Depreciation and amortization expense decreased by $1.5 million primarily as a result of the sale of restaurants over the past two years.  Interest expense decreased by $1.8 million to $2.8 million as a result of a $30.4 million reduction in total gross debt over the last 12 months and lower interest rates under our refinanced credit facility.

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