Denny's (DENN) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

 

Commission File Number 0-18051

DENNY’S CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	13-3487402
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization	Identification No.)

203 East Main Street

Spartanburg, South Carolina 29319-0001

(Address of principal executive offices)

(Zip Code)

(864) 597-8000

(Registrant’s telephone number, including area code)

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

Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	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

As of July 30, 2010, 99,623,334 shares of the registrant’s common stock, par value $.01 per share, were outstanding.

TABLE OF CONTENTS

	Page
Part I - FINANCIAL INFORMATION
Item 1.   Financial Statements
Condensed Consolidated Statements of Operations
Quarter and Two Quarters Ended June 30, 2010 and July 1, 2009 (unaudited)	3
Condensed Consolidated Balance Sheets (unaudited)	4
Condensed Consolidated Statement of Shareholders' Deficit and Comprehensive Income (unaudited)	5
Condensed Consolidated Statements of Cash Flows (unaudited)	6
Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.   Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.   Controls and Procedures	25
PART II - OTHER INFORMATION
Item 1.   Legal Proceedings	25
Item 6.  Exhibits	26
Signatures	27

2

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

Denny’s Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

	Quarter Ended						Two Quarters Ended
	June 30, 2010			July 1, 2009			June 30, 2010		July 1, 2009
	(In thousands, except per share amounts)
Revenue:
Company restaurant sales	$	105,301		$	125,500		$	213,084	$	261,076
Franchise and license revenue		29,776			30,313			59,565		60,497
Total operating revenue		135,077			155,813			272,649		321,573
Costs of company restaurant sales:
Product costs		24,500			29,306			50,192		61,589
Payroll and benefits		43,363			52,151			87,539		109,911
Occupancy		6,908			8,056			14,309		17,100
Other operating expenses		15,994			17,994			31,858		38,592
Total costs of company restaurant sales		90,765			107,507			183,898		227,192
Costs of franchise and license revenue		11,123			10,689			23,489		21,987
General and administrative expenses		13,111			15,907			26,185		29,754
Depreciation and amortization		7,291			8,015			14,664		16,727
Operating (gains), losses and other charges, net		(117	)		(3,751	)		306		(3,453	)
Total operating costs and expenses		122,173			138,367			248,542		292,207
Operating income		12,904			17,446			24,107		29,366
Other expenses:
Interest expense, net		6,514			8,239			12,912		16,730
Other nonoperating expense (income), net		570			(745	)		558		(1,231	)
Total other expenses, net		7,084			7,494			13,470		15,499
Net income before income taxes		5,820			9,952			10,637		13,867
Provision for income taxes		362			616			591		224
Net income	$	5,458		$	9,336		$	10,046	$	13,643
Net income per share:
Basic	$	0.05		$	0.10		$	0.10	$	0.14
Diluted	$	0.05		$	0.09		$	0.10	$	0.14
Weighted average shares outstanding:
Basic		99,263			96,113			98,179		96,079
Diluted		101,983			98,457			101,068		97,893

See accompanying notes

3

Denny’s Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

	June 30, 2010			December 30, 2009
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	21,677		$	26,525
Receivables, less allowance for doubtful accounts of $147 and $171, respectively		13,352			18,106
Inventories		3,741			4,165
Assets held for sale		2,941			—
Prepaid and other current assets		12,583			9,549
Total current assets		54,294			58,345
Property, net of accumulated depreciation of $254,158 and $258,695, respectively		122,987			131,484
Other assets:
Goodwill		32,283			32,440
Intangible assets, net		53,587			55,110
Deferred financing costs, net		2,128			2,676
Other noncurrent assets		31,386			32,572
Total assets	$	296,665		$	312,627
Liabilities and shareholders' deficit
Current liabilities:
Current maturities of notes and debentures	$	753		$	900
Current maturities of capital lease obligations		3,785			3,725
Accounts payable		17,676			22,842
Other current liabilities		55,251			64,641
Total current liabilities		77,465			92,108
Long-term liabilities:
Notes and debentures, less current maturities		239,467			254,357
Capital lease obligations, less current maturities		19,934			19,684
Liability for insurance claims, less current portion		20,973			21,687
Deferred income taxes		13,109			13,016
Other noncurrent liabilities and deferred credits		38,628			39,273
Total long-term liabilities		332,111			348,017
Total liabilities		409,576			440,125
Commitments and contingencies
Shareholders' deficit:
Common stock $0.01 par value; authorized - 135,000; issued – 99,362 and 96,613, respectively		994			966
Paid-in capital		546,922			542,576
Deficit		(642,781	)		(652,827	)
Accumulated other comprehensive loss, net of tax		(18,046	)		(18,213	)
Total shareholders' deficit		(112,911	)		(127,498	)
Total liabilities and shareholders' deficit	$	296,665		$	312,627

See accompanying notes

4

Denny’s Corporation and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Income

 (Unaudited)

	Common Stock				Paid-in						Accumulated Other Comprehensive			Total Shareholders'
	Shares		Amount		Capital			Deficit			Loss, Net			Deficit
	(In thousands)
Balance, December 30, 2009		96,613	$	966	$	542,576		$	(652,827	)	$	(18,213	)	$	(127,498	)
Comprehensive income:
Net income		—		—		—			10,046			—			10,046
Amortization of unrealized loss on hedged transactions, net of tax		—		—		—			—			167			167
Comprehensive income		—		—		—			10,046			167			10,213
Share-based compensation on equity classified awards		—		—		1,038			—			—			1,038
Issuance of common stock for share-based compensation		198		2		(2	)		—			—			—
Exercise of common stock options		2,551		26		3,310			—			—			3,336
Balance, June 30, 2010		99,362	$	994	$	546,922		$	(642,781	)	$	(18,046	)	$	(112,911	)

See accompanying notes

5

Denny’s Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Two Quarters Ended
	June 30, 2010			July 1, 2009
	(In thousands)
Cash flows from operating activities:
Net income	$	10,046		$	13,643
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation and amortization		14,664			16,727
Operating (gains), losses and other charges, net		306			(3,453	)
Amortization of deferred financing costs		516			542
(Gain) loss on early extinguishment of debt		7			12
(Gain) loss on interest rate swap		167			(875	)
Deferred income tax expense		93			278
Share-based compensation		1,249			2,702
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Decrease (increase) in assets:
Receivables		2,344			1,242
Inventories		424			1,072
Other current assets		(3,040	)		(5,051	)
Other assets		(1,268	)		(1,100	)
Increase (decrease) in liabilities:
Accounts payable		(2,472	)		(3,112	)
Accrued salaries and vacations		(7,899	)		(3,067	)
Accrued taxes		(105	)		(342	)
Other accrued liabilities		(2,470	)		(9,230	)
Other noncurrent liabilities and deferred credits		(1,870	)		(2,561	)
Net cash flows provided by operating activities		10,692			7,427
Cash flows from investing activities:
Purchase of property		(6,310	)		(7,936	)
Proceeds from disposition of property		3,322			13,030
Collections on notes receivable		2,691			—
Net cash flows (used in) provided by investing activities		(297	)		5,094
Cash flows from financing activities:
Long-term debt payments		(16,793	)		(12,025	)
Proceeds from exercise of stock options		3,336			24
Net bank overdrafts		(1,786	)		(1,697	)
Net cash flows used in financing activities		(15,243	)		(13,698	)
Decrease in cash and cash equivalents		(4,848	)		(1,177	)
Cash and cash equivalents at:
Beginning of period		26,525			21,042
End of period	$	21,677		$	19,865

See accompanying notes

6

Denny’s Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s, is one of America’s largest family-style restaurant chains. At June 30, 2010, the Denny’s brand consisted of 1,556 restaurants, 1,328 (85%) of which were franchised/licensed restaurants and 228 (15%) of which were company-owned and operated.

The following table shows the unit activity for the quarter and two quarters ended June 30, 2010 and July 1, 2009:

	Quarter Ended						Two Quarters Ended
	June 30, 2010			July 1, 2009			June 30, 2010			July 1, 2009
Company-owned restaurants, beginning of period		237			286			233			315
Units opened		—			—			4			1
Units sold to franchisees		(9	)		(22	)		(9	)		(52	)
Units closed		—			(1	)		—			(1	)
End of period		228			263			228			263
Franchised and licensed restaurants, beginning of period		1,322			1,260			1,318			1,226
Units opened		7			10			13			20
Units purchased from Company		9			22			9			52
Units closed		(10	)		(11	)		(12	)		(17	)
End of period		1,328			1,281			1,328			1,281
Total restaurants, end of period		1,556			1,544			1,556			1,544

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

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 30, 2009 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 30, 2009. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 29, 2010.

Note 2.     Summary of Significant Accounting Policies

Newly Adopted Accounting Standards

Fair Value

Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”

Effective March 31, 2010, we adopted ASU No. 2010-06, which improves disclosure requirements related to fair value measurements under the Codification. The new disclosure requirements relate to transfers in and out of Levels 1 and 2. ASU No. 2010-06 also includes separate disclosure requirements about purchases, sales, issuances and settlements relating to Level 3 measurements, which we are required to adopt in the first quarter of 2011. The adoption did not have a material impact on the disclosures included in our Condensed Consolidated Financial Statements.

Subsequent Events

ASU No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements"

Effective December 31, 2009, the first day of fiscal 2010, we adopted ASC No. 2010-09, which removes the requirement to disclose the date through which subsequent events have been evaluated. The adoption did not have a material impact on the disclosures included in our Condensed Consolidated Financial Statements. See Note 18.

7

Variable Interest Entities

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”

Effective December 31, 2009, the first day of fiscal 2010, we adopted FASB ASC 810, which amends the guidance on the consolidation of variable interest entities for determining whether an entity is a variable interest entity and modifies the methods allowed for determining the primary beneficiary of a variable interest entity. In addition, it requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and enhanced disclosures related to an enterprise’s involvement in a variable interest entity. The adoption did not have a material impact on our Condensed Consolidated Financial Statements.

There have been no other material changes to our significant accounting policies and estimates from the information provided in Note 2 of our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 30, 2009.

Accounting Standards to be Adopted

Fair Value

Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”

As mentioned under the "Fair Value" section above, we are required to adopt the disclosure requirements of ASU 2010-06 about purchases, sales, issuances and settlements relating to Level 3 measurements in the first quarter of 2011. We do not anticipate the adoption to have a material impact on the disclosures included in our Condensed Consolidated Financial Statements.

Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.

Note 3.     Notes Receivables

Notes receivable were comprised of the following:

	June 30, 2010		December 30, 2009
	(In thousands)
Current assets (included as a component of receivables):
Receivables related to sale of restaurants to franchisees	$	1,093	$	3,504
Receivables related to sale of real estate to a third party		62		61
Total current notes receivable	$	1,155	$	3,565
Noncurrent (included as a component of other noncurrent assets):
Receivables related to sale of restaurants to franchisees	$	1,844	$	1,894
Receivables related to sale of real estate to a third party		80		111
Total noncurrent notes receivable	$	1,924	$	2,005

Note 4.     Assets Held for Sale

Assets held for sale of $2.9 million as of June 30, 2010, include restaurants and real estate to be sold to franchisees. There were no assets held for sale as of December 30, 2009. We expect to sell each of these assets within 12 months. Our Credit Facility (defined in Note 8) requires us to make mandatory prepayments to reduce outstanding indebtedness with the net cash proceeds from the sale of specified real estate properties, restaurant assets and restaurant operations to franchisees, net of a voluntary $10.0 million annual exclusion related to proceeds from the sale of restaurant operations to franchisees and a voluntary $10.0 million annual exclusion related to proceeds from the sale of restaurant assets. As of June 30, 2010 and December 30, 2009, no reclassification of long-term debt to current liabilities was required.
60;There were no impairment charges recognized related to assets held for sale for the quarter and two quarters ended June 30, 2010.  As a result of classifying certain assets as held for sale, we recognized impairment charges of $0.1 million and $0.4 million for the quarter and two quarters ended July 1, 2009. This expense is included as a component of operating (gains), losses and other charges, net in our Condensed Consolidated Statements of Operations.

8

Note 5.    Goodwill and Other Intangible Assets

The changes in carrying amounts of goodwill for the quarter ended June 30, 2010 are as follows:

	(In thousands)
Balance at December 30, 2009	$	32,440
Write-offs associated with sale of restaurants		(157	)
Balance at June 30, 2010	$	32,283

Goodwill and intangible assets were comprised of the following:

	June 30, 2010				December 30, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Goodwill	$	32,283	$	—	$	32,440	$	—
Intangible assets with indefinite lives:
Trade names	$	42,463	$	—	$	42,454	$	—
Liquor licenses		176		—		176		—
Intangible assets with definite lives:
Franchise and license agreements		46,513		35,649		50,787		38,397
Foreign license agreements		241		157		241		151
Intangible assets	$	89,393	$	35,806	$	93,658	$	38,548
Other assets with definite lives:
Software development costs	$	33,438	$	29,392	$	32,806	$	28,401

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

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

	Quarter Ended						Two Quarters Ended
	June 30, 2010			July 1, 2009			June 30, 2010			July 1, 2009
	(In thousands)
Gains on sales of assets and other, net	$	(1,266	)	$	(3,508	)	$	(1,476	)	$	(4,032	)
Restructuring charges and exit costs		1,149			(673	)		1,782			(244	)
Impairment charges		—			430			—			823
Operating gains, losses and other charges, net	$	(117	)	$	(3,751	)	$	306		$	(3,453	)

Gains on Sales of Assets

Proceeds and gains on sales of assets were comprised of the following:

	Quarter Ended June 30, 2010				Quarter Ended July 1, 2009
	Net Proceeds		Gains		Net Proceeds		Gains
	(In thousands)
Sales of restaurant operations and related real estate to franchisees	$	3,003	$	1,196	$	6,960	$	2,343
Sales of other real estate assets		515		39		2,754		1,134
Recognition of deferred gains		—		31		—		31
Total	$	3,518	$	1,266	$	9,714	$	3,508

9

During the quarter ended June 30, 2010, we recognized $1.2 million of gains on the sale of nine restaurant operations to four franchisees for net proceeds of $3.0 million (which included a note receivable of $0.2 million). During the quarter ended July 1, 2009, we recognized $2.3 million of gains on the sale of 22 restaurant operations to eight franchisees for net proceeds of $7.0 million (which included a note receivable of $0.1 million).

	Two Quarters Ended June 30, 2010				Two Quarters Ended July 1, 2009
	Net Proceeds		Gains		Net Proceeds		Gains
	(In thousands)
Sales of restaurant operations and related real estate to franchisees	$	2,998	$	1,366	$	11,751	$	2,803
Sales of other real estate assets		524		48		2,754		1,134
Recognition of deferred gains		—		62		—		95
Total	$	3,522	$	1,476	$	14,505	$	4,032

During the two quarters ended June 30, 2010, we recognized $1.2 million of gains on the sale of nine restaurant operations to four franchisees for net proceeds of $3.0 million (which included a note receivable of $0.2 million) and additional gains on prior year restaurant sale transactions. During the two quarters ended July 1, 2009, we recognized $2.8 million of gains on the sale of 52 restaurant operations to ten franchisees for net proceeds of $11.8 million (which included notes receivable of $1.5 million). 

Restructuring Charges and Exit Costs

Restructuring charges and exit costs were comprised of the following: 

	Quarter Ended					Two Quarters Ended
	June 30, 2010		July 1, 2009			June 30, 2010		July 1, 2009
	(In thousands)
Exit costs	$	235	$	(795	)	$	863	$	(745	)
Severance and other restructuring charges		914		122			919		501
Total restructuring and exit costs	$	1,149	$	(673	)	$	1,782	$	(244	)

The components of the change in accrued exit cost liabilities are as follows:

	(In thousands)
Balance at December 30, 2009	$	6,555
Provisions for units closed during the year (1)		500
Changes in estimates of accrued exit costs, net (1)		363
Payments, net of sublease receipts		(1,628	)
Interest accretion		295
Balance at June 30, 2010		6,085
Less current portion included in other current liabilities		1,838
Long-term portion included in other noncurrent liabilities	$	4,247

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

Estimated net cash payments related to exit cost liabilities in the next five years are as follows:

	(In thousands)
Remainder of 2010	$	1,449
2011		1,583
2012		1,086
2013		800
2014		677
Thereafter		1,422
Total		7,017
Less imputed interest		932
Present value of exit cost liabilities	$	6,085

10

As of June 30, 2010 and December 30, 2009, we had accrued severance and other restructuring charges of $1.1 million and $0.9 million, respectively.  The balance as of June 30, 2010 is expected to be paid during the next 12 months.

Note 7.     Fair Value of Financial Instruments

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements as of June 30, 2010
	Total		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Technique
	(In thousands)
Deferred compensation plan investments	$	6,192	$	6,192	$	—	$	—	market approach
Total	$	6,192	$	6,192	$	—	$	—

	Fair Value Measurements as of December 30, 2009
	Total		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Technique
	(In thousands)
Deferred compensation plan investments	$	5,721	$	5,721	$	—	$	—	market approach
Total	$	5,721	$	5,721	$	—	$	—

In addition to the financial assets and liabilities that are measured at fair value on a recurring basis, we measure certain assets and liabilities at fair value on a nonrecurring basis. As of June 30, 2010, there were no such nonrecurring measurements. As of December 30, 2009, impaired assets related to an underperforming unit were written down to a fair value of $0 based on the income approach.

Fair Value of Long-Term Debt

The book value and estimated fair value of our long-term debt, excluding capital lease obligations, was as follows:

	June 30, 2010		December 30, 2009
	(In thousands)
Book value:
Fixed rate long-term debt	$	175,220	$	175,257
Variable rate long-term debt		65,000		80,000
Long term debt excluding capital lease obligations	$	240,220	$	255,257
Estimate fair value:
Fixed rate long-term debt	$	175,220	$	179,194
Variable rate long-term debt		65,000		80,000
Long term debt excluding capital lease obligations	$	240,220	$	259,194

The market quotation for our Denny’s Holdings, Inc. 10% Senior Notes due 2012 (“the 10% Notes”) was equal to their par value as of June 30, 2010. Therefore, there was nodifference between the estimated fair value of long-term debt and its historical cost reported in our Condensed Consolidated Balance Sheets at June 30, 2010. The difference between the estima ted fair value and historical cost at December 30, 2009 directly relates to the market quotations for the 10% Notes.

Note 8.     Long-Term Debt

Credit Facility

Our subsidiaries, Denny's, Inc. and Denny's Realty, LLC (the "Borrowers"), have a senior secured credit agreement consisting of a $50 million revolving credit facility (including up to $10 million for a revolving letter of credit facility for short term needs), a $65 million term loan and an additional $30 million letter of credit facility for longer term needs (together, the "Credit Facility"). At June 30, 2010, we had outstanding letters of credit of $24.5  million (comprised of $24.4 million under our letter of credit facility and less than $0.1 million under our revolving letter of credit facility). There were no revolving loans outstanding at June 30, 2010. These balances result in availability of $5.6 million under our letter of credit facility and $49.9 million under the revolving facility.

11

The revolving facility matures on December 15, 2011. The term loan and the $30 million letter of credit facility mature on March 31, 2012. The term loan amortizes in equal quarterly installments at a rate equal to approximately 1% per annum with all remaining amounts due on the maturity date. The Credit Facility is available for working capital, capital expenditures and other general corporate purposes. We will be required to make mandatory prepayments under certain circumstances (such as required payments related to asset sales) typical for this type of credit facility and may make certain optional prepayments under the Credit Facility. We believe that our estimated cash flows from operations for 2010, 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.

The Credit Facility is guaranteed by Denny's and its other subsidiaries and is secured by substantially all of the assets of Denny's and its subsidiaries. In addition, the Credit Facility is secured by first-priority mortgages on approximately 100 company-owned real estate assets. The Credit Facility contains certain financial covenants (i.e., maximum total debt to EBITDA (as defined under the Credit Facility) ratio requirements, maximum senior secured debt to EBITDA ratio requirements, minimum fixed charge coverage ratio requirements and limitations on capital expenditures), negative covenants, conditions precedent, material adverse change provisions, events of default and other terms, conditions and provisions customarily found in credit agreements for facilities and transactions of this type.

A commitment fee of 0.5% is paid on the unused portion of the revolving credit facility. Interest on loans under the revolving facility is payable at per annum rates equal to LIBOR plus 250 basis points and will adjust over time based on our leverage ratio. Interest on the term loan and letter of credit facility is payable at per annum rates equal to LIBOR plus 200 basis points. The weighted-average interest rate under the term loan was 2.5% and 3.6% as of June 30, 2010 and July 1, 2009, respectively. Taking into consideration our interest rate swap, described below, the weighted-average interest rate under the term loan was 6.4% as of July 1, 2009.

Note 9.     Derivative Financial Instruments

We may choose to utilize derivative financial instruments to manage our exposure to interest rate risk and commodity risk in relation to natural gas costs. We do not enter into derivative instruments for trading or speculative purposes.

As of June 30, 2010 and December 30, 2009, there were no derivative instruments included in the Condensed Consolidated Balance Sheet.

The gains (losses) recognized in our Condensed Consolidated Statements of Operations as a result of interest rate swaps and natural gas hedge contracts are as follows:

	Quarter Ended					Two Quarters Ended
	June 30, 2010		July 1, 2009			June 30, 2010			July 1, 2009
	(In thousands)
Realized gains (losses):
Interest rate swap - included as a component of interest expense	$	—	$	(927	)	$	—		$	(1,794	)
Natural gas contracts - included as a component of utility expense, which is included in other operating expenses	$	—	$	(438	)	$	—		$	(1,020	)
Unrealized gains (losses) included as a component of nonoperating expense:
Interest rate swap	$	—	$	312		$	(167	)	$	875
Natural gas contracts	$	—	$	400		$	—		$	406

The unrealized gains (losses) related to the interest rate swap include both the changes in the fair value of the swap and the amortization of losses previously recorded in accumulated other comprehensive income.

Interest Rate Swap

In 2007, we entered into an interest rate swap with a notional amount of $150 million that was designated as a cash flow hedge of our interest rate exposure. Under the terms of the swap, we paid a fixed rate of 4.8925% on the notional amount and received payments from the counterparties based on the 3-month LIBOR rate for a term ending on March 30, 2010, effectively resulting in a fixed rate of 6.8925% on the notional amount. Interest rate differentials paid or received under the swap agreement were recognized as adjustments to interest expense. At the end of 2007, we determined that a portion of the underlying cash flows related to the swap were no longer probable of occurring over the term of the swap as a result of the probability of paying the debt down below the notional amount. As a result, we discontinued hedge accounting treatment. The losses included in accumulated other comprehensive income as of December 26, 2007 were amortized to other nonoperating expense over the remaining term of the swap. In 2008, we terminated $50 million of the notional amount of the swap. In the fourth quarter of 2009 we terminated the remaining $100 million of the notional amount of the swap. The 2009 termination resulted in a $1.3 million cash payment, which was made in the fourth quarter of 2009. There were no interest rate swaps outstanding as of December 30, 2009 or June 30, 2010.

Natural Gas Hedge Contracts

Realized gains (losses) on the contracts are recorded as utility cost which is a component of other operating expenses. The contracts are not accounted for under hedge accounting; therefore, changes in the contracts' fair value are recorded in other nonoperating expense.

12

Note 10.     Defined Benefit Plans

The components of net periodic benefit cost were as follows:

	Pension Plan						Other Defined Benefit Plans
	Quarter Ended						Quarter Ended
	June 30, 2010			July 1, 2009			June 30, 2010		July 1, 2009
	(In thousands)
Service cost	$	94		$	107		$	—	$	—
Interest cost		858			862			34		38
Expected return on plan assets		(979	)		(864	)		—		—
Amortization of net loss		240			313			6		3
Net periodic benefit cost	$	213		$	418		$	40	$	41

	Pension Plan						Other Defined Benefit Plans
	Two Quarters Ended						Two Quarters Ended
	June 30, 2010			July 1, 2009			June 30, 2010		July 1, 2009
	(In thousands)
Service cost	$	188		$	195		$	—	$	—
Interest cost		1,716			1,726			69		76
Expected return on plan assets		(1,964	)		(1,732	)		—		—
Amortization of net loss		457			653			11		7
Net periodic benefit cost	$	397		$	842		$	80	$	83

We did not make any contributions to our qualified pension plan during the two quarters ended June 30, 2010. We made contributions of $0.6 million to our qualified pension plan during the two quarters ended July 1, 2009. We made contributions of $0.1 million and $0.1 million to our other defined benefit plans during the two quarters ended June 30, 2010 and July 1, 2009, respectively. We do not expect to contribute to our qualified pension plan during 2010. We expect to contribute an additional $0.1 million to our other defined benefit plans over the remainder of fiscal 2010.

Additional minimum pension liability of $18.0 million is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Income as of June 30, 2010 and December 30, 2009.

Note 11.     Share-Based Compensation

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

	Quarter Ended					Two Quarters Ended
	June 30, 2010			July 1, 2009		June 30, 2010		July 1, 2009
	(In thousands)
Share-based compensation related to liability classified restricted stock units	$	(513	)	$	523	$	211	$	596
Share based compensation related to equity classified awards:
Stock options	$	225		$	364	$	535	$	506
Restricted stock units		105			781		408		1,443
Board deferred stock units		74			149		95		157
Total share-based compensation related to equity classified awards		404			1,294		1,038		2,106
Total share-based compensation	$	(109	)	$	1,817	$	1,249	$	2,702

Stock Options

During the two quarters ended June 30, 2010, we granted approximately 0.6 million stock options to certain employees. These stock options vest evenly over 3 years and have a 10-year contractual life.

The weighted average fair value per option for options granted during the two quarters ended June 30, 2010 was $1.21. The fair value of these stock options was estimated at the date of grant using the Black-Scholes option pricing model. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Condensed Consolidated Statements of Operations.

13

We used the following weighted average assumptions for the stock option grants for the two quarters ended June 30, 2010:

Dividend yield		0.0	%
Expected volatility		60.2	%
Risk-free interest rate		2.48	%
Weighted average expected term	4.7 years

The dividend yield assumption was based on our dividend payment history and expectations of future dividend payments. The expected volatility was based on the historical volatility of our stock for a period approximating the expected life. The risk-free interest rate was based on published U.S. Treasury spot rates in effect at the time of grant with terms approximating the expected life of the option. The weighted average expected term of the options represents the period of time the options are expected to be outstanding based on historical trends.

As of June 30, 2010, we had approximately $1.3 million of unrecognized compensation cost related to unvested stock option awards outstanding, which is expected to be recognized over a weighted average of 1.8 years.

Restricted Stock Units

In June 2010, we granted two awards of less than 0.1 million restricted stock units to certain non-employee board members. One award had a grant date fair value of $2.72 and the other had a grant date fair value of $2.82. The units vest 12 months from the grant date and, based on the participant's election, are converted to shares of Denny's stock either upon vesting or upon the board member's separation from the Board of Directors.

In January 2010, we granted approximately 0.1 million performance shares and 0.1 million performance units to certain employees. As these awards contain a market condition, a Monte Carlo valuation was used to determine the performance shares grant date fair value of $2.69 per share. The awards granted to our named executive officers also contain a performance condition based on certain operating measures for the fiscal year ended December 29, 2010. The performance units were valued at $2.00 per unit. The performance period is the three year fiscal period beginning December 31, 2009 and ending December 26, 2012. The performance shares and units will vest and be earned (from 0% to 150% of the target award for each such increment) at the end of the performance period based on the Total Shareholder Return of our stock compared to the Total Sh areholder Returns of a group of peer companies.

During the two quarters ended June 30, 2010, we made payments of $0.9 million (before taxes) in cash and issued 0.2 million shares of common stock related to the restricted stock unit awards that vested as of December 30, 2009.

Accrued compensation expense included as a component of the Condensed Consolidated Balance Sheet was as follows:

	June 30, 2010		December 30, 2009
	(In thousands)
Liability classified restricted stock units:
Other current liabilities	$	440	$	1,303
Other noncurrent liabilities	$	596	$	506
Equity classified restricted stock units:
Additional paid-in capital	$	5,207	$	5,237

As of June 30, 2010, we had approximately $1.6 million of unrecognized compensation cost (approximately $0.6 million for liability classified units and approximately $1.0 million for equity classified units) related to all unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of 1.4 years.

Board Deferred Stock Units

During the two quarters ended June 30, 2010, we granted 0.1 million deferred stock units (which are equity classified) with a weighted average grant date fair value of $2.92 per unit to non-employee members of our Board of Directors. The directors may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of the Board of Directors) or upon termination as a member of the Board of Directors.

Note 12.     Comprehensive Income and Accumulated Other Comprehensive Loss 

Total comprehensive income was $10.2 million and $14.2 million for the two quarters ended June 30, 2010 and July 1, 2009, respectively.

The components of Accumulated Other Comprehensive Loss, Net in the Condensed Consolidated Statement of Shareholder’s Deficit and Comprehensive Loss are as follows:

	June 30, 2010			December 30, 2009
	(In thousands)
Additional minimum pension liability	$	(18,046	)	$	(18,046	)
Unrealized loss on interest rate swap		—			(167	)
Accumulated other comprehensive loss	$	(18,046	)	$	(18,213	)

14

Note 13.     Income Taxes

The provision for income taxes was $0.4 and $0.6 million for the quarter and two quarters ended June 30, 2010 compared to $0.6 million and $0.2 million for the quarter and two quarters ended July 1, 2009. The provision for income taxes for the first two quarters of 2010 and 2009 was determined using our effective rate estimated for the entire fiscal year. The increase in our effective tax rate for the two quarters ended June 30, 2010 results primarily from the recognition of $0.7 million of current tax benefits during the first quarter of 2009 related to the enactment of certain federal laws during the first quarter of 2009. We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses (“NOL”) generated in previous periods.

Note 14.     Net Income Per Share

	Quarter Ended				Two Quarters Ended
	June 30, 2010		July 1, 2009		June 30, 2010		July 1, 2009
	(In thousands, except for per share amounts)
Numerator:
Numerator for basic and diluted net income per share - net income	$	5,458	$	9,336	$	10,046	$	13,643
Denominator:
Denominator for basic net income per share – weighted average shares		99,263		96,113		98,179		96,079
Effect of dilutive securities:
Options		1,235		1,311		1,585		1,132
Restricted stock units and awards		1,485		1,033		1,304		682
Denominator for diluted net income per share – adjusted weighted average shares and assumed conversions of dilutive securities		101,983		98,457		101,068		97,893
Basic net income per share	$	0.05	$	0.10	$	0.10	$	0.14
Diluted net income per share	$	0.05	$	0.09	$	0.10	$	0.14
Stock options excluded (1)		2,313		6,147		2,231		5,583
Restricted stock units and awards excluded (1)		—		420		—		420

(1) Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive.

Note 15.     Supplemental Cash Flow Information

	Two Quarters Ended
	June 30, 2010		July 1, 2009
	(In thousands)
Income taxes paid, net	$	882	$	791
Interest paid	$	12,612	$	15,750
Noncash investing activities:
Notes received in connection with disposition of property	$	200	$	1,475
Execution of direct financing leases	$	—	$	2,275
Noncash financing activities:
Issuance of common stock, pursuant to share-based compensation plans	$	438	$	1,021
Execution of capital leases	$	2,084	$	35

Note 16.     Related Party Transactions:

During the quarter and two quarters ended July 1, 2009, we sold company-owned restaurants to franchisees that are former employees, including a former executive. We received cash proceeds of $1.1 million and recognized losses of $0.1 million from these related party sales during the quarter and two quarters ended July 1, 2009.  In relation to these sales, we may enter into leases or subleases with the franchisees. These leases and subleases are entered into at fair market value.

15

Note 17.     Commitments and Contingencies

On July 23, 2010, the Company received notice that our former Chief Executive Officer (“CEO”) has elected to arbitrate issues with respect to the settlement of any outstanding obligations related to his departure. Under the terms of the employment agreement with our former CEO, such arbitration proceeding is to be held before a single arbitrator in Charlotte, North Carolina in accordance with the rules of the American Arbitration Association and is to be completed within 60 days of the delivery of such notice. We estimate that the arbitration could result in payments to our former CEO ranging from approximately $0.8 million to $3.2 million. At June 30, 2010, we have recorded $0.8 million of severance a nd other restructuring charges related to the resolution of this matter.

In addition, there are various other claims and pending legal actions against or indirectly involving us, including actions involving employees and guests, other employment related matters, taxes, sales of franchise rights and businesses and other matters. Based on our examination of these matters and our experience to date, we have recorded reserves reflecting our best estimate of liability, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty. We record legal expenses and other litigation costs as those costs are incurred.

Note 18.     Subsequent Events

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

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

Forward-Looking Statements

The following discussion is intended to highlight significant changes in our financial position as of June 30, 2010 and results of operations for the quarter and two quarters ended June 30, 2010 compared to the quarter and two quarters ended July 1, 2009. The forward-looking statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which reflect our best judgment based on factors currently known, involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; change s in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors included in the discussion below, or in Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part I. Item 1A. Risk Factors, contained in our Annual Report on Form 10-K for the year ended December 30, 2009.

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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 revenues, except as noted below.  Percentages may not add due to rounding.

	Quarter Ended										Two Quarters Ended
	June 30, 2010					July 1, 2009					June 30, 2010					July 1, 2009
	(Dollars in thousands)
Revenue:
Company restaurant sales	$	105,301		78.0	%	$	125,500		80.5	%	$	213,084		78.2	%	$	261,076		81.2	%
Franchise and license revenue		29,776		22.0	%		30,313		19.5	%		59,565		21.8	%		60,497		18.8	%
Total operating revenue		135,077		100.0	%		155,813		100.0	%		272,649		100.0	%		321,573		100.0	%
Costs of company restaurant sales (a):
Product costs		24,500		23.3	%		29,306		23.4	%		50,192		23.6	%		61,589		23.6	%
Payroll and benefits		43,363		41.2	%		52,151		41.6	%		87,539		41.1	%		109,911		42.1	%
Occupancy		6,908		6.6	%		8,056		6.4	%		14,309		6.7	%		17,100		6.5	%
Other operating expenses		15,994		15.2	%		17,994		14.3	%		31,858		15.0	%		38,592		14.8	%
Total costs of company restaurant sales		90,765		86.2	%		107,507		85.7	%		183,898		86.3	%		227,192		87.0	%
Costs of franchise and license revenue (a)		11,123		37.4	%		10,689		35.3	%		23,489		39.4	%		21,987		36.3	%
General and administrative expenses		13,111		9.7	%		15,907		10.2	%		26,185		9.6	%		29,754		9.3	%
Depreciation and amortization		7,291		5.4	%		8,015		5.1	%		14,664		5.4	%		16,727		5.2	%
Operating (gains), losses and other charges		(117	)	(0.1	%)		(3,751	)	(2.4	%)		306		0.1	%		(3,453	)	(1.1	%)
Total operating costs and expenses		122,173		90.4	%		138,367		88.8	%		248,542		91.2	%		292,207		90.9	%
Operating income		12,904		9.6	%		17,446		11.2	%		24,107		8.8	%		29,366		9.1	%
Other expenses:
Interest expense, net		6,514		4.8	%		8,239		5.3	%		12,912		4.7	%		16,730		5.2	%
Other nonoperating expense (income), net		570		0.4	%		(745	)	(0.5	%)		558		0.2	%		(1,231	)	(0.4	%)
Total other expenses, net		7,084		5.2	%		7,494		4.8	%		13,470		4.9	%		15,499		4.8	%
Net income before income taxes		5,820		4.3	%		9,952		6.4	%		10,637		3.9	%		13,867		4.3	%
Provision for income taxes		362		0.3	%		616		0.4	%		591		0.2	%		224		0.1	%
Net income	$	5,458		4.0	%	$	9,336		6.0	%	$	10,046		3.7	%	$	13,643		4.2	%
Other Data:
Company-owned average unit sales	$	448				$	460				$	906				$	915
Franchise average unit sales	$	339				$	357				$	681				$	719
Company-owned equivalent units (b)		235					272					235					285
Franchise equivalent units (b)		1,322					1,273					1,321					1,257
Same-store sales decrease (company-owned) (c)(d)		(6.2	%)				(2.7	%)				(5.8	%)				(1.1	%)
Guest check average (decrease) increase (d)		(2.7	%)				2.3	%				(1.3	%)				1.3	%
Guest count decrease (d)		(3.7	%)				(4.9	%)				(4.6	%)				(2.5	%)
Same-store sales decrease (franchised and licensed units) (c) (d)		(5.9	%)				(4.7	%)				(6.1	%)				(3.1	%)

__________________

(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 2010 comparable units.

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Quarter Ended June 30, 2010 Compared with Quarter Ended July 1, 2009

Unit Activity

	Quarter Ended
	June 30, 2010			July 1, 2009
Company-owned restaurants, beginning of period		237			286
Units opened		—			—
Units sold to franchisees		(9	)		(22	)
Units closed		—			(1	)
End of period		228			263
Franchised and licensed restaurants, beginning of period		1,322			1,260
Units opened		7			10
Units purchased from Company		9			22
Units closed		(10	)		(11	)
End of period		1,328			1,281
Total restaurants, end of period		1,556			1,544

Company Restaurant Operations

During the quarter ended June 30, 2010, we incurred a 6.2% decrease in same-store sales, comprised of a 2.7% decrease in guest check average and a 3.7% decrease in guest counts. Company restaurant sales decreased $20.2 million, or 16.1%, primarily resulting from a 37 equivalent-unit decrease in company-owned restaurants. The decrease in equivalent units primarily resulted from the sale of company-owned restaurants to franchisees.

Total costs of company restaurant sales as a percentage of company restaurant sales increased to 86.2% from 85.7%. Product costs decreased to 23.3% from 23.4%. Payroll and benefits decreased to 41.2% from 41.6% primarily as a result of a decrease in incentive compensation, partially offset by the deleveraging effect of lower sales and unfavorable workers’ compensation claims development. Occupancy costs increased to 6.6% from 6.4% primarily due to the effect of lower sales. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales: 

	Quarter Ended
	June 30, 2010				July 1, 2009
	(Dollars in thousands)
Utilities	$	4,391	4.2	%	$	5,584	4.4	%
Repairs and maintenance		1,999	1.9	%		2,533	2.0	%
Marketing		4,522	4.3	%		4,812	3.8	%
Legal settlement costs		77	0.1	%		—	0.0	%
Other direct costs		5,005	4.8	%		5,065	4.0	%
Other operating expenses	$	15,994	15.2	%	$	17,994	14.3	%

Utilities decreased 0.2 percentage points primarily due to the recognition of $0.4 million in losses on natural gas contracts during the prior year quarter. Marketing increased 0.5 percentage points as we funded additional advertising for the Super Bowl promotion and the $2/$4/$6/$8 value menu program. Other direct costs increased 0.8 percentage points primarily as a result of charges for excess promotional materials.

Franchise Operations

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

	Quarter Ended
	June 30, 2010				July 1, 2009
	(Dollars in thousands)
Royalties	$	17,824	59.9	%	$	17,991	59.4	%
Initial and other fees		679	2.3	%		1,287	4.2	%
Occupancy revenue		11,273	37.8	%		11,035	36.4	%
Franchise and license revenue	$	29,776	100.0	%	$	30,313	100.0	%
Occupancy costs		8,642	29.0	%		8,586	28.3	%
Other direct costs		2,481	8.4	%		2,103	7.0	%
Costs of franchise and license revenue	$	11,123	37.4	%	$	10,689	35.3	%

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Royalties decreased by $0.2 million, or 0.9%, primarily resulting from the effects of a 5.9% decrease in same-store sales, partially offset by a 49 equivalent unit increase in franchised and licensed units. The increase in equivalent units resulted primarily from the sale of company-owned restaurants to franchisees. Initial fees decreased by $0.6 million, or 47.2%, as fewer restaurants were opened by and sold to franchisees during the current year quarter. The increase in occupancy revenue of $0.2 million, or 2.2%, is also primarily the result of the sale of restaurants to franchisees over the last 12 months.

Costs of franchise and license revenue increased by $0.4 million, or 4.1%. The increase in occupancy costs of $0.1 million, or 0.7%, is primarily the result of the sale of company-owned restaurants to franchisees. Other direct costs increased by $0.4 million, or 18.0%, primarily as a result of expenses associated with future restaurant openings related to the Pilot Flying J transaction (See Recent Events section). As a result, costs of franchise and license revenue as a percentage of franchise and license revenue increased to 37.4% for the quarter ended June 30, 2010 from 35.3% for the quarter ended July 1, 2009.

Other Operating Costs and Expenses

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

General and administrative expenses were comprised of the following:

	Quarter Ended
	June 30, 2010				July 1, 2009
	(In thousands)
Share-based compensation		$	(109	)		$	1,817
Other general and administrative expenses			13,220				14,090
Total general and administrative expenses		$	13,111			$	15,907

The $1.9 million decrease in share-based compensation expense is primarily due to the adjustment of the liability classified restricted stock units to fair value as of June 30, 2010 and a $0.5 million reduction in expense related to forfeitures resulting from the departure of the Company's former Chief Executive Officer. The $0.9 million decrease in other general and administrative expenses is primarily the result of a $2.6 million decrease in incentive and deferred compensation, partially offset by a $1.5 million increase in costs related to our recent proxy contest.

Depreciation and amortization was comprised of the following:

	Quarter Ended
	June 30, 2010			July 1, 2009
	(In thousands)
Depreciation of property and equipment		$	5,328		$	6,028
Amortization of capital lease assets			691			678
Amortization of intangible assets			1,272			1,309
Total depreciation and amortization expense		$	7,291		$	8,015

The overall decrease in depreciation and amortization expense is due to the sale of company-owned restaurants to franchisees during fiscal 2009.

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

	Quarter Ended
	June 30, 2010				July 1, 2009
	(In thousands)
Gains on sales of assets and other, net		$	(1,266	)		$	(3,508	)
Restructuring charges and exit costs			1,149				(673	)
Impairment charges			—				430
Operating (gains), losses and other charges, net		$	(117	)		$	(3,751	)

During the quarter ended June 30, 2010, we recognized $1.2 million of gains on the sale of nine restaurant operations to four franchisees for net proceeds of $3.0 million (which included a note receivable of $0.2 million). During the quarter ended July 1, 2009, we recognized $2.3 million of gains on the sale of 22 restaurant operations to eight franchisees for net proceeds of $7.0 million (which included a note receivable of $0.1 million). The remaining gains for the two periods resulted from the recognition of gains on the sale of other real estate assets and deferred gains.

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Restructuring charges and exit costs were comprised of the following:

	Quarter Ended
	June 30, 2010			July 1, 2009
	(In thousands)
Exit costs		$	235		$	(795	)
Severance and other restructuring charges			914			122
Total restructuring and exit costs		$	1,149		$	(673	)

Severance and other restructuring charges for the quarter ended June 30, 2010 includes $0.8 million related to the departure of the Company's former Chief Executive Officer (see Part II Item 1. Legal Proceedings).

Impairment charges for the quarter ended July 1, 2009 relate to underperforming restaurants as well as restaurants held for sale.

Operating income was $12.9 million for the quarter ended June 30, 2010 compared with $17.4 million for the quarter ended July 1, 2009.

Interest expense, net was comprised of the following:

	Quarter Ended
	June 30, 2010			July 1, 2009
	(In thousands)
Interest on senior notes	$	4,363		$	4,363
Interest on credit facilities		444			2,118
Interest on capital lease liabilities		1,046			932
Letters of credit and other fees		387			398
Interest income		(388	)		(442	)
Total cash interest		5,852			7,369
Amortization of deferred financing costs		258			271
Interest accretion on other liabilities		404			599
Total interest expense, net	$	6,514		$	8,239

The decrease in interest expense resulted primarily from the repayment of $15.0 million and $46.7 million of term loan debt during 2010 and 2009, respectively.

Other nonoperating expense (income), net was $0.6 million for the quarter ended June 30, 2010 compared with other nonoperating income of $0.7 million for the quarter ended July 1, 2009.

The provision for income taxes was $0.4 million for the quarter ended June 30, 2010 compared to $0.6 million for the quarter ended July 1, 2009. The provision for income taxes for the second quarters of 2010 and 2009 was determined using our effective rate estimated for the entire fiscal year. We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses (“NOL”) generated in previous periods.

Net income was $5.5 million for the quarter ended June 30, 2010 compared with $9.3 million for the quarter ended July 1, 2009 due to the factors noted above.

Two Quarters Ended June 30, 2010 Compared with Two Quarters Ended July 1, 2009

Unit Activity

	Two Quarters Ended
	June 30, 2010			July 1, 2009
Company-owned restaurants, beginning of period		233			315
Units opened		4			1
Units sold to franchisees		(9	)		(52	)
Units closed		—			(1	)
End of period		228			263
Franchised and licensed restaurants, beginning of period		1,318			1,226
Units opened		13			20
Units purchased from Company		9			52
Units closed		(12	)		(17	)
End of period		1,328			1,281
Total restaurants, end of period		1,556			1,544

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Company Restaurant Operations

During the two quarters ended June 30, 2010, we realized a 5.8% decrease in same-store sales, comprised of a 1.3% decrease in guest check average and a 4.6% decrease in guest counts. Company restaurant sales decreased $48.0 million, or 18.4%, primarily resulting from a 50 equivalent-unit decrease in company-owned restaurants. The decrease in equivalent-units primarily resulted from the sale of company-owned restaurants to franchisees.

Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 86.3% from 87.0%. Product costs remained constant at 23.6%. Payroll and benefits decreased to 41.1% from 42.1% primarily as a result of a decrease in incentive compensation. Occupancy costs increased to 6.7% from 6.5% primarily due��to the deleveraging effect of lower sales. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

	Two Quarters Ended
	June 30, 2010				July 1, 2009
	(Dollars in thousands)
Utilities	$	9,042	4.2	%	$	12,433	4.8	%
Repairs and maintenance		3,944	1.9	%		5,098	2.0	%
Marketing		8,824	4.1	%		9,594	3.7	%
Legal		200	0.1	%		355	0.1	%
Other direct costs		9,848	4.6	%		11,112	4.3	%
Other operating expenses	$	31,858	15.0	%	$	38,592	14.8	%

Utilities decreased 0.6 percentage points primarily due to the recognition of $1.0 million in losses on natural gas contracts during the prior year. Marketing increased 0.4 percentage points as we funded additional advertising for the Super Bowl promotion and the $2/$4/$6/$8 value menu program.

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:

	Two Quarters Ended
	June 30, 2010				July 1, 2009
	(Dollars in thousands)
Royalties	$	35,818	60.1	%	$	35,885	59.3	%
Initial fees		1,112	1.9	%		2,906	4.8	%
Occupancy revenue		22,635	38.0	%		21,706	35.9	%
Franchise and license revenue	$	59,565	100.0	%	$	60,497	100.0	%
Occupancy costs		17,319	29.1	%		16,608	27.4	%
Other direct costs		6,170	10.3	%		5,379	8.9	%
Costs of franchise and license revenue	$	23,489	39.4	%	$	21,987	36.3	%

Royalties decreased by $0.1 million, or 0.2% primarily resulting from the effects of a 6.1% decrease in same-store sales, offset by a 64 equivalent-unit increase in franchised and licensed units. The increase in equivalent-units resulted primarily from the sale of company-owned restaurants to franchisees. Initial fees decreased by $1.8 million, or 61.7%, as fewer restaurants were opened by and sold to franchisees during the current year period. The increase in occupancy revenue of $0.9 million, or 4.3%, is also primarily the result of the sale of restaurants to franchisees over the last 12 months.

Costs of franchise and license revenue increased by $1.5 million, or 6.8%. The increase in occupancy costs of $0.7 million, or 4.3%, is primarily the result of the sale of company-owned restaurants to franchisees. Other direct costs increased by $0.8 million, or 14.7%, primarily as a result of expenses associated with future restaurant openings related to the Pilot Flying J transaction (See Recent Events section). As a result, costs of franchise and license revenue as a percentage of franchise and license revenue increased to 39.4% for the two quarters ended June 30, 2010 from 36.3% for the two quarters ended July 1, 2009.

Other Operating Costs and Expenses

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

General and administrative expenses are comprised of the following:

	Two Quarters Ended
	June 30, 2010		July 1, 2009
	(In thousands)
Share-based compensation	$	1,249	$	2,702
General and administrative expenses		24,936		27,052
Total general and administrative expenses	$	26,185	$	29,754

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The $1.5 million decrease in share-based compensation expense is primarily due to a $0.5 million reduction in expense related to forfeitures resulting from the departure of the Company's former Chief Executive Officer and the adoption of lower cost share-based compensation plans during recent years. The $2.1 million decrease in other general and administrative expenses is primarily the result of a $4.1 million decrease in incentive and deferred compensation, partially offset by a $2.0 million increase in costs related to our recent proxy contest.

Depreciation and amortization is comprised of the following:

	Two Quarters Ended
	June 30, 2010		July 1, 2009
	(In thousands)
Depreciation of property and equipment	$	10,796	$	12,604
Amortization of capital lease assets		1,345		1,396
Amortization of intangible assets		2,523		2,727
Total depreciation and amortization expense	$	14,664	$	16,727

The overall decrease in depreciation and amortization expense is due primarily to the sale of company-owned restaurants to franchisees during fiscal 2009. 

Operating gains, losses and other charges, net are comprised of the following:

	Two Quarters Ended
	June 30, 2010			July 1, 2009
	(In thousands)
Gains on sales of assets and other, net	$	(1,476	)	$	(4,032	)
Restructuring charges and exit costs		1,782			(244	)
Impairment charges		—			823
Operating gains, losses and other charges, net	$	306		$	(3,453	)

During the two quarters ended June 30, 2010, we recognized $1.2 million of gains on the sale of nine restaurant operations to four franchisees for net proceeds of $3.0 million (which included a note receivable of $0.2 million) and additional gains on prior year restaurant sale transactions. During the two quarters ended July 1, 2009, we recognized $2.8 million of gains on the sale of 52 restaurant operations to ten franchisees for net proceeds of $11.8 million (which included notes receivable of $1.5 million). The remaining gains for the two periods resulted from the recognition of gains on the sale of other real estate assets and deferred gains.

 Restructuring charges and exit costs were comprised of the following:

	Two Quarters Ended
	June 30, 2010		July 1, 2009
	(In thousands)
Exit costs	$	863	$	(745	)
Severance and other restructuring charges		919		501
Total restructuring and exit costs	$	1,782	$	(244	)

Severance and other restructuring charges for the two quarters ended June 30, 2010 includes $0.8 million related to the departure of the Company's former Chief Executive Officer (see Part II Item 1. Legal Proceedings).

Impairment charges for the two quarters ended July 1, 2009 generally relate to underperforming restaurants as well as restaurants and real estate held for sale.

Operating income was $24.1 million for the two quarters ended June 30, 2010 and $29.4 million for the two quarters ended July 1, 2009.

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Interest expense, net is comprised of the following:

	Two Quarters Ended
	June 30, 2010			July 1, 2009
	(In thousands)
Interest on senior notes	$	8,726		$	8,726
Interest on credit facilities		927			4,299
Interest on capital lease liabilities		1,979			1,896
Letters of credit and other fees		776			859
Interest income		(838	)		(830	)
Total cash interest		11,570			14,950
Amortization of deferred financing costs		517			542
Interest accretion on other liabilities		825			1,238
Total interest expense, net	$	12,912		$	16,730

The decrease in interest expense resulted primarily from the repayment of $15.0 million and $46.7 million of term loan debt during 2010 and 2009, respectively.

Other nonoperating expense (income), net was $0.6 million for the two quarters ended June 30, 2010 compared with other nonoperating income of $1.2 million for the two quarters ended July 1, 2009.

The provision for income taxes was $0.6 for the two quarters ended June 30, 2010 compared to $0.2 million for the two quarters ended July 1, 2009. The provision for income taxes for the first two quarters of 2010 and 2009 was determined using our effective rate estimated for the entire fiscal year. The increase in our effective tax rate for the two quarters ended June 30, 2010 results primarily from the recognition of $0.7 million of current tax benefits during the first quarter of 2009 related to the enactment of certain federal laws during the first quarter of 2009. We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses (“NOL”) generated in previous periods.

Net income was $10.0 million for the two quarters ended June 30, 2010 compared with $13.6 million for the two quarters ended July 1, 2009 due to the factors noted above.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash generated from operations, borrowings under our Credit Facility (as defined in Note 8) and, in recent years, cash proceeds from the sale of surplus properties and sales of restaurant operations to franchisees, to the extent allowed by our Credit Facility. Principal uses of cash are operating expenses, capital expenditures and debt repayments.

The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:

	Two Quarters Ended
	June 30, 2010			July 1, 2009
	(In thousands)
Net cash provided by operating activities	$	10,692		$	7,427
Net cash (used in) provided by investing activities		(297	)		5,094
Net cash used in financing activities		(15,243	)		(13,698	)
Net decrease in cash and cash equivalents	$	(4,848	)	$	(1,177	)

The increase in operating cash flows is primarily the result of timing differences in marketing spending and the reduction in our interest payments. We believe that our estimated cash flows from operations for 2010, 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 $0.3 million for the two quarters ended June 30, 2010. These cash flows include capital expenditures of $8.4 million, of which $2.1 million was financed through capital leases. These expenditures were partially offset by $3.3 million in proceeds from the sales of restaurant operations to franchisees and the sale of other real estate assets and collections of notes receivable of $2.7 million. Our principal capital requirements have been largely associated with the maintenance of our existing company-owned restaurants and facilities, new construction, remodeling, information technology and our strategic initiatives, as follows:

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	Quarter Ended
	June 30, 2010		July 1, 2009
	(In thousands)
Facilities	$	2,742	$	2,904
New construction		1,630		1,819
Remodeling		756		1,253
Information technology		597		35
Strategic initiatives		11		836
Other		574		1,089
Capital expenditures	$	6,310	$	7,936

We generally expect our capital requirements to trend downward as we reduce our company-owned restaurant portfolio and remain selective in our new restaurant investments.

Cash flows used in financing activities were $15.2 million for the two quarters ended June 30, 2010, which included $14.6 million of term loan prepayments and $0.4 million of scheduled term loan payments.

Our Credit Facility consists of a $50 million revolving credit facility (including up to $10 million for a revolving letter of credit facility for short term needs), a $65 million term loan and an additional $30 million letter of credit facility for longer term needs. At June 30, 2010, we had outstanding letters of credit of $24.5  million (comprised of $24.4 million under our letter of credit facility and less than $0.1 million under our revolving letter of credit facility). There were no revolving loans outstanding at June 30, 2010. These balances result in availability of $5.6 million under our letter of credit facility and $49.9 million under the revolving facility.

The revolving facility matures on December 15, 2011. The term loan and the $30 million letter of credit facility mature on March 31, 2012. The term loan amortizes in equal quarterly installments at a rate equal to 1% per annum with all remaining amounts due on the maturity date. The revolving facility is available for working capital, capital expenditures and other general corporate purposes. We will be required to make mandatory prepayments under certain circumstances (such as required payments related to asset sales) typical for this type of credit facility and may make certain optional prepayments under the Credit Facility.

The Credit Facility is guaranteed by Denny's and its other subsidiaries and is secured by substantially all of the assets of Denny's and its subsidiaries. In addition, the Credit Facility is secured by first-priority mortgages on approximately 100 company-owned real estate assets. The Credit Facility contains certain financial covenants (i.e., maximum total debt to EBITDA (as defined under the Credit Facility) ratio requirements, maximum senior secured debt to EBITDA ratio requirements, minimum fixed charge coverage ratio requirements and limitations on capital expenditures), negative covenants, conditions precedent, material adverse change provisions, events of default and other terms, conditions and provisions customarily found in credit agreements for facilities and transactions of this type. We were in compliance with the terms of the Credit Facility as of June 30, 2010.

As of June 30, 2010, interest on loans under the revolving facility is payable at per annum rates equal to LIBOR plus 250 basis points and will adjust over time based on our leverage ratio. Interest on the term loan and letter of credit facility is payable at per annum rates equal to LIBOR plus 200 basis points. As of June 30, 2010, the weighted-average interest rate under the term loan was 2.5%.

Our working capital deficit was $23.2 million at June 30, 2010 compared with $33.8 million at December 30, 2009. The decrease in working capital deficit resulted primarily from the sale of company-owned restaurants to franchisees during 2009 and 2010 and a $2.9 million increase in assets held for sale. We are able to operate with a substantial working capital deficit because (1) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories, and (3) accounts payable for food, beverages and supplies usually become due after the receipt of ca sh from the related sales.

Recent Events

As previously disclosed, Denny's has been selected as the full-service restaurant operator of choice for Pilot Travel Centers LLC (“Pilot”). On June 30, 2010, the Federal Trade Commission approved Pilot’s merger with Flying J Travel Centers (“Flying J”). Now named Pilot Flying J, the company is North America’s largest retail operator of travel centers. Up to 140 Flying J full-service restaurants could be converted to Denny’s. We began converting former Flying J restaurant operations in July 2010 and expect to have 80 sites converted by year end 2010, including 10 sites which will operate as company restaurants. Denny’s franchisees will convert and operate most of the Flying J locations with the Company pla nning to convert and operate approximately fifteen of the restaurants. We also expect up to an additional 50 Denny's restaurants will open in existing and proposed Pilot Travel Centers over the next several years.

Implementation of New Accounting Standards

See Note 2 to our Condensed Consolidated Financial Statements.

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, borrowings under the term loan and revolving credit facility bear interest at variable rates based on LIBOR plus a spread of 200 basis points per annum for the term loan and letter of credit facility and 250 basis points per annum for the revolving credit facility.

Based on the levels of borrowings under the Credit Facility at June 30, 2010, if interest rates changed by 100 basis points, our annual cash flow and income before income taxes would change by approximately $0.7 million. This computation is determined by considering the impact of hypothetical interest rates on the variable rate portion of the Credit Facility at June 30, 2010. However, the nature and amount of our borrowings under the Credit Facility may vary as a result of future business requirements, market conditions and other factors.

Our other outstanding long-term debt bears fixed rates of interest. The book value and estimated fair value of our fixed rate long-term debt (excluding capital lease obligations and revolving credit facility advances) was approximately $175.2 million at June 30, 2010. This computation is based on market quotations for the same or similar debt issues or the estimated borrowing rates available to us. The market quotation for the 10% Notes was equal to their par value as of June 30, 2010, therefore there was no difference between the estimated fair value of long-term debt compared with its historical cost.

We also have exposure to interest rate risk related to our pension plan, other defined benefit plans and self-insurance liabilities. A 25 basis point increase or decrease in discount rate would decrease or increase our projected benefit obligation related to our pension plan by approximately $1.8 million and would impact the pension plan's net periodic benefit cost by $0.1 million. The impact of a 25 basis point increase or decrease in discount rate would decrease or increase our projected benefit obligation related to our other defined benefit plans by less than $0.1 million while the plans' net periodic benefit cost would remain flat. A 25 basis point increase or decrease in discount rate related to our self-insurance liabilities would result in a decrease or increase of $0.2 million, respectively.

Commodity Price Risk

We purchase certain food products, such as beef, poultry, pork, eggs and coffee, and utilities such as gas and electricity, which are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control and which are generally unpredictable. Changes in commodity prices affect us and our competitors generally and often simultaneously. In general, we purchase food products and utilities based upon market prices established with vendors. Although many of the items purchased are subject to changes in commodity prices, the majority of our purchasing arrangements are structured to contain features that minimize price volatility by establishing fixed pricing and/or price ceilings and floors. We use these types of purchase arrange ments to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting our menu pricing or changing our product delivery strategy. However, competitive circumstances could limit such actions and, in those circumstances, increases in commodity prices could lower our margins. Because of the often short-term nature of commodity pricing aberrations and our ability to change menu pricing or product delivery strategies in response to commodity price increases, we believe that the impact of commodity price risk is not significant.

We have established a policy to identify, control and manage market risks which may arise from changes in interest rates, commodity prices and other relevant rates and prices. We do not use derivative instruments for trading purposes.

Item 4.     Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) our management conducted an evaluation (under the supervision and with the participation of our Interim Chief Executive Officer, Debra Smithart-Oglesby, and our Executive Vice President, Chief Administrative Officer and Chief Financial Officer, F. Mark Wolfinger) as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Ms. Smithart-Oglesby and Mr. Wolfinger each concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including Ms. Smithart-Oglesby and Wolfinger, as appropriate to allow timely decisions regarding required disclosure. 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.     Legal Proceedings

On July 23, 2010, the Company received notice that our former Chief Executive Officer (“CEO”) has elected to arbitrate issues with respect to the settlement of any outstanding obligations related to his departure. Under the terms of the employment agreement with our former CEO, such arbitration proceeding is to be held before a single arbitrator in Charlotte, North Carolina in accordance with the rules of the American Arbitration Association and is to be completed within 60 days of the delivery of such notice. We estimate that the arbitration could result in payments to our former CEO ranging from approximately $0.8 million to $3.2 million. At June 30, 2010, we have recorded $0.8 million of severance and other restructuring charges related to the resolution of this matter.

In addition, there are various other claims and pending legal actions against or indirectly involving us, including actions involving employees and guests, other employment related matters, taxes, sales of franchise rights and businesses and other matters. Based on our examination of these matters and our experience to date, we have recorded reserves reflecting our best estimate of liability, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty. 

25

Item 6.     Exhibits

The following are included as exhibits to this report:

Exhibit No.	Description
31.1	Certification of Debra Smithart-Oglesby, Interim Chief Executive Officer of Denny’s Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Debra Smithart-Oglesby, Interim Chief Executive Officer of Denny’s Corporation and F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DENNY'S CORPORATION
Date:  August 3, 2010	By:	/s/  F. Mark Wolfinger
		F. Mark Wolfinger
		Executive Vice President, Chief Administrative Officer and Chief Financial Officer
Date:  August 3, 2010	By:	/s/  Jay C. Gilmore
		Jay C. Gilmore
		Vice President, Chief Accounting Officer and Corporate Controller

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